加载中...
共找到 39,007 条相关资讯
Operator: Hello everyone. Thank you for joining us and welcome to the CTS Corporation First Quarter 2026 Earnings Call. After today's prepared remarks, we will host a question and answer session. If you would like to ask a question, please press star 1 to raise your hand. To withdraw your question, please press star 1 again. I will now hand the conference over to Kieran O'Sullivan. Kieran, please go ahead. Kieran O'Sullivan: Good morning, and thank you for joining us today. I am pleased to report a solid 2026 for CTS Corporation with diversified sales up double digits as we continue to execute our diversification strategy. We also saw strong bookings momentum in the industrial and medical markets. In transportation, we see stability in revenue with modest growth in the first quarter. Overall, with growth in key end markets and solid execution, we believe the company is well positioned to deliver on its strategic objectives. Ashish Agrawal, our CFO, will take us through the safe harbor statement and later through our financials. Pratik Trivedi, our COO, will provide an update on the progress in each of our end markets. Ashish? Ashish Agrawal: I would like to remind our listeners that this call contains forward-looking statements. These statements are subject to a number of risks and uncertainties that could cause actual results to differ materially from those expressed in the forward-looking statements. Additional information regarding these risks and uncertainties is contained in the press release issued today, and more information can be found in the company's SEC filings. To the extent that today's discussion refers to any non-GAAP measures under Regulation G, the required explanations and reconciliations are available with today's earnings press release and the supplemental slide presentation which can be found in the Investors section of the CTS Corporation website. I will now turn the discussion back over to our CEO, Kieran O'Sullivan. Kieran O'Sullivan: Thank you, Ashish. We finished the first quarter with sales of $139 million, representing a solid 11% increase compared to 2025. Our diversified end markets were up 18%. Transportation sales grew 3%. Our book-to-bill ratio for the first quarter was 1.1, up 4% compared to 2025. Looking at bookings performance, industrial bookings were strong, driven by stabilized OEM demand and the recovery in distribution. Medical bookings showed robust growth driven by continued strength in diagnostics and therapeutic applications. In aerospace and defense, we continue to have a robust pipeline of opportunities even as bookings were down compared to last year, as funding on various programs is expected to improve in the second half. We added two new customers in the defense market. In transportation, we secured several new business awards including current sensing in Europe, and a larger award for foot controls with a European OEM in early April. We also added a new customer in the transportation market. Our operational execution was evident as we expanded gross margin by 250 basis points in the first quarter. We maintained strong cash flow generation, supporting our balanced capital allocation approach that includes strategic investments in growth and returning cash to shareholders. First quarter adjusted diluted earnings were $0.62 per share, up from $0.44 in 2025 as we continue to focus on driving profitable growth. Ashish will add further color on our financial performance later in today's call. Turning to the outlook for 2026, for our diversified end markets, demand is expected to be solid. In the medical market, we see continued momentum in therapeutics where we have expanded capacity. In aerospace and defense, revenue is expected to grow given our backlog and the normalization of government funding. Industrial OEM and distribution sales are expected to be solid. We continue to monitor the potential economic impact of the current geopolitical conflicts for the second half of the year. Longer term, we expect our material formulations, supported by three leading technologies and their derivatives, to continue to drive our growth in key high-quality end markets in line with our diversification strategy. Across transportation markets, production volumes are expected to be down given the current geopolitical uncertainties and the potential impact on the economy. Global light vehicle volumes from IHS were recently forecasted to soften. The North American light vehicle market is expected to be in the 15 million unit range. European production is forecasted to be in the 16 million to 17 million unit range. China volumes are expected to be in the 32 million unit range. We continue to monitor potential impact from the geopolitical situation, supply chain issues related to petroleum products, especially resin, and other components such as rare earth metals and semiconductors. We anticipate commercial vehicle demand to improve in the second half of the year. We are closely evaluating the Section 232 tariff changes and focusing on agility and adapting to cost and price adjustments in close collaboration with our customers and suppliers. Our strong balance sheet, healthy cash generation, and experienced teams provide us with the tools necessary to manage these headwinds while continuing to invest in growth opportunities and also advancing innovation. Our increasingly diversified business model continues to enhance our growth and quality of earnings. Assuming the continuation of current market conditions, for full year 2026, we are narrowing our sales guidance to the range of $560 million to $580 million and adjusted diluted EPS to be in the range of $2.35 to $2.45. Now I will turn it over to Pratik, who will walk us through the end market performance. Pratik? Pratik Trivedi: Thank you, Kieran. Our medical end market delivered strong performance in the first quarter with sales of $25 million, up 28% versus the prior year period, reflecting a sustained growth momentum across our medical portfolio, particularly in therapeutic applications where we see robust demand. Bookings in the quarter were up 18% compared to the prior year period. The book-to-bill ratio for the first quarter was 1.2, reflecting continued momentum in this market. We continue to see growth prospects in diagnostic imaging, aesthetics, and minimally invasive surgical systems where there is an increased demand for precision, reliability, and patient monitoring. Our precision sensors and transducers enable high-resolution imaging and precise energy delivery in applications, such as ultrasound and intravascular diagnostics, supporting early detection, better visualization, and more targeted patient treatments. In patient and medical equipment monitoring, our temperature and position sensors provide high accuracy and stability supporting reliable vital sign measurement and device performance over extended life cycles. Our therapeutic products enhance skin lifting and tightening through noninvasive aesthetic treatments that significantly improve patient experience over alternative procedures. During the first quarter, we had multiple wins across all regions for medical ultrasound and a large win for a noninvasive aesthetics application. Demand remains robust for ultrasound imaging and strong for therapeutic products. Knowing that our products support technologies used to save lives is central to our purpose in the medical market. These mission-critical healthcare applications demand uncompromising quality and reliability, reinforcing our commitment to continuous innovation and operational excellence. With an aging population and innovations in healthcare supported by CTS Corporation products, the medical market will continue to enhance our growth profile. Aerospace and defense sales for the first quarter were $17 million, up 11% compared to the previous year. Book-to-bill ratio was less than one. We expect defense bookings to pick up during the rest of the year. Our pipeline of new opportunities remains strong, with backlog levels supporting future growth. Undersea warfare and surveillance are critical elements of modern defense strategy, requiring advanced sensing technologies to detect, track, and classify increasingly quiet and sophisticated underwater threats. CTS Corporation supports this domain through high-performance piezoelectric sensors, transducers, and subsystems that convert acoustic signals into actionable intelligence. Our RF and EMC filters are mission-critical components in defense electronics, ensuring signal integrity and electromagnetic compatibility in secure communications, radar, missile control, and avionic systems. Our products also support unmanned systems and satellite platforms that rely on highly efficient, lightweight technologies to operate in extreme environments with limited power. During the quarter, we were awarded a significant underwater hull penetrator business win with a potential contract value of around $20 million over a five-year period. We also registered multiple wins in the quarter for naval sonar and filter applications with several customers. In the quarter, we added two new customers for RF filters specializing in providing secure communications, SATCOM connectivity, and anti-jamming applications. We are deeply engaged across multiple customer platforms and expect the government funding cycles to start to normalize in 2026 and the funds to flow through with the enactment of the full-year appropriations bill in February. Industrial end market performance remained strong, with first quarter sales of $37 million, representing 14% year-over-year growth and supporting the broader recovery trend underway since 2025. Bookings in the quarter were up 28% from the same period last year, reflecting stable growth from our OEM customers as well as distribution partners. The book-to-bill ratio was 1.29 compared to 1.15 in 2025. We were successful with multiple wins across a diverse range of industrial applications in the quarter, including distribution components, industrial printing, and flow meter applications where our products help in accurately measuring the flow of liquids and gases in industrial systems. We also saw solid momentum in temperature sensing with wins in heat pumps, pool and spa systems, and commercial appliances. These applications underscore our role in enabling more energy-efficient and optimized industrial systems. Industrial demand is expected to remain strong in 2026, supported by secular tailwinds including automation, connectivity, and digitization. At the same time, the push for higher energy efficiency and continued manufacturing automation is expanding the addressable opportunity for our advanced sensing technologies. Transportation sales in the first quarter at $60 million represent a 3% growth over the same period last year and a 7% sequential growth quarter over quarter, which appears to demonstrate early signs of stability. Qualification of our next-generation smart actuator across our customers' platforms is progressing, and we plan to implement further product enhancements later in 2026. Our new business wins in the quarter were a good mix of sensors and foot control solutions across a diverse set of customers. We added an accelerometer to our sensors product portfolio with an award from a North American OEM, supporting safety, dynamics control, ride comfort, and advanced driver assistance systems. We gained a new customer with our current sensing solution, where our products measure the flow of electrical current in vehicle systems to enable safe, efficient, and reliable operation. As vehicles become more electrified and software controlled, current sensing has become a core enabling technology across higher voltage platforms. In the quarter, we secured multiple wins across the foot controls portfolio with OEMs in China, Japan, Europe, and North America. Overall, we continue to strengthen our footwell presence while broadening our sensing portfolio with powertrain-agnostic capabilities that support multiple vehicle architectures. Total booked business was approximately 1.1 billion at the end of the quarter. Over the long term, electronic braking remains a compelling opportunity as ADAS, vehicle electrification, and autonomous capabilities continue to advance. Our products deliver meaningful cost and weight benefits, which are increasingly important for OEMs managing performance, efficiency, and affordability trade-offs. We remain confident in the long-term growth outlook for our footwell product along with our expanding sensor portfolio. Based on recent IHS forecasts, the global light vehicle market is expected to be slightly down for 2026. The commercial vehicle market is expected to grow based on rising freight rates, improving spot and contract pricing, and pre-buy related to emission regulation changes in 2027. Now I will turn it over to Ashish, who will walk us through the financials in detail. Ashish Agrawal: Thank you, Pratik. First quarter sales were $139 million, up 11% compared to 2025 and up 1% sequentially from 2025. Sales to diversified end markets increased 18% year over year, and sales to transportation customers were up 3%. Foreign currency changes impacted sales favorably by $3 million in the first quarter. Our adjusted gross margin was 39.5%, up 250 basis points compared to 2025 and up 40 basis points sequentially. The year-over-year improvement in gross margin was driven by operational improvements and the favorable impact of end market mix. Gross margin was also favorably impacted by 700 thousand due to foreign currency changes. We are monitoring the impact of Section 232 tariff changes on steel and aluminum, inflation in precious metals, and cost increases due to higher oil prices. Our teams are already working to mitigate these impacts and are partnering with customers and suppliers towards the goal of keeping the effect on our margins cost neutral. Our tax rate for the quarter was 20.7%, slightly better than expected due to the mix of earnings and certain discrete items. For the full year, we expect our tax rate to be in the range of 21% to 23%. Earnings per diluted share for the first quarter were $0.59 compared to $0.44 for the same period last year. Adjusted earnings for the first quarter were $0.62 per diluted share compared to $0.44 per diluted share for the same period last year. Moving to cash generation and the balance sheet, we generated $17 million in operating cash flow for 2026 year to date. Our cash balance was $91 million, and borrowings were $63 million from our credit facility at the end of Q1 2026. During the quarter, we purchased 177 thousand shares of CTS Corporation stock totaling approximately $9 million. In total, we returned $10 million to shareholders through dividends and share buybacks in 2026. We have another $82 million remaining under our current share repurchase program. We remain focused on strong cash generation and appropriate capital allocation. With a strong balance sheet, we continue to support organic growth, strategic acquisitions, and returning cash to shareholders. This concludes our prepared comments. We would like to open the line for questions at this time. Operator: We will now open the call for questions. If you would like to ask a question, please press star 1 to raise your hand. To withdraw your question, please press star 1 again. We ask that you pick up your handset when asking a question to allow for optimum sound quality. If you are muted locally, please remember to unmute your device. Please stand by while we compile the Q&A roster. Your first question comes from the line of John Franzreb with Sidoti & Co. Your line is open. Please go ahead. John Franzreb: Good morning, everyone, and congratulations on another great quarter. I would like to start with the quarter itself that we just completed. A couple really quick questions here. The revenue was better than I expected. I am just curious if any jobs revenue got pulled forward into the first quarter from the second? Did anything like that happen in the period? Kieran O'Sullivan: No, John. It was a really good quarter. Nothing pulled forward. John Franzreb: Got it. Got it. Well, then looking back at maybe some of these numbers, I am curious if the gross margin profile differential between some of the diversified end markets—I guess we can include the transportation end market—is it significant that we should really be cognizant of if, you know, medical is sizably better versus A&D? You know, how should we think about the puts and takes by end market? Ashish Agrawal: Yeah. John, in previous discussions, we have talked about our margin profile. In the diversified end markets, we have a much better margin profile compared to transportation. And as we have talked about, we have pretty good margins on the transportation side as well, but the diversified markets are better. Within the diversified markets, it is more, I would say, less evenly—it is not as widely spread. So medical is definitely the strongest end market in terms of margin profile, but we do well in pretty much all the diversified end markets. John Franzreb: Okay. So industrial is relatively close to medical, is what you are saying, Ashish? Ashish Agrawal: There is not a big variation in the margin profile among the diversified end markets. Medical is definitely the strongest one. Yes. John Franzreb: Okay. And the reason I am getting to all these questions here is I looked at the incremental operating contribution in the quarter, and it came to roughly 44% if I did the back-of-the-envelope math right. I thought that was rather astonishing. And looking at the revenue profile, to me, it kind of lent itself that medical was the primary driver. I just want to be sure if I was thinking about this properly, you know, thinking about incremental margin profile properly. I am wondering any thoughts about my conclusions here? Kieran O'Sullivan: No, John. I think the way to look at it is, as Ashish gave you the color on medical, the way to look at it is with our strategy, we have always said as we grow diversified markets, quality of the earnings will improve, and that is what you are seeing here. John Franzreb: Right. Right. Okay. Another quick question. It still looks like debt ticked up in the quarter. Why was that the case? Ashish Agrawal: So, John, in the first quarter, we typically have lower operating cash flow as we do incentive comp payments and those types of things. We also continued our buybacks in the first quarter. So the combination of those two things and a slightly higher CapEx than we normally expect, those are the key drivers. The debt was up by about $5 million. But compared to where we are overall, we are continuing to make good progress. We have almost fully paid down the borrowings from the SyQuest acquisition at this point. John Franzreb: Right. Right. Okay. I think I have monopolized the call enough. I am going to get back in the queue. Thank you, guys. Kieran O'Sullivan: Thanks, John. Operator: Your next question comes from the line of Hendi Susanto with Gabelli Funds. Your line is open. Please go ahead. Hendi Susanto: Good morning, Kieran, Ashish, and Pratik. Congrats on good results. My first question is you mentioned capacity expansion in medical, and I would like to get more color in terms of how much more, and if there are any statistics like up to how much sales you can take—that would be helpful. Pratik Trivedi: Sure. Thank you, Hendi, for the question. The capacity in our medical end market primarily refers to our aesthetics application. We have strong partnerships with some of the customers here where they give us a long-term forecast, and we are able to install capacity ahead of the demand. We continue to see strong momentum in this end market, and we are expecting double-digit growth year over year. Hendi Susanto: Double-digit growth in capacity or in sales? Pratik Trivedi: In sales, which means that we would need to have that capacity installed ahead of it. And we are not seeing any concerns in our capability to meet the demand profile that we are seeing in that space. Hendi Susanto: I see. And then, Ashish, I have a question on the gross margin. So there is some mix benefit, and the non-transportation or the diversified end market is a favorable tailwind. On the other hand, there is also the challenge of high oil prices and component costs. How sustainable is the strong gross margin that we are seeing in Q1? Should we expect some headwinds because of those challenges? Or do you anticipate that Q1 gross margin can serve as a baseline that is sustainable? Ashish Agrawal: Hendi, that is a good question. That is something that we look at very, very carefully. In addition to the topics that you mentioned, we also had a slight impact from favorable currency changes, which was about 700 thousand. Currency can go in multiple different directions, so we will just continue watching the markets for that. We are experiencing cost pressures related to precious metals that have been going on since late last year, and we have been working closely with our customers to manage through the impact of that with pricing changes and materials, those types of things. More recently, we are also seeing inflation related to oil-derived products like resin, epoxy, transportation costs, those types of things. We are expecting to see more cost pressures from late Q1 going into Q2, and our teams are already working with customers to manage through that, as well as with suppliers. So we will see some headwinds, but at the same time, we are very, very focused on making sure that we can make the impact cost neutral on our margins. There can be some timing differences which could impact margins in the short term, but we expect to be able to work through it as we have in the past several years. Hendi Susanto: Okay. And then may I ask more insight into the aerospace and defense expectations of funding? Various programs will improve in the second half. Booking will pick up. Considering the government fiscal calendar ending in September, how should we expect new bookings and new funding to materialize in sales? I assume there would be some lag. I do not know whether a Q4 starting point is somewhat a reasonable expectation. Pratik Trivedi: Yeah, Hendi, for the aerospace and defense end market and just looking at the broader macro trend, overall, defense spending will continue to remain elevated due to the current geopolitical unrest as well as investments in the infrastructure, primarily around the naval side of defense. What we are seeing right now is we are actively engaged in multiple platform discussions with a wide range of customers. However, what we experienced in the first quarter is a delay in government funding. But towards the end of the quarter, with the passage of the appropriations bill, we expect that funding pace to pick up in the second half of this year. The other point to note is that we usually also have a bit of lumpiness in terms of how we get the orders on the defense side. So you could potentially have a quarter where our book-to-bill might be less than one; however, then it makes it up in the remainder of the year. Hendi Susanto: Yep. And then last question for me. Any update on the smart actuator and potential change in allocation by the customer? Pratik Trivedi: Hendi, we continue to be on track with launching the revised version of the actuator with our customer, and we expect normalized modest growth in that particular product line for this year. Hendi Susanto: Okay. Got it. Thank you. Kieran O'Sullivan: Great. Thanks, Hendi. Thanks, Hendi. Operator: Your next question comes from the line of John Franzreb with Sidoti & Co. Your line is open. Please go ahead. John Franzreb: Yeah. I am actually curious about the growth that you saw in the transportation market in the first quarter. Firstly, were you surprised by that? Kieran O'Sullivan: John, I would say we were pleased with how we performed in the light vehicle demand and saw a little bit more positiveness in the commercial vehicle. We think, as Pratik said, that is going to extend into the second half of the year. John Franzreb: As I am sure you have seen, the commercial truck market has seen a strong bookings profile over the last few months. A lot of people are suggesting that the benefits from those order profiles are a second-half event. I am curious if that is how you see it playing out or if it affects you in any different way? Pratik Trivedi: No, we do see it playing out the same way, John. In the market right now, we are seeing cautious optimism here, primarily related to rising freight rates, improved pricing, and then we have, in the second half of the year, the pre-buy event due to EPA 2027. So we expect it to play out in a very similar manner. John Franzreb: Okay. So second half. Gotcha. So then the expectation for the market to be down for the full year—I am gathering that suggests you expect the global vehicle market to continue to weaken for the balance of the year. Is that also a fair assessment? Kieran O'Sullivan: John, what we would say on the light vehicle market is it is performing well so far. But in our prepared remarks, we said IHS had forecast some softness in the second half of the year. With the geopolitical situation, that is how we are thinking about it at the moment—some softness in light vehicle, strength on the commercial vehicle side—so balancing it out a little bit. John Franzreb: Got it. Got it. Okay. And one last question about capital allocation. You are buying back stock. As Ashish pointed out, you are paying down debt, albeit there were working capital needs in the first quarter. What is the outlook right now on the M&A side of the business? Are you in a period of consolidation and working on organic growth, or are you still looking at acquisitions? Can you discuss maybe the size of the markets that you are looking at? Kieran O'Sullivan: Yes, John. The key points for us from capital allocation, first of all, are supporting the organic growth investments, which we have some nice opportunities in, which Pratik touched on as well in medical; still pursuing strategic acquisitions to advance our diversification and quality of earnings—while we have nothing to report today, we are very active in that area; and then returning cash to shareholders is how we are approaching it. John Franzreb: Okay, Kieran. That is all I have. Thanks for taking the questions. Ashish Agrawal: Thank you, John. Operator: There are no further questions at this time. I will now turn the call back to Kieran O'Sullivan for closing remarks. Kieran O'Sullivan: Thank you. Thank you all for your time today. Diversification remains a strategic priority to drive growth and margin expansion. In addition, we are expanding in vehicle powertrain-agnostic solutions. We are guided by our Evolution 2030 strategic initiative to enhance our emphasis on growth, operational rigor, and employee engagement, while also giving back to the communities where we operate. We look forward to updating you on our second quarter 2026 results in July. This concludes our call. Operator: This concludes today's call. Thank you for attending. You may now disconnect.
Operator: Ladies and gentlemen, thank you for standing by, and welcome to the Clarivate Plc Q1 2026 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session. If you would like to ask a question, press star followed by the number one on your telephone keypad. If you would like to withdraw your question, press star then the number one. I will now hand today's call over to Mark J. Donohue to begin today's conference. Please go ahead, sir. Mark J. Donohue: Thank you, and good morning, everyone. Thank you for joining us for the Clarivate Plc first quarter 2026 earnings conference call. As a reminder, this conference call is being recorded and webcast and is the copyrighted property of Clarivate Plc. Any rebroadcast of this information in whole or in part without prior written consent of Clarivate Plc is prohibited. The accompanying earnings call presentation is available on the Investor Relations section of the company's website. During our call, we will make certain forward-looking statements within the meaning of the applicable securities laws. Such forward-looking statements involve known and unknown risks, uncertainties, and other factors that may cause the actual results, performance, or achievements of the business or developments in Clarivate Plc’s industry to differ materially from the anticipated results, performance, achievements, or developments expressed or implied by such forward-looking statements. Information about the factors that cause actual results to differ materially from anticipated results or performance can be found in Clarivate Plc’s filings with the SEC and on the company's website. Our discussion will include non-GAAP measures or adjusted numbers. Clarivate Plc believes non-GAAP results are useful in order to enhance understanding of our ongoing operating performance, but they are a supplement to and should not be considered in isolation from or as a substitute for GAAP financial measures. Reconciliations of these measures to GAAP measures are available in our earnings release and supplemental presentation on our website. With me today are Matitiahu Shem Tov, Chief Executive Officer, and Jonathan M. Collins, Chief Financial Officer. After our prepared remarks, we will open up the call to your questions. With that, it is a pleasure to turn the call over to Matitiahu Shem Tov. Good morning, and thank you for joining us. Matitiahu Shem Tov: Today, I will walk through our first quarter performance, progress against our value creation plan, and how execution across the business is positioning Clarivate Plc for improved organic revenue growth, margin expansion, and stronger free cash flow generation. This is our fifth consecutive quarter of improved performance. We are off to a solid start to the year, and I am pleased to report that our first quarter financial results have us on pace to achieve our full-year guidance. Revenues were $586 million, supported by continued VCP progress and execution across the portfolio. From a growth perspective, the quality composition of our revenue continues to improve. Organic ACV growth was 1.6%, with subscription organic revenue growth of 1.7% reflecting increased adoption of subscription-based solutions across Clarivate Plc. We are encouraged by the underlying momentum we are seeing due to stronger alignment between commercial execution and product strategy. Adjusted EBITDA was $241 million, representing a 41% margin, up almost 200 basis points year-over-year, highlighting the benefit of our subscription-first strategy and disciplined cost management. Free cash flow generation was also solid at approximately $79 million, which allowed us to retire $143 million of debt during the quarter. Most important, the value creation plan is working. We are seeing positive execution across all pillars, demonstrated by accelerating product adoption, improving sales effectiveness, and an expanding cadence of new product introductions. This quarter reinforces our confidence that the actions we put in place are beginning to translate into more predictable performance, expanding margin, and strong free cash flow generation. As a reminder, we launched the value creation plan in early 2025 to sharpen focus, accelerate execution, and unlock long-term shareholder value. The plan is built around four core pillars: business model optimization; improved sales execution; accelerated AI innovation utilizing our proprietary data assets; and portfolio rationalization. You can see these pillars showing up clearly in the numbers: subscription mix, margin expansion, debt reduction. Academia and government continue to be a strong engine for recurring revenue growth. We are executing well across all three pillars of the value creation plan with clear evidence of progress. On business model optimization, we are accelerating the shift towards subscription-based offerings. Adoption of our ProQuest subscription solution remains strong, with over 600 new subscriptions sold in the last twelve months, reinforcing the durability and predictability of our revenue base. Sales execution is also improving, driven by more effective cross-sell execution across content, research and analytics, and software solutions. During the quarter, we secured several key wins, including a multi-product institutional deal with Spire University, a new research-oriented university in China. We are expanding our China footprint, and this demonstrates our ability to deliver integrated solutions that address broader customer needs. We are leveraging the power of AI, which is generating real, measurable value for customers. Clarivate Plc academic AI solutions are optimizing key library workflows, resulting in a 30% to 60% decrease in manual repetitive work and doubling or even quadrupling throughput. This demonstrates how combining AI with Clarivate Plc’s unique content and extensive domain knowledge leads to significant operational improvement for customers. Turning to intellectual property, our attention remains firmly on execution and fundamentals. We are seeing encouraging signs that our increased focus on new subscriptions and renewal discipline is producing results. For the first quarter, renewal rates improved approximately 100 basis points, helping organic ACV trends improve to nearly flat. This represents a clear improvement versus prior trends and supports our confidence that the IP business is moving forward and returning to sustainable recurring growth. Sales execution continues to strengthen, for example with national IP offices, including the USPTO, where we secured a major trademark analytics contract and large-scale digitization programs. These wins are advancing patent and trademark operations globally and reinforce Clarivate Plc’s role as a long-term strategic partner in the IP ecosystem and analytics. During the quarter, we released brand image search, adding advanced AI capabilities such as clustering and multilingual support. These enhancements are expanding how IP professionals uncover insights, assess risk, and make faster, more confident decisions at a global scale. Overall, the IP segment is operating with greater focus and discipline, and we believe this improvement positions the business for future growth. In Life Sciences and Health, we are seeing steady progress with the value creation plan. The shift from transactional sales to subscription is on track, supported by positive customer feedback and more consistent sales patterns. The successful changes we have made are reflected in an almost 1% rise in organic revenue during the first quarter. Notably, we won a new top 20 global pharmaceutical customer for DRG Fusion, our new real-world data analytics platform. This reinforces the strength of our value proposition with large, sophisticated customers. In addition, we secured a six-figure subscription win with a biotech company for OpEx, our platform for preclinical and clinical safety intelligence, demonstrating continued momentum across customer sizes and use cases. On innovation, we continue to expand access to our trusted regulatory and scientific intelligence through strategic partnerships. During the quarter, we integrated Cortellis regulatory intelligence with Anthropic Cloud Enterprise, combining cloud-based proprietary data with advanced AI reasoning to deliver trusted insights directly within customer AI workflows. The collaboration underscores how Clarivate Plc is extending the reach and relevance of its content across the broader AI ecosystem. In February, we announced that we are actively pursuing the sale of the Life Sciences and Healthcare business as part of a broader portfolio rationalization effort. This is consistent with our broader strategy to concentrate capital and management attention on areas where we see the highest returns. The process is ongoing. As always, there is no guarantee of the outcome; we will provide updates as appropriate. Our objective remains clear: maximizing value for shareholders while sharpening strategic focus on our remaining businesses. We have spoken on previous earnings calls about the investments we are making in AI product innovation. Today, I want to highlight how we are scaling AI enablement across Clarivate Plc to drive efficiency and support acceleration of free cash flow. This is a core enabler of the value creation plan and a key lever for margin expansion as we return to healthier organic growth. Let me provide some color and examples. Across go-to-market functions, we are embedding AI within sales and customer care to accelerate revenue growth, streamline customer interactions, enhance service quality and experience, and increase retention. In technology, we are deploying AI throughout software engineering and content operations to accelerate innovation and shorten new product time to market. Within corporate functions, we are leveraging AI across finance, human resources, and legal functions to automate workflows and drive scalable efficiencies. We expect the deployment of digital agents will reduce manual effort, improve accuracy, and create operating leverage. Taken together, these AI-enabled cost efficiencies reinforce our core messages. As organic growth improves, these AI efficiencies give us confidence in sustained margin expansion and growing cash flow. To close, the first quarter demonstrates that the actions we put in place through the value creation plan are translating into stronger execution, improving fundamentals, and a clearer path forward. We are operating with greater focus, strengthening our business model, improving sales effectiveness, and delivering innovation that matters to our customers, all while maintaining strong discipline around cost and cash generation. Thank you for your continued support. We look forward to keeping you updated on our progress. I will now turn the call over to Jonathan M. Collins for a review of our financial results and outlook. Jonathan M. Collins: Thank you, Matitiahu Shem Tov. Slide 14 is an overview of our first quarter results compared with the same period last year. Q1 revenue was $586 million. The change over the prior year was due to the inorganic disposals, partially offset by organic growth and a favorable foreign exchange impact. First quarter net loss was $40 million; improvement over the prior year was driven by a foreign exchange benefit as well as lower restructuring, income tax, and interest expenses. Adjusted diluted EPS was up nearly 30%, or $0.04, over the prior year to $0.18. The increase was attributed to adjusted EBITDA growth, lower interest expense, lower tax expense, and a lower share count due to last year's repurchases, which each contributed about a cent to growth. Operating cash flow was $135 million in the quarter. The change compared to last year was driven by higher working capital due to incentive compensation payments, partially offset by higher adjusted EBITDA. Please turn with me now to page 15 for a closer look at the drivers of the first quarter top- and bottom-line changes from the prior year. The changes over the prior year were driven by three primary factors. First, organic revenues grew modestly as subscription growth of nearly 2% was partially offset by lower reoccurring and transactional revenues. We delivered a strong profit conversion on the growth as operating expenses were lower than the prior year despite the higher revenues as we achieved cost efficiencies across the business. Second, businesses we are disposing decreased revenue by $24 million but were almost entirely offset by cost reductions due to the wind downs, yielding a net $3 million reduction in adjusted EBITDA. And finally, the U.S. dollar remained relatively weaker against the basket of foreign currencies compared to the first quarter of last year, which caused a foreign exchange tailwind on the top line. The mid-teens profit conversion is due to transaction gains last year that did not recur this year. In total, disciplined cost management led to an adjusted EBITDA margin expansion of nearly 200 basis points, which is in line with our full-year guidance. Please turn with me now to page 16 for a look at how the adjusted EBITDA converted to free cash flow and how we allocated the capital. Free cash flow was $79 million in the first quarter, which was $31 million lower than the prior year. The change was due to higher working capital as a result of incentive compensation payments, partially offset by the adjusted EBITDA growth. We used the free cash flow and excess cash on hand to redeem the remaining $100 million of bonds that were due later this year, repurchase $43 million of bonds due in 2028 and 2029 at a blended discount of about 10%, and repurchased 7 million shares of stock to offset the dilutive impact of stock compensation investing. Please turn to page 17 for a look at our full-year financial guidance, which remains entirely unchanged from February. Today, we are reaffirming our full-year financial guidance for all metrics. Beginning at the top of the page, we anticipate the acceleration of our organic annual contract value last year will continue in 2026, resulting in growth of between 2%–3%, representing continued steady progress and an increase of about three-quarters of a percentage point at the midpoint of the range. We expect recurring organic growth of about 1.5% at the midpoint of our range, which is an improvement of nearly a percentage point over last year. Due entirely to the wind down of the businesses we are disposing, we expect revenue to decline by about $100 million at the midpoint of the range to $2.36 billion and that our organic recurring revenue mix, which excludes the impact of the disposals, will improve to between 88%–90%. Moving down the page, we expect adjusted EBITDA will grow modestly despite the lower revenue, increasing our profit margin to nearly 43% at the midpoint of the range. We anticipate adjusted diluted EPS will grow about nine percent at the midpoint of the range to $0.75, largely due to the share repurchases we completed last year. Finally, free cash flow is expected to grow by about 10% to $400 million at the midpoint of the range. Please turn with me now to page 18 for a reminder of the full-year top- and bottom-line changes we are expecting compared to last year. We expect adjusted EBITDA margin will expand by about 200 basis points at the midpoint of our ranges, driven by a return to organic growth, continued cost discipline, and completing the disposals. We anticipate organic growth of about 1%, led by subscription revenue growth from continued ACV acceleration. We have plans in place to achieve cost efficiencies to fully offset inflation, resulting in a full flow-through of the approximately $25 million of revenue growth to profit. This will account for about a third of the profit margin expansion. The inorganic disposals are expected to lower revenue this year by approximately $130 million, and we are reducing operating expenses by more than $100 million, which yields a profit impact of about $25 million, delivering the remaining two-thirds of the profit margin expansion. As a reminder, our financial guidance for this year assumes we will own the Life Sciences and Health business for the entire year, and if an agreement is reached to sell the business, a revision to our guidance for this potential divestiture may be necessary later this year. We continue to anticipate a modest foreign exchange translation benefit to the top and bottom lines of $10 million and $5 million, respectively, most of which we already experienced in the first quarter. Please turn with me now to page 19 to step through the expected seasonality of our revenues and profits this year, which we have refined based on our first quarter results. We continue to expect to make steady progress on the top and bottom lines as we move through the year. As we projected in February, we experienced a slight sequential pullback in our annual contract value organic growth in Q1 but anticipate steady acceleration through the balance of the year to arrive near the midpoint of our range. Recurring organic revenue growth in Q1 of 1% was higher than we expected, due largely to the timing of patent renewals. We do expect a slight pullback in Q2 as a result of this phasing, leading to accelerated growth in the second half of the year. We expect revenue will remain relatively stable over the next couple of quarters and then tick up in Q4 due to the normal seasonality of reoccurring and transactional revenues. We do anticipate profit margins will continue to expand as we move through the remainder of the year, due to the organic growth and the impact of the disposals. Please turn with me now to page 20 to review how we expect the more than $1 billion of adjusted EBITDA will convert to about $400 million of free cash flow and how we plan to allocate capital. At the midpoint of our range, we expect free cash flow to grow about $35 million, or 10%, over last year. One-time costs are expected to abate, primarily on lower restructuring costs. As noted a couple of pages ago, our guidance does not contemplate the sale of the Life Sciences and Health segment. If we reach an agreement, this is an area we would update later this year. We expect cash interest to improve by about $20 million over the prior year as a result of the debt we prepaid last year and last quarter, additional debt we plan to prepay the remainder of this year, and some savings associated with the projected forward base rate curve. Cash taxes are expected to be $510 million higher than last year due largely to the new corporate tax in Jersey. We anticipate the change in working capital this year will be a use of approximately $20 million, primarily due to the incentive compensation payments in Q1. We are also expecting a $10 million benefit associated with lower paired contractual cost. And while we remain committed to investing in product innovation, the disposals and cost efficiencies will improve capital spending by about $15 million. From a capital allocation perspective, we plan to use the free cash flow we generate in the remainder of the year for debt reduction. Please turn with me now to page 21 for more specifics on our deleveraging plan this year and beyond. The chart at the top of the page outlines our debt maturity profile. As you can see, we have a favorable runway with no near-term maturities. Over the past three years, 2023 through 2025, we generated $1.2 billion of cumulative free cash flow, just over $100 million per quarter on average. As I highlighted on the prior page, we expect to generate about $400 million this year at the midpoint of our range, and we expect to generate at least this amount next year and the following. This outlook results in a similar average quarterly rate of about $100 million. Given the current debt market conditions, we plan to use our free cash flow moving forward towards the early retirement of our bonds. Over the next nine quarters, we expect to retire our secured notes in their entirety before their maturity in July 2028. Once those have been redeemed, we plan to use our quarterly free cash flow to begin to retire the 2029 notes, leaving only $500 million of the $1.8 billion of midterm maturities to be refinanced in the next few years. It is worth noting that, as with all of our forward-looking guidance, this outlook includes our Life Sciences and Health business. If the potential sale does materialize, we expect it would eliminate the need for a future bond refinancing. We anticipate these debt reduction actions will lower our net leverage from four turns at the end of Q1 of this year to approximately 2.5 turns in a few years. We continue to be very encouraged by the improved results we are delivering as we implement the value creation plan and the durable cash flows we generate. I would like to finish by thanking all of you for listening in this morning. I will now turn the call back over to the operator. We will now open the call for questions. As a reminder, please limit yourself to one question and return to the queue for additional. Please go ahead. Operator: At this time, if you would like to ask a question, press star followed by the number one on your telephone keypad. If your question has been answered and you would like to remove yourself from the queue, press star followed by the number one. Your first question is from the line of Toni Michele Kaplan with Morgan Stanley. Toni Michele Kaplan: Thank you. You have talked about your new AI capabilities that you have launched, and reducing some of the manual repetitive work through AI efficiencies. I was hoping you could talk about the traction of the new AI products, the reception from customers, how much growth you are getting from them at this point, and, similarly, any ability to quantify the efficiency benefits that you can get from AI as well. That would be great. Thank you so much. Matitiahu Shem Tov: Thank you, Toni. I will start, and Jonathan M. Collins will continue. First of all, we are intensifying our investment in AI. In the last fifteen to eighteen months, we invested more and more into AI, and it goes two ways. The first one that we started was major product introductions and innovation around the three segments, and then now we are shifting or moving also to internal cost efficiencies with AI. So I will start with internal cost efficiencies. There are opportunities in go-to-market, customer support, and sales operations; opportunities in technology to help us innovate and develop products faster with the support of AI; and also opportunities around corporate to rationalize some of our corporate costs, whether it is finance, general, or legal. So there are a lot of opportunities internally. Externally, the product dimension is delivering innovation to our customers where it really matters. So three buckets of product innovation that we have on AI. One is the first wave of products that we have improved with AI assistants. Product by product, in many of our products we have implemented research assistants. We have implemented in different products in A&G, then in Life Sciences, and we are now doing the same with IP. That was wave one. Wave two was agentic AI. We are implementing agentic AI capabilities across our products where it matters. And then, just coming back from some of the feedback we get from some measurements that we have done in implementing agentic AI within our Alma Prime library product, we have managed to reduce the manpower or to quadruple the throughput of some of our customers using agentic AI capabilities, and this is just a start. And the third wave is ecosystem implementation. Ecosystem implementation: we all know that this generation, especially students and researchers, but also lab scientists and IP professionals, are consuming AI through the major LLM providers. So we started the journey. We announced about a month ago that we are collaborating with Anthropic to provide AI capabilities within Anthropic enterprise customers, taking the Clarivate Plc proprietary products and proprietary data that we have, and in collaboration with Anthropic we are enabling the consumption of this data in the Anthropic environment. In a way, we are turning the LLM to our sales agent, meeting our customers where they are. On top of this, yesterday we announced another product from A&G called Nexus Connect. If you think about universities, they subscribe to a lot of different content. And, again, students and researchers are consuming this content through different types of LLM. Nexus Connect is our new offering from A&G that brings the data—ChatGPT, Copilot, whatever your designated LLM—using our technology to bring our content, but also other providers’ content, very close to our customers. So overall, a lot of energy and a lot of resources are going into AI innovation. We have just been awarded outside recognition that we are the front leader in terms of AI innovation in the academic ecosystem. It has been a long answer, but I will move it over to Jonathan M. Collins to talk a little bit about the financials. Jonathan M. Collins: I appreciate the part of the question, Toni, with respect to the opportunity size in the AI efficiency internally. We outlined the areas that we are focusing on there, and at this point, we are confident that the opportunity set here gives us a really good opportunity to continue to expand our margins and grow our cash flows. We are likely going to look to further dimension this probably later this year. Thank you for the question. Operator: Your next question is from the line of Manav Patnaik with Barclays. Manav Patnaik: Thank you. Matitiahu Shem Tov, I was hoping you could just give us an update on how you see the competitive environment out there. Presumably, they are using AI and enhancing their products as well, and I am just curious if you have seen any change and how you would compare your initiatives versus what you are seeing in the market? Matitiahu Shem Tov: I think I just mentioned that we have been recognized as an AI innovator. We see great adoption for our AI products across the three segments. In A&G, we have more than 400 institutions using academic AI solutions. I mentioned Nexus Connect. In Life Sciences, over 10 thousand researchers and users are using some of our AI product innovation. We recently announced the cloud collaboration with Anthropic. We are doing well with IP as well, with the recent brand image search that we have introduced. We always look forward; we try to set the scene as opposed to looking at what the competition does, but we feel good about our product innovation. Many of us come from a background of products and engineering, and we are seeing a lot of improvement and great feedback from our customers across these three different segments. Operator: Your next question is from the line of Scott Wurtzel with Research. Scott Wurtzel: Good morning. Thank you for taking my question. I think in your prepared remarks you talked about the China opportunity and expanding there. I am wondering if you can maybe just talk about that A&G space more broadly in China and the opportunity that presents to you? Matitiahu Shem Tov: China is a great contributor to our A&G capabilities and performance. We just came back from a meeting with some of our Chinese top sales executives. We sold 15 new Web of Science businesses in China last year. There is a lot of great momentum for A&G in China, specifically in Web of Science, and more recently also in Web of Science Research Intelligence. We have some development collaboration we are doing with a few institutions. We feel very good about our top A&G prospects in China—not only A&G, also Life Sciences and IP. We have different ideas we are currently contemplating. We will share more as we have it, but we feel good about the China market. Jonathan M. Collins: Thanks for the question, Scott. Operator: As a reminder, to ask a question, press star followed by the number one on your telephone keypad. Your next question is from the line of Ashish Sabadra with RBC Capital Markets. William Qi: Hey. Good morning, guys. This is William Qi on for Ashish Sabadra. Appreciate you taking our question. It is really great to see the continued sequential improvements on the organic sales metrics. I think IP continues to execute in a bit of a more muted environment. You have noted in the past that there are some expectations for that to improve maybe in 2026 into early 2027 as some of those historical batch renewal cycles come back. Is that the general trend that you expect for that segment? And you have had great wins as well—how do you combine all those together? Matitiahu Shem Tov: I will start, and then I will ask Jonathan M. Collins to add. Just a reminder that we are the market leader in IP. We tend to forget this, and we are the only company that has all the three or four sub-offerings that we have in IP. We are very big on IPMS, and we have great intelligence products, both for trademarks and for patents as well. We have a new management team. We have enhanced focus—very strong focus on two things: sales execution—we have gone through some changes in our sales organization, renewals, territory alignment, and other things that we have done—and then AI innovation. There is very strong AI innovation momentum that we are building with the management team of IP. Brand Image Search was one product we mentioned. We are confident in the return for IP back to future growth. Jonathan, if you can give some more color here. Jonathan M. Collins: As Matitiahu Shem Tov highlighted, the continued investment in AI, we expect, will help accelerate growth in our subscription products there. We have made steady progress. We saw a slight improvement in renewal rates in the first quarter, and we have got an organic ACV that is getting pretty close to flat after a few years of decline, so steady progress based on the investments that we are making there. The biggest part of the IP business—the recurring revenue stream—which is our patent renewal business, declined a few percent two years ago. Last year, it was flat. The first half of this year, due to the comps and some timing from the first half of last year, will be down slightly, but we do expect that business to return to growth in the second half of this year and have a good trajectory heading into next year. Market conditions there—the patent stock growth—have improved over the last few years, which is a good leading indicator. And the team, as Matitiahu Shem Tov said, has done a very good job on sales execution, improving our competitive position in that part of the market. So it is continued progress, and we look forward to better performance from IP in the coming quarters and into next year. Thanks for the question, William Qi. Operator: Your next question is from the line of George Tong with Goldman Sachs. George Tong: Hi, thanks. Good morning. Transactional revenues were down this quarter because of lower A&G activity. Can you talk a little bit more about what you are seeing there and what would need to happen for A&G activity to rebound? Jonathan M. Collins: Thanks for the question, George. Our transactional revenues were down a couple of percent in Q1. As you noted, A&G was the primary driver in the quarter. I will start by saying we do expect, on a full-year basis, our guidance contemplates that the transactional business will be down slightly compared to the prior year, so it was as expected. In the quarter, some of that in A&G was due to the timing of software implementations. That can be a little lumpy quarter to quarter. And then, on a full-year basis, as we continue to have success in Life Sciences with the migrations to subscription, we will expect to see a little bit of a headwind there on the transactional side. But Q1’s slight decline was in line with what we expected and is in line with what we expect for the full year. As we move into next year, as we continue to build that sales pipeline on the software products, there is some opportunity to improve that heading into next year. But that was the primary driver in Q1. George Tong: Very helpful. Thank you. Jonathan M. Collins: Thanks, George. Operator: Your next question is from the line of Andrew Nicholas with William Blair. Andrew Nicholas: Good morning. Appreciate you taking my question. I was hoping to hone in a little bit more on A&G growth. That has been a segment that has hung in there pretty well over the past handful of quarters. Within that approximately 2% organic growth, and the expectation for improvement in 2026, is research analytics and content aggregation leading the way there, or is it a software-led growth, or are they all kind of around that 2% number? Just curious if there is an underlying subsegment where you have more expectation for growth acceleration. Thank you. Jonathan M. Collins: Thanks for the question, Andrew. The bright spot for us as of late in A&G from an organic growth contribution standpoint has been the success in our research and analytics category, which is led by our flagship product, the Web of Science. As Matitiahu Shem Tov touched on in his comments around AI innovation, this is where we have seen a lot of the new innovation come into the product. We are very encouraged by the adoption of the research assistant last year, some of the agents that we have deployed that we are getting great feedback on, such as the literature review agent. And we are also very thrilled about this year's growth that will be driven from the Web of Science Research Intelligence platform. That is the new AI-native multi-agent platform that helps measure research success across the university ecosystem. So we are really encouraged by what we have seen there. The content business has held in; that usually grows at or slightly below the average for A&G. And then the software business is doing well, with very high renewal rates. We have some new product innovation happening there that can help to catalyze further growth. Those are the three main areas, and the strong performance has been in our research and analytics category. Thanks for the question, Andrew. Operator: Our last question comes from the line of Stifel. Analyst: Hi. I am calling on personnel’s behalf. Apologies if I missed this, but in the slide deck, Life Sciences and Healthcare is progressing ahead of schedule in the shift to subscription. What is the current subscription mix of the business, and how should this shift move organic growth through the year? Thank you. Jonathan M. Collins: Thanks for the question. This is our segment that has the highest proportion of transactional revenue. Just as a reminder, our consulting practice for commercialization, which sits in the Life Sciences business, is an important part of the go-to-market motion for this, but it creates a lower organic recurring revenue mix within Life Sciences. What Matitiahu Shem Tov touched on is that we have continued to invest in product innovation to migrate some of these solutions to a subscription. We started to see progress on that last year. That continues into this year, and we expect to continue to make steady progress making that business more predictable with a higher renewal base every year to help accelerate it into growth. So it is a combination of the commercial motion—where we are focused in the marketplace—and the product innovation that is helping to lead that. We expect to see continued traction there, and over time, we think we can see the recurring revenue mix get into the low nineties in Life Sciences. Matitiahu Shem Tov: Maybe just a few words of wrap-up. As I mentioned over the call, the VCP plan is working. This is the fifth quarter of improvement. Our subscription mix has gone to 88%–89%. We have better sales execution, and we are industry-leading in terms of AI. We are very pleased to be here today, and thank you for your time. Jonathan M. Collins: Thank you all for your time today. That concludes our call, and we look forward to speaking with you with any follow-up questions in the coming days. Thank you. Operator: This does conclude today's call. Thank you for joining. You may now disconnect your lines.
Debra Wasser: Hi, everyone, and welcome to Etsy's First Quarter 2026 Earnings Conference Call. I'm Deb Wasser, VP of Investor Relations. Today's prepared remarks have been prerecorded. Joining me today are Kruti Patel Goyal, CEO; and our CFO, Lanny Baker. This quarter, we've changed our earnings process to feature a shareholder letter, which we encourage you to read in detail and have shortened our prepared remarks to enable more time for Kruti and Lanny to take questions from our publishing sell-side analysts. We hope you find that this shift helps drive efficiency and transparency in our process, both for us and for all of you. Please keep in mind that our remarks today include forward-looking statements related to our financial outlook, our business and operating results as noted in the shareholder letter posted to our website for your reference. Our actual results may differ materially. Forward-looking statements involve risks and uncertainties, some of which are described in today's shareholder letter and our most recent periodic report and which will be updated in future periodic reports that we file with the SEC. Any forward-looking statements that we make on this call are based on our beliefs and assumptions today, and we disclaim any obligation to update them. Also during the call, we'll present both GAAP and non-GAAP financial measures, which are reconciled to GAAP financial measures in today's shareholder letter posted on our IR website, along with the replay of this call. With that, I'll turn it over to Kathy. Kruti Goyal: Thanks, Deb, and good morning, everyone. Thank you for joining us. I stepped into my first quarter as CEO after more than 15 years at Etsy, with a deep understanding of what makes this marketplace special and a clear view of where we can unlock more of its potential. At our core, Etsy has a differentiated value proposition that remains deeply resonant with buyers and sellers. Our focus is now translating that strength more consistently into the customer experience. Over the past year, we've been clear about what needs to change and the priorities that we're executing against to close that gap. -- namely expanding how and where buyers discover us, connecting them with items that feel personal and relevant and building relationships that go beyond transactions. That's how we drive engagement and frequency and ultimately turn the uniqueness and scale of our marketplace into a lasting advantage. In the first quarter, we saw encouraging signals that this strategy is beginning to take hold. All of our key performance indicators came in at or ahead of our expectations with GMS at $2.5 billion, up 5.5% year-over-year for the Etsy Marketplace. Revenue of $631 million on take rate of 25.7% and adjusted EBITDA of $185 million or 29.3% adjusted EBITDA margin. And more importantly, we're starting to see early positive changes tied to customer behavior on Etsy. Active buyers grew sequentially for the first time in 2 years. We delivered year-over-year growth in new buyers and active sellers GMS per active buyer grew year-over-year for the first time since 2022, and momentum in our mobile app continued to strengthen. These are early indicators, but they matter. They show the marketplace is getting healthier, and we have confidence this will translate into the top line over time because creating real value for buyers and sellers is what ultimately drives value for the marketplace. Let me briefly remind you how we're thinking about the business. Our strategy is built around four priorities: showing up our shoppers discover, matching them with the right inventory, retaining and rewarding our most valuable customers, both buyers and sellers, and amplifying human connection, one of our core differentiators. These aren't independent initiatives. They operate as a system. Discovery and matching bring buyers in and help them find items and shops they love. Loyalty and human connection give them reasons to come back. We believe that investing in this system is how we'll rebuild frequency over time. Today, we're seeing the clearest progress in discovery and matching, where coordinated investments are already driving meaningful impact across both the customer experience and our financial results. Our app is the centerpiece of this transformation. It's where personalization, machine learning and direct relationships come together most effectively, and we're seeing that show up in the numbers. App GMS is continuing to significantly outpace non-app growth and now makes up about 47% of total GMS, expanding 240 basis points year-over-year. Mobile app GMS was up 11.2% year-over-year in the first quarter of 2026 versus up 6.6% last quarter. As we keep improving the app through levers like better personalization, more effectively using our owned marketing channels and increased adoption, we see a clear opportunity to continue to grow app share and drive frequency over time. This matters because app users engage more deeply, convert at higher rates and come back more often. It's one of the clearest indicators that our flywheel is starting to turn. When it comes to matching, we talk a lot about search, and that's because Etsy's core job is to help shoppers find things that feel personal, relevant and worth coming back for. Historically, our systems prioritize what was most likely to convert in the moment. often favoring popular items over the ones that were truly tailored to a specific buyer. We're changing that. We're shifting toward a more personalized, relevance driven approach, powered by machine learning and AI that better understands what a buyer is looking for right now and their taste over time and the vast inventory offered by sellers on Etsy. We're already starting to see positive signals from models that bring these elements together. With early tests showing improvements in add to cart rates and conversion. We're also expanding the role of our personalized home fee. In Q1, we introduced AI-generated buyer profiles that help us go beyond the shoppers past activity. With the goal of expanding the categories they explore and inspiring new purchases. And finally, we're strengthening our direct relationships with buyers through own channels. using better timed and more relevant push and e-mail communications to drive higher engagement. Turning to loyalty and human connection. Our most valuable buyers and sellers drive a disproportionate share of our marketplace. And we're focused on earning their continued engagement. For buyers, we see an opportunity to both deepen loyalty and retention with our most valuable customers and to nurture those with the potential to become them. by making shopping on Etsy easier, more rewarding and giving them more reasons to come back. We believe that long-term loyalty isn't built through a single program or initiative but across every interaction. So our approach spans the full experience. For more personalized recommendations to targeted offers to programs like our Etsy insider beta. We're also moving toward more intentionally serving our highest value buyers. And importantly, we're expanding ownership of our loyalty initiatives across product, engineering, marketing and operations because all of those moments together determine whether a customer chooses to return. For sellers, we're looking to reduce friction and enable growth with plans to build on our AI-powered tools to simplify listing and shop management so they can spend more time creating and connecting with buyers. And for both buyers and sellers, we're strengthening trust through improvements to Etsy purchase protection and better support for our top customers. The final part of our strategy that I'll discuss today leans into what makes Etsy fundamentally different human connection. Buyers come to Etsy not just for what they buy. But for who they buy it from. This is one of our most defensible advantages and one that we haven't fully delivered on. We've begun taking a more structured approach to understanding how seller identity, craftsmanship and stories influence behavior. And we now have early evidence that when we make those things more visible, buyers engage more deeply and make decisions with greater confidence. So you can expect to see us integrating those elements more directly into the core shopping experience this year. We are also intentional early movers in Agentec deeply focused on developing integrated experiences. We're encouraged by early engagement and traffic signals from Etsy's integrations with OpenAI, Microsoft and Google. And we recently developed an integrated Etsy app for Chat GPT. At the same time, we're testing conversational AI experiences directly on Etsy because we see agents as a powerful way to simplify discovery and decision-making for both buyers and sellers, particularly when paired with our own data and insights. In Q1, we built two agents, one focused on helping buyers find the perfect gift and another that brings together insights for sellers to make better decisions, access the right resources and reduce operational friction. These are early examples of how ML and AI can make the marketplace meaningfully better for our customers. Just as importantly, they're allowing us to move faster, building and iterating in weeks, not months, which helps us learn more quickly and drive growth. Stepping back, we've now delivered two consecutive quarters of year-over-year Etsy marketplace growth, and our outlook points to growth again this quarter. But our progress won't always be linear. There's still a lot more work to do. What gives me confidence is not just what we're seeing in our metrics, but what's driving them. We have a clear understanding of how Etsy works at its best. We're rebuilding the marketplace based on that understanding, and we're executing with greater focus and discipline than we have in the past. Etsy has always stood for something different, creativity, human connection and meaningful commerce. As technology evolves, we believe these qualities matter more, not less. Our focus now is simple: execute against what we know works, measure progress clearly and build the foundation for durable growth. With that, I'll turn it over to Lanny. Charles Baker: Great to connect with all of you today. As Kruti just described, we've had an encouraging start to the year, and I will discuss some of the drivers of that progress, as well as what it means for our outlook going forward. As you review our shareholder letter and 10-Q, please keep in mind that on February 15, we entered into an agreement to sell Depop to eBay for $1.2 billion. We have received regulatory clearance for the transaction in the United States and Germany, and reviews are in progress and on track for other markets, including the U.K. and Australia. We expect to close the transaction by the end of the third quarter of 2026. Given the pending sale, Etsy's results are presented on a continuing operations basis, while Deep Hop's results are now presented within discontinued operations. I also want to note that Reverb, which we sold in June of last year is included in Q1 2025 continuing operations, whereas Q1 2026 reflects only the Etsy marketplace. This makes year-over-year continuing operation results not directly comparable, and we have included stand-alone Etsy marketplace comparisons where most relevant in order to provide investors with a more meaningful basis for evaluating our go-forward operations. kruti covered our top KPIs, so I'll provide a bit more color on Etsy Marketplace GMS, which advanced to solid year-over-year growth in the quarter. Q1 '26 Etsy marketplace GMS was up 5.5% year-over-year, which represents a 540 basis point improvement to the GMS growth achieved in the fourth quarter of 2025. On a currency-neutral basis, GMS growth was 3.6%. Progress in both product development and marketing are beginning to translate into underlying improvements across marketplace fundamentals. And we also benefited from foreign exchange tailwinds and softer performance in the prior year comparable period. Our key customer metrics are continuing to move in a healthier direction. Q1 '26 trailing 12-month active buyer count was $86.6 million, representing the first quarter of sequential growth in the past 2 years. Combined gross buyer additions, new plus reactivated were $11.9 million, up 4.8% year-over-year. Encouragingly, GMS per active buyer improved sequentially for the fourth consecutive quarter and grew year-over-year for the first time since 2022, reaching $122 on a trailing 12-month basis. Purchase frequency remained modestly lower than prior year while average order value increased year-over-year. Several factors, some of which we expect to be temporary contributed to higher AOV, including foreign currency exchange tailwinds and the expiration of the de minimis tariff exemption and subsequent seller listing price increases. We anticipate that these benefits and the resulting impact to AOV will moderate as the year progresses. That said, product improvements have also benefited AOV, including changes to our search and discovery algorithms that better surface higher quality, more relevant and differentiated inventory. Repeat buyer and habitual buyer figures, while still down year-over-year, continue to see sequential stabilization. On the seller front, Q1 '26 was the first period of year-to-year growth in total seller count since we introduced the seller setup fee. Active sellers grew 3.3% to $5.6 million. Turning to take rate drivers. Our shareholder letter depicts the primary factors that help drive our quarterly take rate to 25.7% up 180 basis points year-over-year. 130 basis points of this increase was due to the impact of the River divestiture last June. Meanwhile, Etsy marketplace take rate expansion was led by Etsy Ads where we continue to benefit from machine learning-driven improvements to relevance and seller budget pacing. Offsite ads and Etsy payments also contributed to take rate expansion. Although our current strategic priorities center on driving sustainable long-term growth in GMS. We're encouraged by the way, investments in ads, payments and services continue to provide durability to Etsy's take rate. We're pleased to be executing against our near-term priorities while improving the ways we work. continuously looking for operational efficiencies and keeping a tight control on expenses. This is visible in Etsy Marketplace operating expenses for the quarter with product development, marketing and G&A all gaining leverage on a year-over-year basis. In product development, modestly higher employee costs were offset by savings in other areas. Marketing leverage was achieved by targeted shifts in portfolio mix to better meet customers where they discover and a continued focus on efficiency. Growth of GMS derived from Etsy's owned marketing channels also supported marketing leverage. Turning to our strong first quarter balance sheet. Etsy held $1.6 billion in cash, cash equivalents and short and long-term investments at the end of the quarter. Net cash provided by operating activities of continuing operations was $102.5 million. We converted 50% of adjusted EBITDA to free cash flow more than twice the rate of conversion realized in the year ago quarter. We also repurchased a total of $145 million of stock, which reduced the outstanding share count by approximately 2.7 million shares. As of March 31, we have $828 million remaining on our current board authorized share repurchase programs. we took the opportunity in our shareholder letter to reaffirm and explain our approach to capital structure and capital allocation, which is based on four enduring priorities. Number one, maintaining financial strength to fully support organic investment in the Etsy marketplace. Two, preserving strategic flexibility to selectively pursue opportunities to strengthen our business. Three, ensuring we effectively manage our financial commitments; and four, enhancing returns for our equity holders as made possible by our strong free cash flow generation. Given this framework, the pending sale of DPO will allow us to further accelerate the direct return of capital to shareholders via repurchases. Turning to our outlook for the Etsy marketplace. We assume that overall macroeconomic factors remain relatively consistent and currency tailwinds moderate. We also note that prior year comparisons will become less favorable as we move through the year. We currently anticipate that Etsy Marketplace second quarter GMS will be between $2.48 billion and $2.53 billion, representing year-over-year growth of approximately 3% to 5% for the quarter. We expect second quarter take rate to be approximately 25.7% and adjusted EBITDA margin to be 27% to 29%. For the full year, we now anticipate that GMS growth will be in the low single-digit range as our outlook for the Etsy marketplace has improved relative to the full year commentary provided in mid-February. Our updated full year view incorporates stronger-than-expected first quarter GMS as well as the progress we're making on our growth priorities. We continue to expect year-over-year growth in Etsy GMS in each quarter of 2026. We currently expect full year take rate to be roughly equal to that of the first half of the year, and our full year adjusted EBITDA margin outlook of 28% to 30% remains unchanged. We're pleased to be executing on our plan and delivering better results. And as Kruti stated right upfront we believe there is significant potential yet to be unlocked. And with that, we'll now turn it over to the operator to take your questions. Operator: [Operator Instructions] Our first question will come from Michael Martin with Matt Mason. Michael Morton: Thank you for the question. Clearly, I wanted to ask about the most impactful changes you've made to the app. In the letter, you talked about expanding the role of personalized home feed recommendations. And I was curious, is this driving a measurable increase in frequency as you're putting the app in more buyers' hands, like as we know, I think for Etsy, growing frequency is the holy grow. So maybe any leading indicators you're seeing there within the app would be great to hear. Kruti Goyal: Great, thank you so much for the question. So you're right. We're really focused on the app. This is our highest value platform. As we mentioned, our app users have 40% higher LTV than non-app users. And that's because they visit more, they engage more deeply they convert at higher rates. And so our focus has really been around making the app much more personalized and a much better discovery jumping off point. And so the work there has been really shifting what we show you in the app home feed from popular inventory to items that are really based on buyer interests that are going to inspire new discovery. And so we're really excited about the work that we've done there and the evolution of that home feed. And it's starting to show real traction in engagement. And so as we talked about in the last call, we've introduced these new model that reflects much deeper buyer understanding. Basically -- develops a profile of a buyer of MAP to your interest in has over time and then map those interest inventory so that we can present to you when you first open the app, inventory that clearly connects to your taste but introduces you to new shopping missions and to discover new categories. And we're excited about the traction that we see there so far. It's definitely delivering deeper engagement and more engagement. And that's really the precursor to greater frequency. And so let's talk about frequency for a second. That was kind of the second part of your question. Frequency is really our ultimate goal, and it's what our strategic priorities are designed to work together to drive -- we're not seeing it inflected yet because it really requires a full end-to-end experience shift, not a single fix, not a single platform fix. And so maybe just pulling back from the specifics for a second, I want to explain what I mean by this. and how it relates to our priorities. So the first thing we have to do is show up consistently where our shoppers are with content that feels really relevant in the context to get them to consider and visit Etsy more. Then we need them and match them with items that are really relevant personalized to them so that they engage more deeply. And then for all the inventory we show them, we want them -- we want to consistently highlight what makes that inventory really unique and valuable, really the human touch behind it, that gives buyers confidence to purchase more. And then throughout, we have to show our buyers that we know them, that we value them because Etsy is getting better, the more they engage with us. So that they feel really rewarded for every interaction, and they want to come back again. That's really the flywheel. This is what drives consideration, engagement, conversion, retention and really ultimately frequency. So at this point, we're still in the early stages of driving that consideration a deeper engagement. That labor engagement is what you're seeing on the app, which we think is a really important early and encouraging sign. But it's going to take time for these changes to compound into sustained frequency and retention. Operator: Your next question will come from Trevor Young with Barclays. Trevor Young: Kruti, maybe a bit bigger picture one. Core Etsy has a very healthy take rate for a transactional marketplace. How do you think about the path for take rate here for over, I don't know, maybe 3 or 5 years now that adds and payments have been pretty well optimized. Are there new services you could offer buyers or sellers where there's a fair exchange of value which could push take rate higher? And then on the opposite side, what about opportunities to get a little more surgical on take rate to remove some of the friction in the marketplace that could maybe help drive purchase frequency. Kruti Goyal: Thanks for the question. Your question is about take rate, but let's talk about revenue first for a second because often, when we talk about take rate, it's about how we're really going to grow revenue. . And so the first thing I just want to say is our focus is very much on growing revenue through GMS growth. We think that is the healthiest long-term lever to drive revenue growth. It's by getting more people to buy from Etsy more open. We think we have a very healthy take rate, and we offer services that are really valuable to our sellers in the near to medium term, we're going to continue to invest in making those services better and more effective for sellers. And as we do that, we expect to see some modest improvement in take rate. Certainly, over the longer term, we're open to exploring other opportunities for delivering new services that would be really valuable to our sellers, but that's not the focus right now. The focus is really on growing GMS growth to drive long-term durable revenue growth. Operator: Your next question will come from Nikhil Devani with Bernstein. Nikhil Devnani: I wanted to follow up, Kruti, on related topic around frequency. The letter talks about inspiring discovery beyond a shopper's immediate attend. So I'm curious what trends you've seen or progress you've seen on cross-category shopping on Etsy and really introducing customers to more use cases and occasions on the platform if you were to step back and look at the progress made over the past couple of years, anything you can point to with respect to that trend line would be helpful. Kruti Goyal: Look, I think we're in really early days here, but we are seeing encouraging signs from the changes that we're making to the -- at Home feed in terms of really anchoring on buyers' tastes and interest and using that as a way to introduce them, not just to new shopping missions, but to new categories. But certainly, very early days. I think more broadly, if you think about our approach to how we're serving buyers, One of the shifts that we've made that you've heard from us recently is that we really understand that buyers think about us for shopping missions that are largely horizontal. So those span across categories. And so our approach is really -- has really been to serving those shopping occasion needs, more effectively. We think that, that approach is also going to really help us show up in a way that's more relevant to more people, more of the time and help them consider different categories that are relevant to a shopping occasion. Operator: Your next question will come from Maria Ripps with Canaccord. . Maria Ripps: I just wanted to ask about active is return growth. So as we think about sort of key initiatives there, personalization, the mobile app, there was the largest sort of top final drivers. Is there anything that kind of closer to the lower funnel initiatives that you can talk about? And then more broadly, how should we think about sort of the lag between product improvement and sustained growth inflection in active buyers? Charles Baker: When we think about active buyers, it really are two components. They are the existing recurring repeat users, and they drive most of GMS. And to the second part of your question, all the work we're doing on the product experience, the personalization, even things like customer service and support and trust and safety -- all of these are top priorities to build an environment for those existing repeat purchasers that is -- they become loyal to, they become familiar with and we can drive their frequency and engagement. On the -- in order to get the total buyer pool growing, we have to do more than just serve well the existing buyers. We have to bring in more new buyers and reactivated more prior buyers on Etsy. And that's why in our strategic priorities, we're talking about, we have so much focus on showing up where customers are starting their shopping missions. And so we're really pleased with the momentum that we've started to see now in the number of gross additions between new and reactivated users -- it's been a couple of quarters now of positive year-to-year comparisons there, not only in percentage numbers, but the aggregate numbers of new people coming in today versus a year ago is starting to look better. And that in the long term is what will really drive along with good retention of the existing buyers that accelerating growth on the new and reactivated front is what we're seeking. We've made some changes to our marketing mix to do that. We've been talking about showing up much more strongly in places like social media. We've been talking about making refinements the way we show up in classic search results. We've been leaning out on the very frontiers of what's happening in gene commerce to make sure we're showing up there. We've been emphasizing the mobile app, which we know is the way younger demographic shop. And all those things are starting to have an impact, and you can see that in the numbers that we're talking about. -- you get down into the smaller sort of nuance things. We've talked a little bit about TikTok has been a great channel for us since bringing in a much younger demographic. And I think there's a lot more for us to do in that channel. On the sort of low funnel, social across some of the others we found that we're not always in social acquiring new users. We might be -- and so we've modified our spending a little bit to really focus on activating new users and bringing back lapsed users. That's been a little bit less at the bottom of the funnel in social a little bit more at the awareness -- upper end of the funnel and social. All these things are -- the changes we made today are -- we're going to continue to monitor those and be really disciplined and very ROI-driven and very focused on on what you -- sort of starting point of your question, which is in the long term, growing the active buyer count on Etsy. Operator: Your next question will come from Nick Jones with BNP Paribas. Nicholas Jones: Great. I guess maybe one on internal AI at Etsy. -- if AI is going to kind of unlock bigger kind of more persistent context on our active buyer base. How should we think kind of like where you are and kind of the evolution of being able to build this kind of really rich contracts on a customer basis to build customization is there going to be kind of an impact on expenses as you maybe need to pay for more tokens or something to kind of deploy this to drive conversion higher? . So I don't know if that question makes sense, but just curious on kind of where you are, like what inning it is in terms of using the technology to maybe drive a more meaningful improvement in conversion. Kruti Goyal: Yes. Great question. Thank you. So first of all, we see just so much exciting opportunity for us to leverage this technology to build a much better, much more personalized experience on Etsy. And the way that we think about it is that we need to bring together a really deep understanding of three things: -- our inventory, which, as you know, is very diverse, very unique, very broad. And so we've made a lot of good progress there in terms of richer inventory understanding, leveraging LLMs. The second is fire understanding or understanding our buyers' interest and taste -- and understanding those over time, that's part of what you were just describing as that richer context that persists. And this is where we're putting a lot of effort an investment right now, developing new models that help us understand about the profile of a buyer's taste. I'd say that we're early here, but making really good progress mapping that understanding that deeper understanding of our buyers to our inventory. And then the third piece of this context is understanding your intent in the moment. So for our understanding of buyer interest is something that we build over time. You're -- your intent in the -- is something that is more about in the moment in a session. And that is really, really critical context to help us marry all of those three things together to provide a really personalized and relevant experience every time you shop on Etsy. We're still really early days here, but one of the exciting developments that we shared in the shareholder letter in the prerecorded plus was about the conversational agent that we've just introduced for buyers to help them find gifts. This is a really great example of how we're using this new technology to get a lot more context through a single interaction that again, then if you think about marrying those three things together can allow us to provide a much, much richer, much more personalized and more effective experience. So I'd say we're at different stages of maturity across all three of these areas, but making really good progress and really excited about the opportunity that they present. Charles Baker: To the sort of final bit of your question about managing tokens and the like, -- the way we think about it right now is we really want to embrace an experiment with these brand-new tools. And as Guy said, there's so many applications that we are -- we're really trying to be on our front foot and fund and invest and learn in this area as quickly as we can. . As you know, we will manage the costs, and we will apply that which, hopefully, you recognize we do all the time, we apply a very rigorous ROI discipline. And so the investments we're making in AI and the features that we roll and the costs associated with the compute behind that is all going to be framed with reference to its impact on GMS growth and long-term user growth and frequency growth. And we'll manage that with mine toward long-term profitability as we've done in so many other realms of our go-to-market. Operator: Our next question will come from Marvin Fong with BTIG. . Marvin Fong: I guess I'll ask the obligatory question about consumer health. I know you mentioned in the letter that trends are relatively stable. Is there anything to call out even at a granular level that you're seeing any impact from higher fuel prices? And relatedly, -- it looks like we're going to have like some fuel surcharges in terms of postage costs. Is that -- do you expect any impact on your seller behavior as they try to manage that cost that's embedded in your guidance? Charles Baker: Yes. Thanks. As we said, the consumer environment has remained relatively stable overall. There's been an interesting sort of tension back and forth between some of the softer data and consumer polls and surveys being more soft and concerning. And then the actual hard data that comes through from the consumer has held up. And that's kind of what we've seen. Our U.S. buyers have been resilient -- we've seen broad strength across various household income cohorts like others. I think others have said, we do see some of the strongest growth in the higher-income households, but it's broad-based. I think if you go a little bit -- trying to go a little bit more granular. One of the ways we look at it is segmenting our GMS by trade lengths and the U.S. domestic trade lane was the strongest at the start of this year. One thing that's interesting change is coming into this year from where we were last year, in the first half of last year, our U.S. import channel -- our trade lane was growing pretty well. It's probably the fastest growing channel. That slowed down with the imposition of tariffs and we returned to positive growth in the U.S. import trade lane in the first quarter this year, which kind of goes back to the first year I said, which is the U.S. consumer remains fairly resilient. Our non-U.S. currency-neutral GMS grew for the first time since 2023. So we're seeing some of that resilience overseas as well. U.S. buyers grew on a trailing 12-month basis. in the first quarter from where they were in the fourth quarter, and international buyers were about even in the first quarter with where they were in the fourth quarter. So when you try to pull apart the impact of tariffs and the foreign currencies and tax returns that have been strong in the season, and the impact of oil prices, netting it all out, it's hard to point to any one thing, and that's a stronger comment than the consumers remain pretty resilient, and we remain cautious about the forward outlook. Kruti Goyal: One more thing that I would add, a little bit higher level about the macro environment is like, look, we're obviously in a period of high macro uncertainty on predictability. . As Lenny said, we're really -- we're monitoring consumer confidence closely in the macro environment more broadly. But as we do that, our focus is largely on what we have control over. So there are two things that I think about there. First is we're focused on building a culture of learning quickly and adapting in real time. We saw this in spades last year with our team responded to tariffs to the emergence of genetic commerce, like we're really confident that we can continue to do that. And then second, -- we're focused on executing with clarity and discipline on our strategy, and that's about accelerating our product innovation, evolving how we show up for our customers, reinforcing trust through the entire experience. We think that's what's going to really continue to reinforce the resiliency of our marketplace, as Lanny mentioned. Operator: Your next question will come from Brian Smilek with JPMorgan. Bryan Smilek: Kruthi, curious to your thoughts overall, we've seen in the market open AI, potentially pulling away from constant checkout and focusing more on Discovery and SDK integration as you've launched your app within Open AI, can you just talk about the initial impact to conversions? I believe last quarter, we had talked about traffic being up multiples of what it was year-on-year. But really, AI traffic is still driving more on-platform marketplace conversions. So curious your thoughts there on the shifted strategy by open for the question. Kruti Goyal: I just want to clarify the app is not launched yet. But I think overall, big picture, look, we think that shift really reinforces our hypothesis that we continue to think Gentech shopping can become a meaningful discovery channel for us over time, but the focus is really discovery. That's reinforced by trends that are really consistent with what we shared with you last time we spoke, which is we continue to see strong traffic growth and high-intent traffic. So that's great. but it's still very, very small. It's a fraction of a percent of our total traffic. And so again, that reinforces our prothesis that it could be a high-value discovery channel, but that's where it's best suited. But that's going to take some time. That's over the long term. The other thing that I'll just say here is we continue to be really focused on early engagement being early movers here. It's very aligned with our priorities to show up where our shoppers discover. And we know this is going to be a really rapidly evolving space as we're seeing in real time. Our focus, our commitment is to being where our customers are, so we can learn from that behavior in real time and adapt our experience with that you see us doing that already. Operator: Your next question will come from Nathan Feather with Morgan Stanley. . Nathaniel Feather: Ncourage the stabilization in habitual buyers. What are you seeing that's allowing that to finally normalize, especially as frequency hasn't yet inflected in the hall. And do you have line of sight to that returning to sequential growth through the year? Charles Baker: The activity you're seeing in terms of stabilization on habitual buyers, on repeat buyers and even on frequency and on many of the biometrics, I think is really the fruit of the things we've been focused on strategically that Kruti talked about that we highlighted in the shareholder letter and frankly that we've been talking about for several quarters. Like what you're seeing in the numbers is just starting to see some of the initial early impact of the accumulating effort of last several quarters. One thing I want to point out about habits as you look at those, those numbers are still lower year-to-year. They were pretty stable in the first quarter from where they were in the fourth quarter. And I think the next thing that hopefully plays out is stability turns into a return to some modest growth and equally stronger growth in the long term as we continue to execute on our strategy. One thing it's important to remember is that the habitual buyer number is reflects a certain purchase frequency. And when that number goes down, it's pretty rare that, that habitual buyer has actually left Etsy -- and in fact, they've just kind of fallen below that purchase frequency threshold. And with all the work that we're doing, we hope to bring them back above that threshold, and that's what really will drive that cohort to be a little bit bigger in the future. Operator: Your next question will come from Bernie McTernan with Needham. Bernard McTernan: Great. acknowledging all the the good work that's going on within the app and double-digit growth on GMS. But I wanted to ask about the non-AP, the acceleration sequentially was actually stronger outside the app. So I just want to see what's going on there, whether it's product or whether it's some of those marketing efficiencies that -- in paid search that are driving it. Charles Baker: It's a combination of factors. It is certainly the product work that we're doing that's having an effect across the whole system. . And it's encouraging to see that, that product work -- that effort to be more personalized, to be more relevant, applied on all services has a sort of commensurate impact. It's having the biggest impact on the mobile app because that's all logged-in usage. And we can really go the deepest and fastest there. I think also helping our non-app traffic, our marketing activities were really effective during the first quarter. We increased our marketing spend year-over-year, and we gained operating leverage in terms of GMS and revenue revenue operating leverage on the marketing line. That's come from more efficient spending, mix optimization our owned channels becoming a bigger driver of activation and reactivation and some of the competitive dynamics, particularly in the paid search marketplace. In both PLAs and search engine marketing, we leaned in. We spent a little -- we increased our investment there. Google has made some changes to the algorithms that they use to surface results, and that's helped us in that channel. I talked a little bit earlier about what we're doing in paid social and in our sort of brand marketing on social -- and then really importantly, our owned channels, both the push notifications and e-mail continues to grow at double-digit rates year-over-year, in terms of driving GMS. And that's great because there isn't double-digit increase in spending in that channel. And we've had some search engine optimization wins over the last couple of quarters. that are also feeding some of that strength you're seeing in the desktop and non-app environment. Operator: Your next question will come from Ana Andrea with Piper. Anna Andreeva: Great. Thank you so much. Congrats. Nice to see a steady improvement in the business. We wanted to ask on the seller metrics. First quarter of growth really in quite a while now. And Kruti, you mentioned a better retention of the seller base. in the shareholder letter. Can you talk about what are some of the key initiatives behind that that are resonating the most? And should we expect stability in the seller metrics as embedded in the guide? Charles Baker: Well, the sellers are a fundamental portion of our marketplace kind of obviously the breadth and depth of the inventory that they bring is really what makes Etsy differentiated. We are in our product work, as Rise described, really trying to bring forward the human connection and emphasize the human element of creativity and craftsmanship that really differentiates Etsy sellers. And so as we've done that, and our buyer base continues to grow we're starting to see improvement again in the seller count. Kruti Goyal: Look, I think more broadly, I would just say our -- we haven't invested deeply in the seller experience over the last several years, and that's somewhere where we're shifting more focus to going forward. . And I think that we expect to see really positive impact from that. And really, what we're focused on is making it easier for sellers to do -- to manage their shops and to manage their listings. These are some of the areas that take the most time but are not the most value add. So we was talking about human connection, really the most important things that our sellers can do to add value to the marketplace is continue to innovate at really that new inventory into the marketplace and continue to provide really great human service. to our buyers. These are the places that we're really focused on investing in. I mentioned this in terms of some of the AI tools that we're launching, shopping shop management assistance, we've already talked about AI listing assistance. These are areas where we continue to focus on making the seller experience better to drive that side of the flywheel of marketplace growth. Charles Baker: The retention of sellers has started to improve. And that is helping the overall seller number. We're seeing healthier quality of sellers -- more of the sellers are completing sales and having strong GMS results and a higher percentage of them are staying with us year-to-year-to-year. So some of that product work that we've begun is the friction that we're taking out is starting to have an effect there on the telecon. Operator: Your next question will come from the use of Squali with Truist Securities. Youssef Squali: Lanny, with the mid-single-digit growth for Etsy Marketplace, GMS, you just put up in Q1, -- what are the main drivers pulling that growth rate to a low single-digit percentage expected for the year? And with all the changes you're making, do you believe you have line of sight to positive active buyer growth this year? Just trying to get a sense of what's baked into your low single-digit percentage gyms growth? Charles Baker: As we described, the outlook is predicated upon a gradual improvement in the underlying fundamentals of the business as we've started to show over the last couple of quarters. It will take us some time to get all the different metrics back into positive year-over-year territory. And we haven't commented on those very specifically. As we -- but that underlying -- we do anticipate that there'll be underlying fundamental improvement in sort of the core buyer metrics as we move throughout the year. The comparisons do get trickier, more challenging later in the year than certainly they were in the first quarter. and we roll off of the foreign currency, very strong tailwind that we saw in the first quarter that will moderate as we move through the year. And in the first quarter this year, our GMS was certainly helped by an increase in average order value -- and FX will slow down. We think that the increases in listings prices that corresponded with the end of the de minimis exemption and the implementation of our other tariffs. Those increases are probably sticky price increases, but they -- we will lap the benefit of sellers having taken that up. And also driving AOV have been product improvements that are helping us surface more relevant items, higher quality, higher value items, and that's contributing as well. So as we look across the course of this year, there's some mitigation in sort of the growth benefit of some of those external factors and continuation of the internally driver -- driven inputs to our growth creation. Operator: Your next question will come from Shweta Kajaria with Wolfe Research. Shweta Khajuria: Okay. Thank you for doing my question. Could you please talk about the balance of AOB and frequency. So when we think about frequency, you've now touched on this multiple times, including in your shareholder letter, that may take some time to see that inflection in frequency. But from your prior data, how -- what is the lag that you see once you start seeing an improvement in some of the other fundamental metrics, whether it is buyer or buyer growth or engagement, when -- what is the time lag when you start seeing sort of that uplift in frequency? And then similarly for retention, what are you looking for from personalized recommendations and targeted offers that gives you confidence in driving better retention? Charles Baker: One of the encouraging things that we've seen so far as we started this year is that despite the fact that the average order value has gone up, as I just described, our buyer numbers and our frequency numbers have been stable, if not improving. And that's nice to see that impact on user behavior even in an environment of slightly higher prices on Etsy and other places. And so I think there are some early signs that the work that we are doing to drive retention and frequency through personalization through the mobile app, everything we've been talking about is starting to have a benefit -- and -- but I do think, as we look forward, we'll continue to see that benefit be there and compound over time. See, it is challenging to predict with precision the exact timing of various inflections in that -- in various components of the frequency and the active buyer trend. So what I would say is expect -- we've stabilized. We've started to show growth in some areas. And we'll keep you posted as the benefits of the work that we are doing through our priorities, can you just play through the mechanics of the model. Kruti Goyal: Yes. A couple of other things that I would just add are, it's hard to predict the exact timing, but we know that, that -- we're very confident in the continued growth, but we know that growth won't be linear. . I think that's a really important thing to note. We've talked a lot about our priorities as taking a much more systematic approach that we expect to lift all of the key metrics behind -- that drive our GMS. So that's another reason that it makes it difficult to predict the inflection of any 1 of these metrics individually. I would just also reiterate that we're seeing very early but very encouraging signals, the initial improvements that we're making around personalization across services like App home and marketing communications are very, very promising and are the precursor to driving other metrics, particularly to meeting into frequency and retention. Operator: Your next question will come from Naved Khan with B. Riley. Naved Khan: Great. I just wanted to maybe dig into something you said earlier in answering question. I think it was for you see. But wanted to talk about AOV. And if you were to kind of look at on an FX-neutral basis and strip width impact on the exemption of the demise exemption and its effect on list prices, would -- how would AOV growth look like, excluding these sort of extraneous factors? Charles Baker: I think if you strip out the things that you talked about you would find that there is growth in AOV coming from product optimizations that we have made in how we respond to buyer search inquiries. To surface, we've talked about this for a long time, higher quality, more relevant items, incorporating the quality of the item into the search results ranking and what that's doing is it's elevating the average order value as we surface more differentiated, more unique, more in the eyes of the buyer more valuable items. But as I said, most of the increase in AOB right now is coming from the other factors, foreign currency and listing price changes. But we do have our -- there is an influence from some of the product work that we're doing on AOV. Operator: Your next question will come from Jason Holstein with Oppenheimer. Jason Helfstein: I want to ask goose around AI. I mean, obviously, every company is thinking how they should be deploying this at what scale, at what cost, right? And how much kind of like doing it all internally versus consults. Can you maybe talk about where is Etsy right now in that kind of thought process? And at some point, like should we expect you to hear from you that like it's time to get much more aggressive around kind of bringing AI automation into the workflow of the business. Kruti Goyal: Yes. I think there are a couple of different parts of what you just said. Let me tackle them separately. So how much we do things internally versus leverage external tools. We've been -- first of all, I'd just say we've been very proactive in how we're thinking about AI and the potential impact for AI on the business. . Really holistically. The place that we have all talked about the most is in terms of external partnerships, but we are being just as proactive in how we're thinking about deploying AI internally. I talked a little bit about this before in terms of some of the on-site investments that we're making. And when I look -- when you think about the internal-external mix, we really actively leverage a hybrid of options, open source models, commercial models and our internal models, really balancing capabilities with costs -- and we expect to continue to do that. We want to use the best tools out there to solve the problems that we're trying to solve. I think the other part of your question is how we're applying these tools internally to how we work, and we really see that is a space that is evolving very rapidly. We see these tools as a real force multiplier across our internal teams. These are like power -- there's power tools that are powering how we're working across really every function. And the biggest opportunity here is accelerating our build times -- our build cycles and time to learning. We have seen this already with the agents that we were able to launch in the last quarter really just built in weeks -- as we continue to see more of that opportunity to leverage tools to accelerate our work, we will deploy them actively. I see this as a continued area to lean in and to invest rather than 1 big drop. So you can expect us to take that same kind of disciplined but very proactive approach to how we apply AI tools, both on the experience and internally with our teams. Debra Wasser: Thank you, Kruti. Thank you, Lanny. I'm going to call it there. We don't have time to take a question and answer it. So we appreciate everyone's time this morning, and we'll be following up with all of you. Thank you all so much.
