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Operator: Good day, and welcome to the Brookfield Infrastructure Partners 2026 Results Conference Call and Webcast. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker, Mr. David Krant, Chief Financial Officer. Please go ahead. David Krant: Thank you, Sherry, and good morning, everyone. Welcome to Brookfield Infrastructure Partners First Quarter 2026 Earnings Conference Call. As introduced, my name is David Krant, and I am the Chief Financial Officer of Brookfield Infrastructure. I'm joined today by our Chief Executive Officer, Sam Pollock; and our Chief Operating Officer, Ben Vaughan. Also joining us today is Dave Joynt, a managing partner on our investments team. I'll begin the call today with a discussion of our first quarter 2026 financial and operating results, followed by an update on our capital recycling initiatives. I'll then turn the call over to Sam, who will provide an update on our recent strategic initiatives before concluding with an outlook for the business. At this time, I'd like to remind you that in our remarks today, we may make forward-looking statements. These statements are subject to known and unknown risk factors and future results may differ materially. For further information on known risk factors, I would encourage you to review our latest annual report on Form 20-F, which is available on our website. So with that, Brookfield Infrastructure had a strong start to the year, delivering record results while continuing to advance a number of strategic initiatives across the business. We generated funds from operations, or FFO, of $709 million or $0.90 per unit in the first quarter. This is a 10% increase compared to the prior year. This performance was driven by strong base business results, highlighted by FFO from our data and Midstream segments increasing 46% and 12%, respectively, compared to the prior year. Results in our Utilities and Transport segments reflected resilient underlying performance with the current period impacted by higher levels of capital recycling activity achieved during 2025. I'll now go through our results by segment in more detail. Our Utilities segment generated FFO of $201 million, up 5% year-over-year. The increase was primarily driven by inflation indexation and the benefit of over $500 million of capital commissioned into rate base, along with the contribution from our recently acquired South Korean industrial gas business. Moving on to our Transport segment. FFO was $283 million, slightly below the same period last year. The decrease was primarily attributable to loss contributions from our successful asset sales. As a reminder, this included our Australian export and container terminal operations, the partial sale of a U.K. port operation and the majority interest in a portfolio of fully contracted containers at our global intermodal logistics business. This was partially offset by the acquisition of our North American railcar leasing platform that closed on the 1st of January. After adjusting for all these factors, FFO was ahead of the prior year, reflecting higher volumes and tariffs generally across our rail and road operations. Our Midstream segment generated FFO of $190 million, up 12% compared to the same period last year. The increase reflects attractive commodity pricing, strong asset utilization and robust customer activity levels across our portfolio. Lastly, FFO from our data segment was $149 million, representing a step change increase of 46% compared to the prior year. The increase was driven by the contribution from our U.S. bulk fiber network, which we acquired in the third quarter of last year as well as organic growth across our data storage businesses, which included the commissioning of over 200 megawatts of operating data centers into earnings over the last year. In addition to the strong financial and operating results we have delivered, we also made meaningful progress towards our 2026 capital recycling goal with proceeds secured of $1 billion to date. This includes closing the initial tranche of our partnership on a portfolio of stabilized and under construction data centers in North America and the closing of the sale of the largest of 4 concessions within our Brazilian electricity transmission business. We also completed a secondary sale of a 12% interest in our North American gas storage business. And finally, in April, we signed an agreement to sell our bulk liquid storage business, the largest independent storage provider in Scandinavia. These asset sales improved our strong corporate liquidity position, which was $2.5 billion at the end of the first quarter. Our balance sheet remains well capitalized and our proactive approach to managing debt maturities has allowed us to remain opportunistic in the capital markets. During the quarter, we refinanced approximately $1.5 billion of nonrecourse debt on a net to bid basis, with no incremental borrowing costs for the business. Before turning the call over to Sam, I would like to briefly note that we have recently begun exploring whether a single combined corporate structure would be the best path forward for the business. The goal is to determine if on a tax-free basis, we can create a single corporate security that would enhance liquidity, increase index inclusion and create value for investors. We are in the early stages of this evaluation, and we'll provide an update when appropriate. So that concludes my remarks for this morning. I'll now turn the call over to Sam. Samuel J. B. Pollock: Okay. Thank you, David, and good morning, everyone. For my remarks today, I'm going to discuss our strategic initiatives before concluding with an outlook for the year ahead. We have had an active start to the year with business development activity resulting in new strategic capital partnerships and continued progress under established frameworks. These partnerships are bilaterally sourced with high-quality counterparties and gives us exclusive access to investment opportunities that require long duration capital at scale. Increasingly, these frameworks are becoming a more meaningful avenue for growth, reinforcing our position as a partner of choice and expanding our opportunity set to deploy large-scale capital at attractive risk-adjusted returns. During the quarter, we established a new framework with a leading global investment-grade OEM, and launching an exclusive leasing platform for industrial equipment. Through this platform, we will provide long-term leasing solutions that are expected to generate predictable cash flows without residual value interest rate or refinancing risk. We will have the sole discretion to enter leases under the framework with BIP's share of the equity investment expected to be upwards of $375 million. Our $5 billion strategic partnership to install up to 1 gigawatts behind-the-meter power generation advanced further this quarter as well. We secured an additional $430 million CapEx project, bringing the total capital committed under the framework to approximately $1.6 billion. BIP's total equity commitment associated with the framework to date is approximately $60 million. Given the success of the behind-the-meter solution and strong customer demand based on speed to market, we may have the ability to expand the platform in the coming months. We also remain on track to close Clarus. This is New Zealand's leading gas infrastructure utility in the second quarter. For an equity purchase price of approximately $70 million at our share. Now moving to our outlook. We are progressing through 2026 from a position of strength, and remain very constructive on the backdrop for infrastructure. While recent geopolitical developments have contributed to greater market volatility, the essential nature of our businesses and the regulated or contractual profile of our cash flows continue to provide resilience and growth. More broadly, demand for additional power, connectivity and logistics capacity continues to expand. This is being driven by digitalization, accelerating power demand, the rapid build-out of AI infrastructure and the ongoing reconfiguration of global supply chains. These tailwinds are expanding our opportunity set and providing attractive avenues to deploy capital at compelling risk-adjusted returns. Coupled with strong operating performance and a visible pipeline of organic growth projects, these factors position us well to deliver 10% plus per unit FFO growth in 2026. As David mentioned, our capital recycling program and balance sheet continues to provide the flexibility to fully self-fund the growth ahead. With multiple sale processes underway across our business and continued access to capital markets during windows of opportunity, we are well positioned to fund our investment pipeline while maintaining financial discipline. Taken together, this supports our confidence in the outlook for 2026 and our ability to continue compounding value for our unitholders over the long term. That concludes our remarks, and I'm going to pass it back to Sherry for -- to open the line for Q&A. Operator: [Operator Instructions] And our first question will come from the line of Devin Dodge with BMO Capital Markets. Devin Dodge: Wanted to start on the recently launched equipment leasing business. I'm just trying to get a sense if this is part of the strategy for investing inside data centers, what kind of time frame you'd expect to deploy that $1.5 billion of capital and what do you view as the main risks associated with that investment? Samuel J. B. Pollock: Devin, this is Sam. I'll tackle that one. So the opportunity, I think, will likely be broader than just data centers, but initially, a good portion of the investment will be equipment for data centers. The -- we get a lot of comfort over the transaction itself because we're able to provide capital to essentially high-quality counterparties with investment-grade profiles with fully self-amortizing cash flow streams. So it's very attractive from that perspective. We think we can scale this up as far as timing and deployment of capital. I think our hope is that on a gross basis, we'll deploy $1 billion to $2 billion of equity capital. So BIP share would be 25% of that. And we expect -- it's hard to predict flow, but I think we would hope to do that within a 24-month period. Devin Dodge: Okay. I appreciate that. Second question, I was going to ask about that Intel JV. I didn't see any mention of it in your release, but I think Intel disclosures suggested the payments to the JV may have started in Q1. I guess, first, was that the case? And how quickly can return on investment ramp up in the coming quarters as both those fabs come online? David Krant: Devin, it's Dave here. I'll take that one. Look, I think in the past, we generally won't provide many updates specifically on the project. I think those generally come, as you said, from the Intel side. I think largely, the project has gone well. It's coming online, in line with our targets in terms of scheduling. They did make their first small wafer payments in the quarter. I would expect the initial -- the final capital contributions to go in over the next 6 months. And as those go in, I would expect the earnings to start to ramp up. And so I would expect to start seeing that come through our transmission and distribution segment of our data business in Q3 and then full run rate will be in 2027. Operator: And that will come from the line of Maurice Choy with RBC Capital Markets. Maurice Choy: I wanted to start with this concept of a single combined corporate structure. I have to assume that when the BIPC shares were first created back in 2020, something like this was contemplated. And if so, what were some of the obstacles back then and how those may or may not no longer be as big of an obstacle or even at all this time round. David Krant: Maurice, it's David again. But I think -- as we talked about this morning, we are in the early stages of considering this with the Board direction. And so it's probably hard to say what the obstacles are today. That's the word we'd like to complete over the next little while. As you know, the 2 companies for the last 6 years have served us well, but we're always looking at ways to improve our access to capital. And we think following a few things, obviously, the completion of our sister company BBU's process. We can now have some insights into how 1 simplified corporate structure will trade in the market. An early indication to that that's been positive, that this is the right time to reassess. And so I think that's probably all we can say at the moment in light of that, and I'll leave it that. Maurice Choy: Fair enough. Maybe if I could just finish off more on your energy portfolio. Obviously, we've seen a series of support of federal and provincial government changes in Alberta and broader Canada. And also, there's been the conflict in the Middle East. Just your thoughts on the outlook for your business in the province notably into pipeline and NorthRiver? Benjamin Vaughan: Yes. And it's Ben here. I'll take that question. And look, all those developments are very positive for our Midstream business in Canada. We're seeing really strong demand from all of our clients for more access to our facilities and our pipelines. We completed about $400 million worth of growth projects in the past several months that are now starting to ramp up in terms of the revenue profile and delivering results. And probably most importantly, we have a really tangible, meaningful pipeline of pretty bite size, relatively straightforward to execute and very low build multiple and highly accretive growth projects right in front of us. So I would expect the backlog -- our pipeline to grow. The backlog in Midstream is really attractive right now, and we expect to bring a number of those projects to FID in the coming quarters. And maybe just to put in perspective, the magnitude of the projects that we're looking at the opco level would be roughly in the $8 billion range from a pipeline perspective. So it's a fairly meaningful size number of projects we have to look at. Operator: One moment for our next question. And that will come from the line of Robert Catellier with CIBC Capital Markets. Robert Catellier: I'd like to follow up on the potential corporate conversion that the Board is exploring, understanding it's quite early days. I wondered if you had any time lines for us in terms of what's reasonable to expect in terms of when a decision might be made? Samuel J. B. Pollock: Rob, as I said, unfortunately, there's probably not a ton we can share on the time line as of yet. As I said, we're just kicking off the process now. Robert Catellier: Okay. No, that's reasonable. I just wanted to just dig into the Csquare IPO, which I understand they filed a confidential registration statement. I'm just curious as to how you chose the IPO route versus private sale and maybe you're dual tracking it, but maybe you could comment on that and how much you're expecting to sell by way of IPO. Samuel J. B. Pollock: Robert, I'll tackle that one. Look, I think in discussions with our advisers, the capital markets for IPOs are quite open at the moment. And obviously, there's a lot of anticipation for the upcoming SpaceX IPO. The one thing that public investors are looking for businesses that generate high cash flow, have still strong growth prospects and have great tailwinds related to the AI sector. And our business Csquare basically ticks all those boxes. We think it has the potential to be one of the leading IPOs of the year. And we're really excited about bringing that forward. And so just stay tuned. Operator: One moment for our next question, and that will come from the line of Cherilyn Radbourne with TD Cowen. Cherilyn Radbourne: I wanted to ask a couple of questions on the data segment. And I appreciate the data centers and Intel are the major growth drivers at the moment. Just curious how you think about the balance of your data portfolio in towers, fiber and so forth? And what value that provides in terms of diversity but also what you see in terms of inorganic opportunities there? Samuel J. B. Pollock: Cherilyn, maybe I'll start. But then I think you've given us a good segue to maybe talk about what's going on in the AI infrastructure sector, in particular, and we have Lief Williams here. who I think can expand on some of the things going on. But maybe just talking about some of our other businesses, we're seeing continued strong growth across the sector. One of the situations. And our colleague, Scott Peak mentioned it a number of months ago at our Investor Day. There's this domino effect. And the huge growth in data centers and AI is having impacts across basic utilities, power, Midstream and our other data businesses, including fiber -- our towers. And the types of things that we're seeing is all our customers are looking to expand density across their networks. And so on the tower side, we have a number of build-to-suit opportunities that we continue to execute in all our businesses across Europe and Asia. On our fiber businesses, there's still a huge amount of the U.S. in particular, but other parts of the world that have not been fiberized that are still operating on copper. And so that remains a lot of white space for us to continue to build out those networks and allow people to run all these new devices and programs more effectively. So we see this as a continued 5- to 10-year build-out. And so all our businesses are well positioned. But maybe turning to some of the more, I'd call it even more exciting stuff going on in the AI infrastructure space. Peak, maybe just give us a little update on that. Scott Peak: Yes. Thanks, Sam. And good morning, Cherilyn. So the large users of AI factories and data sectors are highly, highly active in the market. There's effectively no data center inventory remaining for 2026. And even 2027 is quite scarce. What's interesting as well is that the demand profile has broadened from just data center capacity into also looking for compute. So leasing GPU as a service as well as behind-the-meter power opportunities. And so we see a large opportunity for groups like Brookfield, who have tremendous access to capital and an asset base to participate across all of those different asset classes. Cherilyn Radbourne: Great. And then maybe just a quick follow-up on the data center side. I imagine that site selection and acquisition is particularly competitive and secretive. And so I'm not going to ask you to reveal anything proprietary. But to what extent is having a sister real estate business help in that regard? Scott Peak: I would say it certainly helps. And certainly, the scale of Brookfield is helpful in that regard. Just to give a sense, I would say there is a kind of dual track search for powered land. There's front of the meter options and then there's behind-the-meter options. Front of the meter options are challenging in the sense that the number of load applications going to utilities. It just kind of massively overwhelms the grid. And so utilities are now increasingly requesting large levels of credit or financial deposits, which is a huge disincentive to many of the parties out there looking for those front of the meter power solutions. Behind the Meter also has its challenges in terms of delivering baseload power. At speed, the low emissions and highly modular. And so that's a place where, again, we think our Bloom partnership will be tremendously effective. I would say more broadly, we're starting to see some pushback in some locations in terms of the scale of these AI factories and then the risk of it pushing up rates for local ratepayers. And so again, I think Brookfield has been doing large-scale projects across a number of asset classes for many years. And so we think that we're very well positioned to help identify credible powered land sites. And help bring them to fruition. Operator: One moment for our next question. That will come from the line of Robert Hope with Scotiabank. Robert Hope: Hoping to dive a little bit deeper on the AI factory and digital hub strategy. How are we progressing on those discussions with counterparties. And should we be in a position in 2026 to see some notable or sizable project announcements? Scott Peak: Robert, it's Peak again. I'll take this one as well. Yes, look, I think you do see, as I mentioned, tremendous demand from the large technology companies. The demand profile has broadened a little bit as well. There used to be a handful of large hyperscalers. We now have a wave of foundation model companies and inference operators who are also looking to secure the capacity. So I would say there's a tremendous amount of noise in the market in terms of number of sites available and when does the power ramp. But what we're increasingly seeing is these users are looking for credible partners who have placed long-lead equipment orders and you have true dates for when the power is available. And we think that, that will benefit groups but Brookfield who are institutional and who have tangible sites that have a real ramp. And so I would say the demand profile is very strong. I think you will see and we have seen strong leasing activity on the Brookfield portfolio over the last couple of quarters. And I think you'll continue to see strong demand through '26 and certainly through '27. Robert Hope: All right. Appreciate that. And then maybe moving over to kind of to the 10% organic growth rate or to the 10%-plus FFO growth rate for 2026. Can you comment how you're tracking on that? The organic growth at 8% seems strong, and the commodity price environment seems to be helping. Though it does appear that asset sales are coming a little quicker than M&A activity on the other side. So can you maybe talk about what the headwinds and tailwinds that you're seeing there are. David Krant: Yes, Rob, it's Dave here. And look, I think you did a great job summarizing my answer probably, but I think the -- I'll start by saying the first quarter was an excellent start. We delivered on our 10% target. And so with that behind us, I think we feel good with how the year is progressing. It's always hard to predict the timing of new investments and asset sales. But to your point, we have had some good initial success on the capital recycling. Front, I think from an all-in cost of capital is very attractive. The yield we'll see on that $1 billion, somewhere in the mid-single digits probably. And so I think from an accretion perspective, I don't expect that to be a meaningful drag on the business as we look ahead. So all in all, I think we started the year off well. I think we feel confident with our 10% for the year still, and we'll continue to provide an update as we progress through the year. Operator: [Operator Instructions] our next question will come from the line of Frederic Bastien with Raymond James. Frederic Bastien: Good morning. You've historically leaned into periods of uncertainty in this location to pursue large acquisitions. How are you thinking about your ability to deploy capital into a sizable transaction this year? Samuel J. B. Pollock: Fred, I'll talk -- take that one. Yes, I think you're right. We've been historically successful in I think, taking advantage of dislocations. And when others have paused, we've seized the moment. At the moment, I'd say the market remains relatively calm and constructive, given all the volatility. There's still a fair amount of buyers out there. So I wouldn't describe this as an opportunistic market environment. Nonetheless, I do think we're always on the lookout for large value opportunities. We -- what we're seeing is, today, the opportunity set around our AI infrastructure strategy is extremely strong. And so I'm very optimistic about us being able to do some exciting transactions there. We're also seeing an uptick in activity across Europe. And I think there's some larger value opportunities there that I think we can take advantage of. And then we keep on monitoring the capital markets. Often some of our best acquisitions are when the public market will pull back, and we can take advantage of a take private opportunity. So those are the things that we're up to I can't give you like a time line on when we'll do our next large deal, but we're always out there. We have tremendous partnerships so that we can execute on those things and optimistic there will be some exciting deals in front of us. Frederic Bastien: That's helpful. I just wanted to tack on a Midstream related question as well, thinking switching gears on monetization. Are you -- how are you thinking about NorthRiver and a potential monetization there? Samuel J. B. Pollock: Sorry, that was about monetizing NorthRiver. Frederic Bastien: Yes. Samuel J. B. Pollock: Well, look, I could turn it over to Ben in a second if he wants to add anything. But what I would just say is the business has had tremendous commercial success in the past couple of years. We've extended our contract term, I think, to close to 12 years now. And we think it's really well positioned. Our debate internally is whether or not we continue to build out the business and take advantage of some of the additional growth that's there or whether we bring it to market and sees what is probably a pretty constructive environment for Midstream businesses. So we're weighing those considerations. It's performing really well, and we just don't have an answer for it at this point in time. Operator: I'm showing no further questions in the queue at this time. I would now like to turn the call over to Mr. Sam Pollock for any closing remarks. Samuel J. B. Pollock: Great. Thank you, everyone, and thank you, Sherry, for hosting this call. We appreciate you joining us today to hear about our results. And we look forward to the warmer weather that's in front of us and the hockey playoff season. I hope all you Habs fans are cheering for my team. And we look forward to providing an update in the quarter ahead. Operator: Thank you. This concludes today's program. Thank you all for participating. You may now disconnect.
Operator: Good morning, and welcome to the General Dynamics First Quarter 2026 Earnings Conference Call. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Nicole Shelton, Vice President of Investor Relations. Please go ahead. Nicole Shelton: Thank you, operator, and good morning, everyone. Welcome to the General Dynamics First Quarter 2026 Conference Call. Any forward-looking statements made today represent our estimates regarding the company's outlook. These estimates are subject to some risks and uncertainties. Additional information regarding these factors is contained in the company's 10-K, 10-Q and 8-K filings. We will also refer to certain non-GAAP financial measures. For additional disclosures about these non-GAAP measures, including reconciliations to comparable GAAP measures, please see the slides that accompany this webcast, which are available on the Investor Relations page of our website, investorrelations.gd.com. On the call today are Danny Deep, President; and Kim Kuryea, Chief Financial Officer. I will now turn the call over to Danny. Danny Deep: Thank you, Nicole. Good morning, everyone, and thanks for being with us. The first thing I'll note is that our Chairman and CEO, Phebe Novakovic, had a family illness that required her absence. So I'll be conducting today's call along with Kim. At the very outset of these remarks, let me share with you our view that this was a very powerful quarter in all respects. Earlier today, we reported earnings of $4.10 per diluted share on revenue of $13.5 billion, operating earnings of $1.420 billion and net earnings of $1.125 billion. These results compare quite favorably to the year ago quarter, which in and of itself, was a very good quarter. For example, revenue was up 10.3% and importantly, operating earnings are up 12% and net earnings are up 13.2%. As a result, earnings per diluted share are up $0.44, 12% on more than a year ago quarter. The operating margin for the entire company was 10.5%, a 10 basis point improvement over a year ago quarter, which coupled with the revenue growth, led to very strong earnings growth. While Aerospace and Marine led the way on revenue increases, each of the other 2 segments enjoyed revenue increases as well. A similar pattern is true with respect to operating earnings. Each of the segments demonstrated better performance led by Marine Systems with a 26.4% increase from improved operating performance across all of our shipyards coupled with the revenue increase. We beat consensus by $0.43 in the quarter on more revenue and better operating margins than expected by the sell side. In short, this performance exceeded our own expectations. We also had a terrific quarter from a cash flow perspective together with strong order intake, which led to a larger backlog, which Kim will discuss in greater detail in a moment. From our perspective, we have opened the year on a very positive note. At this point, let me ask Kim Kuryea, our CFO, to provide details on our superb cash flow, order activity and solid backlog before I come back with segment observations. Kimberly Kuryea: Thank you, Danny, and good morning. Let me start by addressing our outstanding cash performance during the first quarter. The first quarter was a very strong start to the year with operating cash flow of $2.2 billion. We got out of the gate with our business units overwhelmingly exceeding their planned cash flow and driving operating working capital down. Compared to the first quarter of 2025, capital expenditures were up over 40% to $203 million. While capital expenditures were around 1.5% of sales in the quarter, we continue to expect capital expenditure between 3.5% and 4% of sales for the full year. You should expect the profile of our investment to grow each quarter as we continue to invest, especially in our shipyards to accelerate production and meet demand. After considering capital expenditures, our free cash flow for the quarter was just shy of $2 billion, yielding a cash conversion rate in the quarter of 174%. We continue to expect a free cash flow conversion rate of 100% of net income for the year, but the strong cash acceleration into the first quarter results in a profile that will look a little different than what I provided in January. We now expect the first quarter to represent the largest quarter of free cash flow with positive cash flow in each of the remaining quarters, supporting our continued efforts to drive cash to the left. Also in the quarter, we paid dividends of approximately $400 million and repurchased about $200 million of our common stock to cover dilution. After adding it all up, we ended the quarter with a cash balance of $3.7 billion and a net debt position of $4.4 billion, down $1.3 billion from last quarter. Moving now to orders and backlog. Our order activity and backlog continued to be a strong story and a highlight for us in the first quarter. We received over $26 billion of orders achieving an overall book-to-bill ratio of 2:1 even as revenue grew by over 10% from the year ago quarter. The robust demand across our portfolio resulted in total backlog of $131 billion, an impressive 48% increase over last year and 11% higher than just a quarter ago. Total estimated contract value, which includes options and IDIQ contracts, ended the quarter at another record level of $188 billion, a 33% increase from last year. Now some final areas -- some final items in my area to address. We have $500 million of notes coming due in both June and August 2026 for a total of $1 billion. Our plan assumes that the $1 billion will be refinanced, but this is something that we will continue to evaluate throughout the year. Turning to interest. Our net interest expense in the quarter was $69 million compared to $89 million in the respective 2025 period. The decrease is due almost entirely to the interest we paid for commercial paper borrowings in the first quarter of 2025. Wrapping up with income taxes. Our effective tax rate in the first quarter of 2026 was 17.8%, generally consistent with our full year guidance of 17.5%. Danny, that concludes my remarks. I'll turn it back over to you. Danny Deep: Thanks, Kim. Now I'll review the financial performance for each of the groups. First, Aerospace. Aerospace did very well in the quarter. It had revenue of $3.3 billion and operating earnings of $493 million with a 15% operating margin. Revenue was $253 million more than last year's first quarter, an 8.4% increase. To give you a little perspective here, the increase was driven by 2 more aircraft deliveries and higher services revenue at both Gulfstream and Jet Aviation. The 38 deliveries in the quarter are exactly as planned. Operating earnings of $493 million are up $61 million driven in part by the increased revenue, but most importantly, by a 70 basis point improvement in operating margin. The comparison with last year's first quarter is particularly instructive from my point of view, the number of deliveries is similar, but up by 2 in the quarter, neither quarter was significantly burdened by tariff costs and neither has any unusual items of significance. As a result, the improvement quarter-over-quarter comes from a lot of measurable improvements across the entire business. From an operational perspective, we are off to a strong start to the year and as I mentioned, with 38 deliveries in the quarter, that happens to be the highest number of deliveries for any first quarter in Gulfstream history. We see durable productivity improvements on the G700 and 800 in both manufacturing and completions. Performance on the G800 has been a particular standout. This quarter, they delivered with very good gross margins. In fact, it was better than the G650s that it replaced which delivered in the first quarter of 2025, quite remarkable given how recently G800s have entered into service. In fact, we will deliver only our 25th G800 this coming quarter, so very positive, given how early we are in that program. Turning to market demand. We had a 1.2 book-to-bill in the quarter with 17 more airplane orders than the year ago quarter. We were on our way to a spectacular quarter, but numerous transactions slowed at the end of the quarter as a result of the conflict in the Middle East. The book-to-bill over the trailing 12 months is 1.3x. So we see very active interest across all models in the U.S., but some cautious concern for some customers in the Middle East. We are also off to a solid start in the first month of this quarter. In summary, the aerospace team had a special quarter operational. So let's move on to the defense businesses. First, Combat Systems. Combat Systems had revenue of $2.28 billion up almost 5% over the year ago quarter. Earnings of $310 million are up 6.5%. Margins at 13.6% are up 20 basis points against the year ago quarter. The increased revenue performance was at Ordnance and Tactical Systems and European Land Systems. We also experienced good order performance at 0.9:1 book-to-bill given the third and fourth quarters of 2025 book-to-bill of 2x and 4.3x, respectively. In fact, on a trailing 12-month basis, the book-to-bill has been 2.1x. Demand for Combat Systems products is strong, driven primarily by U.S. allies. Wheeled and tracked vehicles are up, reflecting the increased threat environment. In addition, ordinance and tactical systems continue to lead this group's growth with particularly strong growth in munitions. What is encouraging for Combat is during this period of recapitalization and transition to next-generation platforms for our U.S. land force customers is the breadth of this portfolio with both international vehicles as well as our munitions group that continue to provide a nice growth outlook with very solid margins. Turning to Marine Systems. Once again, our shipbuilding units are demonstrating strong revenue growth. Revenue has continued to increase to reflect increased demand and importantly, increased throughput across all of our shipyards. This quarter's growth of 21% was driven primarily by the Columbia and Virginia class programs, followed by the oiler at NASCO. Repair volume has also increased at both our East and West Coast repair yard. Of significance, earnings improved 26.4% on improved productivity in each of our shipyards. As you know, to support this growth, we have made significant investments in each of our shipyards, particularly at Electric Boat, and we will continue to invest as we go forward to support the additional demand we see. Turning to operating performance. Momentum is building at each of our shipyards at Electric Boat on the Columbia program, we have seen a 29% increase in the number of hours earned as compared to first quarter 2025. And while we still have areas in the supply chain where we need an increased cadence, we have seen a marked improvement versus first quarter a year ago. For sequence critical material, we have seen a 52% increase in the number of items received as compared to this time period last year. At [indiscernible] Iron Works, the DDG51 program continues to improve in both efficiency and schedule. And at NASCO, we'll deliver the final expeditionary sea-based ship this summer with capacity to support additional TAOs or other auxiliary -- or commercial programs. And finally, technologies. This group also experienced growth in revenue and earnings, albeit not at the pace of the other segments. Revenue of $3.6 billion was an increase of 4.2% over the first quarter of 2025. Both businesses contributed to the growth of Mission Systems led the way with an 11.7% increase. Operating earnings of $339 million were up 3.4% over the year-ago quarter. Operating margins decreased 10 basis points from 9.6% to 9.5%. The group's order activity was also encouraging with a book-to-bill of 1.3x for the quarter and 1.2x for the trailing 12 months. This segment continues to compete very well in its markets with win and capture rates between 80% and 90%. For GDIT, we're seeing strong demand for our AI and cyber capabilities. Q1 orders exceeded our internal plans across the portfolio with particular strength in defense. And despite elongated procurement cycles and fewer customer adjudications, GDIT ended the quarter with a 5% increase in the backlog as compared to year-end 2025, which is encouraging given their near record revenue this quarter. Mission Systems had a strong quarter from an operational standpoint with a 50 basis point expansion in margins as compared to a year ago, driven by a favorable product mix and their broader transition away from legacy programs to highly differentiated systems. So to wrap things up, while we historically have not updated our guidance after the first quarter, given our strong start, we thought it would be prudent to revise our EPS guidance to reflect our performance thus far and its implication for the full year. As a reminder, in January, we told you to assume an EPS range of $16.10 to $16.20. Our updated guidance for 2026 would be an EPS range of $16.45 to $16.55. Looking at the year from a quarterly perspective, the first and fourth quarters would represent the high points, favoring the fourth quarter given its typical increased volume with the second and third quarters trailing a bit on expected mix. As is our long-standing practice, we will refresh our internal forecast in detail during the second quarter and elaborate more on the specifics by segment on the July call. Nicole, back to you. Nicole Shelton: Thank you, Danny. [Operator Instructions]. Operator: [Operator Instructions] We'll take our first question from Robert Stallard at Vertical Research. Robert Stallard: Danny, I was wondering if you could comment on the supply chain situation. You seem to have touched on it a little bit in marine, but I was wondering how you're getting on across the broader group, whether there are any tight points that you're trying to address? Danny Deep: Yes. I would say, broadly speaking, as it relates to the supply chain for the whole Marine Group, we have seen an increased cadence on time, deliveries are up. I think we're not seeing the same number of quality issues that we saw in the previous year. I think we still see some areas in the supply chain where we need to get the cadence up, and those problems tend to be where we have complex components or complex systems where there are just single sources of supply. But broadly speaking, we are seeing improvements. Robert Stallard: Okay. And then a quick follow-up. It looks like the Ajax program is back in testing again in the U.K. Maybe for Kim, I was wondering if there had been any accounting or financial implications of the stoppage there the restart? Kimberly Kuryea: No, they have not. Everything is business as usual from an Ajax perspective. Operator: We'll move next to Kristine Liwag at Morgan Stanley. Kristine Liwag: When we look at the fiscal '27 budget request from the White House, there's a fairly large step-up in shipbuilding dollars, you guys have talked about the tightness in labor historically and the supply chain issues in marine. But I was wondering, as you look at the significant step-up in opportunities, are there things that General Dynamics could do to capture more of this growth sooner. It seems like there's more of an urgency to rebuild our Navy. Douglas Harned: Yes. Like, as you can imagine, the lead times for producing these ships pretty extensive. And I think what we see in the budget is good support for the programs that are already in work and certainly, it helps the volume. But we don't anticipate that any of these awards are going to change dramatically the number of ships that we have to produce in the immediate term. Kristine Liwag: And then also when we look at that fourth projection by number of shifts, you've got your traditional programs, but then there's also some of these smaller surface vehicles and smaller unmanned undersea vehicles. I was wondering can you talk about the opportunities for that and is there a way for you to capture more of that smaller end market, especially if we're looking at higher volumes. Danny Deep: Yes. So we have been investing in the unmanned undersea platforms for a number of years with our Mission Systems group through Bluefin. So we're, I think, poised well to participate in the growth in that market. As far as smaller ships on the surface combatant side, we don't really see that. We're going to focus on what we do at NASCO, with oilers and sealift and sub-tenders and at Bath Iron Works with DDG51s and the next destroyer that's out there. But we don't anticipate moving into the smaller ship surface wise. Operator: Next, we'll go to Peter Arment at Baird. Peter Arment: Danny, maybe if you could give some comments on just any impacts you've seen out of the Middle East, whether it's affecting Gulfstream or whether you've had any other impacts more favorably, I guess, on the munitions side of things. So maybe just some overall color of any early -- any feedback from Middle East operations. Danny Deep: Sure. So let me just maybe focus on aerospace initially. As I think we said in our comments, we were having a spectacular quarter from an order standpoint across the board here in the United States as well as the Middle East and then as the conflict started to take form. We saw some slowing in order intake in the Middle East. So certainly impacted on the order side, albeit still pretty robust. From a supply side, as you can imagine, some of what we get from that part of the world is impacted, and it's really a labor force issue. So all of the airplanes that we delivered in the first quarter of 2026, we actually had those airplanes in inventory ready for completion prior to the conflict. So I mean, we're watching that, but certainly, world events could impact supply there. From a demand side, on the defense side, I mean, it's a little early. We're certainly in plenty of discussions with a number of customers where we've had long-standing relationships, but we haven't necessarily matured those opportunities to the point where I can comment that we see increased demand. But I think a lot will depend on how long this goes and what sort of demand we see in terms of refilling their inventories. Peter Arment: I appreciate that. And just a quick follow-up. Just you mentioned Columbia construction is progressing. Can you just give us the latest of like [ where you ] are on kind of the first haul and where things are progressing otherwise? Danny Deep: Sure. Really positive momentum on Colombia. All the major modules we received by the end of last year, and so we're in the process of integrating and assembling those in one of our larger yards and expect to have a real key milestone achieved by the end of this year and on a path to deliver that first boat in -- by the end of 2028. So excellent progress in the last 6 or 9 months on the Columbia program and on the path to deliver. Operator: Our next question comes from Seth Seifman at JPMorgan. Seth Seifman: I wanted to ask about Aerospace. And I know you said you weren't refreshing guidance within the segments. But the first quarter came in nicely ahead of the expectation for the year on margin rate. The reasons for that, that you mentioned seem to be fairly enduring. Are there particular things we should be watching for that would be pushing margin down going forward? Or has Gulfstream, in particular, maybe aerospace more broadly, you kind of gotten over the hump with regard to some of these supply chain challenges and margin headwinds that you faced. Danny Deep: Yes. Look, I think, as you know, we had a pretty strong quarter at Aerospace and Gulfstream specifically. I think you'll see some mix movement in the second and third quarter, but certainly as planned, and then you'll see a really strong fourth quarter. From a delivery standpoint, we should expect that second quarter will be very similar to first quarter and then the third and fourth will be our highest, and that's per plan. So I think all of those things give us some optimism about where we are in aerospace in terms of margins and to use your word, certainly durable. Seth Seifman: Okay. Okay. Excellent. And then maybe in combat, if you could talk a little bit about the facility in [ Mesquite ]. I know I think the release talked about some goodness in artillery and you mentioned OTS in your comments. If we've been reading the trade press over the past couple of months, there's been some customer concerns expressed about Mesquite and the ramp-up there. How should we be thinking about the the risks and the opportunities around that facility. Danny Deep: Yes. So I think as you've seen the customer put out a recent release on that. We've reached agreement with the Army customer on the path forward for that facility. We are very well aligned. We expect that we will be in production next year and producing artillery rounds for them and for the foreseeable future. So we have a very, very good path forward with the customer. And as I said, we're well aligned. So just think about that happening and coming online next year. Operator: Next, we'll move to Ken Herbert at RBC. Kenneth Herbert: I just wanted to follow up on the aerospace comments. It sounds like, Danny, when you think about some of the production coming out of Israel on some of your programs, how has that been impacted and is that a potential risk as we think about sort of the next few quarters? Danny Deep: Yes. So as I mentioned, all of the airplanes that we delivered in Q1, we had received a fair bit ago, and we're -- we completed them over the quarter and delivered. So we weren't impacted this quarter. I think we could see a small impact the longer this goes on. They're still producing those airplanes ready for us to complete, but we could see some minor impact. And as you know, that's on the G280. Kenneth Herbert: Great. And then maybe, Kim, really nice cash generation in the quarter. Can you give any comments maybe around any onetime advances or other items that could have been supported some of the upside in the quarter and how we think about specifically then the progression here into the second and third quarter as cash steps down relative to the strong first quarter. Kimberly Kuryea: Sure. First, let me start out with -- and I think I mentioned in my remarks that it was really outperformance on our own expectations across the business units. If we think of our 10 business units, I think they all exceeded expectations. And so that was really great performance. When I think about customer advances specifically, they sort of come with the business. So it wasn't anything of terrible significance from that standpoint. And certainly, anything that we got from an advanced standpoint was planned. So I would say this was more outperformance against our expectations for the quarter, which does mean moving some of the cash from second quarter into the first quarter. So as I mentioned, cash will be positive, but down in the quarters to follow, but very strong for the year. And we're certainly looking at the cash conversion rate for the year in terms of is it possible that we could exceed 100%, and we'll see where we go there, too. Operator: We'll move next to Ron Epstein at Bank of America. Ronald Epstein: So Danny, a quick question for you. We've seen, I guess, the DOW putting pressure on some contractors to make investments for, how do I say, the promise of future volume. Have you seen that? Have you guys had to make some investments upfront? And how are you handling that, particularly in the munitions and the defense consumable area? Danny Deep: Yes. So in particular, for munitions, we have been investing. We've been investing in artillery capability, solid rocket motors, energetics and some of the down components to support the missile primes. So we have been doing that and are continuing to do that, and we're fully committed to making sure that we're part of the solution as it relates to the munitions issue. And as you know well, we've been investing for a long time on the marine side, and we anticipate that continuing for a number of years. So I don't know that I would necessarily say that we saw pressure from the administration. I think we've been investing because we see that the demand is there and the need is there and the threat environment is dictating that, and that has been happening for a while with us. Ronald Epstein: Got you. Got you. And then maybe just shifting to marine. There's been discussion about this from class battleship. When would you expect some more details on that, a possible down select or -- as outsiders looking in, when do you think we could learn more about it? Danny Deep: Yes. Look, I think we're in the very early stages of that. We're working with the partner on doing some of the detailed design now. I know that the administration wants to move as quickly as possible on it. And -- but it's just a little early now for us to be able to define exact time lines, but we're part of that process today, but it's in the early stages. Operator: We'll take our next question from David Strauss at Wells Fargo. David Strauss: I wanted to ask about Mission Systems. I think, Dan, I heard you said it was up around 12% in the quarter. I think the business has been flat to down for quite a while. Now you had some programs rolling off. What was driving the -- what's driving the growth there? And maybe touch on the growth outlook from here and what that might mean for margins overall for technologies. Danny Deep: Yes. Look, I think Mission Systems has done an excellent job of transitioning from what we term legacy programs into very highly differentiated systems that are in demand. And if you look at where they have invested and focus a lot of their attention over the last several years. And as they look forward, it's in areas that are very much aligned with the administration's priorities. So I think strategic deterrent unmanned systems, proliferated space and contested space, encryption, modernization, next-generation command and control and precision munitions. So I think all of those things given the alignment with some of the administration's priorities and where Mission Systems has focused their attention, it bodes well for them in the future. And I'm not sure that margins were at 12.6% that you mentioned, but we'll come back to you, I think they're even a little higher than that. So -- and we're continuing to be bullish about where we think they can be. David Strauss: I was -- I think you said the growth at Mission Systems [indiscernible] above 12%, yes, that's right. Danny Deep: Yes. Yes. The growth -- sorry, the growth was at 12%. That's right. And -- yes, and we feel good about the growth in that part of the portfolio going forward based on all the things I just mentioned. David Strauss: Okay. Great. And Kim. In terms of the CapEx step-up this year, your updated thoughts on your ability to kind of recover that through working capital over the near term? Kimberly Kuryea: Yes. I mean it's certainly -- as we continue to invest throughout the year, it certainly has an impact on our cash flow, and that's what we're evaluating as it impacts the quarter, but we're certainly driving to get our working capital off the balance sheet to offset the increase in CapEx. Operator: We'll take our next question from Myles Walton at Wolfe Research. Myles Walton: Danny, you mentioned 1Q representing the highest output for [indiscernible] at Aerospace. And so where does capacity currently fit for large cabin production at this point on an annual basis. I noticed in the fourth quarter of last year, you had a pretty material step-up in CapEx. And so I imagine you're expanding capacity. So maybe if you can just update us on the trajectory to get to whatever capacity you're targeting? Danny Deep: Yes. So from a demand and backlog standpoint, certainly, we have enough of that to increase production on the long range and the ultra long-range family of airplanes. I think the issue here really is the supply chain and their ability to ramp up as quickly. And so in terms of overall capacity, we're putting it in place because the demand is there and it's just a matter of when the supply chain can ramp up to support that. Myles Walton: Okay. And in your tariff outlook, is it still contemplating $40 million or north thereof after the Supreme Court and 232 and all the other changes that have taken place? Danny Deep: Yes. I think when you referenced the $41 million, you're talking about what we reported in the fourth quarter of 2025. And so as we mentioned in the remarks, when you make a comparison of first quarter 2025 to first quarter of 2026, neither of those 2 quarters had any tariffs to speak of. And then we only assumed a very modest amounts or included a very modest amount of recovery in the first quarter. So really nothing material. And then going forward as it relates to these [indiscernible] tariffs, we haven't assumed anything different. Operator: Next, we'll move to Sheila Kahyaoglu at Jefferies. Sheila Kahyaoglu: Danny, really strong start across the businesses. Is it fair to say that the 2% EPS raise is primarily related to aerospace and the 15% margins versus the 14% guide. And maybe how much of that came from 800 accretion versus maybe services, onetime items with fuel? Danny Deep: Yes. I think the increase in guidance is for what we see today. I mean, I think as we mentioned in the remarks, we'll have more fidelity in the second quarter to share the contribution to that increase came from more than aerospace, also from marine and a little bit from technology. So the the expectation for aerospace is that we will continue to execute the way we're executing and we'll see what that means for the second quarter. Sheila Kahyaoglu: Okay. And then sticking to Aerospace, just a follow-up. Two business jet OEMs have called out supply chain issues, Honeywell more publicly. Maybe if you could just talk about you're still growing deliveries 25% year-over-year in aerospace. Should we expect any cadence changes to deliveries for the rest of the year for these jets? Danny Deep: For us specifically, I think you should expect second quarter to look a lot from a cadence and delivery standpoint, a lot like what you just saw in the first quarter. And then third and fourth quarter will be higher and the fourth quarter will be our strongest both from a mix and a margin standpoint. So from a supply chain perspective, as I mentioned, they're keeping up for us. Operator: Next, we'll move to John Godyn at Citi. John Godyn: First, Marine Systems alignment with the $1.5 trillion budget, extremely clear. Can you elaborate a bit more on combat systems and technologies just in light of the priorities proposed in the $1.5 trillion. Danny Deep: Yes. As you mentioned, I think it's very clear where the Marine programs sit in the base budget, and we're encouraged by that. As far as combat goes, there's good support for where we are in the munition space. And as far as combat vehicles goes, they're really in a period of transition, the Army and even the Marine Corp to some extent. And so there's a fair bit of development activity going on. And so during this period, and speak specifically to next-generation main battle tank with [ M13 ] or we'll see some lower volumes on the current version of the tank. And as it relates to [ Stryker ] program, for example, those rates are down, although that vehicle and that platform continues to be versatile and used in a number of different applications, those rates won't replace what we had seen historically, but certainly supported from an RDT&E standpoint for the programs that we're pursuing and that includes M13 and advanced reconnaissance vehicle for the Marine Corps. From a technology standpoint, the areas we see good alignment in the budget. And as you can imagine, in their space, there are a lot more line items to look at. But in the areas, whether it's cyber and space and some of the areas I mentioned earlier for Mission Systems, we see good support in the budget for programs that we are heavily involved in. John Godyn: Great. And just changing gears on capital returns and appetite for buyback. Obviously, that was sort of an interesting topic last quarter for a lot of the companies. But as we sit here today, you guys are executing well. The stock is still kind of down on the year. we'll see how this all plays out. But maybe you could just kind of remind us what the appetite and the view on buybacks may be if you continue to execute well this year and the stock is -- lags the market. Danny Deep: Yes. So as you know, share repurchases are highly sensitive subject in this current environment. And so I think in this atmosphere, it behooves us to continue to be cautious, and that's -- that's exactly what we've been. And as Kim mentioned, we only acquired shares to address dilution. And that's really dilution from our compensation programs, and we think that's just fair to all that are concerned. In terms of dividends, we have -- and we remain committed to paying our dividend. We've increased it for 29 straight years and really think it's part of our investment identity and part of our value proposition. So that's sort of how we see it. But we'll continue to be cautious and as we move forward. Operator: Next, we'll go to Doug Harned at Bernstein. Douglas Harned: Your -- in marine, you had a large increase in revenues, which you attributed mainly to Virginia Class and Columbia class. But can you separate what items led to that growth, such as sort of mix pricing, throughput improvement, additional labor funding or some specific milestones. How should we think about where that growth is coming from? Danny Deep: Yes. Look, I think you should think about it as a story of throughput. And I think both in terms of labor output, and so more earned hours as well as material. So both of those things. But I think what drives it? I mean, obviously, there's always a mix change quarter-to-quarter. But what has been driving that growth is throughput and that throughput is both labor and material. Douglas Harned: So when you look at the throughput now, how do you see this as sort of getting on the way to the goal of, say, 2 deliveries per year for Virginia class, that target that's been so difficult to progress against over time. Danny Deep: Sorry, can you repeat that? How are we doing towards the delivery of 2 per year? Is that the question? Douglas Harned: Yes, it is. Progressing towards that, yes. Danny Deep: Yes. So we are progressing towards that. I won't get into the specific rates that we're currently producing at. But suffice to say that it's up significantly over last year already. And the path to 2 Virginias and 1 Columbia per year. I can't predict the exact timing, but we are on the way there. And certainly, that is the target. But I don't think it's prudent to get into specific rates over this call. Nicole Shelton: So Audra, I think we have time for one more question. Operator: And that question will come from Scott Mikus at Melius Research. Scott Mikus: Jim, very nice results. Just a couple of quick questions on Colombia [indiscernible] 2, Virginia Block VI contract. Just wondering when you're expecting that to be awarded and then also going back to Rob's question earlier on the supply chain in, is there any change that you or the Navy could dual source the steam turbine on the Columbia program to improve supply chain resilience? Danny Deep: Yes. So as it relates to Block VI and [indiscernible] 2, we have had and have been in ongoing and detailed discussions with the Navy on that, and we'll update you in more detail when we have something to report, but that continues to proceed, and we're in detailed discussions, and we've only assumed that it will come in due course. As it relates to -- sorry, remind me your second question? Scott Mikus: Is there a possibility that you or the Navy could seek to dual source the steam turbine on the Columbia [indiscernible] just to improve supply chain resilience. Danny Deep: Yes. Look, I think there's been some activity with the Navy over the last several years on adding some capacity to be able to build turbine generators. And so they've been the focus of that activity, and I think that is -- as I mentioned, some of the challenges with single-source suppliers, you can conclude which some of those are, that's an area that is very critical to the overall success of the of the submarine enterprise. So the Navy has been working on that for a little while now. Nicole Shelton: Well, thank you, everyone, for joining our call today. Please refer to the General Dynamics website for the first quarter earnings release and highlights presentation. If you have additional questions, I can be reached at (703) 876-3152. Operator: And this concludes today's conference call. Thank you for your participation. You may now disconnect.