Operator: Good morning, everyone. Welcome to the Lennox International Inc. 2026 First Quarter Earnings Conference Call. All lines are currently in a listen-only mode and there will be a question-and-answer session at the end of the presentation. As a reminder, this call is being recorded. I would now like to turn the call over to Chelsey Pulcheon from Lennox International Inc. Investor Relations. Chelsey, please go ahead. Chelsey Pulcheon: Thank you. Good morning, everyone, and thank you for joining us as we share our 2026 first quarter results. Joining me today are CEO, Alok Maskara, and CFO, Michael P. Quenzer. Each will share their prepared remarks before we move to the Q&A session. Turning to Slide 2, a reminder that during today's call, we will be making certain forward-looking statements that are subject to numerous risks and uncertainties as outlined on this page. We may also refer to certain non-GAAP financial measures that management considers relevant indicators of underlying business performance. Please refer to our SEC filings available on our Investor Relations website for additional details, including a reconciliation of GAAP to non-GAAP measures. The earnings release, today's presentation, and the webcast archive link for today's call are available on our Investor Relations website at investors.lennox.com. Now please turn to Slide 3 as I turn the call over to our CEO, Alok Maskara. Alok Maskara: Good morning, everyone. Before turning to our quarterly performance, I want to recognize the exceptional adaptability and dedication of our team, as well as the trust and loyalty of our customers. While the macro environment remains uncertain, our core values empower us to respond with discipline, innovation, and an unwavering commitment to enhancing the customer experience. Turning to Slide 3, revenue was $1.1 billion, up 6% year-over-year as growth initiatives gained traction and channel conditions stabilized. Our segment margin was 14.4% in the quarter, down 130 basis points primarily due to the impact of factory under-absorption. Operating cash flow was $16 million, and adjusted earnings per share for the quarter were $3.35. In Home Comfort Solutions, industry conditions began to stabilize as expected. One-step results continue to be impacted by a weak new home construction market, while sentiment in the two-step channel improved as distributors began to restock ahead of the summer season. In Building Climate Solutions, emergency replacement momentum and disciplined execution contributed to record quarterly performance. We are reaffirming our full-year adjusted earnings per share guidance range of $23.5 to $25. With that context, let us turn to Slide 4 to discuss the current economic outlook. The industry environment continues to gradually improve. Channel destocking has largely concluded as dealers regain confidence and replacement demand strengthens. Consumer sentiment remains cautious, contributing to continued softness in new home construction and remodel activity. At the same time, Lennox International Inc.-specific growth initiatives are gaining momentum and beginning to offset these pressures. On the cost side, we are experiencing inflationary and tariff-related increases across commodities, components, and finished goods. Fuel and transportation costs are also rising. In response, we are sharpening our focus on mitigation activities, including productivity and reductions in material cost. We are also further streamlining our supply chain, optimizing manufacturing operations, and implementing thoughtful pricing actions. In Home Comfort Solutions, sales volume year-over-year improved sequentially during the quarter, supported by better performance in the two-step channel. Repair versus replacement stabilized, providing greater visibility into underlying demand trends. New product introductions, including a successful water heater launch and growing traction with new heat pump products, contributed positively. In addition, the on-track integration of Subco Parts and Supplies strengthens our attachment rate growth vector. In Building Climate Solutions, our superior execution continues, with emergency replacement and national accounts both driving volume growth. Greater engagement across our full lifecycle offerings, along with the integration of DuroDyne Parts and Supply, is expanding our commercial portfolio. Now let's turn to Slide 5 to highlight recent product introductions. Innovation continues to be a critical differentiator for Lennox International Inc. Our recently launched products further elevate our competitive position to meet the evolving needs of our customers, particularly around efficiency, backward compatibility, and ease of installation. In commercial, our new Stratagos rooftop with heat pump technology expands replacement options for customers. This product offers greater flexibility in where and how systems can be installed, supporting a wide range of electrification as efficiency expectations continue to rise. In residential, we are broadening our heat pump portfolio to serve all climates and installation requirements. Cold-climate capabilities allow us to better address demand in northern regions, while our new compact air handlers make it easier to deploy high-efficiency systems in retrofit and space-constrained applications. We are also extending our presence within the home through high-efficiency Lennox International Inc. heat pump water heaters via our Ariston joint venture. This new product integration supports the convergence of HVAC and water heating and strengthens the Lennox International Inc. home control platform. Together, these innovations expand our addressable market, increase share of wallet, and reinforce Lennox International Inc.'s long-term competitive position. With that, I will turn it over to Michael to review our financials. Michael P. Quenzer: Thank you, Alok. Good morning, everyone. Please turn to Slide 6. After two consecutive quarters of year-over-year sales declines, we were pleased in the first quarter to return to year-over-year revenue growth of 6%. Growth from our DuroDyne and Subco acquisitions completed in Q4 2025 contributed 6%, while growth in BCS was offset by continued sales declines in HCS. As expected, residential end markets remained down year-over-year, but the rate of decline improved sequentially versus the fourth quarter of last year. As inventory levels normalized, the segment profit was negatively impacted by approximately $50 million of manufacturing cost under-absorption. Against that backdrop, results progressed as expected. Let me turn to the details of our Home Comfort Solutions segment on Slide 7. In our fourth quarter earnings call, we noted that the first quarter end markets would remain challenging, which should show signs of improvement. Overall, HCS revenue declined 10%. M&A contributed a positive 2% while organic revenue declined 12%, with one-step down approximately 10% and two-step down approximately 5%. Organic sales volumes declined 21%, but this represented a meaningful improvement from a 32% decline in 2025. Within the one-step channel, lower new construction activity continued to weigh on results. In the two-step channel, distributor sentiment improved as customers began to restock ahead of the summer season. Mix and price realization contributed positively to results, driven primarily by the full conversion to new R454B products. Product costs were a $23 million headwind, driven by materials inflation and under-absorption due to lower production levels. Finally, acquisitions contributed approximately $2 million of profit, and SG&A cost actions taken last quarter mostly offset SG&A inflation. Please turn to Slide 8 for an overview of the Building Climate Solutions segment. BCS delivered another exceptionally strong quarter, with organic sales up 26%, M&A growth up 12%, and profit margins expanding 300 basis points. Sales volumes increased 17% as national account demand normalized alongside continued growth in emergency replacement and new customer wins across both equipment and service offerings. Price and mix delivered 9% revenue growth, driven by the full transition of light commercial products to the new R454B refrigerant. Similar to HCS, BCS experienced absorption pressure as we optimized inventory levels, but manufacturing cost efficiencies offset this impact. M&A contributed $7 million of profit growth, offsetting SG&A inflation and distribution investments. Please turn to Slide 9 for cash flow and capital deployment. Free cash flow in Q1 2026 was a $39 million use of cash, an improvement versus a $61 million use of cash in the prior-year quarter. Underlying operating performance improved materially. Adjusting for approximately $30 million of higher capital expenditures year-over-year, operating cash flow was $16 million, an improvement of $52 million driven primarily by inventory growth of $60 million this quarter compared to $210 million in the prior-year period. Inventory build in the quarter focused on parts and specific SKUs to support customer fulfillment during the upcoming peak season. Given normal seasonality, we expect inventories to moderate from current levels in the second half of the year. We continue to maintain a strong balance sheet, with healthy leverage while supporting the $550 million acquisition completed in Q4 2025 and continued share repurchases. We also see a healthy pipeline of bolt-on M&A opportunities and remain disciplined, prioritizing deals that enhance our portfolio and meet our return thresholds. For 2026, we continue to expect approximately $250 million of capital expenditures focused on innovation and training centers, digital capabilities, distribution network optimization, ERP modernization, and targeted AI capabilities. Please turn to Slide 10 to review our updated 2026 financial guidance. Our updated full-year 2026 guidance reflects Q1 results and trends including higher cost inflation and tariffs. The tariff environment continues to evolve with little notice. Earlier this month, new Section 232 tariffs were announced. As Alok noted earlier, we have a proven track record of using multiple levers including price and productivity to offset tariff-related cost pressure. As a result of our move to FIFO accounting, we do not expect any income statement impact from these new tariff rules until the third quarter. With that context, I will walk through the specific guidance items that have changed since we introduced our initial 2026 outlook in January. All other guidance items remain unchanged. Revenue is now expected to grow approximately 8% compared to prior guidance of 6% to 7%. The increase is driven by modestly higher mix and price, reflecting the Lennox International Inc. price actions announced earlier this week, the annual price increase implemented earlier this year, and the carryover benefit of the 2025 regulatory mix. Looking at the segment revenue guidance, HCS is now expected to grow 4% compared to the previous guidance of 2%, and BCS is now expected to grow approximately 16%. Organic volumes are still expected to decline low single digits, net of approximately one point of growth from parts and accessories, commercial emergency replacement, ducted heat pumps, and Samsung ductless products. Cost inflation is now expected to be up approximately 5% from up 2%, driven by recent increases in tariffs and input costs for aluminum, steel, copper, and fuel. Based on these updated assumptions, adjusted EPS is still expected to be in the $23.5 to $25 range. Free cash flow remains expected to be $750 million to $850 million, driven by inventory normalization and higher profitability. Overall, we feel good about the underlying momentum in the business while recognizing that the external environment remains dynamic and will require continuous focus and execution. With that, please turn to Slide 11, and I will hand it back to Alok. Alok Maskara: Thanks, Michael. As we close, I want to take the opportunity to share why, four years in, I am still genuinely excited about Lennox International Inc. We operate in an attractive growth industry with an enduring place in the market. However, what really sets Lennox International Inc. apart is how we deliver differentiated growth through our execution on enhancing the customer experience, disciplined capital allocation, and effective acquisition integration, all of which reinforce our resilient margin profile. What excites me most is that innovation is always at the forefront. Our product and advanced technology portfolios continue to expand, enabling us to capture a greater share of wallet. Of course, none of this would be possible without the strong foundation that is our culture. Guided by core values and guiding behaviors, the Lennox International Inc. team shows up every day committed to creating long-term value for our customers, employees, and shareholders. For all of these reasons, and many more, I truly believe that our best days are still ahead. Thank you. We will be happy to answer your questions now. We will now open the call for questions. Operator: Certainly. Ladies and gentlemen, if you do have any questions, please press 1. As a reminder, you can remove yourself from the queue by pressing 2. Additionally, we ask that you please limit yourself to one question and one follow-up. We will go first this morning to Noah Kaye with Oppenheimer. Noah Kaye: Good morning. Thanks for taking the questions. Michael, the FIFO conversion continues to give us talking points, and I want to ask, following up on your comments, how to think about the timing difference in cost increases versus price realization. You mentioned the incremental costs; many of them will not really layer in until the third quarter. How should we think about pricing? And should we still think about the previous guidance for first-half/second-half EPS splits as still applying, or is anything shifting given these moving pieces in the outlook? Michael P. Quenzer: Yes. Right now, for guidance, most of the cost impact and the price impact will fall within the second half. We announced a price increase earlier this week. It will take some time before we start to see the full impact, maybe starting a little bit later in the second quarter, but predominantly both of these should come into the second half of the year. When you look at the revenue splits, that will put a little bit more revenue in the second half than the first half. But overall, profitability should still be about the same by quarters as we reflected last year. Noah Kaye: As a follow-up, you called out the $15 million under-absorption impacting this quarter. Any lingering under-absorption headwind to think about for 2Q, or are we mostly caught up now that restocking is underway and you have not increased your inventories too much? Michael P. Quenzer: As you saw within our results in the first quarter, we continued to not grow inventory as much as we did in previous years, so we had some absorption headwinds. We reduced our production about 30% in the first quarter. There will be a little bit of absorption that will go into the second quarter, but by the end of the second quarter, the inventory normalization will have occurred. Operator: Thank you. We will go next to Ryan Merkel with William Blair. Ryan Merkel: Hey, everyone. Good morning. Thanks for the question. I wanted to ask first on HCS, the revenue outlook for 2Q. I think previously you saw it down low single digits year-over-year, but it sounds like you are seeing a bit of stabilization. Has April been a little bit better? Alok Maskara: Hey, Ryan. Good morning. It is pretty hard to call the quarter, especially given some of the impact of weather that is still unknown. I do not think at this point we would give you any further clarifications compared to what we said in the past. I would go with the same assumptions. The change we made in the guidance simply reflects a stronger Q1 overall and, more importantly, the impact of additional price increases that we announced earlier this week that are going to mostly fall in the second half. Ryan Merkel: Got it. Thanks. As my follow-up, BCS was really strong. You mentioned good execution. Anything else you would call out there, and why not raise the guidance a little bit more there? Alok Maskara: You should expect a conservative CFO as I have, Ryan, so I do listen. On the guidance piece, it is such a seasonal business. Weather makes an impact, and I think based on everything we know, Q1 is not a quarter to raise guidance anyway. There is just so much more to go given it is a shorter season, so I would not read too much into Q1. On BCS, first of all, congratulations to the team. The execution there is just superb. The new factory is paying strong dividends. We are getting the right amount of productivity that we expected, maybe a little more. The emergency replacement initiative, now that we have inventory positioned all over the U.S., is paying off meaningfully. More importantly, the fact that now Stuttgart is more stabilized is also helping us win back national accounts and gain additional volume from that. Do not forget the other two businesses. The service business is benefiting from the full lifecycle value proposition, and the refrigeration business also continues to set records both in growth and profitability. It is a good success story and something that we think we are going to start seeing in HCS as well as our markets stabilize and the end markets are not such a big drag on us. Congratulations to the BCS team. Nothing unusual, just strong execution on a very well-defined strategy. Operator: We will go next now to Julian Mitchell with Barclays. Julian Mitchell: Hi. Good morning. Maybe just wanted to start on the overall operating margin guide for the company. Is it fair to say that you have a flattish operating margin dialed in at the total company for the year? And then within that, you have HCS down and BCS up? How quickly do HCS margins climb out of that hole? Michael P. Quenzer: I will speak to the overall margin guide. When we talked in January, we expected a slight increase in the enterprise margin. Now, with the increase to revenue and cost, we expect a slight decline in the margin. You are correct. Within BCS, organically, we expect margins to be up. Within HCS, organically, we expect them to be down. M&A will have a slight drag overall on the enterprise. But we should expect to see, as volumes recover in the second half of the year, the incrementals within HCS improve. We just need to go through the first half of the year for HCS to see that challenge behind us. Alok Maskara: I think one thing as we dug into the results in Q1 is that the decline in margin, which we do not love at all, is 100% driven by factory under-absorption. We were able to offset inflation with price and efficiency, but it is the under-absorption. As that under-absorption continues to become less of an issue as we go into Q2 and the second half, we are very confident in the margin going back to normal. Julian Mitchell: Thanks very much. My follow-up is around the cost inflation moving to 5%. Is that roughly $100 million or so of extra gross cost headwind? Do you see any competitive implications from that cost base movement? And tied to that, how is price elasticity of volume playing out in HCS at present? Alok Maskara: Your numbers are roughly right, as usual, Julian. I do not see any competitive dynamic that disadvantages us. Inflation in oil and components is hitting all of us. The Section 232 derivative tariff impact hits people differently depending on whether they bring metal components or finished products from overseas, but it does not put us at a competitive disadvantage overall. We remain very sensitive to those dynamics and will continue adjusting as we go along. Michael P. Quenzer: I will add that, since our last guidance, aluminum is up about 25%, steel is up 20% to 25%, diesel is up 50%, and copper is up 10% to 15%. We have hedging programs and fixed contracts that delay some of that, but overall these input costs are up significantly since our last guidance. Operator: We will go next now to Chris Snyder of Morgan Stanley. Chris Snyder: Thank you. I wanted to follow up on the price/cost drivers into the back half. You are still calling for mid-single-digit price, but it sounds like more is coming. Can you provide a little more nuance around that? Also, why is the incremental on the price action getting better? I think now it is expected to be 90% versus prior 75%. Thank you. Alok Maskara: There is a bit of rounding. Mid-single digit is still a broad range. Given all the inflation we just talked about and the additional pricing actions we have taken this week, that gives us better drop-through because it is going to stick better. Michael P. Quenzer: Specific to the 90%, there are really two guide points. First, we have price that has an incremental of 100% because we have costs on the other side of our guidance. Then mix normally has an incremental somewhere in the 50%-ish range. When you blend the two together, you get a higher drop-through because there is now more price than mix. The mix is generally behind us now from the carryover from the regulatory change last year. Chris Snyder: Thank you. As a follow-up on the HCS revenue trajectory from here, to get to the full-year guide, the build into Q2 and Q3 off the Q1 level seems steeper than typical on my math. Is that a function of channels restocking, demand getting better, share, more price? Alok Maskara: In the second half, the comps get much easier. That is where we saw massive declines last year. Pricing will have more of an impact in the second half. In Q2, mix will still benefit us because we had not completed the R454B conversion all the way by Q2 last year. Q1 last year mix was very tough because a lot of people were stocking up in preparation for the transition and buying a lot of R410A inventory. So part of the answer is just comps and then the pricing impact. Michael P. Quenzer: Remember, Q2 last year had the canister shortage issue that significantly impacted that quarter. Operator: We will go next now to Jeff Sprague with Vertical Research. Jeff Sprague: Hey. Thanks. Good morning. Back to inflation, Michael, you went through aluminum, steel, copper, etc. How would you parse the inflation headwind between the tariff changes and general inflation? And given the half-year dynamics, would the price you are putting in place fully cover you for carryover headwind impacts into 2027? Michael P. Quenzer: We have hedging programs and fixed contracts. On average, we are about 70% hedged. There is a piece of our overall inflation guide for the remaining 30%, and then the balance is mostly tariffs. On the annualized impact, we are going to continue to find ways to mitigate. We still have a lot of levers that take time on supply chain and manufacturing processes to continue to mitigate that cost. Our goal is to keep focusing on cost mitigation; some efforts take a little longer. Alok Maskara: I am optimistic on our ability, just like we have done before, to reduce the mitigated impact of tariffs. Supply chain moves, manufacturing moves, product SKU moves, buying U.S. steel in Mexico moves—they just take time. We are working through all of that. Jeff Sprague: On channel behavior, do you sense there was pre-buy in front of inflation, or was it just a realization that inventories got too lean? Alok Maskara: We have no indication of any pre-buy ahead of price increases or inflation. The April tariff announcements took most of us by surprise. We think the restock is pretty normal. Folks are looking at the upcoming summer season, and nobody wants to be short. Inventory levels are pretty normal. We have not had a normal year in years; this will be the first time without a refrigerant or canister transition complicating things. We think inventory levels are reaching normal for the channel and for us. Michael P. Quenzer: We continue to look at our warranty registration data that suggests inventory in the channel continues to be normal, especially on the one-step side. Operator: We will go next now to Amit Mehrotra at UBS. Amit Mehrotra: Thanks a lot. Good morning, everybody. I wanted to come back on the Section 232 changes. There are a lot of moving parts—Mexico, cross-border scope, steel content versus total value, component flows. Can you pull back the curtain a bit on scope and net effects? Alok Maskara: The scope is pretty wide. We have a lot of tariff experts in our company and are running daily crisis-type calls to work through it. The primary impacts are understood once you align on product classifications, but secondary impacts are also emerging. This is not new—we had tariff-by-country surprises last year; this year we are getting some refunds and paying more elsewhere. We have trained ourselves to work through these uncertainties, remaining adaptable and flexible, moving products and raw materials as needed, and working with vendors to share the pain. Every manufacturer who deals with metal is impacted. We are dealing with it with appropriate resiliency and determination, while recognizing things could change again quickly. Happy to have offline conversations on the details. Amit Mehrotra: Follow-up on repair versus replacement stabilizing. Are you seeing consumers move back into replacement, or is repair just not getting worse? Alok Maskara: We are very close to thousands of users in the one-step channel. The sentiment from contractors is that it is not getting worse, and some deferred replacements from last year are now coming back as replacements. Last year we heard more hesitancy to recommend replacement versus repair due to canister shortages and limited R454B training. Now contractors are more confident, and consumers are returning to economic decisions—replacing 10–12-year systems to get better efficiency, warranty, and financing. Definitely stable with some green shoots. Operator: We will go next now to Tommy Moll with Stephens. Tommy Moll: Morning, and thank you for taking my questions. On the one-step channel, there are some green shoots. How have volumes progressed year-to-date? It seems like the year started slow, but March and April started to pick up. Alok Maskara: Things have improved sequentially month over month since the beginning of the year. Some of it is driven by easier comps versus last year’s holding patterns ahead of regulations, and some is confidence coming back in the channel. Two-step is eager not to be left behind if we have a hot start to the summer. Tommy Moll: On BCS, you mentioned emergency replacement momentum. What inning are we in, and how are you attacking the market? Alok Maskara: We are still early—call it the second inning of a nine-inning game. Last year we were not fully covered in the U.S.; we are still not fully covered, but we now serve most metro areas, launching each region one at a time. A positive surprise has been our Lennox International Inc. dealers getting back into rooftop with us. Another benefit is shifting most emergency replacement volume away from Stuttgart, making Stuttgart more of a configured-to-order factory dedicated to national accounts. That has restored confidence in national accounts with shorter lead times and more custom products. Early innings in emergency replacement, with good momentum in national accounts. Michael P. Quenzer: I will add that bundling service with national accounts continues to perform very well. Operator: We will go next now to Jeff Hammond with KeyBanc Capital Markets. Jeffrey David Hammond: Hey. Good morning, guys. It seems like your inflation impact is more Section 232. You mentioned everyone has the same issues, but what happens if most people move on price and not everybody does? Alok Maskara: There are many game-theory scenarios. Section 232 derivative tariffs are about metal content thresholds on imports from outside the U.S., regardless of where they are made, so it impacts a broader group than just Mexico-made products. Also, secondary impacts—higher steel and aluminum costs—affect everyone. We are confident we have taken thoughtful price actions to avoid share disadvantages and are sharing the pain with vendors and customers. Jeffrey David Hammond: On BCS, 1Q numbers were strong. The raise seems small. Any aberrations in 1Q or reasons to temper enthusiasm on emergency replacement or national accounts? Alok Maskara: Besides easier comps in Q1, there is nothing to temper the outlook. The comps get tougher as the year progresses, but nothing beyond that. Operator: We will go next now to Nicole DeBlase with Deutsche Bank. Nicole DeBlase: Maybe on the BCS business: with various drivers of market share gain, it is hard to see the underlying commercial unitary market. Is the overall market still down and Lennox International Inc. is outperforming, or have you seen any improvement? Alok Maskara: The overall market remains challenged. The latest AHRI data shows declines moderating, but the market is still down. We are clearly outperforming, and not just on unitary—services and full lifecycle offerings are contributing. Our market share remains small in the commercial space, leaving significant opportunity. Nicole DeBlase: A quick follow-up for Michael. You expect under-absorption to continue but at a lesser rate in Q2. Relative to the $15 million in 1Q, what are you expecting for 2Q? Michael P. Quenzer: It was $15 million in Q1. In Q2, it will not be zero; there will be a small headwind. By the end of Q2, that should be behind us, and we should start to see year-over-year absorption benefits in the second half. Alok Maskara: Also, $15 million makes a big difference in Q1, one of our softest quarters. In Q2, one of our more profitable quarters, it does not move the needle as much. Operator: We will go next now to Stephen Volkmann with Jefferies. Stephen Volkmann: Thank you, and good morning. Michael, you mentioned spending on ERP and targeted AI. Any details? Alok Maskara: On ERP, we are not doing any massive changes. As we integrate recent acquisitions, we are moving them to our platform, one at a time. On AI, we are seeing good results in three areas: pricing (higher win ratios and profitability), demand planning/SIOP (improving inventory outcomes), and general productivity (agentic AI in call centers, HR help desk, RPA). These require investments in data lakes and partnerships with LLMs. We are also reducing costs by cutting unused subscriptions and sunsetting legacy systems. In the long term, productivity and pricing benefits should outweigh the costs. Stephen Volkmann: On Samsung and Ariston—have tariffs changed how you think about those opportunities? Alok Maskara: Strategically, we remain committed to ductless and water heaters. We had solid momentum in Q1, and we launched the water heater in March. These are joint ventures with supply agreements, giving us flexibility to discuss supply chain moves, tariff cost sharing, and longer-term mitigations. Almost all ductless today is imported; we are moving with the industry and have no concerns around the structure. Operator: We will go next now to Nigel Coe with Wolfe Research. Nigel Coe: Thanks. Good morning. On tariffs, roughly where are we today in terms of U.S. production of residential/light commercial units? Are you planning to redomesticate production over time, or does it still make sense to keep production in situ and pay the tariff? Alok Maskara: It is early in that thought process. We need policy stabilization before making major changes. The approach is still evolving, and USMCA renewal is coming up. We are making smaller adjustments—source of metal, component moves—but no major reshoring in the pipeline today. We have three residential factories in the U.S. (Grenada, Orangeburg, and Marshalltown) and one large residential factory in Mexico, giving us network flexibility. Today, it still makes sense to continue as we are and mitigate impact product by product. Nigel Coe: You mentioned rationalizing residential new construction exposure last quarter. Was that an impact during the quarter, and is that process complete? Michael P. Quenzer: Residential new construction is about 25% of HCS. We definitely saw volumes down more than others—above 30% in that channel. It is a combination of weak new construction and share decisions. That weighed on overall one-step volume growth. Alok Maskara: That share loss will negatively impact us through the year and is baked into guidance. Two-step will do better than one-step. From a profitability perspective, that works in our favor because margins were negative to zero in businesses we exited. Operator: We will go next now to Joe O’Dea with Wells Fargo. Joe O’Dea: Good morning. On the pricing announcements over the past week, can you give any color? We see the HCS guide go from 2% to 4%, but presumably you priced a narrower scope of products. Any quantification of recent price increases and the dollar effect to the homeowner? Alok Maskara: Our price increases went to customers on Monday, and some competitors announced the week before. We need to work through it over the next several weeks. Michael’s changes to our revenue guidance reflect what we are expecting in price. There is the headline announcement and then a stick-rate. We are confident we will offset increased cost inflation through these actions. Michael P. Quenzer: On the impact to the homeowner, equipment is maybe 40% of total installation cost. We will have to see how that evolves, but we do not see this as a big driver of total install cost; contractor labor and margin are the larger components. Alok Maskara: In some cases, equipment plus parts and supplies can be less than 30% depending on install time. It should not change consumer price elasticity in a meaningful way. We are sensitive to market dynamics, but equipment pricing is the least variable component for the homeowner. Joe O’Dea: On HCS seasonality and margins, the past couple of years stepped from 16%–17% in Q1 up to 23%–25% in Q2. Is that a reasonable benchmark for the seasonal step-up in Q2 this year? Michael P. Quenzer: The main driver will be volume recovery within HCS. We had unusual comps last year, but we are building sequential year-over-year improvement: Q2 vs. Q1, Q3 vs. Q2, and Q4 vs. Q3. That will help margins, and in the second half, absorption will further benefit margins. We will watch the summer play out—Q2 is a big quarter—and then we should have strong line of sight for the year. Operator: We will go next now to Deane Dray with RBC Capital Markets. Deane Dray: Thank you. Good morning, everyone. On new products from Slide 5, do you track a new product vitality index? And any update on the Samsung JV would be helpful too. Alok Maskara: We track vitality closely and do not consider refrigerant changes as new products. Excluding that, our vitality remains in the 45% to 50% range; the current figure is about 48%. We are pleased with heat pump introductions, indoor air quality, and control changes, as we shared at Investor Day. On the Samsung joint venture, the meaningful impact is this year as we work through the channel and dealer conversion. We are pleased with momentum and see upside through the year. Feedback is that these are high-quality, quieter products with better controls, and contractors like the combined logistics and rebate programs. Deane Dray: Second question, on recent litigation against residential HVAC manufacturers. Are you able to comment? Alok Maskara: The matter is a pending legal complaint. The lawsuit contains only plaintiffs’ allegations, and there has been no finding of wrongdoing. We dispute the accuracy of the allegations and will actively and vigorously defend our position through proper legal channels. Operator: We will go next now to Analyst with JPMorgan. Analyst: Hi. Good morning. Tying the “inventory being normal” comment with growth on the balance sheet year-over-year—some of that is acquisitions—can you give color on residential units within that bucket year-over-year or versus current sales levels relative to history? Alok Maskara: Typically, from Q4 to Q1 we build inventory for the peak season. Last year we built about $210 million; this year we built $60 million—think of that as a $150 million reduction versus a normal build. We ended last year with $100 million to $150 million more inventory than needed; we are essentially back to a normal seasonal stance. We still have opportunities as demand planning and SIOP improve to work inventory down further. We will continue to invest in parts and supplies and emergency replacement to maintain high fulfillment rates. We are pleased with the drawdown progress and feel on track to normal inventory. Analyst: Cleanup on price/mix. For the 9% in the first quarter, how much came from price versus mix? And for the year’s mid-single-digit, how much is price vs. mix? Michael P. Quenzer: In the first quarter, the majority was mix. That mix should taper off in the second quarter. For the balance of the year, it is essentially all price. Operator: Thank you for joining us today. Since there are no further questions, this will conclude Lennox International Inc.’s 2026 first quarter earnings conference call. You may disconnect your lines at this time, and have a great day.
Operator: Welcome to Seacoast Banking Corporation of Florida's first quarter 2026 earnings conference call. My name is Kate, and I will be your operator. Before we begin, I have been asked to direct your attention to the statement at the end of the company's press release regarding forward-looking statements. Seacoast Banking Corporation of Florida will be discussing issues that constitute forward-looking statements within the meaning of the Securities and Exchange Act, and its comments today are intended to be covered within the meaning of that act. Please note that this conference is being recorded. I will now turn the call over to Chuck Shaffer, Chairman and CEO of Seacoast Banking Corporation of Florida. Mr. Shaffer, you may begin. Chuck Shaffer: Okay. Thank you, Kate, and good morning, everyone. And thank you for joining us. As we move through today's presentation, we will reference our first quarter 2026 earnings slide deck, which is available on our website, cecosbanking.com. Joining me today is Tracey Dexter, our chief financial officer, Michael Young, our chief strategy officer, and James Stallings, our chief credit officer. The Seacoast Banking Corporation of Florida team delivered another great quarter, highlighted by robust deposit growth, particularly in noninterest-bearing deposits, meaningful expansion in the net interest margin, and solid progress towards financial guidance we introduced last quarter. Commercial loan production momentum remains strong, up 35% year over year, and as expected, the first quarter loan growth was seasonally softer and further impacted by elevated payoffs. Importantly, our loan pipeline remains strong, and we expect payoffs to moderate in the coming quarters, supporting a return to stronger loan growth as the year progresses. Asset quality remains exceptional with limited charge-offs, no change in criticized and classified assets from the prior quarter, and a modest uptick in nonaccrual loans. Noninterest income continued to perform well, driven by strength across wealth management, insurance, treasury, and our mortgage businesses. And our expansion in The Villages is already delivering results, with solid mortgage production and growing demand for wealth management services. Expense discipline remained excellent this quarter. Overhead was well controlled. Adjusted efficiency ratio was 55%, and the ratio of adjusted noninterest expense to tangible assets remained near 2.1%, even as we continue to invest deliberately in growth. Our strategy to drive improved shareholder returns remains firmly on track. Excluding merger-related costs associated with the Villages Bank Corporation, our return profile continues to strengthen. For the quarter, adjusted return on assets was 1.31%, and the adjusted return on tangible equity was 16.3%. These results underscore the strong earnings power of the combined franchise. Looking ahead, we remain confident in our 2026 outlook. As outlined in the slide deck, we continue to expect full-year earnings per share in a range of $2.48 to $2.52 despite two fewer rate cuts. And finally, capital and liquidity remain exceptionally strong. We continue to operate with a fortress balance sheet and remain one of the strongest banks in the industry. With that, I will turn it over to Tracey to walk through our financial results. Tracey Dexter: Thank you, Chuck. Good morning, everyone. Beginning with slide four and first quarter performance highlights, Seacoast Banking Corporation of Florida reported net income of $31.9 million, or $0.29 per share, in the first quarter. Reported results include a $39.5 million pretax loss related to the strategic repositioning of a portion of our available-for-sale securities portfolio, which we executed in January. On an adjusted basis, net income was $67.8 million, or $0.62 per share, increasing 42% from the prior quarter and 111% year over year. These results reflect meaningful improvement in our core earnings power, driven by expanding net interest income, disciplined balance sheet management, and continued execution on organic growth initiatives. During the quarter, we delivered 7% annualized organic deposit growth, including 29% annualized growth in noninterest-bearing demand deposits. We also delivered a 13 basis point decline in the cost of deposits to 1.54% and a 9 basis point decline in overall cost of funds to 1.71%. Expansion in the net interest margin was a highlight this quarter, driven largely by lower deposit costs and the bond portfolio restructure. On an adjusted basis, return on average assets was 1.31%, and return on average tangible equity was 16.26%. Our capital position remains very strong. We also were more active in share repurchases, buying back over 317 thousand shares. Turning to net interest income and margin on slide five, net interest income totaled $178.2 million, up $1.9 million from the prior quarter. The net interest margin expanded 17 basis points to 3.83%, and excluding the impact of accretion on acquired loans, margin expanded 13 basis points to 3.57%. This improvement was driven by lower deposit costs combined with higher securities yields. Moving to noninterest income on slide six, reported noninterest income was a net loss of $12.6 million. Adjusted noninterest income, which excludes the securities repositioning, totaled $26.9 million, down 6% from the prior quarter and up 22% year over year, reflecting continued growth in fee-based businesses with the growth of the franchise. Wealth management remains a key contributor with revenue up 36% year over year and assets under management increasing 33% year over year, including $125 million of new organic assets under management added during the quarter. Mortgage banking income declined from the fourth quarter primarily due to volatility in mortgage servicing rights acquired in the Villages transaction. Underlying loan volumes and pipelines remain strong in the business. Insurance agency income benefited from a seasonal contingent commission payment, increasing $200 thousand year over year. Moving to slide seven, our wealth management team delivered another quarter of strong results, with income growing 36% year over year and AUM balances growing 33% year over year, with a 21% annual CAGR in the past five years. We expect to continue to see strong volumes throughout 2026. Moving to slide eight, noninterest expense totaled $122.2 million in the first quarter, which includes $8.5 million of merger and integration costs. On an adjusted basis, noninterest expense was $113.6 million, just slightly higher than the prior quarter. Importantly, we saw continued improvement in operating leverage, with the efficiency ratio improving to 59.5% and the adjusted efficiency ratio at 55.3%, reflecting disciplined expense control alongside core revenue growth. Moving to loan growth and portfolio composition on slides nine and ten, loans ended the period at $12.6 billion, up modestly from year end. Production remained strong with growth largely offset by elevated payoffs during the first quarter. The commercial pipeline increased to over $1 billion at quarter end, supporting continued organic growth as we move through the year. Our loan portfolio remains well diversified by asset class, industry, and loan type, with average loan sizes that reflect the granular nature of our franchise, and exposure levels that remain well within regulatory guidance and that provide significant flexibility for forward growth. On credit quality shown on slides eleven and twelve, asset quality metrics remain solid. The allowance for credit losses totaled $176 million, or 1.39% of loans, three basis points lower than the prior quarter. Combined with the remaining $138 million of unrecognized purchase discount on acquired loans, we continue to maintain meaningful loss absorption capacity. We saw a modest increase in nonperforming loans compared to the prior quarter, to 0.75% of total loans, though still well within the range of low historical levels. The increase in nonaccrual loans during the first quarter reflects the movement of two commercial credits to nonaccrual status, each having collateral values well in excess of balances outstanding and, therefore, no credit loss is expected. Accruing past-due loans declined. Net charge-offs remained low at 11 basis points annualized, and criticized and classified loans were stable sequentially. Turning to deposits on slides thirteen and fourteen, total deposits increased $382 million during the quarter, or 9.5% annualized. Excluding brokered balances, growth remains solid and relationship-driven with organic growth of 7% annualized. Deposit costs are lower by 13 basis points. Transaction accounts represented 50% of total deposits, and the deposit base continues to be highly granular, with the top 10 depositors representing only 3% of total balances. Moving to slide fifteen in the investment securities portfolio, as I mentioned, we took advantage of constructive market conditions and repositioned a portion of the available-for-sale portfolio in late January, which will enhance forward earnings while maintaining balance sheet flexibility. We sold securities with proceeds of approximately $277 million, resulting in a pretax loss of $39.5 million impacting first quarter results. The proceeds were reinvested in primarily agency mortgage-backed securities with a tax-equivalent book yield of approximately 4.8%. Turning to capital and liquidity on slide sixteen, Seacoast Banking Corporation of Florida continues to operate with a fortress balance sheet. Tangible equity to tangible assets was 9.2%, and capital ratios remain very strong, providing significant flexibility to support organic growth, disciplined capital deployment, and opportunistic actions, as the approximately 317 thousand in share repurchases completed during the quarter. On slide seventeen, we reiterate the guidance we provided last quarter. The adjusted earnings per share outlook remains unchanged at $2.48 to $2.52, with the potential for slightly lower revenue resulting from the change in previously expected rate cuts, but with no change to bottom-line results. In summary, our results demonstrate meaningful improvement in core profitability, strong funding trends, and continued execution against our strategic priorities. We remain focused on disciplined growth and long-term shareholder value creation. With that, Chuck, I will turn the call back to you. Chuck Shaffer: Alright. Thank you, Tracey. And, Kate, I think we are ready for Q&A. Operator: We will now open the call for questions. At this time, I would like to remind everyone, in order to ask a question, please press star then the number one on your telephone keypad. Your first question comes from the line of Woody Lay with KBW. Your line is open. Woody Lay: Hey, good morning, guys. I just wanted to start on loan growth, and, you know, higher payoffs impacted the growth in the quarter. But I just wanted to get a sense of how the pipeline was shaping up in 2Q 2026, especially given some of the macro uncertainty that is out there? Chuck Shaffer: Thanks, Woody. And just to go back to the quarter itself, payoffs were very elevated. We notated in the release and in the slides; you can see what it was year over year. In particular, in the first quarter, we did have three larger credits pay off, in aggregate, $150 million amongst the three. It was multiple loans to a couple borrowers in there. The good news is they paid off; they are great borrowers. The bad news is we got paid off, but that is the way the business operates. When we look forward into the remainder of the year, the pipeline remains strong. We expect to return to high single digits here in the coming quarters and remain very confident throughout the remainder of the year. The impacts of the geopolitical concerns are unknown at this point, still probably too early to tell, and we will have to see how that all plays out over the back half of the year. But for now, we remain confident in the guidance and expect to return to high single digits. Michael Young: Hey, Woody. This is Michael. Just adding on one thing at the end. We had 15% annualized growth in the fourth quarter. Our average loan growth in the first quarter was still high single digits, kind of 9% plus. We just had a lot of pull-through of the pipeline late in the quarter. We still feel like we remain on track and consistent; it is just our normal kind of seasonal trends here with strong fourth-quarter production and growth, and then first quarter generally as expected being a bit softer, severely impacted by the payoffs. And maybe one callout headed into the second quarter, we have a stronger first-quarter seasonal deposit growth, and then second quarter we do see that come back a bit before we have seasonal trends return to tailwinds in the back half of the year. Woody Lay: Got it. That is helpful. And then maybe on deposits, I believe the first quarter is typically a seasonally stronger quarter, but the noninterest-bearing deposit growth you saw in the quarter was really strong. Just trying to get a sense of how much you think that is seasonal versus actual core deposit growth? Michael Young: Yeah, it is a good question. We typically see outflows related to tax payments at the end of first quarter and early second quarter. We did see that normal seasonal trend, but it is not that all of that came from DDA or noninterest-bearing deposits. Certainly, some did, but we expect to hold higher levels of noninterest-bearing deposits as we move forward, given growth in aggregate across the franchise and growth in customer count. We certainly see some tax-related outflows here in April, but not enough to backslide us on noninterest-bearing deposits. Woody Lay: Got it. And then maybe just last for me. So you have The Villages conversion coming up here this summer. Can you just remind me how much cost saves are still set to come out of the run rate? Michael Young: Yeah. We articulated a 26%–27% cost out at announcement. As we talked about on the last call, we have an expense step-up here in the second quarter with our normal annual pay cycle and increase. We will expect maybe a little tick up in the efficiency ratio headed into conversion as well in the second quarter, and then we will see the cost outs come in the back half of the year as our efficiency ratio begins to step back down into the fourth quarter. We are also hiring and growing as well, and that will offset some of the expense saves that are just discrete from the deal. Chuck Shaffer: And I would just remind you to push back to the guidance we laid out last quarter that is reiterated in the slide. We think a full-year efficiency ratio is somewhere between 53%–55%. So as you are modeling, that is the ballpark where we expect to be for the full year. Woody Lay: Perfect. Well, thanks for taking my questions. Congrats on the good quarter. Operator: Thanks, Woody. Your next question comes from the line of Russell Elliott Gunther with Stephens. Your line is open. Chuck Shaffer: Hey, Russell. Russell Elliott Gunther: Hey, Chuck. Maybe to start on the core margin, would be helpful to get a sense for how you are expecting that to trend going forward. Maybe touching on incremental commercial loan yield versus deposit cost, and then on that last front, as it relates to the cost of deposits from here, do you think you have the ability to continue to lower, or is there, perhaps with the Fed on pause, an upward bias to deposit costs embedded in the revenue guide? Michael Young: Hey, Russell. This is Michael. A couple questions in there, so I will try to hit each one. First, on the margin progression, we do expect continued margin expansion here in the second and third quarter. You saw we exited the quarter with lower deposit costs than we started the quarter as we continued to blend the rate/volume mix down. We are still at a 75% loan-to-deposit ratio, so we are in a really strong balance sheet position there. But as we have approached the 1.30% ROA and 16% RoTE that we have been targeting, we do want to be on the offensive and grow. We will continue to try to do that throughout the year while maintaining the profitability levels and the guidance that we talked about. We do expect continued, pretty nice margin progression in the second and third quarter. On the deposit cost side, without Fed cuts, as you saw, we revised the revenue guidance low end by one percentage point. That is basically our rate sensitivity to two cuts. We could see some stabilizing or increasing deposit costs potentially later this year without Fed rate cuts as we grow the deposit balances from here. On the loan yields side, we still saw add-on yields in the low 6% this quarter. We are seeing a little more mix of residential mortgage retention as we have talked about before, which, with the long end of the curve at higher levels, is pretty attractive rates and good risk-adjusted returns. On the commercial side, there have been competitive forces at play, but we are really holding around the 6% level. Russell Elliott Gunther: Okay. Thank you, Michael. Maybe switching gears on the expense side, follow-up to the discussion already, appreciate the glide path. Maybe some color or clarification in terms of your efficiency target and how tethered that is to revenue. So if we are at the high end of revenue, should we be at the low end of efficiency, or is there some flex there? And then post conversion, how do you think about a normalized growth rate for Seacoast Banking Corporation of Florida given the franchise investment you see ahead of you at least on the lending hiring front? Chuck Shaffer: Yeah, I would think about it this way. We put the guide out there, the 53% to 55%, to give you a sense of where we think we will land full year. If revenue is higher, I think that does fall to the bottom line and push us to the lower end of that range. Given the fact that, as Michael laid out, we may not have two Fed cuts, that will probably not drive as low deposit costs as we thought we would see in the back half of the year, and as such, that is going to require us to tighten a little bit on the expense side to navigate through that. But we are confident in our ability to deliver on the overall EPS range. We will feather that depending on what the back half of the year looks like, but we have given ourselves room to be 100% confident delivering the EPS range. Long term, we would like to run the company in that same range—53% to 55% efficiency ratio—is probably where we land. The way we are thinking about the business is running with a return on tangible equity north of 16%, ROA north of 1.30%, and high single-digit growth rates with a 53% to 55% efficiency ratio. That delivers really strong shareholder return compounding over time. That is the optimal run rate for the company and what we are working to deliver to shareholders. Russell Elliott Gunther: Very helpful. Thank you, Chuck. Thanks, guys, for taking my questions. Chuck Shaffer: Thanks, Russ. Operator: Your next question comes from the line of Liam Cooley with Raymond James. Your line is open. Liam Cooley: This is Liam on for David Feaster. Chuck Shaffer: How are you doing? Hey, Liam. Liam Cooley: So I appreciate all the color on loan and deposit growth. I am curious, where in your footprint have you been seeing the most success, and where do you expect the most opportunity to be moving forward? Is a lot of that deposit growth coming from The Villages, or is it more of the core markets? Chuck Shaffer: It is broad-based. I would say that we are seeing good solid growth in The Villages. Some of the new offices in The Villages’ two developments are growing nicely. We have been very pleased with that. Some of the expansionary markets up into North Florida—up towards Gainesville and Ocala—have seen really solid growth as we continue to expand what was the legacy Drummond franchise, and then we layered on a really strong banking team up in that market. And Atlanta is also off to a really nice start. So it is fairly broad-based, with most of the growth coming from The Villages and the expansionary markets, some of the new markets we have opened up. Liam Cooley: Great. Thanks. And then on deposit costs, do you expect noninterest balance growth to be the larger driver of total deposit cost reductions into the back half of the year, especially if we are assuming more of a stable rate environment? Michael Young: Yeah, it is a good question. We have been optimizing particularly on the CD rate side, letting some of the higher-rate CDs roll down, which has been a driver along with growth in noninterest-bearing and just repricing the money market as the Fed cut rates. As we move forward, some of it will be mix-driven. Certainly, that will improve cost of funds or maybe keep cost of funds from going up as much over the medium term. Over time, it is really about the pace of growth. If we need to grow at higher paces, then we will see a little more pricing pressure. So I think it is more geared to overall balance sheet growth and how quickly we are growing the deposit portfolio. Liam Cooley: That makes sense. And last thing for me to touch on—it is really impressive to see the wealth management balance growth in a quarter where the market was down almost 5%. With new asset growth continuing and the market rebounding in April, would it be unreasonable to expect some nice balance growth into 2Q? Chuck Shaffer: We do expect that to continue to grow. What we are really excited about in the first quarter is we saw almost $1 million of new AUM coming out of The Villages and $15-plus million coming out of what was the legacy Heartland market. It is great to see new opportunities coming out of those two new acquisitions from last year. The business is operating exceptionally well, and we expect it to continue to grow throughout the year. I remain very bullish on that business inside of Seacoast Banking Corporation of Florida. It continues to drive really solid returns on capital. Ideally, as we move through time, we will continue to get opportunities in The Villages’ footprint and the remainder of the franchise. So far, everything is going right according to plan. Liam Cooley: Appreciate all the color. Thanks, guys. Chuck Shaffer: Awesome. Thanks, Liam. Operator: Your next question comes from the line of Kyle Girman with Hovde Group. Kyle Girman: Hi. This is Kyle on for David Bishop. Good morning. Chuck Shaffer: Hey. Good morning. Kyle Girman: In your prior guidance, you referenced plans for a meaningful banker headcount growth into 2026. I believe it was around 15%. I was wondering if you could update us on the progress so far this year, your target for net new producers for 2026, and how that hiring pace factors into your efficiency and revenue guidance. Chuck Shaffer: I will take that. We are about halfway there—that would be a way to describe it. Through the first quarter, we got about half of what we wanted to get done. Through the remainder of the year, we will see what opportunities emerge. We are going to be thoughtful about making sure we manage efficiency and manage the EPS guide we have given, but we will see what opportunities emerge for us. So far, so good. We continue to focus on that, and particularly, as I mentioned earlier, in some of the expansionary markets, we continue to add bankers and remain excited about what is out there for us. Kyle Girman: Thank you. And then maybe I was wondering how your M&A appetite has evolved heading into the back half of 2026, especially with The Villages conversion approaching. Are you actively evaluating in-market or adjacent opportunities in your Florida and Georgia markets, or is near-term focus squarely on the integration and organic growth? Chuck Shaffer: Thanks. Great question. At the moment, it is heads down focused on integration. Obviously, the impacts of this transaction are substantial on the earnings profile of the company. We want to get this absolutely 100% right, and we are going to deliver a flawless conversion. The team is heads down, very focused on it, and I am confident we will get that done. As we come out of that, we would be available to do M&A. We remain focused only on Florida from an M&A perspective. There are only about a handful of banks left that are big enough and in the right markets to be impactful, and if one of those were to emerge, we would certainly look at it. But there is a limited opportunity set as we move through time under that structure. It could be there; it might not be there. Right now, it is focused on The Villages. Kyle Girman: Thank you for taking my questions. Operator: I will now turn the call back over to Chuck Shaffer for closing remarks. Chuck Shaffer: Alright. Well, thank you all for joining us this morning. I am really proud of the Seacoast Banking Corporation of Florida team this quarter. They continue to do an excellent job growing the franchise while working exceptionally hard to deliver an upcoming conversion. A lot of hard work is going on with building around other new tools and AI products, and we are going to come out of 2026 much stronger than we came into it. I could not be more excited about the year ahead, and thank you all for being on the call. We are available for follow-up calls if anybody has them. That will conclude our call. Thank you, Kate. Operator: Ladies and gentlemen, that concludes today's call. Thank you for joining. You may now disconnect.