Operator: Greetings, and welcome to Lithia Motors and Driveway First Quarter 2026 Results Conference Call. [Operator Instructions] Please note that this conference is being recorded. I would now like to turn the conference over to Jardon Jaramillo, Senior Director of Finance. Thank you. You may begin. Jardon Jaramillo: Good morning. Thank you for joining us for our first quarter earnings call. With me today are Bryan DeBoer, President and CEO; Tina Miller, Senior Vice President and CFO; and Chuck Lietz, Senior Vice President of Driveway Finance Corporation. Today's discussion may include statements about future events, financial projections and expectations about the company's products, markets and growth. Such statements are forward-looking and subject to risks and uncertainties that could cause actual results to materially differ from the statements made. We disclose those risks and uncertainties we deem to be material in our filings with the Securities and Exchange Commission. We urge you to carefully consider these disclosures and not to place undue reliance on forward-looking statements. We undertake no duty to update any forward-looking statements that are made as of the date of this release. Our results discussed today include reference to non-GAAP financial measures. Please refer to the text of today's press release for a reconciliation of comparable GAAP measures. We have also posted an updated investor presentation on our website, investors.lithiadriveway.com, highlighting our first quarter results. With that, I would like to turn the call over to Bryan DeBoer, President and CEO. Bryan DeBoer: Thank you, Jardon. Good morning, and welcome to our first quarter earnings call. In the first quarter, we again achieved record revenues reaching $9.3 billion and adjusted diluted EPS of $7.34 and as our leaders demonstrated the power of our differentiated and diversified model and the operational resilience that has defined our business across all cycles. Our teams executed well despite weather challenges and a dynamic macro backdrop, delivering solid revenue growth year-over-year. We also generated high-quality earnings as our aftersales business continued its steady climb. Used vehicle revenue grew nicely on a same-store basis, and Driveway Finance Corporation delivered another quarter of record originations. These results reflect the differentiated power of our ecosystem when one part of the business faces a little bit of pressure. Our omnichannel platform creates opportunities that sustain earnings and cash flow generation. Across our network, our store teams and department leaders are leaning into what they do best: winning customers, growing share and finding new ways to drive profitability through volume, pricing discipline and cost efficiency. Every incremental customer we bring into our ecosystem multiplies the opportunity ahead of us, creating more DSC originations, stronger after sales retention and a deeper waterfall of future used vehicle trade-ins. During the quarter, our same-store revenues were down 1.7% and total gross profit was down 2.3%, reflecting resilient results against a very difficult year-over-year compensate comparison to the strong first quarter of 2025. Total vehicle GPU was $3,928 essentially flat sequentially from $3,946 in the fourth quarter a positive signal heading into the seasonally stronger months ahead. Our diversified earnings mix continued to provide balance as used vehicle revenues grew 4.6% on a same-store basis. After sales growth grew 5.7% and F&I per unit held steady at $18.13. Note that all vehicle operations results will be on a same-store basis from this point forward as well. New vehicle revenue declined 7.1% on a 7.1% decline in units, which reflected the challenging comparison to the first quarter of 2025 due to tariff avoidance pull forward last March. New vehicle GPU was $2,722 or down $227 year-over-year, but down only modestly from $2,766 in the fourth quarter. Luxury brand revenue was down 10.2%, domestic down 8.7% and imports down 5.4% year-over-year. We continue to see these conditions as cyclical and our teams are focused on operational discipline as the market stabilizes. Our used retail performance continued its industry-leading trajectory with used revenue of 4.6% and unit growth up 0.6%. The used GPU was $1,680, down $115 year-over-year, but up meaningfully on a sequential basis from $1,575 in the fourth quarter. This reflects the early results of our efforts around more dynamic used vehicle pricing and finding higher demand vehicles. Our focus on this high ROI area provides a stable anchor to offset new vehicle cycles and bring more customers into our ecosystem, leading to growth in our F&I after sales and DFC business lines over time. F&I per retail unit was $1,813 essentially flat year-over-year with solid underlying product attachment and pricing. As we have shared previously, record DFC penetration in the quarter intentionally shifted a portion of our finance gross profit from F&I to our captive finance platform where it generates reoccurring higher quality and countercyclical earnings over the life of the loan. Adjusting for mix shift, our F&I performance was up nicely and continued to build momentum. Inventory levels improved during the quarter, the new vehicle day supply at 49 days, down from 54 days at the end of the fourth quarter and used inventory was at 47 days compared to 48 days last quarter. After sales continues to be highlighted with revenues up 3.8%, gross profit of 5.7%, and we saw margins expand again year-over-year to 58.7%. The Growth was consistent across key categories with customer pay gross profit up 6.5% and warranty gross profit up 5%. This stable broad-based growth demonstrates the underlying strength of our aftersales business and its ability to generate predictable, high-margin earnings through every part of the cycle. Adjusted SG&A as a percentage of gross was 71.5%. And while we historically see this metric increase in the first quarter, this year, we held essentially flat sequentially, a sign that the cost discipline is gaining traction. Our sales departments are responding to the challenge we set for them. finding ways to operate more efficiently while continuing to grow volume and serve our customers. The structural improvements we are making across our network from technology investments to vendor consolidation, to back-office automation will continue to build on a foundation for a stronger future. In the U.K., our teams delivered strong results with gross profit up 12.5% SG&A as a percentage of gross profit improving 440 basis points year-over-year. Adjusted pretax income for the quarter grew 78%, building on the momentum we saw in 2025 and as we continue to optimize our international platforms. Our digital platforms also continue to increase our reach and enhance our customer experiences, making shopping financing in service simpler and faster. Our partnership with Pinewood AI continues to support our strategic vision to transform the customer experience, and we are jointly working to bring the Pinewood AI platform to all of the North American stores. Pinewood AI will reduce complexity and place team members in the same platform as our customers increasing retention, supporting operational efficiency and reinforcing the power of our integrated ecosystem. Driveway Finance Corporation continued to scale profitably with financing operation income of $21 million for the quarter, up 71% year-over-year driven by record originations and improving loss provisions. With a steadily growing portfolio now at $5 billion, increasingly efficient securitization and clear runway for penetration growth towards our long-term 20-plus target, DSC is delivering on its promise to convert more of our vehicle sales into reoccurring countercyclical income. Now turning to capital allocation. Our philosophy remains very consistent, deploy capital where it generates the highest returns for shareholders. With our shares continuing to trade at a significant discount to our intrinsic value, we maintained our aggressive repurchase pace, retiring approximately 4% of our outstanding shares in the quarter with total repurchases of $259 million. Our strong cash generation and integrated ecosystem positions us to continue returning meaningful capital to shareholders while simultaneously growing through acquisitions when it makes sense. In the first quarter, we were disciplined and strategic in our acquisition activity, adding import and luxury franchises in attractive U.S. markets while continuing to diversify our U.K. portfolio with the addition of emerging Chinese OEM brands. This helps us establish broader relationships to capture growth as these manufacturers expand their presence internationally. Our acquisition results over the past decade have yielded high rates of return, consistently exceeding our 15% after-tax hurdle rates through consistent and disciplined underwriting, targeting purchase prices of 15% to 30% of revenue or 3 to 6x normalized EBITDA. As we look ahead, we also stay disciplined in balancing repurchases, acquisitions, organic investments and balance sheet strength with a continued bias towards repurchasing while our shares are trading at a discount. Our confidence in the path ahead is grounded in the same strategic pillars that have driven our growth as follows: lifting store-level productivity, expanding our footprint in digital reach, scaling DFC penetration, improving cost efficiencies through scale, and growing contributions from our omnichannel adjacencies. Each of these levers builds momentum. And as they compound together, they reinforce our conviction in the long-term target of $2 of EPS and for $1 billion of revenue. The work our teams are doing today lays the groundwork for durable EPS and cash flow growth in the quarters and years ahead. With that, I'll turn the call over to Tina. Tina Miller: Thank you, Brian. Our first quarter results showed sequential improvement in earnings with year-over-year comparisons, reflecting pressure from margin compression and demand pull forward in the prior year. The strength of our business model continued to generate solid free cash flow, support meaningful share repurchases enabled top line growth while maintaining balance. The design of our business and our disciplined approach provides optionality through our resilient cash engine, and the long run efficiency generated by our size and scale will continue to compound value over time. Our talented leaders drive the financial discipline and execution that allow us to return capital to shareholders while funding our growth. Adjusted SG&A as a percentage of gross profit was 71.5% for the quarter, compared to 68.2% a year ago, while year-over-year pressure reflects the impact of lower new vehicle volumes and normalizing GPUs on our sales department, we held essentially flat sequentially. Our teams continue to focus on managing costs through growing market share and gross profit, which remains our most durable levers for SG&A improvement over time. our sales departments are actively rebalancing cost structures against current volumes and gross profit conditions, tightening variable compensation, aligning staffing to drive throughput and finding new ways to operate and protecting productivity while continuing to provide exceptional customer experiences. We're making steady progress on a set of structural initiatives that will compound across the business. lifting store and back office productivity through performance management and emerging AI tools, including chatbots and customer service automation, consolidating our technology footprint and retiring legacy systems improving our vendor economics at scale and removing manual work from our back office through automation. We're already seeing early savings flow through our results and the contribution is expected to build as adoption broadens. Pinewood AI remains an important piece of this work, and we're pacing the rollout with intention so that the efficiency gains we capture are durable. Ultimately, growing market share and volume is our most powerful lever for SG&A improvement combined with our unique ecosystem, every incremental customer compounds profitability across our adjacencies and as vehicle margins stabilize, that volume flows through to meaningful operating leverage. Moving on to financing operations. Driveway Finance Corp delivered another quarter of high-quality growth with financing operations income growing 71%, as Brian mentioned. We originated a record $840 million of loans and increased net interest margin to 4.8%, up 20 basis points. North American penetration reached 18% for the quarter, also another record. Credit performance continues to be exceptional, with an annualized provision rate of 3% and average origination FICO score of 750 and 95% LTV in the first quarter. Our unique position at the top of the demand funnel creates a fundamental advantage in credit selection, minimizing credit risk. This quarter, our portfolio reached $5 billion, powered by record originations and increasingly efficient securitization. As we continue to build toward our 20-plus percent penetration target, we anticipate steadily improving margins supported by efficient capital structures. DFC is delivering on its potential empowering the profitability of our unique ecosystem. Next, I'll discuss the strength of our cash flow and balance sheet. We reported adjusted EBITDA of $374.6 million in the first quarter, a 9% decrease year-over-year, primarily driven by lower net income. Adjusted cash flow from operations, a representation of free cash flow was $381 million for the quarter after adjusting for a onetime $1.1 billion benefit related to our conversion to a VIN-specific used vehicle floor plan line. This cash flow paired with our strong balance sheet allowed us to opportunistically deploy capital to share repurchases while completing strategic acquisitions of new stores in key markets and brands. We remain committed to share repurchases, and our regenerative cash engine positions us to continue flexible deployment of capital to maximize shareholder return. This quarter, we continued our commitment to focus on share buybacks while shares trade significantly below intrinsic value, and we allocated nearly $300 million to share repurchases and buying back 4% of outstanding shares at an average price of $275. As we move through 2026, our capital allocation philosophy remains disciplined and opportunistic. With a strong balance sheet, regenerative free cash flows and ample liquidity available, we will continue allocating capital to repurchases while relative valuations are attractive and investing in accretive acquisitions at the right price. This flexible deployment allows us to compound returns for shareholders through buybacks while enhancing our network through strategic acquisitions that strengthen our competitive position and diversify our brand portfolio. The investments we have made over the past 5 years in our platform, our network and our people are now positioned to deliver increasing returns. As vehicle margins stabilize and our structural cost initiatives gain traction, the earnings leverage inherent in our model will increasingly flow to the bottom line. Our diversified omnichannel platform and disciplined share repurchases at attractive valuations are compounding together to build a stronger, more predictable earnings base that translates into durable free cash flow growth and long-term value creation for shareholders. This concludes our prepared remarks. With that, I'll turn the call over to the operator for questions. Operator? Operator: [Operator Instructions] Our first questions come from the line of Michael Ward with Citi Research. Michael Ward: Good morning, everyone. I wonder, Bryan, in the past, you would talk about how some of your acquired stores, the SG&A costs were higher on a relative basis to the more mature stores. Can you give any update on where that is? And then the reason why I ask is, if I'm doing the math right, every 100 basis point improvement in SG&A is about $2 a share. And it seems to me that we have 5, 6, 7 points of improvement that could get there getting the acquired stores in line with historical? And then also what Tina was talking about with Pinewood and some of the benefits you have. Am I on the right track? Is that the way you're looking at it? Bryan DeBoer: You are, Mike. This is Brian. I think in that calculation, I think it's about $31 million, $32 million per dollar. So we are getting some pretty good traction on cost management. little different than last quarter, which is quite nice. It took us a little while to get everyone's attention. But our sales departments are starting to understand a little better that there's -- that they need to reinvent themselves in terms of what the org design is in those departments where we've got 4 layers in many of those departments, and we think we can run with 2. And I think a lot of our sales leaders are trying to figure out how to do that and combine jobs or oversee multiple departments or do things remotely. There's all kinds of fun actions that are happening. And I think that overlays the idea of acquired stores. I mean we have added over $27 billion in revenues over the last 6 years. So there's a lot of opportunity of people that maybe have never sold value auto cars in the past. They've never really thought about doing more with less, and now they're really starting to hit their stride. Michael Ward: And Tina, you mentioned the rollout of some of the Pinewood technology. Do you have any -- can you give any data points on like what you're looking at from a timing standpoint and one that could be across all stores. In addition, when that's completed, does it make that integration faster when you make acquisitions? Tina Miller: Yes, Mike, it's a great question. This is Tina. From Pinewood, I think right now, what we're tracking toward is piloting a couple of the stores on that DMS system here in the U.S. later this year. So it would be towards the end of this year is what that pilot is looking toward making great progress on that with the Pinewood team and the technology, which we see it as an easier experience for employees, puts customers in a similar to streamlined experience for -- with that technology there. We also are piloting and trying some of the AI technology that Pinewood has, both in the U.S. and the U.K. So I think good progress there in the U.K., obviously, with Pinewood out their DMS system, there's good strong progress as they work through that, and we're piloting here in the U.S. as well. So excited to see that great partnership with the Pinewood team as we continue to iterate through how that can make our processes simpler and faster and better experiences for the customers and employees. Bryan DeBoer: Mike, maybe just to add on a little bit. In terms of integrating a store, I don't know that it would help integrate a store faster during a purchase. What it's mainly intended to do is put the customers and our team members into the same environment to help with productivity. And I mentioned those 3 or 4 things in redesigning sales departments, service departments and so on. Those are the things we're doing today. So this is an adjunct to that, that as that AI starts to help be a genetic and help make that process simpler and more unified between the customer and our team members. That's what we're really looking for. That's why we invested in Pinewood AI, and it's a big part of our future and being able to drive down that SG&A cost. Operator: Our next questions come from the line of Ryan Sigdahl with Craig Hallum. Ryan Sigdahl: I want to say on SG&A. -- there were some weather challenges from an industry just across the board earlier in the quarter. One of your peers yesterday said that quantified that the exit rate or trajectory on SG&A to gross profit was much improved at the end of the quarter. Curious if you guys saw that or if you're willing to comment kind of month by month what that looked like? And then any guidepost you're willing to put on SG&A to gross profit ratio for the year? Bryan DeBoer: Ryan, I think that's a fair statement that we saw a softer January we hit forecast in February or we're real close to it in North America. The U.K. exceeded forecast. And in March, the U.K. exceeded forecast and so did the United States. Ryan Sigdahl: Willing to put any guidepost around the year or what SG&A to gross profit will be? Bryan DeBoer: I would probably say this more, Ryan, that I think our teams got the attention. They're responsive, they're dynamic, and they've got they've got the con and they can make the decisions as they see what happens in the market. There is a large variability across manufacturers and across geographic areas of the country that I think is important for them to respond to. Let alone the U.K., we're seeing some nice movement because we're able to actually add franchises and partnerships in stores and dual franchises, much different than what the U.K. or Canada is, and we're doing that with Chinese brands, which is helping in the mainstream revenue lines in some ways. So we're real pleased with what's happening. And I think SG&A, we're going to continue to drive towards that mid- to high 50 percentile range in the long term. Ryan Sigdahl: Then just on DFC, your penetration rate is near kind of your long-term target. Curious, as you think about the longer term, I mean, some of your peers are on orders of magnitude higher than where you guys are targeting? Any reason why that can't go higher than the 20% and any reconsideration there? Charles Lietz: Ryan, great question. This is Chuck. So yes, we were very pleased that we hit 18% for the quarter. And I do think that's getting us close to our 20%-plus target. But I think really, it kind of goes back from a forward-looking perspective to Lithia Driveway just leaning more into used cars. And we really see a lot of opportunity to grow used cars. That really plays in well to DFC's value proposition because historically, and I think going forward, we do better in used car penetration rate than new. And I think new is probably the area that holds us back versus some of the peers that you're probably referencing us. But we definitely see positive upside to the 20% plus that we're targeting. Operator: Our next questions come from the line of Rajat Gupta with JPMorgan. Rajat Gupta: Just a couple on moved in parts and service. In the past, you've typically given more weightage to growing the volumes in that business. It seems like there were some reprioritization that happened in the first quarter given the performance on GPUs. I'm just curious, was there any change in how you're approaching profitability there? Or was it just like a supply issue that led to the flattish volume number in the first quarter? And just how should we think about used car growth versus GPUs for the remainder of the year? Bryan DeBoer: Rajat, this is Bryan. I think this is our -- the secret sauce of Lithia. I mean, we hit 1.25% used to new ratio, which is the first time in a long darn time that we were able to do that. And it's coming off the back of a marketplace to some extent, it's a little tighter than it typically is. But values are still strong. And I think as we think about how do we drive performance in used cars, it's getting that $26 billion to $27 billion of revenue that had never really sold value auto cars 3 years ago, 4 years ago to understand that, that is where the profits are in the business. And that ability to procure those through trade-ins or through other or other sources is quite important. If you look sequentially quarter-over-quarter, including F&I, our used cars moved from $2,830 in Q4 and to $3,309. It was up $470. And I would attribute most of that to some repricing efforts on 2 key areas, and I may have spoke about that on the last call. It's primarily the value auto cars, okay? And then secondarily, it's vehicles that are low mileage for their model or their vintage, okay? And those 2 areas where we're getting some pretty good traction fairly quickly. Also, remember that in our ecosystem, a lot of stores price things because that's what they can sell it for, okay? But in our ecosystem, because we have Driveway and Green Cars marketplaces, it reaches out beyond the 30 to 50-mile range that a typical stores reach can achieve. And we're now reaching 500 to 1,000, 2,000 across the entire country. So when stores are a little gun-shy because they don't have the ability to sell that car at that price, when you start to expand the ecosystem, you all of a sudden are able to expand your pricing model. And I think that's where I attribute a lot of that increase sequentially. Rajat Gupta: Understood. That's helpful color. And just on parts and service, second quarter a pretty good profit growth. despite some of the weather challenges you might have seen. Any way to just double click on that and give us a little more detail into what's driving that? I know maybe U.K. maybe had a bit of an FX benefit, but maybe if you want to break up U.S. versus U.K. as well, that would be helpful. And just any more detail within those regions and what's driving the growth? Bryan DeBoer: Yes. Our growth globally, the U.K. is slightly better than North America. But North America is starting to gain traction. What we're finding again when we think about the customer experience and taking out layers and making it simpler, more transparent and more empowered by the customer, just creates better experiences. And I think when we think about going to market, it is about those frontline people making a difference each and every day to create memorable experiences. And that happens through lots of different options, okay? And those options create what we would call individualized experiences for each customer, where one customer may want to sit on their accounts or they may want us to pick up their car from work and another might like to enjoy sitting in our living room and seeing the new product and so on and so on. So it's really giving our people the flexibility to think on their feet, okay? And then the ability to execute lots of different ways to create a more appealing experience and a more memorable experience so they continue to come back month after month during their ownership life cycle. Operator: Our next questions come from the line of Alex Perry with Bank of America. Unknown Analyst: I guess first, I just wanted to ask a little bit more about your outlook for the U.K. It seems like performance there is improving. Can you talk about what specifically is driving that? And if you would expect that to continue? Bryan DeBoer: Sure, Alex. Brian again. I think we've got an exceptional group of leaders and an acceptable group of operators that over the last 2 years, we've been able to purge and then modify the network to adjust to the consumer demands in the United Kingdom, and that includes adding Chinese brands, eliminating some other brands, finding some underperforming stores and getting rid of those. But most importantly, this is coming from the United Kingdom and Neil, Richard and our vice presidents that are there, and their teams underneath them. They are very good at structurally putting in plans and then executing to that plan. It's a real refreshing thing to be able to know that halfway through the month that they're going to hit forecast or they're going to be above forecast, a million or two, whatever it is, they're very definitive and they're very intentional in their actions, okay? We're really hoping that the example that they said as we start to roll out Pinewood AI into the United States and into Canada, what they're seeing over the last 2 years by being on Pinewood AI is an experience where their customers and their team members are sitting in the same environment. In fact, many of the stores now have moved their service drives from the back of the dealership or back a house to write on the showroom floor where they're actually meeting and greeting customers, and some of those are even multiple tasks, meaning they may deal with sales, they may deal with service, they may deal with accessories or whatever else it may be, where they're truly thinking about a one-touch type of experience. And then this is all wrapped around the idea of the Pinewood AI is now starting to give them the ability to manage their expenses in an incremental way downward, okay? And I think, if I remember right, it was 447,000 hours that our CFO, there Richard had defined that service loans, AI will be able for them to capture that money within the next 4 quarters or so. So they're making pretty good progress on that, and we're pretty excited because that is the seeds to what's going to happen in North America, and we're really proud of their leadership over there. Unknown Analyst: That's incredibly helpful. And then just my follow-up question, I just wanted to ask if you had seen any impact from the current sort of geopolitical environment. any slowdown on the new vehicle side as you sort of look through April? Any change in mix seemed like you hit some of your targets through March, so that would sort of indicate that you haven't been seeing anything, but I just wanted to ask about that. Bryan DeBoer: Yes. I think it appears that the quarter ended up strong. We feel pretty good about the start of Q2. I think that the geopolitical climate has been balanced with some higher tax returns. I mean, I really feel like it doesn't feel quite as good as March was in the United States. But I also know that if the war can come down and if tariffs can gain some clarity, and it's a matter of things can fall in the line that we can through this and hopefully have a decent second half of the year. So it's a little bit of a mix of things, but we're sure pleased with where the market's at, despite it only being a 15 8 SAAR as an industry. We really believe that when affordability can get a grip on things and start to trend back down a little bit, then we should be able to start trickling up again towards that 17 million units a year number. Operator: Our next questions come from the line of Jeff Lick with Stephens. Jeffrey Lick: Congrats on a great quarter guys. Brian, I was wondering if we could dig into the used a little more DPU at $1,700-ish. First of all, could you remind us what percent you guys self-source versus any sourcing from auctions? And then I was just wondering, Bryan, if you could just kind of pontificate a little bit as we get into these lease returns and we'll probably have a little bit more of a higher level of supply in the summer that change the dynamic one way or another for you? I'm assuming it does. I'm just curious how that will change the dynamic for you guys and the... Bryan DeBoer: Good insights, Jeff. Our customer-sourced vehicles our 2,483 a unit. And remember, without F&I, the numbers I gave previously were with F&I, okay? Our 24 83 on our customer acquired units, okay? The units that are acquired outside from the -- not from the customers like auction are around $700 to $800. So it's a big delta between those. At one time, you remember, we were $1,000 to $1,100 a difference. Now the difference is $1,500, okay? So it's hyper important of our ability to continue to acquire cars from trade-in. And I think if you look at where we are, this is a big opportunity for Lithia. I mean, we acquired less cars year-over-year by about 3% from our customers. okay? But we also still drove up our margins. So that, I believe, is more of a pricing function than a cost function, okay? But I believe that we can attack both if we're properly valuing cars that are coming in off-trade in, making sure that any online pricing through Driveway or others, are met and matched to be able to ensure that those customers are creating a 2-part buying process, meaning they're giving us their trade and they're buying a car from us. So we're pretty pleased with what's happening there. In terms of the off-lease vehicles, we do see a little bit of a bulge there. We're actually -- it's surprising when we try to push used cars and we talk value auto. Some stores get it. Others just go buy more lease vehicles. So off-lease vehicles and -- to be fair, that's okay, too. We were actually at 22% of our volume was from -- I may have that off. I'm sorry, 40% of our volume was CPO last quarter, okay? So that was a pretty big amount, okay? And I think that could be indicative that we've got lots of stores. That's natural, okay? I mean that's part of our staple diet in our business that you just automatically sell those CPO cars. So I think with more cars available, it will help us definitely. We just want to make sure that our teams are still focused on their core product between 4 and 8 years and most importantly, make sure they've got the affordable cars of $15,000 average price or so in our value auto cars. Jeffrey Lick: And then just a quick follow-up. You had talked on the last call about some of the used car managers maybe being a little quick to break price and maybe not the greatest buyers. And so you kind of thought, hey, there was some room there on the spread at that $1,700. I'm just curious where you're at there and where you think you might be able to get that because previous presentation last year as potential of 1,800 to 2,100 [indiscernible] Bryan DeBoer: Jeff, we're not -- we're going to be -- we want you to be conservative here in this response, but these numbers will probably shock a lot of people on the call, okay? Our price to market, okay? The price that we sell our vehicles for through both driveway because our stores price cars on Driveway and our stores is approximately 95% of what the 1 price used car retailers are selling the same Carrefour. That's an apples-to-apples comparison. If you then figure that your average price is somewhere between $25,000 and $30,000, you're talking about $1,250 that could come just from the pricing equation. Why can't that happen overnight, okay? The reason is, is because most of our cars are still sold within 20 to 30 miles of the footprint of those cars. So the more that we can create visibility, you get more eyeballs on cars and to higher-demand cars, then will command the price that are needed, okay? Where we do pretty good and we sell cars about for market is certified, okay? That's where we sell cars for market. What we don't do is when it's the value auto car or it's a car that's less than its miles for its age. That's where we lose approximately 8% to 9% on pricing. And that makes up that entire 5%, okay? So that's our focus, is how do you convince your stores to look past the transaction that isn't getting them to market pricing on the deal. And that is some underpricing or dropping your pricing too quickly. But most of the time, it's under pricing. It's they don't price the car right at the start. Why? They're salespeople, their service departments and their sales managers are convinced that, that car can't sell for that price. And they don't let it season long enough to be able to do that. I believe, and I think our team believes velocity can hurt your gross profit in used cars. Velocity can hurt your gross profit in used cars. Okay, your ideal time to sell in used cars is between 15 and 40 days, okay? And if you sell it before that, you probably sold it for too little, okay? So it's a function of both eyeballs, belief, end market pricing to be able to get that $1,200 approximate dollars that we know is sitting out there. Operator: Our next questions come from the line of John Saager with Evercore. John Saager: I wanted to discuss the rollout of Prime rod. So you're expecting to complete that by the end of -- can you discuss the impact that will have on expenses during the course of the rollout. I would expect that there would be some headwinds that you counter along the way as you're working through the process. Is there any way you could quantify those headwinds for us? Bryan DeBoer: Sure, John. We're basically doing a rollout by manufacturers. And what we saw in the United Kingdom, and this is data that's, what, 3/4 to 5 quarters old. It took us about 2 quarters to complete the rollout on 150 businesses in the United Kingdom. It went extremely smoothly. We did not see additional costs in that rollout. It's truly a 2- to 3-week prep process and a 2- to 3-week climatization process where they get used to that work. We're also going to be preempting in the sales department, a CRM product. So they'll get used to the CRM product way before the Pinewood full DMS comes in and about 1/3 of our stores are already on that product in North America. So we're very cognitive of that. There was a cost last quarter, if you remember, in CDK that we ended up buying out that contract. So that's been front loaded and is behind us. But beyond, once you get through the integration point, which is truly a 2-month period, okay, the true cost of Pinewood is lower and most importantly, the true benefit of Pinewood is it allows you to do things and have our -- the IT solutions because it puts the customer and the team member into the same environment, there's not redundancies, okay? And today, with multiple vendors, with CDK having all these attached vendors, there's massive amounts of redundancy. Those redundancies can come out almost immediately. Hopefully, that helps, John. A follow-up on that? John Saager: Yes. That makes sense. Actually, the timing of that is fast. But the it is going to take a long time to get there until 2028. And so I wanted to ask about like how does that impact the timing of the path to your medium-term targets. So to get SG&A as a percent of gross down to that 60% to 65% range. What are the primary initiatives or drivers are using to get there? Is there like a revenue per employee number that you have in mind? Or is there some other way of tracking that progress? And do you need Pinewood to be fully rolled out before you... Bryan DeBoer: No we don't. No, we don't. I mean Pinewood is going to help us take it from mid-60s to mid-50s, okay? And I think that's how we think about it. So in the interim -- the single biggest thing that can help us get there is a marketplace that has stable GPUs and is a 17 million SAAR because we gain leverage as we gain volume, okay? Alongside that, what can we focus on, we focus on what we can control. And we basically built a 4-legged stool that's wrapped around a couple of things. First and foremost, we call it the everyday plan. It came off the back of the 60-day plan a couple of years ago. That's vendor management, that's compensation management. And that's typical productivity and efficiency metrics that our people are pretty good at, okay? And they're pretty savvy at. The other 3 items are what I mentioned briefly. It's job combinations. It's re-architecting the sales departments and the service departments to remove layers and combine jobs, okay? It's managers and leadership overseeing multiple departments in multiple stores, which we've moved that quite nicely. We're up to almost 2.5 stores per office manager and about 1.4 stores for a general manager, big moves there. And lastly, and not least, is this idea of remote F&I or remote desking or possibly even remote service advisers, okay? Meaning when you're maybe a half a person short, you don't add a full person. And that makes massive -- and that's probably the easiest example, but that's our push each and every day in our organization over the last few quarters. John Saager: If I could maybe push back just a little bit on that. You've had relatively stable GPUs for the last 2 or 3 quarters now. And the long-term trend on SAAR is around $16 million, not $17 million. So is it realistic to sustainably have SG&A as a percent of GP below 60%, given those long-term trends? Bryan DeBoer: Yes, John, we -- our GPU decrease each of the last 4 quarters has been around $150 to $200 a unit. So -- and that on a base of 100,000, 150,000 units, it's a big number, okay? And that's something that we have to manage. So that is something. I do believe that the volumes, for some reason, each and every quarter, there's something that's semi-soft and again, this quarter, you're seeing it with the 3 people that have reported so far. We had 1 person that was double-digit declines in new vehicle sales, and that all has implications on your SG&A costs. So I really believe that a 17 million SAAR is out there. It may not be coming off the back of tariffs and in a war, but I hope things can settle down because I think there's a world where that can happen, okay? If it doesn't, we're still managing on those 4 legs of our stool and we'll continue to drive down costs. And I think in the quarter, it appears that we're right in step in stride in terms of year-over-year SG&A, and should be able to exacerbate that, relative to our peers. The other thing to remember is we also have the tailwind of [ D&C. ] And that's on track to hit somewhere around $100 million in profitability on its way to $0.5 billion profitability. So that's not in SG&A, okay? So let's not focus as much on SG&A because we are an industry that has costs, but that also gives us the opportunity to drive them down. And I think as an organization, we typically -- if you equalize for the companies that have the United business, U.K. business, we're typically either second or third lowest in terms of SG&A cost as a company, okay? Important to remember. Operator: Our next questions come from the line of Chris Bottiglieri with BNP Paribas. Christopher Bottiglieri: The first one is, can you elaborate on the $20 million contract buyout. Is that a DMS or what does that implicate for future cost savings? Tina Miller: Yes. It's just the planned vendor termination here with part of it, there was a buyout of the contract. Christopher Bottiglieri: Okay. And then wanted to ask, you mentioned the importance of marketplace to get in your targeted GP stability. Just hoping to get an update on Driveway. And then it seems that you made a change to the Chief Technology Officer earlier in the quarter. Just kind of curious if you can give some update on the road map for technology and like what are some of the initiatives that have to be done? What's gone right? What's gone wrong? Just an overall update on all that would be helpful. Bryan DeBoer: You bet, Chris. This is Bryan again. It's neat that the management team really wanted because the ecosystem is so integrated, they wanted to take IT themselves. The after sales team wanted to integrate that. The sales teams wanted to integrate everything across the DFC driveway and green cars. So they were the ones that basically built structure to allow George to be able to go on to bigger and better things, which is exciting. George is a class act and we'll end up in a good space, doing coding and other things that he is amazing at. But as an organization, we just felt it was an impediment, having it as an independent department and then it needed to be integrated into operations. Fundamentally to be able to respond quicker and to be able to capture that marketplace. So Driveway as a whole, it was up 8% in volume across its platform, which was a nice number. And more importantly than that, we've started to gain some traction in new vehicles. New vehicles was up almost 500% in Driveway business. So a big number there. It's still there. I don't know that we dedicate enough resources to it, but we also believe that there will be a time in place where that marketplace disconnects again because we think the market -- e-commerce market is being pushed somewhat fictitiously in regards to one of the competitors out there. And once their financing changes, it should change and possibly open us an opportunity to turn the accelerator back on and driveway. So real successful. We're still sitting at of all customers that come into Driveway are still new to the ecosystem entirely. So pretty cool to be able to have that still out there. Operator: Our next questions come from the line of John Babcock with Barclays. John Babcock: I guess just first on the M&A market. Could you talk about how that looks right now? And then as a tag on to that, you obviously have typically divested a couple of stores each year and I just want to get a sense, recognizing future acquisitions may add to that. How much of your footprint do you think you still have to turn over. So in other words, maybe it's underperforming or for some other reason, you want to divest it. So any color you could provide on that would be useful. Bryan DeBoer: Great, John. As you can tell, we've been -- we've always remained disciplined on acquisitions. We typically pay somewhere between 10% and 30% of revenues and there's deals including 1 large deal out there that's sold for 120% of revenue. We don't see how those returns can make sense. And obviously, with our stock price at where we're at, that's what we reinforce. In terms of what have we done and what does our network look like in terms of cleanliness, we've done almost $500 million so far in revenue this year. That's net of divestitures. We've got, let's see, 1, 2. We've got 3 stores under contract and 2 stores that are close to being LOI and outside of that, I've got one more store that we would consider not part of our network strategy and will be divested. Those are all in North America. The United Kingdom is fully clean. They're really now iterating on which brands are best to put into their facilities. And outside of that, we shouldn't have many other problems other than there's an occasional time where someone offers us some stupid amount of money in the stores always kind of performed mediocre. In those times, we do redeploy the capital into buybacks or to finding other acquisitions that are more attractive pricing wise. Our focus again is in the -- or the Southeast and the South Central, okay? And again, that is where stores are a little bit pricier okay? We have been able to find some pretty nice acquisitions at appropriate pricing, but the market is still quite frothy. John Babcock: Okay. And now just shifting gears to parts and service. Could you break down your growth this last quarter across customer pay and warranty? Bryan DeBoer: Our gross mix? Are you looking for mix? John Babcock: So growth in revenue. Bryan DeBoer: Growth. I think it was 7% on customer paying 5% on warranty. They were virtually -- they were real close. Tina Miller: Yes, they were really close. Those are gross profit numbers that he's quoting in terms of the growth, but they were both pretty close to each other. Bryan DeBoer: And revenue was 5 and 4 million customer and warranty, okay? Operator: Our next questions come from the line of Bret Jordan with Jefferies. Bret Jordan: Could you talk about the impact of negative equity, I guess, on recent volumes. It's obviously getting some press. But is the conversion being impacted as customers come in and realize that their car is going to require a check as opposed to generating a return on the trade. Bryan DeBoer: Yes. Great question, Bret. It's funny. That was what we were discussing prior to the call. So negative equity has climbed a little bit. It started to subside, which is nice to see. But remember, this is the advantage of being as far up funnel as you possibly can be as a retailer. As a new car retailer and is a certified used car retailers, those are the cars that have the most margin which means the most incentives, right, which allows us to absorb the disequity in their future financing of their new vehicle, okay? So that's really why you want to be up funnel is to be able to transfer disequity so then someone doesn't have to write a check. Now most customers still are writing a check. It's around $2,000 is the true amount that they write a check for. but this is where our stores and the traditional network of automotive retail is pretty darn good, okay? Our average disequity that we're focused on in the stores is $2,000 higher than what our AI and Driveway technology approves in the e-commerce platform of driveway.com. So that $2,000 is the benefit of what we get or having some level of negotiation and experts in our stores that are financing cars each and every day. So really, though, does it impact our business? It impacts affordability I think it's important to remember that our manufacturers still don't have tons of incentives out there. I think we're averaging just under $4,000 a unit, okay? At one time, it was as high as $6, 000 or $7,000. So that's a big number that then can be applied to this equity and allow customers to have a little less down payment and still be able to finance their vehicles. Now anything I talk about is equity don't apply that directly to our DFC explanations, because we have extremely disciplined strategies on that. We only have about a 96% check, 96% LTV on our DFC loans, and we're way over 100 as a company as a whole -- way over 100. So we're financing everything we can, but most of that is going to our captive partners, our manufacturer captives or other bank relationships. Hopefully, that helps, Bret. Bret Jordan: Yes. And just real quick on the geopolitical impact in the U.K. I think you sort of talked about the U.S., but -- and maybe it requires sort of looking into April. But given the spike in energy costs over there, you sounded like U.K. beat expectations in the first quarter, but was there any deterioration of the consumer standpoint as the quarter has progressed? Bryan DeBoer: No. What we've actually found and I would say that Neil and the team have done a nice job. The U.K. is built differently. It basically is built off March and September and those months are massive. What they've done a nice job is diversification. They now sell used cars at different times. Those places don't get reregistered, even though you get spikes in those 2 months in use. They're trying to sell those at all times, which is a good thing. Also in their after sales business, that somehow gets spikes. So now they're starting to balance their portfolio we're pretty confident on where the U.K. looks short term, okay? They're able to see out a good 60 to 90 days because 80% of their business is orders. Okay. So they're feeling pretty good about Q2. I got off the phone with Neil yesterday and then the rest of the team the day before. So all things are looking pretty good there and our ability to adjust franchises to be fair, within a 90-day period, 69-day period and do it at about a $50,000 entry price, basically signage for these brands in the store, it's pretty easy to be able to balance your volumes on the new car side and still maintain your units and operations with some dual brand on the aftersales side. So hopefully, that gives you a little bit of color, Bret. Operator: Our next questions come from the line of Daniela Haigian with Morgan Stanley. Daniela Haigian: Just one quick one. We've covered a lot of the core businesses here, but more strategically thinking about the influx of Chinese EVs taking share in Europe. How are the unit economics at your BI stores relative to your other OEM stores in the U.K.? And what are your views on Chinese OEMs coming to the U.S. either directly or indirectly? Bryan DeBoer: Great, Daniela. I think it's critical that everyone hears this, okay. Our relationships with the Chinese manufacturers are growing in the United Kingdom, and we cherish those relationships. However, we need to not apply the economics that are happening in Western Europe over Canada or the United States, okay? And here's the reason why. You heard me talk about this idea the Chinese manufacturers are coming into the United Kingdom. They now have about 12% market share, okay? It's not happening from EVs. It's happening from ICE engines and hybrid engines. The EVs that were brought in by BYD and MG, 2.5, 3 years ago, they virtually sold no cars. It was less than 0.5% market share. It wasn't until about a year ago that they started to bring in plug-ins and hybrids and ICE engines until they gain market share, okay? And that's because of affordability.So important to remember that. Remember this also, in Canada, they've now decided that they're going to bring 50,000 vehicles into Canada as well. That authorization by the federal government is authorized for all electrified vehicles, not just BEVs, okay? So remember that as well. In those areas, they do have the ability to take some market share if pricing allows it and if tariffs keep that in an advantageous spot. Here's the problem. The Chinese manufacturers in Canada, which is the most likely scenario of how they're going to look at things in the United States have decided to use a dealer network in Canada. They've also decided that the network is going to be fairly lean initially, and that it's going to be exclusive stores. Hear that, exclusive stores, okay? In the United Kingdom, our Chinese brands, 14 out of 15 are not exclusive, okay? They're sitting on the same showroom with Ford stores and [ Stellantis ] stores and Renault stores that have a unit in operation base, in after sales that allows those stores to have incremental gross profit that helps the stores profitably. If we were to have to have opened stores independently, even in the United Kingdom, those stores would not be profitable. Why? Because 60% of our profits come from after sales. And there is no units and operations built for the next 5 to 10 years, okay? So when you think about Canada or the United States, you've got to think about the dealer network and how is it going to be designed. Also remember that in Canada, real estate is -expensive. We may have some facilities that have some vacancy and it may make sense to create some partnerships in Canada. We may have the same thing in the United States. We'll have to see what their strategies are. But if we're talking about 50% to 100% tariffs in Canada, the price advantage on like-for-like cars in the United Kingdom is somewhere around 7% to 8%, okay? And on the BEV, there is 0 price advantage at this stage in the United Kingdom, okay? So I don't -- it's difficult to overlay. And I think that for us, it was easy to be a pioneer in the United Kingdom. But being a pioneer in the United States or in Canada, when you're opening an exclusive facility and that facility could cost up $10 million or $15 million, pioneers are probably going to get shot and the settlers are going to be the ones that get rich, and we may take a little bit of a wait-and-see approach on that. Hopefully, that helps. Oh, you asked about margins as well. The margins on those vehicles are very similar to our mainstream margins in the United Kingdom. Operator: We'll now turn to our final questions from the line of Mark Jordan with Goldman Sachs. Mark Jordan: I'll just do one quick one on used retail. Looking through the slide deck here, it looks like the average selling prices for core and value auto has increased nicely both year-over-year and quarter-over-quarter. But prices for CPO vehicles decline. Can you talk about what drove the decline there? Maybe was it a mix or something else that drove that? Bryan DeBoer: Sure, Mark. I actually think it's what one of the other analysts had asked about, which is the availability of those cars is becoming easier, especially remember, those vehicles were driven off of 13 million, 14 million SAAR during COVID. So we're starting to get some units back into operation and availability of those. So we're excited to see that happen. The other thing that can drive ASPs on certified vehicles is incentives, okay? So I think when you start to see incentives come up, that drive to late-model vehicles, down accordingly. Operator: We have reached the end of our question-and-answer session. I would now like to turn the floor back over to Bryan DeBoer for closing comments. Bryan DeBoer: Thanks for your questions today. Thanks for joining us, and we look forward to seeing you on our Lithia Driveway second quarter call in July. Bye-bye, everyone. Operator: Ladies and gentlemen, thank you for your participation. This does conclude today's teleconference. Please disconnect your lines at this time, and enjoy the rest of your day.