Operator: Good day, and thank you for standing by. Welcome to the H2O America 2026 Q1 Financial Results Conference Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. To ask a question during the session, you will need to press star 11 on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star 11 again. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your first speaker, Jonathan Reeder. Please go ahead. Thank you, Siobhan. Jonathan Reeder: Welcome to the 2026 financial results conference call for H2O America. My name is Jonathan Reeder, and I am the Senior Director of Treasury and Investor Relations for H2O America. Presenting today will be Andrew Walters, Chair of the Board and Chief Executive Officer; Ann Kelly, Chief Financial Officer and Treasurer; and Bruce Hauk, President and Chief Operating Officer. For those who would like to follow along, slides accompanying our remarks are available on our website at h2o-america.com. Before we begin today, I would like to remind you that this presentation and related materials posted on our website may contain forward-looking statements. These statements are based on estimates and assumptions made by the company in light of its experience, historical trends, current conditions, and expected future results, as well as other factors that the company believes are appropriate under the circumstances. Many factors could cause the company's actual results and performance to differ materially from those expressed or implied by the forward-looking statements. For a description of some of the factors that could cause actual results to be different from statements in this presentation, we refer you to the financial results press release and to our most recent Forms 10-K, 10-Q, and 8-K filed with the Securities and Exchange Commission, copies of which may be obtained on our website. All forward-looking statements are made as of today and H2O America disclaims any duty to update or revise such statements. You will have an opportunity to ask questions at the end of the presentation. This webcast is being recorded, and an archive of the webcast will be available until July 29, 2026. You can access the press release and the webcast at H2O America's website. In addition, some of the information discussed today includes non-GAAP financial measures of adjusted net income and adjusted diluted earnings per share, which have not been calculated in accordance with generally accepted accounting principles in the United States, or GAAP. These non-GAAP financial measures should be considered as a supplement to the financial information prepared on a GAAP basis, rather than as an alternative with respect to GAAP financial measures. Reconciliations of these non-GAAP financial measures to the most directly comparable GAAP financial measures are presented in the table in the appendix of our presentation. I will now turn the call over to Andrew. Andrew Walters: Welcome, everyone, and thank you for joining us today. We are pleased to provide you with an update on our strong first quarter 2026 results, during which we earned $0.49 per share on a GAAP diluted basis and $0.50 per share on an adjusted diluted basis. Our first quarter 2026 results were consistent with our internal expectations in support of our standalone 2026 EPS guidance of $3.08 to $3.18 per share. Before I ask Ann to discuss the quarterly results in more detail, I want to update everyone on the very successful equity raise that we executed in early March. Following our year-end 2025 update, and taking advantage of what we viewed as a receptive equity market, we decided to take the QuadVest acquisition-related equity risk off the table by coming to the market with a $550 million equity offering to fund not only the transaction, but also the $100 million to $125 million of equity needed for our 2026 San Juan capital budget. Our equity offering received an overwhelmingly positive response from investors, as it was more than five times oversubscribed and priced at a tight 2.6% discount. Due to the overwhelming demand and our desire to accommodate some very high-quality, long-term-oriented investors into our shareholder base, we upsized the issuance to $700 million including the greenshoe. The upsizing also served to address our forecasted equity needs through 2027. I believe the successful equity offering is a direct reflection of the hard work of all my partners here at H2O America and their dedication to providing our customers with high-quality, reliable service while executing on the financial goals that we have communicated to investors. At the same time, we recognize that our work is far from complete. We remain steadfast in our commitment to deliver on the 2026 to 2030 plan that we rolled out in February, including our increased long-term EPS CAGR target of 6% to 8%. The core element of the plan is our tried-and-true strategy of growing the business and creating shareholder value by making the much needed water infrastructure investments across the national footprint of our systems, while constructively engaging our key local stakeholders in a consensus-building process to provide timely regulatory recovery while maintaining customer affordability. As a reminder, our plan does not include any M&A opportunities beyond our two pending Texas acquisitions. On the regulatory front, our teams have been busy working to secure the necessary approvals to execute on our long-term plan. This includes leveraging infrastructure investment mechanisms and recoveries in Connecticut, Maine, and Texas, as well as making a PFAS remediation project recovery filing in Connecticut and California. In addition, a great deal of thought and effort has gone into preparing our general rate case filings in Connecticut and Maine. And of course, there was the filing of the QuadVest LP sales transfer merger application earlier in the year, and our focus continues to be on closing the transformative acquisition later this year and delivering on the anticipated accretion beginning in 2028. Bruce will provide more detailed updates on the QuadVest transaction as well as some of our key regulatory items later in the call. But now I will turn it over to Ann to provide details on our first quarter 2026 results and the key elements of our financial plan. Ann Kelly: Thank you, Andrew. Yesterday, after the market closed, we released our first quarter 2026 operating results. As Andrew mentioned, we are pleased to report first quarter 2026 diluted EPS of $0.49 and adjusted diluted EPS of $0.50. The results were consistent with our internal expectations and supportive of the financial guidance that we provided on our year-end 2025 update. Although we grew the underlying net income by roughly 15%, both our reported and adjusted diluted earnings per share were unchanged when compared to the 2025 results due to the higher share count as a result of leveraging our ATM program in 2025 and our equity issuance in early March. Moving to Slide 8, I would like to briefly discuss the key drivers resulting in the comparable year-over-year earnings per share. We realized a $0.41 per share increase due to higher revenue. Roughly half of it, or $0.20, was driven by rate relief received from general rate cases and infrastructure surcharges primarily in California, Connecticut, and Texas. There was also $0.11 of higher revenues for pass-through water supply costs that are offset in our water production expenses and do not impact our net income. In addition, higher usage, largely due to a hot, dry March across our California service territory, added $0.05. The revenue increase was partially offset by higher water production expenses of $0.20 attributable to $0.10 of higher water supply costs due to increases in average per-unit cost for purchased water and groundwater extraction, $0.09 from increases in water production balances in memorandum accounts primarily related to the full cost balancing account in California, and $0.08 from higher customer usage. These increases were partially offset by a $0.07 decrease in water production expense as a result of the increased availability of surface water. In addition, other operating expenses increased $0.18. The biggest item here was an $0.11 increase in depreciation and amortization for new utility plant placed in service, as well as an increase in maintenance, employee-related costs, and higher non-labor administrative and general expenses. The remaining drivers relate to $0.07 dilution, which I alluded to earlier, from the higher share count partially offset by $0.04 of net other benefits. As for taxes during the quarter, our effective income tax rate in Q1 2026 was approximately 15% versus 17% in 2025. The lower effective tax rate was primarily due to higher flow-through tax. Shifting from the first quarter results to our full-year 2026 and beyond expectations, the figures on the next few slides show that we are reiterating all aspects of the guidance that we rolled out near the end of February with our year-end 2025 update. During the first quarter of 2026, we invested $85 million into infrastructure improvement. This represents 18% of our full-year 2026 CapEx budget of $483 million, which does not include the impacts of closing QuadVest. While the 18% might seem low, it reflects the seasonality of our CapEx cycle, particularly during the winter months for our Connecticut and Maine operations. We are on track to deliver the full-year 2026 CapEx budget, as well as our plan to invest $2.7 billion of capital over the 2026 to 2030 period. Importantly, roughly 80% of the $2.7 billion capital plan qualifies for timely regulatory recovery either through California's three-year forward general rate case framework or through various infrastructure recovery mechanisms in Connecticut, Maine, and Texas. Our five-year capital investment plan, combined with our pending acquisition of QuadVest, is expected to translate into a 13% rate base CAGR off our year-end 2025 estimated rate base of $2.8 billion. As a reminder, these amounts represent our estimated rate base at year-end and not what was or will be recognized in rates by our state regulators in those particular years. We are laser-focused on not only delivering the rate base growth, but translating it into attractive earnings growth by minimizing regulatory lag and continually seeking ways to operate more efficiently in order to keep rates affordable while providing our customers with best-in-class service. The details on Slide 10 are consistent with what we provided in our year-end update. I will not go through them all, but I wanted to reiterate our plan to deliver a non-linear EPS CAGR over the 2026 to 2030 period at or above the top end of our 6% to 8% long-term organic EPS growth rate target, using our 2025 adjusted EPS of $2.99 as a base year. The ability to deliver growth at or above our 6% to 8% long-term sustainable rate is enabled by: one, the line of sight that we have on our five-year capital expenditure plan; two, the anticipated accretion from the pending QuadVest acquisition beginning in 2028 once the new rates from the consolidated Texas general rate case that we plan to file in early 2027 go into effect; and three, our expectation to continue to work constructively with key stakeholders in each of our states to achieve fair and timely regulatory outcomes. We remain excited about our five-year plan and long-term prospects and believe our team is fully capable of delivering on it. Turning to financing and credit on Slide 11, as Andrew discussed, we executed on the equity needed not only to fund our pending Texas acquisitions, but also our 2026 and 2027 base capital expenditures. We expect to stay out of the equity markets, including issuances through our program, through at least year-end 2027, as we have the ability to draw down on the $400 million forward agreement component of the March issuance over this period to fund our capital needs. We still expect to raise $100 million to $200 million of debt across the parent and Texas operating company levels to fund the QuadVest transaction, although we have more flexibility now regarding the timing given the upsized equity issuance. Our liquidity is strong to fund our daily operations. While we work towards closing QuadVest later this year, we utilized the cash received from the equity issuance to pay down our bank lines of credit, meaning the full $370 million is available, and we have invested the remainder of the proceeds into cash equivalents. In addition, our A- credit rating, which S&P affirmed earlier this month, affords us access to the capital needed to fund our longer-term investments. We expect our FFO-to-debt ratio to be in the 11% to 12% range through 2027, which is above S&P's 11% downgrade threshold. In 2028, we expect the ratio to be above 12%, and we will continue to delever throughout the rest of the plan through increased cash flows and the anticipated paydown of our 2029 HoldCo. With that, I will turn the call over to Bruce to provide some regulatory updates, including on our pending acquisition of QuadVest. Bruce Hauk: Thank you, Ann. Our regulatory teams have been busy to start the year. While the California team is gearing up for the 2028 to 2030 GRC filing that will be made in January 2027, earlier this month, we filed a request with the CPUC outside of the GRC process for approval and recovery of our planned Williams Station PFAS remediation project. The estimated capital cost of the ion exchange project is $176 million. If approved, SJWC would adjust rates via annual rate base filing offsets. This is similar to the recovery approach we took for our current AMI project that is expected to be completed around the end of this year. In Connecticut, we filed and received approval to implement annual revenue increases totaling a combined roughly $3.3 million under the WICA and WQTA mechanisms that went into effect on 04/01/2026. Also on April 1, we implemented our 2025 water revenue adjustment mechanism surcharge to reconcile revenues as authorized in CWC's most recent rate case. Notably, as a result of CWC achieving the PURA-prescribed performance metrics in our last GRC, the WRA surcharge provides recovery of certain amounts of compensation expenses. As most of you are aware, CWC filed a letter of intent on March 13 to file a GRC application within the next sixty days. The actual rate case will be filed in the weeks ahead, but per the letter, CWC plans to request an approximately $26 million increase in annual revenues before new rates become effective early 2027, as CWC seeks recovery of approximately $129 million of infrastructure investments made between its last rate case and 2026, as that investment is not reflected in current rates. Moving on to Maine on Slide 14, after getting approval of the stipulation and the rate unification proceeding in January, MWC filed its first consolidated risk application in late February requesting a $900 thousand increase. Earlier this month, MWC filed its first consolidated GRC filing requesting a $9.5 million increase in annual revenues to recover approximately $36 million of infrastructure investments that have been or are expected to be made in the state by 2026 and are not currently in rates. We expect the new rates to go into effect by 2027. Lastly, I would like to shift to Texas regulatory activity. We continue to work through the $5.1 million SICK mechanism application we filed in October, with an expected decision from the PUCT in 2026. We also continue to move the ball forward through the PUCT approval process for the two pending acquisitions. I am pleased to report that just last week, we filed a sales transfer merger, or STM, application for the Cibolo Valley wastewater plant and related collection system, which keeps us on track for an anticipated close of this transaction during 2026. In early 2027, after the close of the QuadVest and Cibolo Valley acquisitions, as well as the completion of our significant investments to bring an additional 6 thousand acre-feet of water annually into our existing system, Texas Water continues to expect to file a combined company general rate case with new rates effective in early 2028, so that these and other additions to Texas Water's rate base can be recognized in rates. I did want to point out that despite us making all of these significant and much needed capital investments in recent years across our service territories and seeking recognition of these investments from our regulators, our average bills are still below 1% of the median household income in each of our service territories. This is well below the EPA's recent study that reports water and wastewater bills are affordable if, when combined, they are less than 4.5% of median household income. Assuming a 50/50 split between water and wastewater, it would suggest below 2.25% for each is affordable. We believe this is a reasonable guideline depicting affordability and provides bill headroom for the recovery of our planned infrastructure investments going forward. Now for an update on QuadVest. The STM application for the regulated portion of the QuadVest transaction was filed in January and earlier this month it was deemed administratively complete. As outlined on Slide 15, the STM application requests approval of TWC's acquisition of the QuadVest LP assets and certification of the value of the ratemaking rate base, as determined in accordance with the Texas fair market value statute, at TWC's $483.6 million purchase price. TWC is in the process of issuing the required public notices and once proof of those notices is filed with the Commission, the PUCT's 120-day approval process will commence. That said, the 120-day time frame may be extended if Staff or the Office of Public Utility Counsel request a hearing and/or timeline extension. As such, we are updating our expected closing of the QuadVest acquisition from mid-2026 to sometime during the latter half of 2026. Meanwhile, we continue to see robust connection growth in the Houston-based QuadVest water and wastewater system, which now has more than 57 thousand 200 active connections as of 03/31/2026. This represents an impressive 5% increase in the first three months of 2026, after the active connection count increased 16% during 2025. As QuadVest’s under-contract and pending development pipeline converts into active connections, the pool of future connections continues to be replenished, extending the longevity of the growth profile. Specifically, during 2026, despite QuadVest converting 2 thousand 800 connections from the pipeline to active, the pipeline increased by 5 thousand connections. Of course, future connection growth will vary based on a number of conditions, so this is no guarantee of the future pace of growth. However, these results are in line with our range of expectations, and we believe solid growth will continue in the Greater Houston area, which is the second-fastest growing metropolitan area in the United States. The addition of QuadVest active customers plus the continued conversion of its contracted development backlog is the primary contributor that is expected to drive Texas from 8% of our consolidated customer base today to 26% by 2029. Between QuadVest and Cibolo Valley, we are very excited about our long-term growth potential in Texas. That concludes my regulatory updates, and I will now turn the call back over to Andrew. Andrew Walters: Thank you, Bruce. Before opening the call up to Q&A, I wanted to welcome Commissioner Patrick Rhode, whom Governor Abbott appointed a few weeks ago to fill the remaining vacancy on the Public Utility Commission of Texas, and take a minute to expand a bit on Bruce's remarks with respect to customer affordability. We know the concern remains top of mind with customers, regulators, and investors alike, especially as the recent uptick in energy prices due to the conflict in the Middle East has caused inflationary expectations to rise. Affordability is, and frankly always has been, a top priority for us, and we will continue to work constructively with our state regulatory partners as we look to balance affordability with the extensive investment required to replace aging infrastructure and treat emerging contaminants, all while providing safe, high-quality water and reliable service. As Bruce mentioned, as of year-end 2025, average bills were less than 1% of median household income across all four of our states, which is well below the EPA's suggested 2.25% affordability threshold. In addition, we offer affordability tariffs in California, Connecticut, and Maine, with hopes to introduce this benefit to our Texas customer base as part of our future rate proceeding. As always, we will continue to strive to run the business as efficiently as possible, as we recognize that every dollar of avoided operating expenses enables the recovery of $7 of capital investments with a neutral impact on customer bills. Anytime we can swap operating expenses for capital deployment, we will look to do it, as it is a win-win for customers and the company. With that, I will turn the call back over to the operator for questions. Operator: Thank you. At this time, we will conduct a question-and-answer session. As a reminder, to ask a question, please press star 11 on your telephone and wait for your name and company name to be announced. To withdraw your question, please press star 11 again. Our first question comes from the line of Alexis Kania of BTIG. Your line is now open. Alexis Kania: Good morning. Thanks for taking my question. I had two questions. First, as you think about the upcoming rate case process in Texas for QuadVest next year, I know it is early, but from a high level, how would you think about the affordability statistics you provided for your other jurisdictions and how they may end up looking on a run-rate basis for QuadVest? Andrew Walters: Sure. I will ask Bruce to take this. Bruce Hauk: Thank you very much, Alexis, and good morning. As it relates to the QuadVest rates, we have not disclosed the potential impact on rates, but have disclosed that it would be significant. There has been a lot of investment that needs to be made for reliability in the system, as you heard in my prepared remarks, and also the FMV transaction itself. We are engaged with all the stakeholders, customers, and the regulatory commission as well. We have to be creative and thoughtful in our preparations, and that will most likely be public in 2027 when we file. As Andrew mentioned in his comments, we are very focused on affordability, and our rate design will take that into consideration. We are going to be proposing a low-income tariff to address affordability issues in Texas, while being mindful of how to most appropriately bring those investments into rates and how we can do that in partnership with the commission. Alexis Kania: Great, that is helpful. And then maybe a question for Ann. As you talked about the balance sheet and the FFO-to-debt being in the 11% to 12% range for the next couple of years, given the cushion from the equity offering, is there a long-term FFO-to-debt target we should think about, and the thinking behind wanting to be sizably above whatever the downgrade threshold might be for your A rating? Ann Kelly: Thanks, Alexis. As we mentioned, we do plan to delever over the five-year plan, with the target being to get into the A flat rating, which is comparable to our competitors. Right now, S&P’s upgrade threshold is a 15% FFO-to-debt level, so we would need to be north of that. We expect to be there by the end of the five-year period. Moving to an A flat credit rating gives us flexibility. Overall, we are very committed to our A category rating, currently at A-, but building that up to an A flat gives us flexibility if we were to pursue an acquisition or other transactions in the future, to be able to do so while still maintaining the A category rating. Andrew Walters: Thank you, Alexis. Operator: Thank you. Our next question comes from the line of a Baird analyst. Your line is now open. Analyst: Andrew, Bruce, thank you so much. Excited to be joining your analyst community, and thank you for taking our questions. Two for me. First on QuadVest: could you talk about the final steps needed to close, any risks you see to the timeline, and whether any small deviations—thinking months—would pose any risk to your timing for potentially filing the Texas rate case application next year? Andrew Walters: I will have Bruce take that question. Thank you. Bruce Hauk: Thank you for the question. We are super excited about the major hurdle we most recently cleared, which was being deemed administratively sufficient. That step allows us to issue notice to customers of the acquisition and kicks off a process that allows us to set the 120-day procedural schedule with the commission. When we announced this acquisition, we filed notice for the FMV and then proceeded with filing over 7 thousand pages in the STM process, and to have had a roughly 60-day examination to be deemed administratively sufficient is a significant achievement. As things proceed, that moves us from a mid-2026 close to sometime in the latter half of 2026. All commissions are inundated with dockets—Texas is no exception—so we will work with the commission in partnership to prosecute the STM. We are on track for late 2026, barring significant exceptions in terms of delays that may come up in the process. So far, so good, and we are planning to close in the latter part of 2026, barring unforeseen issues from intervenors or commission staff timing due to their docket load. We are very happy with the process thus far and the engagement by the commission and staff. Andrew Walters: I think that is an important point to highlight. When anyone receives that volume of documents to review, they are not going to scrimp on their process. It just means they have to work very hard to get through it, and from our standpoint, we have nothing but gratitude for the hard work that the staff is putting into this. Analyst: That is super helpful, thank you both. One other if I could: the EPA has been talking more about regulating microplastics and other potentially harmful substances in drinking water. It took a couple of years to move forward on PFAS, so it is still early. Have you thought about whether treating for PFAS would also treat some of these other substances, or could this be a tailwind to increased capital deployment longer term? How should we think about this in the context of your planned capital deployments? Bruce Hauk: Thank you for that question. We are very engaged in the EPA process. To level set, the six constituents that are PFAS-regulated with MCLs—we are on track to make the improvements needed in Connecticut and California to achieve compliance. The new list of compounds is at an early stage, and the rulemaking process is lengthy. Our partnerships with the Water Research Foundation, EPA, and NAWC allow us to be a meaningful part of that process. As to whether ion exchange or GAC used for PFAS mitigation have ancillary benefits: absolutely. On microplastics, our Director of Water Quality based at our San Jose Water operation is conducting a pilot through the Water Research Foundation at our Montevina plant on microplastics to inform the science behind how to eliminate, treat, and remediate microplastics. We are very much in the research and participating in the process that will help our company and the industry as a whole as we work through rulemaking. Andrew Walters: It is good that Bruce highlights the team. We get the honor of telling the story, but the work done in the field is nothing short of amazing. Suzanne DeLorenzo, whom Bruce mentioned, is one of those amazing partners driving progress in our company and putting us at the forefront of issues that impact the entire industry, not just us. Analyst: Super helpful. Thanks for the time. I will pass it on. Operator: As a reminder, to ask a question, please press star 11 on your telephone. I am showing no further questions at this time. I would now like to turn it back over to Andrew Walters for any closing remarks. Andrew Walters: Thank you again for joining us today. H2O America proudly leverages our national platform to support our distinct local operations, all united by a shared mission: delivering reliable service and high-quality water to 1.6 million people across four states. Together, we protect what is precious. At the same time, we continue executing our growth strategy and delivering shareholder value, including our unwavering commitment to the dividend, which we have paid for more than eighty consecutive years and increased in each of the past fifty-eight. I am always available for follow-up, along with my partners, Ann and Bruce. We appreciate your interest in H2O America. Operator: Thank you for your participation in today's conference. This does conclude the program. You may now disconnect.
Operator: Thank you for standing by. My name is Rebecca. I will be your conference operator today. At this time, I would like to welcome everyone to the UMB Financial Corporation first quarter 2026 financial results conference call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. If you would like to ask a question during this time, simply press star followed by the number one on your telephone keypad. If you would like to withdraw your question, press star one again. Thank you. I will now turn the call over to Kay Gregory, Investor Relations. Please go ahead. Kay Gregory: Good morning, and welcome to our first quarter 2026 call. J. Mariner Kemper, Chairman and CEO, and Ram Shankar, CFO, will share a few comments about our results. Then we will open the call for questions from equity research analysts. James D. Rine, president of the holding company and CEO of UMB Bank, along with Thomas Terry, chief credit officer, will be available for the question-and-answer session. Before we begin, let me remind you that today’s presentation contains forward-looking statements, including the discussion of future financial and operating results, as well as other opportunities management foresees. Forward-looking statements and any pro forma metrics are subject to assumptions, risks, and uncertainties as outlined in our SEC filings and summarized in our presentation on Slide 50. Actual results may differ from those set forth in forward-looking statements, which speak only as of today. We undertake no obligation to update them except to the extent required by securities laws. Presentation materials are available online at investorrelations.unb.com and include reconciliations of non-GAAP financial measures. All per-share metrics refer to common shares and are on a diluted share basis. Now I will turn the call over to J. Mariner Kemper. J. Mariner Kemper: Thank you, Kay, and good morning, everyone. We will share some brief comments and open it up for questions. We reported another strong quarter, with results well ahead of expectations. We had 10.8% linked-quarter annualized loan growth, boosted by $2.3 billion in gross production; nine basis points of core margin expansion, driven by a 24 basis point decrease in the cost of interest-bearing deposits; high-quality credit metrics, including 19 basis points of net charge-offs, and provision of $27 million, driven mostly by the $1.4 billion increase in period-end loan balances; and, finally, continued momentum in our fee businesses, with strong contributions from corporate trust, investment banking, and fund services, where assets under administration increased nearly $20 billion from the prior quarter and stand at $565 billion. I will let Ram get into more detail around our results in a moment, but first, I would like to address some of the headlines around the private credit industry, which appear to exaggerate exposures and risks at regional banks. Private credit has been around for years and has been, and will continue to be, an important part of capital formation on a global basis. We have heard some concern that, due to our varied lines of business, we may have some outsized exposures that could impact our performance. The fact is that we have negligible exposure to the private credit industry, and what exposure we do have is to high-quality and experienced operators that have diversified holdings, strong credit structures, and low leverage at the fund level, all underwritten to low loan-to-value metrics. We are proud to partner with a few of the strongest players by providing asset service solutions to their funds. This quarter, we have added additional disclosures to our IR deck to explain what private credit means to us—and, more importantly, what it does not. First, on Slide 31, we have outlined our total NDFI lending exposure, providing additional color to the standard call report categories. As you can see, our total NDFI exposure is $2.6 billion, or just 6.6% of total loans. Within that total, approximately $300 million, or less than 1% of the loans, are to private credit funds. Those loans are subscription lines, which carry an even lower level of risk. As noted earlier, these private credit funds are primarily secured by diversified holdings of senior secured loans, at strong borrowing bases, with minimal exposure to at-risk industries, low leverage, and they have continued to see strong gross inflows. Just under $1 billion of our NDFI loans are to private equity funds, with the largest portion of these being subscription lines, also known as capital call lines. As you can see from the definition included on page 31, subscription lines inherently carry even lower risk to lenders, as they are short-term lines that are repaid with funds received on capital calls made to investors who are contractually obligated to contribute the capital to the fund upon request. The slide gives other detail and characteristics of our high-quality portfolio, including the fact that over 98% of NDFI balances are pass rated. As you have heard us say before, lending to NDFIs is not a new phenomenon and has long been a part of our C&I portfolio, with minimal historic losses. Turning to our fee income exposure to private credit funds, we have added some additional detail on the asset service and custody slide on page 36. Approximately $43 billion of our more than $565 billion in assets under administration is related to private credit, representing just 7.6% of the total. More significantly, the AUA tied to private credit funds increased nearly 5% from the end of the prior quarter. The related annual fee income totaled approximately $13 million, or just 1.6% of annualized first quarter fee income. Similarly, any deposit impact from these funds is immaterial. Moving on, our capital levels continue to build, with a March 31 common equity tier 1 ratio of 11.16%, a 20 basis point improvement from December. While our capital priorities remain the same—with organic growth at the top of our list—our board approved an increased share repurchase authorization, and as you can see in our earnings release, we opportunistically repurchased approximately 178,000 shares in March. We will continue to remain opportunistic in the second quarter. Finally, our results this quarter drove positive operating leverage of 0.4% on a linked-quarter basis, a 155 basis point improvement in operating ROTCE, and an operating efficiency ratio of 47.6%. We continue to expect positive operating leverage for the full year of 2026, even with the impact of lower expected contractual accretion benefits. I am extremely pleased with the performance of our newer markets, and I am excited to continue the momentum throughout the remainder of this year. And now I will turn it over to Ram for some additional detail on the drivers of our first quarter results. Ram? Ram Shankar: Thanks, Mariner. The first quarter included $51 million in net interest income from purchase accounting adjustments, $15.1 million of which was related to accelerated accretion from early payoffs of acquired loans. The benefit to net interest margin from total accretion was approximately 33 basis points. On Slide 10 is the projected contractual accretion, which is estimated at approximately $71 million for the remainder of 2026 and $79 million for 2027. These totals do not include any estimates for accelerated payoffs. Slides 12 and 13 include some key highlights and drivers of our quarter-over-quarter variances. Noninterest income for the quarter was $204.8 million, an increase of $6.4 million, or 3.2%. Drivers included strong performance from both fund services and corporate trust, increased deposit service charges, and investment banking revenue, where municipal trading income increased by 39% from fourth quarter levels. Within the other income category, we had $5.9 million in nonrecurring gains on previously charged-off HCLF loans, a variance of $5.4 million from the fourth quarter. And we had a $3.8 million decline in COLI income, which has a similar offset in reduced deferred compensation expense. Adjusting for investment gains, the nonrecurring items I noted, and mark-to-market on COLI, our fee income for the first quarter was approximately $198 million. On the expense side, we had just $4.4 million in merger-related costs, compared to elevated levels in the prior quarter, when the largest portion of contract termination and conversion expenses were recognized. Excluding the impact of one-time costs, operating noninterest expense was $375.4 million, a reduction of 4.2% compared to the fourth quarter. The largest drivers included a reduction of $5.9 million in salaries and benefits expense related to lower bonus and commissions accruals following strong fourth quarter performance, and a $3.9 million reduction in deferred compensation expense, partially offset by seasonal increases in payroll taxes, insurance, and 401(k) expense. Compared to the guidance I provided last quarter, the favorability in expenses was driven by timing of marketing and other spend, sooner-than-expected synergies realized on contract terminations, and deferred compensation expense. Looking ahead, we would expect second quarter operating expense to be in line with the current consensus expectations of $383 million. The increase from first quarter primarily reflects one additional salary day, as well as the impact of our merit cycle that went into effect in April. Turning to the balance sheet, driving the 10.8% annualized growth that Mariner mentioned was 22% annualized growth in average C&I balances, led by strong activity in Texas. Other regions—California, St. Louis, Colorado, and Utah—posted double-digit quarterly growth. It is great to see the momentum building in several of our acquired regions along with Utah, where we opened our first physical bank location in December. Our pipeline remains strong heading into the second quarter. Average deposits, as shown on Slide 25, were essentially flat in the first quarter, as the 10.4% linked-quarter annualized increase in DDAs was largely offset by lower interest-bearing deposit balances. We added a metric this quarter that adds customer repurchase agreement balances, which are deposit surrogates. Average customer funding increased $702 million, or 1.2% from the prior quarter, and 4.8% on a linked-quarter annualized basis. This balance remix, coupled with the residual impact of the rate cuts in the fourth quarter, drove our cost of total deposits down by 19 basis points to 2.06%, while cost of interest-bearing deposits declined by 24 basis points to 2.79%. We realized a blended beta of 70% on total deposits for the quarter, driven by favorable mix shift as well as continued outperformance for pricing on our soft-index deposits. Reported net interest margin for the first quarter was 3.38%. Excluding the 33 basis points contribution from purchase accounting adjustments, core margin was 3.05%, increasing nine basis points sequentially. The primary drivers of the linked-quarter increase in core net interest margin included benefits of a favorable deposit mix shift and repricing of deposits following the reduction in short-term interest rates, and the positive impact of day count in the quarter, partially offset by loan repricing and lower loan fees, and the impact of liquidity balances and a lower benefit from free funds. Relative to the first quarter adjusted margin of 3.05% that excludes accretion, we expect second quarter margin to be relatively flat, as the benefits from fixed asset repricing are offset by day effects and stable deposit costs and mix shift. I will add my typical caveat that net interest income will depend on the levels of DDA growth and excess liquidity, any SOFR movements, and mix shift within the lending and funding portfolios. Finally, our effective tax rate was 21.1% for the first quarter compared to 20.3% for the fourth quarter. Looking ahead, our tax rate is expected to be between 20–22% for 2026. Now I will turn it back over to the operator to begin the question-and-answer session. Operator: At this time, I would like to remind everyone, in order to ask a question, press star then the number one on your telephone keypad. Your first question comes from the line of Jon Arfstrom with RBC Capital Markets. Your line is open. J. Mariner Kemper: Hey, good morning to everyone. Jon Glenn Arfstrom: Maybe Mariner or Jim, for you guys on the pipelines. Good number, the $2.3 billion—maybe there is a little seasonality in there—but do you expect that to continue to grow from here? And you flagged this in the release, but have you seen any impact on pipelines from some of the geopolitical risks or higher energy costs? J. Mariner Kemper: I will take that first. James, feel free to add anything. I think this is a good news story, which is that I do not really have anything new to tell you from being in the seat for 22 years. It is the same thing every quarter for 22 years, which is the next quarter looks pretty good. It is not seasonal at all. We continue to book loans based on our strategy—bottoms-up capability, capacity of the officer, and market share opportunity in the markets that we are in and in the verticals we are in—and there is a very long runway for us across our entire footprint, including some new, very big markets like California. James D. Rine: The only thing I would add is it continues to be strong, and it is from a cross-section from all markets. Jon Glenn Arfstrom: Okay. And then anything on the payoffs and paydowns slowing? I know that number jumps around, but it was a pretty big step down in the quarter. Is there anything you would flag on that? J. Mariner Kemper: No. Actually, I would say that the anticipated payoffs and paydowns in the first quarter actually materialized, so what we expected to happen happened. It can bump around. The reality as we look forward—if we are going to be higher for longer instead of seeing rates come down—we are not likely to see as much payoff/paydown for the rest of the year if that is going to be the case, which seems to be the prevailing thought. We do not anticipate any rates coming down anytime soon. Jon Glenn Arfstrom: Okay. Alright. Thank you very much. Appreciate it. J. Mariner Kemper: Thanks, Jon. Operator: Your next question comes from the line of Jared Shaw with Barclays. Your line is open. Jared David Shaw: Thank you. Good morning. J. Mariner Kemper: Morning, Jared. Jared David Shaw: Just looking at the fee income lines—you had some really good strength there this quarter. How should we think about the income for the year and for the second quarter, building off what we saw this quarter? J. Mariner Kemper: We do not give specific guidance on expectations for growth in fee income, other than to point backwards. We continue to expect the same kind of performance from the team, and the pipelines across all those businesses remain very strong, to include the two that drive it and have for some time, which would be fund services and corporate trust. We have been giving you a little color over the last couple years on the success we have had with our private investment group, and we expect to continue to see exits and successes periodically there as well. Without giving you specific guidance, expectations continue to be as strong as they have been. Pipelines are good, activity is strong, and we are taking share across the board in all those businesses. Jared David Shaw: At the time of the Heartland deal, you talked about the opportunity of corporate trust in some of those new markets. Are you seeing any activity there yet, or is that still more in the future as you build out those markets and capabilities? J. Mariner Kemper: The message intended with that is that corporate trust is a very local business, and it is a brand business. The brand extension—having offices and signs and visibility across California and other places, and places for lawyers to meet together in offices and things like that—is brand extension and pushes the business further. It is hard to point directly to Heartland specifically, but we know that the brand extension with those locations is helpful. We also did a lift out—you know, we talked about that last quarter—from Wilmington Trust in California. I would call it mostly brand extension. It helps. James D. Rine: This is James, Jared. As Mariner mentioned, we continue to add to the team in all markets, so we look for that to do nothing but grow. Jared David Shaw: Okay. Thanks. And then if I could just follow up on the deposits. Ram, you called out the impact to NIM from potential deposit mix shift and DDA growth. If we look at average DDAs versus end of period, it feels like there could be some good growth built in there. How should we think about DDA balances growing from here, or is there just a lot of quarter-end variability? J. Mariner Kemper: I will take that too. We try to guide you to think about averages rather than point in time because of the episodic nature of our institutional businesses and some of our larger corporate business—things such as dividends and tax payments that can happen from quarter to quarter. That is true, but also, as I mentioned a moment ago, picking up the Wilmington Trust team in California and adding team members across the country in our New York and LA offices in corporate trust, and the momentum we have with fund services, the addition of more clients in between those episodes allows the base to grow over time. The expectation, without knowing the exact timing, is that the DDA baseline grows over time due to the success and momentum we have in client acquisition that takes place in between those episodes. Jared David Shaw: Okay. Thanks. J. Mariner Kemper: Yep. Ram Shankar: Thanks, Jared. Operator: Your next question comes from the line of Brendan Nosal with Hovde Group. Your line is open. Brendan Nosal: Hey. Good morning, everybody. Hope you are doing well. Ram Shankar: Good morning. Brendan Nosal: Kicking off on capital, have you any early read on the updated capital rules overall, and then specifically, how it ties into how you think about $100 billion, and then you pair that alongside the increased activity we saw in the buyback this quarter? Ram Shankar: I will take this. On our preliminary read, it is a net positive for us—obviously a lot of relief from risk-weighted assets. We are still studying it—going from 100% to 95% on some of the commercial relationships and LTV-based assignments on risk for mortgages—and the negative is just the inclusion of AOCI. I still think it is a net positive for us in terms of what it means to our CET1 and total capital ratios. J. Mariner Kemper: I would just add that we are very efficient and accreting capital very quickly on top of all that. It is a beautiful position to be in. We are likely to have more flexibility with capital with all of the things that Ram just said, along with our ability to accrete and grow capital, which is going to give us flexibility as we look into getting closer to $100 billion. We feel well positioned. We also believe, because of the quality of our assets, we benefit from likely being able to support lower levels of capital than our peers anyway, long term. Brendan Nosal: Alright. That is fantastic. Maybe pivoting to a top-level question on the overall return profile. There has been a pretty meaningful step-up in ROA over the past couple of quarters. Things can move around period to period, but conceptually, are we at a level that you can more or less maintain going forward, or are there environmental pressures that kind of ease that somewhat? J. Mariner Kemper: We expect to continue to perform at that level. Ram Shankar: We do not give long-term guidance on our growth targets, but even if you exclude some of the purchase accounting things that go through our income statement, our performance has been increasing because of strong operating leverage, good balance sheet growth, and good margin trajectory. We feel pretty good about it. To add to your previous question on capital, we still have almost $600 million of pretax accretion left to take through our income statement for the next two to three years. That is roughly $6 of EPS and close to 100 basis points of capital, on top of the regular outperformance that we see in our legacy operations, before all the purchase accounting benefits. We are pretty excited. The denominator is growing at a fast clip, and that is why you saw what we did this quarter, including doing some buybacks before our quiet period ended. Obviously, we had $1.4 billion of loan growth, and you heard the comments about the pipeline looking pretty strong. Then we will be more active about looking at our dividend and other opportunities. I would also add, as a reminder, one of the reasons we did Heartland was to gain strength in our retail business. J. Mariner Kemper: We doubled our branch network and doubled our granular, low-cost deposits, and that is a really nice leverage point going forward for us. Our retail business was a bit more of a drag on those profitability metrics, and that has gotten a lot more efficient. We expect it to continue to do so as it grows. Brendan Nosal: Okay. Fantastic. Thanks for taking my questions. Ram Shankar: Thanks, Brendan. Operator: Your next question comes from the line of Casey Haire with Autonomous Research. Your line is open. Casey Haire: Great, thanks. Good morning, guys. I wanted to touch on the NIM outlook from the loan yield side of things. Where are new money yields versus that 6.52% level in the first quarter? Ram Shankar: If you look at our loan yields excluding accretion, we show that the loan yields are close to under 6% if you exclude the accretion benefit from loans. For the first quarter, our production yields are somewhere between 6% and 6.25%, so they are pretty accretive on new money coming in. Then there is the fixed asset repricing that happens within the loan portfolio as well. We have close to $3 billion of loans that have some 5% rates that are repricing higher in today’s environment. Casey Haire: Okay. Great, understand that the core will be impacted. And then apologies if I missed this on the expenses—very good discipline here in the first quarter. Just some color on what drove that $10 million of surprise versus your guidance, and with the guide being up in the second quarter, what are some of the drivers there? I think there were some seasonal roll-offs. J. Mariner Kemper: And, you know, with the guide being up in the second quarter, what are some of the drivers there? Because I think there were some seasonal roll-offs earlier in the year. Ram Shankar: Some of it was just timing of when we expected some of the marketing spend to happen, so that did not happen as I had anticipated in the first quarter when I gave my guidance. We also did a great job achieving expense saves from some of the contract terminations, so they happened sooner than expected, which was part of our $385 million to March guidance that I gave last quarter. The step-up in the second quarter is one more day and then the merit cycle that goes into effect in April for our associate base. Those are the two drivers that take us higher. We also had an expense credit of $3 million from our deferred comps. If you add that back, our quarter baseline is more like $378 million, and what I guided to is about $383 million, which steps up because of the merit cycle and one more day. Casey Haire: Gotcha. Thank you. Ram Shankar: Thanks. Operator: Your next question comes from the line of Janet Lee with TD Cowen. Your line is open. Janet Lee: Good morning. On deposits, I want to better understand the reason for the muted deposit growth in the quarter. I thought 1Q has seasonal public fund inflows. Even on an average basis on page 25, I see commercial balances decline, although other parts have been growing. Is this just timing or seasonality, or was there something else that attributes to somewhat muted deposit growth for the quarter? J. Mariner Kemper: Thanks. I tried to address that a moment ago. It is complex. We have many lines of business that make it harder to understand. We like to describe it so that you think about averages rather than point in time. We have a lot of episodic activity that goes through many of those business lines that you see on that page. Public funds have a seasonal drawdown in the quarter because of tax payments and such. The rest are more episodic, and that is why you have to think about averages. I also like to point to page 42 because you really need to think about what is happening to our deposits over time, not even just averages for a single quarter. We have a very long-term track record of adding clients. In between quarters, you can see tax payments and dividend payments and putting money to work—all those kinds of things that can bump things around. You should think about multiple linked quarters and year-over-year growth in what we are able to do as a company. We have an exceptional deposit-generating machine. There is nothing to read into at the end of the quarter; it is business as usual. Client count is good and growing. Ram Shankar: In a nutshell, we did not lose any business. Janet Lee: Great. Thanks for the color. You have already touched on total fees, and I appreciate all the color you gave on the private credit exposure on Slide 36. Does this mean that, at least from either deposit or fee perspective on the trust and security processing fees, you have been growing at a very strong pace? You are not seeing any disruption to that flow, and the trajectory of that line item should be continued growth since you are not seeing any outflows on AUA and the fee income side of the business. Is that fair? J. Mariner Kemper: Yes, that is absolutely correct. One of the things that is really important to note about this business for us is that, from time to time, investors will ask—there was a time when hedge funds were leading the way, and, as you are all aware, hedge funds became out of favor. During that same time, we got the same set of questions: what is going to happen to your assets under administration as the hedge fund business slides away? The answer is that private investing is still leading the way. In our business, as you go from hedge funds to private equity, and within private equity, intervals come out, then the popular vehicle becomes private credit, and then private credit has this conversation taking place. It does not mean all this money goes to public investing; it means it redistributes back through the other verticals within private investing. We are the beneficiary regardless, as that money moves around within the private investing universe. We have benefited handsomely over time regardless of which one of those verticals is accumulating capital at the time. Janet Lee: Got it. Thanks for all the color. J. Mariner Kemper: Thanks. Operator: Your next question comes from the line of Nathan Race with Piper Sandler. Your line is open. Nathan James Race: Morning, everyone. Thanks for taking my questions. Going back to the capital discussion—given you are generating a lot of capital internally and obviously eclipsed your CET1 target this quarter—given that capital’s ability is so strong, even with double-digit balance sheet growth, how are you thinking about using the buyback authorization as more of a continuous tool to manage excess capital? It has been more episodic in the past, but are you thinking about buybacks as a more consistent component to excess capital management? J. Mariner Kemper: We have a long-tested philosophy around that. As long as we are able to do what we have been able to do and expect to continue to do, the first and highest, best use of our capital is to put it into loans, and we are very successful at it. We do not see that fading away. We have an excellent team, a deep pipeline, long-tenured associates, and big new markets to pursue, having lots of success—really across the board. Wisconsin for us is on fire. Minneapolis has really turned on. California is doing great. New Mexico—I could go on and on. The new markets are really performing, and we are still early days in getting the benefit out of them. So first and foremost, loans. Then it is a combination of other capital uses based on lots of variables: how our currency is trading relative to others, what is going on in the economy. On M&A, we still think it makes sense for us to do tuck-in acquisitions that meet our test for low-cost, granular, under-levered deposits—well-run smaller banks that fit into markets we are already operating in. That is investing in the business, so that would probably be next. Then the next two on the list are going to be buybacks and dividends. We will be opportunistic on the buyback side, as we have been. On the dividend side, U.S. investors should expect—as long as we are performing—that you should see an increase in our dividend every year. We will first think about investing in our business, and then think about buybacks. Nathan James Race: Understood. That makes sense. Maybe a bigger-picture question: it seems like you are firing on all cylinders. Are there any segments or businesses where that is not working, where you are seeing opportunities for greater efficiency or operational improvement going forward? J. Mariner Kemper: Anybody who is not trying to leverage technology to make their business more efficient should have their heads examined. We are always looking at ways to operate better, and machine learning is being deployed across the whole organization to get smarter, better, faster, and bolder. AI is an overused term for being smart using technology to make your business better. We are looking for ways to do that all the time, and I think you will see us do that successfully going forward. Otherwise, it is making sure the salesforce has everything they need and we are staying out of the way, and letting our exceptional, tenured team get out there and build our business. We think we have a tremendous opportunity to take the feel of “local national”—from Illinois to California, from Milwaukee and the Twin Cities down to New Mexico and throughout Texas. We think we can be the go-to bank with the team that is in place and has deep pipelines. Nathan James Race: Great. I appreciate all the color. Thanks, Mariner. J. Mariner Kemper: Thanks, Nathan. Operator: Your next question comes from the line of Brian Wilczynski with Morgan Stanley. Your line is open. Brian Wilczynski: Hi, good morning. Ram Shankar: Morning, Brian. Brian Wilczynski: Just wanted to follow up on the core net interest margin guidance for the second quarter. Ram, you mentioned that new loan growth is accretive to core loan yields. You talked about the fixed-rate asset repricing. Can you elaborate on some of the puts and takes and any headwinds that keep core NIM stable in 2Q as opposed to up? Ram Shankar: It is the incremental cost of deposits relative to what we can make on the asset side. If you look at our cost of interest-bearing deposits, in the last quarter it was about 2.80%. We have, as Mariner said, a very diversified funding mix, and it depends on where it comes from—whether it comes from DDAs or some other verticals. Interest-bearing costs or deposit costs can vary from one quarter to another, depending on where it is coming from. There are no specific headwinds; it is the absence of the tailwinds we had with rate cuts. Our internal view is there might be one rate cut later this year—maybe not. So there are no more tailwinds from that standpoint that benefit our beta. We expect deposit costs to be stable and some accretion on the lending side because of new money yields and fixed assets repricing. J. Mariner Kemper: Stable, with the opportunity of outperformance on demand deposits. Again, I say opportunity—that is a possibility for us. Otherwise, it would be stable. Brian Wilczynski: Got it. And on the deposit side, you had really strong growth this quarter in the corporate trust deposits. Can you remind us of some of the drivers for that business? I know UMB has an aviation business and a relatively new CLO business. Can you talk about what is working there and the environment right now for corporate trust? J. Mariner Kemper: It sounds like you could list them—yes, exactly. The aviation business is hitting on all cylinders. Our CLO business is firing up really well on a national basis, so lots of opportunity there. Infrastructure spending is finally happening on a national basis, so our offices on the coasts have really started to pick up. We did this lift out, which we have talked about a couple of times on the call already, which is allowing for growth. It is a big list on the infrastructure side. It is across all those verticals. There are a couple of relatively new verticals as well. We are number two and number three in the country by number of issues now, and our coastal offices are relatively new, so I think there is a huge runway for what we are able to do in Orange County and New York—up and down the coasts. Brian Wilczynski: Got it. Really appreciate all the color and thank you for taking my questions. Ram Shankar: Thank you, Brian. Operator: Your next question comes from the line of Chris McGratty with KBW. Your line is open. Christopher Edward McGratty: Hello. Great morning. Ram Shankar: Morning, Chris. Christopher Edward McGratty: Ram, I appreciate the commitment to operating leverage this year. Thinking about the moving pieces over the medium term—you have the accretion rundown—but it feels like this model is capable of operating leverage for the foreseeable future. Any response to that? Ram Shankar: That is why—even last time—and Mariner said it this time as well: whether there are more private investment gains or less, whether there is more accretion or less, our job is to maintain positive operating leverage as we build scale. Some of our strategic pillars are about building scale in each of the markets. We are doing that very selectively. We are becoming more profitable as we grow into our size as well. This is not an environmental thing. We want to weather all economic environments and achieve positive operating leverage. That is how we judge ourselves. J. Mariner Kemper: We judge ourselves on operating leverage. Every dollar spent should have positive leverage. That is how we operate the business. Christopher Edward McGratty: As a follow-up, is there anything magic about the 50% efficiency ratio? You are kind of in the low fifties today. Balancing the need for investments, the benefits from AI, and that dynamic—is there anything magic about 50%? J. Mariner Kemper: Absolutely nothing magic about 50%. We feel like we are doing really well where we are, given the mix of business. Being at 47% where we are right now is a top-of-class number for just a net interest margin shop, and the fact that we are able to perform at 47% with all of our institutional businesses layered on top—we feel pretty good about that. So no, there is nothing magic about 50%. Thanks, Chris. Operator: Again, if you would like to ask a question, press star 1 on your telephone keypad. Your next question comes from the line of Brian Foran with Truist. Your line is open. Brian Foran: Hey. Good morning. Mariner, I appreciated you led with “anyone not using technology to get better needs to be examined.” I thought it was interesting you said AI is overused or overhyped. Can you expand a little bit on where you think doing AI for banks is a little too much? J. Mariner Kemper: It is not that banks are doing too much. The term is overused. At the end of the day, AI is the use of data to run your business better and make better decisions and move faster. It is not a new subject. TV and the financial press have made a big deal out of it, but it is the use of machine learning to get better, smarter, faster, and bolder—which is not new. I am not saying banks are doing too much or not enough. I am saying you should be doing it—leveraging faster computing and better data to make your business better. If you are not doing that, you should have your head examined. Brian Foran: Perfect. On M&A, as I am sure you are aware, there became this narrative last year that somehow you were on the list to do a big deal. I thought it was interesting you kept using the word “tuck-in.” Any other parameters you would give on what an ideal tuck-in deal looks like for you, and as an extension, if and when the $100 billion line finally goes up, does the definition of the size of a tuck-in change, or is it really independent of that move in regulation? J. Mariner Kemper: I am still surprised there was a narrative we were going to do some big deal. We would never give up control of our company, try to merge two management teams, give up half our board, and so on. We have a fantastic management team and a great strategy, and I have no need or desire to do that. The purpose of using the term “tuck-in” is to help define a deal that is not going to affect any of that—where we can tuck it in, it is still our management team, we do not have to give up part of the boardroom, and we do not have to try to merge two cultures. That is what tuck-in is supposed to mean. Our definitions are long used: a smaller deal that would be in-market or contiguous, where we can leverage our people, synergies, and brand. Really importantly for us would be granular, low-cost deposits that are under-levered. We do not want to do a deal where every next dollar we lend has to be from acquired deposits. We love the idea of an institution that is leverageable, that has deposits we can put to use, because we have the asset-generating machine and we do not want to put that under pressure. Those are the general themes. Brian Foran: That is helpful. Thank you so much. J. Mariner Kemper: Yep. Operator: I will now turn the call back over to management for closing remarks. J. Mariner Kemper: Thank you, everybody. As always, we appreciate your interest in our company and the time you spend to get to know us better. I hope that page 31 helped dispel some of the misguided understanding of what the private credit topic means to us—less than 1% of our loans, etc. We have a very long track record of lending the same way across every asset class, and you can see on pages 42 and 22 the intersection of growth and quality is what we like to define as rarified air that we live in. We have a long-tenured team and a great track record. We are very excited about what lies ahead, and we appreciate your interest. Kay Gregory: Thank you, Mariner. As always, if you have follow-up questions, you can reach us at (816) 860-7106. Thank you. Operator: Ladies and gentlemen, that concludes today’s call. Thank you all for joining. You may now disconnect.
Operator: Ladies and gentlemen, good morning, and welcome to the Teradyne First Quarter 2026 Earnings Conference Call. [Operator Instructions] As a reminder, today's call is being recorded. I now like to turn the call over to Amy McAndrews, VP, Corporate Relations for Teradyne. Please go ahead. Amy McAndrews: Thank you, operator. Good morning, everyone, and welcome to our discussion of Teradyne's most recent financial results. I'm joined this morning by our CEO, Greg Smith; and our CFO, Michelle Turner. Following our opening remarks, we'll provide details of our performance for the first quarter of 2026 and our outlook for the second quarter. The press release containing our first quarter results was issued last evening. We are providing slides as well as a copy of these prepared remarks on the Teradyne Investor website, that may be helpful in following the discussion. Replays of this call will be available via the same page after the call ends. The matters that we discuss today will include forward-looking statements that involve risks that could cause Teradyne's results to differ materially from management's current expectations. We caution listeners not to place undue reliance on any forward-looking statements included in this presentation. We encourage you to review the safe harbor statement contained in the slides accompanying this presentation as well as the risk factors described in our annual report on Form 10-K for the fiscal year ended December 31, 2025, on file with the SEC. Additionally, these forward-looking statements are made only as of today. During today's call, we will refer to non-GAAP financial measures. We have posted additional information concerning these non-GAAP financial measures, including reconciliation to the most directly comparable GAAP financial measures, where available, on the Investor page of our website. Looking ahead between now and our next earnings call, Teradyne expects to participate in technology-focused investor conferences hosted by Bernstein, TD Cowen, Stifel and Bank of America. Our quiet period will begin at the close of business on June 12, 2026. Following Greg and Michelle's comments this morning, we'll open up the call for questions. This call is scheduled for 1 hour. Greg? Gregory Smith: Good morning, with revenue of approximately $1.3 billion and non-GAAP EPS of $2.56, Teradyne delivered record results in the first quarter of 2026. Our previous high watermark was in the consumer-driven mobile peak of Q2 of 2021. In Q1 of 2026, our revenue was $200 million or 18% higher than that previous record. This new record comes from durable AI demand drivers and the continuing acceleration of our wafer to AI data center strategy. This strategy is delivering demand across Teradyne's portfolio. In Q1, AI-related demand accounted for nearly 70% of our revenue, up from about 60% in Q4 of 2025. Our strategy continues to be anchored across 3 broad trends: verticalization, electrification and AI. Verticalization is the concentration of our business into extremely large vertically-integrated technology companies. The verticalization trend was cleared by 2024 and continues to accelerate. This includes companies like hyperscalers, but also huge AI ecosystem enablers like foundries, merchant compute, memory and networking companies. Many of these companies are customers of all 3 of our businesses: Semiconductor Test, Product Test and Robotics. And this product portfolio enables us to serve their needs from wafer to data center. While these massive customers are driving strong growth, it also means that the business is increasingly concentrated to these customers into a smaller number of very large ASIC and commercial device programs. This concentration also increases the risk that bottlenecks in other areas could shift demand for our products, which can lead to short-term demand peaks and valleys superimposed over long-term strong growth trend. In other words, it's lumpy growth. The electrification trend continues. In the auto industrial segment, 46% of our revenue came from data center devices in the first quarter, which historically has been dominated by automotive and industrial devices. It goes without saying, AI is the dominant force shaping our business. We think about the opportunity presented by AI as 3 superimposed waves, each building on the one before it. We are in the heart of the first wave, which focused on the build-out of general-purpose AI data center capacity. This was behind the massive increase in data center spend in 2025. In 2026, we are entering the second wave. While there is still huge investment in general-purpose AI data centers, these data centers are being augmented with compute silicon optimized for inference at scale. This wave will grow to a high run rate over the next few years. Still yet to come is the Edge AI physical AI wave. As the technologies for silicon packaging, memory and AI models improve, compelling use cases for AI at the edge will be emerging. Obvious examples of this are self-driving cars, robotics, PCs, wearables and smartphones. These waves are broad-based, and we expect them to stack on top of each other, driving significant ATE TAM growth over the full midterm. Because of Teradyne's wafer to data center strategy and our historic strength in mobile, automotive and industrial, we are well positioned to ride each of these waves as they arrive. Back in our January call, we shared that we expected robust double-digit year-over-year growth. We still expect that the compute TAM and revenue will grow significantly from an already strong 2025 base. We're seeing healthy engagement with both networking and VIP compute customers, and our pipeline of new design wins remains robust. Aligned with this momentum, I am pleased to share that we have received our first multi-system production test orders for merchant GPU in Q1. We expect these systems to ship, be installed and be in production in Q2. Customer engagement remains strong, and we are well positioned to capture further share as we bring up more devices on our platform. In automotive and industrial, we're seeing moderate but steady recovery in both TAM and revenue. There are signs of strength in automotive, primarily ADAS, and we're seeing increased demand for power going into AI data centers. As of now, mobile appears a bit weaker, with memory pricing and availability affecting end market demand, especially outside the iOS ecosystem. Memory test demand appears to be even stronger than our view in January, with AI compute demand for both HBM and DRAM continuing to act as an accelerator. We're also beginning to see increasing flash test demand driven by SSD. The overall memory market is on track for solid TAM growth for the year, and we expect to gain low single-digit share. In 2025, our IST group expanded its HDD customer base and entered the SLT compute market. Now in 2026, IST is on track to deliver against this expanded opportunity. We're seeing strength in HDD, driven by greater than 20% annual exabyte growth fueled by AI. This translates into longer test times per drive and a larger HDD TAM and revenue for Teradyne. In Robotics, we delivered our fourth consecutive quarter of sequential growth. This is particularly notable because Q4 is typically our strongest quarter and Q1 is typically down. We're seeing strong customer engagement across e-commerce, electronics manufacturing and semiconductor end markets. Robotics is a key part of our wafer to AI data center strategy, with robotic-assisted assembly test and data center operations. Our robots are being used in environmental sensing and data centers, and we recently demonstrated a complex physical AI work cell in partnership with Generalist as part of the recent NVIDIA GTC. In prior calls, we have often talked about the investments that we are making to capture growth opportunities coming from our wafer to data center strategy. In Q1, these investments have resulted in 2 significant new product introductions. The first is Photon 100, which is our platform for silicon photonics and co-packaged optics testing. The Photon 100 is based on our proven UltraFLEXplus tester and is bringing SiPho testing from lab to fab. I'll remind you that silicon photonics and co-packaged optics are in the very early stages of a ramp that will likely be substantial. There is uncertainty about the timing and the slope of this ramp, but as optical interconnections are increasingly used for scale out and then scale up networking, it is going to be a big chunk of the total networking TAM. As this market grows, we also expect to bring significantly more efficient test solutions online, so it would be a mistake to linearly extrapolate from today's test strategies and economics. That being said, we expect that this is a meaningful TAM expansion opportunity, which could reach $300 million to $700 million per year over the midterm. The second product introduction is Omnyx, which is a new production board test platform designed to address the unique set of test challenges for server boards and tray assemblies. This platform uses power, thermal, optical and TDR test capabilities from across all of Teradyne to enable earlier detection of defects that are plaguing the build-out of AI data centers. In addition, we continue to pursue inorganic opportunities to grow our business. Our MultiLane Test Products joint venture closed on April 8, and we believe this partnership will accelerate the development of high-speed I/O and data center interconnect test solutions, a critical test need as AI data centers transition from cable-based connections to back plane and mid-plan architectures. Additionally, we closed the acquisition of TestInsight 2 weeks ago. TestInsight is the leading provider of test development tools that are used with our testers and competing platforms. This acquisition strengthens Teradyne's design to test software capabilities, enabling us to build a virtual test environment, which will reduce time to market for complex AI and networking devices. In summary, Q1 2026 was a record quarter for Teradyne. We're executing our strategy, capitalizing on secular growth drivers and delivering value for our customers and shareholders. Our team, especially our operations team and manufacturing partners, went above and beyond to hit this ramp, and I'm grateful for their hard work and skill. We came into the second quarter with a lot of momentum and confidence that 2026 will be a strong growth year, and we are well on our way to achieving our target earnings model. With that, I'll turn the call over to Michelle. Michelle Turner: Thank you, Greg, and good morning, everyone. Today, I will cover our first quarter financial results and our second quarter 2026 outlook. Starting first with Q1. First quarter sales were $1.282 billion with non-GAAP EPS of $2.56, both above the high end of our guidance range. Total company sales were up 87% from first quarter last year and up 18% sequentially from last quarter. Non-GAAP earnings per share was up 241% from first quarter last year and up 42% sequentially from last quarter. This represents a record financial performance for the company, driven by all things AI across all 3 of our business groups. In the quarter, we continue to have 2 specifying customers and 1 purchasing customer greater than 10% of our revenue. Building on that, let's look a little deeper at revenue starting with Semi Test. Revenue was $1.1 billion, breaking the $1 billion threshold for the first time, up 26% sequentially from last quarter and over 100% year-over-year versus Q1 2025. The revenue breakdown within Semi Test was SoC at $882 million, memory at $203 million, and IST at $27 million. The key drivers were continued AI strength in compute segments and memory. At roughly 75%, compute is the largest portion of our SoC product revenue. This continues the evolution of our test portfolio from being mobile-centric shifting to AI dominant. Within auto and industrial, revenue nearly doubled sequentially from a low base last quarter, driven by power management demand increases for AI data center build-outs. Mobile revenue was roughly flat with fourth quarter 2025 and remains a muted impact to our overall results with the increasing importance of compute in our SoC portfolio. Aligned with our strong top line performance, operationally, we have more than doubled our UltraFLEXplus shipments over the last 9 months while sustaining our 12- to 16-week lead times. Our multisource strategy, primarily leveraging contract manufacturers, provides ultimate flexibility for our customers while ensuring capacity continuity in today's dynamic environment. Moving on to memory. Our memory business delivered another strong quarter of $203 million in revenue, relatively flat to our record last quarter, driven by robust HBM and DRAM test solution demand. We also successfully ramped the newest generation of our memory tester, Magnum 7. IST revenue of $27 million was relatively flat year-over-year, though we are seeing early indicators for potential growth, driven primarily by HDD in the second half and continuing into 2027. Product Test Group revenue was $80 million, up 8% year-over-year. Growth was led by sustained defense and aerospace demand and production board test. Robotics revenue was $91 million, up 32% year-over-year, representing our fourth sequential quarter of growth. Our one sales team approach is delivering results with revenue strength across end market verticals and e-commerce, electronics manufacturing and semiconductors, including in AI data centers. Shipments associated with our large e-commerce customer increased sequentially and AI revenue increased to 15% of the quarter's sales. Now moving down the P&L. A confluence of positive factors delivered record earnings results, including peak AI-driven volume, favorable product mix and nonrecurring onetime benefits. Gross margin for the quarter was 60.9%, up 370 basis points sequentially, driven by strong semi test volume and product mix and nonrecurring operational impacts. OpEx declined sequentially from last quarter and was favorable to guidance, due primarily to the timing of nonrecurring engineering. Non-GAAP operating income was $480 million, with an operating margin of 37.5%, both all-time financial records. Now moving on to capital allocation. Our capital allocation strategy remains consistent, and that is to maintain cash reserves to enable us to run the business and have dry powder for M&A. We ended the quarter with cash and investments of roughly $400 million. Working capital, predominantly in accounts receivable, increased in support of the revenue growth delivered in the quarter. Capital expenditures were flat year-over-year with the expectation that Q2 will increase, driven by continued investments in innovation and operations scaling. We paid $20 million in dividends in the quarter, and our share buybacks were de minimis. As Greg mentioned, we closed on 2 important inorganic asset opportunities this month. On April 8, we closed on our previously announced MultiLane Test Product joint venture. The results of this business will be consolidated into the Product Test group, and our EPS will reflect our share of the results of this business. On April 16, we closed on the acquisition of TestInsight business, furthering our wafer to AI data center product penetration. Combined, these 2 deals used roughly $165 million of cash in the second quarter, which we funded via our credit revolver. Looking ahead to our second quarter guidance. For the quarter, we expect revenue in the range of $1.15 billion to $1.25 billion and non-GAAP EPS of $1.86 to $2.15. Gross margins are expected to be in the range of 58% to 59%, normalized for peak volumes and onetime benefits. Operating expenses are expected to run at approximately 27% to 28% of second quarter sales. The non-GAAP operating profit rate is expected to be between 30% and 32%. Based on current customer order visibility, we continue to expect first half weighted revenue with approximately 55% to 60% of annual revenue expected in the first half. This expanded range from 3 months ago recognizes the continued strong demand signals we are hearing from our customers, while also balancing potential order lumpiness that could impact revenue timing across quarters or years. For the year, we have line of sight to about $50 million in revenue for merchant GPU, but our visibility into the second half is quite limited with increasing contributions over the midterm period. So in closing, our teams delivered exceptional financial results, reflecting strong execution and robust demand across our portfolio aligned with our wafer to data center strategy. We remain confident in the full year trajectory and our target model of $6 billion in revenue and $9.50 to $11 in non-GAAP EPS. I want to thank all of our Teradyne team members for their performance and operational discipline in delivering for our customers and shareholders. With that, we'll open the call for questions. Operator? Operator: [Operator Instructions] And we'll take our first question from Timothy Arcuri with UBS. Timothy Arcuri: Greg, I guess, my question is just on the back half of the year. So it's a bit of a disconnect. It sounds like the demand signals has anything gotten better over the past 3 months, but you're not raising guidance for the back half of the year. Is this -- this kind of came up on the -- on your competitor's call as well. So is this, to some degree, like factoring in some constraints that may be your downstream of your business? And I know you did talk about this, VIP stuff can be very lumpy. So maybe that's part of it. So if you can talk about that. Michelle Turner: Tim, it's Michelle. I'll start, and then Greg can add some specifics from a customer perspective. So let me start with where we're at today. Q1 was an exceptional quarter, a record quarter. You heard that throughout our script for the company. When you look at our Q2 guidance, it's equally strong. So revenue of $1.15 billion to $1.25 billion. This represents about 84% year-over-year growth at the midpoint after coming off of a really strong Q1 of 87% growth. So as a result of the strength in the first half, we have expanded our first half revenue range to 55% to 60%. So this is a change from January where we've given a point estimate of 60%. So when I think about the ranges, just to kind of round this, the low end of the range really reflects the potential for timing impact. So this is either lumpiness in terms of large customer ordering patterns or it could also be hiccups in the AI data center build out the ecosystem, if you will in terms of when our testers actually get accepted. So these dynamics, as you know, can impact revenue within the quarter or across your boundaries. And so that is part of the dynamic that's playing out in the second half. When I think about the high end of the range, this really reflects continued strength that we're seeing from a demand perspective across compute, networking and memory. And then the other element I would add to this is in terms of visibility. So we talked in our January call around improved visibility from a customer ordering perspective. That is consistent with where we're at today. So historically, this business has had about 13 weeks of visibility. Coming into this year, we improved that. We can now see into another quarter out, although not as strong as the current quarter. And so we still do have some undefined parts as we think about Q4. Gregory Smith: Yes. So -- and Tim, let me give you a little bit more color in terms of sort of how the first half, second half polarization breaks down by sort of group or technology. The part of our business that we believe is most first half weighted is VIP compute. And that's -- like we have pretty good visibility into the timing of programs associated with that and the specific customers that we have. We think that that's like -- it's really, really strong in the first half of the year, and the next wave of that for the next generation of that technology is early '27. It might start bleeding in or pulling into the end of 2026, but we really don't know about that. When you go from then to like networking, networking has started off very, very strong. And we think it's going to stay at a reasonably strong level through the year, but our visibility isn't as strong into the second half. And we've historically seen that sort of filling in more as time goes on. Like as you look beyond 2 quarters, you start to see that sort of -- that tending to go up, not down. So there's potential upside in the networking space. When you look at memory, that, I think, is actually going to end up being more back half weighted than front half weighted. So that's a counter thing. And the stronger that memory gets, the more we're going to be able to trend towards that 55% end of the range that we gave. And then if you look beyond the Semiconductor Test part of this -- well, actually in Semiconductor Test, just to sort of finish the story around auto and industrial. Right now, data center is hot, hot, hot in that segment, and we expect that to continue. What we're seeing and hearing from those customers is that the rest of their portfolio, that there are -- like there's reduced inventories and potential demand increases, but we haven't seen that translate into increased demand for capital equipment in the auto and industrial part of that beyond data center. So moving beyond that, getting into IST, we definitely think that's stronger second half than first half. But I mean we're talking about coming off of a base of $27 million in Q1. So there's a lot of upside to go before it really moves the needle at the enterprise level. Product Test similarly will be back-half weighted. But again, it's like a smaller percentage of the total. And typically, our second half is much stronger in Robotics than the first half, but we've started this year at a really good run rate. And so we -- like the signs are encouraging, but we've learned to be very careful about predicting what's going to happen beyond lead time in the Robotics space. So does that help a little bit? Timothy Arcuri: It does, Greg. Yes. I guess I just then wanted to ask you about the TAM for the year. So you didn't give us a TAM. I know Advantest is saying like low 9s for SoC and sort of low to mid-2s for memory, so kind of a total of like [ 11 5 ]. You've usually been pretty close to their number, a bit lower in memory and a bit higher in SoC. So is that total [ 11 5 ] for the year, is that like a reasonable TAM number for the year? Gregory Smith: So bearing in mind how far off both Teradyne and Advantest were about the 2025 TAM when it was April. So make that the big asterisk on this answer -- that like -- because a lot changed last year, and the TAM strengthened significantly from the April view through the full year view. Now for 2026, there's 3 -- like just at a logical level, there are 3 possible things. One is that people have overcorrected in terms of estimating what the TAM is, people have gotten the TAM exactly right or it could follow the same pattern that it followed in 2025. I would say that, like we are not talking about a TAM publicly because we feel really uncertain about which of those time lines we're living in. I don't think the numbers that Advantest gave are absurd, but I don't feel confident enough in our forecast to share them. Operator: We'll take our next question from C.J. Muse of Cantor Fitzgerald. Christopher Muse: I guess first question, and again, congrats on your first merchant GPU win. Curious how to think about the follow-through there? What kind of -- are the steps to try to ascertain a greater percentage penetration there? As well as how you're thinking about custom ASICs from here beyond your one very large customer? Gregory Smith: Yes. So first on GPU. What we've said previously, I think, is the way it is going to -- is tending to play out. That the first project is the hardest project because it involves qualifying the test platform and converting all of the underlying libraries that support the testing. So that part of this project is behind us, and we are into the phase where that initial qualifying part can go into production. The next phase is what you could call the fast follower phase. So we're going to begin working on projects that are earlier in their life cycle, and that we will be able to complete more quickly than the first qualification project. So those are projects that probably have a time line where we would be releasing into production late in this year. And so whether that capacity ramp starts to hit at the end of '26 or into '27 is an open question. And the thing that I want to caution is like the long-term view, over the midterm, we expect that a dual source customer is going to be managing share in that 30% to 70% range. It's going to take us a few years to get there because there are so many different part types, so many different SKUs that as an incumbent platform, there's a lot of flexibility about what -- like if you need capacity for a particular device, you know that you have the solution for it on the incumbent platform. So during the fast follower, we're really competing on the basis of differentiation of the platform and an ability to serve spot demand more quickly than our competition. So we're trying to be very responsive. We're trying to get as many SKUs converted over to our platform as possible. But I would expect it's going to take -- like it's going to take us a few years to get from low single digits in 2026 to sort of entering that 30% to 70% range over the midterm. Christopher Muse: Very helpful. And then maybe a question on gross margins. You're taking a downtick here. And historically, the business has not been fixed cost. It's been much more product cycle driven. So curious what is precisely driving that downtick in June and how should we be thinking about modeling the second half of the year? Gregory Smith: Hang on, like -- my colleagues have reminded me that I neglected the second half of your question about custom ASICs. So we'll take your gross margin question right after. I just want to hit the custom ASICs. So right now, there are 2 hyperscaler programs -- 2 compute hyperscaler programs that are at scale. If you include like Edge automotive, there are 3 hyperscalers that are at commercial scale and driving tons of volume for us or our competitor. We are actively competing for parts that have not yet ramped and also for dual-source status against the hyperscalers that have already ramped. And the timing for that would be more 2027 than 2026, but stay tuned for news of that as we go on. And I'll pass it over to Michelle for the gross margin commentary. Michelle Turner: Well, I think technically now, CJ has 3 questions now as a result of this, but we'll go with this. Gregory Smith: But that's my error. Michelle Turner: Yes. So from a gross margin perspective, we did have a really strong Q1. So 60.9%, again, another record for the company. And there were several favorable factors coming into play simultaneously that drove this. One was related to the AI demand. So really strong semi test volume, which was 87% of our overall portfolio within Q1. Along with that, we also had favorable product mix and some benefit from some nonrecurring operational benefits. So as you think about the shift from -- or the step down from Q1 into Q2, at the midpoint, that's about 240 basis points. About half of that is driven by the onetime nonrecurring kind of operational benefits that we had. And then you couple that with what we're seeing from a mix perspective within Q2, this is somewhat of a normalization. The one thing I will highlight, however, is when you look at first half, overall margins will be around 59.7%. This is at the low end of our target model range. And so I think it's important to kind of keep in context that you should expect to see our margins move around a bit. They are lumpy like our revenue. We typically will see up to 400 basis points within a year. However, when you look year-on-year, it's a much tighter range. It's within like 200 basis points. So some of this is noise just within the first half. That's how I would think about it from a modeling perspective. Operator: We'll take our next question from Mehdi Hosseini with SIG. Mehdi Hosseini: I also have 2. The first one has to do with how you have been managing quarterly guide? And your performance has actually been exceeding on a consistent basis. And with that as a background, my question to you is, are you seeing a consistent trend where late in a quarter, you get the rush order, you get the programs in line, and the last month of the quarter becomes the source of upside? Or is there something fundamentally different in the way you communicate with the Street? And I have a follow-up. Gregory Smith: I'll start. And Michelle, if you want to chime in with some additional color. When we sit down to do our guide, we try to give the very best view in terms of balancing the risks and opportunities that we see in the current quarter. And we are typically carrying some upside capacity that if we get quick turn orders, that we -- that -- like if we can help improve customer satisfaction by serving orders within lead time and we have the capacity to do it, we are going to do that. So in a strengthening demand environment we will tend to over-perform. At the same time, we, like everyone else, are working really hard to solve the supply chain issues that come from ramping capacity. And so there are supply chain risks that our operations team does a great job solving. But when we go into the quarter, we don't know that we have a solution for all of those. The other thing that I'll say at a like minor level is we are still being quite cautious about Robotics. That we are seeing much improved -- like improved predictability and improved growth from that unit. But we don't want to get ahead of ourselves in terms of -- assume that we are in like a bold new future there, we want to make sure that we really understand exactly what our funnel of opportunities looks like and our conversion rate. And like we're really happy about having 4 good on track quarters in a row, but we are still quite careful in terms of predicting like higher rates of growth against that business until we get a little bit further down the road. Michelle Turner: And the only other thing I would add to that, to Greg's point about the supply chain variability, that's not just within Teradyne but also with our customers. And so to the extent, for example, all the parts of a test cell are not coming together, they're not looking to take our testers and install them. There could be slips that happened within the quarter. And so that could be either upside or downside in terms of how it plays out within a particular week. And so you'll see this sitting in our receivables at the end of Q1, where we shipped a lot of units that originally, we have been told to kind of push out. So I think it's important to note that we're seeing variability not only on the order side, but also in terms of the supply chain from a customer perspective. Mehdi Hosseini: Got it. And then since the last earning conference call, agentic AI has become the new buzz word. And there are a number of existing and the new semiconductor companies that are trying to capitalize on tokenization and offer a new kind of a CPU. And my question to you is given the fact that historically, [ x86 ] has been more of a -- driving more of an in-house test solution, and now you have a diversification of a CPU because of agentic AI. Does that also add a new layer of opportunity for you? Was that already embedded in your longer-term forecast? Or is this something new and could potentially provide some upside? Gregory Smith: So I think of it more as providing potential upside than something that's in our plan. That we are testing primarily ARM-based CPUs for data center applications. I think we have active design-in opportunities that I expect to be able to convert in this space as well. I would add that in addition to sort of new demand for CPU in agentic, there's also a big trend towards this optimizing data centers for inference at scale. I talked about that a little bit in the prepared remarks, that if you look at what NVIDIA is doing to try to decreased time to first token on inference and other players are doing, I think we have reasonable exposure to those types of devices as well. So as things shift towards more inference and more agentic, then I think we have potential long-term upside. Operator: We'll take our next question from Shane Brett, Morgan Stanley. Shane Brett: My first question is on networking. Regarding CPO and silicon photonics, can you talk about where you stand in terms of share now? And how do you anticipate your share tracking? I'm asking as your competitor announced that they received their first high-volume AT order for silicon photonics. Gregory Smith: Thanks for the question. So our best guess, so far in 2026, that share is quite balanced between us and our competitor. And I think -- like the only difference is whether we're talking about single large orders or multiple smaller orders. But I think share is kind of balanced, and that's where we think things are right now. As -- but it's really early days that -- right now, there is -- there are very few end customers that are trying to ramp CPO into production. And the share split right now is mostly around which test insertion is being done by what companies. And so our strength is primarily in the -- in insertion [ 2 ], where the -- where you're actually connecting electrically to a compound of wafer on the top for electrical and looking at light down in the bottom. We are in the process of releasing solutions for that in production. And we are working with partners to do that. So it's really kind of a 4-way partnership involving foundry, end customer, ficonTEC and Teradyne. We're working that with a team in Taiwan, Israel, Germany, North America to bring this technology to production. We think that it's -- this is a very important market. And as -- like what -- the way we see this happening is that in '27, this is primarily going to be associated with scale-out kind of networking. The scale up networking is likely to be even higher volumed, but over a longer period of time like '28, '29. And we are going to be rapidly changing the efficiency of tests at all 4 insertions. And the balance of where things are going to be done across those foreign insertions is really going to be driven by the end economics. So if they are finding a lot of faults at a particular level, they will keep doing that test. If they have very high yields, then they will look to see if they can eliminate that. But I -- like personally, I think efficiency is going to go up by like a factor of 10 over the next couple of years. And despite the fact that, that efficiency is going to get that much higher, I think that this is still going to be $300 million to $700 million worth of equipment once you get a few years into this midterm. Shane Brett: That's really insightful. And for my follow-up, one of your auto industrial customers talked about a bit of a tester shortage on the earnings call. And while I was listening to that, my interpretation was, oh, there may be a fight among customers to get in the queue at Teradyne. Just where do we stand right now in terms of capacity and utilization? And how much capacity are we looking to expand over the next year or so? Gregory Smith: So if that customer is having trouble getting testers, they're obviously not buying them from Teradyne. That we are able to serve the demand that we have, our capacity has ramped rapidly, where we have multiple contract manufacturing partners that are enabling our production. So we were surprised by that. We -- for this particular end customer, we have a very good relationship. And for the parts of their business that we serve, we're able to deliver the testers that they need and the lead time that they needed. So I think this is another reason that more and more customers are really looking at supply chain resilience, all the way back to their test equipment capital supplier. And that kind of strategy isn't something that is just solved by increasing capacity that -- what customers really need is to be able to get the capacity that they need when they need it for the parts that they are ramping. And you don't know how that demand is going to overlap at as a supplier. So I think it's -- I think the trend in the future is that for high-volume devices, we're going to increasingly see this trend towards multiple sourcing of test equipment. And overall, I see that as a real positive for Teradyne. Operator: We'll take our next question from Krish Sankar with TD Cowen. Sreekrishnan Sankarnarayanan: I have 2 of them. First one, on the silicon photonics. Michelle or Greg, you spoke about the $300 million to $700 million opportunity. I understand it's midterm. How big is the market this year? Is it like tens of millions of dollars this year? And along the same path, is the high contact being acquired by a Chinese entity an issue? Is it a nonissue for you? And then I have a quick follow-up. Gregory Smith: Yes. So this year, we're probably looking at silicon photonics right around 100-ish, maybe a little bit less, maybe a little bit more. It's substantial, but it's pretty early days. With regards to ficonTEC, ficonTEC has been an independently operated unit of a Chinese corporation since 2021, I think. I mean, this is not a new thing. It is -- and our relationship with ficonTEC is with both the unit, which is in Germany and also the Chinese company that it's a part of RoboTechnik. We have a great relationship with the CEO there. And they are one of the absolute world-class providers of active alignment for silicon photonics assembly and for test. That there are a lot of hard things that you need to do when you're building silicon photonics. One of the most difficult is achieving alignment in the assembly process for electro-optic modules or for CPOs. And ficonTEC is a -- is like one of the world leaders in that technology, and they are working to build their business in semiconductor capital equipment, the test part of it. And that is something that is a high priority for us, high priority for them. And I think that the press reports that came out are like they've been refuted by ficonTEC, and we don't see any evidence on the ground that it's at all true. Sreekrishnan Sankarnarayanan: Great. That's very helpful. And a quick follow-up for Michelle. I know you gave some color on how to think about gross margins. But just visually thinking, as auto analog industrials cyclically starts rebounding, is it fair to assume that's a huge tailwind for your gross margin given those legacy eagle testers are pretty high margins? Michelle Turner: So I think the short answer is no. When you think about kind of our full year expectations and what's really going to influence the end results even over the midterm, right? So we've given a target model of 59% to 61%. We're sitting at 60.9% in Q1. We expect the first half to be about 59.7%. I still think that that's within the range. And auto -- and when you think about auto and industrial, it's not going to be the biggest swinger in terms of our overall margin portfolio. I'm just going to go back to just the tightness in our overall margins within 200 basis points year-on-year. So when you use the words like huge or significant, I'd probably react to that a little bit. I do think it can be somewhat of a tailwind. But just given the size of it to the overall portfolio, I would say no, in terms of the significance. Gregory Smith: Yes. I mean over the years, we've seen most of our product lines converging towards similar margins. And so it's -- I would not expect to see -- even if we saw us like a significant increase in the percentage of total revenue that's coming from auto and industrial, I don't think we'd see that as a big mover. Now the other thing to remember is that one of the things that goes into auto and industrial is ADAS. And so if you squint at an ADAS tester, it looks a hell of a lot like a VIP compute tester. So the -- just because things are aggregating into particular end markets, it doesn't necessarily reflect the platform that's being sold to serve it. Operator: We'll take our next question from Vivek Arya with Bank of America Securities. Vivek Arya: Greg, on the GPU engagement, when we look at the large customer, the demand is clearly increasing. The number of queues across training and inference is going up. So I'm curious, what is the gating factor to getting to that, let's say, whatever, 20%, 30% market share? What is your share assumed in your $6 billion target model? Gregory Smith: So let me start at the beginning. So the thing that is setting the time line to get to, say, 25% share of GPU is how efficiently we execute our fast follower strategy, how fast we can bring up test programs and test solutions for devices that are early enough in their life cycle that we capture a significant portion of the ramp. So that ultimately is the limitation. As time goes on, the ultimate phase of fast follower is something that I've referred to as tester agnostic development. So what many of our customers are talking about in this space is that they really want to develop their test solutions against a -- like think of it as like a virtual test system. And by flicking a switch in software that they can target that towards our platform or towards another platform. When we get to that, then we are going to be in a world where it's much more about the differentiation on throughput and performance and availability than incumbency. And I think that we have certain advantages around test coverage for elements of the device. I think we have some advantages in terms of platform reliability. I certainly think that we have some advantages in terms of responsiveness to demand. So -- and what we've seen -- like one of the reasons that we're -- that we feel like we know what we're talking about here is that this is basically the world that we live in, in high-performance memory. That -- we were later to market than our competitor when it came to HBM performance testing. But once we released a platform that delivered better economics and better performance, then we began to see significant share gains because the customer can choose which platform they're going to buy, and we were able to capture that. As the AI accelerator world migrates more towards this idea where there are solutions existent on both platforms, then we think that we can compete on being able to get them the capacity that they need and getting the most parts out of each test cell because at the end of the day, it's like the limitations are turning into things like floor space and number of probers and handlers that they can buy. So having very productive test equipment is a potent advantage. In terms of the -- the part of the $6 billion, I think that we are -- looking at -- I don't think we need to be much -- like we can get to this -- our model in the fast follower phase of this, where we're just doing specific part conversions. And I think we would only need kind of low double-digit share in order for us to hit our model. Vivek Arya: And from my follow up, I just wanted to get back to the visibility question. AI is over 70% of your sales. But when we look at any other semiconductor company involved AI, logic or networking or memory, right, even the semi cap front-end players, they all claim to have great visibility, not just for this year, consistent sequential growth and then visibility even in 2027. And I'm curious, why is that not translating into stronger visibility for the testing part right? Because you guys are an important part of that supply chain also. So how come everyone else has great visibility and confidence, but we are not hitting that right from the testing side as much? Gregory Smith: So I think that the point that Michelle made is really important, that the lead time for a tester is on the order of the same as the lead time for the actual wafer, not the wafer front-end equipment. And these are -- our customers are rapidly trying to build out capacity to be able to support all of the phases of production. And so where -- like at the end of the day, these customers are definitely leaning hard into produce -- into creating the front end capacity to increase the number of wafers that go through. But until they actually are seeing the wafers go through, they are holding back on the orders for the test equipment. I mean we definitely are working against a long-term plan around capacity expansion for our products. We have an idea of our -- think of it as like a strategic forecast that we're working against, but that's very, very different from the level of commitment that we get from our customers around what they'll buy and when. And since the -- like testers are sold for particular devices and particular device ramps. Those ramps can move significantly if you have an issue with -- like if it's an ASIC, if the first silicon doesn't work, then that can inject a 2 quarter delay in a ramp, that would have a meaningful effect on the timing of our growth. It wouldn't have a meaningful effect on the long-term growth that we'll achieve. So I think the front end is less lumpy, but growth in the front end inevitably leads to growth in the back end, it's just uncertain in the timing. Operator: We'll take our next question from Jim Schneider with Goldman Sachs. James Schneider: Relative to the CPO opportunity, I think you did a good job kind of outlining where you believe the market is going. Just kind of 2 follow-ups on that. One is, can you maybe level set us for where you expect your CPO revenue to land in terms of a range for this year, 2026? And then you talked about kind of a 4-way kind of tie-up for -- to pull off some of the second insertion solutions. Do you have any kind of plans or thoughts about how you might integrate that a little bit more under one roof in some way or another? Gregory Smith: So I don't think we're publicly disclosing our expectations for 2026 revenue, mainly because there's so much uncertainty about where in the test flow the investment will go. So will they lean harder into insertion 2 or insertion 1 or insertion 3. So there's a lot of noise on that data right now. So we're not trying to make a prediction. The 4-way partnership is actually -- that's kind of the way the world works normally. That if you think about non-CPO devices, there's a fabulous specifier. There's a foundry, there's an OSAT. There's a handler or prober provider, and there's a tester provider and there's a probe card provider. There's like -- there are a lot of -- there's a whole ecosystem that makes these test cells work. And we are a real strong advocate of this open ecosystem long term. We think that, that's what our customers want, and it's how we want to try and work. And we also want to make sure that all of the providers in this space, for probers, handlers, whatever, that they feel like we are being -- that we're treating people alike, that we're not showing favorites. So what we're really trying to do is we're trying to lean hard into helping fight contact, build their capability in the semiconductor test equipment space, but we're acknowledging that they are the world experts in active alignment. So they're a great company. They know what they're doing. We want to help stand them up to be a great member of this ecosystem versus trying to integrate them [indiscernible]. James Schneider: That's helpful. And then just as a follow-up for Michelle. Clearly, the growth and margins and everything else are kind of turning out very well, and it seems like you will indeed probably get to your model at some point. Just from a philosophical standpoint, from an OpEx perspective, to the extent you do tend to grow on a multiyear basis a lot stronger, would you tend to believe that you could actually underpunch the OpEx intensity? Or would you -- you plan to develop more OpEx resources to R&D over time? Michelle Turner: So the answer is yes. And so we've historically talked about growing OpEx at 50% of revenue, and we still believe in that model. We believe in investing back in the business. Particularly in today's environment as we think about the pain points in our kind of wafer to data center strategy, there's lots of opportunities for us to help our customers. So we're going to look for those opportunities to reinvest back in the business, which will impact OpEx. And when we think about the short term, however, in the current year, in such a hyper-growth mode, we wouldn't expect that same translation to play out within 2026, but definitely over the midterm and the longer term, that's the aspiration that we would be driving to. Gregory Smith: Yes. The only color that I'd add to that is there is such a high rate of technology change in this end market and so many interesting opportunities, like there is a ton of waste due to yield issues and quality escapes. It's kind of a perfect environment for a company that is delivering something to help other companies get to high quality. So we are -- like for a while, we were in a world where like the marginal utility of additional R&D spend was not that great. Like if you look back a few years. Now, we have just a really long list of great things that we can invest in that will drive long-term revenue growth. So we're going to do our very best to constrain the growth of our G&A. We're going to do the very best that we can to manage the growth of our sales and marketing so that most of that is customer-focused technical investments, and we're going to lean into R&D because it's a target-rich environment. Operator: This concludes our Q&A session. I'd like to now turn it back to our presenters for any additional or closing remarks. Gregory Smith: Thank you, operator. So thanks, everyone, for joining the call. We are really looking forward to Q2, another really strong quarter. And I just want to reiterate our thanks to the team around the performance for Q1. It was -- we're calling 2026 the year of execution. And we are like hitting on all cylinders, the team is doing really, really well, and we appreciate you having the interest in the company. Operator: Thank you. This concludes today's Teradyne First Quarter 2026 Earnings Call and Webcast. You may disconnect your lines at this time, and have a wonderful day.
Operator: Good morning, and thank you for standing by. Welcome to the AbbVie First Quarter 2026 Earnings Conference Call. [Operator Instructions] Today's call is also being recorded. If you have any objections, you may disconnect at this time. I would now like to introduce Ms. Liz Shea, Senior Vice President, Investor Relations. Elizabeth Shea: Good morning, and thanks for joining us. Also on the call with me today are Rob Michael, Chairman and Chief Executive Officer; Jeff Stewart, Executive Vice President, Chief Commercial Officer; Roopal Thakkar, Executive Vice President, Research and Development and Chief Financial Officer; and Scott Reents, Executive Vice President and Chief Financial Officer. Before we get started, I'll note that some statements we make today may be considered forward-looking statements based on our current expectations. AbbVie cautions that these forward-looking statements are subject to risks and uncertainties that may cause our actual results to differ materially from those indicated in our forward-looking statements. Additional information about these risks and uncertainties is included in our SEC filings. Abby undertakes no obligation to update these forward-looking statements, except as required by law. On today's conference call, non-GAAP financial measures will be used to help investors understand AbbVie's business performance. These non-GAAP financial measures are reconciled with comparable GAAP financial measures in our earnings release and regulatory filings from today, which can be found on our website. Following our prepared remarks, we'll take your questions. So with that, I'll turn the call over to Rob. Robert Michael: Thank you, Liz. Good morning, everyone, and thank you for joining us. AbbVie is off to an excellent start to the year, with first quarter results exceeding our expectations across our diverse portfolio. We are delivering top-tier growth and continue to strengthen our long-term outlook with pipeline advancements and strategic transactions. Turning to our first quarter performance. We achieved adjusted earnings per share of $2.65, which is $0.07 above our guidance midpoint. Total net revenues were $15 billion beating our expectations by $300 million and reflecting robust sales growth of 12.4%. I'm especially pleased with the momentum in immunology and neuroscience, which are both delivering share gains in growing markets. Based on this strong performance, we are raising our full year adjusted earnings per share guidance by $0.12 and now expect adjusted EPS between $14.08 and $14.28. Turning now to R&D. We are making meaningful progress advancing programs across all stages of development. Recent highlights include the U.S. regulatory submissions of Rinvoq for Alopecia Areata giving us a potential new source of growth in dermatology and Skyrizi subcu induction in Crohn's with an approval decision expected later this year. We also saw promising interim data from our Crohn's platform study, combining Skyrizi and our own alpha 4 beta 7, which has potential to deliver transformational efficacy. In obesity, we announced early-stage data for our Amlin Analog 295 with very encouraging weight loss results. In oncology, we are now expecting the regulatory submission for [indiscernible] by the end of this year, which is earlier than our previous expectations. We also expanded our emerging oncology pipeline by closing the Remagen agreement, giving us a novel PD-1 VEGF bispecific antibody. We will continue to augment our portfolio with business development to access external innovation. And given our strong growth outlook, we have significant financial capacity to pursue both early and late-stage opportunities. Lastly, as part of AbbVie's $100 billion commitment to U.S. R&D and capital investments over the next decade, we recently announced construction of several new manufacturing sites. This includes a $1.4 billion investment to build a pharmaceutical manufacturing campus in North Carolina, and a $380 million investment for 2 new plants in North Chicago. These strategic investments will strengthen AbbVie's ability to produce medical breakthroughs in immunology and neuroscience, oncology and obesity. In summary, the fundamentals of our business are strong, and we are well positioned to deliver top-tier growth for the long term. With that, I'll turn the call over to Jeff for additional comments on our commercial highlights. Jeff? Jeffrey Stewart: Thank you, Rob. I'll start with the quarterly results for immunology, which delivered total revenues of $7.3 billion reflecting impressive sales growth of $1 billion. Skyrizi total sales were $4.5 billion, up 29.2% on an operational basis, exceeding our expectations. We continue to demonstrate exceptional performance across psoriatic disease, where we are gaining share and have clear leadership over all biologics and orals by a very wide margin. The psoriatic market is growing robustly, and we feel extremely confident in Skyrizi's best-in-class profile, including high and durable efficacy on both skin and joints as well as simple quarterly dosing, which collectively gives us a distinct advantage relative to all the existing and emerging therapies in this area and we continue to generate compelling evidence to support Skyrizi as the preferred treatment option for psoriatic disease. At the recent AAD meeting, we presented new data highlighting Skyrizi's strong efficacy in genital and scalp psoriasis, which are very difficult to treat areas, often leading to significant social and emotional burden to patients. The FDA has recently approved adding the new study results in these high-impact area to the SKYRIZI label. We also now have long-term efficacy and radiographic data in psoriatic arthritis demonstrating Skyrizi's durable efficacy with nearly 90% of patients showing no radiographic progression through 5 years of treatment. This data will enhance our existing leadership in the important PSA segment where Skyrizi's is the frontline in-play patient share leader in both the derm and room segments. Performance also remains very robust in IBD, where Skyrizi is on track to deliver more than 30% global sales growth across Crohn's disease and ulcerative colitis this year. Competitive dynamics within IBD are playing out in line with our expectations, with Skyrizi continuing to capture a leading share of total new patient starts in the U.S. in the quarter. including very significant in-play leadership in the frontline setting, which is the strongest signal of overall physician preference for Skyrizi I'm also pleased with the compelling results from our recent subcutaneous induction study for Crohn's with data, particularly in the bio-naive population that we believe compares very favorably versus the competition and we look forward to providing an additional dosing option for physicians and IBD patients later this year. Turning now to Rinvoq, which is also performing above our expectations. Global sales were $2.1 billion, up 20.2% on an operational basis. Demand remains strong across all of Rinvoq's indications. We are now achieving high-teens in-play patient share in and are seeing a nice inflection in prescriptions across gastro, especially in UC, following the recent expanded label supporting access to Rinvoq earlier in the treatment paradigm for IBD patients. We are also planning for the potential near-term commercialization of 2 additional indications, [indiscernible], which will meaningfully expand Rinvoq label and where we have also recently expanded our field force to support these emerging opportunities. Lastly, in immunology, HUMIRA global sales were $688 million, down 40.3% on an operational basis, reflecting biosimilar competition and in line with our expectations. Moving to neuroscience, where we continue to outperform our expectations as well. Total revenues were nearly $2.9 billion, up 24.3% on an operational basis. In migraine, our leading portfolio continues to gain market share with [indiscernible] and Botox Therapeutic each delivering robust double-digit sales growth. In psychiatry, Vraylar global sales were $905 million, up 18.4%, reflecting strong prescription growth in both bipolar disorder and adjunctive MDD. Vraylar has significant close to branded competitor, and we expect continued momentum following the introduction of new lower doses, allowing prescribing flexibility as well as pediatric usage. Moving to Parkinson's disease. We continue to see encouraging uptake for VYALEV, which is on track to achieve blockbuster revenue this year. Total sales were $201 million, up approximately 10% on a sequential basis. We are also preparing for the potential approval and launch of Tavapadon in the U.S. later this year. an exciting new oral treatment for patients with Parkinson's and a very complementary addition to our growing Parkinson's portfolio with Biolab and Duopa. Tavapadon has demonstrated strong efficacy as both a monotherapy as well as an add-on to the standard of care, and we believe it will be a sizable commercial opportunity. Moving now to oncology, where total revenues were more than $1.6 billion, down 3% on an operational basis. Venclexta continues to perform very well. especially in CLL as combination use with BTK inhibitors are emerging as a preferred fixed treatment duration globally. We've recently received full approvals in the U.S. and the U.K. as well as positive CHMP opinion for Venclexta's use with BTKs for that fixed treatment course. Total Venclexta sales were $770 million, up 9.7% on an operational basis. Continued sales growth from [indiscernible] also helped to partially offset the expected sales decline for IMBRUVICA, which was down 24.7% due to IRA pricing and competitive share pressure. Moving now to aesthetics, which delivered global sales of nearly $1.2 billion, up 5.1% on an operational basis. Botox cosmetic total revenues were $668 million, up 17%, reflecting a favorable price comparison in the U.S. as well as modest market growth globally. Juvederm Global sales were $232 million, down 2.9%, reflecting continued headwinds in key dermal filler markets. While economic headwinds have continued to impact market conditions globally, the long-term prospects for the category remain attractive given high consumer interest and low penetration rates. As the industry leader, we are investing in promotion and innovation support patient activation. I'm particularly excited about the potential for [indiscernible], our fast-acting short-duration toxin which, once approved, we expect will be market expanding and complements our toxin portfolio very nicely. While [indiscernible] is delayed in the U.S. we continue to anticipate approval and launches this year in key international markets, including Europe, Canada and Japan. So overall, I'm extremely pleased with the execution and continued strong performance across our commercial portfolio. And with that, I'll turn the call over to Roopal her comments on our R&D highlights. Roopal? Roopal Thakkar: Thank you, Jeff. We continue to make good progress across our pipeline. I'll start with dermatology programs in immunology. As Jeff just mentioned, new data was presented at the recent AAD meeting, highlighting SKYRIZI's strong efficacy in genital and scalp psoriasis and long-term efficacy, including radiographic data in psoriatic arthritis. These recent presentations add to the growing body of evidence supporting Skyrizi's best-in-class profile in psoriatic diseases. Its strong durable efficacy on both skin and joint measures, favorable safety and tolerability profile and convenient quarterly maintenance dosing, give us confidence that Skyrizi will continue to be the preferred first-line treatment option for patients with psoriatic disease. Additionally, Discussions are ongoing with the FDA regarding revised label language related to tuberculosis evaluation for Skyrizi. While TV monitoring has become fairly routine prior to initiating treatment with biologics, updated language would allow health care providers to use their clinical judgment. Moving to Rinvoq. The regulatory application for alopecia areata was recently submitted to the FDA approval decisions are anticipated later this year in Europe and Japan and in early 2027 in the U.S. [indiscernible], Phase III studies for both Rinvoq and lutukizumab are progressing well and remain on track for 16-week top line results in the second half of this year. Turning to gastroenterology. All co-primary and key secondary endpoints were met in the Phase III AFFIRM study with Skyrizi's cutaneous induction in Crohn's disease, demonstrating very high levels of endoscopic response and clinical remission. While not a direct head-to-head comparison, when matching these data against results from the Skyrizi IV induction program, the subcu induction achieved numerically higher results across key end points. We are extremely pleased with the strong performance demonstrated by subcutaneous reduction, especially considering that this study enrolled a very difficult-to-treat patient population. 2/3 of the patients received prior advanced therapy with half failing 2 or more therapies and a third failing [indiscernible] or a JAK inhibitor. Data in those who had not previously experienced advanced therapy were particularly noteworthy, where 61% of Skyrizi patients achieved endoscopic response and 73% achieved clinical remission at week 12. This is 45 points higher than placebo on both measures. These are very impressive results, which will continue to support first-line use. These data reinforce Skyrizi's best-in-class profile and provide an additional induction dosing option for patients with Crohn's disease. Our U.S. regulatory application was recently submitted with an approval decision anticipated later this year. Subcu induction for ulcerative colitis is also being assessed and we will be discussing options with health authorities. Next, on to other gastro programs. An interim analysis was recently completed on our Crohn's disease platform study. In the cohort evaluating Skyrizi plus our novel anti alpha-4 beta-7 antibody, ABBV-382, the combination resulted in a higher rate of endoscopic remission at week 12 and at week 24. The rate was double that of either monotherapy arm. Endoscopic remission was achieved by approximately 42% of patients receiving the combination at week 24. These results were absorbed -- observed in a broad population that had severe and refractory disease, which included 82% advanced treatment failures and 53% of patients failing 2 or more advanced treatments, of the patients that previously received advanced therapies, 63% failed an agent with an overlapping mechanism with the combination and 20% failed a JAK inhibitor. At baseline, patients had a mean Crohn's disease activity index of 325 and a simple endoscopic score of 14, which represents a very treatment refractory patient population. Achieving this level of endoscopic remission in this setting is a particularly meaningful achievement as this endpoint is an objective measure of mucosal healing and is associated with long-term benefits, including reduced rates of hospitalization, surgery and disease progression. Safety of the combination was consistent with the profiles of the monotherapies no new signals were observed. These results demonstrate the potentially transformative level of efficacy that our novel combination can achieve. The study is expected to complete in the third quarter with presentation at a medical meeting anticipated by early next year. A Phase IIb study is planned to begin this summer in patients with Crohn's disease and ulcerative colitis to evaluate Skyrizi in combination with both 382 and with our extended half-life TL1A antibody. In parallel, we will be evaluating Phase II acceleration options for Skyrizi plus 382 in Crohn's disease. In the Skyrizi plus lutikizumab cohort, the combination did not sufficiently differentiate from monotherapy Skyrizi and will not be moving forward. In the early-stage immunology pipeline, we are nearing completion of a Phase I study for an [indiscernible] inhibitor, ABBV-848 and and plan to begin a Phase II study in rheumatoid arthritis later this year. This potent inhibitor has the potential to provide biologic-like efficacy, a favorable safety profile with no box warnings and convenient once-daily oral dosing I will now discuss neuroscience. Top line analysis was recently completed on our Phase II trial evaluating ABBV-932 in bipolar depression. In the study, the overall difference observed between the drug treated and placebo groups was not statistically significant. However, in a prespecified subgroup analysis of bipolar I patients an efficacy signal was observed. The safety profile of 932 was generally similar to placebo, including rates of extrapyramidal events, demonstrating the potential for a more favorable tolerability profile compared to Vraylar. We are evaluating next steps to continue 932 development in bipolar 1 patients. Dose escalation work continues for emraclidine in both schizophrenia and elderly patients. In schizophrenia, we have cleared the 100-milligram dose and will begin evaluating 150 milligrams. Phase II studies in monotherapy and adjunctive schizophrenia as well as psychosis related to Alzheimer's, Parkinson's and Louis Body Dementia are planned to begin in the fourth quarter. Moving to our psychedelic acid brain. Additional data from an ongoing Phase II study in major depressive disorder will be available this year. Several studies are planned to begin in 2026, including a Phase III trial for single course acute treatment in MDD, a Phase IIb evaluating repeat dosing for chronic use in MDD and a proof of concept Phase II and post-traumatic stress disorder. And in Parkinson's disease, we remain on track for an approval decision for tavapadon in the third quarter. Turning to our solid tumors program in oncology. [indiscernible] is progressing well across a broad range of tumor types. At the upcoming ASCO meeting, early-stage safety and efficacy results for Tmab-A in head and neck and ovarian cancers will be presented. Based on these results, we are engaging with regulators regarding ways to accelerate programs for Temab-A plus pembrizumab in frontline head and neck cancer and Temab-A plus bevacizumab in front-line ovarian cancer. In colorectal cancer, we have made a decision to update our strategy in the third line plus setting and will now focus the pivotal program on Temab-A in combination with bevacizumab in an all-comers population as opposed to pursuing monotherapy in cMET selected patients. Targeting all comers will allow Temab-A to reach a substantially broader population. Temab-A plus bevacizumab demonstrated improved response rates and disease control versus current standard of care regardless of c-MET expression levels. Treatment with Temab-A at 2.4 milligrams per kilogram plus [indiscernible] achieved an objective response rate of 30% and and a confirmed disease control rate of 97% compared to rates of 0% and 70%, respectively, for [indiscernible]. Given the expanded patient population for the all-comers Phase III trial, we anticipate faster enrollment compared to the study in cMET selected patients. Initial data readout is expected in the second half of next year. In lung cancer, Temab-A received its first breakthrough therapy designation as a monotherapy in second-line plus EGFR wild-type non-squamous non-small cell lung cancer. We are in the process of planning a Phase III trial in this setting. SP369624356 In small cell lung cancer, a Phase III trial for monotherapy, ABBV-706 recently began in relapsed refractory patients. Two Phase II studies evaluating 706 triplet combinations in frontline patients are also planned to initiate this year. These trials will evaluate 706 in combination with atezolizumab plus [indiscernible] cell engagers. Moving to AbbVie 96 dose escalation data in late-line metastatic castration-resistant prostate cancer will be presented at ASCO. Based on these results, we are in the process of discussing acceleration options with regulators in order to advance into Phase III trials as quickly as possible. We also continue to augment our solid tumor pipeline through investments in external innovation, including one with Castro Therapeutics, we recently began a Phase I study to evaluate a [indiscernible] inhibitor in advanced solid tumors harboring KRAS mutations. This next-generation inhibitor has the potential to provide an improved efficacy and safety profile based on increased potency and specificity against the most relevant KRAS mutations, while sparing H and NRAS [indiscernible]. Our strategy is to combine this pan KRAS inhibitor with Temab-A in pancreatic, lung and colorectal cancers. In hematologic oncology, our Phase III trial evaluating monotherapy [indiscernible] in third-line plus multiple myeloma is tracking ahead of schedule. We anticipate a response rate readout in the third quarter with potential to also see an interim analysis on progression-free survival. If this interim analysis is positive, regulatory submissions would occur later this year. Progress continues in earlier lines of therapy as well. The increasing use of anti-CD38 antibodies in earlier treatment setting is driving a need for CD38 free BCMA combinations, particularly those that can provide the convenience of monthly BCMA dosing combined with an oral agent. Plans are underway for a Phase III study evaluating [indiscernible] in combination with [indiscernible] in second line plus patients, including those that were exposed or refractory to a CD38 antibody or who lost response to a BCMA, CAR-T or ADC. Moving to other areas of our pipeline. In aesthetics, the FDA issued a complete response letter for our [indiscernible] application related to manufacturing questions. The CRL did not identify any issues related to safety, efficacy or labeling of [indiscernible] nor has the FDA requested any additional clinical trials be conducted. We will be working closely with the FDA to address their feedback and determine next steps for resubmission. In obesity, positive top line results were announced from a multiple ascending dose study, evaluating our long-acting amylin analog, ABBV-295. In the study, 295 demonstrated clinically meaningful weight loss of nearly 10% and after only 12 weeks of treatment despite enrolling a predominantly male nonobese population, 295 was well tolerated with mostly mild and transient GI-related adverse events no cases of severe nausea, vomiting or diarrhea were reported. These early results are encouraging and reinforce our view that our long-acting amlin analog has the potential to provide strong weight loss with favorable tolerability. In the next phases of development, higher doses of 295 will be tested in patients with obesity, including every other week and monthly regimen. Interim data from our Phase I study in obese patients are anticipated later this year. Our Phase II program is now expected to begin in the third quarter. To summarize, significant progress continues with our pipeline, and we look forward to additional important data readouts, regulatory submissions and approvals throughout 2026. With that, I'll turn the call over to Scott. Scott Reents: Thank you, Roopal. Starting with our first quarter results. We reported adjusted earnings per share of $2.65 and which is $0.07 above our guidance midpoint. These results include a $0.41 unfavorable impact from acquired IP R&D expense. Total net revenues were $15 billion, this reflects top tier growth of 12.4%, including a 2.1% favorable impact from foreign exchange. Adjusted gross margin was 83.6% of sales. Adjusted R&D expense was 15.1% of sales, and adjusted SG&A expense was 22.7% of sales. The adjusted operating margin ratio was 40.8% of sales, which includes a 5% unfavorable impact from acquired IPR&D expense. Net interest expense was $645 million, the adjusted tax rate was 15.4%. Turning to our financial outlook. We are raising our full year adjusted earnings per share guidance to between $14.08 and and $14.28. Please note that this guidance does not include an estimate for acquired IP R&D expense that may be incurred beyond the first quarter. We now expect total net revenues of approximately $67.3 billion, an increase of $300 million. The impact from foreign exchange on full year sales growth remains roughly in line with our prior expectations. This upgraded revenue forecast includes the following approximate assumptions for several of our key products and therapeutic areas. We now expect Skyrizi global revenues of $21.6 billion, an increase of $100 million, reflecting demand growth in psoriatic and IBD indications. Rinvoq global sales of $10.2 billion, an increase of $100 million, reflecting strong performance in the room and gastro indications. Total Neuroscience revenues of $12.6 billion an increase of $100 million, reflecting momentum across the portfolio. Moving to the P&L for 2026. We continue to forecast full year adjusted gross margin above 84% of sales. Adjusted R&D expense of approximately $9.7 billion and adjusted SG&A expense of approximately $14.2 million. We now anticipate an adjusted operating margin ratio of approximately 47.5% of sales, in line with our previous expectations after including the roughly 1% unfavorable impact of acquired IP R&D expense incurred through the first quarter. We also now expect adjusted net interest expense of approximately $2.7 billion, a reduction of $100 million, primarily related to favorable rates on our debt issuance. Turning to the second quarter. We anticipate net revenues of approximately $16.7 billion. This includes an estimated 0.6% favorable impact from foreign exchange. We are forecasting an adjusted operating margin ratio of approximately 50%. We -- we expect adjusted earnings per share between $3.74 and $3.78. This guidance does not include acquired IPR&D expense that may be incurred in the quarter. In closing, AbbVie continues to deliver outstanding results and our financial health remains very strong. Our capital allocation priorities remain focused on the future as we are investing in the business at record levels, have financial flexibility to pursue compelling business development and returning capital to shareholders through our strong and growing dividend. With that, I'll turn the call back over to Liz. Elizabeth Shea: Thanks, Scott. We will now open the call for questions. In the interest of hearing from as many analysts as possible over the remainder of the call. We ask that you please limit your questions to 1 or 2. Operator, first questions please. Operator: First question comes from David Amsellem from Piper Sandler. David Amsellem: So appreciate all the metrics you have on Skyrizi, but I wanted to get your thoughts on the competitive landscape, particularly with the rollout of code are you thinking about its impact on [indiscernible] going forward, if any? And give us some color on your counter detailing messages to practitioners regarding the product as you enter this period with more intensive competition. Jeffrey Stewart: Yes. Thank you, David. It's Jeff. I'll give you some flavor on that. As I mentioned, it's just such an exceptional product. We see in our audits and our trackers that over the last couple of quarters despite incredibly high share, really over 4x basically the in-play share and total share versus the next leading competitor, our NBRx has accelerated and continued to hit all-time highs. And that's because of a few of the items, right? The superiority data that we have on skin clearance is just exceptional. So we have head-to-head trials in 5 mechanisms in psoriasis, including the 2 oral agents, the [indiscernible] and [indiscernible]. We can show category-leading durability in the real world. It's just exceptional adherence given the dosing cycle and the ability to keep the disease controlled. We have that leading PSA indication with that new 5-year joint stability data that Roopal and I highlighted and then this new data on hard-to-treat areas like the scalp, the genitals, the hands and feet, head to toe for Skyrizi, so to speak. So those are just really, really powerful messages to the physicians who write this medication. I would say there's other things around the -- maybe the oral competitors you highlighted. Look, the launch is quite early. The way that we look at this is, certainly, we're able to communicate that it's not an oral Skyrizi the efficacy parameters are quite a bit lower when you match all the controls. You understand the populations, which our medical teams and our commercial teams are able to highlight Certainly, PSA is a huge market value driver, and there's not a lot of evidence there. There's also some complexities really just even around an oral in the adherence there, and we have some data and evidence on the orals in the category as well. So we're well prepared for this dynamic. So we think that we can navigate this competitor quite well. And we may see, in fact, we saw it with Otezla over a decade ago that there's going to be some market expansion as well. So again, the teams are prepared. We're very confident, and hopefully, that gives you a little bit of flavor of the dynamics in the market. Robert Michael: And David, this is Rob. What I would add is, I mean, we obviously contemplate competition. when we provide guidance. We've obviously now once again taken up the guidance for Skyrizi. We continue to see upside to consensus forecast for Skyrizi going out every year and growing each year. And so we have a tremendous amount of confidence. We are well aware of the competition that's coming in. We factored that in, and you can see the asset continues to perform exceptionally well. Operator: Next, we'll go to Chris Schott from JPMorgan. Christopher Schott: Just first one for me is on the Skyrizi alpha 4 beta 7 program. Can you just comment a little bit on what dosing looks like for this combo and where you see this fitting into the competitive landscape? So is this kind of a second line drug post Skyrizi or something that could eventually actually get to frontline? And the second question is just maybe building on that and looking at kind of the broader I&I competitive landscape. It does seem like there's significant development across the space. I think the Street is increasingly concerned about this means relative to your portfolio. So can you just kind of address your -- like how you think about sustaining the competitive position you have in I&I how important the Skyrizi combo is, your ability, again, freedom to operate with BD and I&I. Just help us a little bit in terms of how you're envisioning that playing out over time. Roopal Thakkar: It's Roopal. I'll start. The dosing -- I would say, Skyrizi, you know the dose, it's already in the label. So the other assets, 382, the alpha beta 7 and the TL1A, the goal there is to optimize those. So in fact, while we start gearing up for a Phase III study, we have a Phase IIb plan. We had preplanned that ahead of time. And in this quick interim look that we have had we've already observed a non-flat slope, so meaning an exposure correlation with 382, meaning patients with higher exposures did better. So what we'll do in the Phase IIb is in fact, study a higher dose of 382 in combination with Skyrizi. So there's a potential that the efficacy could go even higher. The goal with this one will be likely monthly dosing, co-formulation work is ongoing. And while we're finishing that work, we'll also be speaking with regulators and there's a potential to further accelerate. I don't think we need to wait for the Phase IIb to be totally finished. If we see something while we're conducting the trial, we can pivot relatively quickly. We would anticipate starting, I would say, roughly where we sit today in about 2 years in the Phase III or even sooner. And the team will be looking at ways to accelerate. And as I stated, the TLA will be added into this platform as well, and we'll be studying ulcerative colitis along with Crohn's. So as you think about IDD and competitive dynamics, what you see coming from AbbVie is next-generational therapies and really raising the bar on efficacy, as we stated on the endpoint in my opening remarks, we doubled the endoscopic data. And that's really what's most critical. It's the most objective and that's what clinicians are looking for. So as we look to the future, you see that what we're doing, we see other competitors coming entering. But we see these as monotherapies and even the Phase II data observed to date regardless of mechanism the data do not differentiate from where we sit today with Rinvoq and Skyrizi. So the goal here for the whole portfolio that we've spoken about is to raise that standard of care meaningfully higher. And again, Rinvoq and Skyrizi do that very well today even against emerging competition. And the data that I speak about are battle-tested Phase III data in very difficult-to-treat populations. That's going to hold for the near term, and we have not seen a competitor that can beat that other than us with our own combinations, and we have more to come. So that's, I think, the way to think about how we think about immune technology. Robert Michael: And Chris, this is Rob. I'll just add to Roopal's comments. The way we've been thinking about business development over the last couple of years, is to support that strategy. So you've seen us add through business development, new mechanisms, TL1A, IRAK4 [indiscernible] as we think about this combination approach. We acquired Nimble to give us the oral peptides capability. So that obviously plays an important role in the future of immunology. And then I'd say the one that doesn't get enough attention is the Capstan acquisition with the B-cell depletion approach with the in vivo CAR-T platform. as we think about the future of immunology, now we're thinking about growth beyond Skyrizi and Rinvoq, we certainly see a trend there. And so we've been very active with business development over the last couple of years. to add depth to our immunology pipeline so that we can continue to remain ahead of the competition. And we have tremendous amount of confidence given our long-term experience here. We obviously have -- or commercial powerhouse, but I'd say our R&D organization understands the space very well. And I think we positioned ourselves for long-term growth. Operator: Next, we'll go to Mohit Bansal from Wells Fargo. Mohit Bansal: Just wanted to double click on the IRAK4 that you are developing in RA. So you try its is a space where after HUMIRA, there's not a lot of options which are safe as well. So like what gives you excitement about IRAK4 compared to what is out there in the world in terms of in terms of therapies which are being tested in imitates because is trying to become a win work without the box warning here. Roopal Thakkar: Thanks, Mohit. It's Roopal. We have very early data. This is a partnership with [indiscernible], and we saw some data. Clinical data in China in a small study. And what we observed there was biologic-like efficacy. So something like existing therapies, including the anti-TNF class and what we saw preliminarily in that data, similar to our combo data and IBD, a relationship with PK and response rates. So we have the opportunity here to do this Phase IIb study to see if we can push efficacy even higher. And what we like about that is it's another oral. And potentially the safety profile as it's played out to date, we don't anticipate a boxed warning. So that would be a differentiator versus the anti-TNF class and the JAK inhibitor class. So that's what gets us excited about this particular molecule ahead. Operator: Next, we'll go to Louis Chin from Scotiabank. Louise Chen: Congratulation I wanted to ask you, first, if you could provide more color on your opportunities for an extended half-life IL-23 and also your oral peptide IL-23. And you still plan to enter the clinic with those this year. And then just on your combos, just curious if you plan to look at those for first line or save those for more refractory [indiscernible] Roopal Thakkar: It's Roopal. So yes, we do have it's called ABB-547, which you'll hear more about. And that is our asset based on all of our experience with Skyrizi and IL-23 inhibition and this is what we'd like to advance. And this would be a longer-acting version. And to your point, the dosing has already initiated Along those lines, we also anticipate dosing our long-acting IL-23 TL1A bispecific antibody and the nimble anti-IL-23 asset both of those will be first in human this year. The goal for those are to -- at least for the long-acting is to be slightly longer acting than Skyrizi but not too much longer acting. And the reason for that is, I should state, is that when we take all these factors given that Skyrizi is already available as quarterly, and that is very, very convenient and the data are all very compelling when you look to the maintenance data. I know we've seen some short-term data. But when you look at Skyrizi, and this extends well beyond week 16, we've demonstrated Pass 100 responses of approximately 60%, passing 90 responses, exceeding 80%, and that's already happening with quarterly dosing. And what I would say there is similar to what Jeff had stated, we also are focused on all of our assets on difficult-to-treat manifestations that includes [indiscernible], genital scalp psoriasis that Jeff has mentioned. Now the other important fact here and why I said the long-term duration is important, is that 30% or so of patients with psoriasis will go on to develop psoriatic arthritis. And again, that's why durability and long-term data are very important. Now the reason I made the comment on the half-life of where we want it to be, we want to offer choices in the future. And that will matter, I would say, to the -- most of our clinicians who want to individualize the therapy for example, on this longer half-life. If an infection, for example, were to occur or there's a tolerability issue and you have a very, very long half-life biologic, the prolonged pharmacologic persistence could limit the ability to rapidly discontinue therapy. And also, you could have clinical scenarios that may necessitate switching therapies prior to full washout. And if you have overlapping mechanisms of actions that could pose challenges. So we are targeting 2 or 2.5x of where Skyrizi is today, and that would create another option and that would be along with the oral that I said would also be focused on a slightly longer half-life on that one than what we see today for orals, because what we know and Jeff pointed this out, the adherence matters with orals. We see it with Rinvoq, but we have very potent efficacy. For the oral from Nimble, we would like to see higher potency and a longer half-life in case someone slips up and misses a dose. So that's how these are being developed. And as you stated, they're both in the clinic this year. So we anticipate data hopefully by next year, if not sooner. And then I apologize, I think I had the combo question on how we're positioning this. Well, the data that we have to date, we're in an all-comers population, and you see particularly refractory. And when we've seen that with Skyrizi and Rinvoq and you pivot to a naive population, the efficacy getting in higher. So we are not going to restrict at all how we would study patients because it's important to clear second line and third line and even come after Skyrizi. In fact, we had Skyrizi patients in the study. We had vedolizumab patients in this study. we had Rinvoq patients in the study. That's an important market because second and third line continue to evolve and grow. But in IBD, the front line is also important. Many of our clinicians want to tackle the inflammation right away in the best possible way they can. Because with gut inflammation, you can run into problems, it results in hospitalizations, structuring and irreversible damage that can result in surgeries. So nobody wants that. So if you have the best therapy, we believe there's many clinicians that will want to use that early on in the course and not hold out. So we're very excited about the data that we've observed because we see that high level of efficacy in this interim analysis across different lines of therapy in IBD. Operator: Next, we'll go to Terence Flynn from Morgan Stanley. Terence Flynn: Great. Rob, I was just hoping you could elaborate on your thoughts on M&A. Obviously, it's been a very active year so far across the space, seeing companies lean in really at that kind of $5 billion to $10 billion deal size. You mentioned comments on immunology and some of the work you guys have done on the early-stage side. But do you see a need here to maybe be more aggressive and also push into other areas quicker than what you're currently doing? Would just love your broad high-level thoughts there. right. Robert Michael: Terence, it's Rob. So I'll take that question. So yes, we have been and continue to be very open to acquiring external innovation, really with a major focus for us in neuroscience, oncology and obesity. And to the extent we see a differentiated asset in any of these areas, whether early stage, late stage or even on market, we are very willing to pursue it. I mean, today, we have an on-market portfolio and an emerging pipeline that gives us a clear line of sight to very strong growth into 2030. So we are operating from a position of strength and we have ample financial capacity. So if you think about over the last 2 years, we have added significant depth to our pipeline, including deals with [indiscernible], as I mentioned earlier, [indiscernible] and [indiscernible] to name a few. I see each of these opportunities as an opportunity to really drive growth in the next decade and beyond. But that said, while we don't need BD to deliver top-tier growth this decade, we're not opposed to near-term revenue drivers that are differentiated in our core areas of focus. Operator: Next, we'll go to [indiscernible] from RBC Capital Markets. Unknown Analyst: Just 2 on Skyrizi, please. So first one is when I look at the 1Q Skyrizi sales, you look at it versus the IQVIA scripts, it looks like net pricing is flat. So slightly better than that low single-digit erosion you guided. I guess, first, can you clarify if there were any one-off items in 1Q for Skyrizi? Or is that discrepancy from IBD and IV induction. And then how should we think about that pricing step down through the year, if you are on track for low single-digit decline? And then just following on [indiscernible] successful exclusivity extension to 2037, what's your confidence in extending Skyrizi's LOE? Is there any time lines you have there? Or any signals you have for potential biosimilar settlements. Scott Reents: This is Scott. I'll take your first question regarding Skyrizi pricing. You are correct. And in the first quarter, Skyrizi pricing was relatively flat. That's really just a comparison issue on a year-over-year basis in the quarter, a gating, if you will. On a full year basis, we continue to... [Technical Difficulty] Operator: Please standby, the conference will begin again shortly. I apologize for technical difficulties. We are experiencing technical difficulties. Again, please stand by. Thank you for standing by. Liz, you may go ahead. Elizabeth Shea: Okay. Sorry. I think we were in the midst of answering the question about sales [indiscernible] Yes, go ahead, Scott, sorry. Scott Reents: Great. Thanks, Liz. I apologize for the technical difficulty there. I'll start from the beginning again with respect to your question on first quarter Skyrizi, you are correct. The price was flat in the quarter, relatively flat. It was just a comparison year-to-year when we look at it from a full year basis, we do continue to expect low digit pricing for the full year. So that means while we've not given specific gating guidance, if you will, you'll see continued low single digits for the remainder of the year. And I think that when you think about that price. That's something we've talked about low single-digit in the immunology franchise across the board from rebates low single digits over time. And so Skyrizi is going to be very consistent with that. There was a slight amount of inventory destock as well. So the total demand number was consistent or right around 30%. I think that's consistent with what you would have seen in IQVIA. Robert Michael: And then [indiscernible], this is Rob. I'll take your question on Skyrizi. Look, although Skyrizi's competition of matter patent expires in 2033. We do have later expiring IP granted and in process that embodies Skyrizi significant innovation. And this includes patents expiring in the U.S. in the mid-2030s and later. Now it's important to note that regulatory data protection for Skyrizi does not expire until 2031. So we do not expect to see biosimilar application filings until the end of this decade. But clearly, we have a strong track record of vigorously defending our patents and protecting our innovation, and I would expect that to continue. Operator: Next, we'll go to James Shin from Deutsche Bank. James Shin: I have one for Roopal on [indiscernible] PD-1 VEGF. Given [indiscernible] is relatively behind some of the other PD-1 VEGF we all know. Is there any angle or differentiation to make up for a lost time and then sticking with oncology rule, what should we envision for [indiscernible] Do you see this being a transformational kind of readout is getting a competitive space in frontline [indiscernible] Roopal Thakkar: For the PD-1 VEGF, the key for that and what you've heard previously from us and other dose, the [indiscernible] deal that we just talked about, the DLL3 TCE. The key for these assets are in combination with our emerging ADC portfolio, in particular, Temab-A where I highlighted some readouts to come at ASCO. And that for us is the key looking forward, especially across colorectal cancer lung cancer, I noted combinations in pancreatic cancer today. So this, wherever we see a PD-1 we can utilize that in combination. So that's where the innovation occurs where we're going to use our ADCs wherever we can to replace chemotherapy provide higher efficacy, potentially longer durability because of better tolerability. And if the data point us in this particular direction, you could have a biomarker population. So physicians were able to individualize care and optimize that benefit risk. So you would see an efficacy contribution from ADCs and with an asset like 148. The other place that's under consideration is in the [indiscernible] alpha space in ovarian. There could be potential for 148 there. So you can see how it can be introduced across multiple tumor types. And regarding DLBCL discussions will be ongoing with the current readout where we saw improved PFS and no detriment to OS that discussion is ongoing. And then we still have the potential for second line DLBCL and even front line DLBCL data this year. And that frontline is at [indiscernible] plus R-CHOP. So I would say a very simple and potentially easily adoptable regimen. So again, potential for readouts this year. And if you do see a benefit there, I would say, in front line is the largest opportunity for [indiscernible] Operator: Next, we'll go to [indiscernible] from Canaccord Genuity. Unknown Analyst: First, for the additional indications for Rinvoq. As they start to come through, Vitiligo and Alopecia areata will be next. Are you still thinking all those indications can be $2 billion in aggregate or are you getting more optimistic on that front? So what's your latest thinking on the contribution from those and additional efforts you're putting in the derm space and then just on tavapadon in Parkinson's, just how you're thinking about that product, how it will fit into the treatment paradigm within Parkinson's mono versus combo and then the overall opportunity for it. And if you'll put more resources within the Parkinson's franchise as well. Jeffrey Stewart: Thanks. It's Jeff. And I would say that we have been very, very encouraged over the data that we've seen as these products have read out. And the first of the the third wave of the Rinvoq indications was giant cell arteritis, which was the smallest of the bunch. What we've observed has been quite interesting in the rheumatology community as we've started to highlight the benefits of of Rinvoq for GCA, it actually has what I would call a spillover effect onto RA and PSA. So the rooms get more and more comfortable. So these indications, we believe, will build on top of each other. We still look at that $2 billion as a reasonable base case. But I would say, basically, we're leaning towards more, let's say, bullishness. And one of them has to do with certainly the timing of vitiligo this is the -- will be the first truly systemic drug for vitiligo. And we look at the data, and it seems to continue to build over time. Now this isn't like atopic derm itch. -- where you get like in 1 or 2 days, you get something profound on the symptoms. The patients need to be consistently taking the medication, but it just continues to be this really significant burn in terms of stopping the inflammation. So that's very positive. So the first in vitiligo I would say the other thing that surprised us is there are approved JAKs in alopecia. We can see their revenue level, but the efforts were not very significant and basically, the Rinvoq data, again, cross-study comparison is twice as good. So I would say we're sort of really leaning towards that we can have some upside to that initial approach, I would say, primarily driven by alopecia areata given the profound changes that we're seeing. And I would be remiss if I didn't say that we're also very excited to see how the ultimate readouts are in HS. We built the HS market. And so with HS, with basically [indiscernible] and the readout for Rinvoq, that's also another nice portfolio play for us. So they're meaningful meaningful approaches that we have as we get closer to that. Robert Michael: And then this is Rob. Just to add to [indiscernible], just maybe to zoom out a little bit. I mean obviously, we're very excited about this next wave of indications and the impact they can have on the asset. When we look at overall Rinvoq expectations, at least for what sell side consensus is modeling we still see broadly upside on Rinvoq in each year with that number growing each year. And so this will contribute to that. But I'd say the underlying performance of the approved indications also is very strong. Jeffrey Stewart: And to move to tavapadon, again, is the idea of building these deep portfolios. Obviously, we have the small product with [indiscernible], which had the surgery [indiscernible] is continuing to progress towards that blockbuster status. It's progressed much faster than we thought even 18 months ago. And with the approval of tavapadon we can actually play with an innovative molecule and brand in front of Violet. So we're bringing this into the oral market, which is about 85% of the market right now. And as you highlighted, it's attractive in both monotherapy setting as well as an add-on setting to the standard of care levodopa/carbidopa. Our physicians are reacting to the monotherapy side, particularly for patients that are younger okay? And there are significant amount of younger patients where they could be on these oral medications for a decade or more, and they try to want to spare, which we've seen like the emergence of dyskinesia if you're sort of using over time too much levodopa/carbidopa. So that's very important adding on to control the dyskinetic events and sort of spare again, this march towards dyskinesia that you see is also something that is brought up by the thought leaders. I would also say that the adverse event profile is remarkably different than we've seen with, let's say, the older generation of these agents. So you see again, far less dyskinesia, you see less edema, you see amazingly low sedation, which is just a horrific side effect of the older medications as well as basically compulsive disorders. So we're super happy with this. We're looking forward to the launch here, and we've started to build out our team in Parkinson's, like we have for dermatology for those additional indications. So a nice catalyst that's coming here at the end of the year. Robert Michael: This is Rob. I'll just add. [indiscernible] obviously then complements [indiscernible] and giving us a very strong footing in Parkinson's. And we think about neuroscience overall for the company, I've said before that we are now the industry leader, and we expect to be the industry leader in [indiscernible] for a very long time [indiscernible] giving us essentially a business of Parkinson's that we expect to peak above $5 billion. That's 1 of $5 billion-plus franchises between psychiatry, migraine and Parkinson's that we think can really drive AbbVie's leadership in neuroscience is probably another area that doesn't get enough attention. Operator: Next, we'll go to [indiscernible] from Guggenheim Securities. Unknown Analyst: On the call today, especially on the pipeline. So I have one, maybe following up on the comments you made around HS data coming later this year. So I was just curious if you could maybe just level that sort of expectation of what you're hoping to see from both [indiscernible] from those readouts that we should get soon? And then the other one, tend to make looks like that's moving a little faster than you thought potentially filing this year, obviously, a pretty competitive space. Just curious if you can based on how things are evolving in that market where you see the differentiation for your product would be relative to a competitor? Roopal Thakkar: It's Roopal. On HS, the 16-week data is what we anticipate for Rinvoq and [indiscernible] and the way these are designed, they're slightly different. So lutakizumab will be enrolling patients that have already been on advanced therapies and treatment-naive patients. And if you go back to the Phase II data, that was 100% TNF IR and a very refractory patient population with quite severe HS, and we saw very strong data in that setting, we did conduct some data in naive patients, and that data looks even stronger. The issue in HS for all of us in drug development is control of the placebo rate. So for luticizumab being in naive and failure populations, we will be utilizing a high score 75. And hopefully, that serves to reduce that placebo rate but then if that data looks good and the potential for approval, you would have an agent that could play in both areas of the market. And then secondly, on Rinvoq, that is going to be 100% bio failure population. And because of that, that has the potential ability to control some of the placebo effects and we'll have the standardized high-score 50. So if both look good and are approved, you'll see a dynamic that's not dissimilar to what we have in IBD, where you have a frontline very powerful asset and then one that can come later on in case there's a loss of response like a Rinvoq. And that's consistent with what we see with Crohn's and UC. And I think it will be beneficial to both assets, if approved, if we're able to take them both to market, again, strategically like we've done the setup in IBD and what's driving what we see as being the potential of those assets is best-in-class efficacy and, I would say, ease of use. And I think that segues into the 383 [indiscernible] question, we do see the crowded market, as you've stated, but the opportunity is still tremendous. And that opportunity exists if you have the right asset with the right profile. And what [indiscernible] brings is very high substantial efficacy that we've seen, and that is, we think, associated with the strong binding to BCMA. It has a slightly lower affinity for the T cell side of things and the T-cell engagement. And that has set up what we believe to be a best-in-class safety profile and we have a somewhat extended half-life. So what you could then see happening if we're successful, is a singular priming or step-up dose and immediately going to the full dose, you would see very low CRS. And if that's the case, you have the potential for outside of hospital outpatient like setting where you could give the asset, and it's something consistent with what we've seen very successfully with [indiscernible] particularly in heme cancers 80% of these are treated in the outpatient. So [indiscernible] is designed for that in the community setting. And then after the full dose, after the priming dose or step-up dose, you're immediately able to dose on a monthly basis, which is very convenient for the clinic, you don't take up a chair. And then for the patient who doesn't have to keep coming into the hospital. So that currently, the profile I just described doesn't exist. So entering a little bit later is okay. We believe if you're bringing the right profile. Recall, we've had some success with Skyrizi coming in third as a 23 and Rinvoq as a third JAK inhibitor. But we believe the profile is going to be the key driver of the potential uptake in the future. Operator: Next, we'll go to Asad Haider from Goldman Sachs. Asad Haider: First, Rob, just maybe for you in the context of the statements that you continue to see upside to consensus forecast for both Skyrizi and Wink going out each year and that upside growing each year. Just curious as to how that triangulates with your calculus of no longer updating mid-term guidance for these products? And related, are there still areas of where you see meaningful disconnect versus consensus outside of those 2 products. And then maybe if I could squeeze one in for up. Just on obesity, as you think about doing -- building a broader portfolio around 295, just what might that look like in the context of Rob's earlier comments on obesity as an area of potential PD interest? Robert Michael: Okay. So, it's Rob. I'll take your first question. And recall, our previous long-term guidance really served a very specific purpose ahead of the HUMIRA LOE. But I wouldn't rule out doing it again in the future if it made sense. That said, when I look at the current state of AbbVie's business, the long-term outlook and the pipeline is replacement power, we have never been in a stronger position. I mean we are the clear leader in immunology and neuroscience with a portfolio of assets that are demonstrating very significant growth, in many cases, north of 20%. And both areas have a pipeline that can deliver transformational improvements over existing therapies. When I look at sell-side consensus, I mentioned, we do see upside. We see upside for the total company revenue in every year with that upside growing. I already mentioned that we expect to -- we have upside versus the sell side on Skyrizi and Rinvoq. We expect to exceed the peak consensus that's in those models. I already mentioned in neuroscience that we see upside versus expectations for the migraine in Parkinson's [indiscernible] right now, what we see in consensus is peaking at below $4 billion. We've said several times, we expect them to each peak in excess of 5. And then we look at our oncology pipeline assets. Roopal just highlighted [indiscernible]. We haven't really talked about Temab-A. We believe both of these have significant multibillion-dollar peak potential and both have really not even been described any value by roughly half of the cell site. And so we will continue to highlight this in our commentary when we see the upside Clearly, the previous long-term guidance was very granular more than really anyone in the industry has ever provided but we did it at a time where it was important to help understand what the company will look like on the other side of the HUMIRA LE, we're now in a very strong position. We can deliver top-tier growth for the long term, puts us in a position of strength to continue investing in the business. I already mentioned our commentary around BD. We're very active in the BD area open to areas of differentiation within our -- within each of our core areas. And so we think the setup is very strong. And so I wouldn't rule out giving another long-term update at some point. But clearly, we have a lot of confidence in the outlook, and we'll provide updates as we see Fed. [indiscernible] as you heard, the initial strategy is to drive as high of efficacy as we can, but clearly balance that with tolerability because that's what's going to drive ultimate durability. We've seen too many people fall off their current [indiscernible] assets because of tolerability. So, so far, we see that shaping up nicely and notable weight loss in a nonobese population. So that opportunity still exists and along with our ability to further increase dose and what we saw in the multi-ascending dose. So that strategy will play out over the course of this year and next year before we start designing Phase IIs. But the key is to optimize that efficacy, tolerability to drive that durability to the patient can experience those benefits long term. That could be in an early patient population naive, but we understand many of those patients will be coming off of their increase. The other opportunities that we would be looking for externally or anything that can augment that weight loss but maintain tolerability. If we see that in a subcu that's combinable, that would be very important and oral would be something that we could be interested in. Also any other assets that would allow the optimization of being able to retain muscle and have a majority of the weight loss come from fat. We still see there's an opportunity there. So there will be some other areas that we would be interested in. Other unique areas are in immunology and potential combinations with our own assets. There's a substantial amount of obesity in psoriasis today, and that's a set up and something that we are exploring now and also even higher rates of obesity in [indiscernible]. So that could be a potential other combination. And recall, with our tremendous amount of experience and presence in the aesthetics channels for any type of asset that comes up, that sets us up very nicely and could have a very good go-to-market synergy because of that aesthetics channel. Operator: Next, we'll go to Dave Risinger from Leerink Partners. David Risinger: I missed part of the call, so hopefully I'm not repeating something. But with respect to AbbVie 295, the amylin [indiscernible] has stated that the secret sauce and [indiscernible] is that it dialed out the calcitonin. So can you please comment on 29 activation of amylin one relative to calcitonin. And also, if you could discuss its half-life because the press release suggested the potential for monthly dosing and just wanted to get clarity on the half-life and your level of confidence in monthly dosing. Roopal Thakkar: It's Roopal. Again, and I'll talk about. So yes, we have a DACRA molecule it signals through Amylin and calcitonin. And we -- I don't think we know yet where the secret sauce is relative to outcomes. As we stated, the weight loss was substantial in only 12 weeks in a mostly male population that had a BMI of around 29%. We anticipate in later stages of development, BMI is in the range of 36 and 37. And more than 50% of the patient population would be women where most of the weight loss comes. So we still see a tremendous amount of potential there. The safety profile looked very strong. The potential upside is a benefit to bone because of the calcitonin signaling. And as we develop the molecule, we'll be able to obtain, for example, [indiscernible] to monitor bone and to see and compare if there's less loss of bone and preservation of bone, that could be very important for women, especially as they get older. And we know with rapid weight loss, you do see loss of bone density. So at this stage, we see this as a potential advantage because of the efficacy and tolerability that we've seen to date. The half-life is approximately 270 hours. And what we did observe is every other week and the potential for monthly, the pharmacodynamic effect should also be considered along with half-life. We've seen examples of that. Skyrizi is a good example in psoriasis. The half-life is 28 days. If one is considering a dosing interval at around 1 to 2 half lives, you see Skyrizi is a type of molecule that really over delivers beyond its half-life. And so far, the pharmacodynamic effect with 295 does create the potential for once a month dosing, I would say, particularly in the maintenance setting, which would be really important from a tolerability and convenience standpoint. Elizabeth Shea: Operator, we have time for one final question. Operator: For a final question, we'll go to Steve Scala from TD Cowen. Steve Scala: Rob, just to be clear, cars consensus is $33 billion in 2031. So are you saying there's upside to that? And Rinvoq is $16 billion in 2031. Are you saying there's upside to that? And would you care to add whether or not you think it's just marginally low or whether there is significant upside. And then secondly, during periods of past economic uncertainty, I think AbbVie has observed and stated that aesthetics businesses were fairly resilient. But this time, it seems to be different. So is my recollection correct? And if so, why is it different this time? Robert Michael: Steve, I'll take the first question, Jeff will take the second question. So the numbers that you're quoting from are consistent with what we've -- what we're seeing in terms of sell-side consensus. And yes, -- we do expect the peak potential for both Skyrizi and Rinvoq to exceed those estimates. Obviously, the sell side doesn't go out much further than that. and we think they obviously have more runway. And so we do think there's a significant runway and upside opportunity for both assets. Jeffrey Stewart: Yes. And Steve, you remember correct on we -- several years ago, we referred to some recessionary type dynamics around the Great Recession, for example, we had a [indiscernible] has the legacy business where we saw sort of compression and then a more rapid response to robust growth. But in this case, we've seen this more lingering inflationary dynamic that we haven't seen for 40 years. I think we're seeing relative stability in the markets now. I mean, low single low single-digit growth for toxins still decline for fillers. I do think it's a different cycle of pressure on the consumer -- but you're correct in terms of what we had said previously with different types of recessionary issues. Elizabeth Shea: All right. Thanks, Steve, and that concludes today's conference call. If you'd like to listen to a replay of the call, please visit our website at investors.abbvie.com. Thanks again for joining us. Operator: Thank you all for joining the AbbVie First Quarter 2026 Earnings Conference Call. That concludes today's conference. Please disconnect at this time, and we hope you have a wonderful rest of your day.