Operator: Good morning, and welcome to ONEOK's First Quarter 2026 Earnings Conference Call. As a reminder, this call is being recorded. [Operator Instructions] With that, it is my pleasure to turn the program over to Megan Patterson, Vice President, Investor Relations. You may now begin. Megan Patterson: Thank you, Angela. Welcome to ONEOK's First Quarter 2026 Earnings Call. We issued our earnings release and presentation after the markets closed yesterday, and those materials are available on our website. After our prepared remarks, management will be available to take your questions. Statements made during this call that might include ONEOK's expectations or predictions should be considered forward-looking statements and are covered by the safe harbor provision of the Securities Acts of 1933 and 1934. Actual results could differ materially from those projected in forward-looking statements. For a discussion of factors that could cause actual results to differ, please refer to our SEC filings. With that, I'll turn the call over to Pierce Norton, President and Chief Executive Officer. Pierce Norton: Thank you, Megan, and good morning, everyone, and thank you for joining us today. Joining me on the call are Walt Hulse, Chief Financial Officer; Randy Lentz, Chief Operating Officer; and Sheridan Swords, our Chief Commercial Officer. Yesterday, we reported first quarter earnings and raised our 2026 financial guidance, reflecting strong performance and building momentum. Before we get into the quarter, I'd like to take a step back and frame the environment we're operating in and how we think about ONEOK's role within it. Energy markets remain dynamic, but long-term fundamentals are strong. It remains clear that the U.S. energy infrastructure is essential for economic growth, industrial competitiveness, power demand and global energy security. Midstream's role is similar. We connect supply and demand safely and efficiently across cycles, not around them. That's where ONEOK differentiates itself. We built a regionally diversified integrated platform at scale across natural gas liquids, natural gas, crude oil and refined products, anchored by an innovative employee base, the interconnectivity of our assets, customer relationships and a predominantly fee-based model. Our systems sit in and around some of the most resilient basins and durable demand centers, including power generation, industrial demand and export markets. As we look to the remainder of 2026, our high-level priorities remain consistent, operate safely and reliably, execute our capital growth program with discipline, maintain balance sheet strength and financial flexibility and leverage our integrated asset advantage and strong customer relationships to continue driving volume growth across all of our systems. These priorities are grounded in what we see across the U.S. energy landscape where long-term demand remains constructive, both domestically and globally. U.S. natural gas demand is growing, across power generation for emerging data center demand, industrial activity and liquefied natural gas exports. LNG export capacity alone is protected to more than double over the next decade, reinforcing the durable global call on U.S. energy and natural gas infrastructure. 65% of U.S. natural gas production contains recoverable natural gas lipids. That means the infrastructure to handle natural gas liquids must be addressed alongside natural gas. This requires full value chain infrastructure and continued investments in natural gas, natural gas liquids, crude oil and refined product assets by companies like ONEOK. At the same time, NGL demand remains strong globally, driven by petrochemical and international markets, with U.S. supply playing an increasingly critical role. And finally, the resilience and innovation of the U.S. energy industry continues to stand out. through consistent efficiency gains and reliable results. Recent global events have only reinforced the importance of secure, resilient energy supply. -- and the cripple roll U.S. energy plays in providing it. The world has seen that the most expensive energy is the energy that does not show up. As global demand continues to grow, infrastructure not supply is the constraint, and that is exactly where ONEOK is positioned, providing scalable, strategically located infrastructure with capacity and the ability to respond to evolving demand dynamics. I'll now turn the call over to Walt Hulse for our financial update. Walter Hulse: Thank you, Pierce. As Pierce mentioned, we are increasing our 2026 financial guidance, reflecting the strong performance we delivered in the first quarter across ONEOK's integrated systems and our higher expectations for the remainder of the year. We now expect 2026 net income to increase to a midpoint of approximately $3.5 billion, with diluted earnings per share increasing to a midpoint of $5.53. We are also increasing our adjusted EBITDA guidance to a midpoint of $8.25 billion. These updates reflect strong underlying business segment performance as well as increased opportunities across our system. Driven in part by a more constructive market environment that developed late in the first quarter. As we move into the back half of the year, the combination of higher volumes, completed projects and market tailwinds should be reflected more clearly in our results for the balance of this year and into 2027. Our total 2026 capital expenditure guidance remains unchanged at $2.7 billion to $3.2 billion. Turning to the first quarter performance. ONEOK reported net income of $776 million or $1.23 per diluted share, a 12% increase compared with the first quarter of 2025. Results included a noncash impairment of $60 million or $0.07 per diluted share after tax related to our Powder Springs logistics joint venture in the refined products and crude segment. Adjusted EBITDA for the quarter totaled approximately $2 billion, a 13% year-over-year increase driven by higher volumes, and strong segment level performance. As market conditions strengthened towards the end of the quarter, we also saw additional opportunities across our system. We continue to expect the first quarter to be our lowest EBITDA quarter of the year, consistent with our typical annual cadence and seasonal dynamics. Importantly, our balance sheet and capital framework remains strong. We continue to prioritize financial flexibility while investing in the business and returning capital to shareholders. In April, we redeemed nearly $500 million of outstanding notes due July 2026, and we entered into a $1.2 billion term loan further enhancing balance sheet flexibility in a rapidly changing market. Our results reflect the same themes that underpin our strategy: A high-quality largely fee-based earnings mix, strong performance across our integrated systems and disciplined cost and capital management. And our increased financial guidance reflects both this consistent execution year-to-date and improving market dynamics. I'll turn it over to Randy for an operational and large capital projects update. Randy Lentz: Thank you, Walt. From an operational standpoint, our focus remains on safe and reliable performance across our integrated assets. Our teams continue to execute well across all 4 business segments, managing normal seasonality and weather-related impacts. The scale and diversity of our systems allow us to absorb those seasonal dynamics while continuing to provide reliable service to our customers. Winter Storm created temporary wellhead freeze-offs that briefly reduced throughput. But as a reminder, there were no material downtime on our assets on those -- related to those impacts were already reflected in our original 2026 guidance. Turning to capital projects, we've made strong progress so far this year. In the first quarter, we completed the relocation of our 150 million cubic feet per day shadow fax natural gas processing plant from North Texas to Midland Basin. We expect a steady ramp-up of volumes as producer activity remains solid in the area. We're also on track to complete expansions of our Delaware Basin processing assets in the third quarter, increasing our capacity in the basin by 110 million cubic feet per day, in addition to our 300 million cubic feet per day Bighorn processing plant that remains on schedule for completion in mid-2027. In the Powder River Basin, we're on track to complete construction of our 60 million cubic per day in center plant in the fourth quarter of 2026. This plant will increase our processing capacity in the Powder River to more than 100 million cubic feet per day, we expect capacity to deal quickly from wells already drilled and expected to be drilled by our 15% JV Parker plant. Across other segments, our Denver area refined products pipeline expansion will add 35,000 barrels per day of capacity when an inter service midyear and Phase 1 of our Medford NGL fractionator will add 100,000 barrels per day of Mid-Continent fractionation capacity in the fourth quarter. These projects remain on schedule and are positioned to deliver meaningful near-term benefits by improving reliability, expanding connectivity and increasing optionality by also creating long-term durable value across our footprint. I'll now turn it over to Sheridan for a commercial update. Sheridan Swords: Thank you, Randy. Commercially, we continue to see active engagement across our asset portfolio. Demand is supported by downstream particularly from power generation, industrial and petrochemical demand and export linked markets. These dynamics reinforce the importance of strategically located infrastructure and long-term relationships. Looking at the first quarter, we delivered strong year-over-year volume performance across our assets. despite typically seasonal headwinds. Starting with the Natural Gas Liquids segment. Performance was led by broad-based volume growth across all 3 of our core regions. In the Rocky Mountain region, NGL volumes increased 11% year-over-year, driven by higher base volume and increased ethane recovery. In the Mid-Continent, volumes increased 4% year-over-year, driven entirely by C3+ volume, even as the region experienced some temporary impacts of winter storage earlier in the quarter. In the Gulf Coast Permian region, volumes increased more than 30% year-over-year, primarily reflecting base volume growth from newly connected third-party plants that were delayed last as well as higher short-term volume opportunity. From a global perspective, NGL demand remained structurally strong, and recent geopolitical dynamics have further reinforced the attractiveness of the U.S. supply. request for capacity on our announced LPG export dock were already increasing and have accelerated more recently as customers look to do supply toward the U.S. Turning to the refined products and crude segment. Year-over-year refined products volumes increased 12%, supported by strong gasoline and diesel demand, refinery maintenance dynamics, favorable regional basis differentials and wide crack spreads that drove strong refinery utilization. Lending volumes were also strong during the quarter. We entered the spring blending season significantly hedged, which limited our exposure to binding ore -- to butane spreads. Historically wide basis differentials between New York Harbor, where we hedge and the Mid-Continent where we sell product, also impacted realized margins. Looking ahead, we've secured additional hedges on fall volumes at higher prices and extended new hedges into spring 2027. Importantly, lending volumes continue to be driven primarily by system throughput rather than EPA RVP waivers, which typically create only modest incremental opportunities. Increased gasoline throughput and completed synergy projects provide a much greater benefit allowing us to optimize blending activity across our system. More broadly, the reach and flexibility of our refined product systems remain a key advantage. We are the only refined products pipeline system with bidirectional access between the Mid-Continent and the Gulf Coast, which allows us to attract incremental volume and respond to changing market conditions. Demand fundamentals remain strong. We continue to see very strong diesel demand across our system, which we expect to remain as we move into spring agricultural season. We also anticipate a robust summer travel season. supported gasoline demand across our footprint. Additionally, jet fuel supply remains constrained for an extended period, we could see incremental demand for gasoline. Refined products and exports have increased in recent months amid global supply titers, particularly related to diesel, and we are well positioned with dock capacity across multiple Gulf Coast marine facilities, crude dock utilization remained robust at our highly contracted joint venture, and we are in discussions to extend our contract expiring capacity at favorable rates. Finally, higher-margin Permian crude oil gathering volumes increased compared with the fourth quarter as activity in the basin remains favorable of discipline. Moving to the natural Gathering and Processing segment. We delivered strong year-over-year volume growth, led by the Mid-Continent where volumes increased 7%. Mid-Continent producers continue to focus activity across both gas-focused and liquid-rich plays, and we have 11 rigs currently operating at costs more than 1 million dedicated acres in this region. In the Rocky Mountain region, processed volumes increased year-over-year even with winter weather and heater treater impacts. As operating conditions normalize, we expect volumes to strengthen in the second and third quarters. There are currently 11 rigs on our dedicated acreage with producers continue to drive efficiency gains through longer labs. In the Permian basin process volumes increased 4% year-over-year, and we currently have 11 rigs operating across our footprint. As Randy mentioned earlier, our expanded capacity in the Permian enhances system flexibility and positions us well to support producers' development plans across both the Midland and Delaware Basins. Customer activity remains strong, and we are increasingly encouraged by the depth of opportunities the Permian Basin brings to our portfolio. From a financial perspective, realized commodity prices were lower in the first quarter as a result of entering the year fully hedged. Importantly, underlying throughput volumes increased year-over-year across all regions, reinforcing the long-term earning capacity and resilience of our gathering and processing portfolio. Producer behavior remains disciplined and executive focused. We are seeing some acceleration in completion activity, which supports our confidence in the 2026 volume outlook. That confidence is driven by direct visibility into producer plans rather than an expectation of higher commodity prices. This view is consistent with recent earnings commentary for oilfield services companies, the noted early signs of increasing activity. particularly among private and single basin operators. Doug inventories can also provide an avenue for this acceleration. Our producer base across ONEOK's approximately 7 Bcf per day system is well balanced among large public companies, private operators and private equity-backed producers. That diversity provides both scale and durability while allowing activity to adjust incrementally. I'll close with our Natural Gas Pipeline segment, where strong results continued in the first quarter with all regions outperforming expectations. Results benefited from wider than planned Waha to Katy location price differentials as well as incremental marketing opportunities created by winter storm firm across our Louisiana assets. Looking ahead, we expect Waha to Katy differentials to normalize as new pipeline egress comes online in the second half of the year. Firm transportation demand remains strong, with high contracted capacity and strong utilization of the system. We also continue to see significant interest from added center-related opportunities in Oklahoma and Texas and we remain in advanced discussions with several counterpoints. Additionally, LNG-related demand remains strong, both near term and long term, reinforcing the durability of demand of our natural gas pipeline assets. Pierce, that concludes my remarks. Pierce Norton: Thank you, Sheridan, Randy and Walt for those comments. To close, I'll come back to where I started. The energy landscape will continue to evolve, but the need for reliable, scalable U.S. energy infrastructure is not cyclical. It is driven by long-term demand fundamentals. ONEOK is built for this environment, having an integrated platform with capacity, a strong balance sheet and disciplined execution. Results, durable long-term value creation. Most importantly, none of this happens without our people. I want to thank our employees for their continued focus on safety, operational excellence, innovation and service. And thank you to our investors for your continued trust and support in ONEOK. With that, operator, we're now ready to take questions. Operator: [Operator Instructions] And our first question will come from Spiro Dounis with Citi. Spiro Dounis: Maybe let us start with the improved outlook, just for a little more granularity on how much of that $150 million move is maybe early realized here in the first quarter? I guess, what level of visibility you have on the remaining forward component Sheridan, you mentioned sort of hedging out butane through '27. Just curious how much of that forward look is locked in? Walter Hulse: Spiro, it's Walt. So first of all, I just want to clarify, picture that -- it's clear that winter storm turn was already in our guidance. So we had zero impact from that as it related to the increase. The increase was really a blend of stronger volume expectations driven by higher commodity prices, continued expected differential opportunities, and then we, of course, expect to realize some benefit from the higher commodity prices. So though we are hedged. And typically, we're hedged about 75% going into a year. But with the higher volume expectations, any volumes we receive going forward will enjoy the full benefit of these higher commodity prices. Spiro Dounis: Understood. Well, second one maybe for you as well, just pivoting to capital allocation. So once again, you're trending a little bit stronger than expected. Could you just level set us I know you're thinking about the timing to sort of reach your leverage targets here. And when you do free up that cash flow, just where your head on buybacks or any other uses of that free cash? Walter Hulse: Sure. Well, nothing's really changed from our capital expenditure plan, as you know, and Randy mentioned, our projects are on time and right on budget. So we expect to start completing those this year with the Denver project finishing up and Bedford first phase finishing up, as well as some of the smaller things. As those wind down, as we've stated in the past, most of our CapEx -- larger CapEx will be completed by midyear of 2027. And that's when we'll really see the free cash flow kicking in. We're headed towards our leverage targets. Clearly, with the increased EBITDA expectations as that denominator rises, we'll get there faster. But we continue to pay down debt and we'll be in a position to meet our targets and return capital to shareholders appropriately. But I want to make sure that everybody stands our first objective is always to get high return capital projects. So as we see those come in, we'll definitely try to prioritize those. But our expectation is free cash flow, there will be funny for those. Our dividend our debt repayment as well as other forms of returning to shareholders. Operator: Our next question comes from Theresa Chen with Barclays. Theresa Chen: Going back to your comments on the upstream outlook, though it's still early on. Can you elaborate further on recent conversations with your producer customers? What are your near- and medium-term expectations for upstream activity in your areas of service? And where do you think prices will need to stabilize in the outer years to stimulate a material uptick in production? And how long would it take to see these volumes potentially materialize on your system? Sheridan Swords: Theresa, this is Sheridan. The first thing we're seeing with producers is what we call kind of leaning in to production. And that starts with the first 1 starts with -- if there's anything that goes down there quickly getting that back up quicker than they do in a much more lower price environment. We also see them bringing on more completion crews. So that's kind of impacting your DUCs. They go forward or bringing things on quicker than they've already drilled. And the other thing, as I said in my remarks, we are starting to see some producers looking for additional rigs to bring online. And as we see the environment we are today, where a lot of people see the back end of the curve coming up, people are getting more excited about what the price environment is going to be going forward. Obviously, when we bring on rigs that the rig volume is a little more delayed into the back half of '26 and earlier. But as I said earlier, pretty more completion crews on and when they have any downtime getting that back on will be the more near-term effect on volumes. Theresa Chen: And the second question is related to your export infrastructure and your outlook there, given the call on U.S. Energy Resources and export infrastructure, in particular, within your existing liquids export docks on the heels of recently building out the connectivity between going to park, East Houston and your Pasadena and VP joint venture, what kind of upside -- could you potentially furbish whether it be optimization on utilization or spot cargoes or even additional brownfield investment in Pasadena? And then on the LPG front, can you just talk through the commercialization process at this point? And have those conversations with potential counterparties accelerated? Sheridan Swords: Yes. Starting with our existing facilities. We have -- as you mentioned, we have 2 marine export facilities refined products on the Houston Ship Channel market and MVP. We have seen increased activity across those docks going forward. We still have more room that we could expand for and we are in conversations with customers around that. So there could be a little bit of upside in that area. -- on our crude dock, it is highly utilized right now. We have a lot more interest in there. And what we're seeing is the opportunity to extend contracts or more turn at more favorable rates than we historically have seen. So we see some tailwinds not only in '26, but beyond in both of our export facilities. Concerns our LPG dock, yes, we are seeing an acceleration of interest. We are sowing interest before the Middle East conflict, we're seeing even more of that interest. And right now, we are not concerned at all about finishing the contracting of our targeted utilization of that dock here in the relative near future. Pierce Norton: Theresa, this is Pierce. I want to add something to what Sheridan said, just to remind everybody on this call and prior to the Iran War, the U.S. and the Middle East were the only ones -- only two countries that we're actually going to expand LNG facilities over the next 5 years. And then if you fast forward to today, you look at the damage that was done to Qatar's LNG facilities, more than likely the equipment that was ordered to do those expansions, we'll probably go to rebuilding some of the damage that was done during these war efforts. So that means that the incremental capacity is going to really land back in the United States. And with LNG going from 18 Bcf to 30 Bcf basically by 2030, and I'd like to remind everybody, 65% plus of all the U.S. gas has recoverable NGLs with it. So that's really going to drive a lot of the NGL growth here in the United States, and we're well positioned for that. Think Sheridan did a great job of explaining the LPG exports, but it's providing a very constructive backdrop for the future volume growth here at ONEOK . Theresa Chen: And if I could just squeeze in a final one. Your funding say, splitter in the Gulf Coast, what utilization is that seeing currently? And what's your recontracting time line for that? Sheridan Swords: It's highly utilized right now, especially with the spreads that we're seeing. And we have just recently recontracted that for term. So that will be contracted here for the foreseeable future. And we will be running at high utilization rates. Operator: Our next question comes from Michael Blum with Wells Fargo. Michael Blum: I wanted to go back to your comment on hedges. You said you entered the year about 75% hedged. Wondering if you can give us a sense specifically on butane blending, if that's the case as well, if you're 75% hedged going into the year? And then is there any kind of seasonality to these hedges? Are they sort of more back-end weighted, front end loaded or how that plays out? Michael Lapides: Yes, Michael, this is Sheridan. We came in highly hedged for the first quarter on the butane to RBOB hedges. We do have some -- had some space to hedge further out into the fourth quarter that we have done that at much higher prices after the Middle East complex going forward. The thing we're really seeing on butane that's really exciting for us right now is that we're seeing, as I mentioned in my remarks, an increased gasoline volume across our system. That gives us even more opportunity to blend. And you couple that with our synergy projects that we brought online that we think we have some really good tailwinds behind our blending operation, both here in the first quarter when you see a lot of blending and in the fourth quarter when we see the fall blending season come about. Michael Blum: Okay. Great. I appreciate that. And then I just wanted to ask the status of the potential Sunbelt Connector project. As I'm sure you're aware, Western Gateway appears close to moving forward. So wondering if there's a possibility that you could somehow join that project in some capacity if it does reach FID or if there's a path for both projects? Sheridan Swords: Yes, Michael, this is Sheridan, again. As I've said before, there's -- we think there's only room for one project. And what we've said before is if either 1 of these projects go forward, we think it will benefit 1 of from us being able to bring volume out of the Gulf Coast into the Mid-Continent as long leave that to go to Arizona on the P66 project. And we also think that we have the ability to supply it coming out of the Gulf Coast with with us being connected to all the refiners on the Gulf Coast and the ease of getting it into the El Paso area. Operator: Our next question comes from Jean Ann Salisbury with Bank of America. Indraneel Mitra: You touched on [Technical Difficulty] Can you give a little bit more color about how 1 possible in your systems in 2025 and just fit with your portion and something that you would consider to increase that volume... Walter Hulse: Jean, you were breaking up quite badly there. It's very difficult to understand what you're saying. Could you try that again, maybe pick up your handset? Jean Ann Salisbury: Yes, sorry about that. I was asking about U.K. volumes and what it would take for to increase on your system? Sheridan Swords: I mean the butane or volumes is related to blending. We've been increasing that for the last 3 years. I think every season, we've been able to blend more and more on our system as we continue to go forward, especially as we brought these synergy projects online. So to see a meaningful uptick in our system. What we need is more volume across our system on gasoline. And we are seeing that right now. And we can even see that grow. As I mentioned in there, the rest of the year into the fourth quarter, if you see jet fuel continue to be tightening -- prices continue to rise people to be able to travel by airplane and move more to traveling by vehicle... Jean Ann Salisbury: Okay. [Technical Difficulty] Hopefully is it more clear. Sorry about that. And my other was that aspire 1 than expected this year. Can you remind us if you use that exposure over the course of the year or if it's all in 2027... Sheridan Swords: Breaking up a little bit, Jean, but I think you said is that the Waha to Katy spread was wider this year in the first quarter than we anticipated, and we were able to capture that. We see that continue through the second quarter into the third quarter when additional pipeline capacity will come online and then it will go back to be more normalized at that time. Operator: And our next question comes from Jeremy Tonet with JPMorgan. Jeremy Tonet: Just wanted to touch on, I guess, the guidance thoughts on EBITDA for the year. If I look at 1Q results and granted there were items that might not repeat. But if I annualize that, that would pretty much get you to the bottom end of the guide. And if I look at last year, I look at the difference between 1Q and 4Q, it's a pretty big step up and you talk about seasonality over the course of the year. I was wondering, if you could just help us think about shaping of the year, EBITDA by quarter, if that's going to vary from your pattern before? Or is there kind of conservatism built into your guidance expectations at this point? Walter Hulse: Jeremy, I'll just point you back to the earnings presentation, I think it's Page 5 in there where we've try to reflect the shape of that as well as demonstrate how the first quarter was the lowest. So we expect the shape of that curve to continue -- the only thing that might change a little bit might be upward slope if we see some enhanced volume in the later part of the year. So no change on the front end and hopefully a big change on the back end. Jeremy Tonet: Got it. So annualized in the first quarter would and does that slope will put you over the top end, it seems like. So it seems like a good year shaping up there. I was wondering, as we think about the uplift in the '26 guide, how much of that do you see recurring in '27? Walter Hulse: I think we're positioned very well to go into '27 with a great tailwind behind us and really have some nice volume growth and strength. And I'd remind you that we have a significant amount of operating leverage on our Bakken pipeline on the West Texas LPG pipeline out of the Mid-Continent. So as volumes pick up in the basins we serve, we don't have any incremental CapEx that needs to be spent. All that's going to drop to the bottom line. So we're looking pretty positively as we go into '27. Clearly, we've had some benefit from the differential on the -- well ahead that may not be there next year. But our system is diverse, and we find differentials all the time. As we bring on Medford, we might see a pickup in the north-south differentials as well. So were they positioned to capture those across our integrated system whenever they present themselves. Operator: Our next question comes from Manav Gupta with UBS. Manav Gupta: [Technical Difficulty] A little bit wet spread in terms of a thereof pipelines coming on. with involvement also, which obviously drives higher prices, which for your volumes, but if this gas gets to [Technical Difficulty] possibility you could see somewhat of a gas not over there. And I'm trying to understand if that does happen in that South Texas part, it starts to dislocate from Are there ways to capitalize on that opportunity? Sheridan Swords: I think it's more volume. I think what you're asking about is could there be a cut in natural gas as we see more volume come on, especially as we see more pipelines down into the Gulf Coast area. Obviously, we're seeing more LNG assets being brought online that will take that volume up. So we don't think we're going to see an overall in the Katy area as these LNG projects come on and also as we see more AI projects coming online as well. Operator: And our next question comes from Julien Dumoulin-Smith with Jefferies. Robert Mosca: This is Rob Mosca on for Julien. Most like the final FERC oil pipeline index came in better than expected. Can you help contextualize maybe what this means for your RPC segment and a refresh on how much of that segment is actually exposed to those FERC index interstate oil pipeline rates? And does this outcome meaningfully change your earnings outlook for RPC over the next 5 years? Sheridan Swords: This is Sheridan, a little bit. Yes. Remember that the spread did come in better than expected, which is beneficial to us. I'll remind you that 70% of our volume on the RPC system is market-based rates, not FERC index. So the impact in 2026 is going to be very marginal, as we go in there. But there's a compounding effect as we continue to go forward that, that will build out every year in a little bit more as we go forward. But it's a nice little tailwind, but it's not substantially change our outlook for the RPC segment. Robert Mosca: Yes, understood. And then maybe just turning back to the guide. I guess wondering if the current commodity -- environment simply holds and -- should we think about there being upside or something additive to guidance for the remainder of the year? I'm just trying to think through how much of that impact you're already factoring into your rest of your outlook? Walter Hulse: Well, I think that one of the things that you hear quite a few of -- especially the larger producers talk about is that the back end of the curve right now probably isn't really reflecting the actual physical damage that's been done over in the Middle East. So our expectations would be today that that curve should strengthen throughout the year. We have not factored any of that into our thinking when it comes to guidance. So should that happen, we'll enjoy that benefit going forward. Clearly, if that results in more volume, that's a positive for us. It takes time to bring on rigs. So maybe we get a little impact in the fourth quarter, but that's going to send us into '27 with a lot of momentum going forward. Operator: Our next question comes from Jackie Koletas with Goldman Sachs. Jacqueline Koletas: Just going back to the guide, one more really quickly. How would you frame up kind of the magnitude of the optimization upside that's now expected relative to that $150 million of year-over-year headwinds that was previously assumed. Walter Hulse: Well, clearly, we knew going into our guidance that these pipes were going to be constrained throughout -- at least the first 2 quarters and into the third, so that was factored into our guidance. So as it relates to the win spread, a good portion of that. It's been a little stronger than we had expected. So we've gotten some incremental benefit. But a good portion of that was already there. When you look at the the bridge last year from '25 into '26, there was -- a portion of that was really the the hedging that was done in '25 or '26 as it compared to '25 was at some lower pricing. So that was factored into our guidance as well. So really, the potential changes to the upside if we get more volume and enjoy these higher rates on all of that. And then there's still 25% that is unhedged that we will enjoy the higher benefits. Jacqueline Koletas: That's clear. And then just another -- can you touch on the incremental opportunities within the natural gas segment maybe longer term? I benefiting from price differentials today, how are you thinking about your exposure to power demand and how those commercial discussions trended recently? Sheridan Swords: This is Sheridan. We have been -- we are in advanced discussions with both AI and power demand right now. We have some very nice projects that are in the queue, and then we actually have projects behind that, that we're even working on as well as they continue to move forward. So we are very excited about what we see in the natural gas demand sector and where our assets sit, especially in the Oklahoma, Texas region for the power and AI demand going forward, and we'll have these projects in the 2026 and '27. So it is a good time to be in the natural gas segment for sure. Pierce Norton: So what I would add, I know set the same thing is -- when we first started talking about AI opportunities as related to power generation. We originally saw those. It's kind of short lays smaller volumes, so not necessarily that much of a material impact. As we've now gone through time and we're talking to more and more of these hyperscalers, the volumes that they're requiring that it's going to require us to reach back further into our systems and lay larger pipelines. So I think that's the big change that I see from where I sit versus where we were maybe 1.5 years, 2 years ago. Operator: Our next question comes from Keith Stanley with Wolfe Research. Keith Stanley: Wanted to follow up on Western Gateway. As you assess what that project could do to the market, do you see it mainly as an opportunity for longer haul volumes on your system out of the Gulf Coast? Or do you think this could create constraints and meaningful new growth investments like the Denver project to expand pipeline capacity? Sheridan Swords: Yes. I think it's a little bit of both. Obviously, if we if we start shipping volume out of the Gulf Coast up into the Mid-Continent to fulfill volume that's leaving the Mid-Continent to go on that Western Gateway project. That's going to mean we're going to get a longer tariff because we're moving the volume from a much longer distance away. Also is our -- the tariff from Gulf Coast out to El Paso. It's a very long term, one of our higher tariffs. If we increase that volume as well, that's going to have a very nice impact on when it can continue to go forward. And obviously, as we get more demand, will we see more expansion of product on our system? Yes, we will, as people are going to shift out the Gulf Coast more over to our system to be able to get it out to the -- out to El Paso and to meet the access into the Phoenix and California markets. Keith Stanley: Second question, the Bakken volumes were only down 2% to 3% versus Q4, that seemed a lot better than the seasonal guidance that you had pointed to last quarter on what's typical in Q1. So would you say volumes in the Bakken surprised to the upside in Q1 versus what you were expecting? Sheridan Swords: Yes, a little bit. I mean, the winter is always a little bit. We try to average it out over the 4 months and everything else. So it can be a little bit surprising to us where where the winter actually hits and when we see the volume come online. So I would say outside of winter storm and firm, we have seen -- we've been surprised with our volumes in the Bakken. Operator: Our next question comes from Brandon Bingham with Scotiabank. Brandon Bingham: I wanted to maybe talk about your Permian processing capacity portfolio and how you see that sort of evolving in light of all this resilient gas production? And just seeing some other operators in the basin discuss a more optimistic outlook for run rate capacity additions on an annual basis? How do you that being incorporated into your portfolio moving forward? Sheridan Swords: Well, I think Randy had mentioned already right now, we just put in 150 million a day, the Shaderfax plant that we moved out of the Barnett into the Midland Basin. So we brought another 150 million a day on there that we see that ramping up over time. And right behind that, we have some low-cost capacity expansions in the Delaware, 110 million a day that will come up later this year. And then we've already announced the 300 million a day plant that we'll be putting in the Delaware beyond that. Those are what we have announced. We continue to look forward. We see a lot of opportunity in the Permian Basin. We're in a lot of discussions on RFPs, especially in the Delaware that we would have the potential to even expand that capacity even more. beyond what we see today. I think we see that and also expect that to happen as we get into the -- as we get further into 2017, we hope there's opportunities as well. So we are, as like everybody else, very optimistic on the growth out of the... Brandon Bingham: Okay. Great. And then I just wanted to go back to some comments made earlier about better volume expectations this year as part of the guidance increase. Could you help frame up how the new volumes expectations compared to maybe the various midpoints within the businesses? I noticed the ranges didn't necessarily change, but it sounds like within those ranges, the expectation is definitely better now. Walter Hulse: As I said, our increase in guidance was balanced across what we've seen in volumes. And Sheridan just mentioned that we did have a little bit stronger first quarter volumes in some areas than we might have historically expected given what the or treater impact and that sort of thing would have been -- so as we go forward, we hope that builds, and we've taken that kind of projected it forward. Clearly, I think it still has to be seen what these higher commodity prices are going to do from producer activity. Some of our smaller producers, private equity or smaller independents seem to be a little bit quicker to think about rigs, and getting them fired up. So we could see some of that impact a little quicker. But I think the larger exploration companies are waiting for that curve to reflect what they think the fundamentals are and then they'll make their decisions. So -- we're not trying to get too far ahead of our volume expectations. We'll let that play out. But we do think in this commodity environment and how it's going to look into '27 that we would expect to go into '27 with a really nice tailwind behind us. Operator: And our next question comes from Sunil Sibal with Seaport Global Securities. Sunil Sibal: And hopefully, you can hear me all right. So my first question was related to the hedging. I think you mentioned on the call that you put in some hedges for '27 also. Could you indicate how much of your total 2027 commodity price exposure is hedged now? Walter Hulse: No, we're not going to get into specifics, but we've taken opportunities to make sure that we've captured at least a portion of what we see in '27. We clearly have been focused on the tail end of '26. So across our various businesses, we cleared in some portion of '27 at this point. In the markets that we can, it's probably important to know that in many of the markets that we are serving, there's just not a lot of liquidity in '27 or the backwardation is just so significant that we wouldn't want to do that. So we've been opportunistic, but where we think it makes sense. We've looked at it, and we're going to continue to look at it throughout the year. Pierce Norton: Sunil, this is Pierce. The only thing I'd add to that is that we have a what we call a programmatic hedging program where we just automatically hedge a certain percentage as the year goes back out. So it's not until we see some of these opportunistic opportunities that we go out and do anything like an just described. But there is a -- we don't try to time the market is sitting here, wait knowing something that happened that didn't move. We just methodically go through the year. And we do that because we're 90% volume times rate anyway, and so we just want to make sure we're not speculating too much on the hedging. Sunil Sibal: Understood. And then one clarification on the potential projects that you're looking on. I think you mentioned in Texas and Oklahoma with the data center clients. Should we think about those as significant CapEx opportunities with some midstream people -- midstream players undertaking? Or is it -- should we think about more like incremental CapEx or small incremental CapEx for those opportunities? Walter Hulse: Yes. I think as we've gone through and given you some thoughts about '27 and beyond '27 into '28, '29 and a run rate. We've looked at kind of a run rate of around $600 million of maintenance, about $1 billion, give or take, of what we call routine growth and a portion of this would be in that routine growth. And then we left kind of another $500 million to $600 million to get you around that 2 -- a little bit over $2 billion kind of run rate going forward. basically unallocated. So these types of projects, while they're bigger than our expectation, we originally thought they'd be $50 million projects are turning out to be $400 million to $700 million project. So they'll fit right in that window that we had left open, and they're coming in at really nice returns. Operator: Our next question comes from Gabe Moreen with Mizuho. Gabriel Moreen: If I could just ask about head chem economics, having improved quite a great deal here over the last month or 2, are you seeing any change in behavior on ethane extraction as it relates to either the Bakken or cadence going into Louisiana? I'm just curious if things have changed on that end at all? Sheridan Swords: Well, Gabe, you're right. I mean, obviously, what's going on in the world right now, the ethane economics in the United States are very strong, and we're seeing our petrochemical customers operating at very high utilization rates. But it has had due is we are seeing the ability for discretionary ethane out of the Bakken and at times out of Oklahoma to be good, be strong, and that's driving some of -- we see in volumes, so we mentioned. Going into -- that's coming off of coming out of the Mid-Continent and out of the Bakken as we draw feet over into our Louisiana crackers or Louisiana fractionators that hasn't really changed that amount on that piece. But as I said before, I think we will see some pretty good tailwinds on ethane coming out of the Bakken and then coming out through the rest of the year with the demand we're seeing from the petrochemical facilities. Gabriel Moreen: Great. And then if I could ask a quick follow-up. The PRB new plant there sounds like it's still pretty quickly any visibility to more capacity there. And then I think there was also a call out for Northern Border performance during the quarter. Was that onetime in nature or kind of there's a step-up on ratable earnings there? Sheridan Swords: We'll see on the Powder River, we've been working on that plant for a period of time. It's a 60 million a day plant. So we mentioned we have a JV partner that's a producer up in that area, coming along with us. We are getting more and more excited what we're seeing there. That's going to feel fairly quickly. Do we see there's opportunity for more volume? Yes, we hope so. And discussions with them. We'll continue to evaluate that, but we do think there's possibility to put some more capacity up there as we look forward. Northern Border, Northern Border is pretty steady. Outperformance is a little bit. Frankly, we see that kind of every year a little bit that they come in a little bit higher than what they had predicted. We continue to see this year, and we continue -- we expect to continue to see that throughout the year. Pierce Norton: [indiscernible] In the volumes is the amount of area and dedication. So there's plenty of running room up there to continue to drill there in the powder. Operator: Our next question comes from Jason Gabelman with TD Cowen. Jason Gabelman: I wanted to go back to full year guidance. And I guess when I look at your slide deck from 4Q from last quarter, you showed that at the time of your initial, I guess, '26 outlook, was predicated at $75 oil. That was, call it, $8.7 billion-ish, maybe a little higher of EBITDA for '26. Oil moved down, so your '26 EBITDA outlook move lower, but we've seen oil now move higher, and I understand the hedging dynamics mean maybe you don't capture all of the upside this year. But would you expect to kind of get back to capturing that upside next year based on where the commodity curves are right now? Walter Hulse: So what I would say there is you're absolutely right that clearly, we've got a different realized price environment, so that is going to take some time to work its way through and also takes some time for rigs to get up and moving. So when you didn't have quite as much rig activity as we had expected, that has an impact that you're starting from a different point as you exit '26. But we think we are going to see that type of strength. I'm not going to give you an actual guide to a number. But we're going to see that type of strength that we expected as volumes pick up if these prices stay or go higher, especially in the back end of the curve, there's a pretty big difference between the prompt month and as you go out towards '27. So that's going to be the story to tell as that plays out coming forward. Jason Gabelman: Great. And just a quick follow-up on a comment you just made. Did I hear you right that the -- some of the data center-related projects you're pursuing you thought they were going to be in the $50 million range and they're coming in more like $400 million to $700 million, those are the right figures? Walter Hulse: Yes. The thing is, originally, when we go back to that $50 million, that was couple of years ago when we first started seeing opportunities and people talked about citing these facilities, they were dropping them right next to pipelines, thinking that they could take the gas off of those pipelines. Well, when they were doing that, there were a lot of them were in the development stage. You didn't have a lot of hyperscalers involved. So some of the specs might not have been quite as realistic. On the hyperscalers talk about 5 gigawatt facilities, you can't just take that kind of gas off of a fully contracted pipe. So what it's caused is pure sites for us to need to look at reaching back into our system where the gas is available and building bigger pipe, and that's why the size of the projects have gone up. But at the end of the day, the value of getting these projects down to the hyperscalers is still well above their concern about price. So they're very pleased to provide good economics to make sure that speed and reliability are there. Operator: And our final question comes from Gabe Dowd with Truist. Unknown Analyst: Just quickly back to the upstream conversations. Just curious if there's any notable difference in behavior or price that operators need to see on the screen as you talk to public versus private. Just curious, especially as it looks like current rig activity is largely dominated by private in the Bakken for your footprint? Sheridan Swords: Yes, Gabe, this is Sheridan. We're definitely seeing more on the private sector more activity or talking about more activity that we're seeing on the public sector. especially with the large integrated large integrators are still being very disciplined. And looking at the price environment in front of what we are seeing, especially on the private equity side, starting to look more at rigs, more completion, trying to move production up that's where the majority of the activities happen. I think as we've stated here, as we continue to go throughout the year and everybody expects the the back end of this curve to move up as the paper is not reflecting what we're seeing in the physical world, when that happens, I think you could see -- start seeing some of more of the integrated and larger companies lean in more at that time. We'll start bringing rigs on that time. We still are seeing even with the larger, we are seeing them, making sure they get anytime they're down, they get things back up and looking to complete wells quicker than they had been in the past, but really concerning rig deployment that is more into the private sector. Pierce Norton: And there's one other element, I think is worth mentioning here is that they are really leaning into the efficiency of their drilling and how they're completing at the length of these laterals. So I don't think we need to get too hung up on like the numbers of rigs because the ones that are running, they're really putting a lot of emphasis on how efficient those rigs are to make them more profitable per well. Operator: That concludes our question-and-answer session. I would now like to turn the call back over to Megan Patterson for closing remarks. Megan Patterson: Our current period for the second quarter starts when we close our books in early July and extends until we release earnings in early August. We'll provide details for that conference call at a later date. Our IR team will be available throughout the day for any follow-up. Thank you for joining us, and have a great day. Operator: Thank you. That concludes today's call. You may now disconnect your lines at this time, and have a wonderful day.