Operator: Good morning. And welcome to Seven Hills Realty Trust First Quarter 2026 Financial Results Conference Call. All participants will be in listen only mode. After today's presentation, please note this event is being recorded. I would now like to turn the call over to Matt Murphy, Manager of Investor Relations. Please go ahead. Matt Murphy: Good morning. Joining me on today's call are Thomas Lorenzini, President and Chief Investment Officer; Matthew C. Brown, Chief Financial Officer and Treasurer; and Jared Lewis, Vice President. Today's call includes a presentation by management followed by a question and answer session with analysts. Please note that the recording, rebroadcast, transmission, and transcription of today's conference call is prohibited without the prior written consent of the company. Also note that today's conference call contains forward looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 and other securities laws. These forward looking statements are based on Seven Hills Realty Trust's beliefs and expectations as of today, 04/29/2026, and actual results may differ materially from those that we project. The company undertakes no obligation to revise or publicly release the results of any revision to the forward looking statements made in today's conference call. Additional information concerning factors that could cause those differences is contained in our filings with the Securities and Exchange Commission, which can be accessed from the SEC's website. Investors are cautioned not to place undue reliance on any forward looking statements. In addition, we will be discussing non-GAAP financial numbers during this call, including distributable earnings and distributable earnings per share. A reconciliation of GAAP to non-GAAP financial measures can be found in our earnings release, and the presentation can be found on our website at 7reit.com. With that, I will now turn the call over to Thomas Lorenzini. Thomas Lorenzini: Thank you, Matt, and good morning, everyone. On our call today, I will start by providing an update on our first quarter performance and recent investment activity, followed by an overview of our loan portfolio, then Jared Lewis will discuss current market conditions and our pipeline, before Matthew C. Brown reviews our financial results and guidance. Yesterday, we reported solid first quarter results reflecting the continued strength of our fully performing loan portfolio and our disciplined underwriting approach. Distributable earnings for the quarter came in at $5.3 million, or $0.24 per share, which was at the high end of our guidance. We reached a new high watermark with approximately $776 million in total outstanding loan commitments, after originating three new loans totaling $67.5 million during the quarter, reflecting our continued progress in deploying the capital raised from our December rights offering. First quarter closings included a $30.5 million loan secured by a medical office property in Atlanta, a $19.5 million loan secured by a grocery-anchored retail property in Palm Desert, California, and a $17.5 million loan secured by a select-service hotel in Scottsdale, Arizona. We also have three additional loans in process that we expect to close in the near term totaling approximately $78 million, which Jared will speak to in more detail. These originations reflect our ability to source opportunities across property types and geographies while maintaining disciplined underwriting. Importantly, we remain selective in deploying capital and continue to focus on opportunities that meet our return thresholds. Originations so far in 2026 have been executed at a net interest margin of approximately 195 basis points, representing the highest level we have achieved over the past four years. When including the impact of exit fees, total returns are incrementally higher. We believe this reflects both the strength of our platform and an improved first quarter transaction environment. Turning to our loan portfolio. As of March 31, we had total loan commitments of approximately $776 million across 26 floating rate first mortgage loans. Our portfolio continues to demonstrate strong credit performance with a weighted average risk rating of 2.8, no realized losses, and all loans current on debt service. Our weighted average all-in yield at quarter end was 7.8%, and our weighted average loan-to-value at origination remained conservative at 66%. During the quarter, we received the full repayment of a $16 million loan secured by a hotel in Lake Mary, Florida, and subsequent to quarter end, we received an additional $54.6 million from the repayment of a multifamily loan in Ohio. We are also expecting the repayment of a $26.5 million loan secured by an office building in suburban Chicago as early as this week; upon payoff, this will reduce our overall office exposure to approximately 21% of the current portfolio. This repayment activity meaningfully increases our available capital and supports continued deployment into new investments. With recent loan repayments, we currently have approximately $110 million of cash on hand and nearly $400 million of available capacity under our secured financing facilities. As previously announced, we extended the maturities of our UBS and Wells Fargo financing facilities to 2028 and doubled the capacity of the Wells Fargo facility to $250 million, further enhancing our ability to deploy capital and continue growing the portfolio. In summary, we believe Seven Hills Realty Trust is well positioned to capitalize on an active pipeline of middle market lending opportunities. While recent headlines have raised concerns around private credit, it is important to note that Seven Hills Realty Trust remains narrowly focused on senior secured commercial real estate lending. This approach is reinforced by RMR's multi-decade track record managing and operating commercial real estate, providing deep asset-level insight, disciplined underwriting, and proven experience across market cycles. With strong liquidity, expectations of improving transaction activity, and attractive lending spreads, we remain focused on disciplined execution and generating compelling risk-adjusted returns for our shareholders. With that, I will now turn the call over to Jared Lewis. Jared Lewis: Thanks, Tom. Since our last call, we have seen increased volatility across the capital markets, driven in part by the ongoing conflict in Iran and its impact on investor sentiment. Interest rates have also moved higher, with the ten-year Treasury increasing from approximately 3.95% in February to 4.39% today, and the expectation is that the FOMC will maintain its target range for the federal funds rate at 3.5% to 3.75% later this afternoon. While the year began with strong transaction activity, continuing the momentum we saw at the end of 2025, recent market volatility has started to have an impact on owners' decision making. Over the past month, we have seen some moderation in acquisition and sales activity as market participants take a slightly more cautious approach due to the uncertainty around interest rates, inflation, monetary policy, and broader geopolitical developments. With respect to debt capital markets, the CMBS market appeared to slow a bit earlier this month given the macroeconomic uncertainty and interest rate volatility, but overall, we have not seen a meaningful pullback in capital availability. Banks, debt funds, life companies, and government sponsored enterprises all remain active, and importantly, our bank partners continue to support transactions through our secured financing facilities. From an activity standpoint, we are seeing a divergence across asset classes. Multifamily refinancing continues to dominate as borrowers work through maturing bridge and construction loans originated in 2021 and 2022. In contrast, for new acquisitions and in many other asset classes, owners that are not under pressure to transact are generally waiting for greater clarity on macroeconomic conditions before moving forward with buy, sell, or refinance decisions. However, despite this period of slow acquisition transaction volume, assets still need to be financed, and we continue to see consistent demand for flexible lending solutions. As a result, our pipeline remains strong, and we have over $105 million of term sheets outstanding for new loan opportunities and three loans totaling $78 million currently in diligence that we expect to close in the near term. These include a $39.2 million loan secured by a multifamily property in Georgia, a $22.7 million loan secured by a medical office property in Texas, and a $16 million loan secured by a self storage property in Pennsylvania. In addition, we continue to evaluate a range of opportunities across the industrial, storage, retail, and hospitality sectors where we believe we can achieve more attractive risk-adjusted returns relative to more competitive segments of the market. Importantly, we remain disciplined in our approach. While competition remains elevated in certain sectors, particularly multifamily, we are focused on transactions that offer attractive yields. We believe our ability to provide certainty of execution and flexibility to borrowers is a key differentiator in the current environment. Overall, while near-term transaction activity may remain somewhat uneven given ongoing macro uncertainty, we believe the current backdrop represents an attractive opportunity for lenders with available capital and a disciplined underwriting approach. As conditions stabilize, we expect to continue to selectively deploy capital into opportunities that meet both our credit standards and return thresholds. And with that, I will turn the call over to Matthew C. Brown to discuss our financial results. Matthew C. Brown: Thank you, Jared, and good morning, everyone. Yesterday, we reported first quarter distributable earnings of $5.3 million, or $0.24 per share, which includes $0.08 of dilution related to our rights offering in December. As expected, the rights offering has impacted earnings in the near term; however, deployment of the proceeds is progressing well. New loan investments over the last two quarters contributed $0.03 per share of distributable earnings in the first quarter, and as Tom mentioned, originations so far in 2026 have been executed at net interest margins of 1.95%, the highest level over the past four years. During the first quarter, interest rate floors remained active for seven of our loans, a structural feature of our portfolio that actively protects earnings in a declining rate environment. These floors contributed $0.01 per share of earnings protection for the quarter based on SOFR as of March 31. All but one of our loans contain floors ranging from 25 basis points to 4.34%, providing a meaningful baseline of downside protection as the rate environment evolves. Earlier this month, our Board declared a regular quarterly dividend of $0.28 per share, which equates to an annualized yield of approximately 14% based on yesterday's closing price. Although distributable earnings have not covered our dividend over the past quarter, we remain committed to this dividend level through 2026 at a minimum and expect distributable earnings to trend back to our quarterly dividend level by the end of this year. Overall, we expect second quarter distributable earnings to be in the range of $0.23 to $0.25 per share. As the proceeds from the rights offering are invested and capital from loan repayments is redeployed, we expect the incremental earnings contribution by the end of the year to offset the impact of the higher share count. Credit quality remains strong at Seven Hills Realty Trust. Our CECL reserve stands at a modest 130 basis points of total loan commitments, flat from last quarter, and is supported by a conservative portfolio risk rating of 2.8, also unchanged. The portfolio is well diversified by property type and geography, and all loans are current on debt service. Importantly, we have no five-rated loans, no collateral dependent loans, and no loans with specific reserves. This reflects a disciplined underwriting and asset management process that we believe creates durable, long-term value for shareholders. That concludes our prepared remarks. Operator, please open the line for questions. Operator: We will now open the call for questions. The first question today comes from Jason Weaver with Jones Trading. Please go ahead. Jason Price Weaver: Hi, good morning, and thanks for taking my question. I thought it was notable that your origination net interest margin of 195 basis points this quarter is about 35 basis points wider than last year's average. Is that a function of mix, or pockets of the market that you are able to access that others are not? We are seeing opposite trends at some of your peers. And where do you see the rest of the year's NIM settling, and how much of that is a step of the base rate? Thomas Lorenzini: Thanks for the question. The loans that we did in Q1 were medical office, retail, and select-service hospitality, so there was no multifamily in there, which is where we see the tightest pricing and the narrowest margins. We were able to attract some outsized returns, especially in select-service hospitality, which generally tends to price at wider spreads, then medical office as well, and then retail. It is really product mix on those. I would also say we take a rifle-shot approach to originations. While we have a lot of transactions come through a robust pipeline, we really pick our spots and take deals off the street where we are going to achieve that outsized return, rather than get into a commodity situation where we are simply bidding against several other lenders and everyone is cutting spreads by a few basis points to win the business. We try to avoid those auction-type situations. Going forward, for the three loans we expect to close here in short order, net interest margin is probably a little bit inside of 195 basis points, closer to about 180. Again, that is a function of product type. We do have a multifamily loan in there that is fairly sizable relative to the three, which drives down that net interest margin a little bit, and the other properties—another medical office and a self storage, as Jared mentioned—help round that out. We are able to maintain a healthy margin, but it is really the multifamily loans where we are seeing the most compression. Jason Price Weaver: Understood, that is helpful. And then after the Olmsted Falls repayment in April, I think you are sitting on a pretty large chunk of liquidity, almost half a billion. What does the qualifying pipeline look like by sector and size, as well as probability of closing in the near term? And what is the realistic deployment timeline? Jared Lewis: Thanks, Jason. Right now, the pipeline averages about $1 billion and it continues to turn over pretty frequently. We are seeing a lot of transactions, and as we mine through them and meet on the ones we want to look at, they get replenished, so we are still seeing quite a bit of activity. The majority of the activity we are seeing today is really for refinancing of assets as opposed to acquisitions, so those are a little bit more challenging to underwrite. We do have three loans right now that we are negotiating term sheets for, about $125 million, and the average deal size is a little bit barbelled, but we are targeting deals in the $25 million to $40 million range as a sweet spot. With the majority of the pipeline being refinancings, they are a little bit harder to quantify because we are determining whether we want to do deals with borrowers who are bringing new cash to the table—we want to do deals where we understand a reset basis in the transaction—and a refinance is much harder to do that than an acquisition. In terms of our ability to deploy the capital that we have now, as I said, we are negotiating three term sheets at $125 million and are far along in a couple of those. I cannot handicap whether we will win all of them, but we feel pretty good about it. Going forward, we will continue to evaluate quite a bit of multifamily; the majority of our pipeline is in multifamily, but we are not going to chase deals down to win business by 5, 10, or 15 basis points. Over the next two quarters, we should have the ability to meet our targets of origination activity in the $100 million to $300 million range. Jason Price Weaver: Got it. Thank you. I appreciate the color. Operator: Your next question comes from Citizens Capital Markets. Please go ahead. Analyst: Hi, everyone. Thanks for taking the questions. First, 1Q originations were pretty diverse—you touched on this a little bit—but is there a particular asset type that you want to increase exposure to, or are you more just looking at the best opportunities across the board that are not in super competitive asset classes? Thomas Lorenzini: We would certainly like to increase exposure further to multifamily. That is beneficial given it is an extremely liquid market with Fannie and Freddie active, and from an investor standpoint as well. But the transactions we are going to pursue there will be ones where we feel we are making a decent return. That said, other product types certainly make sense in today’s world. We like self storage; student housing has been attractive to us; medical office has been attractive; and industrial remains an attractive asset class. The only thing we are not actively pursuing right now is new office loans and healthcare-related assets. We do not target, per se, a set percentage per property type. It is more holistic—making sure we have a diverse portfolio, which we do and want to continue to maintain—while focusing on proper risk-adjusted returns. If we can pick off a few multifamily deals, we will do that, but we are more than capable with the other products as well. Grocery-anchored retail is also an area of focus. It is less formulaic and more about the rifle-shot approach, lending against quality real estate and earning an outsized return to do so. Analyst: That is helpful. Were 1Q origination volumes impacted at all by the geopolitical disruptions? How are you thinking about net portfolio growth over the coming quarters? Thomas Lorenzini: We touched on it a bit. In the first quarter we saw quite a bit of activity and were very happy with what came through the pipeline. With the war in Iran, things have slowed a little from a transaction standpoint. If borrowers and investors do not need to make a decision right now, they might pause to see what happens with interest rates given the recent volatility. That said, there is still adequate flow. We anticipate this quarter—with the loans that have closed, the loans that are closing, and a couple of speculative loans—originations of approximately $200 million. From a repayment standpoint, we have an office loan we believe is repaying possibly this week, and beyond that we are not expecting other payoffs in the quarter. So we should have pretty good net portfolio growth—maybe $50 million to $75 million—compared to where we are today, and then in Q3 and Q4, another couple of hundred million dollars of net portfolio growth. Analyst: Understood. And any updates you could share on the plans for the Yardley REO property? Thomas Lorenzini: That property continues to perform remarkably well. Occupancy remains about 81% to 82%. We renewed a large tenant, and the WALT is almost six years now. There has been quite a bit of recent activity from new tenants; we have done some test fit-outs for a few groups looking for space. Our goal would be, if we lease a bit more incremental space, to consider discussing with the Board a potential disposition of the asset, maybe late this year. Operator: Your next question comes from Christopher Nolan with Ladenburg Thalmann. Please go ahead. Christopher Nolan: Hi. Just to follow up on portfolio growth, is it fair to say you are expecting roughly a couple hundred million dollars in incremental portfolio growth for 2026? Thomas Lorenzini: Yes. Ideally, we end up close to $950 million at the end of the year for total portfolio size. Christopher Nolan: Great. And on the allowance reserve, does the steeper yield curve impact reserving? If someone has a property and interest rates are higher at refinance, they may need to add equity. Does CECL require you to increase your allowance as long rates go up? Matthew C. Brown: It is an interesting question. There are many factors that go into the CECL reserve. Some are related to our specific portfolio, maturities, and so on, as well as broader economic factors. We would expect our reserve at 1.3% of total commitments to hang around there for a while. It could tick down a little bit—Tom mentioned an office loan we expect to repay in the near term and we have some other office loan maturities coming up this year—but overall, we have a modest reserve at 1.3%, which is on the low end for some of our mortgage REIT peers. Christopher Nolan: Final question. Given the jump in fuel prices, for projects being repositioned with a developer, construction inputs go up. How does that impact your underwriting? Do you require the developer to put in more equity, or is there no real impact? Thomas Lorenzini: A couple of points. First, our portfolio’s future funding exposure is somewhat limited—about 6% of total commitments—so it is not that sizable. Where it is a value-add transaction and there are cost increases beyond what we budgeted when we closed, there is typically an equity rebalance required from the sponsor. If a project has commenced rehab or construction and there are X dollars available inside the loan to fund those costs but the actual costs come in higher, they are required to rebalance and come to the table with equity. Christopher Nolan: Great. Thanks, Tom. Operator: That concludes our question and answer session. I would like to turn the conference back over to Thomas Lorenzini for any closing remarks. Thomas Lorenzini: Thanks, everyone, for joining today's call. We look forward to seeing many of you at the upcoming NAREIT Conference in New York City this June. Please reach out to Investor Relations if you are interested in scheduling a meeting with Seven Hills Realty Trust. Operator, that concludes our call. Operator: The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
Operator: Good morning, and welcome to SNDL Inc.'s first quarter 2026 financial results conference call. This morning, SNDL Inc. issued a press release announcing their financial results for the first quarter ended March 31, 2026. This press release is available on the company's website at sndl.com and filed on EDGAR and SEDAR as well. The webcast replay of the conference call will also be available on the sndl.com website. SNDL Inc. has also posted a supplemental investor presentation in addition to the conference call presentation we will be reviewing today on its sndl.com website. Presenting on this morning's call we have Zachary George, Chief Executive Officer, and Alberto Paredero-Quiros, Chief Financial Officer. Before we start, I would like to remind investors that certain matters discussed in today's conference call or answers that may be given to questions could constitute forward-looking statements. Actual results could differ materially from those anticipated. Risk factors that could affect results are detailed in the company's financial reports and other public filings that are made available on SEDAR and EDGAR. Additionally, all financial figures mentioned are in dollars, unless otherwise indicated. We will now make prepared remarks, and then we will move on to the analyst questions. I would now like to turn the call over to Zachary George. Please go ahead. Zachary George: Welcome to SNDL Inc.'s Q1 2026 financial and operational results conference call. During 2026, SNDL Inc. faced notable challenges beyond the usual seasonality that typically results in the lowest demand at the start of each calendar year. After 16 consecutive quarters of operational improvement, both our liquor and cannabis markets experienced declines in same-store sales. The downward trend in the liquor market is a familiar issue, but the softness that began to emerge in the cannabis market during the second half of the previous year has developed into a more significant and persistent challenge. Our results for the quarter were further affected by suboptimal execution on working capital management within our upstream cannabis operations. This issue has since been addressed and remedied following the close of the quarter. Despite these headwinds impacting our financial performance, we remain encouraged by the proactive actions taken by our teams. They have responded with focus and determination, taking control of the situation and implementing necessary initiatives that support our ongoing efforts to build a successful, sustainable, and profitable growth model. We continue to invest in growth platforms during the quarter. One notable example is our exclusive contract for the production and commercialization of Jeter, a leading U.S. cannabis brand. This exclusivity was formally assumed in April, but production activities and inventory pipeline development had already commenced in March, with initial shipments delivered to provincial boards. Additionally, both of our retail segments, liquor and cannabis, reported improvements in gross margin. Our teams achieved these gains by enhancing promotional efficiency, maintaining pricing discipline, and optimizing product mix management. Periods of adversity are a true test of a management team's resilience and determination. The SNDL Inc. team has demonstrated these qualities by thinking creatively and implementing several profit enhancement initiatives. These actions are expected to boost profitability and improve commercial execution, generating more than $20 million in incremental operating income over the remainder of the year. As previously communicated during our Q4 and full-year 2025 earnings call, we continue to leverage our board-approved share repurchase program. In 2026, SNDL Inc. repurchased a total of 4.5 million shares. Last week, U.S. authorities took a significant step towards rescheduling cannabis by moving certain state-licensed medical marijuana to Schedule III. While this does not constitute federal legalization, it is an important regulatory development. This step is particularly relevant for SNDL Inc. due to our credit exposure through the SunStream vehicle in the U.S., especially for Parallel, a licensed operator active in key medical markets such as Florida and Texas. The regulatory change is constructive for Parallel, as its restructuring process continues to progress with only a limited number of outstanding conditions remaining. Over now to Alberto for more insights on our first quarter financial performance. Alberto Paredero-Quiros: Thank you, Zachary. I want to remind everyone that the amounts discussed today are denominated in Canadian dollars unless otherwise stated. Certain figures referred to during this call are non-GAAP and non-IFRS measures. For definitions of these measures, please refer to SNDL Inc.'s Management’s Discussion and Analysis document. Before moving on, I would like to highlight a small accounting presentation change following the adoption of amendments to IFRS 7 and IFRS 9. As of 2026, cash in transit is no longer classified as cash and cash equivalents and is instead reported as a receivable. This change has no impact on liquidity, cash generation, or underlying economics, but it does affect the comparability of reported cash balances. Specifically, the $213.4 million of cash reported on our March 31, 2026 balance sheet does not include any cash in transit, whereas the $252.2 million reported at December 31, 2025 included $12.1 million of cash in transit. Net revenue of $196 million in Q1 2026 represented a 4.4% year-over-year decline, driven by market contractions that impacted our different segments. Gross profit of $53 million is a reduction of $3.8 million, or 6.8%, compared to the same period of the prior year. While most of this reduction is driven by the revenue decline, we also reported a consolidated gross margin decline of 70 basis points. This margin decline is purely driven by our cannabis operations segment, as both our retail segments expanded margin. Both adjusted and unadjusted operating income were negative due to the seasonality impact in the first quarter, but saw an improvement compared to the prior year, as the reduction in gross profit is more than offset by OpEx improvements and the absence of the prior year's downstream valuation reduction. Free cash flow of negative $7.6 million in the quarter was partially driven by seasonality impact. Compared to the prior year, it represents a reduction of $6.5 million, mainly driven by working capital increases in cannabis operations, as well as additional CapEx investments across retail and operations segments and increased lease costs. Our historical quarterly performance clearly reflects the seasonality typically impacting the first quarter. That said, despite the moderate year-over-year improvement in operating income, net revenue, gross profit, and free cash flow declined compared to the prior year, as previously discussed. Looking ahead, we expect to see improvements in revenue growth year over year as of 2026, driven in part by the impact of our initiatives and also as we begin to lap softer revenue comparisons for the second half of the year. Looking more closely at segment-level contributions across our key financial KPIs, and starting with net revenue, the overall decline was driven primarily by liquor retail and cannabis operations, while cannabis retail was essentially flat. I will expand further on the drivers by segment in a few minutes, but at a high level, liquor retail declines were driven by challenging market conditions, cannabis retail was able to offset market softness through growth from newer store openings, and cannabis operations declined due to market destocking and the timing of contract orders. Gross profit follows similar dynamics, although both retail segments were able to partially offset revenue pressure through continued margin improvements. Adjusted operating income showed a modest improvement, as the operating income decline driven by lower gross profit in cannabis operations was offset by the absence of the prior year SunStream valuation reduction and ongoing corporate cost savings. The decline in free cash flow compared to the same period last year was driven by lower earnings, primarily reflecting reduced gross profit, as well as higher capital expenditures to support store openings and differences in the timing of lease payments relative to the prior year. Movements in working capital were broadly consistent with the prior year; however, two offsetting dynamics largely netted each other out. Looking more closely at free cash flow, there are a few takeaways. First, the combined impact of net income and noncash addbacks was negative. This is what we refer to as earnings on the previous slide. In simple terms, while net income improved by $4.8 million compared to the same period last year, that improvement was driven by noncash items. After adjusting for these noncash effects, the overall contribution from earnings was negative. Second, inventory increased more in 2026 than in the prior year, largely offset by improvements elsewhere in working capital. Inventory typically builds in the first quarter due to seasonality, and this year's increase was more pronounced as a result of the inventory build related to the Jeter launch in cannabis operations. Other working capital, primarily the net impact of receivables and payables, represented an improvement year over year, reflecting continued optimization of collections and payment terms. We also saw capital expenditures and lease payments increase by $3.6 million compared to the same period last year, driven by initial investments to support new store openings as well as differences in the phasing of lease payments between the first and the second quarters relative to last year. Finally, the chart on the right-hand side of the slide clearly illustrates the seasonality of free cash flow, highlighting the typical differences between the first and second half of the year. When reviewing each commercial segment individually, I would like to begin by highlighting a change in the way we are reporting segment results. As of 2026, we have started allocating shared service costs to the respective segments, which were previously recorded within corporate. This change allows investors to assess the fully loaded profitability of each segment. For comparability purposes, we have also restated the segment information for 2025. Additional details on these adjustments are provided in our Management’s Discussion and Analysis. Starting with liquor, net revenue in this segment continued to be impacted by demand softness and broader market decline. This resulted in a 6.1% decline in same-store sales, which was partially offset by new store openings, leading to a net 4.9% year-over-year decrease in revenue. The decline in gross profit, driven primarily by lower revenue, was partially offset by a 20-basis-point improvement in gross margin. To this last point, in addition to pricing and promotional optimization, we continue to improve our product mix by the penetration of private-label offerings at accretive margins. Operating income was negative in the quarter, largely due to seasonality, and modestly lower than the prior year, as SG&A efficiency improvements were more than offset by the gross profit decline and higher sales and marketing expenses. Cannabis retail was also impacted by market demand softness, although to a lesser extent than the other two commercial segments. A 2.5% decline in same-store sales was partially offset by new store openings and the integration of five Canna Cabana locations. Gross profit of $20.4 million increased by 3.7% year over year, supported by a 100-basis-point expansion in gross margin driven by pricing actions, improved promotional effectiveness, and favorable product mix management. This gross profit improvement did not translate into operating income growth despite additional SG&A cost efficiencies, due to the impact of approximately $1 million in unadjusted one-time charges incurred during the quarter. That said, the segment still delivered positive operating income of $1.1 million in the quarter. Cannabis operations experienced a large relative decline during the quarter. Net revenue of $29.4 million represented a 14% year-over-year decrease, driven primarily by destocking activity and temporary changes in the timing of business-to-business orders. These declines were partially offset by strong growth in international sales, which increased from $1.8 million in 2025 to $3.5 million in 2026. Gross profit was impacted by both lower revenue and a seven-percentage-point decline in gross margin. The margin compression was primarily driven by inventory adjustments and under-absorption resulting from lower production volumes. The decline in gross profit also weighed on operating income. Operating expenses were largely flat compared to the prior year, as SG&A efficiency improvements were more than offset by one-time unadjusted charges, including an incremental write-down related to the idle federal term facility. As a reminder, we apply a very stringent definition of adjustments, and only restructuring-related charges and impairments of intangible assets are adjusted. Over to you, Zachary, for additional comments related to our strategic priorities. Zachary George: Turning now to the progress we have made during the first quarter against our three strategic priorities—growth, profitability, and people—I would like to highlight a few key developments starting with growth. Our Jeter launch represents an important milestone with significant potential. Jeter is one of the leading branded cannabis platforms in the U.S., with strong consumer recognition and a proven track record in key medical and adult-use markets. By taking over the exclusive production and commercialization rights in Canada, we now control execution end to end, from manufacturing to distribution, which gives us the ability to fully align quality supply and brand strategy with our broader cannabis platform. In Canada, we are focused on building a measured and scalable rollout, leveraging Jeter's brand strengths while applying our operational capabilities and relationships with provincial boards. In the U.S., Jeter continues to perform as a strong brand in medical and regulated markets, and together, this creates a complementary cross-border brand platform that supports long-term growth while remaining focused on execution and profitability. We also continue to expand our retail footprint. As most markets have reached or are approaching saturation, our focus remains on quality rather than quantity. In this context, since December 31, we have expanded our cannabis retail network by six stores, including five Canna Cabana locations in Alberta and Saskatchewan. In Saskatchewan, we are also completing our investment to support a new Wine and Beyond liquor store, which is expected to open during the second quarter. We also continue to expand our international partnerships, generating $3.5 million in international sales during the first quarter, representing a 94% increase compared to the same period last year. Following the launch of our Rise Rewards loyalty program in cannabis during 2025, we expanded the program into our convenience liquor banners, Ace Liquor and Liquor Depot, during 2026, with the rollout to our Wine and Beyond locations scheduled for the second quarter of this year. Rise Rewards is our customer-led loyalty program that delivers greater value to everyday shoppers through savings, rewards, and personalized offers, strengthening engagement and long-term loyalty across our retail network. Turning to profitability, as previously mentioned, we were pleased with the continued year-over-year improvement in retail margins during the first quarter. A 20-basis-point expansion in liquor retail and a 100-basis-point expansion in cannabis retail translated into an average improvement of 50 basis points across our combined retail segments. As highlighted in my introduction, we have recently implemented several decisions under a profit enhancement initiative that are expected to boost profitability and improve commercial execution, generating more than $20 million in incremental operating income over the remainder of the year. While the majority of this improvement will come from efficiency gains, it also reflects pricing actions and commercial and mix management optimizations. During the first quarter, we continued to demonstrate our ability to improve efficiencies by delivering an additional $2 million in G&A savings, while our data-related revenue reached $4.2 million. Under our people strategic priority, we also continue to make meaningful progress, from the completion of our performance-to-pay cycle—where our competitive compensation philosophy aligns individual impact and contributions with merit and incentives—to the alignment of individual goals for 2026, as well as continued improvements in our recruiting processes and employee value proposition. This strategic priority remains critical and foundational for us. As part of our ongoing talent review process, we will be particularly focused over the coming months on strengthening our capabilities in support of our strategy, including the review and deployment of individual development plans for our team members. While market conditions remain challenging, I am grateful for and energized by the passion and resilience demonstrated across our organization, and I want to thank our teams for their continued commitment. We remain focused on growth and cash flow generation, and on delivering sustainable returns for shareholders, whom I would also like to thank once again for their continued trust and support. I will now turn the call back to the operator for the analyst Q&A session. Operator: Thank you. We will now open the call for questions. As a reminder, to ask a question, please press 11 on your telephone and wait for your name to be announced. To withdraw your question, please press 11 again. Our first question will come from Frederico Gomes with ATB Cormack Capital. Your line is open. Frederico Gomes: Thank you. Good morning. Thanks for taking my questions. This question is about capital allocation and how you are thinking about the U.S. following the rescheduling news. Does anything change here in terms of how you are looking at potential additional investments there, as well as new investments in the SunStream platform? Thank you. Zachary George: Frederico, good morning. The recent news over the last week is actually incredibly positive for our SunStream exposure. As you are aware, Parallel, for example, which is yet to complete its foreclosure process—we expect that to be done in a couple of months—is a predominantly medical portfolio. So, number one, it is very clear that from a tax perspective, as they seek DEA registration, they will no longer be liable for 280E-related taxes for the 2026 calendar year, which lifts a lot of uncertainty around margins and path to profitability in the future. So very, very positive. We are really focused on completing the foreclosure before we tackle significant additional investments. But that team is working hard on potential operational improvements, and also whether it is growing in the state of Florida or the emerging opportunity in the medical market in Texas, of which they are an original three-license holder. We are very excited about the future. I do not want to speculate too much in terms of uplisting opportunities, but we believe we are going to have strong clarity on that in the next several weeks. It is a top priority, as we have stated in prior calls for the last several years, but we want to make sure we have all the facts and can close these restructurings before we get too aggressive. Frederico Gomes: Perfect. Appreciate that. And then just to follow up on capital allocation, you are obviously being active in terms of your share repurchases. If you look at the valuation, it looks like over 50% of your market cap now is net cash. So how much more aggressive do you think you could be, or do you intend to be, if these valuation levels hold? Alberto Paredero-Quiros: Hi, Frederico. We will certainly continue operating with our share buyback program as long as the share prices are at this level. Obviously, we have our own internal models. We are looking at what we believe is the underlying value of our different businesses and segments, and we are convinced that right now our stock is trading below those values. As long as that is the case, we will continue being active. Zachary George: I would just add some color to that. The M&A market is heating up, and with this Schedule III announcement, there should be further momentum there. We are being approached on a near-daily basis on a number of transactions and financings that we are being invited to participate in. We are seeing interest both on the buy and the sell side in different asset classes that have been relatively quiet over the last four years. So there is a sense that animal spirits are emerging here. But it is clear to us that where equity is trading today is really not at a suitable valuation to be used as a currency in transactions. And so you will see us biased to retiring shares as a more accretive use of cash relative to larger-scale M&A based on where we are trading right now. Frederico Gomes: Perfect. Appreciate that. And a final question from me. On the operational side, it looks like your cannabis operations segment is the one that has been particularly underperforming in terms of operating income loss. I am curious if you could provide more color on why that is and whether you have identified exactly what could be improved to get that segment to operating income profit like the cannabis retail segment. Thank you. Alberto Paredero-Quiros: Yes, great question. And yes, it is fair to say that the cannabis operations segment, particularly in the first quarter, had relatively weak performance. There were multiple factors impacting it. Starting with net revenue, you saw a 14% decline. There is a combination of different things, but the main two drivers were a little bit of destocking in our retail channel for this segment—about 70% of the revenue in this segment is to the provincial boards, and that volume, not only in our own retail but also in third-party retail, saw slight reductions in inventory levels both at board levels as well as third-party retail during the first quarter. We also had headwinds in the contract channel, or what we call B2B. As you know, we are producers for some other LPs, where we leverage our capacity and our expertise in manufacturing to provide products to others. In that front specifically, we saw a relatively large reduction compared to last year. To give you an indication, last year in the first quarter we had $9 million of contract sales, and in the first quarter of this year it was half of that amount—$4.5 million lower. All of that is tied in. The timing of these contracts and the shipments are relatively volatile, and we saw a very weak first quarter. We have strong orders for the second quarter, so we are not concerned when it comes to the full year, but certainly, in the first quarter, that was a headwind. That pretty much explains the reduction in net revenue, because as we pointed out in the presentation, we saw growth in our own retail and we saw growth in international, so we continue to be encouraged by the potential of those two channels. When you look at gross margin, we did see a relatively large reduction from a pretty healthy gross margin last year of 26.8%. We went down to 19.7%. An element of that was under-absorption triggered by the lower volumes and the lower revenue. We also had some problems with the ramp-up of the manufacturing of Jeter. We are still learning about the product, and we had some inefficiencies in that front. We also had some one-time inventory adjustments that hit the quarter. The combination of all of those factors triggered the reduction. A lot of what we set with the profit enhancement plan that we are planning for the second half of the year is already, as of May, starting to deliver good results. Much of that is pointed specifically at this segment because we see a lot of opportunities in addressing some of the basic inefficiencies that we have. Finally, we had a few one-time items that were impacting the quarter in SG&A. They are north of $1.5 million. We do not adjust for those things. As you know, we have a policy that we do not like to adjust whatever we do not like seeing in our P&L—we face it as it is and keep on working on it. But specifically in the first quarter, we had this $1.5 million of one-times between terminations and impairments of fixed assets, creating a bit more of a headwind on the bottom line. Keep in mind as well that the $6.9 million negative operating income, or operating income loss, that we have in 2026 includes all of the allocations of shared services. You are probably used to seeing last year better profitability levels, but as we pointed out in the presentation, we have restated that, so right now each segment shows the fully loaded profitability profile. It is the same thing for the two other segments. There are still a lot of opportunities that we can materialize in the cannabis operations going forward. Zachary George: Thank you very much for that, Frederico. Operator: Thank you. The next question will come from Aaron Grey with AGP. Your line is open. Aaron Grey: Hi. Thank you for the questions here. Just with rescheduling that was announced for FDA-approved and state medical, can you speak to some of the potential impacts for SunStream that you alluded to? And more particularly, given there are certain assets that are exclusively medical markets—you talked about Florida and Texas specifically—is there a route where you could choose only to consolidate those and maintain the Nasdaq listing while leaving the other ones within that SunStream portfolio? I know you said you are still evaluating that, but would love to hear some additional color there. Operator: Thank you. Zachary George: The short answer is yes. There is nothing about the portfolio makeup in terms of the exposure that we carry as creditors through SunStream. You have, in the case of Parallel, a medical operator that is serving patients in the states of Massachusetts, Florida, and Texas. Florida is the vast majority of that business. In the case of Skymint, today that is a purely recreational business. We understand that Nasdaq and its counsel are being swarmed right now by a lot of different parties looking for clarity. A number of MSOs are making aggressive commentary about their timelines to uplist. We just want to make sure that we can confirm that process. But if that DEA registration creates permissibility in terms of uplisting, we will certainly have structural options that would let us retain our Nasdaq listing, which I think would minimize disruption as we continue to grow the business. Aaron Grey: Okay, great. That is helpful color. Second for me is on cannabis retail. You commented on some of the same-store sales softness that you are seeing there. Obviously, some of it is just the market maturing, but I am curious if you are also seeing anything in terms of increased competitive market dynamics. Do you feel confident in terms of getting same-store sales back to positive in terms of some of that broader second half improvement in sales that you alluded to? Zachary George: It is a great question, and there are multiple factors driving this result. One is maturity, as you pointed to. There still is very stiff competition amongst operators. When you look at our levels of profitability, even with this emerging flatness in terms of growth, we compare very nicely amongst the top three operators in Canada. I am personally very concerned. Since the start of the Iran war, you have seen gasoline and heating oil prices up 20% to 35% as these commodities face the Canadian consumer. I think discretionary spend has been challenged. We have talked about this concern in prior quarters, but what was already challenging became very acute early this year, with energy pricing escalating so dramatically. We are watching it really carefully. We have levers to pull. Our profit enhancement plan is targeting even further efficiencies and margin improvement. We are not standing still, and we do have a plan to improve performance, but there are certain elements of the macro environment that are going to continue to have an impact, and we are working to overcome those. Alberto Paredero-Quiros: Adding some more color, Aaron, if you look at the composition of our revenue, a little bit north of 85% of our sales in cannabis retail are in the Alberta and Ontario provinces. Both provinces are declining in revenue. As Zachary mentioned, that is driven by saturation in those markets and challenges consumers are facing. Specifically, Alberta represents close to 55% of our revenue. The market has been declining 3% in the first quarter, and Ontario has been declining close to 1% in that period. Obviously, we are facing the headwinds that our large markets are the ones that are declining, more mature, and saturated. We need to put it in context that last year, during the first half, we were seeing very high single-digit growth rates in these markets too. The focus from the market, and from us as well, has been different as of late. As you can see, we improved one full percentage point in gross margin. While operators have been doing that already for a few years, we are seeing a slight decline in sales, but we continue focusing on opening the right profitable doors and improving the margin profile. We anticipate that as we start lapping the softer revenue profile from 2025 in the second half of the year, we will see better performance. We will continue with our strategy, as said before, on improving efficiencies and margins, and opening new doors where it makes sense. Operator: I am showing no further questions in the queue at this time. I will turn the call back over to Zachary for closing remarks. Zachary George: Thank you, and thank you to all for joining us today. We look forward to updating you on our progress in the near future. Thank you. Operator: This concludes today's conference call. Thank you for participating, and you may now disconnect.
Operator: Good morning, and welcome to the American Assets Trust, Inc. First Quarter 2026 Earnings Call. All participants will be in a listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To withdraw your questions, please press star then 2. Please note this event is being recorded. I would now like to turn the call over to Meliana Leverton, Associate General Counsel of American Assets Trust, Inc. Please go ahead. Meliana Leverton: Thank you, and good morning. The statements made on this earnings call include forward-looking statements based on current expectations, which statements are subject to risks and uncertainties discussed in the company's filings with the SEC. You are cautioned not to place undue reliance on these forward-looking statements, as actual events could cause the company's results to differ materially from these forward-looking statements. Yesterday afternoon, American Assets Trust, Inc.’s earnings release and supplemental information were furnished to the SEC on Form 8-K. Both are now available on the Investors section of its website, americanassetstrust.com. It is now my pleasure to turn the call over to Adam Wyll, President and CEO of American Assets Trust, Inc. Adam Wyll: Good morning, everyone, and thank you for joining us today. At American Assets Trust, Inc., we continue to approach this market with the same mindset that has guided us across cycles: patient, disciplined, and with a long-term focus. That mindset, combined with the quality of our assets and our platform, guides how we allocate capital, manage risk, and run our business. We started 2026 in line with our expectations, generating $0.51 of FFO per diluted share and continuing to make progress against the priorities we laid out last quarter. Across the portfolio, we saw encouraging activity, most notably in office leasing, while our retail assets remained highly leased and consistent. Our multifamily teams operated well in a competitive supply environment, and Waikiki Beach Walk delivered steady results against a still mixed tourism backdrop. Before turning to the portfolio, I want to highlight a significant balance sheet accomplishment. On April 1, we successfully completed the recast and upsize of our unsecured credit facility. We increased our revolving line of credit from $400 million to $500 million and extended the maturity of the revolver and our $100 million term loan to April 1, 2030. Altogether, this facility provides us with $600 million of total unsecured borrowing capacity. This outcome reflects the quality of our portfolio, the strength of our banking relationships, and the confidence our lender group has in our credit. Importantly, it gives us enhanced financial flexibility and runway as we execute our leasing and operating objectives, now with no debt maturities until 2027. That added capacity is particularly valuable in the current market. While the macro backdrop remains uneven, our tenants are generally well capitalized, and the markets where we operate continue to benefit from diversified economies, strong demographics, and meaningful barriers to new supply. Those structural advantages matter, particularly during periods when the broader landscape is less predictable. One topic that has generated considerable discussion in our office segment is artificial intelligence. AI is driving investment, business formation, and growth across technology, infrastructure, and innovation-oriented companies, along with the professional and advisory ecosystem that supports them. While its impact on office demand will vary by industry, we believe the net effect in our markets has been constructive. At the same time, the bar for office space keeps rising. When companies make office commitments today, they are focused on location, amenities, flexibility, ownership quality, and the ability to attract talent—attributes that define our coastal office portfolio. On our own platform, we are investing in technology to improve how we operate, from work order management and preventative maintenance analytics to tenant communication tools, while also building the data foundation for future AI capabilities. We are early in this effort, but we believe they can become a differentiator as we improve the tenant experience and our operating margins. In office, the momentum we flagged last quarter carried forward. Demand concentrates at the top of the market and in well-located, well-amenitized buildings with strong ownership. That is where we compete. Our office portfolio ended the quarter 84.5% leased, and our same-store office portfolio ended the quarter 86% leased. Same-store office cash NOI came in essentially flat year-over-year, modestly ahead of our internal expectations, reflecting the known move-outs we previously discussed. During the quarter, we executed approximately 237,000 square feet of office leases, with comparable cash leasing spreads of 4.8% and straight-line leasing spreads of 10.6%, which are now separately disclosed in our supplemental. Meanwhile, of our 14 non-comparable leases in Q1, 12 were new tenants, nine of which were in our spec suite program, underscoring the role that program is playing in converting demand into executed leases. We entered the second quarter on solid footing, including approximately 144,000 square feet of previously signed leases not yet commenced, another 122,000 square feet in lease documentation, and a proposal pipeline of over 200,000 square feet. At La Jolla Commons Tower 3, the building is currently 49% leased, with proposals out on another 30% of the building. The UTC submarket has limited large block availabilities outside of Tower 3, and with no meaningful new supply on the horizon, we believe we are in a strong position to capture large tenant requirements in the submarket, including several active requirements we are tracking today. At 1 Beach Street, the building is currently 36% leased. While one larger opportunity we referenced last quarter did not move forward, our leasing focus has shifted toward building a broader pipeline of smaller and mid-sized tenants. We already have permits in hand and work underway to advance our spec suite build-out, positioning us to capture tenants seeking high-quality, move-in ready space. Prospect activity has improved, and the execution across the portfolio has been strong. We remain confident that the trajectory of our office portfolio, including our progress towards stabilizing Tower 3 and 1 Beach, will translate into increased cash flow as these leases convert to revenue. Last quarter, we mentioned our goal of ending the year between 85%–90% leased across our office portfolio. Since then, we learned that Genentech at Lloyd District, approximately 67,000 square feet, reversed course on a short-term renewal and will be vacating in Q4. The space itself is turnkey and modern, and we believe it will show well in the market. However, the vacancy was not in our assumptions last quarter, and as a result, we are now targeting the lower end of that range. We have some work to do, but reaching that level would still represent a meaningful step forward. Retail remains a source of consistent, reliable performance. Our retail portfolio ended the quarter 98% leased, and we executed approximately 39,000 square feet of leasing during the period, with average base rents reaching a new portfolio record of $30 per square foot. Same-store cash NOI was modestly below the prior-year period, primarily due to the temporary impact of vacancies from two former Party City spaces and a former Discount Tire space. The Discount Tire space and one of the two Party City spaces are already re-leased, with cash rents expected to commence later this year. Tenant health across the retail portfolio is strong. Leasing demand is solid, and our centers benefit from affluent, supply-constrained trade areas with limited new competition. Less than 3% of our retail square footage expires this year, and we are actively engaged on upcoming rollover. While we are closely monitoring the consumer in an uncertain economic climate, we believe the demographics surrounding our retail assets support a resilient spending base and a steady cash flow profile. In multifamily, same-store cash NOI increased 3% year-over-year, a solid result given the competitive supply landscape in San Diego and Portland. Excluding the RV park, our multifamily portfolio ended the quarter 96% leased. In San Diego, our apartment communities ended the quarter 98% leased, and excluding our newest acquisition, Genesee Park, net effective rents in San Diego were up just over 1% compared to the prior-year period. In Portland, Hassalo on Eighth ended the quarter at 93% leased, up an additional 4% from a year ago. Net effective rents were essentially flat, which we view as a reasonable outcome in the current Portland market. The recovery remains gradual, and our focus right now is on protecting occupancy while positioning for better growth as supply moderates. As we have noted, 2026 is more of a stabilization year for multifamily than a recovery year. We are focused on optimizing pricing, maintaining occupancy, and tightly managing controllable expenses. At Waikiki Beach Walk, our retail component continued to perform well year-over-year, partially offsetting softness on the hotel side, with overall mixed-use cash NOI down modestly versus the prior-year period. We believe in the long-term value of this irreplaceable fee simple asset and are focused on driving performance across both the hotel and retail components. Finally, I am pleased to share that our Board has approved a quarterly dividend of $0.34 per share, payable on June 18 to shareholders of record as of June 4. While our payout ratio remained elevated in the quarter, much of that reflects leasing-related capital tied to signed leases and our spec suite program, both of which are intended to drive occupancy and future NOI growth. We continue to have conviction in the long-term cash flow profile of the portfolio and are comfortable maintaining the current dividend at this point in time. Robert F. Barton will provide more detail on the payout ratio and its expected moderation in just a moment. In closing, we are pleased with how we have begun 2026. We are converting leasing activity into future revenue, strengthening our balance sheet, and executing against the plan we laid out entering 2026. Our priorities for the year are unchanged: advance office leasing, protect the steady cash flow from our retail and multifamily platforms, and remain disciplined in how we allocate capital. At our core, we own irreplaceable coastal real estate, we operate through a vertically integrated platform, and we manage this business with a long-term perspective. We are in a good position, and our focus is on converting that position into earnings growth. With that, I will turn the call over to Robert F. Barton, who will walk through the financials in more detail. Robert F. Barton: Thanks, Adam, and good morning, everyone. Last night, we reported first quarter 2026 FFO per share of $0.51 and net income attributable to common stockholders of $0.08 per share. FFO increased $0.04 per share compared to 2025, driven primarily by lower G&A expense, incremental rental at Plymouth, Pacific Ridge Apartments, and 14 Acres, as well as lower operating expenses at La Jolla Commons. As we expected, same-store cash NOI across all sectors was flat year-over-year in Q1. Breaking that down by segment as compared to Q1 2025, office same-store NOI was essentially flat, primarily due to the expiration of CLEAResult at First & Main in April 2025. The space has been partially backfilled. Retail NOI declined 0.7%, driven by the known vacancies Adam mentioned at Gateway Marketplace and Solana Beach Town Center, both of which have now been addressed through executed leasing. Multifamily NOI increased 3%, driven by higher rental income and improved occupancy, particularly at Pacific Ridge and Hassalo on Eighth. Mixed-use NOI declined 2.7%, as a year-over-year increase of 2% in the retail component was offset by lower ADR and higher operating expenses at Embassy Suites Waikiki, where in Q1 occupancy improved to 92% from 85%. RevPAR increased 2% to $305, ADR softened by 6% to $332, and NOI was approximately $2.4 million versus $2.6 million last year. Turning to liquidity and leverage. We ended the quarter with approximately $518 million of liquidity, including $118 million of cash and $400 million available on our revolving credit facility. As Adam mentioned, we closed the recast and upsized the credit facility on April 1, extending both the $500 million revolver and $100 million term loan to April 2030. Net debt to EBITDA was 6.9x on a trailing twelve-month basis. Our long-term target remains 5.5x or below. Interest and fixed charge coverage were both 3.0x. Turning to the dividend. Our first quarter dividend payout ratio was approximately 111%, driven primarily by the timing of leasing-related capital expenditures including tenant improvements, leasing commissions, and our spec suite program along with normal recurring capital needs. Importantly, a meaningful portion of this capital is tied to leases that have already been signed or spaces that we are proactively preparing to meet current tenant demand. As those leases commence and convert to cash rent, we expect the payout ratio to moderate. For the remaining three quarters of the year, we currently expect the payout ratio to trend in the low to mid-90% range, with the full-year payout ratio likely landing in the upper-90% range. Since our IPO in 2011, our payout ratio has generally been approximately 65% to 85%. We continue to view that as an appropriate long-term range for the business. In the interim, given our liquidity position, our visibility into signed lease commencements, and our confidence in the long-term cash flow profile of the portfolio, management and the Board are comfortable maintaining the current dividend. As always, we will continue to evaluate the dividend each quarter in the context of operating performance, leasing progress, capital requirements, and broader market conditions. Turning to 2026 guidance. We are reaffirming our full-year FFO guidance range of $1.96 to $2.10 per share with a midpoint of $2.03. This reflects continued stability across our diversified portfolio, supported by leasing activity, contractual rent growth, and disciplined cost management. Based on our current outlook, we believe we are well positioned to achieve our full-year objectives, with potential to trend toward the upper end of the range if several factors align: number one, retail tenants currently reserved for bad debt continue to pay their rent; number two, office lease commencements occur ahead of expectations; number three, multifamily outperforms expectations on occupancy and/or rent growth; and number four, tourism demand improves, supporting performance at Embassy Suites Waikiki. As a reminder, our guidance excludes the impact of future acquisitions, dispositions, capital markets activity, or debt refinancings not yet announced. We remain committed to transparency and will continue to provide clear insight into both the results and assumptions. Additionally, all non-GAAP metrics discussed today are reconciled in our earnings materials. I will now turn the call back over to the operator for Q&A. Operator: Thank you. We will now open the call for questions. To ask a question, you may press star then 1 on your touch-tone phone. If you are using a speakerphone, please pick up your handset before pressing the keys. If at any time a question has been addressed and you would like to withdraw your question, please press star then 2. The first question comes from Todd Thomas from KeyBanc. Please go ahead. Analyst: Hi, good morning. This is Sean Glass on for Todd. You previously discussed some known move-outs in the office portfolio. I think there was an expectation that there could be 300 to 400 basis points of occupancy from expected vacates. Have any tenant decisions shifted or changed since year-end, and can you remind us what is embedded in guidance for the office portfolio’s year-end lease rate? Robert F. Barton: Well, as Adam said, the one new one is Genentech, which will occur in Q4 of this year. On the positive side, we have three known move-outs that are in lease documentation at City Center Bellevue specifically. So that is 28,000 feet of move-outs that are already in lease documentation. So that is the latest. Analyst: And one thing of note that I am tracking is 173,000 feet right now. Adam Wyll: Seventeen deals. Eight of those, or about 60,000 feet, are relocations due to expansion. So we are expanding tenants, they are giving space back. Those are good-news givebacks of tenants that have already expanded. Once the TIs are done, we are getting their spaces back. So it is not all bad news. And, Sean, we mentioned in the script that we are targeting mid-80% full portfolio occupancy or lease percentage by the end of the year, which is achievable if momentum continues as it is right now. But we are going to give you a range—we have a little bit of flexibility to figure out how it shakes out. Analyst: Thank you. That is great color. Wanted to ask about La Jolla specifically. Some very good traction there on leasing. Can you talk about the pipeline a little? Were there any additional leases around for signature or anything in documentation? Maybe some color on where you might expect La Jolla to be at year-end? Thank you. Adam Wyll: So it is the premier offering in not only UTC, but Del Mar as well in terms of available spaces, and I am speaking of Tower 3 specifically. We are in proposals with two full-floor users and two multi-floor users, and we do not have that many floors to lease, so it is a good situation. We are in space planning with every one of them. The competition is very narrow, so we expect to make one or more of those, and that would account for the remainder of the full floors. On the spec suite program, we only have one suite left on the 4th floor. We have already pre-leased a 5th floor spec suite, and those are not going to be completed until September. So the traction is good. And the traction is with well-capitalized professional service firms—tenants that you want in this sort of building. So we are pleased with that. Analyst: If I could slip one more in. On 1 Beach, there is some good traction there too. Could you talk a little about the AI demand or otherwise, and where you think that might be at year-end? And maybe you could touch on the one large opportunity I had in pencil, if that changes the equation at all. Adam Wyll: For that large deal, we gave ourselves a 30-day window in which to vet it. There were some complexities to it due to the use, dealing with exiting, dealing with the traffic and such, and it ended up not panning out. We spent 45 days on it. But we pivoted very quickly back to the spec suite program, which is underway, and Jerry and his team will complete that construction around September. We pre-leased that 3rd floor before we had started construction on that floor, so we expect to have similar results. I cannot give you the exact timing, but we are optimistic. Analyst: Thank you. Operator: The next question comes from Haendel St. Juste from Mizuho. Please go ahead. Ravi Vijay Vaidya: Good morning, guys. This is Ravi Vaidya on the line for Haendel. Hope you all are doing well. I wanted to ask a bit about the signed and not occupied pipeline in both office and retail. Can you give some numbers as to how and when you think leases will begin cash flowing for those two verticals, and maybe some detail about the timing over the next couple of years for both office and retail? Thank you. Adam Wyll: Hey, Ravi. It is Adam. As I mentioned in my script, we have about a quarter million square feet on the office portfolio signed, not commenced, and I think about $0.07 is reflected in 2026 guidance. But about 100,000 square feet in that signed-but-not-commenced bucket will not hit meaningfully until next year. So looking at about $0.07 per share or so—call it $5-plus million—that will hit this year. I do not have the retail numbers in front of me. Robert F. Barton: I do not think there is much on that front, though. Ravi Vijay Vaidya: Got it. That is super helpful. I wanted to ask about the hotel in Hawaii. I noticed the occupancy came up quite a bit as you discussed in your script, but mostly offset by rate. What can we see regarding demand for tourism, foot traffic, and how that asset is positioned from both seeing demand from Japanese and American tourists right now? Robert F. Barton: Yeah, Ravi, this is Bob here. It is still slow right now, but what is interesting in terms of the rates—we still outperform our competitive set, which consists of just under 10 hotels, including beachfront properties. For example, our occupancy was 91%, but our comp set was 79%. Our ADR was $300-plus, and theirs was under $300. RevPAR—we are $300-plus, and our comp set is significantly under $300. So everybody is feeling the impact, though from the statistics that I am seeing, we are the number one hotel in Waikiki. Two things happened during March. One is that there were two huge Kona rainstorms, one on March 10 and another on March 24—significant flooding, dumping over [inaudible] gallons of rain—overall, so everybody in town felt that impact. Secondly, the Japanese yen—while the more wealthy clientele from Japan continue to come—has weakened; they have to work through that issue. So there are a lot of little things that are impacting that. Also, you have operating expenses going up. But all in all, it is the number one performing Embassy Suites in the world. It continues to be. Adam Wyll: Hey, Ravi, just to layer on that. As you know, Waikiki is very sensitive to tourism, especially international demand, and as Robert F. Barton was mentioning, the Japanese are not there as much as they used to be. It used to be closer to 40% of tourism in Waikiki; now it is about 20%. So it is slow incremental progress. Recovery has been slower than anticipated, and affordability pressures are really weighing on the results. Still, it remains a high-barrier-to-entry, globally relevant market, and we view the asset as well positioned for the long term. Ravi Vijay Vaidya: Thank you. Appreciate the color, guys. Operator: This concludes our question and answer session. I would like to turn the conference back over to Adam Wyll for closing remarks. Adam Wyll: Yes. Thanks, everybody, for calling and joining us today or listening on recording later. We appreciate your interest, and we will be as transparent as possible going forward. Take care. Operator: The conference has now concluded. Thank you for attending today’s presentation. You may now disconnect.
Operator: Greetings, and welcome to the Federal Signal Corporation First Quarter Earnings Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. If anyone requires operator assistance, please press 0 on your telephone keypad. It is now my pleasure to introduce your host, Felix M. Boeschen, Vice President of Corporate Strategy and Investor Relations. Thank you. You may begin. Felix M. Boeschen: Good morning, and welcome to Federal Signal Corporation's first quarter 2026 conference call. I am Felix M. Boeschen, the company's Vice President of Corporate Strategy and Investor Relations. Also with me on the call today are Jennifer L. Sherman, our President and Chief Executive Officer, and Ian A. Hudson, our Chief Financial Officer. We will refer to some presentation slides today as well as to the earnings release which we issued this morning. The slides can be followed online by going to our website, federalsignal.com, clicking on the investor call icon, and signing into the webcast. We have also posted the slide presentation and the earnings release under the Investor tab on our website. Before I turn the call over to Ian, I would like to remind you that some of our comments made today may contain forward-looking statements that are subject to the safe harbor language found in today's news release and in Federal Signal Corporation's filings with the Securities and Exchange Commission. These documents are available on our website. Our presentation also contains some measures that are not in accordance with U.S. Generally Accepted Accounting Principles. In our earnings release and filings, we reconcile these non-GAAP measures to GAAP measures. In addition, we will file our Form 10-Q later today. Ian will start today with more detail on our first quarter financial results. Jennifer will then provide her perspective on our performance, current market conditions, our multiyear growth initiatives, and go over our revised outlook for 2026 before we open the line for any questions. With that, I would now like to turn the call over to Ian. Ian A. Hudson: Thank you, Felix. Our consolidated first quarter financial results are provided in today's earnings release. In summary, we delivered strong financial results for the quarter with 35% year-over-year net sales growth, 52% operating income improvement, gross margin expansion, a 190 basis point improvement in adjusted EBITDA margin, robust cash generation, and strong order intake. Consolidated net sales for the quarter were $626 million, up $162 million, or 35%, compared to last year. Organic sales growth for the quarter was $70 million, or 15%. Consolidated operating income for the quarter was $99.7 million, up $34 million, or 52%, compared to last year. Consolidated adjusted EBITDA for the quarter was $126.3 million, up $41.2 million, or 48%, compared to last year. That translates to a margin of 20.2% in Q1 this year, up 190 basis points compared to last year. GAAP diluted EPS for the quarter was $1.14 per share, up $0.39 per share, or 52%, compared to last year. On an adjusted basis, EPS for the quarter were $1.18 per share, an increase of $0.42 per share, or 55%, from last year. Orders for the quarter were $623 million, up $55 million, or 10%, from last year, contributing to a backlog at the end of the quarter of $1.04 billion. In terms of our group results, ESG's net sales for the quarter were $533 million, up $145 million, or 38%, compared to last year. ESG's operating income for the quarter was $89.1 million, up $29.4 million, or 49%, compared to last year. ESG's adjusted EBITDA for the quarter was $113.3 million, up $35.8 million, or 46%. That translates to an adjusted EBITDA margin for the quarter of 21.3%, an improvement of 130 basis points compared to last year. ESG reported total orders of $534 million in Q1 this year, an increase of $54 million, or 11%, compared to last year. SSG's net sales for the quarter were $93 million, up $17 million, or 22%. SSG's operating income for the quarter was $23.6 million, up $7.8 million, or 49%, compared to last year. SSG's adjusted EBITDA for the quarter was $24.7 million, up $7.9 million, or 47%. That translates to an adjusted EBITDA margin for the quarter of 26.6%, up 460 basis points compared to last year. SSG's orders for the quarter were $89 million, up $1 million, or 1%, from last year. Corporate operating expenses for the quarter were $13 million, compared to $9.8 million last year, with the increase primarily due to higher acquisition and integration-related expenses and increased legal, stock compensation, and incentive-based compensation costs. Turning now to the consolidated income statement, the increase in net sales contributed to a $48.6 million improvement in gross profit. Consolidated gross margin for the quarter was 28.7%, a 50 basis point increase over last year. As a percentage of net sales, our selling, engineering, general, and administrative expenses for the quarter were down 150 basis points from Q1 last year. Other items affecting the quarterly results include a $2.2 million increase in amortization expense, a $600,000 increase in acquisition-related expenses, and a $3.9 million increase in interest expense associated with higher average debt levels. Tax expense for the quarter was $21.8 million, an increase of $6.1 million compared to Q1 last year, with the increase primarily due to the effects of higher pretax income levels, partially offset by the recognition of approximately $1 million of excess tax benefits from stock compensation activity. Our effective tax rate for Q1 this year was 23.6%. At this time, we continue to expect that our full-year effective tax rate will be approximately 25%, excluding additional discrete tax benefits. On an overall GAAP basis, we therefore earned $1.14 per share in Q1 this year compared with $0.75 per share in Q1 last year. To facilitate earnings comparisons, we typically adjust our GAAP earnings per share for unusual items recorded in the current or prior quarters. In the current year quarter, we made adjustments to GAAP earnings per share to exclude acquisition-related expenses and purchase accounting expense effects. On this basis, our adjusted earnings for the quarter were $1.18 per share compared with $0.76 per share last year. Looking now at cash flow, we generated $101 million of cash from operations during the quarter, an increase of $65 million, or 176%, from Q1 last year. We ended the quarter with $480 million of net debt and availability under our credit facility of $939 million. Our current net debt leverage ratio remains low, even after paying the full $15 million earnout associated with the HOG acquisition and funding the MEGA Equipment acquisition during the quarter. With our financial position remaining strong, we have significant flexibility to invest in organic growth initiatives, pursue strategic acquisitions, pay down debt, and return cash to stockholders through dividends and opportunistic share repurchases. On that note, we paid dividends of $9.2 million during the quarter, reflecting an increased dividend of $0.15 per share, and we recently announced a similar $0.15 per share dividend for the second quarter. That concludes my comments, and I would now like to turn the call over to Jennifer. Jennifer L. Sherman: Thank you, Ian. We are proud of our record-setting first quarter performance, which included new quarterly records across net sales, adjusted EPS, and adjusted EBITDA, thanks to outstanding results from both of our groups. As I reflect on our start to 2026, I was particularly pleased with several items in the quarter that drove better-than-expected results versus our expectations. First, there was broad-based strength across several product verticals within each of our groups. Second, the early progress our teams made integrating HOG, New Way, and MEGA into the Federal Signal Corporation family. And third, the strong margin performance in the quarter, with adjusted EBITDA margins expanding 190 basis points year over year. Within our Environmental Solutions Group, we delivered 38% year-over-year net sales growth, a 46% increase in adjusted EBITDA, and a 130 basis point improvement in adjusted EBITDA margin. Higher production levels, leveraging the power of our platform to drive internal margin initiatives, and proactive price/cost management were all meaningful organic contributors. Acquisitions also contributed $92 million of net sales during the quarter, with the New Way, HOG, and MEGA transactions driving notable increases in sales of refuse trucks, road marking and line removal equipment, and mineral extraction support equipment. We remain focused on building more trucks across our family of specialty vehicle businesses in line with demand levels. These efforts to increase throughput across our manufacturing sites contributed to strong net sales across several ESG product verticals, including vacuum trucks, dump truck bodies and trailers, and other specialty equipment including street sweepers, road marking and line removal trucks, and water blasting equipment. From a capacity perspective, the combination of large-scale capacity expansions that we completed between 2020 and 2022, good access to labor, and continued investments in several productivity-enhancing projects position us well to properly absorb more volume into our existing footprint. In 2026, we expect approximately half our annual capital expenditures to be focused on various growth initiatives, with the other half focused on maintenance investments. Shifting to aftermarkets, demand remains strong, aided by contributions from recent acquisitions. For the quarter, aftermarket revenue increased 18% year over year, primarily driven by higher demand for aftermarket parts, increased service activity, and rental income growth. As we continue to monitor this dynamic geopolitical and tariff environment alongside our dealer partners, customers, and suppliers, we see our aftermarket operations as a critical competitive advantage for our customers. With a dedicated local service footprint across both Canada and the United States, including rental assets, we believe we are well positioned to continue to serve the local markets in which we operate. Moreover, our unique aftermarket ecosystem spanning parts, service, rental, and used equipment offerings allows customers to access equipment in a capital-efficient manner of their choice, providing flexibility throughout various economic cycles. We also continue to execute on early opportunities within our Build More Parts, or BMP, initiative, whereby we are vertically integrating certain parts production. Over a multiyear timeframe, this initiative allows our teams to drive increased recurring parts revenue streams while expanding margins. Our acquisition of New Way provides additional opportunity for future BMP growth. Shifting to our Safety and Security Systems Group, the team delivered another excellent quarter with 22% top-line growth, a 47% increase in adjusted EBITDA, and a 460 basis point improvement in adjusted EBITDA margin. This improvement was primarily driven by a combination of volume increases across our public safety and industrial signaling product verticals, proactive price/cost management, and realization of certain cost savings. Our SSG teams continue to drive efficiency gains across our University Park facility, partially fueled by the successful addition of a fourth printed circuit board line in the fourth quarter of last year. We are also energized by several market share initiatives aimed at penetrating historically underserved customer segments, such as certain law enforcement customers and environmental disaster warning applications. Lastly, we had an outstanding quarter of cash generation, with $101 million of operating cash flow representing cash conversion of 144% of net income. On an annual basis, we continue to target 100% cash conversion. Shifting to current market conditions, on an underlying basis, excluding the impact of acquired backlog and third-party LaBrie refuse orders received in Q1 last year, our orders this quarter increased by $70 million, or 13% year over year, with healthy demand across both our Environmental Solutions and Safety and Security Systems groups. Within product lines, we experienced strength in demand for other specialty equipment, including refuse trucks and mineral extraction support equipment, as well as in aftermarket parts and service and warning systems. Somewhat offsetting this strength was an approximate $20 million year-over-year reduction in international export orders spanning product lines across both groups. While they represent a small portion of our overall net sales, we are closely monitoring any political impacts on international demand stemming from current geopolitical conflicts. Looking ahead, we are energized by the pipeline of strategic market share initiatives across the enterprise that aim to further strengthen our value proposition in the marketplace for years to come. Lastly, our backlog stood at $1.04 billion at the end of the quarter, essentially unchanged from the end of last year, and down approximately 6% year over year. This decrease is principally driven by our successful execution, decreasing lead times across vacuum trucks and street sweepers, and the planned decline in the third-party LaBrie refuse backlog, which was discontinued in 2025. At the end of the quarter, our third-party LaBrie refuse truck backlog stood at approximately $55 million. As a reminder, net sales of our backlog-intensive products represented approximately 45% of net sales last year. As such, given the size of our backlog, we continue to enjoy strong forward visibility in our backlog-driven product lines. Shifting now to an update on our multiyear growth strategy, through cycles we target low double-digit top-line growth, split roughly evenly between inorganic and organic growth. At the same time, we are committed to growing profitably and have implemented associated EBITDA margin targets for our groups that we have increased several times over the past years. While we are proud of our historical track record, we are not done here. As I sit here today, I feel as energized as I have ever been as I look across our set of strategic initiatives. A couple of highlights. Starting with SSG, we are formally raising our EBITDA margin targets today for our Safety and Security Systems Group to a new range of 22% to 28% from the previous range of 18% to 24%. As a reminder, these margin targets represent through-cycle margin targets and do not present any sort of long-term ceiling. Within SSG, we continue to see a multitude of organic market share opportunities spanning penetration of underserved customer segments within our domestic public safety and warning system businesses, an active new product development pipeline, including several recent launches, and certain geographic expansion opportunities. These growth opportunities, coupled with our ongoing productivity investments, including capacity optimization and automation within our factories, all underpin our confidence in these new margin targets. In fact, our consistent margin improvement journey throughout the last quarters has solidified two important strategic pillars for us, which we are further accelerating throughout 2026. The first is the identification of incremental margin opportunities across the enterprise that we believe we can realize in 2027 and beyond spanning several work streams. At the same time, we are also scaling several enterprise-wide investments starting in 2026 aimed at fortifying Federal Signal Corporation's competitive position to achieve continued multiyear growth. These include investments in our internal centers of excellence, with a focus on new product development, dealer development, data analytics, and operations. We are also piloting two capacity optimization initiatives across our plants, whereby we are constructing additional warehousing space, allowing for conversion of prior storage space to available manufacturing capacity to support future growth initiatives. While a small financial investment at less than $5 million, our teams will be well positioned to capitalize on our growing Power the Platform benefits that we have identified. As an example, we are in the early stages of utilizing our dealer development processes within our refuse collection and multipurpose maintenance product verticals. Our dealer development team, in conjunction with our data analytics team, helps our direct sales and dealer development teams identify untapped growth opportunities across new, used, and aftermarket services on a localized basis. An institutionalized function within our vacuum truck and street sweeper product verticals, we are in the early innings across other vehicle categories. Within sales channel optimization, we are in early phases of leveraging and scaling HOG's existing airport sales channel to capitalize on opportunities across other specialty vehicle verticals. We have also identified aftermarket growth opportunities in several historically underserved states. On the operational side, we are working on several production simplification projects across our vacuum truck, road marking, and water blasting verticals. Our procurement and aftermarket teams are working diligently on leveraging the recently acquired businesses which have provided multiple new parts optimization opportunities spanning several existing specialty vehicle verticals. As we have added more product verticals, the possibility for further collaboration and productivity gains continues to increase. I go through this illustrative list of initiatives to highlight the breadth of our strategic growth projects as we continue to intensely focus on solving our customers' problems. As we scale our internal Power of the Platform infrastructure, we believe these benefits will be split roughly evenly between revenue and cost while supporting our M&A integration efforts. Lastly, we have been pleased with the early integration progress our teams are making at New Way and MEGA. We are in the early stages of reaping benefits by merging the MEGA and Ground Force sales channels, which we ultimately believe will drive cross-selling opportunities in historically underserved markets for our mineral extraction support equipment. We are also pleased with the early performance of New Way, including execution on our cost initiatives, and reaffirm our targets of delivering the outlined $15 million to $20 million of annual synergies by 2028. Turning now to our outlook for the remainder of 2026. With our first quarter performance, our current backlog, and continued execution against our strategic growth and productivity initiatives, we are raising our full-year adjusted EPS outlook to a new range of $4.80 to $5.50 from the prior range of $4.50 to $4.80. We are also increasing our full-year net sales outlook to a new range of between $2.57 billion and $2.66 billion from the prior range of between $2.55 billion and $2.65 billion. We are maintaining our CapEx outlook of between $45 million and $55 million for the year. We also remain active in the M&A markets across both of our operating groups. We will now open the call for questions. Operator: Thank you. We will now be conducting a question-and-answer session. If you would like to ask a question, please press 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press 2 to remove yourself from the queue. Participants using speaker equipment, it may be necessary to pick up the handset before pressing the star keys. One moment, please, while we poll for questions. Our first question comes from the line of Timothy W. Thein with Raymond James. Please proceed with your question. Jennifer L. Sherman: Good morning, Tim. Timothy W. Thein: Good morning. Jennifer, I was surprised you did not weave in some Michigan basketball reference into your Go Blue. On how the first quarter played out and how that plays into the balance of the year, from a seasonal perspective, the first quarter did not play out as the first quarter normally does. I am curious if there is anything that went for you more than you thought and maybe that pulled ahead earnings. How should we read the first quarter in the context of the full year? Jennifer L. Sherman: I will start with a couple of comments. Our teams did an outstanding job, and what always gives me encouragement is that it is not any one business. There was really strength across the board, and I want to do a shout-out to our teams because we are continuing to execute on the programs we put in place. Our acquisitions did better than expected and got off to a strong start this quarter, particularly New Way, and we saw strong performance in early days from our MEGA/Ground Force teams. SSG had a better quarter than expected. So, strong performance across the board with a very encouraging start with respect to the acquisitions and SSG. With respect to the cadence of the seasonality of EPS, the seasonality of our earnings is not as pronounced this year, largely due to some of the seasonality of the recently acquired businesses that are different than our legacy businesses. For the remainder of the year, we are expecting our EPS contribution to be roughly evenly split by quarter. Timothy W. Thein: Got it. Thank you. On the management of price/cost as a benefit in the first quarter, we may see more inflationary dynamics coming. Can you remind us how you expect that to play out, including contractual agreements and the like, and what could be coming in terms of raw material and other cost inflation? Ian A. Hudson: The major raw material we have is primarily steel. As we typically do, for the majority of our product lines, pricing is locked in through the rest of the year. With that said, we will experience some inflation on that line item in the second half of the year even though we are locked. That is considered in the guidance we gave today. As it relates to other cost increases, everyone is monitoring the freight market. That is a relatively low percentage of our overall costs and sometimes a pass-through for us. We are monitoring it, and as we have demonstrated in the past, if we need to, we have the ability to reset pricing on new quotes for the second half of the year. Timothy W. Thein: Very good. Thank you. Jennifer L. Sherman: Thank you, Tim. Operator: Thank you. Our next question comes from the line of Ross Sparenblek with William Blair. Please proceed with your question. Jennifer L. Sherman: Good morning, Ross. Ross Sparenblek: To start off on free cash flow, it was a record quarter. It looks like there is an unusual benefit from inventory. Is this related more to new acquisitions and pruning what you acquired, or more progress on bringing down lead times? Ian A. Hudson: There is definitely some of that with the recent acquisitions. We ended the year probably at a higher level of working capital than necessary, so there was an effort to work down some of that. You see that in the cash generation during the quarter. Contribution from those acquisitions was pretty good during Q1. There is also some benefit from reduced lead times, and overall, really strong management of working capital by the businesses, along with the increase in earnings. Those are the main factors. Ross Sparenblek: As a follow-up, going forward in the second and third quarters, should we expect more of an inventory benefit as well, or was this a onetime thing to start the year? Ian A. Hudson: Maybe so, but we are not expecting it to be as dramatic as what we saw in Q1. We are still expecting strong cash generation for the balance of the year. What we have seen in April is consistent with this as well. We aim for cash conversion of 100% on an annual basis. We were ahead of that for Q1, but that remains the long-term goal. Jennifer L. Sherman: I will add that the New Way team did an excellent job of implementing Federal Signal Corporation’s approach, and we saw benefits from that in Q1. Ross Sparenblek: That is very helpful. One more on New Way. A robust quarter, much higher than we were expecting on top-line contribution. Any seasonal factors to be aware of, or is this penetration in Canada, parts sales synergies? How should we think about the strength in the first quarter? Jennifer L. Sherman: We are very focused on executing on synergies. The revenue synergies typically take longer. On the cost side, we exceeded our internal expectations in terms of realization of some of those cost synergies. The teams were extremely disciplined with respect to implementing the power of our platform, and we are very pleased with the progress in Q1. Ross Sparenblek: That is very helpful. Great quarter. I will pass it along. Jennifer L. Sherman: Thank you. Operator: Thank you. Our next question comes from the line of Walter Scott Liptak with Seaport Global Securities. Please proceed with your question. Walter Scott Liptak: Great quarter. On the order growth, in the prepared remarks you talked about a 13% order growth rate. Can you go through in a little more detail where you are seeing that order growth and what kinds of products are getting the orders? Jennifer L. Sherman: A couple of comments about the orders this quarter that are important to understand. We have a few moving pieces, given the discontinuation of the third-party LaBrie refuse trucks and the impact of the acquired backlog. As I stated in my prepared remarks, looking forward we have about $55 million of these third-party refuse trucks in our backlog. As we strip out these nonrecurring items and give you the cleanest view on net sales and orders for what we view as continuing operations into 2027 and beyond, we provided a walk on page 9 of the earnings presentation. When you look at that, orders are up 13%, and that includes the impact of New Way and some of the other acquisitions. One challenge is there can be noise in organic growth numbers because we have effectively merged the sales and production functions across MEGA/Ground Force and our road marking businesses—MRL, HOG, and Blasters—as a function of our 80/20 and integration growth strategies. If you think about the underlying core organic orders, without the impact of LaBrie or any of the acquisitions, that number was down about $20 million due to a reduction in international export orders as described in the prepared remarks. Excluding that, organic orders were flat. Walter Scott Liptak: Thank you. On the backlog, understanding you did a great job with production this quarter, have we seen the peak for backlog and now see more stability, or does backlog keep coming down? Ian A. Hudson: As Jennifer mentioned, backlog-relevant businesses represented about 45% of our net sales last year. There is still $55 million of LaBrie debris backlog remaining, and we expect to work that down over the next few quarters. Also, as we continue to reduce lead times for street sweepers and sewer cleaners, backlog could come down a bit there. Those are the main drivers—delivery dynamics and reducing lead times. Walter Scott Liptak: The Section 232 modifications that happened in April—any impact from that? Do you have tariff-related costs? Jennifer L. Sherman: We do not have material exposures because we are mostly in-country-for-country from both the manufacturing and supply chain perspectives. The biggest potential exposure is on the chassis side, which is a pass-through for us. So the short answer is not a material impact. Operator: Thank you. Our next question comes from the line of Analyst with KeyBanc Capital Markets. Please proceed with your question. Jennifer L. Sherman: Morning. Analyst: Jennifer, you have been vocal about your desire to reduce lead times and backlogs in things like vacuum trucks and street sweepers. Can you give us an estimate of how much throughput you have realized with those 2019 to 2022 capacity investments, and is there more room for improvement as we think about 2026 and beyond? Jennifer L. Sherman: We are really pleased with the progress at our vacuum truck facility and at our Elgin facility this quarter on what we call Build More Trucks. Overall, we saw about 15% year-over-year improvement. Our lead times for our sewer cleaners are running about 11 months, and for our street sweepers, the four-wheel sweepers, a tick up of a year. We have made nice progress and will continue to make progress. We think it is really important that those lead times be in the four- to six-month range depending on the particular product line. That will allow us to be more nimble in responding to market opportunities. We have the capacity and labor to continue. Analyst: Switching gears to your four strategic pillars, is there an overarching technology angle or commonality across your products? Technology adoption seems likely to become more prevalent. Jennifer L. Sherman: Our technology is segmented with respect to our SSG teams and our ESG teams, and our CTO oversees that. We look for opportunities—for example, we have had success with control systems as a common platform. We also look for opportunities across our parts and aftermarket businesses. This is a critical focus and one of the values of the Power of the Platform. We can make investments in technology at the Federal Signal Corporation level and then implement across our various vehicle or SSG businesses. Operator: Thank you. Our next question comes from the line of Christopher Paul Moore with CJS Securities. Please proceed with your question. Jennifer L. Sherman: Good morning, Chris. Christopher Paul Moore: Congrats. SSG margins are exceptional and look to be getting better, much due to internal actions. Can you talk about the competitive landscape? Has it changed much over the last few years, and who do you see consistently? Jennifer L. Sherman: Success is not the result of one initiative. We have a lot of bets and different projects across the enterprise. With SSG, what is encouraging and why we raised those margin targets is not only what they have accomplished but what we see in the pipeline. On new product development, that team has introduced several new products to respond to customer needs in new end markets, and we are in early innings of traction. The team does an exceptional job on speed to market. On insourcing, the team identified the opportunity to insource printed circuit boards, which gives flexibility to the new product development team and accelerates speed to market. We completed the implementation of our fourth printed circuit board line in Q4 and are seeing benefits. The competitive market is primarily privately held competition. We are very active in that M&A market. As we move forward, the team is bringing on some new products in the second half of the year, we are making additional investments in new product development and talent, and I feel really good about the opportunities in 2027 and beyond. Christopher Paul Moore: One on New Way. JJ has been distributing LaBrie refuse trucks for a long time in Canada. You are not taking new orders there and are ramping sale of the New Way refuse trucks. Can you compare and contrast the two truck lines? Is there anything on the LaBrie trucks that is hard to match, or that you will have to incorporate into New Way trucks to convert long-term LaBrie owners? Jennifer L. Sherman: Both companies make a good ASL—the automated side loader. We are very pleased by the start. These are demo-intensive products, and we are in the very early innings of our Canadian strategy. Dealer development is important as we work with valued dealer partners to grow market share. One critical differentiator is our aftermarket support. Our teams have years of experience and customer intimacy that we believe we will leverage to grow New Way products. Operator: Thank you. Our next question comes from the line of Michael Shlisky with D.A. Davidson. Please proceed with your question. Ian A. Hudson: Good morning. Jennifer L. Sherman: Good morning, Mike. Michael Shlisky: Can you give us a few more comments on your international shipments in the quarter? Are issues tied to customers in countries facing military conflict, or more political or tariff-related? More color on what is going on there? Jennifer L. Sherman: In the prepared remarks, I was referring to a reduction in international export orders of approximately $20 million year over year. That involves several product lines, so it is not material to any single product, but there is an aggregate impact. That would include street sweepers, a small portion of our SSG business, and a small portion of our road marking business. We also had a onetime large order in Q1 of last year out of Mexico. So it is a year-over-year comparison effect of those large, nonrecurring international export orders. Michael Shlisky: Understood. On the increase in the SSG margin outlook, it looks really strong. What has changed to make it go four full points higher? Is it mix, new products, or something that has been building for quite some time? Jennifer L. Sherman: We have been operating at the top end or above the previous EBITDA margin targets. As we look at the new products we are introducing, market penetration opportunities and what we have already achieved in underserved markets, and the production efficiencies and scale we have achieved, it gives us confidence. I highlighted the fourth printed circuit board line, but there are many factors. This is primarily done in North America in one facility, and there are opportunities to continue expanding. I referenced a small pilot project—putting up a warehouse to open more manufacturing space at our University Park facility. That supports new products we are introducing and some M&A opportunities. It is a combination of all those factors that gives us the confidence to make that material jump in EBITDA margin targets. We are not done—there is a lot of opportunity for that business. Michael Shlisky: Lastly, on mineral extraction, can you give a bit more color on how that has been going in the last quarter as far as quoting activity? Do changes to tariffs mean more quoting on domestic mineral extraction projects? Jennifer L. Sherman: Starting with MEGA, we closed that acquisition in January. It was an acquisition we had been working on for quite some time, so out of the box, day one, they were selling jointly. We discontinued certain products at one facility and are now manufacturing in another. The results are blended and off to a strong start. It was one of the businesses that did better than expected. Together, we now have additional manufacturing capacity, and putting the talented Ground Force and MEGA teams together gives us opportunities to penetrate previously underpenetrated markets. We are seeing increased activity in the United States. Operator: Thank you. Our next question comes from the line of Gregory John Burns with Sidoti & Company. Please proceed with your question. Jennifer L. Sherman: Good morning, Greg. Gregory John Burns: You mentioned looking at some acquisition opportunities on the SSG side. Can you talk about the pipeline—are you looking for scale in existing businesses, new product lines, or geographic expansion? Do you think you might get something done this year? Jennifer L. Sherman: We started cultivating that pipeline about two years ago. We have spent a lot of time meeting different founders and second-generation owners. We are encouraged by the opportunities in 2026, 2027, and beyond. They come in a couple of flavors. One is audible and visual warning devices that serve different end markets. One driver of building the warehouse in University Park is to open additional manufacturing capacity for both new products and acquisitions we might integrate into that building. It is a very attractive niche for us. We think there are opportunities to leverage our channel and manufacturing. Given the investments we have made in printed circuit board lines, there would be obvious cost and efficiency synergies. Police is the largest portion of our SSG business, so there would be opportunities within police car upfitting to expand our portfolio. They range in different sizes, and the team is actively working on those as we speak. Gregory John Burns: Great to see the margin uplift in SSG. With the breadth of all the internal projects you outlined, what is your view on the potential for further margin gains on the ESG side? What is the timeframe for realization of the revenue and margin benefits—2026, 2027, 2028? Jennifer L. Sherman: The 18% to 24% ESG target is not a ceiling. Based on Power of the Platform and the investments we are making, we continue to believe there are opportunities to further increase those EBITDA margin targets. Some of that depends on the cadence of achieving both the revenue and cost synergies in the various ESG acquisitions. When we bought New Way, it was below our target EBITDA margin. We are only one quarter in—off to a good start—but more work to be done. We reaffirm our confidence in achieving $15 million to $20 million of synergies by 2028. It will vary quarter to quarter, but directionally, we are extremely confident our current EBITDA margin targets are not a ceiling, and we will continue to strive over the long term to improve and raise those. Operator: Thank you. Our next question comes from the line of Timothy W. Thein with Raymond James. Please proceed with your question. Timothy W. Thein: A two-parter on ESG orders. What was the split between publicly funded versus industrial customer base? And, Jennifer, I thought you said after slicing and dicing, orders came out flat—can you clarify? Jennifer L. Sherman: There are a couple of important things about Q1 orders. One is the discontinuation of the third-party LaBrie refuse trucks and the impacts of acquired backlog. Second, we have merged MEGA/Ground Force and also our road marking businesses across both sales and production functions, so it is increasingly difficult to parse which was a MEGA order and which was a Ground Force order, and similarly for MRL, HOG, and Blasters. We also noted that our international export orders were down about $20 million. Orders were up 13%, but when you exclude the international, organic orders were flat. Ian A. Hudson: On the split, industrial was probably a little stronger than the publicly funded side, mostly because the public side had some fleet orders in Q1 of last year from international markets. Timothy W. Thein: Thank you very much. Operator: We have reached the end of the question-and-answer session. I would like to turn the floor back over to CEO Jennifer L. Sherman for closing remarks. Jennifer L. Sherman: Thank you. We would like to express our thanks to our stockholders, employees, distributors, dealers, and customers for their continued support. Thank you for joining us today, and we will talk to you next quarter. Operator: Thank you. This concludes today's conference. You may disconnect your lines at this time. Thank you, and have a great day.
Operator: Good day and welcome to the Old Dominion Freight Line, Inc. First Quarter 2026 Earnings Conference Call. All participants will be in listen-only mode. There will be an opportunity to ask questions. Please note this event is being recorded. I would now like to turn the conference over to Jack Atkins. Please go ahead. Jack Atkins: Good morning, everyone, and welcome to the first quarter 2026 conference call for Old Dominion Freight Line, Inc. Today's call is being recorded and will be available for replay beginning today and through 04/29/2026 by dialing 506-9658, access code 769-9494. The replay of the webcast may also be accessed for 30 days at the company's website. This conference call may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, including statements, among others, regarding Old Dominion Freight Line, Inc.'s expected financial and operating performance. For this purpose, any statements made during this call that are not statements of historical fact may be deemed to be forward-looking statements. Without limiting the foregoing, the words “believes,” “anticipates,” “plans,” “expects,” and similar expressions are intended to identify forward-looking statements. We are hereby cautioned that these statements may be affected by the important factors, among others, set forth in Old Dominion Freight Line, Inc.'s filings with the Securities and Exchange Commission and in this morning's news release. Consequently, operations and results may differ materially from the results discussed in the forward-looking statements. The company undertakes no obligation to publicly update any forward-looking statements whether as a result of new information, future events, or otherwise. Finally, before we begin, we note that we welcome your questions today, but ask that you limit yourselves to just one question at a time before returning to the queue. Thank you for your cooperation. At this time, for opening remarks, I would like to turn the conference call over to our President and Chief Executive Officer, Marty Freeman. Marty, please go ahead. Marty Freeman: With me on the call today is Adam N. Satterfield, our CFO. After some brief remarks, we will be glad to take your questions. Our first quarter results reflect a continuation of the encouraging trends that started to develop late last year. While our first quarter revenue declined on a year-over-year basis, demand for our service improved as the quarter progressed. This contributed to the acceleration in our LTL volumes during the quarter, with strong sequential tonnage growth in February and March. Importantly, during the quarter, our team continued to deliver best-in-class service to our customers and maintained our disciplined approach to yield management. Providing our customers with superior service at a fair price is the cornerstone of our strategic plan. The consistency of our service performance day in and day out creates significant value for our customers and is something that we take significant pride in. As a result, we were pleased to once again deliver 99% on-time service and a claims ratio below 0.1% in the first quarter. The strength of our unmatched value proposition has differentiated us from our competition and allowed us to win more market share than any other LTL carrier over the last ten years. Our value proposition will continue to support our ability to grow our business in the years ahead, and we continue to believe that we will be the biggest market share winner over the next ten years as a result. Our best-in-class service also supports our yield management initiatives. Our long-term disciplined approach to pricing is designed to offset our cost inflation and support our ability to make strategic investments back in our business. These investments will allow us to stay ahead of our anticipated growth curve to help us ensure that we will always have the capacity we need to grow. Our ability to say “yes” when a customer needs us the most is the hallmark of our industry-leading customer service. Business levels in the LTL industry can change very quickly, and being able to respond to growth opportunities in an improving demand environment is one of the primary areas that differentiate us from our competition. We believe it is important to consistently invest throughout the economic cycle despite the short-term cost headwinds associated with this strategy. This is why, despite a challenging operating environment, we invested nearly $2 billion in capital expenditures over the past three years, while we plan to invest an additional $205 million in 2026. We have also continued to invest in the most important component of our long-term success, which is our OD family of employees. Our people and our unique culture are truly what sets us apart at Old Dominion Freight Line, Inc. As a result, we have worked to ensure that we are providing a competitive wage and benefit package as well as various internal developmental programs like our in-house driver training schools and our management training program. These programs not only provide important opportunities for career advancement for our team, but they help ensure that our company is ready to respond when our customers need us the most. While we are always focused on the long term, it is critical that we remain diligent in controlling our cost and continue to operate as efficiently as possible without compromising our superior service standards. That remained the case in the first quarter as we continued to find ways to maximize our operating efficiencies and control our discretionary spending. We continue to believe that our business model contains significant operating leverage, which has been enhanced by our ongoing investments in our technologies and continued focus on business process improvements. We produced solid results in the first quarter by continuing to execute our strategic plan, and I want to thank the entire OD family of employees for their unwavering dedication to our customers and to our company. Due to our consistent execution and investment, we are uniquely positioned to handle incremental volume opportunities as the demand environment improves. As a result, we remain confident in our ability to win market share, generate profitable revenue growth, and increase shareholder value over the long term. Thank you very much for joining us this morning. And now Adam will discuss our first quarter in greater detail. Adam N. Satterfield: Thank you, Marty, and good morning. I am a little under the weather today, so I would like to ask you all to bear with me as we get through this call. Old Dominion Freight Line, Inc.'s revenue totaled $1.33 billion for the first quarter of 2026, which represents a 2.9% decrease from the prior year. Our revenue results include a 7.7% decrease in LTL tons per day that was partially offset by a 5.7% increase in our LTL revenue per hundredweight. Excluding fuel surcharges, our LTL revenue per hundredweight increased 4.4% compared to the first quarter of 2025, which reflects our long-term disciplined approach to yield management. On a sequential basis, our revenue per day for the first quarter increased 0.5% when compared to the fourth quarter of 2025, with LTL tons per day decreasing 0.4% and LTL shipments per day decreasing 0.7%. For comparison, the ten-year average sequential change for these metrics includes a decrease of 2.8% in revenue per day, a decrease of 2.5% in LTL tons per day, and a decrease of 1.6% in LTL shipments per day. The monthly sequential changes in the LTL tons per day during the first quarter were as follows: January decreased 3.4% as compared to December, February increased 4.9% as compared to January, and March increased 4.6% as compared to February. The comparative ten-year average change for these respective months is a decrease of 3.1% in January, an increase of 1% in February, and an increase of 4.5% in March. While there are still a couple of workdays remaining in April, our month-to-date revenue per day has increased by approximately 7% when compared to April 2025. This includes a decrease in our LTL tons per day of approximately 6.5% and an increase in our revenue per hundredweight excluding fuel surcharges of 4% to 4.5%. As usual, we will provide the actual revenue-related details for April in our first quarter Form 10-Q. Our operating ratio increased 80 basis points to 76.2% for the first quarter of 2026 as the increase in overhead cost as a percent of revenue more than offset the improvement in our direct cost. Our overhead cost increased as a percent of revenue primarily due to the deleveraging effect associated with the decrease in our revenue as well as an increase in our general supplies and expenses. This resulted in the 60 basis point increase in our general supplies and expenses and 40 basis point increase in our depreciation cost, as a percent of revenue. All of our other combined costs improved as a percent of revenue for the quarter on a net basis. The improvement in our direct operating cost as a percent of revenue was primarily due to our continued focus on revenue quality and operating efficiencies. Despite the lack of density on our network associated with the decrease in our volumes, our team did a nice job of matching our labor cost with current revenue trends and this will be a key focus for us over the balance of the year. That said, we currently believe we have an appropriately sized workforce to handle a sequential increase in volumes during the second quarter. Old Dominion Freight Line, Inc.'s cash flows from operations totaled $373.6 million for the first quarter; capital expenditures were $62.6 million. We utilized $88.1 million for our share repurchase program during the first quarter and our cash dividends totaled $60.5 million. Our effective tax rate for 2026 was 25% as compared to 24.8% in 2025. We currently expect our effective tax rate to be 25% for 2026. This concludes our prepared remarks this morning. We will now open the call for questions. Operator: We will now begin the question and answer session. First question comes from Jordan Robert Alliger with Goldman Sachs. Please go ahead. Jordan Robert Alliger: Yes. Hi, morning, everyone. Thanks for the update. I guess, in the context of some of those trends you have been seeing, maybe on the trend thought and share some color or thoughts on direction of OR as we move from Q1 to Q2? Thank you. Adam N. Satterfield: Yes. The ten-year average change for the operating ratio is a 300 to 350 basis point improvement from the first to the second quarter, and we are comfortable with that range in the second quarter this year, assuming that we do see some sequential improvement in our volumes from here, and that is what we would anticipate. Obviously, there is a lot going on in the world right now, but based on what we are currently seeing, we are expecting that increase in volumes, and I think we are comfortable with hitting that normal sequential range as a result. If we do so, that would be the fourth straight quarter that we have been able to be in, or at least beat, what our normal sequential change would be. Jordan Robert Alliger: Thanks. And I do not know if I could ask a follow-up, but just related to that, have you seen a shift in sort of that excess terminal capacity? Has it come in a little bit as we have seen volumes look a little better? I think you have looked at like 30% to 35% terminal capacity; I am just curious if that has changed at all. Adam N. Satterfield: We are still a little north of 35%. Our volumes are still down on a year-over-year basis and, obviously, this is the slower time of the year in the first quarter, but that is something that we continue to see as an opportunity and will drive part of that operating ratio improvement as we can continue to see sequential volume improvement and then leverage those fixed costs—those investments that we made and that depreciation headwind that we have been facing. So we will leverage those and some of our other fixed overhead costs, with the benefit of density driving improvement in both our direct operating cost as well as some of those overhead costs. Operator: Thank you. The next question is from Jason H. Seidl with TD Cowen. Please go ahead. Jason H. Seidl: Thanks, operator. Good morning, Marty, Adam, and Jack. Adam, I hope you feel better. I am going to stick on the OR topic a little bit here. As we think about your commentary on the normalized sequential moves from 1Q to 2Q, can you help us frame up the impacts in 1Q for both fuel as well as weather so we could figure out where in the range we might want to be? Adam N. Satterfield: Glad you asked that. I figured fuel would be a topic of conversation. Fuel is part of our yield management strategy. We have always talked about wanting fuel, which is just a variable component of pricing, to really be indifferent—if fuel goes up or if it goes down, essentially, we want the bottom line to be the same, and that is how we look at things on an individual account profitability basis. When you look at what happened from the fourth quarter to the first quarter of this year, we outgrew our normal sequential trend with tonnage by about 200 basis points, and that is really the story of the quarter in the sense of the strong operating ratio performance we had there. Our shipments per day from the fourth quarter to the first quarter were essentially the same. Fuel was up 10%, bill count was consistent, profitability was relatively consistent, a little bit better overall, but obviously there are other things going on. When I compare that back to 2023, compared to the second quarter of 2023, a lot of similar circumstances: bill count was the same between those two periods, fuel was down 10% between those two periods, so you had revenue impact on the downside of fuel, but profitability was consistent between those two periods. Obviously, there are always a lot of fluctuations, but I think those two sequential periods—when you have got similar bill counts, similar mix of freight—show that fuel can go up or down 10% and overall profitability can stay the same. Now, we are looking at a much larger increase in fuel, and I would probably point everybody back to the second quarter of 2022. I think this first quarter to second quarter of 2026 is probably going to have a lot of similarities to that first quarter to second quarter 2022 period when we saw the fuel shock and all the other inflationary impact that drives. Operator: The next question is from Christian F. Wetherbee with Wells Fargo. Please go ahead. Christian F. Wetherbee: I wanted to get your sense on how you feel about demand and then ultimately how you are faring from a market share perspective as you think about coming out of the really strong performance in February and then what you have seen so far in March and April. Has some improvement continued or do you feel like there has been more steady demand? And does what you are seeing inform revenue assumptions for the second quarter? Adam N. Satterfield: Yes, it definitely feels like it has continued to improve. Go back to last year: through March we had five months of normal sequential trends for us. Obviously, like I mentioned earlier, it is the slower part of the year, but we started hearing optimism from customers and from our sales team late last year, and we started seeing that return to seasonality. We have seen a pickup in our weight per shipment; in April, weight per shipment is up on a year-over-year basis a little over 1%. That is usually a leading indicator of an improving demand environment. Add in the positive ISM trends that we have seen, and we would expect another positive ISM for April. The retail side of the sector has probably been driving more of the volume performance at this point, and we are looking for the industrial to start contributing as well—that usually starts performing on a lag basis after you see the positive ISM performance. There is some geopolitical risk, but most people seem to be looking through what is going on, supporting a positive consumer and positive trends we are still hearing from customers that whatever can be settled within the next three or four months, hopefully we can get back to restocking inventories and doing all the things that contribute freight to us. We would like to see that momentum continue through the balance of this year. On revenue for the second quarter, we are a little bit below normal seasonality right now in April, but I still feel good just looking at the trend of how the revenue is performing and our volumes as well. We have had good acceleration through the month, which has been good to see. It is not a surprise to see things pull back a little bit and some customers showing a little bit of caution, but there is a lot of cautious optimism from the feedback we are hearing, and we are starting to win more in bids that we are participating in. There are a lot of positive trends developing. Going back to looking at that 2022 comparison, that was still a growing environment. Who knows what is going to happen with May and June, but if we can continue to see some sequential improvement in our volumes, which I believe we will, then I think we can continue to show strong top-line improvement and then carry that through to an operating ratio that will produce some pretty good-looking numbers from a bottom-line standpoint. Operator: Our next question comes from Scott H. Group with Wolfe Research. Please go ahead. Scott H. Group: Hey, thanks. Good morning. Feel better, Adam. The last couple of quarters you have given us a range of revenue embedded within the OR guidance—can you share something similar? And bigger picture, the truckload market clearly has gotten a lot tighter; we keep hearing it is more supply driven. Are you seeing any of that typical spill from truckload back into LTL? And do you think a supply tightening in truckload means it is any different of a cycle this time as it relates to LTL versus the past? Adam N. Satterfield: That definitely has been happening. You see what is going on in the truckload market with rate and capacity changes driving a lot of that. Late last year, a lot of shippers anticipated this environment would finally turn this year. I can think of a couple of large accounts that said part of their supply chain strategy over the last year or so had been taking advantage of that market by consolidating some loads, and that they were going to revert back to moving more freight by LTL. I can look at a couple of specific customer accounts and see that trend has reversed. Bigger picture, that has been a headwind for us for the last couple of years, and it was something we felt would need to fix itself in the truckload world, taking some of the pressure off load consolidation that shippers have been taking advantage of. I do think that will unwind and will be a big benefit to the industry and something that we will be able to benefit from as we get back to market share opportunities. On the revenue range, I did not go through that this time. There is some volatility based on fuel, and hopefully we will see that continue to decline. Thinking about volumes, as I mentioned, we are trending a little bit below what our normal sequential change would be at this point from a tons standpoint. Unless we have strong performance like we did in February and March, volumes may come in a little lighter than our normal sequential change. Too many factors to give a precise top-line range, but based on right now, April revenue per day is up about 7%. If you hold that bogey across and adjust with our mid-quarter updates and what fuel is doing, that should allow you to flush that through your model. Operator: Our next question comes from Eric Thomas Morgan with Barclays. Please go ahead. Eric Thomas Morgan: Hey, good morning. Thanks for taking my question. I wanted to ask on pricing and yields. I think the 4.4% in the quarter was a bit ahead of your guidance. Could you speak to the drivers there? I think per shipment was pretty consistent throughout the quarter. You said 4% to 4.5% in April, maybe per shipment a little bit more of a mix impact at this point. What is the right run rate here for 2Q and how should we calibrate that? Adam N. Satterfield: I think that 4% to 4.5% for the full quarter is still appropriate, and we will be looking at weight per shipment. If trends can hold, it should be up around 1% or so for the full quarter. We are up a little over 1% at this point in April, and we would love to see that number continue to move higher and be even more of a headwind, if you will, relative to our revenue per hundredweight performance, because it would indicate that the economy is continuing to get stronger and we would continue to be winning business. The first quarter yield came in a little bit stronger overall—just a little bit; we had said up 4%—and I was probably anticipating a little more weight-per-shipment headwind than what we got. It was still nice to see it is the first quarter in some time where we have had a year-over-year increase in weight per shipment. Overall, our results reflect our consistent long-term strategy. We always want to be consistent and fair with our customers and get cost-based increases, and I think we have done that over time, including over the last couple of years when the environment has been slower. We can continue to maintain that measured approach as we go forward. That gives us really strong revenue per shipment, especially as the weight per shipment starts improving, and that is what we ultimately have to get back to: a positive revenue-per-shipment over cost-per-shipment spread. We are not there yet, but we are starting to close the gap and get those numbers moving back in the right direction. Typically, we want to see 100 to 150 basis points of positive revenue-per-shipment over cost-per-shipment spread. Operator: Our next question comes from Ravi Shanker with Morgan Stanley. Please go ahead. Ravi Shanker: Great, thanks. Good morning, everyone. On the 2Q OR walk, I am a little bit surprised that you are not pointing to maybe doing better than normal seasonality, given some of the positive trends like April up 7%. Is that just being conservative? Is that a higher starting point with 1Q? Can you talk about some of the moving parts again that may help you beat normal seasonality? Adam N. Satterfield: It is probably a couple of things. One unknown is we feel like we are going to see some headwinds related to our fringe benefit cost. They came in a little better than what I am forecasting for the entire year in the first quarter, and already looking at the April trend, we expect higher cost there for the full quarter. As fuel changes, it creates headwinds from a variable cost standpoint that may get overlooked. That is why pointing people back to 2022 might be a good measure to look at. Anything petroleum-based—products—we are going to see inflation, but other overhead-type costs you would not think of, like credit card fees and the percent of bad debt write-offs, will create ancillary costs. It is not to say that if business levels continue to pick up we cannot beat the guidance like we just did in the first quarter. As you mentioned, we do have a pretty good starting point with our 1Q performance. That is based on us talking about probably being a little bit lower than our normal sequential trend from a tonnage standpoint as well. If we can execute on those broad numbers we just talked about, we are starting to map out double-digit type earnings growth. All those numbers flowing through the model certainly can get better, but I think this is a good starting point to finally see things back in the green for us. Operator: Our next question comes from Jonathan B. Chappell with Evercore ISI. Please go ahead. Jonathan B. Chappell: Thank you and good morning. Maybe Marty can answer this one, give you a break, Adam. February did a lot better than typical seasonality; March was a smidge better or maybe in line, and now it sounds like April is dipping a bit lower. Do you get a sense that there was any pull-forward into the first quarter, and does that help frame how you are thinking about the second quarter? Also, it feels like June is a really easy comp given the difficult environment last year—could you end the quarter on a higher note based on a comp perspective? Marty Freeman: Jonathan, I will answer your pull-forward question. We are not hearing any major pull-forward comments from our large customers as they visit our corporate office. As Adam said earlier, we see some of this truckload volume that LTL went to last year and the year before coming back because of the tightness of the drivers and so forth. We are not hearing the pull-forward comment at all. Adam N. Satterfield: As we go through the balance of the quarter, there is still a lot of uncertainty with everything going on in the world. I would love to have a clear crystal ball to say that we will have May and June performance similar to what we had in February and March, but it is hard to pinpoint that at this point. We feel like there are a lot of opportunities out there. The good thing about us giving our mid-quarter update is that when we see the actual results for May, we will be able to talk about those trends as they are developing and whether we see a continuation of the positive trends. We have heard more optimism from customers through the balance of the year. Like Marty said, I do not think there was any pull-forward per se that helped boost the numbers. We got through the first quarter; we expected continued strength. It is not totally unexpected, given everything going on, that people pulled back just a little bit. Still, overall good performance in April; we are pleased with what we have been able to do and what our numbers look like, but we certainly hope to see a continuation of the build-up not only through June, but really from now through September. Operator: Our next question comes from Kenneth Scott Hoexter with Bank of America. Please go ahead. Kenneth Scott Hoexter: Hey, great. Good morning, Marty, Jack and Adam. It is spring, so hopefully you get well soon. Those truckload volumes you are talking about—are they good quality freight or better? I am always confused if that is stuff you want. Then, if volumes are trending below seasonality, I want to clarify—is this a share loss indication or are volumes not as good as expected? And then my other one is the average employee down 7%. You mentioned your ability to scale if you do get that inflection. Is that something you are focused on? Adam N. Satterfield: On staffing, we have talked for the last few quarters that where we are positioned now, we are in a really good spot in terms of having people to be able to respond to sequential growth through the balance of this quarter. Not to say there might not be some hiring here and there, but overall, I would expect a pretty similar headcount level as we go through the balance of this quarter. We certainly have the capacity from a people standpoint, plenty of service center capacity, and the fleet to be able to accommodate sequential growth as well. I do not think the April trend is any type of market share loss at all. The numbers are a little bit softer from a volume standpoint than what we had been seeing. Typically, you see a little drop-off in April, and it is what it is, but we think we will exit the month at a pretty good run rate, and we would anticipate sequential improvement from where we are now into June. How strong that will be is to be seen, but there are a lot of opportunities, and we are seeing a lot of wins in bids. There is a lot of behavior consistent with the environment turning overall. Hopefully, in the early stage of recovery, we typically outperform our competitors the most. Looking back over time, in the early stages of recovery—those high growth years—we have been able to outperform our competitors somewhere around 900 to 1 thousand basis points from a volume standpoint. Hopefully this is what is kicking off now, while keeping in check the risks we see in the economy. On the truckload comment, it is not that a full truckload of freight is now coming in and we are moving a 40,000-pound load. With load optimization software, a lot of customers in a weak truckload environment—and many 3PLs—have mode optimization tools, so they can consolidate different loads and move freight at a lower cost. We have not started necessarily seeing that completely unwind yet; I think we are in the early stages as well, just from looking through the underlying data of our 3PL business. That should continue—probably more of a tailwind as demand improves. Marty Freeman: Also, it is good freight because many of these customers that transitioned some of their business over to full truckload—we were still handling LTL shipments for them, and that pricing is still in effect. So when it moves back over to us, it moves at that profitable LTL pricing we have in effect for them. So it is good freight. Kenneth Scott Hoexter: Very helpful. Thanks, Marty. Thanks, Adam. Operator: Our next question comes from Thomas Richard Wadewitz with UBS. Please go ahead. Thomas Richard Wadewitz: Thanks. I know you said it is a little worse than seasonality in April, down 6.5% year over year. What would the ten-year average in normal seasonality be, just so we can assess clearly? And the broader question: we have seen some improvement from other players—TFI talking about service improvement and favorable trend in volumes at a low price point; ArcBest active with dynamic pricing; FedEx Freight eventually makes investments and can be a better competitor. Historically, when others improve service, does it impact you, or is the market big enough that it is more cycle and your own performance than what this or that LTL is doing? Adam N. Satterfield: On the competitive landscape, based on all the data and feedback we get, the service gap between us and our competition is as wide as it has ever been, if not getting wider. I will not comment on anyone specific, but we see optimism, we are starting to win more business in bids, and that gives us optimism for the balance of the year. We are still down year over year from a volume standpoint, but we have had five straight months of sequential performance and may take a break this month for April. We need to get back to neutral year-over-year tonnage and shipments per day and then back to what we do best—growth. It looks like we are going to have revenue growth in the second quarter, which should lend itself to good earnings growth as well. I do not think any specific carrier initiative is having a material impact on us. We are seeing more wins when I look at our individual bid performance. On April seasonality, I did not give a specific number earlier because month-to-date depends on the last couple of days and can be apples to oranges. The normal would be down 1%. Tomorrow should be a really big day for us and will skew the month-to-date number up, but based on the trend, we will be below that 1% number. I am comfortable where we are, and given the run rate today and how these trends generally develop, I feel pretty good about sequential growth as we get into May and June to close out the quarter. Operator: Our next question comes from Brian Ossenbeck with JPMorgan. Please go ahead. Brian Ossenbeck: Hey, good morning. Thanks for taking the questions. A couple of follow-ups, Adam. You gave helpful comments about some of the cost pressures you are seeing—excluding fuel, anything else to call out from a cost-per-shipment perspective you already have line of sight to? Sounds like health care and benefits are moving up through the rest of the year. And on competition, we see a lot of new entrants or conversations about grocery and expedited freight—how long do those bid cycles last and how long does it take to get into those markets? It is easier said than done; would like your perspective on how that really works in practice with higher premium services. Adam N. Satterfield: On costs, I mentioned the fringe headwind we are looking at, and anything fuel-related we are going to see increased cost. On the flip side, we had an increase in our general supplies and expenses in the first quarter; I would expect to see a little improvement there, especially as we get leverage on those costs. Some G&A expenses are variable in nature, so as revenue goes up, you will get a little pressure there; some are more order-specific, so we should see a little benefit relative to normal trend. Depreciation is another item: relative to the ten-year average change in depreciation cost from 1Q to 2Q, with our CapEx plan being lower this year, we should not see the same type of inflation in those costs. We should be able to get a little leverage there to offset some of the other headwinds. With respect to other carriers focusing on different segments, we compete with every carrier today in those same lines of business. There is no secret part of the market we have exclusive access to. There are things we do really well where we add tremendous value to our customers that we do not see from some competitors—that is direct customer feedback. We take none of that for granted and are always enhancing services through technology and other measures to keep the service gap. Over my career, different competitors have targeted one segment they think OD has a lock on versus another; it has not slowed our growth over time, and I do not think it changes our long-term growth trajectory either. As we have said, service is ultimately what we sell in this industry. I think we have a better service product than anyone else, and that is why we believe we will be the biggest market share winner over the next ten years like we have been over the last ten. Operator: The next question comes from Analyst with Deutsche Bank. Please go ahead. Analyst: Thank you. Good morning, everyone. Adam, I know you want to refrain from commenting on competitors, but with FedEx Freight’s spin right around the corner, I wanted to get your impression. Earlier this month, we heard that team talk extensively about their differentiated dual service offering—priority and non-priority—as a key differentiator along with their scale and speed. Do these attributes give them an edge as they emerge as an independent entity with a dedicated sales force? Broadly, your impression on the strategy they laid out and what, if anything, surprised you. Also, does the timing of Easter this year versus last year come into play for how April progressed? Adam N. Satterfield: Easter was at the beginning of the month, and that certainly has an impact like it always does. We do not count half-days, but Good Friday is a little more than half of a normal workday, so that had an impact on the April trend. With respect to FedEx, we have been competing against them for years. Priority and economy are not new service offerings. We expect them to continue to be a good competitor, but it does not really change the competitive landscape. If anything, they have to go through a lot of change as they go through that separation, and we will see how they handle it. I would not expect a lot of change from a customer standpoint comparing those service offerings to ours. Be it through the Mastio measurements that we have won for multiple years in a row now, or being the biggest market share winner over the past ten years, all those measurements tell me we have the best service in the industry. We do not rest on our laurels—we want to continue to get better every day and continue to win that Mastio award year after year. We focus intently on listening to customers and what they need and want. We continue to refine our network, make changes, and we have made plenty of lane changes where we have had to speed up transit times in the past year. We will continue to move as the market moves and make sure we are giving the very best value proposition to our customers. That is what we have proven over time, and it is why we are the biggest market share winner and why we keep investing in our business and preparing for future market share opportunities. Operator: The next question comes from Ariel Luis Rosa with Bank of America. Please go ahead. Ariel Luis Rosa: Good morning, gentlemen. On the nature of this downturn and potential upcycle relative to past cycles: you have said you won the most market share over the past decade and are confident for the next decade. But the last three years have been anomalous with negative year-on-year volume growth each year. How are you thinking about the ability and timeline to recover that lost volume? Is that something to expect in the next upcycle? How much depends on competitive environment versus macro versus idiosyncratic actions you can take to be more aggressive to take back share? Adam N. Satterfield: We are not immune to the economy, and the last three years have been difficult. Every year we have reaffirmed our strategy. Typically, we maintain market share through the downturn and then win significant market share as demand improves. A couple of things drive that: we have been the only carrier consistently investing in new capacity over time, even over these past three years—about $2 billion in CapEx—to grow our business and prepare our network for future growth. We do not build out the network hoping to achieve market share; we do it through conversations with customers and engagement with our sales team, having confidence in where we believe we will see growth over time. We aim to stay ahead of the growth curve. We have seen how quickly things can change; the first quarter is a good indicator—look how quickly volume changed in February and March and what we did from an operating ratio standpoint. We may or may not carry that forward; I was hoping this would be more like a 2017 kind of year, and it still could be. We are not writing off May or June—we are optimistic with a hint of caution given geopolitical risk. If we can carry forward sequential improvement in volumes and get back to positive year-over-year later in the year, we can continue to grow from there. In prior strong years—2014, 2017, 2018, 2021, 2022—we produced double-digit volume growth while competition was in single digits because we run excess capacity and the industry has historically been capacity constrained. Many carriers are talking about excess capacity today, but the numbers do not bear that out. We still see the industry as capacity constrained. That is why we are confident that once demand starts to improve, we will get back to outgrowing our competition like we have in prior cycles. Operator: Our next question comes from Jeffrey Kaufman with Vertical Research. Please go ahead. Jeffrey Kaufman: Thank you very much and thank you for squeezing me in. Could you give a bit more color on weight per shipment? Is improvement coming from regions or industries coming back to life, or is it simply more units per pallet? Adam N. Satterfield: Generally, it is more widgets per pallet. It typically follows when you start seeing industrial performance as well; industrial freight is usually heavier than retail-related freight. Most of our positive performance over the past five months has been on the retail side. We started to see some early indications in March of industrial turning the corner as well. As industrial comes in conjunction with positive ISM trends, we would expect weight per shipment to continue to tick higher. Right now, we are just around 1.5 thousand pounds per shipment—about where we were in March—and normally weight per shipment falls back a little in April versus March; we are trending around 1.49 thousand right now. In really strong markets, we have been more like 1.6 thousand pounds per shipment. That is a number we would love to see move up, because it means more revenue per shipment while cost per shipment does not move in tandem. That helps get us back in balance, moving our cost per shipment back closer to the longer-term average of 3.5% to 4% and then having a positive spread of revenue per shipment over cost per shipment. Operator: The next question is from Stephanie Moore with Jefferies. Please go ahead. Stephanie Moore: Thanks for the question. On capacity—specifically private capacity—any color you can provide on what you are seeing across the broader industry? Many public names talk about excess capacity, but how do you see it, particularly on the private side? Adam N. Satterfield: Once Yellow closed, a lot of those service centers went into the private world, and a lot of the market share Yellow had ended up with private carriers as well. Many people took some elements of share. The factor we look at is shipments per day per service center. Public carriers disclose the number of service centers, so when we look at that data, it tells us some carriers do not have as much capacity as maybe what they talk about, because shipments per day per service center were pretty similar at the end of 2025 to where they were in 2022 when everybody was capacity constrained and could not grow. Looking at total service centers across public and private carriers, shipments per day per service center is down about 3% from 2022 to 2025—pretty close. We think there is probably 5% to 10% excess capacity across the industry as a whole, but much less than some think. At the 100 thousand-foot level, you had a carrier that did over 50 thousand shipments per day and had over 300 service centers—not all of those service centers have remained in our industry. What was a capacity-constrained industry in 2022 will be an even more capacity-constrained industry as we move forward. Operator: The next question comes from Analyst with Stifel. Please go ahead. Analyst: Hey, gentlemen. This is Matt Vialas calling for Bruce this morning. Thanks for squeezing us in. Circling back to pricing—yields and contract renewals seem to remain strong. Is that strength and stability universal across the entire book? We have heard about increased competitiveness around 3PL business. Perhaps you can share what percent of the total book is tied to 3PL. Adam N. Satterfield: About a third of our business overall is related to the 3PLs. We are pretty consistent with what we target for increases every year, be it with our general rate increase that applies to our tariff-based business—that is about 25% of our revenue overall—as well as what we try to achieve as we go through contract renewals. Every account is different, and we look at each account on its own merits and profitability. We have been consistent with getting increases. We take a different approach than some competitors; we try to be consistent, which helps customers know what to plan and budget for. It forms a partnership and relationship versus just looking at market-driven moves. It has worked well for us over time, and that will continue to be the focus: achieve reasonable increases that are fair and equitable, offset cost inflation, and support our ability to keep investing in our service center network, in new technologies that our customers in many cases are demanding, and in our people to drive the business forward. Operator: The next question comes from Analyst with Stephens. Please go ahead. Analyst: Hey, thanks for taking the question. Everyone is focused on service as a means to drive yields higher. With your position as a service leader, what is your focus when you think about continuing to improve your mix of business? Are there any end markets or services you are leaning into currently where you might have a better value add relative to competitors? Marty Freeman: Service is not just delivering on time and claims-free. It is also how you handle issues, which relates to superior customer service—being able to talk to a human on the phone. We are in a world of bots now, but customers put a lot of stock in being able to pick up the phone and call one of our service centers or corporate office, trace a shipment, and talk to a human. Also, billing accuracy plays a big part in service. Sending a correct invoice the first time is very important to our customers. It creates less work for them and allows us to get paid faster. There are a lot of components when we talk about customer service, and we feel like we lead the industry in all of those factors. Operator: Thank you. This concludes our question and answer session. I would like to turn the conference back over to Marty Freeman for any closing remarks. Marty Freeman: Thank you all for your participation today. We really appreciate your questions. Please feel free to give us a call if you have anything further, and have a great day. Operator: The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
Operator: Good day, and thank you for standing by. Welcome to Rush Enterprises, Inc. First Quarter 2026 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers’ presentation, there will be a question-and-answer session. To ask a question during the session, you will need to press star 11 on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star 11 again. Please be advised that today’s conference is being recorded. I would now like to turn the conference over to your speaker for today, Rusty Rush, Chairman, CEO, and President. Please go ahead. Rusty Rush: Well, good morning. Welcome to our first quarter 2026 earnings release call. With me on the call this morning are Steven L. Keller, chief financial officer; Jody Pollard, chief operating officer; Jay Hazelwood, vice president and controller; and Michael Goldstone, senior vice president, general counsel, and corporate secretary. Before I get started, Steven will say a few words regarding forward-looking statements. Steven L. Keller: Certain statements we will make today are considered forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995. Because these statements include risks and uncertainties, our actual results may differ materially from those expressed or implied by such forward-looking statements. Important factors that could cause actual results to differ materially from those expressed or implied by such forward-looking statements include, but are not limited to, those discussed in our Annual Report on Form 10-K for the year ended 12/31/2025, and in our other filings with the Securities and Exchange Commission. Rusty Rush: Thank you, Steven, and thanks everyone for joining us today. As we reported yesterday, we generated revenues of $1.68 billion in the first quarter, with net income of $61.5 million, or $0.77 per diluted share. We also declared a quarterly cash dividend of $0.19 per share, which reflects our continued focus on returning value to shareholders. Now stepping back for a minute, the first quarter was still a tough environment for the commercial vehicle market. Industry-wide retail sales for new trucks remained at historically low levels, and we are still working through the effects of the freight recession, excess capacity, and general economic uncertainty. That said, we do believe this quarter represents the trough of the cycle, and more importantly, we are starting to see some early signs that things are moving in the right direction. Freight rates improved a bit, miles driven began to pick up, and customer sentiment started to feel a little more optimistic. As a result, we saw increased quoting activity and order intake as the quarter progressed, especially from our large fleet customers. That has not translated into sustained strength in truck sales yet, but it is a good leading indicator and gives us confidence that demand is starting to come back. One thing that stood out again this quarter is the strength of our business model. Even with soft truck sales, our aftermarket, leasing, and rental businesses, along with disciplined expense management, helped us stay very profitable and performed well overall. We also stayed focused on growing the business. During the quarter, we signed an agreement to acquire Peterbilt dealerships in Southern Louisiana and Mississippi. We expect to close that deal and begin operating those locations as Rush Truck Centers in June. So even in a down cycle, we continue to invest in the business, expand into new markets, and position ourselves for long-term growth. Our aftermarket business continues to be a key strength for us. It made up roughly 66% of our gross profit in the quarter and generated $627 million in revenue, up slightly year over year. Demand was still soft in subsegments, especially for some of our over-the-road customers, but overall we were able to deliver growth, which speaks to the strength of our relationships and our execution. We also started to see some positive indicators here: more freight activity and more miles being driven, which should translate into stronger parts and service demand as customers begin catching up on deferred maintenance. Our aftermarket strategic initiatives are also making a difference. Our inspection processes and parts delivery optimization have gained traction across our network and are delivering incremental revenue, increasing uptime for our customers, and delivering a better experience overall. Looking ahead, we expect the aftermarket to gradually improve as we move through the year and continue to be a key driver for our performance. Turning to truck sales, the market was still very tough in the first quarter, with Class 8 industry sales at their lowest level since COVID. But even in that environment, we performed well, sold 2,964 Class 8 trucks in the U.S., and captured a 7.2% market share. That really comes down to execution, having the right inventory, and the diversity of our customer base. As I mentioned earlier, we saw solid order activity and increased engagement from customers during the quarter. We think that is being driven by improving freight conditions and customers beginning to plan for 2027 emissions regulations. Class 4 through 7 truck sales saw the worst demand since 2015, but our results were more about timing than demand. Some large fleet customers pushed deliveries into later in the year, so we expect that to benefit us in the coming quarter. Used truck demand improved as we moved through the quarter, and we are seeing better conditions tied to improving spot rates and tighter capacity. So overall, while the first quarter was slow, we expect sales to improve gradually in the second quarter and then pick up more in the second half of the year. Rental and leasing continue to be strong and a growing part of our business. Revenue was $92 million in the quarter, up a little over 2% year over year. Leasing demand remained strong as customers look to replace aging equipment and get ahead of cost increases tied to the upcoming emissions regulations. Rental is below where we would like it to be, driven by current market conditions, but it did improve as the quarter progressed, and we expect utilization to continue trending up through the year. Overall, Rush Truck Leasing continues to generate consistent, recurring revenue and remains an important contributor to our performance. So to wrap it up, the first quarter reflected the ongoing pressure from the freight recession and weak truck demand, but we delivered solid earnings and profitability. That speaks to the strength and balance of our business. We believe we are at the bottom of the cycle, and we are encouraged by early signs we are seeing, whether that is freight, customer activity, or order trends. As conditions continue to improve, we believe we are well positioned to capture that demand and grow the business. Before I close, I want to thank our employees across the company. Their focus, discipline, and commitment to our customers continue to drive our performance, especially in a very challenging environment like this. With that, I will take your questions. Operator: We will now open the call for questions. Operator: Thank you. As a reminder, if you would like to ask a question, please press star 11 on your telephone. You will hear the automated message advising your hand is raised. We also ask that you please wait for your name and company to be announced before proceeding with your question. Our first question for the day will be coming from the line of Avinatan Jaroslawicz of UBS. Your line is open. Avinatan Jaroslawicz: Good morning. Glad to see the year is still on track for improvements sequentially. Thinking about the second half, it sounds like there is still a decent amount of uncertainty around the pre-buy this year on a number of fronts — whether the OEMs are going to have new reg engines ready, how the rules are going to be enforced, and the demand dynamics around that. Can you give us a rundown on how those moving parts are shaping your expectations? Rusty Rush: That is a good statement there, Avi. It is kind of crazy, is it not? We are April 30 tomorrow, we have eight months left in the year, and we still do not have definitive regulations printed. When I am talking about emissions regulations, the EPA has sent out signals and told people what they are going to do — supposedly keep it at 0.35 — but they have not clarified about credits, whether there are going to be NCPs, things like that. We are probably still 60 days away from it. Regardless, we do know there are going to be new emissions regulations, and I think that has spurred customers to order. Order activity, starting in December, has been up dramatically from where it was the prior seven or eight months. Even with that uncertainty, there is certainty that something is going to happen; exactly what it is, we are not sure because it has not been posted by the EPA yet. We hope to know within the next 45 to 60 days, though that timeline keeps getting kicked down the road. The most important thing is customers are more optimistic, finally, because of contraction on the supply side — taking trucks out, whether through nondomicile, building fewer trucks in the back half of last year and in the first quarter of this year. On the supply side, things have squeezed down. Customers are more optimistic about rates. If you had asked me three or four months ago, everyone said flat to low single digits; then it was mid-single digits; and now people are looking at maybe high single-digit increases. So people are optimistic. At the same time, to your point about emissions, we do not know clearly what it is going to be, but we do know it is going to be stricter, whether there will be NCPs and costs go up dramatically, or total enforcement of what is out there for EPA in 2027. That is about the best I can tell you — there is still uncertainty, but something is coming down the tracks; we just do not know exactly what. Avinatan Jaroslawicz: Understood. As a follow-up, thinking about improving conditions in the freight market driven by capacity reductions — that does not necessarily help parts and service as much as improving freight activity. What are you seeing there, and when might parts and service volumes inflect positively? Rusty Rush: Theoretically, people believe that when truck sales go down you get more parts and service, but that is not really the case because people cut back their budgets. That is what we have seen — we have remained fairly flat over the last couple of quarters. In spite of inflation, we have remained flat because people have tightened their belts. The best thing is for their business to get better. Historically, when customers feel better and are more optimistic, there will be no postponing of maintenance or repairs. When income goes down, you take what you spend down too — no different than managing your household. The most encouraging thing will be seeing second- and third-quarter releases and hearing about contract rates going up so that optimism comes to fruition. We have gradually improved: February was better than January, March was better than February, and April looks a little better than March. As conditions improve, parts and service will improve as well. Tonnage was up for the first time in two or three years in February, if I am not mistaken. It is getting a little better not just from the supply side but also demand. There are outliers — overseas events, fuel — but the general macro environment for continued improvement at the customer level is there without interruptions from geopolitics. I believe it is going to be a gradual, continued improvement based on conversations with many customers and people around the industry. Avinatan Jaroslawicz: Appreciate the perspective, Rusty. Rusty Rush: I am going to pass it on. Operator: Thank you. One moment for the next question. Our next question is coming from the line of Brady Lierz of Stephens. Your line is open. Brady Lierz: Thanks, and good morning, Rusty. You mentioned you expect overall commercial vehicle sales to improve gradually. Can you help break that out between heavy duty and medium/light duty? Given the weakness in medium duty in the first quarter, should we see a more immediate recovery there versus Class 8? Rusty Rush: Sequentially, yes, because medium duty was so off in Q1. From a percentage basis, you are going to see medium improve quicker because heavy duty was not off as badly as the market — we were off about 6%, the market was down 20% to 21% — and we were way off in medium, and a lot of it was timing. Sequentially, medium will pick up quicker because we are starting at a lower base. Looking at the year, I expect a better year on the Class 8 side than medium; medium will be closer to flat for the year, catching back up, which bodes well for the next few quarters because we started in such a hole on medium duty. I expect heavy duty to continue to ramp up. If you want a number, say Class 8 up 15% in Q2 if things hold together, we get some emissions clarification, and business continues to look better for our customer base, across vocational and over-the-road. Over-the-road is still the biggest market — about two-thirds — so if that continues to get better, we will continue to increase quarter by quarter as the year goes and roll into Q1 next year. From an emissions perspective, it is all about when the engine was built; those engines are usually built maybe halfway through January, and because we are the retailer, it takes anywhere from 32 days to five months depending on the product to reach the customer. That bodes well for us all the way through next year in Q1. The number that comes out this year probably is not more than a normal replacement, but it will be backloaded. Q1 Class 8 retail of about 41,000 units was the lowest in years, and medium was the lowest since 2015. So with emissions regulations and improving economic conditions for our customer base — as long as geopolitics stay out of the way — it is set to ramp up slowly. Q2 should be better than Q1, not dramatically, and build from there through the rest of the year and through Q1 next year. Typically, parts and service should build as well; it has been slowly building, and I am looking forward to seeing it ramp up a little faster. Brady Lierz: Thanks for the color. As a follow-up, the reduction in capacity is driving improvement in freight. How do you think that affects new truck sales this cycle? Is that a headwind, or does the emissions regulation offset it? Rusty Rush: The first thing was supply — it has been pulled out for the last three quarters. If you took Q3, Q4, and Q1 and strung them together, retail demand would annualize under 200,000 units in the U.S. That has taken supply out, but you need both supply contraction and demand improvement. It was nice to see tonnage bump up in February. Even if it is not robust, having both helps. ACT says the U.S. Class 8 market will be about 225,000 this year. That implies it needs to average around 60,000 a quarter for the last three quarters, a 50% bump from Q1, and it will not be evenly loaded — maybe 50,000 in Q2, then higher in Q3 and Q4 — which is at or slightly under replacement. We just went through a three-year freight recession — I have never seen one like that — and I felt for a lot of our customers. We were fortunate with our diversified business model that we do not rely on one revenue stream. The average fleet age is probably a little over half a year older than where most want it. Even if we have a big ramp up and average 60,000 in the last three quarters, we are still only at replacement. That is not a huge pre-buy that would cause a big drop in 2027. I think we should roll through 2026 and not see a big drop in 2027, at least from my viewpoint. Brady Lierz: Thanks so much for the time this morning, Rusty. I will pass it along. Rusty Rush: You bet. Thank you. Operator: Thank you. One moment for the next question. The next question will be coming from the line of Andrew Obin of Bank of America. Please go ahead. Andrew Obin: Good morning, Rusty. Maybe we can talk about parts and services. You have a big initiative with large corporate customers. How is that initiative progressing? Do you think you are outgrowing the industry on parts and services, and what levers do you have to keep outgrowing the industry? Rusty Rush: In the first quarter, we were probably close to in line. Across the quarter, the hardest-hit piece was service. Service was back for us in Q1, and that is why our margin mix was down a little — service margins are much higher than parts. I was nervous, asking what we were doing wrong, but through our manufacturers I have statistics on other dealer groups. Service was off across a large group of about 200-plus dealers around 3% to 4%. We were off a little less than that. Customer spend was off in Q1 — belt-tightening. On the initiative, yes, our initiatives are still in place. We grew our national account business on the parts side, but people really tightened up on service. You can extend maintenance intervals; you do not have to fix every oil leak; you can extend oil change intervals by 5,000 miles — when things are tight, that is what people do. As their business gets better, they get back to a more normalized spending cycle. Parts was up; service was down, similar to what I saw from others. As business improves, spending normalizes. Spot market rates were up 25% to 30% year over year; the balance between spot and contract got way better. That allows folks to be more optimistic, and when they are optimistic, people spend money. We love our business model — leasing, parts, service, sales — multiple revenue streams that allow us to balance through cycles. Our parts and service initiatives are ongoing; parts was slightly up and will get better through that initiative and others we are not discussing publicly. You have always got to have something going. Andrew Obin: You have a footprint across the country and sometimes share macro views. What are you seeing overall and in key verticals? You have a big off-road presence — what are you seeing there? Any impact in oil and gas from higher commodity prices? And on-road as well. Rusty Rush: Geographically and by vertical, we were up slightly in refuse and construction in the first quarter; most other areas were flat. Our national accounts were pretty flat in Q1 — they were up last year — and we are not keeping up with plan in the first quarter. The most notable softness is in our unmanaged accounts — small customers — which still make up a little over 30% of our business. That segment is down almost another 10% in the first quarter, on top of a weak last year, but we managed to make up revenues in different sectors, particularly vocational — refuse, construction, and other vocational businesses — from a parts and service perspective. Geographically, Florida continues to be strong. On oil and gas, we have not seen a big bump yet; we do expect to possibly see something, but it has not come to fruition yet. Texas is always one of our strongest areas, along with Florida, and we are doing fairly well in the Chicago/Northern Illinois region this year too. Overall, I feel good that we will continue to see gradual improvement without geopolitical interruptions. I prefer consistent, solid growth and taking share rather than a huge pre-buy. Maybe we did not take as much share as I wanted in Q1 — we were slightly better than others, but slightly is not good enough — so we are focused on continuing to execute and rolling out other initiatives. We are ready, willing, and able, and excited for what I believe will be a better environment without outside interruptions. Andrew Obin: Thank you, Rusty. Rusty Rush: You bet. Operator: Thank you. As a reminder, if you would like to ask a question, please press star 11 on your telephone. One moment for the next question. Our next question will be coming from the line of Cole Cousins of Wolfe Research. Please go ahead. Cole Cousins: Yesterday, PACCAR suggested that recent order strength is perhaps a little misleading and that build rates and retail sales remain more muted, and thus the pricing backdrop remains more competitive right now. What do you think is driving recent order strength, and how sustainable are current order rates in the coming months? Rusty Rush: Good question. I believe that while it is not as robust as what we saw in February — about 46,000, one of the seven or eight best months ever — that was a little overstated, driven by one OEM. I do believe there is strength in order intake, and as long as overseas issues do not interfere, there will be sustainability to continued solid order intake. If it is 25,000 to 30,000 a month, I consider that a pretty good month. From our perspective, our order intake continues to remain solid, with a backlog. There is a process — quoting, competitive dynamics — and people are still adjusting to tariffs. OEMs, customers, and ourselves are incorporating that into everyday life; at least we know what they are now. I cannot say it will stay over 35,000 a month, but continued order strength in the 25,000 to 30,000 range would be solid, and we went seven months without a month like that. We started from a low backlog base. As we get more clarity around emissions and as customers’ businesses improve — remember, we did not deliver many trucks the last three quarters — people need to get back to replacing trucks. Some fleets got off their trade cycle last year. U.S. Class 8 was about 216,000 last year, under replacement by 20,000-plus, and it continued to be under replacement into Q1. Even without outside activity, people have to replace trucks; maintenance costs on older trucks go through the roof. I do not think it will be a huge pre-buy, but relative to how bad Q4 and Q1 retail were, you should expect getting back in line. I think it will be solid, continued order growth as customers’ businesses get better, plus the emissions factor we know is coming. Cole Cousins: In the context of an improving demand backdrop and visibility to higher truck prices next year, when do you think we can start to see truck pricing move higher this year? And is there a gross margin opportunity ahead of the EPA transition to sell older trucks you might have in inventory toward the end of the year or into early 2027? Rusty Rush: We have certainly thought about what inventories we are going to carry into the first quarter of next year; as long as the engine stamp date is December 31 or earlier, we can carry them. We will make those determinations. There are still build slots in the back half, and I think a lot of OEMs are protecting some of their Q4 build slots and trying to push them forward because you cannot just go to suppliers and ask for three or four months of sudden ramp — they need a steady run rate. I know build rates have moved up at an OEM or two. From our perspective, we are trying to be properly inventoried going into next year, while still selling into this year — we have done a nice job, but there is still room to sell in the back half. We continue to have activity. On carrying older (pre-2027) engines into next year, we will carry some inventory over as we always do; we might carry a little more into next year depending on how the year plays out and demand, but we will have to wait and see. Cole Cousins: On SG&A, it only increased 2% sequentially in the first quarter — better than historical trends. Can you talk about measures you are taking to drive this cost management? Rusty Rush: A lot like our customers, we knew Q1 was going to be the trough, and this is a credit to the entire organization. It was tough — we had to squeeze down, and we did. SG&A was down year over year about 2.5% on the G&A piece, in spite of inflation and normal raises. That is contributions from everyone. We will try to maintain that discipline — the hardest part is maintaining it if we move into a growing environment. We are not in a growing environment yet, but I can see it coming. We need to get the parts and service business back — that is what drives G&A, not so much truck sales. We had to do some cutbacks; we executed, and it is part of being in a cyclical business. As parts and service go up, we would love to hire back where appropriate; there is a cost to growth. We try to keep at least 40% to 50% of every gross profit dollar in parts and service, but it takes people to make it happen. It was a great job by our team, and I look forward to a little more breathing room as we go downstream without having to be quite so tight. Rusty Rush: Look forward to seeing you folks in a couple of weeks. Operator: That does conclude today’s Q&A session. I would like to turn the call back over to Rusty for closing remarks. Go ahead, please. Rusty Rush: I appreciate everybody joining us this morning, and we look forward to speaking to everyone in July. We will discuss Q2 to see if everything still looks the same — I am banking on it. Thank you. Bye-bye. Operator: Thank you for joining today’s program. You may now disconnect.