Operator: Good day, and thank you for standing by. Welcome to the First Quarter 2026 Generac Holdings Inc. Earnings Conference Call. [Operator Instructions]. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Kris Rosemann, Director, Corporate Finance and Investor Relations. Please go ahead, sir. Kris Rosemann: Good morning, and welcome to our first quarter 2026 earnings call. I'd like to thank everyone for joining us this morning. With me today is Aaron Jagdfeld, President and Chief Executive Officer; and York Ragen, Chief Financial Officer. We will begin our call today by commenting on forward-looking statements. Certain statements made during this presentation as well as other information provided from time to time by Generac or its employees may contain forward-looking statements and involve risks and uncertainties that could cause actual results to differ materially from those in these forward-looking statements. Please see our earnings release or SEC filings for a list of words or expressions that identify such statements and the associated risk factors. In addition, we will make reference to certain non-GAAP measures during today's call. Additional information regarding these measures, including reconciliation to comparable U.S. GAAP measures, is available in our earnings release and SEC filings. I will now turn the call over to Aaron. Aaron P. Jagdfeld: Thanks, Kris. Good morning, everyone, and thank you for joining us today. Our first quarter results reflect a return to strong growth as net sales increased 12% year-over-year with healthy gross margin performance and robust operating leverage. Growth during the quarter was led by a 28% increase in our Commercial and Industrial segment sales primarily driven by continued momentum in the data center end market and the almond acquisition. First quarter adjusted EBITDA margin of 18.3% expanded significantly from the prior year and was stronger than anticipated, driven by strong execution, favorable sales mix and lower-than-expected input costs and operating expenses. Given our first quarter outperformance, the continued strength in our C&I segment, including an increase in projected global data center revenue, and the expected contribution from the acquisition of Enercon, we are raising our full year net sales and adjusted EBITDA margin outlook this morning. Now discussing our performance by segment in more detail. We're continuing to progress through the final stages of vendor approval with 2 hyperscale data center customers, and we are very confident that we'll be able to secure meaningful future volume commitments from these accounts. As previously disclosed, we received a nonbinding notice to proceed for approximately $600 million in 2027 deliveries with a certain hyperscale customer, and we have begun discussing site level specifications for these projects as we prepare to ramp our supply chain and production to meet this accelerating demand. We believe the successful navigation of these rigorous approval processes will solidify Generac as a top-tier global supplier of large megawatt diesel backup power generators in the years ahead. Importantly, we have also realized significant order activity from both new and existing data center customers, increasing our current backlog to more than $700 million, which does not include the anticipated impact of the notice of reset opportunity mentioned above and represents an increase of approximately $300 million since our fourth quarter update in mid-February. This backlog growth provides visibility through 2027 even before considering the significant expected contribution from other hyperscale related opportunities and ongoing momentum with nonhyperscale customers. As we prepare for meaningful growth in large megawatt generator shipments in the coming quarters, our new facility in Sussex, Wisconsin, remains on track to begin production in the second half of this year, supporting the expected increase in our domestic generator manufacturing and assembly capacity for these products to more than $1 billion by the fourth quarter. We believe this expanded footprint will allow us to capture an increasing share of the rapidly growing demand for backup power solutions from large data center customers. And together with our international C&I production base, provides us with unique global flexibility and scale to serve this market. Additionally, on April 1, we completed the previously announced acquisition of Enercon, a leading designer and manufacturer of generator enclosures and switchgear, -- this acquisition enhances our competitive positioning for large megawatt generators by giving us direct access to the design and manufacturing processes that are an important element of the bespoke content included with large megawatt generators. Additionally, our ability to invest in additional capacity for these highly customized genset packages will allow us to solve for a growing industry bottleneck and enable us to better control overall customer lead times for our products. By bringing these packaging capabilities in-house, we expect to expand our margin profile, further improving the profitability for products sold into the markets for these products, including data center applications. In addition, Enercon's expertise in other product categories such as switchgear and packaged electronics controls also enables our participation in interesting adjacent market opportunities, which we are currently evaluating as we fully integrate this business into our C&I segment. During the first quarter, shipments to our domestic industrial distributor channel increased from the prior year and project quoting activity remains solid to start the year. While product lead times for this channel have continued to normalize over the last several quarters, we expect modest growth for the full year, supported by stable near-term end market demand as well as our continuing investments in distribution that are helping to drive market share gains. Order rates from domestic telecom customers improved sequentially during the quarter, providing visibility to better than previously expected growth for the remainder of the year. Our telecom customers continue to invest in further hardening of their networks, as dependence on wireless communications increases and global tower and network hub counts are expected to continue to grow well into the future. Additionally, the evolving telecom and digital infrastructure landscape is expanding our opportunity set with new and existing customers. We are working to leverage our track record of highly engineered solutions, market expertise and customer relationships in traditional telecom applications to capitalize on these opportunities, including data center adjacent applications. Domestic mobile product shipments to both national and independent rental equipment customers exceeded our expectations during the quarter and increased at a strong rate from the prior year. The acquisition of Allmand in January contributed to the strong year-over-year growth and outperformed our prior expectations with respect to both sales and adjusted EBITDA contribution. Many of our rental customers have begun to invest in new equipment as part of a refleeting cycle, and this timely acquisition has both broadened our customer base for mobile products and provided us with additional capacity and flexibility within our domestic manufacturing footprint. Additionally, robust order rates from our existing national rental customers are contributing to our increased overall net sales outlook for 2026. International shipments also increased at a strong rate year-over-year, driven primarily by revenue from products sold to the data center end market, global shipments of our controlled solutions and the favorable impact from foreign currency. Sales increased across most regions, partially offset by softness in the Middle East and Latin American regions, resulting from geopolitical instability and trade policy uncertainty. With the strong start to the year, we are increasing our full year 2026 C&I segment net sales guidance as a result of the increased expectations across our data center, telecom and rental markets as well as contributions from the Enercon acquisition. This is partially offset by softness in certain international regions as previously mentioned. We now expect C&I segment net sales to increase in the mid- to high 20s percent range, which represents an increase from our prior guidance for growth in the low to mid-20s percent range for this segment. And now I'd like to provide an update on our residential segment for both the quarter and the year. At our Investor Day in March, we introduced Generac Home a new organizational structure within our residential segment that brings together our home standby, portable generator and energy technology teams into a single group. As our residential backup power and energy technology solutions are increasingly integrated, this combination enables us to better leverage synergies across our product development, supply chain, operations, sales and marketing and customer service capabilities. The unification of these teams will allow us to further streamline our software platforms to better serve our customers as well as accelerate the development of products and solutions to help homeowners solve for the increasingly -- increasing power reliance, resiliency and cost challenges they are facing. Importantly, the efficiencies resulting from this new structure reflect the continued recalibration of our clean energy operating expenses and are expected to enable cost savings that support our projected residential segment adjusted EBITDA margin expansion in the coming years. We've already begun to realize these benefits, as evidenced by the expansion of our residential segment EBITDA margins by nearly 500 basis points as compared to the prior year first quarter, driven largely by lower operating expenses in the current quarter. Looking at our first quarter residential segment results in more detail, home standby generator sales were approximately flat from the prior year with higher pricing offsetting lower volumes as compared to a strong prior year period that included the benefit from an active 2024 hurricane season. The current quarter's performance was slightly ahead of our expectations as we experienced stronger-than-anticipated demand following winter storm firm. This event and the related media coverage preceding it helped drive awareness for our products, resulting in strong year-over-year growth in home consultations for home standby generators and higher shipments of portable generators. However, despite the elevated outage activity from winter storm firm, overall power outage activity for the first quarter was approximately in line with the long-term baseline average. Activations or installations of home standby generators declined as expected from the first quarter of 2025, primarily driven by markets that were impacted by elevated hurricane activity in the second half of 2024. We expect activations will return to growth in the second half of this year, underpinned by our assumption for a return to a more normal baseline average power outage environment as compared to the exceptionally soft outage environment experienced in the second half of 2025. Our residential dealer network expanded further during the quarter and now includes more than 9,500 dealers, representing an increase of approximately 300 from the prior year. Continuing interest in the home standby category from these partners provides us with further confidence in the significant growth opportunity that remains for home standby generators as contractors continue to see value with their involvement in the category. Additionally, as we continue to integrate the teams within our new Generac home organization, we intend to also unify our distribution networks with the goal of providing homeowners and channel partners greater access to a wider range of home energy solutions with enhanced service and support capabilities. First quarter sales of our residential solar and storage solutions decreased from the prior year as expected following the successful completion of our Department of Energy program in Puerto Rico. Throughout the quarter, we continued to execute against our plan of ramping production of Power Micro, the first Generac branded microinverter product with a contract manufacturing partner here in the U.S. The Power Micro product offering is expected to deliver strong gross margin contribution as sales increase throughout the second half of 2026 and into 2027. The attractive margin profile for these products, together with our ongoing focus on operational efficiencies and within the new Generac home structure are expected to contribute to our longer-term residential segment margin expansion. A significant focus for the Generac home business is to market and sell our differentiated residential energy ecosystem with ecobee positioned as the energy management hub of the home. An important metric, Ecobee's connected home count grew to -- continued to grow in the quarter to more than 5 million homes with service attach rates further increasing and providing us with a growing high-margin recurring revenue stream to complement Ecobee's expanding hardware market share. Profitability continued to improve as well with Ecobee delivering its first positive adjusted EBITDA during the first quarter, which is normally a seasonally softer quarter for these products. We are expecting continued strong growth in Ecobee shipments for the full year 2026 and as a result, we believe the benefits of a scaling top line, together with a strong gross margin profile and disciplined operating expense investment will support continued improvement in profitability into the future. In closing this morning, our first quarter results and increased 2026 outlook provide an early look at the significant earnings growth potential of our business given the dramatic sales increase in our C&I segment, healthy gross margin performance and realization of strong operating leverage. Based on our continued progress in porting multiple hyperscale data center customers, combined with the improved competitive positioning and profitability resulting from the recent Enercon acquisition, our confidence in capturing a growing share of the generational growth opportunity in the data center market has only increased. Additionally, the megatrends of lower power quality and higher power prices remain firmly intact and continue to support long-term growth expectations for our Residential segment, highlighted by the $50-plus billion penetration opportunity that we believe exists for home standby generators. We remain guided by our powering a Smarter World enterprise strategy, and we believe that we are on the cusp of a special moment in the history of Generac as a result of the more balanced growth drivers we're experiencing across our entire business. With that, I'd now like to turn the call over to York to walk through some of the first quarter financial results. and our updated outlook in some more detail. York? York Ragen: Thanks, Aaron. Looking at first quarter 2026 results in more detail. Overall, consolidated net sales during the quarter increased 12% to $1.06 billion as compared to $942 million in the prior year first quarter. The net effect of acquisitions, divestitures and foreign currency an approximate 4% favorable impact on revenue growth during the quarter. Residential segment total sales increased approximately 1% to $552 million as compared to $549 million in the prior year. This sales increase was primarily driven by higher portable generator shipments due to winter storm Fern in January 2026. And partially offset by a decline in energy storage system sales due to the completion of our DOE Puerto Rico program. Home standby generator sales were approximately flat versus prior year as higher pricing was offset by lower volumes due to a strong prior year period that included the benefit from a substantial 2024 hurricane season. Commercial and Industrial segment total sales increased approximately 28% to $510 million from $399 million in the prior year quarter, including an approximate 10% net favorable impact from the combination of acquisitions, divestitures and foreign currency. Favorable FX and the Allmand, C&I mobile products acquisition contributed to this inorganic growth, partially offset by 2 small divestitures that closed during the quarter. The core total sales growth for the segment was primarily driven by revenue from products sold to global data center customers. In addition, increased shipments to our domestic industrial distributor and rental channels and higher sales of our control solutions to the global power generation market also contributed modestly to the C&I segment sales growth during the quarter. Consolidated gross profit margin was 38.7% compared to 39.5% in the prior year first quarter. The 0.8% decrease in gross margin was primarily driven by the higher mix of C&I sales in the quarter, partially offset by favorable price/cost realization. As compared to our prior expectations, we experienced better-than-expected sales of our higher margin home standby generators following winter storm Fern. This favorable sales mix, together with strong execution and lower-than-expected input costs, supported our first quarter gross margin outperformance relative to our previous guidance. Operating expenses increased $4.6 million or 2% compared to the first quarter of 2025. The increase was primarily driven by higher intangible amortization from the Allmand acquisition. Importantly, we were able to realize strong operating leverage on higher shipment volumes while also capitalizing on operational efficiencies by recalibrating our clean energy spending as part of our Generac Home reorganization. To that end, OpEx as a percent of sales, excluding intangible amortization expense, improved from 27.9% in Q1 of 2025 to 24.8% in Q1 of 2026. Overall adjusted EBITDA before deducting for noncontrolling interest, as defined in our earnings release, was $193 million or 18.3% of net sales in the first quarter as compared to $150 million or 15.9% of net sales in the prior year. As just discussed, the improved operating leverage on higher sales volumes coupled with reduced residential OpEx drove the significant increase in adjusted EBITDA margins versus prior year. Importantly, this represents strong outperformance compared to our prior expectations helping to contribute to our higher full year 2026 guidance that I will discuss shortly. Adjusted EBITDA for the Residential segment was $139 million or 25.1% of total residential sales as compared to $112 million in the prior year or 20.3%. This significant margin increase versus prior year was primarily driven by favorable price realization and operational efficiencies from the reorganization of Generac Home resulting in lower operating expenses, partially offset by higher costs from tariffs and commodity prices. Adjusted EBITDA for the Commercial and Industrial segment, before deducting for noncontrolling interest was $67 million or 13.0% of C&I total sales as compared to $45 million or 11.4% of total sales in the prior year. This margin increase was primarily driven by improved price cost realization, the favorable impact of the Allmand acquisition, and operating leverage on higher shipment volumes. Now switching back to our overall financial performance for the first quarter of 2016 on a consolidated basis. As disclosed in our earnings release, GAAP net income for the company in the quarter was $73 million as compared to $44 million in the first quarter of '25. The current year includes a modest noncash loss from the net impact of 2 small divestitures that closed during the quarter as we continue to trend the portfolio of noncore assets. The prior year included a $10 million noncash loss to reflect the change in fair value of our Wallbox investment. GAAP income taxes during the current year first quarter were $23.6 million, or an effective tax rate of 24.4% as compared to $14.2 million or an effective tax rate of 24.3% for the prior year. Diluted net income per share for the company on a GAAP basis was $1.24 in the first quarter of 26% compared to $0.73 in the prior year. Adjusted net income for the company, as defined in our earnings release, was $106 million in the current year quarter or $1.80 per share. This compares to adjusted net income of $75 million in the prior year or $1.26 per share. Cash flow from operations was $119 million in the current year quarter as compared to $58 million in the prior year first quarter. And free cash flow, as defined in our earnings release, was $90 million as compared to $27 million in the same quarter last year. The strong increase in free cash flow was primarily driven by higher operating earnings and a lower use of cash for working capital as compared to the prior year. From a use of cash standpoint, we closed the Allmand acquisition in January 2026 by funding the $123 million purchase price in cash. Subsequent to March 31 quarter end, we closed the Enercon acquisition on April 1. We funded the $122 million initial purchase price with $77 million in cash and $45 million in stock. Total debt outstanding at the end of the quarter was $1.32 billion, resulting in a gross debt leverage ratio at the end of the first quarter of 1.7x on an as-reported basis, which is within our target gross debt leverage range of 1 to 2x adjusted EBITDA. With that, I will now provide further comments on our updated outlook for 2026. As disclosed in our earnings release this morning, we are raising our full year 2026 outlook for net sales and adjusted EBITDA given further momentum across certain C&I end markets, the acquisition of Enercon and our first quarter outperformance. As a result of these factors, we now expect consolidated net sales for the full year to increase at a mid- to high teens rate as compared to the prior year, which includes an approximate 2% favorable impact from the net effect of foreign currency, acquisitions and divestitures. This net sales update compares to our previous guidance of growth in the mid-teens percent range over the prior year. This increased net sales growth expectation is driven entirely by the C&I segment with net sales for this segment now projected to increase in the mid- to high 20% range compared to 2025, an increase from our previous range of low to mid-20% growth as disclosed at our Investor Day in March. Incremental sales from additional data center projects, higher shipments into our rental and telecom channels and the Enercon acquisition are all contributing to this updated guidance for C&I segment net sales. For the full year, significantly higher data center revenue is expected to be the main contributor to our C&I segment organic growth, while the net effect of foreign currency, the Allmand and Entercon acquisitions, and 2 small divestitures that closed in the first quarter of 2026, are anticipated to have an approximate 5% favorable impact versus prior year. Our Residential segment net sales guidance remains consistent and is still expected to increase in the 10% range compared to the prior year. Growth in home standby generators is expected to be the primary contributor to this net sales growth during the year, in particular in the second half of 2026 and given a relatively easier prior year comparison that included a very low power outage environment. Consistent with our historical approach, this guidance assumes a level of power outage in with the longer-term baseline average for the remainder of the year and does not assume the benefit of a major power outage event during the year. From a seasonal pacing perspective, we now expect first half sales to be approximately 45% weighted and sales in the second half approximately 55% weighted, resulting in second quarter consolidated net sales growth in the approximate 9% to 10% range, driven entirely by the C&I segment. Year-over-year net sales growth is expected to accelerate in the second half of the year, given expected continued data center strength and an easier prior year comparison for the residential segment that included very low power outage activity. Looking at our updated gross margin expectations for the full year 2026. We now expect gross margin percent to increase approximately 50 basis points from our previous expectations, resulting in full year 2026 gross margins in the 38.5% to 39.5% range. This improved gross margin outlook is driven primarily by our first quarter outperformance and and the margin accretive impact of the new Enercon acquisition. From a seasonality perspective, we now expect gross margins to be more level loaded throughout 2026. Importantly, this updated guidance excludes the future impact of any potential tariff recovery as a result of the recent Supreme Court ruling related to EPA tariffs. Additionally, our outlook assumes that the removal of the EPA tariffs will get fully offset by a new tariff framework made up of incremental section 122, 232 and 301 tariffs. As a result, and given that the trade policy landscape remains dynamic, our assumptions around overall tariff rates remain consistent with our prior guidance. Given the factors outlined in our net sales and gross margin update, we are increasing our guidance range for adjusted EBITDA margins to 18.5% to 19.5%. This compares to our previous guidance range of 18.0% to 19.0%. We expect second quarter adjusted EBITDA margins to increase modestly relative to second quarter 2025 levels in the 18% range before improving sequentially in the back half of the year, reaching approximately 20% in the fourth quarter of 2026. This sequential second half adjusted EBITDA margin improvement is projected to be driven primarily by stronger operating expense leverage on seasonally higher sales volumes in the second half of the year. As is our normal practice, we will also provide, we're also providing additional guidance details to assist with modeling adjusted earnings per share and free cash flow for the full year 2020. Importantly, to arrive at appropriate estimates for adjusted net income and adjusted earnings per share, add back items, add back items should be reflected net of tax using our expected effective tax rate. For full year 2026, our GAAP effective tax rate is expected to be between 24.5% to 25.0%. We now expect interest expense to be approximately $65 million for full year '26 down from $65 million to $69 million previously expected, assuming no additional term loan principal prepayments during the year. Lower borrowings during the year are the primary driver for this reduction in interest expense guidance. Our capital expenditures are still projected to be approximately 3.5% of our forecasted net sales for the year, slightly elevated from historical levels as we continue to invest in incremental capacity and execute other projects to support future growth expectations, particularly for C&I data center products. Depreciation expense is now forecast to be approximately $108 million to $112 million in 2026, an increase from $104 million to $108 million previously expected, primarily due to slightly higher CapEx guidance and recently closed acquisitions. GAAP intangible amortization expenses in 2026 is now expected to be approximately $112 million to $116 million during the year, up from $108 million to $112 million previously expected primarily due to updated assumptions around recently closed acquisitions. Stock compensation expense is still expected to be between $54 million to $58 million for the year. Consistent with prior guidance, operating and free cash flow generation is expected to be weighted toward the second half of the year in 2026, resulting in projected free cash flow generation of approximately $350 million for the full year 2026. Our full year weighted average diluted share count is still expected to be between 59.5 million and 60 million shares in 2026. And finally, this 2026 outlook does not reflect potential additional acquisitions, divestitures or share repurchases that could drive incremental shareholder value during the year. This concludes our prepared remarks. At this time, we'd like to open up the call for questions. Operator: [Operator Instructions]. Our first question comes from the line of Tommy Moll with Stephens. Thomas Moll: Aaron, you referenced the $600 million nonbonding notice to proceed, which was also discussed at the Investor Day. I'm just curious if you can share anything about how the product testing and pilots are going there. And then related, the accompanying service capabilities don't get a ton of air time. but you did mention it at the Investor Day. And I'm just curious, is that also potentially a gating factor here? Do you need to staff up a lot with Generac folks to enable those capabilities. Aaron P. Jagdfeld: Yes. Thanks, Tommy. So yes, the notice to proceed that we talked about at Investor Day and we mentioned again this morning, that's from one of the hyperscale customers that we continue to negotiate with and I would -- maybe the best way to characterize it, Tommy, is if this was a 100-yard dash. We're like 99 yards of the way done with the race. We've got one yard left. We're in the final stages with the final agreement. There's a process, it's a gauntlet. I mean, there's literally a hurdle for every step along the way here. But all of the everything from product quality to supply chain visits, our factory visits, the audits that they put us through internal and external. We continue to march through the process and we're passing all of those gates as we go. And we really are at the very last yard of this race, this 100-yard race. So we feel really good about it. And as such, we're into -- we mentioned this in the prepared remarks, we're into discussions about the specifics around certain sites, which sites would we see next year as part of that MTP, the notice to proceed, and we're preparing accordingly. On that point, maybe transition to the second part of your question was service. This is obviously an area that as we deploy equipment to these large project areas, we need to make sure we're appropriately staffed. I think one of the great things about our industrial distribution network is over the last 5 or 6 years, we've been in -- we've talked about the investments we've made there. Some of those investments have come in the form of acquisitions. And today, we own about 30% to 35% of of our industrial distribution network here in the U.S. And we continue to work with our partners on staffing to appropriate levels. to serve the market. I mean, obviously, the ability to react to any kind of service situation is critical. And again, I think we're -- we feel like we're in a really good spot there. given our own ownership and our appetite to continue to invest and hire people as needed as the sites get deployed. Operator: Our next question comes from the line of George Gianarikas with CGF. George Gianarikas: As you look to scale hyperscale demand, I mean, how are you derisking your engine supply chain. And what sort of multiyear capacity guarantees have you secured? And maybe more specifically, any exclusivity frameworks you have to ensure that the supply remains an advantage to Generac? Aaron P. Jagdfeld: Yes. Thanks, George. Obviously, an important question in this whole effort around data centers is supply chain based, right? And it's not just the engine, although the engine, of course, is is critical, but it's alternator supply, it's cooling package supply. It's the end packaging of the product, which we're -- with our Enercon acquisition that we closed on April 1, we're taking a big step forward there trying to solve for what is becoming a fast becoming a bottleneck in the industry around finished packaging. Even if we can get great lead times on the unpackaged product, it doesn't help us if the packaging phase is constrained. So that was a big part of the thesis, our calculus in acquiring Enercon, and we look to expand that operation as well pretty aggressively here so that we can control those lead times. With respect to engines, maybe directly to your question there, we have a multiyear agreement in place with our current engine supplier, our large diesel engine supplier. That agreement allows us to have exclusivity. Here in the U.S., there are a couple of small exceptions to some legacy customers there, but nothing that I would say any of those small customers are going to be able to get through the gauntlet, at least with hyperscale customers, we don't foresee that at all. Engine supply, we feel really good about our engine suppliers capacity and their ability to not only produce at the kind of scale that is going to be needed with the volumes that we're talking about with these hyperscale customers and non-hyperscale customers, but also their appetite to continue to invest and the footprint that they have, the global footprint they have and the ability to expand that footprint as needed. So we're talking to this -- the engine partner about potential production of these engines right here in the U.S. at this point. So it might even be something cohabitated with us on some kind of joint investment. We're not exactly sure at this stage. Right now, there's plenty of capacity in place. So we feel really good about that. And we're really working to solve kind of the next level of capacity constraints in supply chain around alternators, cooling packages. We're multi-sourcing those critical components as well. And we feel like the supply chain for those other critical components, if they don't already have the capacity added, they have really good plans to add it as we enter 2027 and beyond. So at this stage of the game, we feel like we're in pretty good shape. But it's -- supply chain is something that's not 100% inside of our control. So obviously, that's something we have to keep a close eye on. I'm very pleased, though, with our team's engagement there. It's an area of strength for Generac historically, just working with supply chain, developing deep partnerships focusing on capacity adds where needed and getting ahead of it. We don't wait to react. We try to be proactive. And so I feel like those -- we're covering those bases as well as we can today. And we're basically kind of coiling the spring here as we get ready to get into the fourth quarter, back half of this year and really into 2027 really driving to the next level with the data center products. Operator: Our next question comes from the line of Mike Halloran with Baird. Michael Halloran: So on the non-data center side of the C&I piece, maybe just talk us to what you're seeing from a sequential and then how the rest of the year should play out on the kind of core rental telecom and then traditional C&I type categories. And then related layer in how the new product categories from a power range that you're bringing to bear, how those are early receptivity of those products into those markets? Aaron P. Jagdfeld: Yes. Thanks, Mike. Yes, the balance of our -- the amazing thing is the balance of our C&I business is also -- it's -- as we indicated, over the last couple of quarters, we were starting to see signs of nice recovery or growth in telecom as an example, which really began in kind of in earnest in the fourth quarter of last year and has continued to pick up steam here in early 2026, really kind of outpacing expectations on order volume giving us good confidence as part of the guidance raise here for the balance of 2026 and the C&I segment is coming from telecom. The other area is rental. It's interesting, I kind of had an epiphany, it's probably not in the [ Pifany,] it's probably too strong I'm overstating. But driving by one of these data center construction sites, there's actually one going up right next door to our Beaver Dam, our new Beaver Dam manufacturing plant. And when I was kind of taking a drive through that last year, and it's right next door, I was struck by just how much of our mobile equipment and the type of equipment that we build is on that site in light towers, mobile generators, for temporary power, temporary lighting and temporary heat even in the cold Wisconsin winters to keep construction going and construction does go, it goes 24/7 on these sites. And so it's really no surprise that what we're seeing and hearing from our rental customers, starting with our national rental customers is that the refleeting cycle really has begun. And we've been waiting on it to begin about 18 months here. It's been -- we've kind of been on the backside of that, and it's starting to kick up. And fortuitously, we had been negotiating for the Allmand acquisition and we closed that deal on January 1 as we announced, and it's just the timing couldn't have been better. We've seen just a really nice response there. That business has outperformed on top line and bottom line. And the combination of that business, our business historically was focused on national rental account customers, which typically have a little bit lower gross margin profile because they're buying in bulk, whereas the almond business was really focused on the independent rental channel, so it was a great complementary fit for us from a distribution standpoint, and it also gave us some much needed capacity. They have a nice big factory in Nebraska. And so the combination of our factory here in Wisconsin and that factory in Nebraska give us some great capacity for serving what is a growing market. Our core C&I business, the industrial distributor business has been good. Our quote rates remain pretty strong. I would tell you, I'll remind you that as we've talked over the last really 4 or 5 quarters, we've been working down our backlog there and shortening up our lead times, and we've kind of caught those now, continue to grow, albeit not at the same rate we were growing previously for those core markets. And then I think maybe the last point of your question, Mike, was around these larger machines kind of taking those to market through our traditional channels, that's been very well received. The sales cycles are very long, especially in the traditional market. So we've only started to realize the first couple of orders coming through the pipeline here. But just this week, we had an engineering symposium conference in [indiscernible] with over 200 -- I think it was like 220 engineering firms represented and it's an opportunity for us to talk about the expanded product line. One of the shortcomings of Generac historically in the C&I markets, has been our product line stopped at 2 megawatts. So now having a product line that goes to 3.2, 3.25 megawatt and then we've got an expansion of that even further to 4-megawatt on the drawing board makes us a full-line provider and it really takes away any final excuses that specifying engineering firms may have had not to specify us by name, either because they were concerned that they couldn't just it have to put us on certain specs and not on all specs because we didn't have a full product range, that's been completely eliminated now. So really good receptivity there, and we're expecting big things out of that product range in our traditional markets in the years ahead. Operator: Our next question comes from the line of Jeff Hammond with KeyBanc Capital Markets. David Tarantino: This is David Tarantino on for Jeff. Maybe switching to residential. Could you give us some color on the strength in margins here? It sounds like there was some favorable mix here. But could you parse out anything unique to this quarter? And maybe how sustainable this level of margin is moving forward? Aaron P. Jagdfeld: Yes. Maybe I'll start and then maybe York can chime in, too. The margin improvement there was pretty dramatic. It was 500 basis points of EBITDA margin expansion over the prior year. And a combination of 2 things. I mean, it was primarily driven, as we said in the prepared remarks, though, by just better cost control, I would say, as we have brought together our teams there under the Generac Home the on residential, on home business that we've referred to. It's really helped us leverage our team members more efficiently across that business. We built a world-class team in our Energy Technology business. And look, the market has shifted, right? It's -- it's moved based on policy, based on continued high -- persistently high interest rates and some other things that have been presented headwinds to that market. We believe that, that long term is still a good business opportunity as retail energy prices continue to rise. I mean there's no question that self-generation, self-storage, that cost containment for homeowners and businesses around electricity rates in particular, is that's going to become a headline story here. It's already moving into the headlines. So we like that business. But the reality of it is it's softer right now because of where the market's at. And so being able to leverage that team, this world-class team that we've built and moved that into our traditional residential business or what we refer to as consumer power around portable generators and home standby. It's been a great move. We've been able to get a lot out of that team -- we've been able to get some early wins here on cost containment. That's really the primary driver for a big chunk of that improvement in EBITDA margin, and you should expect to see that going forward, Dave. We also had some gross margin improvement there as well. And maybe I'll let York just maybe chime in a little bit around that. York Ragen: Yes. No, like you said, probably about 3% of that 5% improvement was the OpEx side that Aaron just talked about, the remainder is the gross margin improvement that we saw with residential. We still continue -- will -- we did -- our home standby shipments. We did see strong demand following winter storm Fern, a little bit of favorable mix there relative to prior year, but we still are seeing positive price cost here in the quarter for the residential segment. If you recall, so we rolled out pricing probably in more Q2 of last year as a result of higher input costs and tariffs. And then as we rolled out our next-gen home standby in the second half of last year, -- we -- with the added features to that product offering, we did roll out additional price with that new product offering as well. So the combination of the higher input costs and the rollout of the new model allowed us to roll out additional price. And we saw that reading through here probably more than the cost is coming up. So still favorable price cost on the residential side that we're pleased with. Operator: Our next question will come from the line of Brian Drab with William Blair. Brian Drab: I just wanted to ask about the standby business at the moment. I think I gathered that you said it was flat in the first quarter. And then I heard a comment that the second quarter growth would be driven entirely by C&I, but I think you're still modeling for the year. I don't know if you restated it today, but you're thinking like mid-teens growth for the standby business for the full year in '26. Is there a significant ramp in the second half that you're expecting? I know there's easy comps with the weather. But can you just talk about if there is a ramp and what drives that? York Ragen: I guess, things, sorry, Aaron, I'll start and then you can maybe follow, but the Winterstorm firm Fern did help some of the residential side in Q1, we're not modeling any -- I guess, we're just modeling baseline weather for Q2. But yes, normal seasonality would have the second half sequentially increasing first half, second half. That's just normal seasonality. And then when you're looking at year-over-year growth in the second half, there should be -- you should see significant home standby growth because we just didn't have a season in '25, second half '25. So basically, the 15% home standby growth that you're referring to or overall 10% for the residential segment will come in the second half for the most part. Aaron P. Jagdfeld: And a good chunk of that is there's price as well, but half the growth in 2026, Brian, is price. With the new product line we introduced the higher price there. So that's part of the equation. But as York said, that return to base that assumption that we returned to baseline normal outage kind of long-term outage environment is a big assumption for the second half. But we start off the year well. Winter storm Fern was a nice kick. We had a lot of -- we saw a lot of interest in terms of sales leads in Q1. We'll see what conversion looks like here as we get into Q2. It's kind of the first real test for us of our new pool our lead pool system. So we're modeling Q2 off of our historical close rates when we get an influx like that. So we'll see if that holds or if it's better, maybe it will be better. We're not sure yet at this point. We've got to watch the read through. But it's a good start to the year. And as York said, we feel like with the easy comps in the back half, that we're going to see growth. We see really nice growth in the second half with Home Standby particular. Operator: Our next question comes from the line of Stephen Gengaro with Stifel. Stephen Gengaro: Two kind of connected topics for me. The first is, how should we -- and I know you kind of gave the full year guide for the company. How should we think about sort of the C&I margin progression, given obviously the strong growth that we're seeing. And maybe attached to that. I know it's early, but based on what you're seeing in order fall and you talked about the nonbinding notice, do you think growth rates in that business can remain in the teens plus into '27? Aaron P. Jagdfeld: Yes, thanks, Stephen. Maybe I'll take the first -- or the second part of the question I let York kind of tackle the margin progression because there's some there's a lot of moving pieces in that, but a lot of that is coming from leverage that we're going to get on the OpEx line. But in terms of the -- just the growth rates there, obviously, we put some aggressive targets out there and long-term growth rates at the Investor Day, but -- and the growth rates here near term are even better just given the the incremental nature, right, like we're going from almost from 0 to the kind of the $700-plus million backlog that we've talked about, right, in converting that backlog over the course of this year and next, in particular, and then the hyperscale opportunities that haven't been reflected in that backlog. And the notice to proceed of $600 million is a good representation I think, of the kind of volumes that are -- the potential that's there in terms of growth rates. I think the answer to your question, Stephen, though, is somewhat highly linked though to the CapEx spending assumptions for for data center buildout. And so it really depends on where you kind of land on the spectrum here. And I will say this, and I think it's easy -- and you got to be really careful in situations like this because it's easy to talk yourself into all kinds of things. But every single conversation we have, and it's up and down the line, it's not just the data center customers themselves, but it's the developers, the other component suppliers that are feeding this. Obviously, here in Wisconsin, we have the benefit of having a few other companies that are also feeding the data center market with products as OEMs and so just kind of comparing notes, right, just sharing notes. It's -- I think most, if not all, of these, I guess, forecast -- this is going to be more than a multiyear run. And the kind of impact that AI is going to have on businesses and on kind of society at large, I think we're just at the very early innings of that and starting to see some of the power of this and what it can do. And as that takes root, the need for data center capacity is just going to be -- is just going to grow. And so we feel really good about our longer-term growth rates. And then maybe I'll kick it to York just on the margin progression. If there are any comments there, York you want to make. York Ragen: Yes. Just to follow up on the growth rate. So if you recall in our Investor Day back in March, we did have guide a 3-year CAGR for our C&I segment of low to mid-20% range. I think obviously, we've got some visibility to the 2027 numbers with that notice to proceed that Aaron talked about as well as the backlog that we -- the $700 million of backlog that we have that will spill some of that will spill into -- so we have at least clear visibility there and we're feeling good about the growth rate. The margin progression, you're obviously seeing it here in Q1. You're starting to see that. A couple of comments there is the Enercon acquisition, which really starts April 1, that's when that closed. That should actually -- with the vertical integration and the margin profile of that and getting the margin stack of that business on top of the margin -- the data center margins that we were guiding previously, that's actually going to give us about a 50 basis point lift to our -- to the C&I segment. EBITDA margins or gross margins. So that's good. And then again, as you grow low to mid-20% CAGR over the next 3 years, you start really leveraging the OpEx infrastructure that we're building to support the data center initiative and you should start seeing more mid- to high-teens EBITDA margins in the out years in that 2028 when you get out into 2028. So continued margin margin growth for C&I is expected as you grow dramatically on the top line. Operator: Our next question comes from the line of Praneeth Satish with Wells Fargo. Praneeth Satish: So the release in there, it references a potential multiyear hyperscale agreement. Is that referring to the same customer behind the $600 million notice to proceed that was discussed at the Investor Day, potentially extending that order. Are you signaling a separate hyperscale hyperscaler opportunity, just trying to get some more detail on the opportunity set? And then just very quickly, can you confirm whether you've included the impact of the new Section 232 rules on steel in the guidance? Aaron P. Jagdfeld: Yes. I'll take the first part of your question, and then I'll let York tackle the tariff assumptions. Yes, Praneeth, we're really -- we're in conversation with 2 hyperscale customers in particular. And both would be -- we would assume would present multiyear opportunities for us. The agreements themselves, there's kind of a master supply agreement. And then once you get past that, you're officially added to the approved vendor list and then they can cut POs. So -- and each customer has a different approach to that in terms of giving you a forecast. And then those POs that would be with that. But because the planning cycles are so long on these projects, and because lead times have been stretched in our industry anyway, our lead times may be shorter, but industry lead times are longer. Many of the planning cycles they're already looking at, in some cases, 2028, and beyond because the traditional supply base for these backup systems are constrained. And so the visibility we have -- right now, it's limited to 2027. We hope that, that -- we'll get better visibility to that as we kind of get through this final stage of negotiations with these 2 customers. The customer that we are working with that we've got the notice to proceed with is the customer that were closest to the finish line. But I would say the other customer is close behind. There's just a few more steps there that we have to work through. But both of them and the volume numbers that they've kind of talked to us about in preparing us for being able to be a supplier they're significant. And I think we're already turning our attention to what do we think about for the next leg of capacity growth because we're trying to accelerate our Sussex facility ramp here into Q3. We originally slated it as Q4, trying to pull that in, so that we've got an opportunity to maybe even do some of this in the fourth quarter. But we're going to need it's the old jaws phrase, we're going to need to be -- build a bigger boat. If we need a bigger boat if we're going to win both of these accounts because that's not in our our current capacity capability today, we would definitely have to add more. So -- and then I'll kick it to York on the tariff question. York Ragen: Yes. On the 232, obviously, with the EPA reciprocal tariffs getting overruled by the Supreme Court that would be a savings to us. But with the Section 122 at least temporarily in place. And then to your question, the 232 steel aluminum tariffs, the way we've modeled it is that we're assuming that that just offsets any EPA tariff savings. So it's not going to be detrimental to our run rate margins. Currently, as they're stated today, there's some benefit, but there's some uncertainty as to sort of what 232 tariffs will be in the second half, with 301 tariffs will be in the second half. So we've just assumed that in the outlook that we've presented today that we're just being consistent with the tariff rates from our previous guidance. So not any worse, not any better, which probably is a conservative view here. Operator: Our next question comes from the line of Christopher Glynn with Oppenheimer & Co. Christopher Glynn: Just wanted to go back to the residential margin upside. Curious clearly sounds like it came in ahead of your expectations wonder if that was the speed of the unification benefits or kind of the scope of the cost structure opportunity? It sounds like maybe those 3 percentage points OpEx maybe a way point and a point in time that you continue to build off of. And really just kind of trying to tie into the 50 basis points boost to the EBITDA margin guidance. It seems like what you delivered in the first quarter. Residential EBITDA margins is really considered pretty modestly in the full year guide, especially since first quarter is the seasonal mix low for residential. York Ragen: Yes. I mean I can I can start with that. Yes, so if you look -- if you factor in what do we factor in the updated margin guide, the extra 50 basis point improvement in gross margins. You're right, it's the outperformance in Q1. And then the margin accretion from the Enercon acquisition that I mentioned that will help impact improved margins for Industrial. We, for the most part, are holding everything else again, that tariff assumption that I just gave on the previous question. Obviously, the mix elements there, we've taken up with taking up C&I, you'd expect actually expect it to mix down, but there's a little bit of improvement that we've baked in to offset that. So we're basically holding Q2, Q3, Q4, outside of our margin profile, outside of those other the Q1 beat and the Enercon acquisition. Aaron P. Jagdfeld: Yes. And then maybe on the residential OpEx, Chris, just to put a finer point on that. I mean there's some really good things going on there. I mean unification has happened quickly. That was a process we began evaluating last year and really accelerated the combination as we got in here into 2026. And so there's clearly -- that is having an impact. I would also say we're on the backside of some of those new product introductions with the Power Micro, now getting into market ramping there. And then Power cell to also in the market. So some of the the hard core development work being done last year on those projects is tapering. And then on the software side, like everybody else, we are benefiting from the trends in coding around AI and just not needing the intensity of head count there to produce productivity is up dramatically. And that's certainly helpful. So I mean it's a combination of those areas that is helpful. And I think also as you look forward, kind of the other part of your question, I think it's a good jumping off point as we go into 2026 here. We do typically have expenses start to ramp as the season. When you go back to our core business around HSB, home standby and portables, There'll be some marketing ramp and whatnot as we -- as you would normally expect seasonally here. So the raw quantum of dollars will increase, but so does the top line as we've laid it out into the second half of the year. So we feel really good about this, though. I think the Generac 1 Home project. I'm not ready to call it a complete success at this point. I mean, there's still a lot of things we're working through to bring those teams together. But we like what we see so far, and we're getting a lot of leverage out of that combined entity. Operator: Our next question will come from the line of [ Julian Dominsmith ] with Jefferies. Unknown Analyst: This is Tanner James on for Julian. Maybe just a question on what you're seeing for pricing momentum for large diesel gen sets. You spoke to the lead time advantage relative to competitors. You're talking about additional capacity growth and investment. Just prospectively, how should we think about the sequential pricing ex tariffs here into the 27, 28, 29 time frame? Aaron P. Jagdfeld: Yes. Thanks, Tanner. It's a great question. And I'll preface my response by saying, when we laid out our original business case to go into the large megawatt gen set market, historical pricing levels, the ASPs of those machines were lower because we put our business case together in a much less constrained with a much less constrained backdrop of supply. And so as that's changed, and as you would expect, we've seen pricing improve. And that has improved the overall business case for those products. Even with data center customers who buy in large quantities where you would typically assume you'd have margin pressure. And the margins are lower kind of net -- on a net basis, relative to selling a similar machine into more of our legacy traditional market, but they're not dramatically lower. And they're dramatically better than historical margins in the product segment would have been. So we feel good about that. Speaking to the forward ASPs, I think everything that we look at today is that lead times are going to remain constrained for the next several years. And a lot of that is underpinned by continued engine supply constraints. So with our competitive set, they are adding capacity. They've announced those projects and those plans, but it's going to take time to get that online. I do think over time, that probably will find its baseline and normalize -- but at this stage of the game, we feel like there are also opportunities to increase our vertical integration and efficiencies. Again, back to the Enercon acquisition, a part of our calculus there is the opportunity to capture that value with the machine and the math is very good there. As you can imagine, it's not only the ASPs on the gen sets themselves, the bar gensets that have increased, but also the packaged ASPs have increased. And so the opportunity to capture some of that value and bring that through in our gross margins there. is very strong. And so we'll look at other areas as well. And I think as we improve our efficiency and we leverage our footprint here, we think there's probably some other opportunities there to to continue to improve margin on a go-forward basis, but that may be offset by ASP kind of normalizing or even coming down slightly, but we think those gross margins are going to hang in there for the foreseeable future. Operator: Our next question comes from the line of Vikram Bagri with Citi. Vikram Bagri: I have 2 questions, one on C&I and one on residential quick ones. Are you hearing air quality permits for diesel generators as a sort of like a gating factor or a reason for delay in final orders. You talked about potential for next leg of capacity growth, where do you see sort of like the gating factors in capacity growth? You've acquired Enercon, -- so that part is said, would it require any more M&A to expand capacity beyond what you have? And then on residential, you're seeing multiple benefits from at home and expense recalibration I was wondering if you've accelerated the ET energy transition breakeven time line at all, any update on that? Aaron P. Jagdfeld: Yes. Thanks, Vic. Yes. So the C&I question -- in terms of -- I think the question was diesel on permitting, air permitting around some of these bigger projects and I think all permitting, whether you're talking air or water or other things that's become more challenging as communities grapple with the impacts that data centers may have on air, on water, on energy, there are solutions there with respect specifically to diesel backup generators, the option of using a Tier 4 certified solution. There are after-treatment packages that can be added to those projects to further improve the emissions profile -- and in particular, there are some markets where that's required kind of best commercial best available technologies are required either because of the concentration of data centers in a particular market or just concerns around diesel particulate and emissions. So -- but again, there are -- we have projects that we're involved with, where we're discussing site certifications that would include aftertreatment and/or Tier 4 certified product. So there are ways around that. I don't -- we don't see that being -- that's not a showstopper put it that way. That's something that we can solve for. On the capacity question with C&I, that question -- as we look at the future here, we're already looking for ways to expand capacity. As I said before, we've got to be forward thinking here. And we've got to be thinking not about $1 billion in capacity. But $2 billion or $3 billion in capacity. What does that look like? How do we achieve that? Can we get more out of our existing footprint, the footprint inclusive of Sussex, inclusive of what we've acquired with Enercon, but beyond that, we're also looking at other facilities. And where would we cite those facilities? Do we have time to do a greenfield? Do we not? We can buy existing real estate? Can you buy existing companies? To your point, could some of that be solved through M&A. And so we're looking at all those things. Everything is on the table. And I think you will hear from us about those capacity adds as we go forward here and in particular, as we get through these negotiations with these hyperscalers and it becomes more real, we definitely have to take action. So you should see that coming. The residential question, again, I think as you reiterated the One Home project has gone well. We still love energy technology. We just -- the technologies themselves and where we're at in the cycle there, we've got a very competitive microinverter that's in market today, and we're starting to scale. So we're moving from our initial production tooling, which was more of an approved outline. Moving it to a scale line, that's here domestically. We're getting on ABLs for more customers there. We're starting to dabble with some prepaid lease products, so that we can take away additional constraints there. And the market is changing too rapidly. As you know, there's a lot going on here in terms of consolidation of distribution. There's changes in terms of focus with other OEMs that supply either inverter products or batteries into the market. Some of those pivots are the necessity of the current environment. But longer term, look, this is simple math. If electricity retail electricity prices continue to rise. And things like storage costs and electronics costs continue to come down, we're going to see strong demand for these products in the long run is clearly going to be a bumpy 2026 and into 2027, probably for these products in terms of market demand. But we feel we're very well positioned. And when we put that together with our home ecosystem that we're building out, which is differentiated, we feel like we're in a really good position there to capture opportunities and it's a unique market. I think it helps round out our residential segment quite well, and we're very excited about the future. We just have to get through this kind of air pocket in -- at least as it relates to energy technology here in the market over the next, I would say, next year, 1.5 years. York Ragen: And the breakeven time line remains intact for 2027. Aaron P. Jagdfeld: Absolutely. Have not moved on that. Operator: Our next question comes from the line of Keith Housum with Northcoast Research. Keith Housum: Just in terms of the telecom and the national rental trajectory for both of those companies. It appears, obviously, they're both on the upper swing here. Can you just remind us, are these more refresh opportunities or growth within these markets? And then traditionally, when you guys have had an upward cycle, how long do these cycles generally last? Aaron P. Jagdfeld: Yes. Thanks, Keith. Great question. I'll talk to telecom first. Telecom cycles usually go, they're multiyear. And actually, that cycle it tends to follow kind of project build-out. So a lot of it is new build of sites. There is retrofitting of existing sites still available as part of the opportunity with telecom. And this is mostly what's referred to in the industry as outside plant back up. So it's the towers that you'd see along highways, hillsides, things like that or -- and a lot of that is still around the 5G build-out that continues for many of the carriers we're the primary supplier to all the Tier 1 wireless carriers and have been for decades. We customize product for them. We have great response rates from a service standpoint. We're able to work with their engineering and operations teams to create bespoke solutions and then build those at scale. In all honesty, it's a lot like what these hyperscale opportunities are on the data center side, in terms of working with engineering teams and operations teams for bespoke solutions and then turning that into product at scale and then being able to provide the service and support to surround it. It's just obviously a lot bigger factor, form factor and a lot bigger dollars. But telecom is usually a multiyear run. We feel really good about that going forward, a lot of new build there. And then on the mobile side, that's a refleeting cycle, there is some new -- it's new equipment, but the cycle is they'll buy for a couple of years, and then they'll not buy for a year or 2 as they let the equipment kind of age out, they watch very closely their utilization rates, their rental rates, and then they watch the residual equipment value rates as well. And it's kind of -- it's basically math. A lot of the equipment companies -- the rental equipment companies have become very sophisticated in terms of the math that they run and the metrics that they watch. And so they kind of know when they need to kind of hit the gas on spending CapEx to re-fleet so that it's available for the market and where it's supported, obviously, by the metrics that they needed to be supported by. And those typically, those runs can be usually, again, a year or 2 on and generally maybe a year, 18 months off. That's kind of what we saw here in the latest run -- there can be other cycle factors there. I'd just point this out. In the past, we've seen energy cycles as domestic energy production increases that can increase the intensity of the rental market cycle. And we -- I think we're seeing a little bit of that right now. We'll see where that goes here over the next couple of quarters. But everything we're hearing is a lot of the refleeting cycle right now is just the age out of some of the equipment they've had in their fleets. And then obviously, demand is continuing to be pretty strong. Again, you can built around data center construction activity and other activity in the domestic energy production sector. Operator: And I'm showing no further questions at this time. And I would like to hand the conference back over to Chris Rosman for closing remarks. Kris Rosemann: We want to thank everyone for joining us this morning. We look forward to discussing our second quarter earnings results in late July. Thank you again, and goodbye. Operator: This concludes today's conference call. Thank you for participating, and you may now disconnect. Everyone, have a great day.
Operator: Good morning, ladies and gentlemen, and thank you for standing by. Welcome to Wingstop Inc.'s Fiscal First Quarter 2026 Earnings Conference Call. [Operator Instructions] Please note that this conference is being recorded today, Wednesday, April 29, 2026. On the call today are Michael Skipworth, President and Chief Executive Officer; Alex Kaleida, Senior Vice President and Chief Financial Officer; and Sarah Niehaus, Senior Director of Investor Relations. I would now like to turn the conference over to Sarah. Please go ahead. Sarah Niehaus: Thank you, and welcome to the Fiscal First Quarter 2026 Earnings Conference Call for Wingstop. Our results were published earlier this morning and are available on our Investor Relations website at ir.wingstop.com. Our discussion today includes forward-looking statements. These statements are not guarantees of future performance and are subject to numerous risks and uncertainties that could cause our actual results to differ materially from what we currently expect. Our SEC filings describe various risks that could affect our future operating results and financial condition. We use certain non-GAAP financial measures that we believe can be useful in evaluating our performance. Presentation of such information should not be considered in isolation or as a substitute for results prepared in accordance with GAAP. Reconciliations to comparable GAAP measures are contained in our earnings release. Lastly, for the Q&A session, we ask that each of you please keep to one question and a follow-up to allow as many participants as possible to ask a question. With that, I would like to turn the call over to Michael. Michael Skipworth: Thank you, Sarah, and good morning, everyone. We appreciate you joining the call. We believe 2026 is going to be a transformational year for Wingstop and remain extremely confident in the long-term opportunity in front of us. Our focus is on execution. Execution against unique brand-specific strategies, which include strengthening our operations through the Wingstop Smart Kitchen, expanding our reach to new guests and launching our new and highly differentiated loyalty program each of which we believe are structural changes that will drive sustained growth towards our AUV target of $3 million. As I step back and assess the current state of the business, we are making significant progress against our strategic priorities. We are seeing measurable improvements in speed, accuracy and consistency that are being enabled by the Wingstop Smart Kitchen along with early signals that our marketing is reaching new guests and driving deeper engagement. That said, our same-store sales result in Q1 was disappointing and fell below our expectations. As we started the year, domestic same-store sales trends from Q4 carried into the first month of Q1, suggesting more consistency in the trend. However, as the quarter progressed, 2 factors came into play. The first was atypical winter weather resulting in temporary restaurant closures in over 700 restaurants. And secondly, elevated gas prices as a result of the conflict in the Middle East. Not too dissimilar to what we experienced in 2022, rapidly rising gas prices stress the balance sheet of the lower-income consumer that our business overindexes to. As a result, our same-store sales trend worsened during the quarter and resulted in a decline of 8.7%. If you exclude these unusual external factors, performance would have broadly been in line with our expectations. We have updated our full year outlook to reflect our results for Q1 and now anticipate same-store sales to be down low single digits, but we believe our business can return to growth in the second half of the year as these strategies we are executing all come together. While the macro backdrop is masking some of the near-term impact, we can see measurable progress across our key initiatives. Our asset-light, highly franchised model continues to demonstrate its resilience. In the quarter, we delivered double-digit adjusted EBITDA growth, and we opened 97 net new restaurants translating into 17% unit growth. This performance reinforces the strength of our model. Central to our strategies is our disciplined focus on protecting our brand partners' margins and maintaining strong unit economics, which we believe is foundational to sustaining long-term unit growth. And despite the challenging macro backdrop, we saw brand partner margins strengthen in Q1. And we believe this helps reinforce the strength of our development pipeline, a pipeline that remains one of the strongest in the industry, showcasing the durability of our model and confidence of our brand partners who continue to invest in the long-term growth of the brand. We believe we have significant opportunity in front of us to scale Wingstop to over 10,000 restaurants globally. We remain focused on what we can control, and our strategy remains unchanged. Let me start with the Wingstop Smart Kitchen. The West market is a meaningful operational transformation, requiring fundamental changes to how our restaurants execute day-to-day. We are making clear progress in strengthening our operations with improvements in speed, accuracy and consistency across the system. And while the full benefits from our new back-of-house technology have not scaled to the entire Wingstop system yet, we are seeing clear evidence it is working. Last quarter, we discussed the need to focus on Friday and Saturday dinner dayparts, where we see the highest volume of new guests entering the brand, with approximately 50% of new guest trying us for the first time during those windows. Within these dayparts, we are now seeing an approximately 16-point improvement in the number of restaurants hitting our targeted speed of service in Q1 compared to Q4, along with a roughly 5 percentage point improvement in accuracy. Restaurants are driving greater consistency during these peak periods, ensuring we deliver on those moments that matter most for both new and existing guests. In addition, customer satisfaction improved across both digital carryout and delivery in the quarter with delivery improving approximately 17 percentage points in customer satisfaction driven by gains in need and execution. We are also seeing in restaurants consistently achieving our 10-minute speed of service standard. Delivery times are now moving closer to our goal of less than 30 minutes, reinforcing that stronger execution translates into a better end-to-end guest experience. The most pronounced impact is in our lowest performing restaurants, reinforcing that we are raising the floor of performance across the system. This is a significant operational transformation and scaling consistent execution across the system of our size is a deliberate ongoing focus. As we continue to build consistency across restaurants, dayparts and channels, we expect to more fully unlock the demand and conversion benefits of the platform. To further highlight the progress we are making on speed of service, we're targeting a launch of our order ready tracker by the end of Q2 and that is designed to reinforce our speed of service through enhanced communication to our guests and drive measurable impacts in guest satisfaction. This feature directly connects into the Wingstop Smart Kitchen with real-time status updates, guiding the guests through the cook-to-order high-quality experience only Wingstop can deliver. In early testing, the order tracking feature created greater confidence into the guest quote time, better highlighted the craft associated with each Wingstop order and reduced status-related complaints and improved accuracy. The takeaway is clear. When we deliver that high-quality cook-to-order Wingstop experience and execute with speed, accuracy and consistency, we drive stronger conversion, improved retention and incremental sales. As we closely analyze the data, it is what we see in the data and the results that gives us strong conviction in the Wingstop Smart Kitchen as a key unlock for our restaurants. We are building momentum. And as we execute at a high level, consistently across the system, we expect the Wingstop Smart Kitchen to be a meaningful contributor to scaling AUVs towards our target of $3 million. Another key strategy in 2026 that we believe can position Wingstop for sustained growth is the launch of our loyalty program, which we are referring to as Club Wingstop. This is not a traditional discount-driven rewards program. Club Wingstop is built around a simple premise, members eat first. Given our most engaged guests, access, experiences and benefits that go beyond points and discounts. What differentiates the platform is how it enhances the guest interaction through capabilities like group ordering, point sharing and personalized offers that adapt based on behavior. As part of the latent design of this platform, we built an AI-enabled tool that will allow us to achieve personalization at scale. This includes generating hundreds of pieces of content that drive relevant and adaptable messages to specific segments in our database. We have features embedded in our Club Wingstop technology that are designed to strengthen the emotional connection to our brand and drive sustained frequency over time. In our pilot market, we are seeing this translate into improved retention, higher reactivation of lapsed users and increased engagement from our most valuable guests. Engagement is strong, with roughly half of active guests enrolled and approximately 40% of new guests are signing up. Members are also demonstrating higher check and stronger retention relative to nonmembers. Results in our pilot market are being achieved with limited marketing support. And only a partial feature set, which to us reinforces the strength of the platform and the opportunity as we scale. We are preparing for a national launch by the end of Q2, supported by a full 360-degree marketing strategy and a robust pipeline of features, including personalization, merchandise and experiential elements that extend well beyond traditional points-based programs. We believe loyalty will be a meaningful driver over time, particularly as we scale nationally and integrate more deeply into our digital ecosystem. Widening the top of the funnel and capturing our fair share of our demand space is another key priority for us in 2026. We estimate we are capturing only about 2% share in a demand space, we believe we can win a 20% share, highlighting the significant runway ahead, but execution is foundational to this effort. It starts with driving acquisition through brand awareness and innovation, particularly flavor-led innovation, which we know is a key driver of consideration, especially among the consumers we are targeting in our demand space. Our Wingstop is Here advertising campaign is designed to expand the top of the funnel, and we are beginning to see early signs that it is working. New guests are increasingly skewing towards higher income cohorts, particularly in the $50,000 to $100,000 range, one of the fastest-growing segments among new guests we're acquiring. This gives us confidence that our marketing is resonating with a broader audience and is reflective of the opportunity we're targeting in our demand space. Looking ahead, we have a strong pipeline of innovation and marketing initiatives, including continued flavor-led innovation in the next phase of Wingstop is Here, which we believe will showcase the quality and premium experience our guests have come to love. Together with the Wingstop Smart Kitchen and Club Wingstop, these efforts are designed to strengthen acquisition, improve conversion and support sustained traffic growth over time. Another significant factor for building brand awareness and acquiring new guests is what we've been able to accomplish in expansion of our footprint. Our unit growth is supported by the strength of our unit economics underpinning the strong demand from our brand partners. In the first quarter, we opened 97 restaurants globally at a more than 17% growth rate versus the year. As we grow our restaurant base, development itself becomes a demand driver, expanding brand awareness and amplifying the impact of our marketing, reinforcing the flywheel across the system. We continue to scale Wingstop in a disciplined manner and believe our market level strategies will allow us to do so in the most sustainable way. Outside of the U.S., momentum remains strong, with newer markets such as Ireland and Thailand thriving and already delivering attractive unit economics as well as reinforcing the portability of the brand. Looking ahead, we remain on track to enter our largest new market to date, India, in 2026, representing a significant long-term opportunity. What fuels our growth is our brand partners' returns, which we believe are industry leading. It's why we believe addressing near-term challenges for our core consumer should not compromise our long-term fundamentals. That mindset has translated into incredible growth. Since the beginning of 2023, we have opened over 1,000 restaurants and more than doubled system-wide sales to over $5.4 billion on a trailing 12-month basis, all while systematically growing our global pipeline to a record level. While the level of uncertainty in the current operating environment remains high, our path forward and strategies are very clear. We are focused on strengthening our operations through the Wingstop Smart Kitchen, expanding our reach to new guests and launching Club Wingstop, each of which we believe will drive a return to same-store sales growth and further strengthen brand partner profitability and returns. We are confident in the strength of our asset-light model, the resilience of our brand and the significant runway ahead. Together, we believe these position us to scale average unit volumes towards $3 million, expand our global footprint and continue advancing our ambition to become a top 10 global restaurant brand. And it is important to note that none of this would be possible without the dedication of our team members and the continued commitment of our brand partners who are executing every day to deliver a great guest experience and grow the Wingstop brand around the world. With that, I'll turn the call over to Alex. Alex Kaleida: Thanks, Michael, and good morning. Our first quarter results reflect the resiliency of our highly franchised, asset-light model. In a more pressured consumer environment, we delivered system-wide sales growth, double-digit adjusted EBITDA growth and unit growth that well exceeded our long-term algorithm. Development continues to be one of the most compelling proof points in our model and the long-term opportunity to scale Wingstop into a top 10 global restaurant brand. We opened 97 net new restaurants in the first quarter, a 17% growth rate. And with domestic AUVs at approximately $2 million on a roughly $580,000 upfront investment to build a Wingstop, our brand partners are seeing, on average, a payback of less than 2 years. Our unit economics are what drive the demand we see in our pipeline, which is evident in a pipeline that stands at more than 2,200 restaurant commitments under development agreements, and that demand remains broad-based across our brand partners. System-wide sales increased 5.9% to $1.4 billion in the quarter, fueled by net new unit development and more than offset the 8.7% decline in same-store sales. As a result of our system-wide sales growth, total revenue increased 7.4% to $183.7 million versus the prior year. Royalty revenue, franchise fees and other increased $8.7 million to $87.5 million. Company-owned restaurant sales increased by $2.9 million to $33 million, driven by 6 additional corporate stores opened or acquired since the prior year comparable period. Company-owned restaurant cost of sales decreased 110 basis points versus the prior year to 74.9% of company-owned restaurant sales, primarily driven by a 160 basis point decline in food, beverage and packaging costs. Our supply chain strategy continues to provide great visibility and predictability into food costs for our brand partners throughout 2026. With this current operating environment, we are encouraged by how our strategies improved profitability for our brand partners this quarter. SG&A increased $3 million versus the prior year to $34.4 million, primarily driven by a $2.4 million nonrecurring restructuring charge related to the corporate realignment announced in January this year. This was partially offset by lower system implementation costs. We continue to take a disciplined approach with our SG&A investments, ensuring we are investing appropriately in people, capabilities and technology to support our long-term aspirations. Adjusted EBITDA, a non-GAAP measure, was $65.4 million during the quarter, an increase of 9.9% versus the prior year. Q1 net income was $30 million or $1.08 per diluted share, a decline of $62.4 million in net income versus the prior year. This was driven by a nonrecurring gain of $92.5 million recognized in the prior year associated with the sale of our U.K. brand partner, Lemon Pepper Holdings. As we disclosed in Q1 last year, we reinvested $75 million of the proceeds from the sale of LPH into the newly formed entity, which we believe will strengthen returns for shareholders. On an adjusted basis, excluding the impact from this nonrecurring gain in the prior year, earnings per diluted share was $1.18, a 19.2% increase versus Q1 2025. In recognition of our strong free cash flow generation and our commitment to returning capital to shareholders on April 28, 2026 and our Board of Directors authorized and declared a quarterly dividend of $0.30 per share of common stock to be paid on June 5, 2026 to stockholders of record as of May 15, 2026, totaling approximately $8.2 million. On March 11, 2026, the Board of Directors also authorized an additional $300 million available for share repurchases. During the first quarter, we repurchased and retired 374,324 shares of our common stock at an average price of $208.08 per share. As of March 28, 2026, $313.4 million remained available under our existing share repurchase program. Since the inception of our share repurchase program in August of 2023, we have repurchased and retired more than 2.9 million shares of common stock. Our ability to consistently return capital to shareholders remains an important component of our strategy to maximize shareholder returns. Turning to our outlook for 2026. We updated our domestic same-store sales guidance to a low single-digit decline, reflecting what we have seen year-to-date and the more significant pressure on our core consumer from elevated fuel prices. We estimate that higher fuel prices and the unusual winter weather in January which caused a high rate of weather-related restaurant closures contributed to an approximately 4 percentage point headwind to domestic same-store sales in the first quarter. We are also updating our full year SG&A outlook to a range of $146 million to $149 million, which includes $3 million of restructuring charges related to the corporate realignment and $28 million of stock-based compensation expense. Additionally, we are reiterating the following guidance for 2026, global unit growth of 15% to 16% and which is based on the visibility we have into the pipeline today, net interest expense of approximately $43 million, depreciation and amortization of approximately $30 million. As we look ahead, our focus remains on the strategy that will return Wingstop to same-store sales growth, improving operational execution through the Wingstop Smart Kitchen, scaling our new loyalty platform with the upcoming national launch of Club Wingstop, acquiring new guests into the brand and continuing to expand our global footprint. I'd like to close by thanking our restaurant team members, supplier partners and brand partners for their efforts in driving Wingstop toward a top 10 global restaurant brand. With that, operator, please open the line for questions. Operator: [Operator Instructions] The first question today comes from David Tarantino with Baird. David Tarantino: Michael, I was hoping you could help to clarify where you're seeing some of the traffic loss in your business. And it seems like you picked up a lot of traditional quick-service customers during that 2022 to 2024 time frame. And as we got to kind of the middle of 2024 and the environment got a bit tougher for that consumer and quick service restaurants got more promotional. It seems like your business has been decelerating since that point. So I guess the question is, is it that traditional consumer you gain that you're now losing? And I was wondering if there's any tactical response that you could have to stop the bleeding in the bottom of the funnel, so to speak? Michael Skipworth: David, I appreciate the question. I think maybe it's -- the way we're looking at it, it might be somewhat similar to how you phrased the question, but we've talked about over the past year, how much our business compared to other restaurants does over-index a little bit to the lower-income consumer. And so those could be one and the same. And I think what we saw in Q1 was the start of the quarter, we saw some stability within the trend and then obviously, we're hit by a couple of events that were outside of our control. And when we looked at the data, particularly within March, we look back at kind of how our business responded and how our core consumer responded to when gas prices reached similar levels in 2022, we saw a pretty similar reaction this year in March in our business. And so we do think that that's attributed to a little bit of the near-term or more pronounced immediate reaction to gas prices when they reach these levels. But we do see that normalize pretty quickly. And I think we did see that in the trends as we exited the quarter and started Q2. David Tarantino: Great. And I guess the second part of my question, is there a tactical response, maybe a bit more focus on value to be more competitive with that consumer that you appear to be losing, I guess, is there anything you're considering there? Michael Skipworth: Yes, David, I would say we're obviously focused on executing against the strategies that we believe are going to position the brand for this next phase of growth and what's in front of us. But I would say a couple of things. Obviously, with the data that we have and what we know about our consumer we can be very targeted with the messaging that we present. And I think you saw us do that a little bit. And this is really us showcasing existing value that's on our menu and us not necessarily discounting or anything like that or being overly promotional. And we did that in ways of highlighting flavor under $10, where we have our chicken sandwich combo and a tender combo that is incredible value. And we are able to present value not only just through price point, but we think what's really important is to deliver it through quality, through abundance, through the experience. Ultimately, delivering an experience to the guest that's worth it. And so we can do that in a very targeted way. But what we're seeing and what the opportunity for us is really around what we're doing to expand the top of the funnel and bring in new guests. These guests look a little bit different than our traditional guests. And while it might be masked a little bit by some of the macro events that impacted our business in the first quarter, we're really encouraged by what we're seeing. We're seeing some early signs that the strategy is working. We're seeing the highest income cohort growth within the highest income cohort for us is that $50,000 to $100,000. We're seeing improvement in awareness and conversion. And we're actually seeing some really encouraging signals around the reactivation of laps. And so we think the strategies we're executing are working, but where it is important and where it is relevant to showcase value, we're doing that in a very targeted way, but obviously focusing on these strategies that we're executing against that we're really excited about what that could translate to for the back half of the year. Operator: The next question comes from Jeffrey Bernstein with Barclays. Jeffrey Bernstein: Great. First, I just wanted to follow up on that topic regarding the comp trend. You lowered the full year guidance. I think you just mentioned that in April, maybe trends have improved or normalized. So wondering if you could just clarify for us what maybe you're seeing was the exit to the first quarter and maybe what you're seeing in April and whether or not a concern at all related to the return to positive in the second half. It does seem like not necessarily our compare is getting a lot easier. So presumably, you're talking about some initiatives within your control, maybe the loyalty program. maybe what kind of assumption you're assuming for that loyalty program. But April and then kind of your confidence in turning back to positive in the back half of the year, kind of the biggest drivers? And then I had one follow-up. Michael Skipworth: Jeff, yes, we did see an improvement in the trend to start Q2. And I'll tie back a little bit to my previous comment around a little bit of that more pronounced near-term reaction to fuel prices, and that does normalize pretty quickly. But we saw an improvement. And I think as we updated our full year we obviously took into consideration our actual results for Q1, but we did adjust down our expectations for Q2, which are somewhat related to our expectation of some near-term pressure on the consumer with elevated gas prices. Obviously, it's extremely difficult for anyone to predict this macro environment that we're in. But what we're really focused on, Jeff, is we are seeing some really positive signals in our business, whether it's as it relates to Smart Kitchen, we talked about that Friday and Saturday night daypart that we're focused on, we saw a 16 percentage point improvement and the number of restaurants that are delivering on that 10-minute speed of service on Friday and Saturday night. Our bottom quartile of restaurants, we saw a 3-minute improvement in overall speed within those and we're measuring significant progress and improvements within guest satisfaction scores. All strong signals that give us a lot of excitement and confidence about the impact that Wingstop Smart Kitchen will have on our business over time. I mentioned the marketing. We feel like our marketing is resonating. We're seeing reactivation of laps. We're seeing that fastest growing cohort at $50,000 to $100,000. We're seeing improvements in awareness and conversion, all really strong signals that it's resonating, and we have some exciting things coming within our pipeline as it relates to innovation that we're really excited about that we know based on the research that we've done, is one of the #1 drivers for this target that we're targeting within our demand space. So one of the number one is really around innovation. And so I think that's going to position us well. And then Club Wingstop, it's a big one for us. We're excited about it. Our pilot results continue to strengthen. We're seeing improvements in retention in reactivation in frequency, all really strong signals and again, without the support of our national advertising and without really leveraging that platform at scale. And so the combination of those things do give us confidence in the early signals that we're seeing in the business, we expect over time to return to growth in the second half of the year. Alex Kaleida: Yes. And Jeff, this is Alex. I could help translate a little bit on what we anticipate on the shape of the year. With what we're seeing in the April trends and kind of knowing that this is a little bit of, hopefully, the peak on fuel prices that consumers seeing. We're anticipating somewhere in the mid-single-digit decline range for comps in the second quarter, followed by a gradual improvement into that low to mid-single-digit positive range for the second half as these strategies come together and what Michael mentioned. And I think these are informed by just some ways that we've been able to see results in top-performing restaurants on Smart Kitchen, what they're seeing in their business comp performance also what we're seeing in our pilot market, again, with very limited features and marketing behind it and measure and seen a measurable comp impact. So that's how we got to -- the shape of the outlook, very similar to what we said last quarter, we anticipate a return to growth in the second half. Near term, we have brought forward a little bit of that inflation challenge that we're seeing from the war that took place at the start of March. But we have a high degree of confidence in this outlook and in fact, are working to exceed it. Jeffrey Bernstein: Understood. And then my follow-up. Michael, franchisees, just based on your commentary seem very happy. Obviously, the comp growth isn't where they want it to be, but [ because ] a couple of years sales growth the 70% type returns they're generating, all that supports the outsize unit growth. But clearly, the current macro is challenged. I'm wondering if you could talk a little bit about the recent conversations with franchisees, what they're most focused on and whether it ever becomes a discussion internally about considering maybe tempering unit growth. Clearly, you're running well above the 10% long-term algo with your 15% to 16% growth this year. Maybe there's some risk that is cannibalizing, maybe makes sense to try and control or limit the outsized unit growth? Any thoughts there would be great. Michael Skipworth: Yes, Jeff, we mentioned this in our prepared remarks, but I think it's really important to say it again. And we actually saw our brand partner margins and profitability improved in the first quarter. And we talked about that's about -- that's us making really intentional and strategic decisions about what's right for the business long term. And obviously, continued progress with our supply chain strategy and continuing to protect and, in some cases, enhance those industry-leading returns in unit economics. And they remain strong. The sentiment and the conversations with our brand partners, it's really a lot about acknowledgment that over the last few years, our AUVs have grown close to $500,000. And that, combined with just continued focus and execution against protecting profitability has been pretty positive. But then when you layer on top of that, us working with them and talking to them about these strategies that we're executing and what's in front of us. There's a pretty high level of excitement around Wingstop and to continue to grow and to continue to expand. We feel like we're growing at the right pace. We're obviously executing against our market level playbooks, which are very intentional and very clearly defined around where we open restaurants and at what pace and when we open those restaurants. But -- we mentioned it as well in our prepared remarks, our pipeline sits at a record level, which I think showcases the demand and excitement for growth. And based on the visibility we have in the pipeline today, we're able to reiterate our outlook this year, which is another industry-leading year of unit growth at 15% to 16%. Operator: The next question comes from Andy Barish with Jefferies. Andrew Barish: Guys. Just wondering on kind of thoughts as you look out in terms of becoming a more mainstream brand, do you think kind of marketing has to evolve as we look out maybe to '27, particularly given the size and scale of your spend to more kind of traditional windows and promotions that are laid out. And then kind of also wondering, just on the move to $3 million AUVs. If you could kind of frame up how much of that is maybe related to incremental chicken sandwich and tenders occasions, just given how strong your share is in the traditional wings business. Michael Skipworth: Andy, I think that's a great question. And if you go back 4 or 5 years, we were able to be a little bit more of what I would characterize as a marketing strategy that was almost a one size fits all. And as we look at how our business has grown and scaled and diversified to some degree, we are 100% aligned with the question you asked, and that is we have to be very targeted. Messages need to be different based on audience based on channel. And I think that can go from linear TV all the way down to the social platforms, and that's exactly the playbook that we're executing is making sure our message is tailored specifically to the targeted audience that we're trying to reach. And I think you'll see more of that come to life as we talked about some of the next phase or next chapter of Wingstop this year. You're going to see a little bit more variation in the messages that we're putting in front of consumers, a little bit more targeted messaging as it relates to calls to action. But that's exactly the playbook that we're executing. And as we think about our path to $3 million AUVs. We do think there are a ton of chicken sandwich occasions that we are positioned to win and we will win and tenders are the same. But we also think there's a lot of group occasions, our halo product, bone and chicken wings, that we're going to win as well as we educate more of these consumers who don't know about us or maybe don't consider Wingstop today. And that's what we're excited about as it relates to our Q1 results is we're seeing early signals in the business that we're making progress against all of those initiatives. Alex Kaleida: And Andy, I'd add, too, that we've historically anchored as an example, on social media and as area like TikTok, we now are diversifying more messaging in personalizing content to those channels across Meta, Instagram, X, other areas where we can really speak to that new guests we're looking to acquire. So we think the timing is right to start to move more into those various social channels alongside the level of content we're able to produce and the relevance we can drive at the messaging in those channels. Andrew Barish: Congrats on #500 internationally. Alex Kaleida: Thank you. Michael Skipworth: Thank you. Operator: The next question comes from Chris O'Cull with Stifel. Christopher O'Cull: I had a couple of follow-up questions from earlier ones. And Michael, has the company -- the company has guided to, I think, 15%, 16% unit growth this year, which continues to pace well ahead of the 10% long-term algo. But to what extent is this growth being driven by brand partners voluntarily developing ahead of their contractual mandates? And franchisees reverted to the minimum requirements of the development agreements, what would that base unit growth rate look like? Michael Skipworth: Chris, I wouldn't say there's anything to call out as it relates to brand partners developing ahead of their schedule. In fact, I would say it's it goes back to these market-level playbooks. And that informs how we write these agreements. And we're writing these development