Operator: Good morning, and welcome to the Renasant Corporation 2026 First Quarter Earnings Conference Call and Webcast. All participants will be in listen-only mode. After today's presentation, there will be an opportunity to ask questions. To withdraw your request, please press star then 0 on your telephone keypad. Please note this event is being recorded. I would now like to turn the conference over to Kelly W. Hutcheson, Executive Vice President and Chief Accounting Officer with Renasant Corporation. Please go ahead. Kelly W. Hutcheson: Good morning, and thank you for joining us for Renasant Corporation's quarterly webcast and conference call. Participating in the call today are members of Renasant’s executive management team. Before we begin, please note that many of our comments during this call will be forward-looking statements, which involve risk and uncertainty. There are many factors that could cause actual results to differ materially from the anticipated results or other expectations expressed in the forward-looking statements. Such factors include, but are not limited to, changes in the mix and cost of our funding sources, interest rate fluctuation, regulatory changes, portfolio performance, and other factors discussed in our recent filings with the Securities and Exchange Commission, including our recently filed earnings release, which has been posted to our corporate site www.renaissance.com at the press releases link under the news and market data tab. We undertake no obligation, and we specifically disclaim any obligation, to update or revise forward-looking statements to reflect changed assumptions, the occurrence of unanticipated events, or changes to future operating results over time. In addition, some of the financial measures that we may discuss this morning are non-GAAP financial measures. A reconciliation of the non-GAAP measures to the most comparable GAAP measures can be found in our earnings release. I will now turn the call over to our President and Chief Executive Officer, Kevin D. Chapman. Kevin D. Chapman: Thank you, Kelly, and good morning. Two years ago, we challenged ourselves by setting aspirational goals to improve our financial performance. At that time, we targeted 2026 as a key measuring stick that would show the financial benefits of our work. Frankly, the strong results for the first quarter exceed our goals. Adjusted earnings per share were $0.93 in the first quarter, representing a 41% increase year over year. For the quarter, adjusted return on assets grew from 95 basis points in 2025 to 133 basis points in 2026. Our adjusted return on tangible equity grew from 10.3% to 16.3%. And last of all, the efficiency ratio improved from 65.5% to 55.7%. I am extremely proud of our team's accomplishments to remain customer-centric while we went through our largest merger, conversion, and integration. As we move forward, the team is engaged and focused on the priorities for our company to continue to grow customer relationships and hiring talented bankers. I will now turn the call over to Jim to give more details on the financial results. James C. Mabry: Thank you, Kevin, and good morning. Looking at the balance sheet, loans were down $71.8 million on a linked-quarter basis, or 1.5% annualized. Deposits were up $626.4 million from the fourth quarter, or 11.8% annualized. Reported net interest margin decreased 2 basis points to 3.87%, while adjusted margin decreased 1 basis point to 3.61% on a linked-quarter basis. Our adjusted total cost of deposits decreased 3 basis points to 1.94%, while our adjusted loan yields decreased 7 basis points to 6.04%. From a capital standpoint, all regulatory capital ratios remain in excess of required minimums to be considered well capitalized. We recorded a credit loss provision on loans of $8.1 million, comprised of $4.2 million for funded loans and $3.9 million for unfunded commitments. Net charge-offs were $2.3 million, and the ACL as a percentage of total loans increased 2 basis points quarter over quarter to 1.56%. Turning to the income statement, our adjusted pre-provision net revenue was $118.3 million. Net interest income decreased $3.8 million quarter over quarter. Noninterest income was $50.3 million in the first quarter, a linked-quarter decrease of $0.9 million. The decline in noninterest income is primarily related to the recognition in the fourth quarter of a one-time gain of $2.0 million resulting from the exit of low-income housing tax credit partnerships. The absence of this gain in the first quarter was partially offset by strong performance on SBA loan sales. Noninterest expense was $155.3 million for the first quarter. Excluding merger and conversion expenses of $10.6 million in the fourth quarter, this is a linked-quarter decrease of $4.9 million. I will now turn the call back over to Kevin. Kevin D. Chapman: Thank you, Jim. We believe that Renasant Corporation is uniquely positioned to capitalize on organic growth opportunities. We appreciate your interest in Renasant Corporation and look forward to further discussing our results with you this morning. I will now turn the call over to the operator for questions. Operator: Thank you. We will now open the call for questions. To ask a question, you may press star then 1 on your telephone keypad. If you are using a speakerphone, please pick up your handset before pressing the keys. Please press star then 2 to withdraw your question. At this time, we will pause momentarily to assemble our roster. The first question comes from Michael Edward Rose with Raymond James. Please go ahead. Michael Edward Rose: Hey, good morning, guys. Thanks for taking my questions. Just wanted to start on expenses. Obviously, a lot of hard work has been done on the first cost savings. The step down was maybe a little bit better than I think you guys talked about last quarter. Maybe, Kevin, if you can just give us an update on where the merger cost savings stand. I would assume that you have got most of them at this point, but wanted to see if there is anything left. Maybe you can also talk about the reduction in employee headcount that you have had and if we can assume that there would be a little bit of growth off of this $155 million rate that we saw in the first quarter? Just trying to get a near-term outlook. Thanks. James C. Mabry: Michael, it is Jim. I will start, and I am sure Kevin will add some color. We are really pleased with what has happened in that line item. It has been a focus, as you know, for the company for a number of years, and we started to see real progress beginning, call it, 18 months ago, even before we started to see the benefits from the merger with First, we could see it start to bend down. That has been a focus and remains a focus. In terms of where we go from here, as you point out, we hit our goals with respect to expense saves from First, so very pleased with that. I do not see a lot of savings associated with the merger from this point on; I think we have realized most of those expense saves. That is not to say that we cannot do more just as a company as a whole, but I think expenses that are truly related to the merger are pretty much in this run rate. Looking forward, there are a couple of things. We will have merit increases, obviously, in the second quarter, and there is a day-count factor as we look to Q2 and beyond. Those things will cause expenses to drift up moderately. The other variable is we have seen and are seeing opportunities to hire. As you know, there is a lot of dislocation going on in the marketplace, and we have seen that already and expect to see more of it. I would say that is the part of the picture on noninterest expense that will be a little hard to predict because, as Kevin points out, we see opportunities to be opportunistic and we intend to pursue those. From Q1, probably a low single-digit percent increase is a fair expectation, and that factors in some of the hiring Kevin is talking about, but that piece is tough to forecast. At its base, day count and merit are probably low single digits, and then we will see what comes from the hiring that will add to that. Kevin D. Chapman: Yeah, will do. Thank you, Jim. And Michael, good morning. I will just add, you mentioned headcount. If you go back to June 2024, which is when we announced the merger with First in July, but if you look at just our combined FTEs, we were just shy of 3,400 employees. If you take us plus them, that is what our FTEs were. At 3/31, that number will be about 2,950. So we have carved out 450 employees over that time period. Not all of them were due to the cost saves of the merger. Prior to that, Renasant Corporation was highly focused on accountability and ensuring that we had the right team for what we wanted to be. I agree with Jim that our cost save number has been achieved, but the accountability measures and the requirements to be higher performing at Renasant Corporation have not changed. We will continue to focus on that, find incremental ways to improve costs, and reallocate expenses to higher-performing endeavors. That effort will not change. That did not occur because of First; that was happening long before that. Jim also mentioned the new hires. One thing that is hidden in the focus on expenses that we have had over the past couple of quarters is the hiring we have been doing. The cost saves are cost saves, and the expenses where they land today include new hires that we have been making along the past several quarters. In Q1, we hired 18 revenue producers. In Q4, we hired 6, and in Q3 of last year, we hired 9. So if you look at the real cost saves associated with the merger and accountability measures, it is much deeper than what we are showing optically in the numbers. We are extremely excited about the hiring opportunities we have and the market dislocation that is giving us the opportunity to have conversations with extremely talented bankers all throughout the Southeast. And I think we have said it in the past: we grade out your employees A, B, C, D, and S. We will always hire A-rated talent when it is available, and maybe I will say it a little bit more pointedly: we will not flinch at the opportunity to hire A-rated talent. We are seeing that opportunity all around us right now. Michael Edward Rose: That is great color. So not trying to pin you down, but just as a starting point, it sounds like with the puts and takes, a couple of million bucks higher in the second quarter is what we could expect. Is that fair? Just trying to better appreciate a starting run rate and the seasonality aspect. James C. Mabry: I would say from Q1, probably a low single-digit percent increase, and that factors in some of the hiring Kevin is talking about, but that is variable and hard to predict because, as Kevin points out, we see opportunities to be opportunistic and we intend to pursue those. So that is the piece that is a little tough to forecast. But at its base, day count and merit are probably low single digits, and then we will see what comes from the hiring that will add to that. Michael Edward Rose: Perfect. Appreciate that, Jim. Maybe just as a follow-up, I think the one thing you point to this quarter was just the loan contraction. It looks like production was down maybe a little bit more than some of us expected, and down year over year as well despite the addition of First. Maybe you can update loan growth expectations from here. I think last quarter, you talked about mid-single digits for the year. That could be a little tough just given the starting point. Any puts and takes, and then maybe what paydowns would look like? Thanks. Kevin D. Chapman: Yes. We recognize loan growth was slightly down, but it has not changed our outlook for our growth profile. We think we are squarely a mid-single-digit grower. Michael, when I listen to conversations and get feedback from our team, they are active and engaged. If you break down Q1 into the three months, January and February we had good growth. In March, that growth evaporated a little bit. Two things caused that. One was some macro events. We saw some of our pipeline and some opportunities get pushed into Q2. Right now, at the beginning of the quarter, our pipeline is up 30% from where it was at the beginning of the year. So I think some of it is our pipeline got pushed with some macro events. The other thing is that we saw some very aggressive pricing and terms from some incumbent banks that were being aggressive to retain customers. Those two things led to the slight decrease in our loan growth in Q1. We think one of those corrects with that pipeline being pushed into Q2, and we will continue to operate in a very competitive environment and make decisions that are best for Renasant Corporation. In some cases, we may try to match terms; in other cases, we may not. In talking with our team, we still have confidence that over the course of several quarters, we are a mid-single-digit grower. Michael Edward Rose: All right. So it sounds like you are reaffirming the outlook for the year. I will step back. Thanks, guys. Operator: Thank you. The next question comes from Catherine Mealor with KBW. Please go ahead. Catherine Mealor: Thanks. Good morning. I see you reaffirmed the mid-single-digit growth outlook. The deposit growth was really strong this quarter. Can you talk about if any of that was seasonal or should pull back, and how you are thinking about deposit growth relative to loan growth for the year? And with the deposits, what you are seeing on incremental deposit costs as well? Thanks. James C. Mabry: Sure. Catherine, good morning. The first quarter was a good quarter in terms of deposit growth, and there was some seasonality to it, much of that in public funds. We felt some of those tailwinds reverse in Q1 after public fund outflows in the latter half of last year. So a meaningful, call it 50% or 60%, of the growth we saw in Q1 came from public funds, and the balance was core deposit growth. Looking forward, we will have some seasonality here in April with tax season, plus we will start to see some of those public inflows moderate as we go throughout the year and trend downward. Our outlook overall for the year is mid-single-digit growth in deposits. That is the goal and what we are focused on in terms of growing core deposits in that mid-single-digit range. We want that growth to be roughly parallel with loan growth, and that is still our outlook for the year. Kevin D. Chapman: Catherine, I may just add that we recognize public funds are creating some noise. But if you look through that and tie this back to the market disruption, we have seen an uptick in April in new account openings on deposits, and it is a marked improvement. One data point I learned this morning: over the last four days, we have opened up 340 deposit accounts. The normal trend line in 2025 was probably a couple of hundred accounts per month, and over the last four days, we have opened over 300. I think that is an interesting data point that will ultimately show up in the numbers. It also speaks to how our team is responding throughout our markets and meeting the needs of customers who may be uncertain at this moment. As we get into Q2 and Q3, we will see how it plays out with balance sheet growth. Catherine Mealor: That is great. Thank you. Then maybe thinking about average earning asset growth, it looks like the bond book increased this quarter, and maybe that replaced some of the slowness of the loan growth this quarter and that is temporary. Do you expect to continue to grow securities as we move through the year, or do you think the back half of the year is really more geared towards loan growth and the bond book will be a little bit more flat? James C. Mabry: That is the outlook we would hope for. As you pointed out, we did not have quite the loan growth that we anticipated, and that was some of the reason you saw the growth in the bond book. As we go through the year, our securities portfolio is roughly $4 billion, plus or minus, and that is comfortably $1 billion above where we feel comfortable. So there is plenty of capacity there to fund loan growth, and we would expect and hope that the securities portfolio starts to trend downward as we have that loan growth. Some of that will depend on what we see on the deposit side, but you are correct to point out that was a function of strong deposit growth and lower-than-average loan growth in Q1. Catherine Mealor: Great. Thank you. Great quarter, guys. Kevin D. Chapman: Thank you, Catherine. Operator: The next question comes from Matthew Covington Olney with Stephens. Please go ahead. Matthew Covington Olney: Hey, thanks. Good morning. I wanted to follow up on the net interest margin discussion. I think last time we talked on the call, we talked about the margin being relatively flattish for the year with the expectation of a few rate cuts. Would love to hear updated thoughts on the net interest margin absent any rate cuts and any kind of sensitivity you have if the Fed does cut from here? Thanks. James C. Mabry: Good morning, Matt. Our guidance is really unchanged on the margin. Our current forecast does not have any rate cuts in it, even though, as you point out, we had two cuts in our prior model when we had the fourth quarter call. It really does not change the outlook for NIM that much. The outlook from here is stable in the core NIM. If we get a couple of cuts, we do not think that really influences it very much. So I think it is steady as she goes on core NIM for the balance of 2026. Matthew Covington Olney: Appreciate that, Jim. Following up on that, deposit costs look great this quarter and moved down a little bit more. Any more opportunities on the overall funding side for improvement from what we saw in the first quarter? James C. Mabry: I would say not much, Matt. I think we have exhausted much of what we are going to see in terms of repricing opportunities on the deposit side. We still do have, on the left-hand side, loans maturing. I think we have $1.2 billion to $3.0 billion over the next 12 months at about 5% or 5.1%. So that represents some repricing benefit, but not so much on the deposit side. Kevin D. Chapman: Okay. Great. Thank you, Matt. Operator: Next question comes from David Jason Bishop with Hovde Group. Please go ahead. David Jason Bishop: Hey, good morning, gentlemen. Kevin, I am curious—you talked about the hiring opportunities within the market. Are there any specific niches or segments that maybe you are not in that are enticing you here? Or are these the tried and true commercial C&I bankers that you are going to be targeting? Thanks. Kevin D. Chapman: Yes. Not so much niches per se, but we are seeing the opportunity to build out some areas outside of your traditional commercial bankers or bankers in a specific market. We are seeing the ability to more fully develop and mature some business lines that we already have, whether it is some of our secured lending conversations or, in the case of a line of business like wealth management, we are seeing opportunity there. We already have some of these throughout our footprint; this gives us the ability to get more depth and reach in those business lines. We are not necessarily looking to add a new vertical in a lending unit; it is really about adding more bench strength within already established lines of business or some of our established secured lending lines. That is outside of your traditional C&I or market-specific banking team. The opportunity for conversations and hiring is all throughout. With the disruption and how we overlay with the disruption—we created an internal map that overlays our footprint with the markets that are going through disruption—and we overlay nicely with that. To quantify the opportunity, there is over $90 billion in deposits that are currently going through a transformational merger. I am not saying we are going to pick up $90 billion, but it shows the level of disruption that is happening. We also firmly believe there is going to continue to be M&A in the Southeast, and that disruption just gets louder. To be in a position where Renasant Corporation is today—converted, merged, integrated, and focused on customers and employees—that is a very good place to be right now in a world of disruption. Stability is a great place to be in a world of disruption. Specifically to your question, we are having conversations with people that bring sticky business and sticky revenue that will enhance and complement what we do. David Jason Bishop: Great. And one follow-up on the buyback and the aggressiveness there. Holistically, is there any targeted CET1 or regulatory capital ratios that govern how aggressive you are going to be? Thanks. James C. Mabry: Thanks, Dave. Our outlook there is similar to what we talked about in the Q4 call. If we pick CET1 as a ratio, we started the year at roughly 11.25%, plus or minus. Our desired outcome would be to roughly finish somewhere in that range at year end. Balance sheet growth will play a role in that, but our expectation is to take care of whatever balance sheet growth comes our way and make sure we capitalize that, and then continue to lean into buybacks. As you saw, we were active in Q1, and we continued that activity in early Q2. Our goal is to continue to avail ourselves of buybacks. We are very optimistic about our performance outlook as a company, and we like the opportunity to invest in our stock, bearing in mind those capital guardrails. Our goal is to continue to take advantage of opportunities to buy back our stock. David Jason Bishop: Great. Appreciate the color. Operator: The next question comes from Stephen Kendall Scouten with Piper Sandler. Please go ahead. Stephen Kendall Scouten: Yes, thanks, guys. Good morning. Maybe a little bit following up on that line of questioning, but just wondering how aggressive you would see yourselves being in this macro environment—the level of cautiousness versus the opportunity set before you—and a mindset of always wanting to hire A talent when it is out there. How do you balance that as you look ahead to the rest of this year? Kevin D. Chapman: Great question, and I will be very holistic because I think it speaks to our capital plan. This is a long-term plan, and if you look at what we have been doing over the last couple of quarters, we have been fully enacting this. That plan starts with a strong balance sheet, strong capital ratios, and a strong allowance for loan loss. We try to think in terms of optionality and being best positioned in a variety of scenarios. We believe we are well positioned to be opportunistic to deploy capital for future hiring and have capital allocated for future growth. If things get bad from a macro level—if you start looking at the stability of a balance sheet or the strength of a holding company, the cash on hand at a holding company, or in a stress scenario with allowance—we are going to screen out very well in that draconian scenario as well. We can be opportunistic in a good environment or defensive in a bad environment. That is a great place to be in a world of uncertainty where the whole world can change in a matter of minutes. From a return on tangible common equity or return on Tier 1 capital, being at 16% gives us a lot of optionality. It gives us the ability to pay roughly a 30% dividend payout ratio, stockpile capital for future growth, and have extra capital to either stockpile for future M&A, stockpile for future hires and their growth, or look at the option of buying back in the form of a stock buyback. With where we have gotten the profitability of the company, particularly from our return on Tier 1 capital and return on tangible common equity, that gives us a lot of optionality to choose which way we want to lean based on how we see hiring, performance of the stock, M&A, or simply being defensive. We feel like we are well positioned to have that option in our control as opposed to being behind as the environment changes, and it could change rapidly. Stephen Kendall Scouten: That is great color, Kevin. I appreciate the idea of the optionality there. One follow-up: as you think about the concentration of new hires, would you say it has been more about where those opportunities exist currently based on dislocation, or has there been any incremental effort to deepen the newer markets that you entered into from First? Where are those hires concentrated, if at all? Kevin D. Chapman: They are really targeted in markets where we do not necessarily have the market share that we want to have. For example, in North Mississippi, we have done some selective hiring, but our teams have mainly been focused on customer acquisition as opposed to talent acquisition because of the overlap. In other areas and markets, it has given us the opportunity to build bench strength. There are certain parts of our company where it always feels like we are a player or two behind; this has given us the opportunity to get a player or two ahead in those areas and build bench strength, taking pressure off of our current employees. They do a great job, but we want to give them additional support. We are also taking the opportunity to pick up back-office talent. Our back office has tremendous talent, and this gives us the ability to build bench strength and extend our runway to have the potential to grow to higher levels than we are currently contemplating. By adding that staff today, it will give us that runway and optionality to become a bigger bank without immediately meeting growing pains. We are being very selective, but I would say most of it is targeted in either new markets where we want to build out additional footprint and market share, or very selective places where we are adding talent to provide more bench strength. Stephen Kendall Scouten: Great. Very helpful. Congrats on a great start to the year. Operator: The next question comes from Analyst with TD Cowen. Please go ahead. Analyst: Good morning. You have already touched on it, and I understand that payoffs and paydowns you can never really predict precisely. But is it realistic to assume that your CRE loans are going to continue to decline from here and a lot of your growth will be coming from C&I? Or do you have a line of sight into where the low point is on CRE and things are likely to improve in 2026? David L. Meredith: Janet, good morning. This is David Meredith. We will look at it a few different ways. One, CRE is not an area we intend to shrink. We continue to have a great deal of focus on our commercial real estate business. We have some great lines of business that continue to pursue commercial real estate, so it is a dedicated effort we have. There is a lot of noise in commercial real estate. We have had the expectation for an increased level of payoffs for some time based on interest rates and the aging of some properties, so there is going to be a certain level of rotation or volatility in that space as some of them pay off. But we continue to look at new opportunities and continue to be aggressive in that space. Looking at increasing commitments over the last couple of quarters, we have increased commitment levels in our construction book. With the level of equity going into construction projects, it may be six to nine months before you start to see fundings, but we are growing our commitment levels in those areas, and we have done those for the past couple of quarters as well. We will continue to see, based on the interest rate environment, some rotation of loans as they have matured. In the normal course of business for commercial real estate opportunities, borrowers are going to either sell the asset, go to the private debt market, or look for private placement long-term rates—things that are not traditionally a bank-type financing vehicle. So we will continue to see some volatility in that space, but it is definitely an area we are still pursuing at a high level as part of our growth strategy. Along with that, we have seen increased levels of C&I. As you pointed out, we invested in those lines of business—the factoring, asset-based lending, and the corporate C&I effort—and we continue to focus there. But it is a broad base; it is commercial real estate and C&I. We are not being specific in any one area. Analyst: Got it. Thank you for that. It looks like the first quarter fee income saw some strong performance on the SBA loan sales. Where do you see the most upside in terms of fee income opportunities? It looks like there are different puts and takes within the specific line items within fee, but overall it has been growing nicely. How should we think about the pace of your fee income growth from here? James C. Mabry: Good morning. I would say, as you mentioned, SBA is one area that has done really well, and our outlook for the balance of the year would be that, while there are some puts and takes, generally the first quarter is a pretty good jumping-off point. I think there is a chance for some modest improvement there, but it is a good run rate to think about. Mortgage had a good quarter in Q1; it was up a bit from Q4. SBA was good. We did not see—and this relates to some of the commentary about loan production—the capital markets performance that we typically do in Q1. As we start to see that production fall through and become loan growth, I would expect capital markets would exhibit higher levels of fee income. Lastly, wealth is an area that has been very steady. I think that holds promise as we look forward for solid single-digit, mid-single-digit growth and potentially better down the road. We are putting a lot of effort and energy into that area, and with the things we are doing internally with legacy Renasant Corporation and the dislocation around us, I see that as an area that will do well in coming years. Kevin D. Chapman: Jim, I may just add that some of the hiring we have done has enhanced wealth management. You will start to see that revenue lift as we start to exit Q2 and get into Q3 and Q4. I do want to take the opportunity to talk about mortgage. Mortgage was an interesting quarter. If you go back to February, prior to the macro Middle East conflict events and the subsequent rise in rates, the 30-year rate had gotten down to a five handle on a conventional mortgage, and our pipeline popped immediately. It really speaks to how we have built mortgage with the retooling of production we have added. As rates cooperate, that pipeline’s revenue immediately shows up. I know we are not in a position where rates are cooperating with mortgage today; they will continue to slug it out and be profitable. But when rates cooperate, you will see almost an immediate impact for mortgage. You see that a little bit in Q1 because of what happened with rates in February. We wait for the day that we do not have to apologize for mortgage and for being in the mortgage industry. We continue to be well positioned and invest in that arm of our company, and feel like we are really well positioned if rates ever cooperate with us. Operator: We have a follow-up from David Jason Bishop with Hovde Group. Please go ahead. David Jason Bishop: Yes, just a quick follow-up on credit. Trends look fairly well behaved. It looks like there is a little bit of inflow on the nonaccrual side. Maybe some color there. And then, Kevin, holistically, you have taken pride in the reserves as a rainy day fund. Do you think the ACL on loans sits in this mid-1.50% range as you go through the year, or is there a little bit of a bleed if things improve from a macroeconomic perspective? Thanks. David L. Meredith: David, good morning. On the NPL question, we did see a little bit of an inflow and that number has increased somewhat over the last couple of quarters. That increase has been broad-based; there is nothing in particular. For the period, we had about a $24 million increase—about $69 million of new NPLs on $45 million of outflows. We continue to resolve our NPL loans. The inflow was centered in a few larger-dollar transactions—about $7 million in CRE, $19 million in C&I, and a little bit in construction and development—and it was centered in just a handful of loans that we believe we are in a position to work out. The composition of our NPL book continues to be somewhat consistent quarter over quarter. There is not any one area concentrated from an asset type or a geography standpoint. Our average NPL size is small. Looking at our general asset quality, we see some positives. Our 30–89 day numbers continue to be low, and within the breadth of our portfolio, we do not see a broader level of losses. Our charge-offs in Q1 were only 5 basis points. Over the last 12 months, we resolved a high level of NPLs with minimal charge. We feel comfortable that our underwriting is solid and that we are structuring loans properly as we continue to resolve those problems. We will continue to work through NPLs and have processes in place to identify loans early so we can resolve them quickly and mitigate any loss. Kevin D. Chapman: And Dave, I will just add on the allowance. As we look around, credit quality is stable. One thing that concerns us—and this goes back to when we built the allowance in 2020—is all the volatility and uncertainty that is out there putting strain on either consumers’ or commercial businesses’ cash flows. We do not think the macro concerns have alleviated yet. Take what happened in March with energy costs; all you have to do is go fill up your car, and you saw a 30% to 40% increase in 30 days in what it costs just to fill up your car. Ultimately, that has to catch up with people in some way in their cash flows. We will continue to keep what we think is an appropriate level of allowance given the uncertainty. As we have clearer pictures from a macro level, at that point in time we will reevaluate the sufficiency of the allowance. Right now, there is enough macro uncertainty—even though it may not be showing up quantitatively in our credit quality numbers—to keep the level of reserve where it is. David Jason Bishop: Excellent. Thank you. Operator: This concludes our question and answer session. I would like to turn the conference back over to Kevin D. Chapman, President and CEO, for any closing remarks. Kevin D. Chapman: Thank you, and thank you to all of those that have joined us this morning. We appreciate your interest in the company and look forward to meeting with you throughout the quarter. Operator: The conference has now concluded. Thank you for attending today's presentation. You may now disconnect. Unknown Speaker: Goodbye.
Operator: Hello. And welcome to the ExlService Holdings, Inc. First Quarter 2026 Earnings Conference Call. At which time you will be given instructions for the question and answer session. Also, as a reminder, this conference is being recorded today. If you have any objections, please disconnect at this time. I will now turn the call over to Andrew Tutt, Head of Investor Relations and Capital Markets. Andrew Tutt: Thanks, Jenny. Hello, and thank you for joining ExlService Holdings, Inc.'s first quarter 2026 financial results conference call. On the call with me today are Rohit Kapoor, Chairman and Chief Executive Officer, and Maurizio Nicolelli, Chief Financial Officer. I hope you have had an opportunity to review the first quarter earnings press release we issued yesterday afternoon. We have also posted a slide deck and investor fact sheet on our Investor Relations website. As a reminder, some of the matters we will discuss this morning are forward-looking. Please keep in mind that these forward-looking statements are subject to known and unknown risks and uncertainties that could cause actual results to differ materially from those expressed or implied by such statements. Such risks and uncertainties include, but are not limited to, those factors set forth in yesterday's press release and in ExlService Holdings, Inc.'s filings with the Securities and Exchange Commission from time to time. ExlService Holdings, Inc. assumes no obligation to update the information presented on this call today. During our call, we may reference certain non-GAAP financial measures, which we believe provide useful information for investors. Reconciliations of these measures to GAAP can be found in our press release, slide deck, and investor fact sheet. With that, I will turn the call over to Rohit. Rohit? Rohit Kapoor: Thank you, Andrew, and good morning, everyone. We entered 2026 with strong momentum. In the first quarter, ExlService Holdings, Inc. generated revenue of $570 million, up 14% year over year, and adjusted earnings of $0.58 per share, an increase of 20% year over year. Our sustained double-digit growth demonstrates the strength of our competitive position as well as strong execution against our data and AI strategy. ExlService Holdings, Inc.'s recognized industry expertise and leadership in helping clients adopt AI throughout their enterprise is resonating strongly with the market and fueling our growth with new and existing clients. Demand is being driven by scaled deployments of AI inside core client workflows where ExlService Holdings, Inc. delivers measurable productivity, increased effectiveness, and superior risk-based outcomes. Underpinning this growth is a combination of capabilities that has taken over two decades to build. Helping our clients adopt AI in complex regulated industries requires more than technology. It requires deep familiarity with the operational workflows, regulatory frameworks, and data ecosystems that define how our clients actually operate. This is where our unique combination of domain, data, and AI expertise differentiates ExlService Holdings, Inc. and drives superior client outcomes. ExlService Holdings, Inc.'s proprietary data assets, domain-specific AI models, and orchestration capabilities allow us to embed intelligence directly into how work gets done—not as an overlay but as an integrated part of the process. It is one of the key reasons our renewal rates remain high and we continue to grow at market-leading rates. In addition to our segments, we also provide revenue information across two categories, data and AI-led and digital operations. Data and AI-led revenues grew 28% year over year in Q1, and now represent 60% of the company total. We are seeing strong momentum across our full portfolio of data and AI-led offerings, as clients are stepping up the pace of AI adoption and need help with data for AI, design of their agentic AI systems, and reimagining business processes. Most of our clients across verticals need to improve the way that they capture, enrich, and utilize their structured and unstructured data to drive AI outcomes. We are seeing strong market interest in our EXL Data.ai platform, which helps clients preserve domain-specific semantic context as they build new AI-ready data foundations. And we are continuing to leverage AI in solutions that we manage, which is both driving greater efficiencies and creating new value for clients by increasing precision and enabling improved outcomes. We are embedding AI both in our data and AI-led solutions as well as the operations that we manage for our clients. This last point is important and worth stressing. When we successfully embed AI into an existing client workflow, the nature of that engagement changes. It becomes more intelligent, more IP-led, and more value added. The revenue associated with it moves from our digital operations category into our data and AI-led category. As I communicated to you last quarter, in order to provide greater transparency we share in our investor fact sheet a total operations view that combines digital operations and data and AI-led operations that have migrated into our data and AI-led category. In Q1, total operations grew 10% year over year and remains a growth driver for our company's revenue. The reported digital operations revenue after that migration was down 2% year over year. This is by design. We expect this deliberate and planned shift to continue going forward. We saw strong performance across each of our four operating segments to start the year. Insurance grew 13% year over year, representing over a third of our revenues. I am particularly pleased to see it return to double-digit growth. Insurers are accelerating adoption of AI to improve underwriting, claims, and customer experience. We are seeing strong deal activity across all market segments. Healthcare and Life Sciences grew 21% year over year, representing over a quarter of our revenues. Payers and providers are facing rising cost pressures, regulatory complexity, and margin strain. They are turning to ExlService Holdings, Inc. to apply AI at scale to improve productivity and outcomes. Payment integrity continues to be a significant driver of growth along with broad-based strength in analytics, AI services and solutions, and operations. Banking, capital markets and diversified industries grew 8% year over year and represented a quarter of revenue. The quarter saw very high deal activity and we remain confident in continued progress as the year unfolds. International growth markets grew 13% year over year, reflecting successful AI-led expansions in new and existing clients. International markets are an important driver of our long-term growth and global expansion strategy, and we continue to invest in talent and partnerships to expand our footprint. During the quarter, we hosted our annual AI in Action flagship event bringing together senior business and technology leaders from across our client and partner ecosystem. The focus this year was on what it takes to make agentic AI real inside enterprise operations, from building the right data foundations to orchestrating AI across complex workflows. The level of engagement and the participation reinforced what we are seeing in our pipeline. Enterprises are moving from AI curiosity to AI in production. And we are the partner that can help them execute. We are also seeing co-innovation with our technology partners continuing to resonate and earn us industry recognition. ExlService Holdings, Inc. was recently named Advanced Technology Partner of the Year by NVIDIA, Best New Partner of the Year by Genesys, and AI and Machine Learning Market Disruptor of the Year by AWS. These partnerships are not only enabling our differentiated solutions, they are becoming meaningful go-to-market and pipeline contributors. In summary, ExlService Holdings, Inc. entered 2026 with strong momentum, and we have excellent visibility for the remainder of the year. Demand for our data and AI-led services and solutions remains robust, continuing the momentum we saw at the end of 2025. We continue to strengthen our position through investments in capabilities, partnerships, and talent. Our portfolio is well balanced. Our pipeline is strong. And we have high renewal rates. More than 75% of our revenue is recurring or annuity-like, providing revenue stability and a great line of sight for the year. For full year 2026, we are increasing our revenue guidance to a range of $2.3 billion to $2.33 billion, representing 10% to 12% constant currency organic growth. We are also increasing our adjusted diluted EPS to $2.18 to $2.23, representing 12% to 14% year-over-year growth. As always, I want to thank our clients, partners, and employees for their trust and commitment and to our shareholders for their continued support. Before I hand it over to Maurizio, I would like to remind you that we will be hosting our Investor and Analyst Day on May 13 in New York. We will share our multiyear growth framework, AI monetization model, and client case studies that bring our AI strategy to life. For those of you looking to understand the ExlService Holdings, Inc. growth story, this is the event to attend. Please reach out to Andrew for details. I look forward to seeing you there. I will now turn the call over to Maurizio to provide more details on our financial performance. Maurizio Nicolelli: Thank you, Rohit, and thanks, everyone, for joining us this morning. I will provide insights into our financial performance for the first quarter and our revised outlook for 2026. We delivered a strong first quarter with revenue of $570.4 million, up 13.8% year over year on a reported basis and 13.4% on a constant currency basis. Sequentially, we grew 5.1% on a constant currency basis. Adjusted EPS was $0.58, a year-over-year increase of 20.2%. All revenue growth percentages mentioned hereafter are on a constant currency basis unless otherwise stated. Now, turning to segment revenue for the first quarter. The Insurance segment grew 12.6% year over year with revenue of $193.9 million. This growth was driven by expansion and higher volumes in existing client relationships and new wins. Sequentially, Insurance grew 4.4%. The Insurance vertical, including revenue from International Growth Markets, grew 12.2% year over year with revenue of $226.1 million. The Healthcare and Life Sciences segment reported revenue of $151.9 million, representing growth of 21% year over year and 6.8% sequentially. The year-over-year growth was driven by higher volumes in our payment services business and expansion in existing client relationships with other healthcare services we provide. The Healthcare and Life Sciences vertical, including revenue from International Growth Markets, grew 20.9% year over year with revenue of $152.1 million. In the Banking, Capital Markets and Diversified Industries segment, we reported revenue of $127.4 million, representing growth of 8.1% year over year and 4% sequentially. This growth was driven by new client wins and expansion of existing client relationships. The Banking, Capital Markets and Diversified Industries vertical, including revenue from International Growth Markets, grew 9.4% year over year with revenue of $192.2 million. In the International Growth Markets segment, we generated revenue of $97.1 million, up 10.9% year over year and 5.4% sequentially. This growth was driven by ramp-ups and higher volumes with existing clients and new wins across Banking, Capital Markets and Diversified Industries and Insurance. SG&A expenses as a percentage of revenue increased 20 basis points year over year to 20.4%, driven by investments in data and AI-led solutions. Our adjusted operating margin for the quarter was 20.5%, up 40 basis points year over year, driven primarily by improved gross margins. Our effective tax rate for the quarter was 21.9%, down 40 basis points year over year, driven by higher profits in lower-tax jurisdictions. Our adjusted EPS for the quarter was $0.58, up 20.2% year over year on a reported basis. Our balance sheet remains strong. Our cash, including short- and long-term investments, as of March 31 was $266 million, and our revolver debt was $417 million, for a net debt position of $151 million. During the quarter, we spent $13 million on capital expenditures and repurchased 4.4 million shares at an average price of $31 per share, totaling $136 million. This includes 3.35 million shares received upfront as part of the settlement of our previously announced $125 million accelerated share repurchase. We expect to receive the remaining shares in the second quarter. Now moving on to our outlook for 2026. While we remain cautious about the current macroeconomic climate and geopolitical uncertainties, we are increasing our guidance for the year based on our current growth momentum and our strong pipeline. We now anticipate 2026 revenue to be in the range of $2.3 billion to $2.33 billion. This represents year-over-year growth of 10% to 12% on a reported and constant currency basis. This also represents an increase of $20 million at the midpoint, which includes a $2 million foreign exchange headwind from our previous guidance. We anticipate increased investments in data and AI capabilities and solutions for the rest of the year to expand our competitive advantage and continue to drive top-line revenue growth. We expect a foreign exchange gain of approximately $2 million to $3 million, net interest expense of approximately $6 million to $8 million, and our full-year effective tax rate to be in the range of 21% to 22%. We expect capital expenditures to be in the range of $50 million to $55 million. We anticipate our adjusted EPS to be in the range of $2.18 to $2.23, representing year-over-year growth of 12% to 14%, up from our previous guidance of $2.14 to $2.19. To conclude, we had a strong start to the year, demonstrating unique competitive position and participation in high-growth market segments. Despite the current geopolitical uncertainty, our leading indicators remain positive, and we have a highly adaptable and resilient business model, setting us up well for a solid 2026. With that, Rohit and I would be happy to take your questions. Operator: Thank you. At this time, if you would like to ask a question, please click on the Raise Hand button, which can be found on the black bar at the bottom of your screen. When it is your turn, you will receive a message on your screen from the host allowing you to talk, and then you will hear your name called. Please accept, unmute your audio, and ask your question. As a reminder, we are allowing analysts one question and one related follow-up today. We will pause a moment to allow the queue to form. We will now open the call for questions. Our first question comes from an Analyst with TD Cowen. Please unmute your line and ask your question. Analyst: Hi. Good morning. Thank you. I wanted to ask here on the growth guide. So good to see the raise. Can you just dig in on the key assumptions for data and AI-led versus digital ops growth and maybe how your views on the industries may shape up? And then, Maurizio, just despite the strong commentary here, it does not suggest any demand impact to you. But would you still say this feels like a prudent outlook for the balance of the year? Rohit Kapoor: Hi. So, our growth outlook—you know, we have increased our guidance for the full year. As you all know, our first quarter is typically a strong quarter, and we had a great first quarter this time. What we have seen is that we have been able to outperform our own expectations in the first quarter. We continue to see good pipeline and good demand for our services, and therefore we have increased our guidance for the balance of the year. The data and AI-led part of our business is actually resonating very nicely in the marketplace. It now represents 60% of our total portfolio and it is growing very nicely. Even for digital operations, as we have shared with you, our total operations is actually growing quite nicely as well, and we continue to see demand out there. If you talk about industries, we continue to see good momentum in insurance, in banking, and in healthcare. Some of the industries where we see a little bit of softness are retail and communications. But a majority of our business is really made up of banking, financial services, insurance, and healthcare, and those are all very strong pipelines and demand for us. We do not really provide a break-up, as you know, between data and AI-led and digital operations, but it would be fair to say that our digital operations will grow slightly below the company average and our data and AI-led piece will be powering the growth of the overall company. I will pass it on to Maurizio to talk about the prudent guidance that we have given. Maurizio Nicolelli: Thank you, Rohit. And, we are seeing very good momentum coming into the calendar year. Q1 is normally a strong quarter for us to really start out the year, and we saw that again this year. We continue to see that momentum going into the rest of the year. One thing to highlight is we did raise our guidance at the midpoint by $20 million, more than our beat in the first quarter, and that does include a $2 million FX headwind from the last time we gave guidance. And then lastly, our guidance is going to be a bit prudent and take into account what is happening in the current macro environment and also the geopolitical uncertainties that are out there. We have three more quarters remaining for the rest of the year. We have very good momentum going into the second quarter and the rest of the year, and we have increased our guide. We are still early in the year, and we will continue to revisit our guide as we go forward. But the big positive here is that we have very positive momentum going into the rest of the year from Q1. Analyst: Okay. That is helpful. That is clear. Maybe on margin. So it looks like you outperformed there as well. Can you just comment on any change in the expectation on adjusted operating margin for the year? And is it investment timing—any cadence expectations—just to help? Maurizio Nicolelli: Sure. You saw our adjusted operating margin come in at 20.5% in Q1, and that is up 40 basis points from Q1 of last year. We always see Q1 being a very strong quarter both on revenue and profitability, and that sets us up very well for the rest of the year in terms of investing to continue to drive double-digit growth for the rest of the year and also going into 2027. So you will see us, as you saw last year, start to make additional investments, particularly into our data and AI capabilities during the rest of the year. And our adjusted operating margin forecast for the rest of the year will be similar to what we have talked about—in that 19% range. Analyst: Alright. Great. Thank you. Operator: Our next question comes from David Koning with Baird. Please unmute your line and ask your question. David Koning: Yeah. Hey, guys. Thanks, and great job again. I guess one question: we hear your clients—just all the companies in the environment right now—are really looking for AI savings. Do you get some of them pushing you on price a little bit, just saying, “Hey, we need to find ways to save to show our CEO, our board, etc., that we are saving money”? Do you see that as a price headwind at all or more of a demand tailwind? Rohit Kapoor: Hi, Dave. Let me provide a little bit of context around what we are seeing around the adoption of AI. Number one, we are seeing clients switching over from AI pilots and AI POCs to AI in production. That is a big change, and that started out early this year. Frankly, that is playing to our strengths and the value that we can add to these relationships. The second thing we are seeing is, as clients think about AI in production, they are quite willing to open up access to their technology systems, to their databases, and allow us to make changes to the end-to-end workflow. As you know, the application of AI has to be driven in conjunction with the transformation of the workflow, and we are in the best position to drive that. The third piece is the commercial model is also changing. What we are seeing is, as clients come to us with the adoption of AI to be implemented and enabled, the commercial model is changing much more towards a fixed-fee and milestone-based payment and an outcome-based model. That allows us to manage pricing and margins and add value to the customer relationship. The negotiations and conversations are much more about providing our clients with deterministic benefits associated with AI adoption and for us to do it in a way that allows us to earn a respectable margin. We are not really seeing clients come to us just asking for price reductions. The price reduction is alongside the transformation and alongside the value creation. David Koning: Thank you for that. And just one follow-up. In the International segment, I know you called out a little uncertainty with the conflict. At 17% of revenue, it actually accelerated pretty nicely in the quarter. Would you expect to see a little deceleration there? Maybe describe what the impacts you think would happen. Rohit Kapoor: Dave, firstly, our International Growth Markets is highly underpenetrated, so the opportunity set out there is enormous. Second, we have very little and very limited exposure to the Middle East. Most of our revenue from clients really comes from the UK, Europe, Australia, and New Zealand, and we are seeing healthy adoption of AI in these geographies. Our goal will be to continue to drive greater and faster adoption of our services in the International Growth Markets. We are not really seeing any direct impact due to the conflict as such. There may be some downstream second-degree or third-degree impacts associated with that with our clients. But frankly, it is very fertile ground for us in the International Growth Markets. We are going to continue to invest in that space by adding more talent and bringing more capabilities, and we think we should be able to grow our International Growth Markets business quite nicely, and it should grow at the same level as, if not higher than, the company average growth rate. David Koning: Great. Thank you, guys. Good job. Operator: Our next question comes from Maggie Nolan with William Blair. Please unmute your line and ask your question. Maggie Nolan: Hi. Thank you. I am curious if you can share any perspective on net revenue retention at some of your largest accounts to help us get at the question of volume versus some of this work migration between types of offerings? Rohit Kapoor: Hi, Maggie. That is a great question and something that we have been paying close attention to. As I said earlier, one of the things happening with our more mature clients is, as they ask us to help them adopt AI into their enterprise workflows, we are able to work on much larger pieces of operations for them as compared to the past, and also work on a lot of work associated with building the right kind of data foundation and new service lines which we would not have engaged with them on previously. The landscape at which we are operating—our TAM—is expanding. It is becoming a much bigger playing field for us. At the same time, we are able to deploy AI and eliminate and reduce the amount of manual effort required to do some of these processes and pass on this productivity benefit to our clients. So if you talk about net revenue retention, it still is a growth story for us because, on a net basis, we are seeing a much wider landscape to play in, and we are seeing the revenue size and the size of the operation actually increase despite providing them with a benefit associated with the manual portion of the work that was being done previously. Maggie Nolan: Thank you. And then I noticed in the prepared remarks a little bit of an emphasis on partnerships. I am wondering if there is anything you can share with us to give us a sense of how that is progressing—like what the partner-sourced pipeline looks like or co-selling metrics—and then any variance in things like the deal cycle when you have partnership involvement. Rohit Kapoor: We have been very pleased with the progression of our partner relationships. As you saw, our partners are recognizing our effort and our differentiated capabilities as compared to some of the other players they might be dealing with. The unique thing about ExlService Holdings, Inc. is that we come at the transformation and the adoption of AI from a process and workflow lens and with knowledge of our clients’ business and operations. Our partners are finding that to be a unique value proposition—the knowledge of the domain and the ability to apply contextual understanding of our clients’ business alongside the technologies that our partners are providing. That is creating a huge amount of value uplift for our clients. These partnerships are resonating. The motion is becoming a lot easier and smoother in terms of our go-to-market strategies, and our partners are recognizing us and giving us these awards as compared to other players. Go-to-market is the more exciting part because now, when we interact with clients, we are able to take our partners there, and our partners are also bringing us into deals in which they are participating. The activity and the deal flow have increased substantially, and we foresee that going into the future as well. Maggie Nolan: Thank you. Congratulations. Rohit Kapoor: Thank you. Operator: Our next question comes from Surinder Thind with Jefferies LLC. Please unmute your line and ask your question. Surinder Thind: Rohit, can you help me understand the step-down in the digital ops segment? Over the past couple of years, that was a high single-digit grower. I think the expectation is more muted. Is the idea here that that correlates with the advancement in agentic model capabilities? Should we expect to maybe a year or two from now see a further step-down in that segment as the models further advance? And then ultimately, is all of that getting recaptured in the data and AI-led segment? Rohit Kapoor: Yes, Surinder. Let me try to go through this step by step. Firstly, if you take a look at total operations, that continues to grow and expand, and in the first quarter, total operations grew 10% year over year. Within total operations, you could split it into two buckets: one is digital operations, and the other is data and AI-led operations. As the adoption of AI increases, we are going to see a bigger shift towards data and AI-led operations, and frankly, that is a very good thing from our perspective because as the operations shift towards data and AI-led, we are putting in more IP, more proprietary assets of ExlService Holdings, Inc., and creating more value for our clients. That business becomes much stickier, much bigger in size, and we control the outcome end to end. Going forward for the remainder of this year, digital operations will likely continue to have the same kind of deceleration of growth that happened in the first quarter, but the shift towards data and AI-led operations is the critical piece. That is positioning the company to be a future-forward company for our clients, and that is what our clients and prospects are looking at, engaging with us in an even more determined manner. That is why we are seeing our pipeline being extremely full and the level of activity very high. We feel very confident about continuing to grow our overall business in this double-digit range going forward. Surinder Thind: And then turning to headcount. You continue to see a strong uptick there. Is that how we should expect the model to evolve over the next couple of years—where there is a spread between revenues and headcount—or should that spread expand in the coming years when we think about getting to a more revenue-per-headcount model as you build out your IP? Rohit Kapoor: If you take a look at Q1, our revenues increased by 14% and our headcount increased by about 11%. If you look at previous quarters and previous years, typically that has been the trend where headcount increase is lower than the revenue increase. We would expect that to continue. Going forward, it depends upon the type of service mix we are providing to our clients and the activities we are undertaking. As we move from digital operations to data and AI-led operations, that is definitely going to result in a lower headcount addition and a much higher revenue uptick. But if we get into newer service lines, it will depend upon the dynamics of those new service lines, and the revenue per headcount will be determined by the characteristics of that particular service line. On a steady-state basis as this transition takes place, you would expect a delta between revenue growth and headcount growth to be about 3%, which is the case right now. But as we go forward, that can shift one way or the other. Operator: Please use the Raise Hand button that can be found on the black bar at the bottom of your screen. Our next question comes from an Analyst with JPMorgan. Please unmute your audio and ask your question. Analyst: Hi. Thanks for taking my question. I was wondering if you could talk about the specific drivers on such strong traction in AI and data services you provide to operations management clients. Was it in any way related to AI model evolution or just clients embracing AI with new budgets? Rohit Kapoor: Our data and AI-led portion of our business has multiple elements: our data management business, our analytical model and services and solutions business, our payment integrity business, and our data and AI-led operations. We are seeing broad-based traction and growth across all of these different service lines. The data management part is foundational, and that is where we are seeing huge demand. The challenge for us is hiring talent quickly enough to fulfill that demand. In other areas, we are seeing a pivot—some of our analytical services are switching over to AI services, and that is a very strong pivot. We are also seeing a very sharp increase in data and AI-led operations. When those conversions move into production, that is driving a faster growth rate of our data and AI-led category. We are very pleased that we have multiple service lines in that category, each with tremendous headroom and all growing very nicely. It is very broad-based. It is not one particular service line driving that growth; it is multiple service lines. That gives us confidence in the sustainability and durability of our business growth. Analyst: Got it. Seems very broad-based. And maybe as my follow-up, our checks are showing that AI-driven automation of business processes from 50% to 80% is 10 times harder than going from zero to 50. Could you touch on what you are seeing in your clients in embracing this next milestone? And is there any progress within the quarter? Rohit Kapoor: The 50% to 80% refers to what metric? Analyst: AI-driven automation of business processes. Rohit Kapoor: When clients want to adopt AI into their operations, it is not simply taking an LLM and pasting it on top of that operation. There is a whole series of work that needs to be undertaken. Number one, the data foundation has to be correct, and the ability to use structured and unstructured data and make that readily usable is a key foundational step. Secondly, the application of the LLM or the AI model needs to be iterated upon and refined as we go forward. Third, there is a very big piece associated with knowledge and understanding of context—bringing together policies, rules, regulations, and how a particular transaction needs to be processed. That knowledge needs to be clearly defined with the use and application of the AI model. Finally, the semantic layer—which is key for creating value for any enterprise AI adoption—needs to be combined using both the probabilistic elements of an LLM and deterministic elements, particularly for regulated industries. Bringing together all of these things, and then putting together guardrails, security, and a number of elements associated with token economics—this is all very complex. We are in a fortunate position that we have done this several times over. We can deliver the business outcomes to our clients, and our clients trust our ability to execute. That is what is driving the growth there. Operator: Our next question comes from David Grossman with Stifel. Please unmute your audio and ask your question. David Grossman: Good morning. Thank you. I think, Rohit, you had mentioned in an earlier question that the NRR is above 100%. We can clearly see that in the numbers. Perhaps you could help us understand how that number has trended over the past couple of years, as well as compare and contrast that with what the IT services companies are seeing—who are struggling—and what is making you different there. As well as maybe talk about the backlog and just how far out you can see that dynamic continuing? Rohit Kapoor: Yes, David. The NRR for us is quite strong and positive. The big reason is that with the adoption of AI, clients are getting more comfortable outsourcing more work and outsourcing more end-to-end process journeys. In the past, they were comfortable outsourcing tasks and pieces of it, but now they are comfortable allowing a partner like ExlService Holdings, Inc. to manage that journey end to end. The reason is that is the only way to transform the journey, take control of the data assets, deploy AI across the workflow, and be held accountable for the outcome. Frankly, the business model change with AI is allowing a very favorable shift compared to previously. Previously, with the adoption of other technologies—whether it was bots or other automation—it was always about whether more work could be outsourced. Now it is the full end-to-end life cycle that can be outsourced. It is a lot better in this AI adoption wave. David Grossman: And how long, Rohit, does it take to go from the beginning to more of a steady state? Rohit Kapoor: A while, David. Setting up the data foundation itself takes a fair amount of time because most of our clients do not have very mature data estates, and putting that in place requires a lot of heavy lifting. Then iterating on the model and making sure that it is working along with the contextual pieces of our clients’ business also requires a fair amount of effort, complexity, and time. This is not a once-and-done piece. Once you implement AI into the workflow, you have to constantly maintain and upkeep it, and there is a managed service portion that needs to be in place because these models will drift over time. You need to apply new context to these models on an ongoing basis. It is a fairly complex piece of work to deliver the outcome and then to maintain it and keep it up. David Grossman: So can the NRR stay above one when you go into the maintenance mode? Rohit Kapoor: We will have to see how that progresses. One of the things we are seeing is, as we deploy AI into the workflow, our clients are starting to offer newer feature sets to their customers in their offerings. They are also willing to offer newer service lines. There is more being added to the existing piece of work, and if that continues, yes, I think the NRR will continue to remain above one. David Grossman: Great. Thanks. So just one quick one on margins. I know you are guiding, Maurizio, to flattish margins year over year—or at least that is what it would appear in the 19 range—and that is despite what looks like favorable mix shift. Is there some dynamic when you migrate from a person-based billing model to more of an outcomes-based model on a short-term basis where there are some transition costs? Or is there something else going on that would result in flattish margins on such strong revenue growth? Maurizio Nicolelli: We had a very good quarter overall on profitability, and you continue to see an uptick in gross margins. If you look at the second quarter of last year, we were at 37.7%. This quarter, we are at 38.9%. Each quarter since then has continued to rise. What you are seeing is us driving profitability there. The offset is continued investment. If you look at our investment line and the level of investment we are making, it is growing faster than revenue overall. We need to continue to invest, particularly in R&D, as we develop more and more AI capabilities. That leads us back to a mid-19% range overall in margins. And if you look at our overall guidance, we are still driving EPS slightly higher than overall revenue, which is one of our stated goals. David Grossman: Got it. Alright, guys. Thanks very much. Operator: Our last question comes from Vincent Colicchio with Barrington Research. Please unmute your audio and ask your question. Vincent Colicchio: Yeah. Rohit, you had mentioned the commercial model has changed, and it often incorporates outcome-based pricing on AI deals. I am curious, what portion of new AI deals involve outcome-based pricing? Rohit Kapoor: We are seeing some AI deals have outcome-based pricing models, particularly those where clients are allowing us to transform their end-to-end processes. That is where they are holding us accountable for the outcomes, and the pricing model is switching over to that. Keep in mind that the adoption of AI is gradual, and that shift is happening over time. There are portions of our business that are already outcome-based—the payment integrity work that we do is completely outcome-based. As that business continues to grow and use a lot more AI in its service line, that portion continues to increase. Anytime we are adopting more AI into the workflow, that is something which is kicking in. The biggest barrier is clients do not have good metrics associated with how to define that outcome and how to attribute responsibility for the outcome. Some of this tends to be a portion on a fixed-fee basis and, over and above that, some sharing of the gain and productivity that we can provide to our clients. That model works well for newer clients that are going into this and wanting to seek the benefit of that outcome. Vincent Colicchio: And could you update us on how robust your acquisition pipeline is and where your priorities may lie? Rohit Kapoor: In this environment, we are seeing a fairly strong pipeline of assets. We want to be very careful in terms of the choice of these assets and make sure they further our ambitions to be the AI strategic partner of choice for our enterprise clients. There are capability sets within the AI enablement workstream that we want to add to. We have consciously picked and chosen the areas where we would like to add more capability, and we are looking at acquisitions on a fairly regular basis. As you know, only when you consummate an acquisition can you really be sure about doing an acquisition. We hope that we will be able to close an acquisition soon, but we cannot comment on the timing as of now. Vincent Colicchio: Thank you, Rohit. Nice quarter. Rohit Kapoor: Thank you, Vincent. Operator: We have no further questions at this time. This concludes our call. Thank you, and have a good day.