agreements in a very targeted and intentional way that we believe is kind of really helping us have our hand on the dial and manage the pace of development. So I would almost go so far as to say we discourage brand partners from developing ahead of that contractual commitment because we've been very intentional with how we design these agreements. And we believe we've got a strategy that we're executing against. Christopher O'Cull: Okay. That's helpful. And then we've noticed the sub-$10 combos, which you mentioned earlier, being pulse through social and CRM channels. But what is the reluctance to pivot linear TV towards these offers since it would seem to be a better medium to drive new and lapsed users than maybe targeting some of the existing users to increase frequency. Michael Skipworth: Yes, Chris. That's a little bit of what I hit on earlier. I think you're going to see that come to life as we progress through the year. And while linear is obviously continues to be an efficient platform, you're going to see us leaning a lot more into OTT and streaming, which allows us to be very targeted because some people -- the relevant message that we're targeting might be this new group pack bundle, where we preconfigured a bundle at a compelling value to serve 3 or 4 people, and we've preselected the flavors, highlighting convenience, highlighting ease, but obviously, the flavor and quality associated Wingstop, and they can order that with one click. And so that could be the right message that we highlight in a targeted way, or it could be someone who's more value-sensitive. And in that case, we can target them with the message that profiles this lunchtime offer that we have that is pretty compelling value to get our cook-to-order, [ hand-tossed ] sandwich or tender combos for under $10. So that's exactly something we're leading into. Operator: The next question comes from Sara Senatore with Bank of America. Sara Senatore: Just, I guess, maybe one quick follow-up and then one quick question. Just you mentioned the lower-income consumer. I think in the past, you've said that's roughly 1/4 of your sales, but that maybe has been trending down. So if you if you could update on what that mix is? Because I do think that's obviously much higher than I think what we've seen from others. So that's just a data point. But the question is on value. You mentioned value for the money, which I think is obviously clearly embedded in your menu. But some of what we're seeing that is very successful, especially for lower-income consumers is very low price point value. And I think in the past, in 2023, relative value is a big part of what you're able to offer because wing prices were down so much. Is there -- I know your emphasis on visibility in terms of wing prices as opposed to kind of maximizing the benefit from the recent decline. But is there an opportunity to do more price point value below that $10? Or is it the margin structure just really doesn't support that? We have seen some other higher ticket concepts, maybe do things on the app only to really kind of introduce people to the brand at very accessible price points, just as budgets are really constrained. So just trying to understand if there is that opportunity either through the app or through your loyalty because these sort of entry-level price points you seem to be working very well right now. Alex Kaleida: Sara, this is Alex. I can jump in first. The low income percent still has been about that mix of about 25% within our database. And we still are acquiring low-income guests. What we have seen in their behaviors is more they're actually trading up into larger bundles. We've seen the ticket increase, but the items that they're attaching per ticket has changed. That's come down a little bit. So they're almost kind of looking for that abundance, quality that we can deliver inherent value. And I think we've said this in prior calls, too, that that consumer is still telling us we're doing the right things in terms of messaging value, delivery and quality. And we really think about that overall value proposition that we deliver to guests beyond just the price point. So we're focused on some areas to showcase our menu differently flavor lists value as well. And then loyalty is a way for us, we believe we can strengthen the value proposition. And one difference that we're seeing among low-income consumers is in our market where we're testing loyalty, their engagement, their frequency has been sustaining. We're not quite seeing what we're seeing in the rest of the U.S. And we think we've brought some areas and examples for it for them that's really showcasing that value proposition, how loyalty can come into play there. Sara Senatore: Great. And just is it the 7% increase? Is that roughly the same that you've been seeing in these sort of loyalty frequency as in the past? Alex Kaleida: Yes. Actually, loyalty members are outperforming nonloyalty members in terms of -- across a number of metrics, including frequency, new guest retention. We're also seeing reactivation of lapsed users come back in at a rate of 2x nonloyalty members in there. So there's a variety of metrics were really -- which has given us that confidence in the path to growth in the second half based on this data we're seeing. But yes, it continues to be more elevated in the pilot market. Operator: The next question comes from Brian Harbour with Morgan Stanley. Brian Harbour: Could you comment on how your 2 biggest markets, California and Texas are doing relative to the rest of the country? Michael Skipworth: Brian. I would say, obviously, California, I wouldn't say the trend has really improved as inflation like kind of the consumer macro backdrop has remained pretty consistent there. I would say, as it relates to the Texas market, we have obviously a lot of corporate restaurants there. And so our corporate results give you a little bit of an indication. But as we look at DFW as an example, or even broader Texas, where we have had more tenure with the Smart Kitchen, those markets are performing a little bit better than the rest of the country. But I would say it's really something that we pointed to in our prepared remarks, which has to do with those restaurants that are consistently delivering on our 10-minute speed of service target. And I think that applies outside of Texas, where those restaurants that are doing that -- we continue to see higher new guest retention rates, better frequency, higher guest acquisition -- or guest satisfaction scores and ultimately better same-store sales. Brian Harbour: Okay. and on Smart Kitchen, I mean, it is fully rolled out at this point, right? So I guess the question is like for the earliest adopters, are you still seeing a same-store sales gap consistent with what you've talked about before. I guess I might conclude at a high level that customers don't really care about this yet, like I think we understand the operational benefit in the theory, but is it necessarily showing up for customers in faster delivery times? Or are you seeing kind of more like walk-up business in response to this? I mean at what point do you think it actually is more of a mover for customers? Michael Skipworth: Yes. Brian, I would say -- and we mentioned this in our prepared remarks, but we can see it in the data. And we know what good looks like -- and when it is delivered, and we are delivering on that 10-minute speed of service, you can measure it in the results and in the data. One of the things we highlighted in our prepared remarks was the kind of bottom quartile restaurants where we've really been focused on execution there, and we've reduced speed by 3 minutes and seeing some pretty meaningful improvements in get satisfaction score, so the guests are noticing and giving us credit for that. I would say one of the areas where the most noticeable improvement was in delivery times and guest satisfaction within the delivery channel, where we measured a 17 percentage point improvement in guest satisfaction scores in the delivery channel, and that channel outperformed versus the rest of the system. And so there are some really strong signals that we're seeing in the business and the progress we're making. But I think it's important just to highlight that this is a really big operational change. It may be bigger than we even anticipated. And one of the things we've learned as we're continuing to focus and drive execution is we have to also guard against being too fast. We're updating -- we talked earlier this year about the new op scorecard that we rolled out. We're actually updating our scorecard, just to make sure we're measuring performance against our targeted speed of service of 10 minutes, but we're also not rewarding the wrong behavior. But progress is being made across the board. We are getting credit from the consumer and the opportunity in front of us, and I think the long-term impact here continues to be really big. Operator: The next question comes from Danilo Gargiulo with Bernstein. Danilo Gargiulo: Michael, first of all, I'd like to expand on the comment you just made on this being an operational lift of high magnitude. I guess I'm trying to understand what is the impediment for all the stores to deliver within 10 minutes, even during peak times of Friday and Saturday, you're updating the scorecard. But I think for most operators, this market is translating into better operations. So what's the impairment on the ground for a better adherence to the high standards. Michael Skipworth: Yes. I mean I think, Danilo, if you take a step back and think about and just remember, particularly with these more tenured restaurants and tenured team members the change is pretty drastic to go from an operating model that relied on paper kitchen tickets and a lot of voice command to now leveraging a technology platform, interaction with the screens and ultimately relying on in leveraging an AI-enabled demand forecast bespoke to every single restaurant that's being delivered in 15-minute increments. It's a fundamental change. And I agree with your statement that it is a better team member experience, and it does result in overall improvement in operations, but it is still a big change, particularly when you think about -- we often reference our standard quote time of 20 minutes on average, but when you think about Friday and Saturday night, when restaurants are experiencing high volume, those tickets -- the speed times could be on average 45 minutes. And we've taken that down significantly. And in some cases, we're not at that 10-minute yet, but we're materially faster than we used to be. And so it's a balance of ensuring we're executing and delivering on the speed that consumers expect but also making sure we're not rewarding the wrong behavior or driving the wrong behavior. That could translate to some unintended consequences around being too fast. And so it is a balance, and it's something we're focused on and the team is executing against a plan, and we're confident based on the data that we see and the progress that we're making that we will get the entire system to deliver on a consistent tenement speed of service. But it is taking time. It is taking focus. It's taking some revisions to our scorecard that I mentioned, but the progress is clear in the data that we see. Danilo Gargiulo: And if I may, with increased uncertainty on macro geopolitical and even the demand environment, why is the best option to continue to do share repurchases versus maybe driving down the leverage to 3 to 4x over time in anticipation of high volatility rates? Alex Kaleida: I think, Danilo, great question. I think as we've shared in the past, we want to demonstrate our commitment to our buyback strategy because we believe in the long-term value creation it has for shareholders. And I think what you'll see as we manage through this is not accessing near-term outside capital to support the strategy, leverage this free cash flow generation that we have in our business and in combination of seeing some deleverage. But we do see ourselves in a place that's closer to that 4x leverage range as opposed to where we've been historically in 5 to 7x. Operator: The next question comes from Sharon Zackfia with William Blair. Sharon Zackfia: Yes, I want to [ delve into ] [indiscernible] early. I think you guys [ point and speed ] or execution, maybe I missed that on Saturday nights. But can you just give us kind of broadly speaking, what percent of the system is hitting the 10-minute speed? And then I think secondarily, you had talked last quarter about some challenges with the delivery providers getting under 30 minutes. Can you talk about kind of what percent are now consistently under progress is moving [indiscernible] kind of move that towards the goal line? Michael Skipworth: Sharon, you bet. You were breaking up a little bit, but I think I caught the gist of your question. As it relates to Friday, Saturday and dinner daypart, I think one of the things is, obviously, it's important to highlight those are 2 of our busiest or peak dayparts within the week. But it's also the dayparts where about 50% of our new guests visit the brand for the first time. And so obviously, extremely important as we think about the marketing strategies that we're executing and broadening the top of the funnel and bringing in new guests that we deliver on their expectations and retain them. And so that's a big focus for us. And when we entered this year, about 30% of the restaurants were delivering on that targeted 10-minute speed of service within the Friday and Saturday dinner daypart. And we've made meaningful progress on execution within our restaurants. And it's due to the incredible work of our ops team, of our brand partners, of our teams and their teams and the restaurants. And so kudos to them, but we've seen a 16 percentage point improvement just in 1 quarter in the number of restaurants that are delivering. And so that's meaningful progress that's super encouraging and we're going to continue to chip away at it, and I'm confident that we'll get the entire system there over time. And then I think the other part of your question, could you repeat that part again for me? I lost you at the very end of it. Sharon Zackfia: Yes, sure. Sorry about the cell phone. On the delivery providers, I think there were some challenges getting them under 30 minutes even when you were at 10 minutes. Can you talk about kind of where you stand at the 30-minute threshold system-wide and how those discussions and how that progress is going? Michael Skipworth: Yes. We're really encouraged with how our partners on the third party have leaned in. We obviously have had some meetings with their leadership team, their teams leaned in with our teams. We've implemented a few things that are helping send the right signals to their drivers at the right time to make sure they're getting there to the restaurant when the order is ready and we mentioned it, but we're seeing a meaningful improvement in the performance there. And we actually highlighted this within that bottom quartile of restaurants, just the improvement within the delivery channel that we're seeing there is pretty meaningful. And I think it speaks to the opportunity we have within that channel. But to see 1 percentage point improvement in guest satisfaction within the delivery channel is pretty pronounced. And so we're encouraged by the progress we're making. Operator: The next question comes from Jon Tower with Citi. Jon Tower: I know you mentioned that protecting and growing franchisee profits and cash flows is frankly a priority for the company? And kind of following up to Sara's question earlier around value. In your conversations with them, are they reluctant to move down on price points on the menu over time? I'm just curious if that's been pushed back from that community specifically. Alex Kaleida: Jon, this is Alex. No, I think we're lockstep with our brand partners in terms of really even in this environment, protecting the unit economics. And we don't believe it's a little bit more of our perception that training a guest to come to you for a $3 menu item as an example, is not who Wingstop is. Our demand space target that group occasion. Again, our guest has given us feedback that we're doing all the right things on overall satisfaction. We've improved quality 6% versus last year. Consideration is up 4% versus last year. And even at lower income consumer isn't saying that we have a value issue with us. So we're focused on that and really building that top of the funnel, attracting those new guests and keeping our brand partners focus on that long-term opportunity for Wingstop to build towards 6,000-plus restaurants in the U.S. Jon Tower: Got it. And I know, Michael, you earlier in the conversation, you had mentioned that innovation is kind of top of mind for most guests in terms of what they want to see from the brand. It sounds like you're focused primarily on flavor. I mean any form factor changes that you're thinking about going forward? Michael Skipworth: Jon, yes, it's super clear to us when we studied our demand space, the consumer and who we're going after, who really doesn't engage with our brand today, but represents a huge opportunity for us. And our brand hits on the top emotional and functional needs of that guest and is best positioned to win. It's really about just driving awareness and then making Winstotop-of mind and relevant to them. But the #1 driver for these guests we are targeting to bring in to the brand is innovation and it's innovation through flavor. And this is a proven playbook for us. We go back to 2024, and when we launched Hot Honey. But we launched Hot Honey when everyone else was doing it as a wet sauce, we did the way that only Wingstop can do and did it as a driver of, and that is a great example of how we can lean into innovation, lean in to flavor and drive relevance and bring new guests into the brand. In Q1, we launched a Hot Honey Trio, 3 ways to Hot Honey. That actually performed a lot better than we anticipated. In fact, we sold out of 2 of the flavors within about 2 weeks. Another example I will point to is our current LTO flavor, Citrus Mojo. A lot of guests have kind of said it's a play on our iconic lemon pepper where it's a fresh garlic herb, a bright splash of citrus. But what we're seeing with the performance of Citrus Mojo, over-indexing to the reactivation of lapsed guests. It's bringing in new guests. And so we have an innovation pipeline built out for the rest of the year that we're super excited about. This includes a lot of really unique flavors that only Wingstop can do, but it also includes some unique dips as well. And so we're excited about this innovation pipeline and how that's going to drive relevance and I think continue to really bring in these new guests that we're targeting. Operator: This concludes our question-and-answer session and concludes our conference call today. Thank you for attending today's presentation. You may now disconnect.
Operator: Hello, everyone. Thank you for joining us, and welcome to the Garmin Limited First Quarter 2026 Earnings Call. After today's prepared remarks, we will host a question and answer session. [Operator Instructions] I will now hand the conference over to Teri Seck, Director of Investor Relations. Teri, please go ahead. Teri Seck: Good morning. We'd like to welcome you to Garmin Limited's First Quarter 2026 Earnings Call. Please note that the earnings press release and related slides are available at Garmin's Investor Relations site on the Internet at www.garmin.com/stock. An archive of the webcast and related transcript will also be available on our website. This earnings call includes projections and other forward-looking statements regarding Garmin Limited and its business. Any statements regarding our future financial position, revenues, segment growth rates, earnings, gross margins, operating margins, future dividends or share repurchases, market shares, product introductions, foreign currency, tariff impacts, future demand for our products and plans and objectives are forward-looking statements. The forward-looking events and circumstances discussed in this earnings call may not occur, and actual results could differ materially as a result of risk factors affecting Garmin. Information concerning these risk factors is contained in our Form 10-K filed with the Securities and Exchange Commission. Presenting on behalf of Garmin Ltd. this morning are Cliff Pemble, President and Chief Executive Officer; and Doug Boessen, Chief Financial Officer and Treasurer. At this time, I would like to turn the call over to Cliff Pemble. Clifton Pemble: Thank you, Teri, and good morning, everyone. As announced earlier today, Garmin achieved remarkable financial results during the first quarter of 2026 in a continuation of the positive trends we've been experiencing over the long term. Consolidated revenue increased 14% to $1.75 billion, which is a new first quarter record. We achieved double-digit growth rates in 3 segments, and we experienced strength in many product categories across the business, including wearables, which were a significant contributor to consolidated growth. Gross and operating margins expanded to 59.4% and 24.6%, respectively, resulting in record first quarter operating income of $432 million, up 30% year-over-year and pro forma EPS of $2.08, up 29% year-over-year. We're off to a great start in 2026, and we are very pleased with our results. As a reminder, the first quarter is typically the lowest seasonal quarter of our financial year. While the initial trends are encouraging, much of the year remains ahead. With this in mind and consistent with our typical practice, we are maintaining the guidance issued in February, and we'll provide updates as the year unfolds. Doug will discuss our financial results in greater detail in a few minutes, but first, I'll provide a few remarks on the performance of each business segment. Starting with fitness. Revenue increased 42% to $547 million, which is a new first quarter record, driven by broad-based growth across all product categories, led by strong demand for advanced wearables. The primary driver of our performance is higher unit volumes, resulting in meaningful market share gains. Gross and operating margins were 62% and 29% respectively, resulting in operating income of $158 million. During the quarter, we launched the Varia RearVue 820, our brightest and most powerful radar tail light for cyclists. We expanded on-device messaging for select wearables with a new Connect IQ app that allows customers to read, reply and react to WhatsApp messages right from their wrist. We also announced that select wearables can now integrate with the highly acclaimed Natural Cycles birth control and Cycle Tracking app, empowering women to better understand and manage their reproductive health. The Fitness segment has achieved outstanding performance over the long term, and we are very pleased with these results. As mentioned in February, we expect that the Fitness segment will be the strongest contributor to 2026 consolidated growth. Moving to Outdoor. Revenue decreased 5% to $418 million as we compared against a strong prior year quarter, which included the launch of the Instinct 3 smartwatch family. Fenix smartwatches performed well during the quarter, even considering the strong comparable from the prior year. Gross and operating margins were 67% and 28%, respectively, resulting in operating income of $119 million. During the quarter, we released the Approach G82 handheld GPS with a built-in launch monitor and the Approach J1, our first GPS watch specifically designed for junior golfers. The Approach J1 was created by Garmin Associates who through their own experiences, recognize that aspiring junior golfers also want tools designed specifically for them to learn the game and improve performance. I'm proud of the way that our teams lean on their own experiences to bring unique, highly differentiated products to market. Also during the quarter, we launched the zumo XT3, our newest and most advanced motorcycle-focused GPS device and the Catalyst 2, a compact device for motorsports that helps high-performance drivers achieve faster times on the track. Looking forward, we expect second quarter outdoor performance to be similar to that of Q1. We also expect to achieve stronger performance in the back half of the year due to the timing of product launches, resulting in improved full year growth when compared to 2025. Looking next at Aviation, revenue increased 18% to $264 million with growth contributions from both OEM and aftermarket product categories. Gross and operating margins were 75% and 27% respectively, resulting in operating income of $71 million. During the quarter, Daher unveiled their new TBM 980 single-engine turboprop aircraft featuring our G3000 PRIME avionics suite. Also, the Hondajet Elite II was certified by the FAA, becoming the first twin turbine business jet with Garmin Emergency Autoland technology. We are very pleased with the performance of aviation during the first quarter, and we expect to achieve solid growth throughout the remainder of the year. Turning to the Marine segment. Revenue increased 11% to $355 million with broad-based growth across multiple product categories. Gross and operating margins were 56% and 26%, respectively, resulting in operating income of $91 million. The year-over-year margin compression was primarily due to higher tariff costs. During the quarter, we launched a new 360-degree scanning sonar with Spy pole, allowing anglers to see a bird's eye view of fish and underwater structure in every direction. Also during the quarter, we launched the quatix 8 Pro, our purpose-built nautical smartwatch with inReach technology for 2-way satellite and cellular connectivity. Our Marine segment is off to a very good start, and we believe we are on track to achieve growth consistent with the prior year. And moving finally to the auto OEM segment. Revenue increased 1% to $170 million with growth primarily driven by infotainment programs. The segment operating loss narrowed to $6 million due to gross profit improvement and lower R&D expenses. We continue to achieve important milestones leading up to the launch of our next large-scale program with Mercedes-Benz, which we anticipate will drive significant growth starting in 2027 and beyond. As a reminder, we expect auto OEM revenue to decrease in 2026 as the BMW program has reached peak volumes and as certain legacy programs approach end of life. We also expect the operating loss to narrow compared to 2025, although we are not expecting the segment to be profitable on a GAAP basis for the full year. Wrapping up, we continue to outperform expectations in a business environment characterized by economic whiplash and geopolitical uncertainty. Even in these challenging circumstances, we believe that great products and customer service always win. As strong as our product line currently is, we are planning to launch even more new products throughout the year, including some that represent new categories for Garmin. That concludes my remarks. Next, Doug will walk you through additional details on our financial results. Doug? Douglas Boessen: Thanks, Cliff. Good morning, everyone. I'll begin by reviewing our first quarter financial results, provide comments on the balance sheet, cash flow statement and taxes. We posted revenue of $1.753 billion for the first quarter, representing a 14% increase year-over-year. Gross margin was 59.4%, a 180 basis point increase from the prior year quarter. The increase was primarily due to favorable foreign currency impacts. Also for your reference, [we do not record] any benefit or receivable related to any potential refund of previously paid tariffs. Operating expense as a percentage of sales was 34.8%, 110 basis point decrease. Operating income was $432 million, a 30% increase. Operating margin was 24.6%, a 290 basis point increase over the prior year quarter. Our GAAP EPS was $2.09, and pro forma EPS was $2.08. Next, we look at first quarter revenue by segment and geography. During the first quarter, we achieved double-digit growth in 3 of our 5 segments, led by the Fitness segment with 42% growth, followed by the Aviation segment with 18% growth, and Marine segment with 11% growth. By geography, we achieved growth in all 3 regions, led by 25% growth in APAC, followed by 15% growth in EMEA and 10% growth in Americas. EMEA and APAC regions benefited from favorable foreign currency impacts. Looking next at operating expenses. First quarter operating expense increased by $59 million or 11%. Research and development increased approximately $28 million. SG&A increased approximately $31 million compared to the prior year quarter. Both increases were primarily due to personnel-related expenses. A few highlights on the balance sheet, cash flow statement and taxes. We ended the quarter with cash and marketable securities of approximately $4.3 billion. Accounts receivable increased year-over-year due to strong sales, but decreased sequentially to $941 million following a seasonally strong fourth quarter. Inventory increased year-over-year and sequentially to approximately $1.9 billion. During the first quarter of 2026, we generated free cash flow of $469 million, a $9 million increase from the prior year quarter. Capital expenditures for the first quarter of 2026 were $67 million, approximately $27 million higher than the prior year quarter. During the first quarter of 2026, we paid dividends of approximately $174 million, purchased $40 million of company stock. At quarter end, we had approximately $491 million remaining share repurchase program, which is authorized through December 2028. For an effective tax rate of 14.3%, which is comparable to 14.5% in the prior year quarter. This concludes our formal remarks. Ben, can you please open the line for Q&A. Operator: [Operator Instructions] Your first question comes from the line of Joseph Cardoso with JPMorgan. Joseph Cardoso: Maybe for my first question, can we just double-click on the performance, the strong performance in the quarter, both from a revenue and gross margin perspective. Cliff, it sounds like you're cautiously optimistic about the year despite kind of sticking to the typical full year guidance practice here. So maybe can you just touch on what is reinforcing that view, for example, how did demand momentum trend through the quarter and into 2Q to date? And then as you think about kind of the component cost and availability trends that we talked about last quarter, how did that trend through the quarter? And any change in view relative to your ability to navigate those dynamics versus 90 days ago? And then I have a follow-up. Clifton Pemble: Yes. Joe, I think, as I mentioned, we're very pleased with the initial results. Q1 does tend to be our lowest quarter. So we take it as a data point, but we definitely need to see more of the year unfold before we can really start to tweak what our 2026 results expectation will be. In terms of demand trends, they're consistent, continue to be very strong, like we saw in the prior year. Registration rates are continuing to be strong. We have not seen any impact from some of the recent developments in the Middle East and some of the conflict there when it comes to registration rates. In fact, some of them are the strongest that we've been experiencing in the near term. So no worries there for the near term. Component costs wise, I would say that right now, we are not experiencing that in our current results. But keep in mind that component costs come through our inventory on the balance sheet. So consequently, as costs change, we'll see some of those go up as the year unfolds. We do have significant safety stock of some components that are under pricing pressure. So I would expect that 2026 is still going to be somewhat muted, and we'll start to see some effect in 2027. Joseph Cardoso: Got it. Great color there, Cliff. And then maybe for my second one, and this is perhaps a bigger picture question. Over the last 6 months or so, we've seen a couple of private wearable companies complete successful funding rounds, disclose healthy revenue trends. And I think both are pursuing a somewhat different approach, both in terms of form factors and perhaps a more aggressive push into subscriptions or hardware-as-a-service models relative to incumbents like yourselves, so just given that, maybe just curious to hear your thoughts on how you're assessing the competitive implications just given that different approach being taken by these challengers. And maybe alternatively, do you see this as more of a market expanding dynamic potentially that could open the door for you to evolve how your own monetization approach is taken over time? Clifton Pemble: Yes. I would say that if there's anything that we've learned over the years is that customers want choices when it comes to devices, especially those that they wear. So that's what we're seeing, I think, in the market today is an expansion of options for people. And for us, again, we're -- we don't rule anything out. We're open to all kinds of devices and form factors in how we deploy our wearable sensor technology. So I would say that, again, we see this as expanded opportunity for everyone. And I would point out that our results also reflect the general increase in the market and awareness and use of wearable devices for both fitness activity as well as wellness monitoring. In terms of subscription-based models, I would remind everyone that we have been expanding our role in subscription-based services for our products. In the services that we offer for those with Garmin Connect Plus as well as other services that we have in segments across the business. And so it's an area of enhanced focus for us as well. Operator: Your next question comes from the line of Tim Long with Barclays. Tim? Alyssa Shreves: This is Alyssa Shreves, on for Tim Long. Just a few quick questions. It sounded like you said strong demand for advanced wearables in the quarter. What are you seeing in the lower tier of the portfolio? Is there anything kind of -- are you seeing a dispersion in customer trends between the 2? And then I have a follow-up. Clifton Pemble: Yes. So when we talk about advanced wearables, we're really talking about those wearables that have GPS and the ability to download applications and that kind of thing. And really across our wearable price bands, all of those products pretty much qualify in that category. It's really the very basic kind of wearable bands like our vivosmart line that aren't considered advanced wearables, but those are a small part of our portfolio. So within advanced wearables, we have many different price tiers from entry level on through to premium, and we're definitely seeing strong demand, both at the low end and the high end of those ranges. Alyssa Shreves: That's helpful. And then just a quick question on the GEOS. I know the commentary on the call about the FX with EMEA and APAC. But in the Americas business, is there anything to call out in the GEOS, anything you're seeing there in customer trends? Clifton Pemble: No, I don't think there's anything particular at this point to call out. There are a lot of dynamics in the geographies right now, the geopolitical spectrum. And so time will tell, but initial indications are that some of the initial kind of bumps that occur whenever there's a big change like that have evened out and people are starting to get back to kind of normal patterns. So right now, I would say we're encouraged by what we see. But again, it's a very dynamic environment. Operator: Your next question comes from the line of David MacGregor with Longbow Research. David S. MacGregor: I wanted to ask about the new product introduction because it seems as though there was maybe a stronger-than-normal new product quarter. I wonder if that's true. And if so, can you just talk about the impact on growth and margins from -- just strictly from new product launches? Clifton Pemble: I think we typically release somewhere around 100 new products a year, and we would expect that 2026 is in line with that, if not slightly stronger as we look at some new things. In terms of margin profiles, new products are the ones that come out and they're fresh design. So they have all the latest components and design optimizations that we do. And they also -- if they have new features and capabilities and segmentation in the market, we can typically bring them out at appropriate prices for their particular competitive landscape. So they can be a margin enhancer. But in general, we rely on new products to really drive revenue growth within the company. David S. MacGregor: Right. And just to clarify on that, do we see maybe a slightly larger proportion of the reported revenues being generated from new products versus what we might have otherwise seen in prior years? Clifton Pemble: No, I would say it's historically consistent with what we've seen. Again, we're very consistent with product introductions, which means that generally, our revenue mix from new products tends to be pretty similar from year-to-year. David S. MacGregor: Okay. Good. And just as a follow-up, I wonder, you talked about the auto OEM business and the transition between the BMW and the Mercedes programs. Can you just help us think through kind of the -- how you're thinking about the cadence of revenues in 2026 leading into the ramp of that Mercedes early 2027? Clifton Pemble: As we mentioned in the remarks, we expect that 2026 would be a slightly down year compared to previous year because of the ramp down of the BMW program, which is starting to -- its tail off cycle into phase out. And then 2027 should be a ramp-up year for the Mercedes program. David S. MacGregor: You were flat in this quarter. Do you expect to be flat in 2Q and then see that revenue gap become more visible? Or do we see that begin in 2Q? Clifton Pemble: Yes. I would say probably not able to share the specific dynamic of Q2 just yet. But again, for the whole year, we definitely expect the long-term forecast that we're receiving would result in a slightly down year for auto OEM in 2026. Operator: Your next question comes from the line of Ben Bollin with Cleveland Research. Benjamin Bollin: I wanted to start, could we discuss a little bit in aviation. Could you discuss what you're seeing with respect to demand around new deliveries versus the retrofit opportunities? And any thoughts on order volume with bonus depreciation and what that's doing to backlog? And then I have a follow-up. Clifton Pemble: I think the new deliveries are definitely a strong contributor to the growth, stronger than the aftermarket side, although both contributed to the growth. Aviation aircraft makers are sitting on high backlog still. And so consequently, their volumes and cadence tend to be -- tend to move slowly as they work through backlog, but their objective is not to clear out backlog. Their objective is to keep feeding backlog and to incrementally grow as well. So in general, we see it as a very healthy cadence in the OEM side of things and have not, at this point, heard of any indications that people are hesitating around the purchase of new aircraft. Benjamin Bollin: Okay. The other -- Cliff, you talked a little bit about thoughts on the commodity environment and how that looks this year and even into next. I guess bigger picture, how are you thinking about the overall balance sheet and working capital strategy with that backdrop? Has it changed? Any thoughts around working capital commits, more strategic procurement? Anything along those lines that you guys are thinking about that you can share? Douglas Boessen: Yes. As it relates to our balance sheet and inventory, we look at inventory really as a business tool for us. Depending upon the situation, we'll look at that to increase our safety stock for key components as such. And also, obviously, demand of our product, we have to take that into consideration. But it's really a key part of our overall operations is to make sure that we use that inventory appropriately to make sure we have products for when the customer needs it as well as to manage our full supply chain, including the commodities are out there. Operator: Your next question comes from the line of Erik Woodring with Morgan Stanley. Erik Woodring: Cliff, can we just get a very kind of high-level view from you on the state of the consumer, specifically the consumer that you guys kind of sell into? Just anything that is changing? I know you mentioned the Middle East conflict hasn't had any impact, but there's just a lot of kind of cross currents in the economy today. So I would just love your updated view on the state of the consumer. And maybe if you could tie into that. Just given your answer to that, maybe is there a specific segment or market where you maybe feel incrementally better about the year more than 90 days ago versus anywhere you feel maybe incrementally more cautious? Just if you could maybe tie those together and then a quick follow-up, please. Clifton Pemble: I would say that, Erik -- I would say that what we see of the consumer is pretty much the same as what we have seen over the past several quarters. There is a lot of public talk about how consumers are stressed. And certainly, we probably all have to believe that's true. At the same time, many of the banks and monitors of personal credit usage and spending seem to be very positive. People seem to be shaking off whatever their concerns are that they're voicing. For the customer base that we serve, we tend to serve those that place a high priority on their personal health and wellness as well as products for active lifestyles and mobility. And so we believe we're serving a customer base in a market that's probably a little more resilient than what the average reporting out there is. In terms of segments where we feel better or worse, I would say we're optimistic about all of them. I would say that if there's any area of concern when it comes to oil prices and conflict is that it can tend to give some of those markets like marine and aviation, a little more hesitancy as people think about fuel prices and investments there. The one thing I would think is a positive even in that backdrop is that the stock market and the financial markets have been very strong, and so that tends to offset any hesitation. So in general, it's a mixed bag, but I would say the environment and the scenario is really very good considering everything that's going on. Erik Woodring: Okay. That's super helpful. And then just as a quick follow-up. Cliff, you kind of alluded to leveraging your balance sheet in this commodity environment. Is the message that you're sending we will see costs going up in the second half and therefore, there will be some margin pressure, all else equal? Or given the illusion that costs or given that you're alluding to costs going up, how will you kind of protect margins with higher input costs? I just want to make sure I kind of understand the message as we go into the second half and in 2027. Clifton Pemble: Yes. As we mentioned, our -- we do have a lot of safety stock around some components that we've accumulated. And so the impact on our financials due to higher input costs at this point, we feel are well controlled in 2026, and we've included those in our outlook for our guidance. We're not at all starting to think about 2027 or issuing guidance from that but definitely people should expect that the higher input costs that are rolling their way through our inventory would start to appear more in 2027. So that's what we're seeing. I think for our business, definitely, the bill of materials is -- if you look at our margin structure, we have ways that we can offset some increases here and there with efficiencies in other areas. So we're going to work hard to protect those margins. It's not our goal to go backwards. But again, we are facing some headwinds because of the component environment. Operator: Your next question comes from the line of Ivan Feinseth with Tigress Financial Partners. Ivan Feinseth: Congratulations on another great quarter and a great start to the year. And for the number of new watches that you're making that incorporate, inReach and LTE functionality, what percentage of buyers are signing up for a subscription plan? Clifton Pemble: Yes. We don't break it out, but the obvious point of those devices with the connectivity hardware is to use the services. And one of our key differentiators as a company is especially the inReach service around messaging and SOS services. And so we feel like we have a strong differentiator there that gives a real why Garmin for those product lines. And so I would expect to see more of those kinds of products coming to market in the future. Ivan Feinseth: And then that including your family of apps, can you give like a big picture of how you see that growing your user base as they use like Messenger and Explore and those are integrated in more and more products? Clifton Pemble: We see people engaging with our apps across the broad spectrum. As you point out, there are several different app properties that we have that people rely on, such as Garmin Connect, of course, is kind of a baseline, but we also have the Golf app. We have Messenger. We have all kinds of apps across our business that interact with our devices. So we see strong engagement from our customers and good feedback from them. Ivan Feinseth: And then especially Messenger, as somebody gets a Garmin watch, they tend to connect with maybe friends that weren't using it, but you see the overall growth of Messenger being used that could be a big driver to more product adoption? Clifton Pemble: We see Messenger pulling in not only the Garmin device user that manages the device, but also their friends, which allows them to communicate and of course, gives us opportunity to expose more people to the Garmin brand. Ivan Feinseth: And then my second question is, how much more robust is the functionality that you provide on board to Mercedes compared to what you're providing to BMW? Clifton Pemble: Well, I think you're probably thinking maybe of content or ASP, but I would definitely say that it's a more complex unit and higher ASPs than what we saw with BMW because of its level of integration and also strong volumes. So we expect to see, again, Mercedes to be a strong contributor to scale starting in 2027. Operator: Your next call comes from the line of Jordan Lyonnais with Bank of America. Jordan Lyonnais: [ANA Aviation], could you give a sense of what the size is of the defense and government markets and if that contributed to the gains in the quarter? Clifton Pemble: Well, we tend to send -- sell our products on a commercial off-the-shelf basis to opportunities within government and military. There are some light customizations that we do. But in general, we're selling the same platforms that we sell across commercial as well. It's a smaller part of our overall business, but one that we view as a key opportunity. Operator: Your next question comes from the line of Noah Zatzkin with KeyBanc Capital Markets. Noah Zatzkin: Hoping to get your thoughts on some of the more recent changes in tariff policy and whether or not that's changed your view on the overall tariff impact this year versus last quarter? I think relatedly, maybe how are you thinking about the potential magnitude of refunds that you might be positioned to recoup over time? Douglas Boessen: Yes. Regarding tariffs, yes, first of all, regarding the gross margin, year-over-year, there was an unfavorable impact on tariffs this Q1 versus last year since the tariffs were not in effect for that period of time. As we think about the remainder of the year, we do expect there to be some tariff impact for the remainder of the year, basically at the current trends we're seeing. Obviously, that's evolving, but that's our current opinion. As it relates to the refunds, we have not recorded any receivable or benefit for those refunds at this point in time. We'll continue to evaluate that and record at the appropriate time and provide more details when we do record that receivable and benefit. Noah Zatzkin: Great. And then maybe just one on Marine, another strong quarter there. What are you guys seeing in terms of the underlying trends in the marine end market? And maybe just any color around what you -- what you think is helping to drive what I assume to be share gains there? That would be great. Clifton Pemble: I think for Marine, for us, we saw particular strength on deliveries to builders. So they definitely helped contribute to the growth that we have in the quarter, although the retail and the aftermarket was also a contributor. I think in general, we're starting to hear some of those customers start to express some worry given the current geopolitical situation. But I think a lot of times, that worry takes some time to filter through the market. So we're taking a wait-and-see approach on that. But in general, I would say that the overall market has been very strong, and we've had a very, very positive reaction to our new products, particularly the Spy pole and the 360 sonar. Operator: Your next question comes from the line of David MacGregor with Longbow Research. David S. MacGregor: Just a couple of cleanups. I guess on operating expenses, dollar expenses are up, but you're leveraging those increases very well. How should we think about the pace of incremental operating expense investment in '26 and '27 and also your ability to continue leveraging those investments at the operating line? Douglas Boessen: Yes. Regarding the operating expenses on a consolidated basis, for the full year, a percentage of sales, we expect operating expenses to be relatively consistent year-over-year. So a few things impacting our operating expenses. Obviously, the biggest driver there is personnel-related expenses, really the headcount, compensation as such, primarily in the R&D side of things just to fuel our innovation. But a couple of things also in the quarter, one of which was foreign currency that impacted our top line, they increased that, but also did increase some of our expenses there, too. Then also, we did have an acquisition of MYLAPS that anniversary this year also from that standpoint and they're annualized. So those are some factors in there. But we expect relatively consistent kind of pace in our operating expenses. David S. MacGregor: Flat year-over-year, I guess, is the guide. Douglas Boessen: Yes, consistent growth. David S. MacGregor: Right. And then secondly, just on distribution, are you seeing any meaningful change this quarter in the route to market? Any growth in distribution network to call out and how that may have influenced the reported margins? Clifton Pemble: I would say nothing specific to call out. We have very broad-based distribution across all kinds of retailers and distributors. And so I think the diversity of our go-to-market channels is probably richer for Garmin than any other company out there because of the broad base of markets we serve as well as the broad product categories that we have within each market. Operator: There are no further questions at this time. I will now turn the call back to Teri Seck for closing remarks. Teri, please go ahead. Teri Seck: Thank you all for joining us today. Doug and I are available for callbacks, and we hope you all have a great day. Bye. Operator: This concludes today's call. Thank you for attending. You may now disconnect.
Operator: Good day, ladies and gentlemen, and welcome to the 1Q 2026 Arch Capital Earnings Conference Call. [Operator Instructions] As a reminder, this conference call is being recorded. Before the company gets started with its update, management wants to first remind everyone that certain statements in yesterday's press release and discussed on this call may constitute forward-looking statements under the federal securities laws. These statements are based upon management's current assessments and assumptions and are subject to a number of risks and uncertainties. Consequently, actual results may differ materially from those expressed or implied. For more information on the risks and other factors that may affect future performance, investors should review the periodic reports that are filed by the company with the SEC from time to time, including our annual report on Form 10-K for the 2025 fiscal year. Additionally, certain statements contained in the call that are not based on historical facts are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. The company intends the forward-looking statements in the call to be subject to the safe harbor created thereby. Management also will make reference to certain non-GAAP measures of financial performance. The reconciliations to GAAP for each non-GAAP financial measure can be found in the company's current report on Form 8-K furnished to the SEC yesterday, which contains the company's earnings press release and is available on the company's website at www.archgroup.com and on the SEC's website at www.sec.gov. I would now like to introduce your host for today's conference, Mr. Nicolas Papadopoulo, and Mr. Francois Morin. Sirs, you may begin. Nicolas Alain Papadopoulo: Good morning, and welcome to Archer's First Quarter 2026 Earnings Call. We delivered a strong quarter, reflecting both attractive underwriting margin and the disciplined execution of our underwriting and capital management strategies. After-tax operating income for the quarter was $901 million or $2.50 per share, producing an annualized net income return on average common equity of 17.8%. Today's market is clearly more competitive than in recent years. That said, rates and terms and conditions in aggregate still support strong returns. Capturing those returns requires the ability and willingness to actively manage the portfolio across and within lines of business. This is embedded in Arch's operating principles and among our differentiating traits to dynamically add to areas where returns are attractive while declining those risks that no longer provide an adequate margin of safety. Regardless of where we are in the cycle, Arch is committed to generating superior returns for our shareholders. I'll now provide updates across our reporting segments, beginning with insurance, which generated $66 million of underwriting income in the first quarter. It compares favorably to the first quarter in 2025 that was impacted by the California wildfires. Overall, market conditions remained favorable. However, top line growth in the segment was essentially flat in the quarter, reflecting our focus on profitability over volume as competitive pressures increase. Growth opportunities remain across most casualty focused businesses, including excess and surplus line casualty, construction, alternative market as well as a number of our London market businesses. Growth was offset by softening rates in a few areas, including large account and excess and surplus lines property as well as in some short-term lines in London. We also chose not to renew certain program business acquired in the middle market commercial transaction that did not align with our risk appetite or meet our profitability requirements. As we have discussed on prior calls, these nonrenewals are expected to reduce net premium return by approximately $250 million throughout 2026. I also want to note a significant operational milestone achieved in our middle market commercial business. Earlier this month, our team successfully completed the data and system migration of the acquired businesses from Allianz to Arch on systems. The ability to complete this effort in just 18 months speaks not only to the dedication of our teams but also represents a strong use case for artificial intelligence in accelerating systems and platform transformation. With a significant step completed, the business can now pursue its objective of creating a scalable best-in-class experience for clients and distribution partners. Our reinsurance segment delivered an excellent $441 million of underwriting income in the quarter, a significant increase from the $167 million in the first quarter of 2025 which was heavily impacted by the California wildfires. Rate reductions and increased retention by our students contributed to a 6% decline in net premiums written versus the same quarter last year. shorter lines, including other property, property catastrophe and marine were the primary driver of these declines. Strong industry results over the past few years and attracted significant new capacity from traditional markets and third-party capital, resulting in a broadly competitive environment, its additional supply continues to put downward pressure on property catastrophe in short-term rates while also moderating the push for needed rate increases in some casualty lines. However, underwriting performance remains excellent. Our focus and disciplined underwriting led to the reinsurance group's 76% combined ratio marking the fourth straight quarter of sub 80% combined ratios. Consistent with our cycle management philosophy, our reinsurance team actively manages the portfolio mix by continuing to write new business, admits a risk-adjusted return target and by reducing our share of business that falls below our minimum return thresholds. The mortgage segment delivered another strong quarter with $221 million of underwriting income to go along with $266 million of net premiums return. Mortgage originations picked up modestly in the first quarter, no affordability challenges tied to high mortgage rates and home prices continue to constrain demand. Credit quality across the mortgage insurance portfolio remains excellent with delinquencies normalizing from seasonally higher levels in the fourth quarter of 2025. Competition remains disciplined and we continue to pursue growth through innovation and new product introductions across our global footprint. Overall, mortgage performance continues to exceed expectations and provide shareholders with a differentiated and diversifying source of earnings that support long-term value creation. Turning to investments, which contributed $408 million or $1.13 of net investment income per share in the quarter. The decline in net investment income from the fourth quarter of 2025 was driven in part by lower cash yields lower qualified refundable tax credit benefits and seasonal compensation payouts are nearly $48 billion in investment portfolio provides a material contribution to earnings and book value growth, effectively raising our quarterly earnings flow. In the first quarter, we repurchased $783 million worth of our common stock while still increasing book value per share by 1.7%. Our first priority remains to deploy capital into our business. When organic opportunities do not meet our return threshold, we view repurchasing our shares as an attractive use of excess capital, reflecting our conviction in the intrinsic value of the franchise. The Board's recent $3 billion increase to our share repurchase authorization underscores its approach to capital allocation. To conclude, Arch delivered another strong quarter, I think true to our principles of disciplined cycle management and by leveraging the strengths of the Arch brand and our diversified platform. In today's market, underwriting discipline powered by insights from our investment in data and analytics, rewarding our underwriter for profit and volume, and prudent capital management continues to differentiate Arch and drive long-term value for our investors. Arch's 25-year record of strong returns and compounding book value at double-digit rates is a direct result of hard work and discipline. That is Arch. That is our DNA, and that is why we believe we will continue to deliver best-in-class results across market cycles and into the future. I will now turn the call over to Francois, who will talk through the financials in more detail. Francois? François Morin: Thank you, Nicholas, and good morning to all. Last night, we reported our first quarter results with after-tax operating income of $2.50 per share in an annualized operating income return on average common equity of 15.4%. Book value per share grew by 1.7% in the quarter. Our 3 business segments once again delivered excellent underlying results with an overall ex-cat accident year combined ratio of 82.3% up 130 basis points from the same quarter last year and consistent with the more competitive environment we are facing. I will provide more color on trends in each of our segments shortly. Our underwriting income included $200 million of favorable prior year development on a pretax basis in the first quarter or 5 points on the overall combined ratio. Recognized favorable development across all 3 of our segments and in many of our lines of business, but mainly in short tail lines in our P&C segments and in mortgage due to strong cure activity. Of note this quarter, we commuted a large transaction, which increased the level of favorable prior year development in our reinsurance segment by approximately 25% in the quarter. Current year catastrophe losses were $174 million, net of reinsurance and reinstatement premiums and were mainly the result of winter storms in the U.S. and the Iran conflict. All in, these losses were slightly lower than our seasonally adjusted expectations for natural catastrophes. The insurance segment's gross premiums written grew 2% while net premiums written declined 1.4% year-over-year. As Nicholas explained, the nonrenewal of certain program business acquired as part of the MCE transaction impacted our top line this quarter. In addition, net premiums written were also impacted by a shift in business mix toward lines with lower net to gross retention ratios. The ex-cat accident year loss ratio improved by 70 basis points to 56.7% compared to the same quarter 1 year ago. The acquisition expense ratio for the current accident year increased by 160 basis points the benefit we observed in the first quarter of 2025 from the write-off of deferred acquisition costs from the MCE acquired business rolled off. We would expect the most recent acquisition expense ratio to be more representative of long-term expectations. Our operating expense ratio was higher this quarter as we incurred additional expenses related to the transition of our middle market business to Arch Systems. We would expect our operating expense ratio to revert back to a level closer to historical levels during the second half of the year. The Reinsurance segment had an excellent quarter to $441 million in pretax underwriting income. Overall, gross premiums written were down by 2.3%, while net premiums written were down by 6% from the same quarter 1 year ago. Net premiums written were up in specialty partly due to timing differences in the recognition of certain treaty renewals that impacted our financials in the first quarter of 2025. Over 1/3 of the decrease in net premiums written in property catastrophe was attributable to a lower level of reinstatement premiums compared to a year ago, which were impacted by the California wildfires. Overall, our ex catastrophe accident year combined ratio of 78.1% is comparable to last year's results for the same quarter. Our mortgage segment produced another very strong quarter with underwriting income of $221 million. Net premiums earned were down by approximately $6 million from last quarter, mostly driven by lower levels of cancellation premiums in our CRT business. Of note this quarter, new insurance written at USMI reflects a large non-GSE transaction of $2.2 billion in NIW. Absent this transaction, which increased our NIW by 15%, we would expect our market share of the PMI market to remain relatively unchanged from the prior quarter. The delinquency rate for our U.S. MI business decreased by -- decreased to 2.06%, consistent with our expectations and seasonal trends. On the investment front, we earned a combined $568 million from net investment income and income from funds accounted using the equity method or $1.57 per share pretax slightly down from the $1.60 per share we earned last quarter. Cash flow from operations remained positive at $1.2 billion for the quarter. Our portfolio remains a very high quality with a short duration and in line with our asset allocation targets. Income from operating affiliates was $36 million for the quarter, up from $17 million from the same quarter 1 year ago, which was impacted by the California wildfires. As a reminder, this quarter's result reflects our lower ownership stake in Summer's Re since the start of the year. Our effective tax rate on pretax operating income was 14.8%, reflecting the mix of income by tax jurisdiction. It was slightly below the 16% to 18% previously guided range mostly due to a 1.7% benefit from discrete items. As of January 1, our peak zone natural catastrophe probable maximum loss from a single event 1 in 250-year return level on a net basis. remained flat at $1.9 billion and now stands at 8.2% of tangible shareholders' equity. On the capital management front, we repurchased $783 million of our shares in the quarter or 8.3 million shares. We have repurchased an additional $311 million in shares so far this quarter through last night. Our balance sheet remains in excellent health with strong capitalization and low leverage. With these introductory comments, we are now prepared to take your questions. Operator: [Operator Instructions] Our first question comes from Elyse Greenspan from Wells Fargo. Elyse Greenspan: My first question is on property cat on the reinsurance side. I was just hoping to get some of your expectations for the midyear renewals? And then if you expect declines in the book to continue, would you expect your cat load to come down after the mid-years? Nicolas Alain Papadopoulo: Yes. Elyse, so we don't -- as we always said, we don't have a crystal ball, but for the 6/1, I think we really expect the market to remain competitive and to adjust our underwriting stand based on the actual rate decrease that we will see at that time. So we don't really have a forecast there. On the overall trend of the catastrophic portfolio, I think we have huge headwinds because of the double-digit rent decrease and we really -- I said it in prior calls, we really monitored the property cat through a lens of 50 separate zones. So I think some I go back 2 years ago, they were all green. So now we have a bunch of them that are still green. I think Florida is still green and -- but we have a bunch of them that are yellow and some of them that have churn rates. So I think depending on the where the business renew and our perception of the attractiveness of that zone, we -- our underwriting team, we make the decision, so. Elyse Greenspan: Okay. And then on the casualty side, you guys were mentioning still some good opportunities, I think, on both the insurance and the reinsurance side. Can you just talk through within casualty, where you're currently seeing the best growth opportunities? Nicolas Alain Papadopoulo: Yes. I think we still optimistic on the casualty. And we think that the pain is not gone through yet. As you may have seen I think we're still seeing some little development from the year 2016 and '17, but the most recent years, '21, '22, '23, '24, we've seen additional adverse development. And so that should, in our view, continue to sustain price increases above trend. So in terms of our risk appetite on the insurance and insurance, I think it hasn't changed. I think we like the specialty casualty, the excess sensor plus line, casualty, primary position on the large accounts. So that's where we play. we are not -- we stay away from the commercial auto and also the larger account excess towers, which we think are still very challenging despite some of the rate increases that we've seen. Operator: Our next question comes from David Motemaden from Evercore ISI. David Motemaden: I was hoping maybe just to get an update on the insurance book where we stand just on rate versus trend in both the U.S. and internationally. Nicolas Alain Papadopoulo: So starting with the U.S., I think on the U.S., I think we are broadly getting rate at trend. And I think so, as I mentioned earlier, we are getting rate above trend on the casualty lines of business. And we are getting -- as the tractor on the trend is really the short-tail property lines of business where we've seen a rapid rate decrease. But when you sum it up for North America, I think we're seeing rate slightly below trend. If you go to international, I think we have more short-tail lines on the international book of business. So we're seeing some rate pressure on the short-tail lines. So overall, low 1-digit rate decrease of over trend overall. But we started there with pretty high margins. So we feel very good about the business there. David Motemaden: Got it. And then I believe you mentioned just in reinsurance, some of the supply there and good returns in short tail lines, trickling into casualty re, just wondering, does that change sort of how you're thinking about the growth opportunity there as an offset to the headwinds on the property side? Nicolas Alain Papadopoulo: So on the casualty on the reinsurance side, I think we are mainly talking about quota shares. I think that as I mentioned earlier, I think we like the fundamental of the specialty casualty business. The difficulty there, it's really the sealing commissions. I think based on the past experience of the casualty market, ceding commission should have gone down, but we get we get excess supply. I think there's a lot of other competitors wanting to get on that business or increase share on that business. So that allows for the sealing commission to stay flat and on the best account to continue to go up. So the side cars, the latest flavor of the day with the casualty side car is just going to add to that dynamic. Operator: Our next question comes from Tracy Benguigui from Wolfe Research. Tracy Benguigui: One of the largest primary insurers had said on the earnings call some pretty pessimistic views of property pricing, particularly shared and layered in North America and in London and the culprit is cheaper forms of capital coming in from MGAs reinsurers and alternative capital. So from your vantage point, is this a real structural shift in the market? And how does that influence your underwriting appetite? Nicolas Alain Papadopoulo: Yes, for us is more business as usual. So the advantage that we have is that we are not a retail large account players. We don't play in that space. So that has been -- that has gone up, it has coming rapidly going down. So we don't play in that space. We play in the excess and surplus line property business. And so that space is getting competitive, and we are taking a very careful approach to that line of business right now. Tracy Benguigui: Excellent. And there was also a recent settlement development early in the second quarter around Francis Scott bridge collapse. Are you currently sizing industry loss? And has that pushed your loss estimate upward? Nicolas Alain Papadopoulo: So in that particular case, I think we were holding much more conservative estimate than loss estimates in the market. So no real change for us. Operator: Our next question comes from Mike Zaremski from BMO. Michael Zaremski: In the insurance segment, the underlying loss ratio continues to show some healthy improvement. Is that -- if you can kind of talk about some of the drivers, I believe, right, some of the nonrenewals on some programs is, I think, helping that, but if you can kind of talk around the dynamics we should consider. François Morin: Yes. This quarter, in particular, as we benefited from a relatively benign amount of activity in attritional losses in London, in particular. So our international segment book did very well this quarter. So that explains most of the favorable or a reduction in the kind of ex cat loss ratio compared to a year ago. Again, as a reminder, we'd encourage you all to look at trailing 12-month kind of rolling numbers to kind of get a view on performance of the book. And the impact of the MCE and non renewals is yet to be seen, right? I think it's -- we're -- as the business earns out, it's -- it will show up in the numbers. But at this time, we don't think it will be material. I think it's still a relatively small part of the book you think of an $8 billion insurance segment book of business, the impact of nonrenewing some of these programs will be somewhat immaterial or limited. So hopefully, that explains that really the quarter was all about kind of really good performance out of London. Michael Zaremski: Got it. And Francois my follow-up, I think you mentioned on the catastrophe side that this quarter's losses were I think you said a bit lower than "normal". And you also added a bit on the Iran conflict. Maybe you can kind of just elaborate on the Iran conflict, how you guys are thinking about that? Is it all IBNR, are there real losses or... François Morin: Yes. I mean there's nothing paid, but it's certainly -- there are some real losses, specialty book out of London, like terror, political violence. I mean those are the some of the lines that are exposed, will be exposed. It's ongoing. So we took a first stab at it this quarter based on what had happened and, call it, in the month of March. But we will expect -- we do expect more losses to come through in the second quarter. And we'll keep reporting on it. But it's -- yes, it's ongoing. And the point in my comments was really to communicate that we have been able to absorb those losses in the first quarter as part of our overall cat load, even though technically, the cat load is only on the natural catastrophe side. So it's a man-made. We call that man-made cat, but we still report it as part of our cat losses to the street, and that's kind of included in the overall number. Operator: Our next question comes from Andrew Kligerman from TD Cowen. Andrew Kligerman: So I know you've gotten a lot of questions about property. And I'm kind of -- just to kind of gauge a sense of where we are in the cycle, which you are very good at. I'm wondering if you could share -- and again, this is blunt. Where are you seeing risk-adjusted returns in property catastrophe reinsurance. And I know there are different layers and risk online, et cetera. But like if you had to gauge a risk-adjusted return range, what are we seeing today? And maybe the same question with the E&S property that you've been writing. Nicolas Alain Papadopoulo: And so the way you actually understand is that -- as I explained, we -- property cat, we managed very dynamically based on the actual underlying profitability we see in 50 zones. So we said earlier that 2 or 3 years ago, we were in the 30s. I think the business we have on the book today is still in our mind very attractive because, again, we we're not writing some of the business that we think has fallen below the threshold for us to ride the business. So we think the business -- it's a different mix than it was probably 3 years ago. The mix has shifted, but the business that we have today remains attractive on our book. So -- and we are still in the high teens, I think. Andrew Kligerman: I see, I see. But it's sounds Nicolas... Nicolas Alain Papadopoulo: And on E&S -- yes. Go ahead. Andrew Kligerman: Just following up on that, Nicolas. It sounds like that there is business out there that Arch Capital won't write that is well below your upper teens return threshold. Is that fair? Nicolas Alain Papadopoulo: That's fair. Operator: Our next question comes from Cave Montazeri from Deutsche Bank. Cave Montazeri: First question is on share repurchases. It was nice to see a little uptick. I think this quarter, it was 87% of your operating income versus roughly 70% over each of the past 2 quarters. Then my question is, if the current pricing trends continue, you don't really need any capital to grow and you're starting from a pretty healthy capital position. So without any obvious mine targets, is there any reason why you couldn't pay out of income, potentially even more, given that you're releasing capital when you're shrinking. I guess I don't want to sound greedy, but like I'm wondering what held you back from doing more this quarter? François Morin: I mean, there's nothing -- I mean, nothing is stopping us. We don't set targets and how much we're going to buy back. So we go at it, we look at what's in front of us. We look at both in terms of the stock price and also liquidity in the stock, which is still very liquid. So that means so far hasn't been a problem. But in terms of like could we buy back 100% of our income for the year, we could. I mean we -- but that's not how we think about it. It's more, I'd say, an outcome if things work out in a certain way in terms of kind of, again, the stock price and the volume, et cetera. So you saw the reauthorization by the Board. I think, hopefully, that gives you a little bit of a some direction in terms of how we think about the opportunity there and how much capital we think we can buy back or are looking to buy back. But whether it happens this quarter or next quarter or next year, I think that's nothing set in stone. So we'll react to what's in front of us. But to answer your question, there's really no structural limitations in beyond, again, the regulations around buying back stock that we have to deal with. Cave Montazeri: That's great to hear. My second question, just want to pivot to cyber insurance. And maybe if you can help us separate the cyclical versus structural pieces for us. So I guess first question, where are we in the underwriting clock today for cyber? And then structurally, like given the recent developments in AI and the potential for cyber attacks to become more frequent and more destructive, does that change your view of tail risk, aggregation risk or even the long-term insurability of the product? Nicolas Alain Papadopoulo: Yes. I think in terms of [ Ingrid Clark ], I would think cyber is probably around 3:00 p.m., I think is still okay, but it's getting to that point. So in terms of the recent AI, Anthropic Mythos, we see it as a real current threat. But we don't really see it's changing the cyber product. I think we see the cyber product as more of a the cyber market as more of an arm race between attacker and defender. And certainly, Mythos is accelerating that trend. But Mythos can help the attacker, but the defender can also reinforce in deference using the same model. So we think it's really an acceleration of the speed at which maybe cyber attacks can be conducted. And it's -- and to your point, it's also an acceleration of the scale. So I would think because the scale would be larger I would think we see it more as an increased systemic risk. So we are taking a very careful approach to that in our RDS scenarios, so. Operator: Our next question comes from Josh Shanker from Bank of America. Joshua Shanker: Yes. I know you don't give guidance certainly on margins, but it's an interesting time. Obviously, property declines and prices are well noted. Broadly speaking, Arch and other companies, loss ratios are generally in the same sort of range they were a year ago, but growth is about I guess maybe it's a clock question, but as you sort of give an outlook to internally for the next year, do you expect arches and the industry's loss ratios to begin to deteriorate from here? Or do you think the current levels are supportable. Nicolas Alain Papadopoulo: So I don't know about the industry, to be honest. It's hard to predict because as far as we are concerned, we are confident in our ability to manage the cycle. That's what we do. So I think we I think that's our first line of defense. If things fall below our threshold, we reduce. And we are confident in our ability to continue to find attractive opportunities to be able to expand. And I think we have -- certainly, the property market is coming down. So everybody can see that. But we still think we have a good opportunity on the casualty side. So overall, I think -- again, as I said, based on our own mix of business, we think that we see rates just below trend. So that would support a thesis that margins are sustainable at this for the near future. Joshua Shanker: And then in terms of SME commercial business, the mid-core acquisition was in part to be less cyclical. Are you seeing fruits of that play out in 2026 that you're able to capture some incremental share in less cyclical ostomy business. Nicolas Alain Papadopoulo: So again, we just -- as I mentioned in my remarks, we just finished the cutover. So the main focus on the -- for us has been to roll over the portfolio and to get to create an entirely workbench with which we can underwrite the business on Arch paper. So those have been the primary goal. So now that this is done, it opens our abilities to try to enhance the value proposition of that business and be at scale. So I think we -- I would doubt I think it's more of a 2027 game than it is in 2026 because after you do the cutover, you have to stabilize, then we have to start to -- we are focusing on building new tools to really help our underwriters with battery selection, triage and so on that will make them more productive. Operator: Our next question comes from Rob Cox with Goldman Sachs. Robert Cox: Just a question on premium leverage. So on the one hand, the business is shifting away from property and property cat, which should allow for an increase to premium leverage. But in the past, we've noticed it's been hard to rightsize leverage in a softening market like this due to the lack of growth opportunities I guess the question is, do you foresee premium leverage would continue to fall like this as we get further into the soft market? And how does that impact your view on the future ROEs? François Morin: Well, certainly, we're managing the equity side of the leverage. So if we can't grow, we can't deploy the capital in the business as we've been doing like the last few quarters, we'll be returning more of the capital to the shareholders. So that's certainly a tool we have that we have been using. We'll keep using and make sure that our ROEs remain attractive. So I'd say, for sure, like if the mix goes more long tail than short tail, it helps on the leverage. And again, the equity part of it is something we're watching careful. Robert Cox: That's helpful. And then just a follow-up on terms and conditions. Just curious, if any negotiations on terms and conditions started to change in the quarter and like which terms you think could start to get further negotiated as we move deeper into the soft market. Nicolas Alain Papadopoulo: Which lines of business are you talking about property cat or the... Robert Cox: Yes, particularly property cat reinsurance. Nicolas Alain Papadopoulo: So we've talked to our team. And we are seeing a bit more, but it remains a very small portion of some of the aggregates, a bit more aggregate a bit more top end drops, which -- but it's at the margin so far. So -- but as the market gets more competitive, we'd expect more of those structures that are much more difficult to price to come back to the market. Operator: Our next question comes from Ryan Tunis with Cantor. Ryan Tunis: Well, the company is obviously a much larger company a day than it was 7 years ago, both from a premium side, but also from an OpEx side. And I imagine a lot of that increase in OpEx is in support of hard market growth. So my question is, no longer being in a hard market. To what extent are you looking at managing the OpEx side of things as a potential source of boosting margins? Nicolas Alain Papadopoulo: I think the answer is yes. We -- that's something that's in our mind, I think the loss ratio part is probably more important as the market gets softer, but yes, I think I would say especially in the insurance group, I mean, the expense side is important, and we are actually paying attention to it. Ryan Tunis: Okay. And then just a follow-up for Francois. Underlying loss ratio and the mortgage insurance segment looked a little elevated. Nothing really stood out to me, maybe a little bit higher reserve for default. I'm not sure if that's seasonal, but how should we interpret that loss ratio result this quarter in mind? François Morin: Yes. Definitely, some of it is a result of the change or the growth in the average mortgage that goes into NOD. So if you think of the loans that are currently going in NOD this quarter are more -- from more recent vintage years and post-COVID effectively, right? And that's when mortgage loans were up in size. So as you look at the -- frequency assumptions have not changed. They've been flat for us the last couple of years, I want to say. But the math behind the reserve levels is such that we apply the frequency with the severity per loan and the severity has -- remains stable, but it's the average size of the loan that's hitting the loss ratio. So I think it's a little bit kind of like an evolving kind of thing within the loss ratios. I think it's -- for mortgage, it's gone up a little bit, but still very much within what we would expect it to be. Operator: Our next question comes from Alex Scott with Barclays. Taylor Scott: I guess I wanted to follow up on the excess capital and less about just asking how much you buy back. But thinking more broadly, I mean, you don't have the business that you can really lean into growth. And right now, like you have in sort of most environments in the past has been -- 1 of your 3 businesses has been attractive to really leg into. So does it create any need to sort of look at potentially diversifying transaction? And then is lagging into an artificial intelligence investment and doing it that way to try to achieve growth something that you think is achievable? Just trying to understand how you're thinking about the different ways to get invested. François Morin: Yes. I mean I'll take the first part. I mean, certainly, the business are all doing well. I mean, yes, I mean, you're right. I think the growth opportunities in all 3 of our segments are somewhat limited. We're working hard trying to find new opportunities internationally and et cetera, like mortgage and insurance for sure. But at this point, it's harder to see how the market will support massive or outsized growth in any of our segments. So yes, I mean, the share buybacks, again, like as we generate -- we keep generating meaningful earnings, I think that we don't want to accumulate excess capital beyond what we think is prudent. So we're certainly looking to return it or do something with it. M&A is -- we look at a lot of things, but we want for us to do something, given our scale, we truly think it has to be something that is additive. We're not interested in doing deals just for the sake of doing deals. It has to make us better. It has to make us more competitive, increase our presence or our scale in a market, et cetera. So we're very selective there. But we're trying to think outside the box, too. I mean if there's things that we don't do currently that can make us better, we'll explore those. In terms of AI, I mean, I don't -- I mean, it's certainly something that is coming at us really quickly, really fast. We're trying to think of ways where we can kind of, again, automate things, and we're doing some of that, but I think there's -- it's still very early innings, very early days of that. So I think we'll -- that will evolve, and we'll see where it goes. Nicolas Alain Papadopoulo: Yes. [indiscernible] we've been investing in AI for the last 10 years, both in mortgage and P&C. So we've deployed a bunch of AI and machine learning models and -- but it's changing really fast. I think the industry in our struggle is really to really show results while at the same time, working on our data strategy and our integration of our system to really support AI at scale. And third, really figure out what AI would look like 3 years from now because it's changing so quickly. If you look at the Entropic model, they open huge opportunities to do certain things, but what's next. So I think you really have to take -- and it's a lot of investment. At the same time, you're trying to create productivity and the insight for your underwriters to be able to compete. So I think it's... Taylor Scott: Yes, all helpful. And as a follow-up, I wanted to see if you could talk a little bit about exposure to private credit. I know I think in the past, you've talked about the alternatives portfolio allocation and private credit, so we have a rough idea of that. But I wanted to see if you could tell us about anything that would be sort of considered private credit within the fixed maturity part of the book? François Morin: Yes. We have some, but limited, right? So we have it both in our, again, call it, public markets and private markets. the general thinking that the strategy with our investment guys has been to go more on the high-quality loan. So kind of low loan to value and kind of very good collateral supporting the investments. So yes, it's something we're watching like everybody else. But at this point, there's no red flags, nothing that really is rising to a level where we have to take action. Operator: Our next question comes from Matthew Heimermann with Citi. Matthew Heimermann: I just wanted to follow up on your call related to using AI in the technology rollover of mid-corp. And just curious how that experience has been different than past. I recognize that you're not a significant acquirer. So universe of past might be smaller, but just thought that was provocative comment. Nicolas Alain Papadopoulo: Yes. So I think the -- I mean, the way it really help us and speed up the process is to write some of the codes. I think we old didn't do it out there. But when we did, it was really helpful. And the big help was on the testing. A lot of the testing was done by AI, and that really accelerated the time to market. So those are the 2 aspects that we -- when we talk to the teams, the really highlight as the impact of AI on this shift, on this [indiscernible]. François Morin: Because again -- right, Matt, just quickly, I mean, again, it was a build-out of a brand-new effectively platform infrastructure, right? So it's unusual in that sense that we bought the business. But without the systems, we had to create this infrastructure or this platform, brand new that we ourselves at Arch did not have. So it's -- that's where I think to Nicolas' point, the AI kind of capabilities really came through and helped speed up the process. Matthew Heimermann: That's helpful. I just want to make sure I understand the using -- use of the word testing correctly. Is that -- should I think about that as auditing output of... Nicolas Alain Papadopoulo: Running scenario to make -- is running scenarios to make sure that every time you create -- we created a new platform to a good point, Francois for context. And so every time you create a new software you have a lot of testing that to make sure that the software is doing what it's supposed to do. And a lot of it today can be done through AI as opposed to individuals going in and asking the underwriter to test, the guys that collect the cash to test that -- what they answers get to the right places and so on. Operator: Our next question comes from Meyer Shields with KBW. Meyer Shields: Francois, starting question for you. I guess I expected operating expense and reinsurance to go down because you should have more Bermuda tax credits. And I guess I didn't see that. I was hoping you could talk us through the moving parts. François Morin: Down relative to last year or last quarter? Meyer Shields: Last year. For sure up from last quarter. François Morin: Yes, they're certainly up from last quarter. From last year, I mean, yes, there is some -- no question that there's some QRTCs this quarter in reinsurance. I mean, what explains the increase is more investments in staffing and building out further the insurance -- the reinsurance group. So I think there's -- well, I know that there's been kind of hiring around like technology and improving systems, so that's certainly a big part of it. And then a little bit of noise around some of our structured deals that we wrote a year ago. I mean they were actually beneficial to the expense ratio, the OpEx ratio a year ago. So if you adjust for that, that explains a little bit of the difference as well. But nothing -- I'd say -- nothing, I'd say structural that we -- was a surprise to us. Meyer Shields: Okay. That's very helpful. And then shifting gears, there are some reports of very significant rate increases for product lines exposed to the Iron conflict. And I was wondering whether Arch is trying to write more of that business or being more cautious because of the risk. Nicolas Alain Papadopoulo: So we do that. I would be with our London office, where we write some political variants and were on line. So we we've been cautious, but we -- the rates have spiked up. So we actually run a little bit more business but in a very cautious way. Operator: Our next question comes from Rowland Mayor from RBC Capital Markets. Rowland Mayor: I just wanted to ask on your PML disclosure because I'm kind of curious, do you think that the catastrophe models are fully capturing the improved loss environment in Florida from AOB benefit perform? François Morin: The P&L that we report? Rowland Mayor: Yes, I'm just curious on when you model the cat losses out in the state if it's fully capturing how the personal line side of the business has seen significant reports in the loss environment. François Morin: It's been reflected. I think we -- historically, we have -- as we do our modeling, we have loads for certain features of the -- specific to the Florida market that with the reforms, I think, have changed. So we changed how we model those things on fraud and additional expenses around kind of claim handling, et cetera. So that's all captured right now. So yes, our thinking has changed and what we report to you is how we see the business, how we expect the environment to respond given what we know about the latest reports. Operator: Our next question comes from Brian Meredith with UBS. Brian Meredith: Back on the PMLs, I noticed your PMLs did not decline. That kind of stayed the same at 4.1% versus your 1/1 disclosure, but you're declining property cut and everything. Can you help us reconcile kind of what's going on with the PMLs relative to what you're doing with property reinsurance and insurance. François Morin: Yes. I think right, Brian, it's the 4.1 number. So not a ton -- again, think of it as the peak zone. It's -- so I would expect changes at 7.1 next quarter. There's not a ton of activity for us necessarily at the 4.1 renewal that impacts our zone. So that would be the answer being Florida Tri State -- Tri County, in particular, we'll see what 6.1, 7.1 does for us, but that's where I would expect maybe a more meaningful change. Brian Meredith: Got you. But I mean even if I look at -- sorry, look at what happened between September and 1/1, it still was up despite the reduction in business you had at 1/1 renewals, right? So is it like -- is it simply we're just looking at changes in rate? Are you dropping exposure as well? François Morin: Well, at 1/1 -- I mean we held on to most of this. We actually grew a little. So you have we gave up some rate, but we still found that, that business met our -- we're still attractive in terms of returns. So dollars of P&L didn't really change a whole lot. There's always -- you lose one account, you replace it with another. So it might on the margin change the P&L a little bit. But you're right. I mean the rates went down. So we gave up some returns weren't as good as they had been the year before. But that's again, looking ahead, 6.1, 7.1, don't know how it's all going to shake out, but that's when you may want -- I mean there could be some more significant changes in the PMLs depending on kind of what we will do or not. Nicolas Alain Papadopoulo: As we said earlier, we put Florida was green. So I think, for us, we getting the return, we're not going to let go to renewals, and we're going to try at the margin to write more. So I think that was not a zone where we decided to come back. Operator: Our next question comes from Pablo Singzon with JPMorgan. Pablo Singzon: This will be a quick one. Nicolas, just want to follow up on your comments regarding actually side cars. Do you think this is a blip or is there a risk of casualty or refacing the same structural hesitance that property cat experience alternative exacerbating the soft market cycle there? Nicolas Alain Papadopoulo: I couldn't hear you which line of business? Pablo Singzon: Just the casualty side cars? And do you think that ultimately, it will have the same effect that alternative capital had on property cat. Nicolas Alain Papadopoulo: I mean it's hard to tell. The thing we know is that it's not helping. I think the thing that may the thing I may mitigate that is the security risk. I think the people that have used the site cars they usually use it because they want to write that business, but they don't like it. They haven't seen people that are in the market, like Arch using those tools yet. So I think it's -- for the buyer and for the broker, I mean, they have a decision to make because those claims are going to get paid 5, 6 years, 7 years from now and with the vehicle and the cedent, which are usually not the best way of students be there to pay the claim. So I think that may be mitigation factor compared to property cat, where the loss is imminent, and we know the capital roads are high. So I think that would be the difference. Operator: Our next question comes from Yaron Kinar with Mizuho. Yaron Kinar: Just want to circle back to the man-made Iran-related losses. Can you break them out for us for insurance and reinsurance and then maybe what the associated premiums are as well earned premiums? François Morin: Well, we don't break out any -- we report everything as part of cats. But again, the -- it's part of the -- it's priced, right? So when we write some of these payrolls or these lines of business, again, colic violence, tear, et cetera, which in this case, are generating cat losses to us, again, just in terms of how we report them to you, there's -- it's part of the pricing, but it's not really captured in the, call it, our cat load per se that we report to you. Nicolas Alain Papadopoulo: Yes. I think to give you an idea, I think when we talk to our teams, we think that political balance on loss is about $3 billion, and we think the -- it's about the premium that you collect for those lines of business. So that gives you -- I mean, it's not a precise information, but that's the sense that we have $2 billion maybe. Yaron Kinar: $2 billion. And that's across both reinsurance and insurance. Nicolas Alain Papadopoulo: So the loss for the market today, I think, is estimated at $3 billion. We estimate an estimate the premium for those lines of business that have been impacted to be around $2 billion. Yaron Kinar: Because I guess what I'm trying to get at here is when I look at the kind of the underlying loss ratio here, it now doesn't capture some losses, but we still have the premiums associated with that book and the attritional. So like as we think forward, I want to make sure that we're using the right base for the underlying loss ratio. François Morin: Yes, good point. And maybe -- I mean, we can do that offline with you if you -- if that's okay. I mean, I think we can kind of walk you through what the -- yes. Yaron Kinar: That will be perfect. And then my other question was in the insurance book, I saw that the other liability claims made line grew quite nicely in the quarter. Can you talk about what drove that? Nicolas Alain Papadopoulo: Yes. It's really the transaction liability. I think we write transaction liability, both in North America and in our London office and it's really driven by higher pricing in that line of business as well as the M&A activity that has picked up in the last couple of quarters. Operator: I'm not showing any further questions. Would you like to proceed with any further remarks? Nicolas Alain Papadopoulo: Yes, I want to thank you all to participate to our call. And we feel good about the business as it is a challenge with the market conditions for sure. But I think as we said, we think we are equipped and our teams are equipped and ready to compete in that market environment and generate a decent return for our shareholders. So thank you. Operator: Ladies and gentlemen, thank you for participating in today's conference. This concludes the program. You may all disconnect.