Operator: Good day, and thank you for standing by. Welcome to Q1 2026 BXP, Inc. Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. To ask a question during the session, you will need to press star 11 on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star 11 again. In the interest of time, please limit yourselves to one question. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your first speaker, Helen Han, VP of Investor Relations. Please go ahead. Helen Han: Good morning, and welcome to BXP, Inc.'s First Quarter 2026 Earnings Conference Call. The press release and supplemental package were distributed last night and furnished on 8-Ks. In the supplemental package, BXP, Inc. has reconciled all non-GAAP financial measures to the most directly comparable GAAP measure in accordance with Reg G. If you did not receive a copy, these documents are available in the Investors section of our website at investors.bxp.com. A webcast of this call will be available for twelve months. At this time, we would like to inform you that certain statements made during this conference call, which are not historical, may constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act. Although BXP, Inc. believes the expectations reflected in any forward-looking statements are based on reasonable assumptions, it can give no assurance that its expectations will be attained. Factors and risks that could cause actual results to differ materially from those expressed or implied by forward-looking statements were detailed in yesterday's press release and from time to time in BXP, Inc.'s filings with the SEC. BXP, Inc. does not undertake a duty to update any forward-looking statements. I would like to welcome Owen Thomas, Chairman and Chief Executive Officer, Douglas Linde, President, and Michael LaBelle, Chief Financial Officer. During the Q&A portion of our call, our regional management teams will be available to address any questions. We ask that those of you participating in the Q&A portion of the call please limit yourself to one and only one question. If you have an additional query or follow-up, please feel free to rejoin the queue. I would now like to turn the call over to Owen Thomas for his formal remarks. Owen Thomas: Thank you, Helen, and good morning to all of you. BXP, Inc. had a successful first quarter. Our FFO per share result exceeded our own estimate by $0.02. Our FFO per share guidance for 2026 was raised by $0.01. We made continued strong progress on our business plan articulated at last year's investor conference by completing significant leasing, closing additional asset sales, and progressing our development pipeline. Last week, we also released our annual sustainability and impact report outlining the positive outcomes achieved for shareholders and other important constituents from our industry-leading sustainability efforts. Our first business plan priority is to lease space and improve portfolio occupancy. There is no question that AI has been and continues to be enormously beneficial to BXP, Inc.'s leasing activity, despite the market anxiety regarding the impact of AI on job creation and resultant leasing demand. We are experiencing direct benefits by leasing space to AI companies in San Francisco, New York, and Seattle, as well as indirect benefits from both leasing space to companies displaced by growing AI firms and to our core financial, legal, and business services clients serving the rapidly growing AI industry. The near- and medium-term negative impacts of AI on jobs are more likely in support functions, which are less present in premier workplaces and in gateway markets. We had a strong first quarter, completing over 1.1 million square feet of leasing. Our in-service portfolio occupancy rose 70 basis points to 87.4%, and the spread between our leased and occupied square footage widened 80 basis points to 3.5%, a precursor to more occupancy gains ahead. The environment for leasing premier workplaces remains healthy and very active. Our current and prospective clients are generally experiencing increasing earnings due to the growing U.S. economy. We are seeing more client growth than contraction in our leasing activity. In many cases, our clients are also upgrading their space and/or location to more readily effectuate their tightening in-person work policies. All of these client factors—growth, more use of space, and upgrading—have led to the consistent strength and outperformance of the premier workplace segment of the office market, where BXP, Inc. is a clear market leader. Premier workplaces represent roughly the top 14% of space and 8% of buildings in the four CBD markets where BXP, Inc. has a major presence. Direct vacancy for premier workplaces in these four markets is 8.5% versus 13.8% for the broader office market, while asking rents for premier workplaces continue to command a premium of more than 60% over the non-premier buildings. Over the last three years, net absorption for premier workplaces has been a positive 11.9 million square feet versus only 420,000 square feet for the balance of the market. For the non-premier workplace segment, all markets had negative absorption except New York City. Given these positive market and client trends and BXP, Inc.'s strong leasing over the last year, we have started to realize our forecasted occupancy gains the last two quarters, reinforcing our confidence that our target of four percentage points of total occupancy improvement over 2026 and 2027 remains achievable. Our second business plan goal is to raise capital and optimize our portfolio through asset sales. During our investor conference, we communicated an objective to sell land, residential, and non-strategic office assets for approximately $1.9 billion in net aggregate sale proceeds by 2028. We continue to make great progress. In the first quarter, we have raised $360 million in total net sale proceeds so far this year and $1.2 billion since our investor conference, including land sales for $250 million, apartment sales for $460 million, and office/lab/retail sales for $500 million. Further, we have under contract the sale of three assets with total net proceeds of approximately $40 million and are in various stages of marketing several additional assets. As of now, future net proceeds from dispositions projected in 2026 could aggregate up to an additional $400 million, and we are consistently exploring more asset sales. We have been able to achieve attractively valued land sales by creatively positioning our office land for more valuable uses, particularly residential. Across multiple jurisdictions, we have received or are pursuing entitlements for over 3,500 residential units on land intended for office use, which is creating significant value for shareholders and will be the backbone of both our apartment development and land sales activity going forward. We have now sold three high-quality stabilized apartment buildings, which we built, all at a mid-4% cap rate. A notable office transaction we completed in the first quarter was the sale to our partner of our 50% interest in the Marriott headquarters building in Bethesda, Maryland, which we developed in 2021. The 743,000 square foot building is fully leased to Marriott and sold for a gross price of $430 million, or $589 per square foot, and a 6.8% initial cap rate. The Bethesda market is not strategic for BXP, Inc. We were able to achieve attractive exit pricing, and the development was very profitable for shareholders, generating a $35 million gain on a $47 million investment. Supporting our disposition efforts, office transaction volume in the private markets remains healthy, with financing available at scale, particularly in the CMBS market. In the first quarter, significant office sales were $14.1 billion, down from the seasonally elevated fourth quarter but notably up 72% from 2025. In addition to the Marriott headquarters sale, there were a couple of other transactions with relevance to BXP, Inc.'s portfolio. In New York City, 575 Fifth Avenue sold for $383 million, $734 per square foot, and a 5.1% cap rate for the office portion of the building. The asset comprises 525,000 square feet and is 90% leased. In San Francisco, the Transamerica Pyramid sold for an allocated price of $600 million, or $1,113 per square foot. The 539,000 square foot building is only 60% leased. The in-place cap rate was 2.9%, but expected to be in the high-7% range in several years once the asset is leased and stabilized. The third business plan goal is to grow FFO through new development—selectively with office given market conditions and more actively for multifamily with an equity partner. For office, we have and expect to allocate more capital to developments and acquisitions because we continue to find premier workplace development opportunities with preleasing that we believe will generate cash yield upon delivery roughly 150 to 250 basis points higher than cap rates for lower-quality asset acquisitions with ongoing CapEx requirements. The trade-off is timing, as developments obviously take several years to deliver. For multifamily, we have three projects with over 1,400 units under construction, or in various stages of entitlement and/or design for nearly 5,000 units, and have one project in Herndon, Virginia, which we plan to commence in 2026. We expect to continue to capitalize new development starts with financial partners owning the majority of the equity. BXP, Inc.'s largest development underway is 343 Madison Avenue, our market-leading premier workplace tower in New York City with direct access to Grand Central Terminal. As previously reported, we have a lease commitment for 29% of the building located in the mid-rise. We are also negotiating leases with tenants for another 27% of the building, which will bring us to 56% committed, with available space at both the podium and high-rise of the tower. Given strong market conditions and the lack of available competitive product, we are making multiple client presentations every week for the remaining space. We have procured 83% of the construction costs, have realized anticipated savings from our original budget, and our projections remain on track for a stabilized unleveraged cash return of 7.5% to 8% upon delivery in 2029. We are in discussions with several potential equity partners for a 30% to 50% leveraged interest in the property and also have an agreed letter of intent with a consortium of banks for construction financing at attractive terms. We intend to complete the recapitalization in 2026. BXP, Inc.'s current development pipeline, comprising six office, life science, and residential projects underway totaling 3.4 million square feet and $3.6 billion of BXP, Inc. investment, will deliver external growth over the longer term. In conclusion, we continue to successfully lease space and improve occupancy, creatively reposition and monetize non-core assets, and de-risk our development pipeline through leasing, construction, and capital-raising successes. New construction for office has virtually halted, leading to higher occupancy and rent growth in many submarkets where BXP, Inc. operates. Debt and equity capital is available for premier workplaces. BXP, Inc. is building market share given our stability and consistent service to our clients and, in many markets, less competition. BXP, Inc. remains comfortably on track with our business plan, which, if successful, will lead to increasing portfolio occupancy and FFO per share, deleveraging, external growth from development, and a more highly concentrated CBD and premier workplace in-service portfolio in the years ahead. I will now turn the call over to Douglas Linde. Douglas T. Linde: Good morning, everybody. I am going to speak to demand for the bulk of my comments. We can debate whether technology companies today are overstaffed, whether remote work strategies have had a demonstrable impact on premier property demand, whether the massive capital investment from data center infrastructure has led to a different perspective on human capital from the large tech companies, and whether new AI models and AI agents will lead to changes in the makeup of the workforce. There are no answers, just conjectures. What we do know is that the U.S. economy has gone through many technology cycles since the invention of the personal computer 45 years ago, and in this cycle today, there is dramatic incremental office demand growth from new organizations that are developing AI. This new technology demand is focused in San Francisco and more recently in New York City. OpenAI and Anthropic are clearly the most recognizable expansions, but there are many meaningful space occupiers expanding across our markets—Databricks, Perplexity, Decagon, Harvey AI, Sierra AI, Snowflake, to name a few—with Decagon and Snowflake being new tenants in the BXP, Inc. roster. It is clear that the clients that are growing are not the tech types that expanded during the last decade, but there is meaningful office-using growth in our markets. CBRE reports that there has been 3 million square feet of positive office absorption in San Francisco over the last seven quarters, including an extraordinary 1.4 million square feet in 2026. This backdrop is important because it is increasingly translating into tangible leasing activity. In the first quarter, BXP, Inc.'s total leasing volume was 1.14 million square feet. As I discussed during our investor day, in-service vacant space leasing and covering near-term lease expirations will drive our occupancy improvements and same-store revenue growth. During the first quarter, we executed leases on 700,000 square feet of vacant space and renewed or backfilled 235,000 square feet of 2026 and 2027 expirations. Post March 31, our current pipeline of leases in negotiation consists of 1.7 million square feet and covers 500,000 square feet of existing vacancies and 500,000 square feet of 2026 and 2027 expirations. We start the second quarter with 1.44 million square feet of executed leases on vacant space that we expect to commence in the next three quarters of 2026. The remaining calendar year 2026 expirations are down to 770,000 square feet. So if nothing else were to change, we should pick up 670,000 square feet, or 150 basis points of occupancy, and end the year at 89%. The majority of our remaining 2026 expirations are known, so near-term upside will stem from leasing currently vacant space with immediate revenue commencement. We ended 2025 with in-service occupancy of 86.7%. Our occupancy at the end of the first quarter is 87.4%, an increase of 70 basis points, with about 57% of that gain stemming from improvements in the portfolio leasing and the balance due to changes in the portfolio, including the sales described in the press release and the suburban office buildings I highlighted last quarter that we removed from service and expect to demolish and then redevelop to higher-value residential uses, consistent with our portfolio optimization strategy. Conversions are progressing quickly in Santa Monica and Waltham. Separately, we are finalizing documentation with an institutional partner to commence development at Worldgate in Herndon, Virginia, where we purchased 300,000 square feet of office buildings and re-entitled this as residential townhomes and apartments. We anticipate closing the venture during the second quarter and immediately commencing construction. We are in active conversations with new and renewing clients across all of our markets. Our total discussion pipeline, in addition to the 1.7 million square feet in negotiation, includes another 1.4 million square feet, and we continue to anticipate a minimum of 4 million square feet of leasing in 2026, consistent with what we put forth in our 2026 guidance. Post March 31, we have executed 300,000 square feet of leases, so the total for the year stands at 1.5 million square feet as of today. We made a change to the way we are reporting our second-generation leasing statistics this quarter. Instead of providing statistics on leases based on the economic impact data at the lease commencement—which is backward-looking—we are showing the change in the rents for all the leases executed in the current quarter where the comparative lease expired during the prior 24 months from the date of the new lease. Since all that data is in our supplemental, I am not going to repeat it. I do have a few comments on the transactions behind the aggregate numbers. In Boston, the data includes a 100,000 square foot lease in the Urban Edge, space that was previously leased to Biogen. In New York, the bulk of the executed leases this quarter were at Times Square Tower, where we backfilled a law firm that was coming off a 20-year term with large blocks. In San Francisco, the largest portion of the leasing was at 680 Folsom. In D.C., we extended a law firm for almost six years through 2038 in exchange for minimal TIs and a current rent reset. This quarter, we executed several large leases—17 leases over 20,000 square feet—with the largest just over 100,000 square feet and a second with an expanding client that took 92,000 square feet. Thirty-four percent of our square footage involved renewals, extensions, or expansions, and 66% was with new clients. Existing client expansions encompassed 150,000 square feet of activity, and we had about 50,000 square feet of contractions. A few comments on our individual markets speak both to the sources of demand and the success we are having leasing vacancy across the portfolio. In the BXP, Inc. portfolio, Midtown Manhattan, the Back Bay of Boston, and Reston, Virginia, continue to have the tightest supply and therefore the most landlord-favorable market conditions. This quarter, the most significant acceleration in activity was in the South of Market in San Francisco, Santa Monica, and the CBD of Washington, D.C. In the Back Bay portfolio, where we are 98.8% leased, much of our current activity is filling in small pockets of availability, but we have begun discussions with larger tenants that have expirations between 2028 and 2032 since there are no premier blocks of availability in the market. In our Urban Edge portfolio, we completed a 100,000 square foot lease with a national restaurant operator at The Core & Weston and a 43,000 square foot lease with a life science company relocating into 15,000 square feet of lab space and 28,000 square feet of office space at 180 CityPoint. Our current Urban Edge activity includes expanding hard tech companies, and additional life science companies are looking exclusively for office space. In New York, the most significant change in our activity has been in Midtown South. At 360 Park Avenue South, we completed another six floors, or 138,000 square feet, of leasing, which brings the building to 90% leased. Last week, we came to an agreement with an existing AI client to expand to an additional floor, which will bring the building to 95% leased. Across Madison Park, we leased an additional 32,000 square feet at 2 05th Avenue, leaving us with only 33,000 square feet of availability, where we had 350,000 square feet vacant in 2025. At Times Square Tower, we executed over 100,000 square feet this quarter, including 85,000 square feet of currently vacant space. In San Francisco, the most significant change in our portfolio continues to be at 680 Folsom and 50 Hawthorne. During the quarter, we executed leases for 103,000 square feet and, in early April, executed another 63,000 square foot lease. Since the beginning of 2024, AI and tech leasing has steadily increased from 50% of the total leasing demand in the market to 57% to almost 80% in the first quarter of this year. As I stated earlier, there has been over 3 million square feet of positive absorption over the last seven quarters. In Santa Monica, we have seen a pickup in interest from clients with near-term lease expirations and the need for new and expanding space. This is a meaningful change from the last few years. The activity in D.C. this quarter was concentrated in two transactions. We did an early 153,000 square foot extension with the anchor tenant at 601–630 Connecticut, and we gave up our regional headquarters at 2200 Penn as part of a 58,000 square foot lease with the Washington Commanders. Currently, activity in the region is still concentrated at Reston Town Center, where we are 97.3% leased. This quarter, we completed seven small leases with defense contractors and professional service firms, and we are in negotiation on over 150,000 square feet of transactions, including 100,000 square feet of 2027 expiring leases where, in aggregate, the tenants will renew and expand. We continue to field inbound requests from law firms that want us to identify sites and develop new projects similar to what we have achieved at 725, 1212, and 2100 M. We have some visibility on the third of these projects today. That wraps up my comments. I will turn it over to Mike. Michael E. LaBelle: Great. Thanks, Doug. Good morning, everybody. Today, I am going to cover our results for first quarter earnings and update our full-year 2026 earnings guidance. For the first quarter, we reported FFO of $1.59 per share, which is $0.02 above the midpoint of our guidance range and $0.01 ahead of consensus estimates. The performance of our portfolio exceeded our expectations by $0.03 per share and was partially offset by a penny of higher net interest expense. Outperformance in our portfolio was comprised of $0.02 better rental revenues and $0.01 of higher termination income. The rental revenue beat was from commencing leases more quickly in both 535 Mission and 680 Folsom, as well as from some leases in the Urban Edge properties in Boston. We also generated more service revenue from our clients, particularly in New York City and in San Francisco, reflecting increased utilization. Termination income for the quarter totaled $12.8 million and primarily related to two clients. In the first case, we proactively took back 25,000 square feet from a client in Washington, D.C., which allowed us to lease 58,000 square feet to the Commanders at 2200 Penn. This is a great trade for us, creating incremental occupancy and extending lease maturity. The second case relates to a client that defaulted on its lease in the fourth quarter last year, when we took a charge totaling $3.6 million to write off their accrued rent balance. This quarter, we received a termination payment totaling $6.25 million, which covers both the write-off from last quarter as well as nearly twelve months of potential downtime in rent. Our net interest expense for the quarter came in higher by a penny per share from lower-than-anticipated interest income and higher commercial paper rates related to the market volatility in the fixed-income markets. CP rates widened by 25 to 30 basis points during the first quarter. The rates have improved in the past few weeks, but they are still not quite back to where they were in the fourth quarter. Now I would like to turn to our updated guidance for full-year 2026. Big picture, we have increased the midpoint of our FFO guidance by a penny per share by bringing up the bottom end to $6.90 per share and maintaining the top end at $7.04 per share. We have increased our assumption for termination income in 2026 by $8 million. It relates to several credit issues we are working through impacting about 200,000 square feet of space that we expect we will get back in 2026. More than half of this space is held in a joint venture, so the financial impact to us is less. The termination income we expect to receive is in lieu of approximately $5 million of lower rental income in 2026 from these clients. These spaces are readily leasable in the current market, and we expect we will be successful in backfilling them quickly. Strong leasing performance across our same-property portfolio is giving us increased confidence in our growth outlook. In our same-property portfolio, we are increasing our assumption for our share of NOI growth over 2025 by 15 basis points to between 1.4% and 2.4%. Keep in mind, we exclude termination income from our same-property NOI assumption, so if not for the lease terminations, we would have increased our assumption for our share same-property NOI growth by an additional 25 basis points. The increase is driven by the robust leasing activity that Doug outlined, which continues to exceed our expectations and supports a stronger occupancy recovery. Reflecting this momentum, we have increased our occupancy outlook for 2026 by 25 basis points to an average for the year of 88.25%. On a cash basis, we have reduced our assumption for year-over-year growth in our share of same-property NOI by 25 basis points, and that accounts for the lease termination activity as well as a couple of early renewals with free rent periods in 2026. In our development portfolio, we expect to deliver 290 Binney Street more than a month early, as we are just about complete with the tenant improvements. AstraZeneca already commenced cash rent payments as of April 1, and we expect to deliver the project by June 1 at the latest. We have two factors impacting our interest expense assumption for the year. First, the early delivery of 290 Binney requires that we cease capitalized interest early. Second, the likelihood for Fed rate cuts later this year has diminished, and we are now assuming that SOFR rates are flat for the remainder of 2026. Including our first quarter result, we have increased our 2026 assumption for net interest expense by approximately $10 million. Overall, we are raising our guidance for 2026 FFO by a penny per share at the midpoint, and our new range is $6.90 to $7.04 per share. The changes come from increases in our assumption for growth in our share of same-property NOI of $0.02, increases in termination income of $0.04, and an increase of a penny from our development activity. These are partially offset by higher interest expense of $0.06. As Owen described, we continue to execute on our plan. We have closed on asset sales generating $1.2 billion in net proceeds, including $360 million so far in 2026, in line with our guidance. We are making great progress at 343 Madison with additional leases under negotiation and active discussions for both private equity capital and construction financing. Importantly, our leasing activity has been consistent and above expectations. Signed leases that have yet to take occupancy for currently vacant space have grown to 1.6 million square feet. Our current pipeline of 3 million square feet of leases either under negotiation or in active discussions is higher than where it stood last quarter. We remain highly confident in our ability to grow our occupancy meaningfully, driving higher portfolio performance and value. That completes our formal remarks. Operator, can you open up the lines for questions? Operator: Thank you, sir. As a reminder, to ask a question, you will need to press 11 on your telephone. To withdraw your question, please press 11 again. We ask that you please limit your question to no more than one, but feel free to go back into the queue. If time permits, we will be happy to take your follow-up questions at that time. Please stand by while we compile the Q&A roster. I show our first question comes from the line of Stephen Thomas Sakwa from Evercore ISI. Please go ahead. Stephen Thomas Sakwa: Yes. Thanks. Good morning. It sounds like all of you have had very positive comments around the leasing environment. Things have certainly gotten better, and the tide seems to be turning in a number of markets like New York, certainly San Francisco and parts of Boston. I guess the question is, to what extent are you able to shorten the time from when you start the discussions to getting leases signed, and then the implications that might have for the TI and CapEx that you might need to be spending on these deals? Can you get tenants in the space faster, and might we see CapEx start to come down? Douglas T. Linde: Steve, this is Doug. The duration of the lease is really dependent upon the aggressiveness of the legal counsel for our tenant. In some cases, we have counsel that are very thoughtful from our perspective, and we can get leases completed in a couple of days. In other cases, it can take six months. I do not think market conditions have really impacted that. I would say our ability to say yes to requests from our tenants in terms of what their counsels are saying is clearly stiffened, so maybe that is why it is taking longer to get leases done in some cases. From a capital expense perspective, there is no question that in the Back Bay of Boston, in Midtown Manhattan, and in Northern Virginia in Reston, we are being more conservative relative to the kinds of concessions that we are offering, meaning they are lower. They are lower in the form of the amount of free rent and the amount of TIs that we are offering. I would say the West Coast still has a pretty significant concession package, largely because there is still a significant amount of space available, even though the demand has accelerated materially. So there are places where it is better, and there are places where it is still, relatively speaking, consistent with what it has been over the last three or four quarters. Operator: Thank you. I show our next question comes from the line of Anthony Paolone from JPMorgan. Please go ahead. Anthony Paolone: Thanks. Good morning. Wanted to follow up on your comment about 80% of demand in San Francisco coming from AI tenants. How should we think about whether that is really incremental demand above and beyond what would be normal, or if it means only 20% of the demand is coming from outside of AI? What does that tell us about the rest of the tenants in the market? Douglas T. Linde: I will start, and I will let Rod comment. My inference is that there is a clear acceleration of technology—defined as these new AI-oriented companies—that are absorbing the majority of the incremental space absorption in the market. What has changed, and it has changed dramatically, is if you went back to 2010 to 2019, virtually all of the absorption was coming from the tech titans—Google, LinkedIn, Microsoft, Meta—the larger companies. That has clearly shut down. None of those companies are expanding in any material way in the city of San Francisco. In fact, some of them have given back space. I would say that the amount of space that is being absorbed has accelerated. I cannot tell you if that is going to hold on a consistent basis for the next three to five quarters, but these companies are aggressively hiring people, relatively speaking, and they have made a decision that in-place work is critically important to their business strategies. Those are all great indicators from our perspective. The professional services and business services firms have not expanded the way they are expanding in Midtown Manhattan. We are hopeful that as these companies become public and they change their capital flows and that improves the overall wealth creation on the West Coast, there may be more material improvements in financial services and professional services and mid-business and administration services. Rodney C. Diehl: I think you covered most of it, Doug, but I would just add that on the topic of the non-tech companies—the traditional tenants—and we have many of them, particularly at Embarcadero Center, what we are not seeing is downsizing. They have gone through that already, and we have executed a handful of different renewals with those types of tenants and some new tenants coming in. I would say they are stable. Then, when you look to the flip side and think about where the demand is growing and where it is coming from, it is what you would expect from the Bay Area, which is a tech-driven market, and these are tech companies that are driving the market right now. There are 20 requirements that are over 100,000 square feet—that is about 3.3 million square feet in San Francisco specifically—and a year ago, that number was about 12 requirements. It has definitely increased, and it is great. As Doug said, these are with companies that we had not heard of before. It is new, emerging, growing companies. So it is very positive. Thank you. Operator: I show our next question comes from the line of John P. Kim from BMO Capital Markets. Please go ahead. Mr. Kim, your line is open. Do you have your phone on mute? John P. Kim: Sorry about that. At 343, you talked about lease negotiations for another 27% of space. There has been some media speculation of who that is. Can you discuss whether that space represents consolidation of space, expansion, or musical chairs? Douglas T. Linde: This is Doug. It is tenants—it is not a single tenant. It is some consolidation and some growth. John P. Kim: Thank you. Operator: I show our next question comes from the line of Nicholas Philip Yulico from Scotiabank. Please go ahead. Nicholas Philip Yulico: Thanks. Mike, I wanted to ask about lease CapEx. It was higher this quarter—$178 million hit the FAD calculation. I think last call, you said for the year it could be $2.20 to $2.50. Can you talk about what drove that and how to think about leasing CapEx for the rest of the year? Michael E. LaBelle: It was driven by several early renewals that we did a couple of years ago that hit this quarter—over 1 million square feet of that. If you looked at leasing cost per square foot, they were about $10 per square foot per lease year, which is pretty reasonable and well within the range we would expect. It was just these early renewals that hit that caused FAD to be higher. I would not expect that to continue at those levels for the next few quarters. But I do expect that, for the year, our lease transaction costs will be higher given the start that we have at $175 million for the quarter. I would anticipate that our leasing costs will be in excess of $400 million based upon occupancy growth that we anticipate, and there are a couple of other early renewals that are going to be coming in the second and fourth quarter. Operator: Thank you. I show our next question comes from the line of Blaine Heck from Wells Fargo. Please go ahead. Blaine Heck: Great. Thanks. Good morning. I was hoping you could talk about the trends you are seeing in the life science segment of the portfolio. You have disposed of your West Coast exposure, and you have had some success in leasing up the Greater Boston portfolio. Is that potentially a source of funds if the transaction market is supportive, or do you still see the overall Boston life science portfolio as a longer-term hold for BXP, Inc.? Douglas T. Linde: The BXP, Inc. life science portfolio is in two submarkets. It is in Kendall Square in Cambridge—we are building our new building for AstraZeneca, and we have buildings with the Broad—and then our life science buildings in Waltham, Massachusetts at 180 CityPoint, 880 and 200 Winter Street, and then at 101/103 when we get that building leased. I do not think that we are looking at exiting any of those markets or any of those buildings. We are clearly seeing a change relative to the demand that is currently in the market toward more office and less lab intensity, and quite frankly, we are taking advantage of that in our traditional office buildings with life science companies. As part of the 1.7 million square feet of leases under negotiation, we signed a letter of intent last night for a life science company that is going to take 49,000 square feet of office space at one of our buildings. I think we will see a continuation of that. There is no question that the life science market has already bottomed out, and things on the margin are getting better in the greater Boston ecosystem. You will find, if you look at incubator-like companies, there is more activity and more interest in those incubators, and hopefully that will, over time, roll into larger companies. There is clearly consolidation in terms of big pharma purchasing life science companies that were born and bred in the Boston ecosystem, which is a good thing. On the margin, things are better. We are strategically going to continue to maintain our portfolio, and we believe in the long-term viability of a life science business in Greater Boston. Operator: Thank you. I show our next question comes from the line of Jana Galan from Bank of America Securities. Please go ahead. Jana Galan: Thank you. Good morning, and congrats on the great leasing. Given the focus on occupancy and speed to occupancy, can you talk about any initiatives like spec suites to attract tech and AI tenants quicker? Do AI tenants have different power or architectural requirements than more traditional tenant groups? Douglas T. Linde: I will let our regional management team answer that question. I would like Brian to talk about turnkey builds, where we are doing a significant amount of what I would refer to as design-and-build for medium-sized companies. Then Jake can talk about our prebuilt suite program in Northern Virginia. Rod, you can talk about what we did and how we were successful at leasing 680 Folsom. Brian, why do you get going? Bryan Koop: Urban Edge is the area we are seeing this type of activity because our portfolio is effectively leased in Boston and Cambridge. On the Urban Edge, we are seeing this turnkey ability with these new emerging companies, several of them in life science. Like Doug said, we are encouraged and feel it has bottomed out. The activity has definitely ticked up. One interesting thing relates to Steve’s earlier question about time to put a lease together. These clients are doing their best to gauge what their growth will be. We will be working on a 30,000 foot deal, and they will say, we have good news, it could be 40,000. That is new. The turnkeys are working out really well. We have only done very small spec builds in that area, but turnkey is fast with quick occupancy. Jake Stroman: In Reston Town Center, we have delivered over 50 spec suites. There are two buildings in Reston that we have coined our incubator buildings. These are buildings for groups that are 4,000 to 6,000 square feet who want to be adjacent to the many corporate headquarters that exist in Reston Town Center. We have been very successful with those prebuilt suites. Often, when we have gone forward to build five to six of them, prior to having drawings and permits in hand, we have already leased those suites. There has been insatiable demand for that space. In terms of power requirements or anything different, nothing really different relative to those spec suites. Often we are doing those on a short-form lease, we are seeing term greater than five years, and very competitive rental rates. Rodney C. Diehl: At 680 Folsom, spec suites were a key part of our strategy. We did a full-floor spec suite—34,000 square feet—last year. It was extremely well received. We were able to show prospective clients what it would look like, and our activity increased quickly. The activity we reported is largely based on that strategy. This is nothing new for us. We have been doing this for many years, and we continue to do it across our properties in the Bay Area. Most tech companies need the space quickly, and when it is built and ready to go, we can deliver it quickly. On the power question, we are not seeing additional power needs in San Francisco offices. We are seeing that in some of our R&D portfolio properties in Mountain View for robotics or different technology companies. Power is definitely something they will seek out. Operator: Thank you. I show our next question comes from the line of Alexander David Goldfarb from Piper Sandler. Please go ahead. Alexander David Goldfarb: Question on the development program. You talked about a new pipeline of deals. Two parts. One, the split between residential—where you are monetizing land or buildings to ultimately sell—versus office. And then as you contemplate office, given where the stock is trading and implied 8% yields, how you weigh starting a potential future office deal versus where the stock is trading right now? Owen Thomas: Good morning, Alex. On the pipeline, as I mentioned, it is about $3.5 billion or so. It is about to shrink because we are going to deliver 290 Binney Street. We do have a portfolio of new development coming. We have talked about a couple that we are doing in Washington, D.C., so I think that will build back up. On residential, you may have a situation where we have more projects, but it will be lower capital. That is the Seventeen Hartwell deal we did—20% of the equity—and SkyMark—20% of the equity. Those are the models you will see going forward. In the future, the amount of capital invested will be greater in office than in residential. On the development yield versus capital allocation decision of starting a new office development at an 8% yield versus repurchasing shares, we think an 8% yield is higher than the underlying yield in the stock. The look-through cap rates are probably somewhere in the 7s for the stock. At 8%, we think development is an accretive activity for shareholders, and it is more attractive than some of the acquisitions I described. The only other thing I would add on residential is we are going to generate more fee income, because we will only own a minority interest and will generate development and other fees. As those start to ramp up, we should see it in our fee income. The company over a long period of time has generally had somewhere between $3 billion to $4 billion of development underway. In the future, that could continue, but there will be fewer projects because costs are much higher, so it will be concentrated in fewer individual projects. Operator: Thank you. I show our next question comes from the line of Seth Bergey from Citi. Please go ahead. Seth Bergey: Hi, good morning. You mentioned $400 million of dispositions. What is the target mix between non-strategic office, residential, JV interest, land? Given some of the interest rate movements that drove the change in that guidance piece, how have pricing and conversations with potential buyers changed around that pool of assets? Owen Thomas: I am not sure that pricing has really changed all that much. I do think slowly more and more capital is coming back into the office sector. I provided the sales data earlier. In the first quarter of this year, office sales were up 72% seasonally over the first quarter of last year. That is a marker that more and bigger deals and more capital are coming into the market. On your question about mix for the rest of the year, the residential is not fully complete but largely complete. I think you are going to see more non-strategic office and some land. Operator: Thank you. I show our next question comes from the line of Caitlin Burrows from Goldman Sachs. Please go ahead. Caitlin Burrows: I was wondering—back to 343 Madison JV—if you could give any incremental color on the conversations you have been having recently, timing, expectations for an announcement, and if you are pursuing just one partner with you in the project? Owen Thomas: As I said in my remarks, timing is this year. Our goal is to complete this recapitalization in 2026. In terms of how the partnership will be structured, that is to be determined, but our forecast at this point is that we will probably have multiple partners instead of one. Operator: Thank you. I show our next question comes from the line of Brendan James Lynch from Barclays. Please go ahead. Brendan James Lynch: Good morning. Thanks for taking my question. Doug, I wanted to follow up on your commentary about the U.S. economy growing through a lot of tech cycles. The pushback would be that historically office has not necessarily grown in conjunction with tech or even with broader economic growth. There have been lumps over the past couple of decades—the GFC, excess supply in the teens, then COVID. How can we get confidence that this cycle and the next five to ten years are going to be better than the last twenty or so? Douglas T. Linde: I cannot give you that the next five years will be better than the last twenty. What I can tell you is that much of the discourse and pontificating about the impacts of the rapid utilization of artificial intelligence tools is not equivalent to what is actually going on in our markets. In our markets, we are seeing additional absorption of office space, growth from our clients in premier buildings, and—in particular in markets like San Francisco and Midtown South—significant growth of new organizations, many of whose names and ideas did not exist five years ago, that are likely to be the next vehicles of growth from technology compared to the tech titan explosion between 2010 and 2019. We did, in fact, see significant office demand growth during that period. Then COVID happened, which dramatically changed the economics of our business because of the amount of supply suddenly brought back to the market through subleases and tenant defaults. This time is not that different than other cycles we have been through, but the source of the demand is different. As Owen started his remarks by saying, there may be and likely will be some kinds of job disruptions from these technologies, but it certainly does not feel like—nor have we seen any evidence—that it is occurring in premier office assets in our markets across the United States. Hilary J. Spann: If I could add a data point to that, Doug, this is Hilary from New York. In Midtown South, 2026 captured as much AI demand in leasing as 2025 did. The demand from AI users in Midtown South is actually accelerating in New York year over year. Operator: Thank you. I show our next question comes from the line of Upal Dhananjay Rana from KeyBanc Capital Markets. Please go ahead. Upal Dhananjay Rana: Thank you. In terms of capital allocation, the stock has come down a bit this year. Are share buybacks potentially on the table, or is that something you are considering? Owen Thomas: We think our stock is a very attractive investment, given that the look-through cap rate is in the 7s and all the comparable sales that I provide every quarter are in the 5s and 6s. We think the stock is a very attractive investment. That said, as we have described, we are allocating capital to new developments generating 8%+ yields to the company, which are accretive. Also, one of our goals—our leverage is about eight times net debt to EBITDA—is to lower that over time, and that is why we are not repurchasing shares. Operator: Thank you. I show our next question comes from the line of Analyst from Ladenburg Thalmann. Please go ahead. Analyst: Hey. Morning, guys. You talked a little bit about the CapEx requirements. I do not think you quantify your signed-not-open pipeline. You have 350 basis points of delta between your leased and occupied space, and not all space is created equal. Your Urban Edge portfolio has much lower rents. The occupancy there is much less valuable than in your urban portfolio. Maybe you could quantify what your incremental rents would be and the impact on your NOI and FFO potentially. Michael E. LaBelle: I will go back to what I said during our investor day. I cannot answer your question explicitly without having a whole bunch of computer screens open. Big picture, our average rent is about $75 per square foot on our unoccupied vacant space. If you take $75 per square foot, most of it drops to the bottom line other than a little bit of cleaning expense. Multiply that by the roughly 3.5% leased-versus-occupied spread applied to our in-service base to get the contribution if that all flowed through at one time. One thing I can say is there is about 800,000 square feet in Midtown Manhattan. Our leased versus occupied spread is significant in Midtown based upon all the leasing that we have done there over the last six to twelve months. That is a meaningful component at very high rents—somewhere around $100 to $105 per square foot. Operator: Thank you. I show our next question comes from the line of Dylan Robert Burzinski from Green Street. Please go ahead. Dylan Robert Burzinski: I wanted to touch on 343 Madison. Leasing continues to be very strong in New York. You talked about having leases in negotiation that would bring that project to the high-50% pre-let. Dispositions are trending very well, and you continue to monetize that. Why the desire to re-cap the equity in 2026 when it seems like you could wait, get that project closer to stabilization, and get stronger pricing? Owen Thomas: We did delay raising this capital and doing this recapitalization for a year to accomplish all of the things that we have accomplished and to de-risk the asset—in all the ways that you described. We are about to lease more than 50% of it. We bought most of the materials at savings. We are close to completing a construction loan, etc. We think the terms under which we will bring in capital into this transaction will be attractive to shareholders. It will be accretive to BXP, Inc., and it will allow us to free up capital to make additional investments and also to deleverage, which is one of the goals I described earlier. Operator: Thank you. I show our last question in the queue comes from the line of Analyst from Morgan Stanley. Please go ahead. Analyst: Hey. Just a quick one on same-store NOI. As you go through this year and into next year, clearly this year you talked about sort of flat, and there are some buildings taken out of service. As you roll into next year, how should we think about the occupancy ramp, any other buildings that could potentially come out of service, or is it a pretty clear acceleration into 2027 and beyond? Michael E. LaBelle: At the moment, the only thing we can say definitively is that we are going to sell assets, and as we sell assets, they are going to impact our portfolio size—but on the margin. We are highly confident that we will end 2026 at 89%, hopefully a little bit higher, and that we will end 2027 at 91%, hopefully a little bit higher. The majority, if not all, of the occupancy that we are working on today will be in place on 12/31/2026, so you will have a 100% run-rate on all the improvement in occupancy that we are achieving right now. My guess is that we will get some more early in 2027 as we continue to do leasing in this environment on both renewals and vacant space that will likely start during that year. We are still pretty comfortable about the ramp-up in our same-store portfolio on a going-forward basis. Operator: Thank you. That concludes our Q&A session. At this time, I would like to turn the call back over to Owen Thomas, Chairman and Chief Executive Officer, for closing remarks. Owen Thomas: We have no further comments. Thank you all for your attention and interest in BXP, Inc. Operator: Thank you. This concludes today's conference call. Thank you for participating. You may now disconnect.
Operator: Good morning, and welcome to the Highwoods Properties, Inc. First Quarter 2026 Earnings Call. All participants are in a listen-only mode. After the speakers' remarks, we will conduct a question and answer session. As a reminder, this conference call is being recorded. I would now like to turn the call over to Brendan Maiorana, Executive Vice President and Chief Financial Officer. Thank you. Please go ahead. Brendan Maiorana: Thank you, Operator, and good morning, everyone. Joining me on the call this morning are Theodore J. Klinck, our Chief Executive Officer, and Brian M. Leary, our Chief Operating Officer. For your convenience, today’s prepared remarks have been posted on the web. If you have not received yesterday’s earnings release or supplemental, they are both available on the investors section of our website at highwoods.com. On today’s call, our review will include non-GAAP measures such as FFO, NOI, and EBITDAre. The release and supplemental include a reconciliation of these non-GAAP measures to the most directly comparable GAAP financial measures. Forward-looking statements made during today’s call are subject to risks and uncertainties. These risks and uncertainties are discussed at length in our press releases as well as our SEC filings. As you know, actual events and results can differ materially from these forward-looking statements, and the company does not undertake a duty to update any forward-looking statements. With that, I will turn the call over to Theodore. Theodore J. Klinck: Thanks, Brendan, and good morning, everyone. We had an excellent quarter executing on our key initiatives. Leasing volume was strong across our in-service and development properties. This is clear from the 50-basis-point increase in our leased rate on our in-service portfolio and an 800-basis-point increase in our leased rate on our developments. Both of these will deliver meaningful upside in NOI, cash flow, and FFO over the next few years as occupancy ramps. During the quarter, we invested $108 million in best-in-class, commute-worthy properties in BBD locations in Dallas and Raleigh through joint ventures, and sold $42 million of non-core properties in Richmond. All of this activity improves our portfolio and further cements the foundation for pushing our growth rate and cash flows meaningfully higher, and will result in long-term value creation for our shareholders. Even with our strong performance in the quarter, we recognize the broader narrative that advances in AI could reshape the workforce and therefore affect long-term office demand. The range of potential outcomes is wide and varied, and at this point, there are many unknowns. What we do know, however, is that customers and prospects have not diminished their appetite for space and are making long-term commitments to their in-office strategies, and activity across our portfolio, our markets, and our BBDs is strong. Leasing was solid in the quarter. Our leasing pipeline remains robust. High-quality space across our BBDs is dwindling, and there is little to no new supply expected during the foreseeable future. This flight-to-quality dynamic creates a strong backdrop for gains and rent growth, both of which we experienced in the first quarter. Additionally, creditworthy customers are willing to make long-term commitments, as evidenced by our weighted average lease term on second-generation lease volume of 7.5 years, more than one year longer than our recent average lease term. Further, demographic trends across our footprint are favorable, with business relocations and expansions reaccelerating, driving healthy population and job growth. We firmly believe high-quality, commute-worthy properties in BBD locations, owned by well-capitalized landlords, are best positioned to capture increasing demand and improving economics. Turning to the quarter, we delivered solid financial performance with FFO of $0.84 per share, and we maintained our outlook for the year. Our leasing performance was excellent. We signed 958,000 square feet of second-generation leases, including over 300,000 square feet of new leases. We delivered GAAP rent growth of 19.4% and cash rent growth of 4.8%. Net effective rents were the second highest in company history, and 9% higher than the prior five-quarter average. Expansions, which we include as renewals, outpaced contractions at a ratio of nearly two to one. In addition, we signed 107,000 square feet in first-generation leases across our development properties. Customers and prospects recognize that blocks of high-quality, BBD-located office space with well-capitalized owners are diminishing across our footprint, which gives us strong pricing power in the best submarkets. We placed in service more than $200 million of 87% leased development properties during the quarter. GlenLake III, comprising 203,000 square feet of office and 15,000 square feet of retail, is now 94% leased. Across the street, we delivered GlenLake II Retail, which is 100% leased to Crooked Hammock Brewery. The addition of 24,000 square feet of food and beverage options elevates GlenLake’s offerings and complements the nearly 1 million square feet of office we have here. This has supported our ability to push rents across this park in West Raleigh. We also placed in service Granite Park 6 in Dallas’ Legacy BBD. This 422,000-square-foot best-in-class office property is 80% leased. We also made strong progress leasing up our two remaining development properties. 23 Springs, our 642,000-square-foot development project in Uptown Dallas, continues to garner strong activity with the leased rate now 83%, up from 75% last quarter and 62% twelve months ago. We have strong prospects to bring our lease rate at 23 Springs into the 90s. In Tampa’s Westshore BBD, our 143,000-square-foot Midtown East development is now 95% leased, up from 76% last quarter and 39% twelve months ago. The office component at Midtown East is 100% leased. On a combined basis, the properties placed in service during the first quarter and in our remaining development pipeline are 86% leased but only 48% occupied. As the leases commence, we will capture significant growth in NOI, cash flow, and FFO. We are starting to receive interest from build-to-suit and sizable anchor prospects for potential new development. It is still early, and it is hard to say whether any of these discussions will result in new projects, but the increased interest is encouraging and signifies limited inventory companies face when searching for large blocks of high-quality space. On the disposition front, we sold a non-core portfolio in Richmond for $42 million. As reflected in our outlook, we expect to sell roughly $200 million of additional non-core assets by the middle of this year and are marketing other assets for sale. We believe we will be able to redeploy capital from non-core asset and land sales on a leverage-neutral basis that will further strengthen our cash flows and result in higher growth. As we announced last week, we may also use non-core disposition proceeds to repurchase up to $250 million of outstanding shares of common stock on a leverage-neutral basis. We continue to evaluate acquisition opportunities and highly pre-leased developments; the repurchasing of our shares is another capital deployment option we now have in our arsenal. Before turning the call over to Brian, I want to reiterate the priorities we have highlighted over the past few years that will drive long-term value creation for our shareholders. First, we will continue to drive occupancy towards stabilized levels in our operating portfolio. Second, we will deliver and stabilize our development pipeline. Third, we will improve our portfolio quality and long-term growth rate by recycling out of non-core, CapEx-intensive assets in non-BBD locations and invest in properties with better cash flows and higher long-term growth rates. And fourth, we will do all this while maintaining a strong and flexible balance sheet. We made meaningful progress on each of these priorities during the first quarter. We believe the focus on these four areas, combined with a strong fundamental backdrop in our core BBDs due to the healthy demand and limited new supply, will drive significant growth in cash flow and long-term value over the next several years. Brian? Brian M. Leary: Thanks, Ted, and good morning, everyone. Our operating results continue to reflect the advantage of owning commute-worthy, amenitized assets in the best business districts of high-growth Sunbelt metros. Fundamentals across our markets continue to improve, as evidenced by vacancy rates and sublease space declining. Rents are up, which combined with steady concession packages has resulted in higher net effective rents. As far as supply goes, the best of the best and the best of the rest are in high demand. With office construction at historic lows, or non-existent in many markets, new office inventory is in scarce supply. With demolitions outpacing deliveries nationwide, the flight to quality has become, in many cases, an all-out sprint to quality, with users proactively inquiring for early extensions to lock in location and terms. A common theme across our markets is that office rents pale in comparison to the investment customers have in their people, and that exceptional environments and experiences yield superior results when their people are in the office and being better together. Customers are choosing well-located, highly amenitized, Class A buildings with well-capitalized owners and customer-centric operations, and they are willing to pay for it. They are moving to metros that continue to win people and companies with the highest quality of life and most business-friendly outlooks. This is the Highwoods Properties, Inc. portfolio, this is the Highwoods Properties, Inc. team, and these are our Sunbelt markets and BBDs. Starting with Dallas, the Metroplex remains one of the country’s premier destinations for corporate headquarters and expansions, which should not be a surprise at this point considering it is Site Selection Magazine’s number one city for headquarter relocations and is in the state Chief Executive Magazine has deemed as the best for business 21 consecutive years. From 2018 through 2024, Dallas landed roughly 100 headquarters, with 11 more in 2025. The region continues to attract diverse firms across financial and professional services, advanced manufacturing, logistics, and life sciences, seeking a central location, business-friendly environment, and a deep labor pool. That macro story is consistent with the office fundamentals you see in the Q1 broker data. According to Cushman & Wakefield, DFW recorded 117,000 square feet of positive net absorption in 2026, its fifth consecutive positive quarter, with nearly 340,000 square feet of positive absorption in Class A as Class B continues to shed space. Our Dallas portfolio is in Uptown, Legacy, and Preston Center, which is the tightest submarket in the region with less than 6% vacancy and is home to one of our latest acquisitions, The Terraces. These BBDs are squarely in the path of demand. The mark-to-market we are realizing via second-generation leasing, both at McKinney & Olive and The Terraces, is significant, generating GAAP rent spreads of 27%. Turning to Charlotte, the city is increasingly recognized as a strategic hub that is being validated by headline corporate decisions. Among the 104 metros that Cushman & Wakefield tracks, Charlotte was number one for job growth. To that end, and subsequent to our most recent earnings call in February, three global financial institutions have made major new job announcements. Already with an established home in Charlotte’s SouthPark BBD, where we have almost 800,000 square feet, JPMorgan recently announced plans for an eventual 1,000-job regional hub, with 400 of those to be hired by 2028. Two new entries to the market include Capital Group’s planned new home in Uptown, with 600 new employees, and after a nationwide search, Sumitomo Mitsui Banking Group, one of Japan’s largest banks, selected Uptown as well for their second U.S. headquarters, creating 2,000 jobs by 2032, with an average salary for these 2,000 jobs projected to be over $165,000 a year. This macro backdrop aligns perfectly with Q1 office fundamentals; CBRE noted approximately 410,000 square feet of positive net absorption in the first quarter and total leasing volume of roughly 1.4 million square feet, up nearly 74% year-over-year, with about 70% of that volume in Class A buildings. In Uptown, the denominator is shrinking as millions of square feet of office space are being taken out of inventory for conversions to residential, hotel, and retail uses. Strong demand for high-quality space and limited new supply are yielding a landlord-favorable environment for driving leasing fundamentals. Our Charlotte assets are directly benefiting from this demand, which is why we are seeing strong rent roll-ups and net effective rent growth in Charlotte. In Raleigh, the long-term story of in-migration and organic growth remains intact. Recent census estimates show the Raleigh metro is one of the 10 fastest growing in the country between 2024 and 2025, and statewide, North Carolina ranked first in domestic net migration and third in overall population gain for the same period, adding an estimated 146,000 residents. CBRE’s tech report noted that the Raleigh area also produces nearly 5,000 tech graduates annually, reinforcing a sustainable pipeline of skilled workers. Office fundamentals reflect that strength in the best business districts, and our team was busy for the quarter, signing over 200,000 square feet of second-generation space. Our two new developments at GlenLake offer a mix of uses and are 95% leased, and Block 83, our recent mixed-use JV acquisition, which is 97% leased in Raleigh’s CBD, is directly aligned with where both in-migration and corporate demand are strongest. Finishing in Nashville, where strong population growth and a diversified economy continue to attract brand-name employers, just last month Starbucks announced a $100 million plan to open a Southeast corporate office in Downtown Nashville for 2,000 employees, with some relocating from Seattle and the balance of new hires in Nashville. Office data for the first quarter shows that demand is focused on newer or newly amenitized Class A nodes, and our 287,000 square feet of quarterly leasing with a weighted average lease term of 9.8 years, and cash and GAAP rent spreads of 9.4% and 26.5%, respectively, bears witness to this data. Across our footprint, we are aligning capital with the metros and submarkets that continue to win people, jobs, and corporate investment. We are making sure our portfolio and people are prepared to deliver commute-worthy experiences to our customers and their teams. Our success this quarter supports this strategy, and we are confident it will continue to serve us well. Brendan? Brendan Maiorana: Thanks, Brian. In the first quarter, we delivered net income of $31.3 million, or $0.29 per share, and FFO of $94 million, or $0.84 per share. The quarter included a $17 million property sale gain from our disposition in Richmond that was included in net income but not included in FFO. During the quarter, we received a term fee at an unconsolidated JV for a net $2.2 million, or $0.02 per share, from a customer moving from McKinney & Olive to 23 Springs, and we sold our interest in a third-party brokerage services firm, resulting in a $1.4 million gain. These two items were included in FFO and were factored into our original FFO outlook. Otherwise, there were no unusual items in the quarter. You may have noticed some minor changes to our supplemental package we released yesterday that we believe will make it easier to derive our share of joint venture NOI. We also broke out Dallas as its own market now that we have three in-service properties in Dallas, which will increase to four upon stabilization of 23 Springs. Our “Other” markets now primarily consist of our non-core Pittsburgh and Richmond portfolios. We are pleased with our first quarter financial results, which demonstrate the resiliency of our operations and cash flows. Even more consequential was this quarter’s leasing activity on both the in-service portfolio and development pipeline, which positions us to increase occupancy and deliver NOI growth during the remainder of 2026 and beyond. Our leased rate is 89.7%, up from 89.2% one quarter ago. The spread between our leased and occupied rates of 470 basis points is three times our normal historical spread, a strong indicator for future occupancy gains. We reiterated our year-end occupancy outlook of 86.5% to 88.5%, which implies a 250-basis-point increase at the midpoint over the remaining three quarters of the year. Our balance sheet remains in good shape. We had over $650 million of available liquidity at the end of the quarter, and subsequent to quarter-end, we closed a $100 million secured mortgage at Granite Park 6, resulting in over $50 million of capital to Highwoods Properties, Inc. We expect to close one or more additional financings at JVs during the remainder of the year, which will repatriate capital back to Highwoods Properties, Inc. and improve our liquidity and unencumbered debt-to-EBITDA ratio. Based on our current expectations of NOI growth, and assuming $200 million of non-core asset sales, we expect to end the year with debt to EBITDA in the low- to mid-6s, with additional reductions likely in future periods as NOI grows. We have only $40 million of remaining capital needed to complete our share of the development properties. These properties, combined with the developments placed in service this quarter, will deliver over $20 million of annual NOI growth compared to the Q1 2026 run rate. As Ted mentioned, we have maintained our FFO outlook of $3.40 to $3.68 per share. It is still early in the year, and while we are off to a strong start with our leasing activity, most of these leases will have a financial benefit to 2027 and thereafter. Before we turn the call over for questions, there are a couple of items to note. First, I mentioned the term fee and gain on sale were recorded in the first quarter. We do expect some additional term fees in the remainder of the year, as is typical, but these are expected to be lower in subsequent quarters. We also expect some additional other income items in the second half of the year. In total, these items are expected to be around $0.06 to $0.07 for full-year 2026, which is approximately $0.05 lower than 2025. Second, capitalized interest is expected to be lower for the foreseeable future, as we will no longer capitalize interest expense at 23 Springs or Midtown East. There is significant embedded NOI growth at these properties due to leases that are signed but will not be fully online before 2027. Third, as is typical, G&A was higher in Q1 due to the expensing of annual equity grants. G&A is expected to be lower for the remaining quarters of the year. Given these factors and our expectation of steadily increasing occupancy during the final three quarters of 2026, we expect FFO to increase in the second half of the year. Operator, we are now ready for questions. Operator: Thank you. To ask a question, please press star followed by the number one on your telephone keypad. Our first question comes from Seth Eugene Bergey from Citi. Please go ahead. Your line is open. Seth Eugene Bergey: I just wanted to go back to some of your comments in prepared remarks about discussions around potential new developments and the share repurchase authorization. How are you thinking about capital allocation priorities, and how do those opportunities compare to each other today? Theodore J. Klinck: Hey, Seth. It is Ted. Looking at the best ways to improve our long-term growth rate, strengthen and make our cash flows more resilient, and improve the quality of the portfolio, I think our stock buyback gives us another option and optionality. Over the years, we have proven to be disciplined allocators of capital. We have rotated between acquisitions and development throughout various cycles, always looking at the best risk-adjusted return. The stock buyback just gives us one more option to consider. Last year we were very active on the acquisition side; we acquired, on our share, about $580 million worth of assets at what we consider very attractive pricing. Now, as you alluded to, we are becoming more constructive on development. There is a shortage of high-quality space, so we are fielding calls, whether it be build-to-suits or pre-leased office development. Development is hard these days—expensive, hard to finance, interest costs are higher—but we think there are opportunities for well-capitalized developers to earn attractive risk-adjusted returns. We look at everything, and development is certainly becoming more constructive. Seth Eugene Bergey: Thanks. And then on the potential opportunity for dispositions, given the move in the 10-year and maybe some macro headlines around AI, are you seeing any changes in the type of capital interested in office product and any changes in pricing? Theodore J. Klinck: The short answer is no, at least not yet. Since early 2025 through the disposition we had in January, we sold about $270 million roughly at an 8% cap rate, which matched up with our acquisitions. We have a lot of assets out in the market. We have said we are trying to get $190 to $210 million done by midyear—we are on track—and we have other assets in the market at various stages. We have not seen changes in the profile of buyers. Seth Eugene Bergey: Great. Thank you. Operator: Our next question comes from Blaine Heck from Wells Fargo. Please go ahead. Your line is open. Blaine Heck: Great, thanks. Good morning. You have had a solid start to the year on the leasing side. Can you comment on the leasing economics you have seen thus far and how you would expect rent spreads and concessions to trend during the full year of 2026? Theodore J. Klinck: Maybe I will start, Blaine, and then Brian or Brendan can jump in. As you alluded to, we had a great start to the year with almost 5% up on cash and 19% plus on GAAP. It can vary quarter to quarter with mix, but in general, the macro setup is pretty good for office owners over the long term. Demand remains strong in our markets. We are not seeing any impact from AI; in fact, it has been a net positive—we signed a couple of AI-related users. There is absolutely, as Brian said, a dwindling supply of high-quality space in the BBDs. There is going to be a shortage of this space in the next couple of years given that new construction is at a historic low. That should accrue to the benefit of office owners. We do not know exactly what the metrics will look like quarter to quarter, but it is a good setup for owners of high-quality office space in our BBDs. In-migration is a tailwind across our markets, notably Charlotte and Dallas, among others. The supply-demand backdrop feels pretty good right now. Brian M. Leary: Blaine, I might just add an anecdote. We have been proactive in connecting with customers well in advance of expirations to push out extensions, and now they are reaching out to us too. They want to secure where they are and secure terms, and not get caught at a mark-to-market a few years down the road. While the recovery is not universal, we feel the great majority of our portfolio is on the top side of that K-shape and we are benefiting. Blaine Heck: That is helpful color. And then, Ted, on the potential for build-to-suit opportunities, are there specific markets where you are seeing demand increase? Any color on the profile of tenants you might be talking to? And would those potential build-to-suits occur on land you already own, or might you need to acquire some land? Theodore J. Klinck: Market-wise, it is various markets—multiple—and in some of our top, larger markets. I do not want to get too specific as we are competing, and some are still multi-state competitions. Customer-wise, it varies—financial services, corporates—no single theme other than a shortage of space in the submarkets they want to be in. On land, it is both on land we already own and potentially on sites we would control specifically for a build-to-suit. We would not go out and buy land to land bank; any land purchase would be tied to a specific build-to-suit. Our land inventory is more likely to go down from here. Operator: Our next question comes from Peter Dylan Abramowitz from Deutsche Bank. Please go ahead. Your line is open. Peter Dylan Abramowitz: Thank you for taking the questions. I think last quarter you talked about needing around 700,000 square feet this year of vacancy leasing that would actually take occupancy to hit the midpoint of guidance, and mentioned a retention rate of around 35% to 40% under 2026 expirations. Of the 300,000 square feet of new leasing you did this quarter, how much will go toward that 700,000 for the full year that will actually take occupancy before year-end? And is the math still the same on the retention and renewal side? Brendan Maiorana: Hey, Peter. Good question. The math pretty much rolls forward from everything we did in the first quarter. We had talked at the beginning of the year about 1.2 million square feet of leases signed that would commence by the end of 2026. We moved a number of those into occupancy during the first quarter, but we replaced that, so we still have about 1.2 million square feet of signed leases that will commence by year-end. On expirations, out of what remains, there is somewhere in the neighborhood of 850,000 to 900,000 square feet of likely move-outs. That leaves us positive net absorption from 3/31 of 300,000-plus square feet, which means we have another 300,000 to 400,000 square feet to sign and start this year. That is down from the 700,000 we mentioned at the beginning of the year. If we keep roughly 100,000 square feet of new per month, that puts us on track to the midpoint of the year-end occupancy range of 87.5%. Peter Dylan Abramowitz: That is helpful, thanks. On the Richmond sales, what was the cap rate specifically on that portfolio? Theodore J. Klinck: It was at the upper end of the blended range we discussed—call it a very low double-digit cap rate—and that is incorporated in the overall blended number of around 8%. Peter Dylan Abramowitz: Got it. One more: in the same-store pool, operating expense growth was a little elevated in the quarter. Anything unique to Q1 we should be mindful of going forward? Brendan Maiorana: As you might expect from the winter, we had some pretty cold weather, particularly in February, so utility costs were up significantly year-over-year. That really drove the increase in expenses. We were negative 60 basis points on same-store in the quarter and expect roughly flat for the year. That likely means low again in Q2 and then positive in the back half to average out to flat on a cash basis and positive on a GAAP basis. Operator: Our next question comes from Ronald Kamdem from Morgan Stanley. Please go ahead. Your line is open. Ronald Kamdem: Following up on the same-store thread, can you give some breadcrumbs as we think about 2027? As occupancy ramps, presumably you will be at a better pace comping into next year. Any other puts and takes for potential acceleration? Brendan Maiorana: Thanks, Ron. The second-half 2026 improvement in same-store should, in all likelihood, carry into 2027, so you should see good same-store results. From an earnings perspective, breadcrumbs from first half versus back half of this year: in Q1 we had the gain on the third-party brokerage sale and the term fee—combined $0.03. G&A is similarly about $0.03 higher in the first quarter, so those offset. Capitalized interest will go away on 23 Springs and Midtown East—probably a couple of pennies—partially offset by a little higher NOI. We also expect about $200 million of dispositions in Q2; that will be a little dilutive as we pay down the line of credit and keep the remainder in cash in preparation for paying off the 2027 bond. All that likely means Q2 FFO is a little lower than Q1, and then a meaningful ramp in the back half to get to the midpoint of guidance excluding land sale gains. That is positive as you think about 2026 into 2027. Ronald Kamdem: On capital recycling, on the buy side it sounds like Dallas is interesting. Are acquisition opportunities all in existing markets, or any new markets? And on the sell side, an update on the Pittsburgh portfolio situation and timing? Theodore J. Klinck: On acquisitions, we are primarily focused on our existing footprint. We are very pleased with it and do want to grow in Dallas over time, but you go where the opportunity is; for now it has been entirely in existing markets. On dispositions, no real update on Pittsburgh. We will be bringing one of the smaller assets to market soon. For the big asset, PPG Place, no update—we are continuing to get some leasing done before bringing it to market. Capital markets are improving on both debt and equity, so we are getting closer to launching, but have not set a date yet. Operator: Our next question comes from Dylan Robert Burzinski from Green Street. Please go ahead. Your line is open. Dylan Robert Burzinski: Thanks for taking the question. On the build-to-suit opportunities, what sort of stabilized yield on cost do you require to kick one of those off in today’s environment? Theodore J. Klinck: Dylan, it is hard to generalize. We do not disclose targets given competitiveness, and every deal is different based on market, submarket, credit, term, and annual bumps. On a risk-adjusted basis, we think there are attractive opportunities right now. Dylan Robert Burzinski: Thinking about 2027—understanding no guidance—retention around 40% this year for 2026 expirations: is that the low point as we think about 2027 and beyond, or is there any one larger tenant in 2026 that makes 40% not a good assumption for 2027? Brendan Maiorana: Your number is correct on 2026 in the ~40% range as we were migrating into 2026. Keep in mind the adverse selection bias: we early-renew folks, and those not renewed remain in the expiration schedule. For 2027, as of now, we are probably in the 50% to 60% retention range on what remains, and even that is probably lower than the ultimate outcome given a number of 2027 expirations where we have the underlying tenant but they have subleased to someone else. Our retention calc assumes the underlying tenant vacates and then we sign the subtenant as a new lease, so that would show as a move-out and new lease, not a renewal. We think we will do well on 2027 retention, creating a good environment to continue driving occupancy higher from year-end 2026 through 2027. Operator: As a reminder, to ask a question, please press star followed by the number one. Our next question comes from Vikram Malhotra from Mizuho. Please go ahead. Your line is open. Vikram Malhotra: Good morning. Two quick ones. First, on the trajectory from here, what do you need to do new-leasing-wise for the rest of the year to hit the higher end or midpoint of the year-end occupancy? And is there anything new in terms of additional move-outs we should keep in mind going into next year? Second, on AI and leasing—are you hearing any AI-oriented firms looking for space or expanding away from the West Coast in your markets? Brendan Maiorana: On leasing needed to hit the year-end occupancy range—at the midpoint—we probably need roughly 100,000 square feet of new leasing per month through June or July. Those leases are likely to move into occupancy by year-end. To continue pushing occupancy higher into 2027, we would like to see that pace continue in the back half, which should set us up well for 2027. We do not have significant 2027 expirations we are particularly worried about. Theodore J. Klinck: On AI, as I alluded to earlier, we signed one AI-related tenant focused on data centers in Dallas. Otherwise, across our markets, we have not seen much AI demand yet. Vikram Malhotra: Thank you. Operator: Our last question comes from Nicholas Patrick Thillman from Baird. Please go ahead. Your line is open. Nicholas Patrick Thillman: Good morning. One quick question on overall utilization and sublease availability within the portfolio. Do you have a number on occupied space currently listed for sublease? Theodore J. Klinck: Our sublease space is going down—down 6% to 7% last quarter. Some does convert to direct vacancy, but some is being taken off the market and utilized by our customers. We have a little over 500,000 square feet in our portfolio currently being subleased. It is getting better in our portfolio and in the market as well. Nicholas Patrick Thillman: That was it for me. Thanks, all. Theodore J. Klinck: Great. Thanks, Nick. Operator: We have no further questions. I would like to turn the call back over to Theodore J. Klinck for any closing remarks. Theodore J. Klinck: Thanks, everyone, for joining the call, and thank you for your interest in Highwoods Properties, Inc. We look forward to seeing you all at NAREIT, if not before, or on the next call. Operator: Thank you. This concludes today’s conference call. Thank you for your participation. You may now disconnect.
Operator: Good day, and welcome to the Community Bank System, Inc. First Quarter 2026 Earnings Conference Call. All participants will be in listen-only mode. After today’s presentation, there will be an opportunity to ask questions. To ask a question, you may press star, then 1 on your telephone keypad. To withdraw your question, please press star, then 2. Please note that this event is being recorded, and the discussion may contain forward-looking statements within the provisions of the Private Securities Litigation Reform Act of 1995 that are based on current expectations, estimates, and projections about the industry, markets, and economic environment in which the company operates. These statements involve risks and uncertainties that could cause actual results to differ materially from the results discussed. Refer to the company’s SEC filings, including the Risk Factors section, for more details. Discussion may also include reference to certain non-GAAP financial measures. Reconciliations of these non-GAAP measures to the most directly comparable GAAP measures can be found in the company’s earnings release. I would now like to turn the conference over to Dimitar Karaivanov, President and CEO. Please go ahead. Dimitar Karaivanov: Good morning, everyone. I would like to first highlight a very recent recognition our company received. Last week, we were named CenterState CEO Business of the Year with over 50 employees here in Central New York. This is one of the most prominent recognitions in Central New York. I believe it is a great illustration of the activity, commitment, visibility, investment, and impact we are having, and the results we are about to discuss come in no small part due to all of the above. A major thank you to all of our teams across banking, insurance, employee benefits, and wealth management. Great things are happening in Upstate, and great things are happening in our company. Now on to results. We are off to a very good start in 2026. Organic growth is visible across all of our businesses. New business efforts, combined with the benefits of a supportive interest rate environment and market values, resulted in 9% total revenue growth. Our balance sheet, as always, is a source of strength for us and our clients, with excellent liquidity and credit metrics. Expenses and return on investments remain a focus. All in all, 17% growth in operating diluted earnings per share compared to last year’s period is a result we feel very good about. Focusing on each specific business: Banking and Corporate is benefiting from organic growth, expanding margin, and our recent branch acquisition in one of the most attractive markets in the Northeast. A 29% bottom-line improvement year over year is peer-leading. Market share gains have been and will continue to be the main source of growth for us. Employee Benefit Services is expanding at the expected pace of mid- to high-single digits, and we are starting to see some tangible results of our recent investments. Insurance Services had a difficult comp from last year due to the timing of contingency payments, which, as a reminder, came in during 2025 versus our typical pattern of most in the second quarter. This, however, has not changed our expectations for overall insurance performance during the year. Wealth Management Services also experienced mid-single-digit revenue growth and high-single-digit bottom-line growth, in line with our expectations. In summary, we did have a very good start to 2026. Organic activity is strong. Targeted inorganic discussions are active across all of our businesses. We have excellent capital and liquidity and look forward to continued strong performance throughout the year. I will now turn the call over to Mariah Loss for the financial results. Mariah? Mariah Loss: Thank you, Dimitar. Good morning, all. As Dimitar noted, the company’s first quarter performance was strong. Including acquisition expenses, GAAP earnings per share of $1.08 increased $0.15, or 16.1%, from the first quarter of the prior year, and increased $0.05, or 4.9%, from linked fourth quarter results. Operating earnings per share and operating pre-tax pre-provision net revenue per share were record quarterly results for the company. Operating earnings per share were $1[inaudible] in the first quarter as compared to $0.98 one year prior and $1.12 in the linked fourth quarter. First quarter operating PPNR per share of $1.10 increased $0.21 from one year prior and increased $0.03 on a linked-quarter basis. These record operating results were driven by a quarter-over-quarter decline in operating noninterest expenses and a new quarterly high for net interest income. The company’s net interest income was $134.7 million in the first quarter. This represents a $1.3 million, or 1%, increase over the linked fourth quarter and a $14.5 million, or 12.1%, improvement over the prior year, and marks the eighth consecutive quarter of net interest income expansion. The company’s fully tax-equivalent net interest margin increased 6 basis points from 3.39% in the linked fourth quarter to 3.45% in the first quarter, driven by lower funding costs. During the quarter, the company’s cost of funds was 1.2%, a decrease of 7 basis points from the prior quarter, primarily driven by lower deposit costs. Operating noninterest revenues increased $3.2 million, or 4.2%, compared to the prior year’s first quarter and decreased $3.2 million, or 3.8%, from the linked fourth quarter. The increase in operating noninterest revenues compared to the prior year was reflective of increases in Banking, Employee Benefit Services, and Wealth Management Services noninterest revenues, partially offset by a decrease in Insurance Services noninterest revenue due to changes in the timing of collections of contingent commissions revenue. Operating noninterest revenues represented 37% of total operating revenues during the first quarter, a metric that continuously emphasizes the diversification of our businesses. The company reported a $5.0 million provision for credit losses during the first quarter. This compares to $6.7 million in the prior year’s first quarter and $5.0 million in the linked fourth quarter. During the first quarter, the company recorded $133.0 million in total noninterest expenses, a decrease of $5.5 million, or 4%, from the linked fourth quarter and an increase of $7.7 million, or 6.2%, from the prior year’s first quarter. The decrease from the prior year’s fourth quarter was due in part to seasonal factors and the absence of certain one-time items described last quarter, as well as acquisition expenses associated with the Santander branch acquisition. $3.9 million of the increase in total noninterest expenses from the prior year was attributed to salaries and employee benefits, primarily due to the incremental costs associated with acquisitions and de novo bank branches opened between periods, along with the impact of annual merit-based increases. Occupancy and equipment expenses increased $2.2 million from the prior year’s first quarter, driven by incremental costs associated with the opening of 15 de novo bank branches and three regional headquarters, along with the seven branches acquired from Santander in the prior year’s fourth quarter. Additionally, acquisition expenses of $0.4 million were incurred in 2026 associated with a pending acquisition of ClearPoint Federal Bank and Trust. Ending loans increased $181.4 million, or 1.7%, during the first quarter and increased $710 million, or 6.8%, from one year prior, primarily due to organic growth in the overall business and consumer lending portfolios. The company’s ending total deposits increased $978.1 million, or 7%, from one year prior and increased $483 million, or 3.4%, from the prior year. The growth in total deposits during the first quarter was primarily reflective of seasonal inflows of municipal deposits. The increase in total deposits over the past twelve months included the $543.7 million of deposits assumed from the Santander branch acquisition. Moving on to asset quality, the nonperforming loans ratio decreased 4 basis points and the net charge-off ratio increased 2 basis points from the linked fourth quarter, while both the 30- to 89-days delinquent ratio increased 5 basis points from last quarter, aligned with typical seasonal trends. The company’s allowance for credit losses was $90.2 million, or 81 basis points of total loans outstanding, at the end of the first quarter, an increase of $2.3 million during the quarter. The increase was primarily attributed to reserve building in the business lending portfolio reflective of organic CRE growth. The allowance for credit losses at the end of the first quarter represented 7x the company’s trailing twelve-month net charge-offs. Looking forward, we believe the company’s diversified revenue profile, strong liquidity, and historically good asset quality provide a solid foundation for continued earnings growth. With that, the financial expectations we provided earlier this year for full-year 2026 remain consistent. That concludes my prepared earnings comments. We will now open the call for questions. Operator, please open the line. Operator: Thank you. We will now begin the question-and-answer session. To ask a question, you may press star, then 1 on your touch-tone phone. If you are using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, please press star, then 2. We will pause momentarily to assemble our roster. The first question comes from Steve Moss with Raymond James. Please go ahead. Steve Moss: Morning, Dimitar and Mariah. How are you guys doing? Nice quarter here, and maybe just starting on the loan side—good commercial loan growth. I am just curious where you are on the pipeline. I apologize if I missed it. Just curious for color on that aspect of the loan book to start. Dimitar Karaivanov: The commercial pipeline is in excellent shape. I think it is actually the highest it has been and meaningfully higher than last year at this time. Of course, there is uncertainty as to timing and pull-through, but right now activity is very good and it has been building. We have had a little bit fewer payoffs than we did last year so far, and you all know that impacted us meaningfully last year. So right now, we are in pretty good shape. Steve Moss: Okay. And then on the auto side, strong quarter there. I know you were upbeat on it. What are you seeing going forward in terms of pricing and where it could go for the rest of the year? Dimitar Karaivanov: A reminder: the RFPs for us are really a function of pricing and overall market demand because we do not do anything as it relates to credit—that is set with fairly constant credit parameters. As long as they fit in the credit box, then the question is where we are on pricing. We entered this year with a little bit more of an aggressive stance, expecting rates to trend down over time. I think we gained a bit more market share than last year. We learned our lesson last year—we were down meaningfully in the first quarter in that business—and this year we did not want to start deep in the hole. Activity is strong, demand is okay, pricing is now a little bit better than it was at the beginning of the year. Our goal for that business continues to be mid-single digits. Steve Moss: Got it. And then on the fee side, you mentioned the contingent piece more in the second quarter. As I look back, it looks like that contingent benefit you typically get is about $1.5 million to $2 million in the second quarter. Is that about fair? Mariah Loss: Yes, that is in the range. Steve Moss: And just one more on expenses. Good to see where they came in. Updated thoughts on the cadence of expense growth throughout the year and where you are looking for things to land? Dimitar Karaivanov: Our guidance stays intact on that side. Year over year we are running just above 6%, and that includes the impact of acquisitions from last year. As we get into the latter part of this year and we are comparing truly apples to apples—in terms of the de novo expansion last year and acquisitions—I expect that rate to trend lower from 6%. It will be within the range; we are going to drive it as low as we can. Our goal is not to spend money; our goal is to make money, and that will continue to be a focus for us. Operator: The next question comes from David Conrad with KBW. Please go ahead. David Conrad: Good morning. You had really good NIM expansion this quarter, but I thought it was interesting that investment yields actually went down 4 bps. Maybe refresh us on your NIM expectations for the year and talk about how the portfolio balances may be used to pay down borrowings or fund loan growth. Where do you expect those securities balances to go? Thank you. Mariah Loss: NIM did outperform our Q4 guide as we expanded 6 basis points in Q1. This is the result of strong loan growth, ongoing repricing efforts, and a steeper yield curve than in recent quarters. Looking forward to Q2, we expect 3 to 5 basis points of expansion. We will continue to capitalize on loan and deposit efforts and fully realize the late-2025 cuts. Note that Q2 NIM will be partially aided by an FRB dividend. In terms of the overall portfolio, if we have the opportunity, we will pay down borrowings, but we see a steady state for now. We are pleased with how our book looks at the moment. Operator: Thank you. The next question comes from Manuel Navas with Piper Sandler. Please go ahead. Manuel Navas: Hey, just a follow-up on the NIM discussion. So is the expectation for loan yields to be flat to up? And then deposit cost performance has been excellent—any more room for it to come down, or do you have to shift toward acquiring deposits within the de novo branches? Can you talk about deposit costs going forward? Dimitar Karaivanov: Good morning, Manuel. The environment continues to be more supportive on the asset side, so the trajectory for margin will be predominantly driven by assets. There will be quarters like this one where you absorb some of the hit on the asset side while repricing deposits. For us, being flat in loan yields in the quarter, having absorbed 2.5 cuts essentially, was pretty good. Going forward, given where new production is—right around 6%—and where the back book is—around 5.68%—that should give you 30-plus basis points to work with as we continue to reprice the book. On deposits, we have active deposit management across the board and pulled through as much as we could this quarter. If there are no additional cuts, there is more limited opportunity, but another couple of basis points is possible. Also keep in mind that in the second quarter we will be sitting on more liquidity for the first 45 days or so that is municipal-related, and those tend to be higher-cost deposits, so there are natural ins and outs of deposit costs depending on municipal flows. Manuel Navas: Appreciate that. Shifting over to capital deployment, you had a little bit of a buyback this quarter. Can you talk about your appetite there and any updated thoughts on M&A—key businesses versus whole bank? And could we have a checkup on the de novos? Dimitar Karaivanov: We generate a fair amount of capital, and we are fortunate to have four businesses to allocate it across. Our first priority is always organic growth across those businesses. For the bank, that is tied to balance sheet growth; for the other businesses, it is more in the expense base where we are making investments. We continue to have active and very targeted discussions across all businesses on the inorganic side. Historically, for us that has been singles and doubles—a string of pearls—in our nonbanking businesses. On the bank side, we tend to like things we can meaningfully grow and expand, creating returns for shareholders, which also tend to be on the smaller side. We prefer to use cash; sometimes we may have to use stock, and sometimes we will buy back that stock if we use it for an acquisition. The buyback this quarter was opportunistic—to clean up some equity dilution and also take advantage of disruption in the stock price during the quarter, knowing where company earnings are projected to be versus the market price at a moment in time. We will continue to be opportunistic. On a projected forward P/E basis, our stock looks attractive versus historical measures and the overall index, so we think it is reasonably attractive to look at when there are moments of disruption. Operator: The next question comes from Matthew Breese with Stephens Inc. Please go ahead. Matthew Breese: Good morning. Thinking back to strategic initiatives—taking market share in some of the more economically vibrant areas in your footprint—could you give us an idea where we are on that priority and where you have made the most progress, whether it is Rochester, Buffalo, Eastern Pennsylvania, New Hampshire? And then maybe some thoughts around local investments, whether it is chip manufacturing or otherwise, and whether you are starting to see any tangible impacts yet. Dimitar Karaivanov: We have been on a multi-year journey of revamping the organic capability of the company. It started before I joined and included the de novo in Albany, which was very successful, and we then recreated the same approach in Central New York and in Western New York. What is really encouraging is that growth this quarter and the past quarter was broad-based across every single one of the regions. We have had past quarters where the diversification shows up as strong performance in Pennsylvania, Western New York, Syracuse, and New England at different times; lately it has been consistently broad across markets. We feel very good about our opportunities, people, talent, reputation, and brand—things that are hard to replicate. It is not pricing or structure; it is the hard things we have focused on. In terms of Central New York, the major project here is underway. This is a long-tail event that will play out over a decade plus. Tangible things are starting to show up: around 4,000 workers will be on-site soon—transient workers who may not open accounts with us but will consume goods and services in our markets, helping our customers. Then we will see more permanent populations around these facilities—not just Micron, but suppliers, onshoring from Canada and other markets. As a ballpark over multiple years: if you compare the size of the Central New York investment in chips/advanced tech manufacturing to similar investments across the country relative to local GDP, Central New York’s impact is roughly 250% of local GDP. It is very large, and over a long time horizon. Matthew Breese: I did not realize it was that large relative to local GDP. On the ClearPoint deal—is that closed yet, or when is it expected to close? And during the quarter, were there any other notable fee income business line acquisitions that did not get an 8-K? Dimitar Karaivanov: No additional fee income acquisitions in the quarter. As it relates to ClearPoint, both parties are prepared to close—we have everything lined up and it is a straightforward execution with low risk, with limited conversion, technology, or people impact. We are still waiting on regulatory approval. That could be any day, or it could be later—we do not know. Once received, we will be prepared to close shortly after. Matthew Breese: Last one from me. On expenses—in the press release you mentioned use of AI. How and where are you using it, and any notable applications that have saved money or helped on the revenue front? Dimitar Karaivanov: We have been on this journey for about two years. Credit to our retiring director, Sally Steele, who pushed us to be more front-footed back in 2024. Our goal has been to continue to scale without necessarily growing the expense base and headcount—shifting lower-value activities away from people and focusing them on high-value activities. I agree with Alex Karp’s view that AI’s impact needs to be transformational—doing five times as much at half the cost. Until I can point to that outcome definitively and tie it to margin, we will be quieter publicly and continue working in the background. Operator: To ask a question, you may press star, then 1 on your touch-tone phone. The next question comes from Manuel Navas with Piper Sandler. Please go ahead. Manuel Navas: Just want to jump back in. The expense level is seemingly annualizing below your full-year guide. Where are some of the increases across the year as you invest in your businesses? Dimitar Karaivanov: A couple of things to consider. There are fewer days in the first quarter, and additional payroll days in later quarters can be a meaningful add. We also expect continued opportunities for talent acquisition or maybe smaller tuck-in acquisitions that we will ultimately try to absorb with minimal cost, but along the way they might produce some expense. Medical is a swing factor as well—we had a pretty good quarter in medical costs, and that could reverse quickly. A couple of million dollars can be an easy delta in a quarter and move the reported growth rate meaningfully. Mariah Loss: To add to that, we are staying consistent with our guide—4% to 7% expense growth, mid-single digits, with full-year dollars anywhere between $535 million and $550 million, averaging about $135 million a quarter. Core expense came in under $133 million in Q1, so we are on track within those guardrails. We are diligently reviewing spend to ensure investments are focused on growth—talent acquisition, business acquisition, technology, and occupancy. Manuel Navas: Two specific modeling questions. What is the FRB dividend benefit in the second quarter that you expect? And what was the repurchase price on the buyback—you said you were opportunistic; trying to gauge your appetite. Dimitar Karaivanov: On the buyback, it was in the low sixties. As it relates to the dividend, we will follow up with you separately. Operator: Again, if you have a question, please press star, then 1. This concludes our question-and-answer session. I would like to turn the conference back over to Dimitar Karaivanov for any closing remarks. Dimitar Karaivanov: Thank you, everybody, for joining us for our first quarter. We look forward to speaking with you again in July. Operator: Thank you. The conference has now concluded. Thank you for attending today’s presentation. You may now disconnect.