Operator: Good day, and welcome to the Prosperity Bancshares First Quarter 2026 Earnings Conference Call. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the conference over to Charlotte Rasche, Executive Vice President and General Counsel. Please go ahead, ma'am. Charlotte Rasche: Thank you. Good morning, ladies and gentlemen, and welcome to Prosperity Bancshares First Quarter 2026 Earnings Conference Call. This call is being broadcast live on our website and will be available for replay for the next few weeks. I'm Charlotte Rasche, and here with me today is David Zalman, Senior Chairman and Chief Executive Officer; H.E. Tim Timanus, Jr., Chairman; Asylbek Osmonov, Chief Financial Officer; Eddie Safady, Senior Vice Chairman; Kevin Hanigan, President and Chief Operating Officer; Randy Hester, Chief Lending Officer; Mays Davenport, Director of Corporate Strategy; and Bob Dowdell, Executive Vice President. Also joining us this morning are Bob Franklin, Chief Executive Officer of Stellar Bancorp; Ray Vitulli, President of Stellar Bancorp; and Paul Egge, Chief Financial Officer of Stellar. David Zalman will lead off with a review of the highlights for the recent quarter. He will be followed by Asylbek Osmonov, who will review some of our recent financial statistics; and Tim Timanus, who will discuss our lending activities, including asset quality. Finally, we will open the call for questions. Before we begin, let me make the usual disclaimers. Certain of the matters discussed in this presentation may constitute forward-looking statements for purposes of the federal securities laws, and as such, may involve known and unknown risks, uncertainties and other factors which may cause the actual results or performance of Prosperity Bancshares to be materially different from future results or performance expressed or implied by such forward-looking statements. Additional information concerning factors that could cause actual results to be materially different than those in the forward-looking statements can be found in Prosperity Bancshares' filings with the Securities and Exchange Commission, including Forms 10-Q and 10-K and other reports and statements we have filed with the SEC. All forward-looking statements are expressly qualified in their entirety by these cautionary statements. Now let me turn the call over to David Zalman. David Zalman: Thank you, Charlotte. I would like to welcome and thank everyone listening to our first quarter 2026 conference call. The first quarter of 2026 was impactful for the company, and I'm excited to announce that during the quarter, we completed the merger of American Bank Holding Corporation on January 1, 2026, and completed the merger of Southwest Bancshares, Inc. on February 1, 2026, and announced the merger of Stellar Bancorp on January 28, 2026, for which we have now received all necessary regulatory approvals and expect to complete on July 1, 2026. Additionally, we completed a core system conversion in February. We and others believe that Prosperity is doing the right thing. Prosperity has been ranked as one of Forbes America's Best Banks for 2026. And since the list's inception in 2010, was ranked in the top 10 for 14 consecutive years. Prosperity has also been recognized by Newsweek as one of America's Best Regional Banks and was ranked 15th in the S&P Global Market Intelligence top 50 U.S. public bank rankings for 2025. In an effort to continue to enhance shareholder value, Prosperity Bancshares repurchased approximately 837,000 shares of its common stock at an average weighted price of $68.15 a share for a total of $57 million during the 3 months ending March 31, 2026. Our net income was $116 million for 3 months ending March 31, 2026, compared with $130 million for the same period in 2025. The net income per diluted common share was $1.16 for 3 months ending March 31, 2026, compared to $1.37 for the same period in 2025. During the first quarter of 2026, Prosperity incurred merger-related expenses from the mergers with American and Southwest of $42.5 million or $0.34 per diluted common share. Excluding these charges, the net income was $149.9 million and net income per diluted common share was $1.50 for the first quarter of 2026. This represents a 9.5% increase over the $1.37 reported for the same period in 2025. Our loans were $25.2 billion at March 31, 2026, an increase of $3.3 billion or 15.1% compared with $21.9 billion at March 31, 2025. The linked quarter loans increased to $3.4 billion or 16% from $21.8 billion at December 31, 2025. Loans increased primarily due to the mergers with American and Southwest. Excluding the loan increases due to the mergers and excluding the impact of the net charge-off, total loans decreased 1.2% or about 4.8% annually, that did include about $100 million plus in warehouse lending increase. So excluding that, the decrease would have been somewhat more. The deposits were $32.6 billion at March 31, 2026, an increase of $4.6 billion or 16.4% compared with $28 billion at March 31, 2025. Our linked quarter deposits increased $4.1 billion or 14.6% from $28.4 billion at December 31, 2025. Deposits increased primarily due to the mergers. Excluding the deposits acquired from American and Southwest, our core deposits increased about 1.2% and public fund deposits experienced its normal seasonal decrease. Prosperity has strong noninterest-bearing deposits of 32.4% of the total deposits as of March 31, 2026, with a cost of funds of 1.45% and a cost of deposits of 1.32% compared with 1.38% for the same period last year. Our net interest margin on a tax equivalent basis was 3.51% for 3 months ending March 31, 2026, compared with 3.3% for the 3 months ending December 31, 2025. Obviously, the net interest margin was affected by the mergers but it was also impacted by the repricing of assets as we predicted and mentioned during previous calls. Our asset quality, our nonperforming assets totaled $122 million or 33 basis points of quarterly average interest-earning assets as of March 31, 2026, compared with $150 million or 46 basis points of quarterly average interest-earning assets at December 31, 2025. The allowance for credit losses on loans and off-balance sheet credit exposure was $421 million at March 31, 2026, compared with $386 million at March 31, 2025. The allowance for credit losses on loans increased during the first quarter of 2026 due to the mergers of which $47 million was attributable to the American merger and $43 million was attributable to the Southwest merger. Excluding Warehouse Purchase Program loans, the allowance for credit losses on loans to total loans was 1.61% at March 31, 2026, and that's compared with 1.67% at March 31, 2025. Our quarterly net charge-offs were $41 million, the largest amount in our bank's history. This has mitigated somewhat by the total being comprised primarily of two credits both of which were unique in nature and we believe do not represent a trend in the potential future losses. This is evidenced by the lack of any material additions to nonperforming loans in quarter 1, 2026, and only two nonperforming relationships of more than $10 million. Both charged-off credits were generated out of our Dallas office. Both loans were shared national credits. However, both were initially originated and syndicated by us before the loans were moved to much larger banks that were willing to provide modified loan structures that we were not. The larger charge-off of approximately $30 million was to a start-up insurance company. Once that loan was moved and syndicated, Prosperity purchased a percentage of that loan back, although it was a smaller exposure than we previously had. While the borrower had allegedly a strong sponsor that is well known in the industry with the history of backing its investments, it failed to do so this time. The smaller charge-off with a customer who legacy banked for over 15 years and is reflective that in lending money, sometimes things just don't work out. With regard to acquisitions, as previously mentioned, the merger of American Bank Holding Company was completed on January 1, 2026, and the operational integration is scheduled for September 2026, and the merger of Southwest Bancshares was completed on February 1, 2026, and the operational integration is scheduled for November of 2026. We are fortunate to have American and Southwest associates on the Prosperity team. We are excited about our pending merger with Stellar Bancorp and expect to complete the transaction on July 1, 2026. While we continue to have conversations with other bankers regarding potential acquisition opportunities, we remain focused on the completion of the Stellar merger and the integration of all three transactions. Texas and Oklahoma continue to benefit from strong economies and are home to 57 Fortune 500 headquartered companies. Texas also benefits from diversification in various industries, including energy, oil, gas, renewables, technology, manufacturing, trade logistics, major ports health care and finance. Further, it's business-friendly environment, no state income tax, population growth that supports spending and workforce expansion and key role in trade and cross-border commerce positions Texas well for 2026 and the future. While Texas continues to outperform the U.S. on output growth, the labor market has cooled noticeably after years of rapid expansion. The growth in 2026 is expected to be steady, although the state's size, diversity and policy advantages position it well for a rebound. Overall, I would like to thank all of our associates for helping create the success we have had. We have a strong team and a deep bench at Prosperity and will continue to work hard to keep our customers and associates succeed and to increase shareholder value. Thanks again for your support of our company. Let me turn over the discussion to Asylbek Osmonov, our Chief Financial Officer, to discuss some of the specific financial results we achieved. Asylbek? Asylbek Osmonov: Thank you, Mr. Zalman. Good morning, everyone. Net interest income before provision for credit losses for the 3 months ended March 31, 2026, was $321.2 million, an increase of $55.8 million compared to $265.4 million for the same period in 2025, and increase of $46.2 million compared to $275 million for the quarter ended December 31, 2025. The net interest margin on a tax equivalent basis was 3.51% for the 3 months ended March 31, 2026, an increase of 37 basis points compared to 3.14% for the same period in 2025, and increase of 21 basis points compared to 3.3% for the quarter ended December 31, 2025. Excluding for accounting adjustments, the net interest margin for the 3 months ended March 31, 2026, was 3.44% compared to 3.1% for the same period in 2025 and 3.26% for the quarter ended December 31, 2025. The increase in net interest income and net interest margin during the first quarter 2026 is primarily due to repricing of earning assets and addition of American Bank and Texas Partners banks during this period. The fair value loan income for the first quarter 2026 was $3.7 million compared to $3.1 million for the fourth quarter of 2025. The fair value loan income for the second quarter of 2026 is expected to be in the range of $3 million to $4 million. Noninterest income was $46.5 million for the 3 months ended March 31, 2026, compared to $42.8 million for the quarter ended December 31, 2025, and $41.3 million for the same period in 2025. Noninterest expense was $217.3 million for the 3 months ended March 31, 2026, compared to $138.7 million for the quarter ended December 31, 2025, and $140.3 million for the same period in 2025. The linked quarter increase was primarily due to merger-related expenses of $42.5 million and the addition of American Bank and Texas Partners Bank during this period. For the second quarter of 2026, we expect noninterest expense to be in the range of $176 million to $180 million. This projection does not include additional onetime merger expenses for the quarter. The efficiency ratio was 59.2% for the 3 months ended March 31, 2026, compared to 43.7% for quarter ended December 31, 2025, and 45.7% for the same period in 2025. Excluding merger-related expenses, the efficiency ratio was 47.6% for the 3 months ended March 31, 2026. The bond portfolio metrics at 3/31/2026 have a modified duration of 3.8 and projected annual cash flows of approximately $2.1 billion. And with that, let me turn over the presentation to Tim Timanus for some details on loan and asset quality. H. E. Timanus: Thank you, Asylbek. Nonperforming assets at quarter end March 31, 2026, totaled $122.107 million or 48 basis points of loans and other real estate compared to $150.842 million or 69 basis points at December 31, 2025. Since March 31, 2026, $7.936 million of nonperforming assets have been removed or put under contract for sale. For March 31, 2026, nonperforming asset total was made up of $108.714 million in loans, $136,000 in repossessed assets and $13.257 million in other real estate. Net charge-offs for the 3 months ended March 31, 2026, were $41.309 million compared to net charge-offs of $5.884 million for the quarter ended December 31, 2025. There was no provision to the allowance for credit losses during the quarter ended March 31, 2026. But $91.4 million total was added via the mergers with American Bank and Texas Partners bank. No dollars were taken into income from the allowance during the quarter ended March 31, 2026. The average monthly new loan production for the quarter ended March 31, 2026, was $312 million compared to $314 million for the quarter ended December 31, 2025. Loans outstanding at March 31, 2026, were approximately $25.288 billion, compared to $21.805 billion at December 31, 2025. The March 31, 2026, loan total is made up of 38% fixed-rate loans, 28% floating rate loans and 34% variable rate loans. I will now turn it over to Charlotte Rasche. Charlotte Rasche: Thank you, Tim. At this time, we are prepared to answer your questions. Our call operator, Nick, will assist us with questions. Operator: [Operator Instructions] The first question will come from Catherine Mealor with KBW. Catherine Mealor: I wanted to first to start out on the NIM guidance. It was great to see the NIM move higher. I know part of this was just the addition of these 2 acquisitions. But interested if you could just help us think about how you're thinking about the margin moving forward next quarter and then once you add in Stellar. And then maybe is there anything within the margin this quarter that felt onetime in nature, either some kind of onetime loan payments or anything like that, that we should be aware of that we should be rolling forward to next quarter? Asylbek Osmonov: I'll answer, Catherine. So we are pleased with our margin expansion this quarter. it was, like I mentioned, contributed from our asset repricing during the first quarter and addition of 2 banks to help us with the increase in the margin. But if you look at our rate track model, and it's like based on the static balance sheet, looking for the second quarter, we see that our projected margin for second quarter will be flat and a little slightly higher than the first quarter. And the reason is that there was like -- there was several factors that impact in Q1. We saw continued repricing of earning assets, but we also had -- we recognized about $4 million of loan income from nonaccrual loans, which we don't expect in the second quarter. And also, I think the -- having fewer days than the calendar quarter helped as well -- historically helped our margin. So if those 2 things had an impact on it, but overall, we are very pleased with the expansion. David Zalman: Do you want to go ahead and give them some kind of guide? Asylbek Osmonov: So we continue on the guidance. If you kind of long term, and I'm going to include the Stellar Bank in our model for 2026, I think what the model shows that we'll be exiting combined NIM around 3.70% and -- but for having full year of Prosperity and half year of Stellar, average model shows around 3.60% for 2026. Catherine Mealor: Okay. Great. And then on the bond, there was a big increase in assume you restructured the portfolios that you acquired. Is this a good run rate for the rent yield on the securities book or anything to be aware of there and how you're thinking about that going forward? Asylbek Osmonov: No, I think it's a good run rate. What we've done in the first quarter, we did in addition to bringing the bond book from the acquired banks, we also did buy some securities. That's why you saw almost $1.4 billion including bond portfolio. I think we also continue to buy. So from now on, we -- I see that the yield on bonds should increase a little bit than what we had in the first quarter. Catherine Mealor: Okay. And where did that $1.4 billion in securities -- what was the rate -- the new rate on that? Asylbek Osmonov: So I think it's between -- we were able to get between 4.50% and we were able to get around 4.85%. So it was kind of in between when rate is with the Iran war, the rate fluctuated, so we were able to secure some at 4.85%. Operator: The next question will come from Manan Gosalia with Morgan Stanley. Manan Gosalia: Can you hear me? David Zalman: Yes, we can. Manan Gosalia: All right. Sorry about that. So David, you mentioned the benefits of diversification in Texas. At the same time, you mentioned the labor market is kind of cooling right now. And then maybe if I add on to that, there's clearly a lot more competition, especially from some out-of-state banks. Can you put that together for us in terms of how you're thinking about competition overall, loan spreads, deposit rates, loan growth and just your bigger picture thoughts on the dynamics in the state? David Zalman: Well, that's a big question. But even though it may be slower growth, there's probably still better growth than anywhere else in the United States. So I still think that Texas is probably the best place to be as far as growth goes. I mean there has -- it's really kind of a -- it's kind of split. Everybody complains about prices going up and when they go to the grocery store or they go buy gas or car that used to cost $60,000 now costs $100,000. And everybody complains about it, but when I talk to people, again, I think probably middle class and upper middle class, it still had to slow people down. People still have a lot of money and they're still spending money. Probably it's affecting lower earning group than maybe the other group. But I think for the long run, Texas has still had tremendous growth. You're still seeing I mean every time California does a thing like they're going to tax people 5% on net worth, make it only makes states like Texas and Florida better. So for the foreseeable future, we still see it very good. Talking about the competition, that is a big deal because you have a lot of banks that want to be in Texas, it's hard for them to get market share, and we're competing against them on loans on a day-to-day basis. And some of the bigger deals that we competed on where we were in the 6% price range, they were down in the 5.9% range. I understand that when we ever go into a new market, that's exactly what we do. We try to underprice something and try to get some market share. So that's what we're looking at from the out-of-state banks coming in. On the deposit side, you still see them throwing sometimes if you're a noncustomer right now like Truist, you are advertising like a 4% rate on a money market rate -- on a money market account, we're closer to the 3%. So they're trying to buy the business. We understand that. At the same time, we have in acquiesce. We lost several big deals where we haven't come down on the price, we haven't come down on the price and we're still trying to maintain our margin, I think that we will continue. And I think that overall, in the long run, we've been through this before. It's not our first rodeo. We'll continue to do good. Our partners, you could saw -- Stellar, they did much better than we did this time. And I think it just shows that things happen over a period of time. They were up over $200 million. where they might have been lagging before. And I think that's the same thing for us. We'll win. We have a number of big deals that we're looking at right now that we -- I think we've agreed to the price. We're just making sure that we want to do the deal. So I do see that. Having said that, we have 3 mergers with banks. And if you look at it historically, I'd like to tell you that you're going to see this mid- to single digit loan growth or double-digit loan growth, and that just doesn't happen. I think that if we can stay flat, that's pretty good this year. I mean, because I think that as you do these deals, you just see some you see some change in that. And just historically, I'd like to say that you're going to be there, we're going to make it. But historically, that's not happening. Kevin, you may have some comments on the deal or... Kevin Hanigan: No, I agree with you, David. I think not to get too granular, Prosperity ex acquisitions has not had growth in the last couple of quarters. I think as I think about the wise to that, the market has gotten more competitive, particularly on very large construction deals, which we've always played a part in. The market has gotten cheaper in terms of the rates that they're willing to do those deals at and they come off levels of recourse, much lower levels of recourse. And we have not. We have not played in that game. And it's cost us. We've missed out on some deals. I think to augment that or to fight that off a little bit. We're likely to set aside a bucket of, say, $750 million to $1 billion worth of commitments where we'll play in those markets with certain clients, very well-known folks that have been clients for a very long period of time. So I think we'll fight some of that off ourselves ex what happens in the acquisitions. As David said, and this is no surprise to any of you. When we do acquisitions, it is more likely than not that there's some asset runoff from those acquisitions in the ensuing 18 months. It's been the case time and time and time again. And we've got 3 of them. So we'll be fighting those headwinds for the next year to 15 months, 18 months, and I think if we are flat during that period of time, overall, we'll have done pretty well. David Zalman: And I'd even say some of the out-of-state banks are offering 5.8%, 5.9% and we can get 4.85% on a security with about a 4-year average life. Pretty hard to pay the lender, reserve some money for loan loss and really go that low. But again, at the same time, if a customer is able to bring in, it's just not a dry relationship and that customer is really able to bring over a positive relationship that's a whole different story, and we'll give you credit for that, and we'll probably get as low as that if it's not a dry relationship. But all in all, we still stick with the story that the core deposits are really what makes the bank and that's where we're focused on and we're really focused on increasing net interest income and net income for the shareholder over the next 1 to 2 years. And I have to tell you right now I'm probably more excited than I've ever been in the last 3 years about our future. When I look at the numbers, I mean, we were going -- as you all know, our net interest margin was what it got as low as 2.75% or something like that, 2.90%. Our numbers that we're looking at right now, we're really looking at some really great net interest margin going forward. I think we're looking at probably for the next 2 years, net interest income increasing and so I'm terribly excited for where we're at right now today. Manan Gosalia: I appreciate all the color. I know that was a fairly broad question, but I appreciate the fusions. So maybe just a follow up there, given the excitement about the forward NIM expansion and forward growth as well. Maybe how are you thinking about additional M&A from here? Does it make sense to integrate the current deals first? Or do you think that there's room to pursue another one if you get something that makes sense for you? David Zalman: I think the answer that we all need to be doing is these 3 deals are very important. I mean we're going from a $38 billion bank to a $53 billion, $54 billion bank. And so that's -- so our main focus right now is the operational integration of these three deals. And so that's why when we talk about the things we talk about, our whole focus. I mean I don't think you'd ever want to say never on anything. At the same time, our primary focus is bringing these 3 deals together and hitting those consensus numbers that you analysts all have out there, and we feel really good about that. Operator: The next question will come from Dave Rochester with Cantor. David Rochester: Just as a part of your view on NIM going forward, how are you thinking about the cost of deposits here in a scenario of no rate cuts? Do you think you guys can hold deposit costs here? Can you shift them lower? And then I was just curious where you're seeing new loan yields come in as the remaining fixed rate loans are still rolling off here? David Zalman: I don't think that -- if interest rates stay where they're at, our net interest margin targets are really good. I mean I think also back talk to you just a minute ago in about a 3.6% average for this year, 3.7% exit. 2027, I think you guys have about 3.8% net interest margin 3.8%. I think if interest rates stay where they're at, we'll hit that or even higher. If interest rates go down 100 basis points, we're probably -- we'll come off of that to some degree. But again, I don't think that we're a lower deposit rates any. And I think our numbers show really higher net interest margins and maybe you do deals. But at the same time, I don't know that I really believe them because as interest rates come down, we never went up as high on a lot of our customers as we -- as they could have gone somewhere else so I don't know that we'll come down as fast or at the same time. So I don't if that gives you any color or not. Asylbek Osmonov: I'll just add a little bit on the deposit side of it. So we haven't decreased or changed our rates for the past few months now. And based on what we see on the deposit growth we mentioned on our core deposit growth, I think we're holding our own with the current rate. I know it's -- a lot going to depend on the competition. But at the current rate, we believe that we don't need to increase the rates. So they might come down rate overall because we have some higher CDs getting repriced. So we'll see some overall deposit rate or cost of deposits come down a little bit, but not significant, but it will do it because of repricing. But overall, I think as long rate doesn't change, we should be at this level or lower by ourselves. But if you add Stellar, Stellar has a little bit higher. But in the combined one it is still going to be a cost of deposits around 1.40. That's what our model shows. I think on the loan pricing, they want to know on loan pricing, I think if you... David Zalman: The loan repricing, I mean I think we're kind of good where we're at. I mean I don't see us -- I'm not saying we won't jump to maybe 1 or 2 deals to compete on the 5 or under 6. But for the most part, we're really not going to play that game. And we'd rather buy securities, I think, than just try to play a game just to have a dry relationship to beat somebody out and take a lot of risk. David Rochester: So new loan yields or where the book is right now? Are they still a little bit higher? David Zalman: A little bit higher. Asylbek Osmonov: Little higher. David Rochester: Okay. Maybe just one more switching to the loan trends, your thoughts there going forward? I know you mentioned maybe flattish loans this year with all the deals closing, maybe that carries into next year a little bit in terms of like a little bit of a runoff that you normally get. But just looking at Stellar this quarter, which had a solid loan growth quarter. It seemed pretty decently broad-based. I was just thinking about you guys next year and the growth trajectory. I was wondering if you think that with Stellar in the fold, after you have that little bit of runoff, are you thinking that maybe your organic growth profile can improve from where it has been over time? Kevin Hanigan: Yes. Post any, what I would call normal for us, post-acquisition runoff, I do think, particularly with Stellar hitting its stride that we'll return to kind of low to mid-single-digit kind of stuff, but it's going to take a while. David Zalman: I think even American Bank and Texas Partners are talking, they're excited with where their position is too and has done pretty good. Kevin Hanigan: We just want to be cognizant of the fact that it is typical for us to have some loan declines post acquisitions, and we've done 3 acquisitions, and we want to be realistic about it. Operator: The next question will come from David Chiaverini with Jefferies. David Chiaverini: So following up on the deposit side was sort of deposit growth should we expect? Should it kind of trend in line with loans and kind of flattish and the loan-to-deposit ratio stays in the low 70s? How should we think about the deposit side? David Zalman: I think our deposit side is really not going to be effective. We should have our normal organic growth on the deposit side with the exception of seasonal fluctuations with public funds. And I think we've always done at least 2% to 3% more. Now having said that, one of the banks that joined us has some really larger accounts that really operate under their Treasury -- that are treasury -- their treasury system that they have. They feel comfortable that we -- that they won't lose any of those accounts. On the other hand, it's always possible that there's -- there's a handful of those accounts that are $30 million, $40 million, and that could always affect us to some degree. But for the most part, I mean, all the banks that are joining us were in Texas. We should have growth on the deal. I think that -- I think that we're fine. You'll still continue to be -- still can see core deposit growth with seasonal drops with public funds. As far as the loan-to-deposit ratio is, I think I didn't answer that. We have a policy that we -- it doesn't say we can't go above 85%. But once we start hitting -- we hit 85%, we have to go in front of the Board and discuss that with them. So unlike a lot of the other banks or a number of the other banks that are at 90% and 100%, I don't think you'll see us doing that. I think we feel more comfortable at the 75% and 80% for the most part. David Chiaverini: Got it. And then shifting over to the capital side. Can you talk about the Basel III Endgame potential benefit to your capital ratios and then your buyback appetite from here the last couple you've been a little bit more active than you had been historically. How should we think about that going forward? David Zalman: I think that we're going to make a lot of money or at least it looks like we're going to be making a lot of money at least combined. And so I think that as long as -- whenever we see this, you'll see the price. You saw the buyback when the price of the stock was, I forgot what the average time was $68 or something like that. So I think you'll still see us when the price is an opportunity like it is right now, you'll see us continue to buy back. And again, we have a lot of capital even with the combination of Stellar Bank, and I know we're paying 25% or 30% cash on that, but we still have a lot of capital. And I think going forward, you'll see us continue to buy back if prices stay where they're at, for sure. Asylbek Osmonov: Yes. And on the Basel III benefit, we did high-level analysis of impact of the mortgage loans, and it will benefit, but I think it's when we calculate maybe 50 basis points on the capital, that what we saw benefit on the -- once the rule passes on the mortgage loans. David Zalman: But from a capital standpoint, I mean we're in... Asylbek Osmonov: Kind of benefit. David Zalman: When we look at a pro forma based on our combined earnings of both of these banks even after you take out dividends, you're talking about $500 million or $600 million a year in excess after dividends to do something with. So we have a strong capital going in, and I think we'll have a stronger capital going forward, really and the ability to purchase our own stock back. Operator: The next question will come from Matt Olney with Stephens. Matt Olney: I want to go back to the Stellar Bank discussion. And I think you mentioned the improving loan growth at the bank, but also it looks like the adjusted net income at Stellar Bank was almost $30 million in the first quarter, ex a few nonrecurring items. If I go back to the original assumptions when the deal was announced back in January, it looks like the earnings projections from Stellar for the full year was $113 million. So it seems like you're tracking well above that number, if I just annualize that first quarter. Was there anything else unusual or anything else to consider with that first quarter net income number of almost $30 million? Or is that a clean number that we can carry forward from here? David Zalman: Matt, thanks for the question. It is a clean number. We actually feel great about the earnings prospects entering into the second quarter, taking the cumulative nature of the growth that we had in the first quarter. So we feel good about the path that we're on and what that implies. Matt Olney: Okay. I appreciate that. Unknown Attendee: We're paying we paid down on April 1, the last remaining piece of sub debt. So we actually see benefit to margin that will come back -- come out as a byproduct to it. Matt Olney: Okay. David Zalman: For those of you who don't know, that was Paul, CFO at Stellar. Matt Olney: Great. And then I think you completed the core system conversion at the bank in February. I think there was a mention earlier on the prepared remarks, but I missed it. Just remind us of the time line expectations to complete the remaining conversions for each of the acquired banks? David Zalman: Yes. First of all, the DNA conversion was a huge deal. I don't want to just keep talking about it, but our bank was more on a back system. And over the weekend, if you had a long weekend by the time we ran everything back through and brought everybody's account back up to date, we may be up by Monday morning, and we may not. And under this new system, we can update everything in about 1.5 hours. So that just tells you how much capacity we have. It was a real big deal to the years to complete. And so I think when you look at our bank and we had 3 major deals. We had a DNA conversion. We've had our plate full. So the team has done just a miraculous job. And so going forward, we're looking at September operational integration for the American Bank. We're looking at a November operational integration for the Texas Partners Bank and for Seller, we're looking at March 8, I think. Operator: The next question will come from Brett Rabatin with Stonex Group. Unknown Analyst: I wanted to go back to the credits, the 2 credits you guys talked about and you guys obviously have a historical very low net charge-offs, really strong asset quality. So the 2 this quarter were obviously an outlier. But I was hoping maybe for any other color, you mentioned one was an insurance company. Was there a fraud involved? Were these loans from past acquisitions? Was there anything unusual that created the loss exposure relative to what you modified as collateral? Kevin Hanigan: Yes. The big one -- this is Kevin, Brett. The big one was an insurance company. They were in the business of selling Medicare products, so Medicare Plus Medicare Advantage kind of products. And if you want to get to the core of it, their business was doing pretty well for the first 18 to 24 months and not to get too deep into the accounting, but if you call them and you did a Medicare Advantage program through them and your annual premium for the year was, let's just say $240 to make it easy, $20 a month, they would accrue $20 for that first month paid by the government largely. And then the rest of it would be booked as a receivable. So $220 in account receivable. In that business, what you do is you model and project what your account turnover is going to be. So you may wake up 3 months from now and cancel that policy because you think you can get a better deal or you want a different deal. You're unhappy with the deal you've got. So there is some modeling of the turnover of your receivables of people canceling. And what happened here was the cancellation rates were way higher than the model reflected. And that causes obviously two things: a write-down of your receivables by the remaining balance that has not been accrued in the income, and it can cause you to have to restate prior period earnings. And that was the big factor in that overall deal. The deal was backed by a very large, very well-known private equity firm that our bankers have had some experience with in the past, and they have typically backed their deals. In this case, at least to this time, they have not backed the deal. I think we began talking about this deal probably in the third quarter of last year. We talked about it again in the fourth quarter, and we chose to write things down this quarter all the way. So that I would call that a one-off in our case. If we look across the remaining nonaccruals in our book, I think the largest nonaccrual loan we have is $10 million. So there's nothing else out there that looks anything like this. This is truly a one-off. David mentioned the other one has been a long-time client. It was a legacy client in the Buy Here Pay Here car space. High-performing company for 15, 18 years with us that we banked them. And they got a little more aggressive in their business model coming out of COVID, poor timing. And I would differ the first one, which was a one offer and probably should never happen again, a loan we probably should not have made, easy to say today. The second one is the loan we would have made today, and it's just basic business. The guys changed their strategy a bit. The strategy was not successful, and it costs them dearly and it cost us a bit. So I'd say one is a way out there. Nothing else looks like that in the portfolio kind of thing that we're worried about. And the other one, look, it was a bad day. David Zalman: Well, you'd have to say the original insurance deal, we did have the backing of this big sponsor. We didn't want to release it. They wanted to release and so a huge major, major bank took it and they release the guarantee on it. Our stupidity is enough -- us being stupid, we bought a percentage back. However, a lesser percentage than what we had originally. David Chiaverini: Okay. That's very detailed color. I appreciate that. And then, David, I wanted to ask, when I look at your map, I mean you're pretty dense in Texas. Is strategy from here, you're obviously very focused on integrating these 3 acquisitions. But would the strategy from here be more density? Or would you look to new markets? Are there markets -- are there other smaller markets in Texas that might have great deposits, other community banks? Just any thoughts on how you see the environment from that perspective. David Zalman: As we mentioned before, first of all, I'd say we don't want to grow just to grow. But having said that, scale has just become very, very important. I look at our income statement, and I see just buying equipment, technologies, like $2 million a month, sometimes, that doesn't count what the technology we spend, $75 million, $80 million, $90 million a year on that. So scale is important, but we don't want to say we grow to grow. We still, as we mentioned earlier, I think that we really think that a real bank -- the real value in it is the core deposits, where if you don't want to grow loans that you can still buy bonds and still have a good 1.5% plus return. I think that we've all talked about it. We like where we're at right now. But we also -- we still -- again, our primary objective is still to put these 3 deals together. But our real -- our deal is to really be in -- we grew up in the times when you had Texas Commerce and our First City and an Allied and all that. And it's still our plan and goal to continue to make one of the Texas biggest banks, not just because it's big, but they can offer services from a technology standpoint to the biggest customers to the smallest customers. And we'll continue to do that, but we're going to do it at a pace -- we're not going to do it at a pace until we really can put these deals together and really show you that everything that we can make the $6 or something since this year, when we make the $7 or something since next year. We want to show everybody that we can do that. And that like in the past, when we promised that we'd bring in that margins up. We want to do what we say that we're going to do. But but the future is still building that larger bank that we want to be for everybody. Operator: The next question will come from Janet Lee with TD Cowen. Sun Young Lee: I appreciate the near-term guidance you provided on expenses for the second quarter, just given a lot of moving pieces with some cost saves at Stellar in the third quarter. Is there some sort of fuller expense guide you could give for the year or where the efficiency ratio could trend? Is it -- is this mid-40s level a good place to be? Or how should we think about the trajectory? Asylbek Osmonov: Janet, I don't know if I can give a specific guidance long term because we're still trying to integrate two banks and then Stellar coming in the second half of the year. But what we said earlier on at least two banks that we merged, cost savings that we announced, that we are working toward it and we're going to achieve those cost savings. I mean, we're already getting some of the cost saves now, but most of them come when the integration of the system, what we mentioned in September, November, then when we're going to see that. Also, with the Stellar addition, we're going to probably see most of the cost savings next year. And with Stellar 35% cost save, we feel very comfortable about the cost saves on that side of it. So if you combine all together, I think the goal for us to get back to the -- with all the cost savings and get back to the mid 40s that will we ran historically, 44%, 45%, 46%. So that's the goal, and I think it is achievable. Sun Young Lee: Got it. That's fair. And you said the loan accretion income expected to stay around this $3 million to $4 million range on the loan side in the second quarter. Could you remind us where this could go with the Stellar the third quarter? Or could you maybe provide a projection around the full PAA as opposed to just loan accretion? Asylbek Osmonov: Yes. On the -- for second quarter, yes, it's a saying $3 million to $4 million. With the addition of Stellar, I mean, it can a lot of change, right, it depends on the market rate environment when we do merge with Stellar July. So it's kind of hard to say. But I'll tell you when we did our projection when we put together in January, we said that we're probably going to expect about at least on 2027, about $10 million to $12 million of interest -- fair value income from Stellar, that's a pretax number. That's what we estimated. But again, a lot of can change depending on the rate environment in July. David Zalman: That was for loan and securities. Asylbek Osmonov: For loans, yes, and security is going to reprice. I think Stellar was about, what, 3.5% margin. So they're going to reprice a little bit and maybe 100 basis points or so. Sun Young Lee: Got it. And the 3.70% NIM that was the target for the... Asylbek Osmonov: Yes, that was -- yes, that's going to be our exit, meaning the end of the year combined Prosperity Bank and Stellar together. David Zalman: With 3.6% average for the year. Asylbek Osmonov: For the year because we can just going to have Stellar for half a year. Operator: The next question will come from Jared Shaw of Barclays. Jared David Shaw: I guess just on the $30 million charge-off that you had highlighted, was there a specific reserve associated with that prior to the charge-off? Asylbek Osmonov: Yes. For that specific, we had a reserve half of it last year because I think when we kind of start seeing that and we reserved rest of it and charge off this one. That's why we didn't see any of the P&L impacts this quarter because we provisioned half last quarter and we charged off the remaining half this quarter. Jared David Shaw: Okay. Okay. And then on the Stellar deal last quarter, a couple of times, you mentioned that just given their underwriting and pricing, you didn't expect to see any runoff from that portfolio. But today, it sounds like maybe there could be some run off. What should we assume is potentially at risk from the stellar portfolio of running off? And I guess what changed to change your view on that? David Zalman: Kevin can jump in a minute, but again, I think we're just trying to prepare everybody that you have Stellar, you have Texas Partners Bank and American that just historically that we have lost loans through these deals. And again, we don't want to give somebody a deal that says, okay, we thought it was great that they increased $200-and-something million. But again, we don't want to come here and tell you we're going to have a 5% or 6% loan growth when historically, we've seen things that I guess we're just being cautious really. Kevin Hanigan: Yes. I'd say it's cautious. I do think they underwrite much like we do. It does take -- and again, I went through this on the other side in 2019 with a large lending staff. It takes 6 to 9 months to get integrated into the system and how the underwriting is done at prosperity at the forms in the process. it takes a while, and then lenders get used to it and things stabilize. David Zalman: I think it's even more than that, Kevin. I think even I look at what we did in our production this first quarter. And it was definitely impacted by doing a DNA conversion, people trying to get their loans to the loan committee doing working with 3 different banks to put it all together. So I think there's -- when you're doing this, I mean, we increased our assets, you can do the math between $38 million and $54 billion. That's a lot of increases, so to try to massage and put all this together, things are not going to be just exactly the way they were. And if you -- and I would say this that if you think they're going to be exact complex, you're going to have this exponential growth I think it would be a mistake. I think right now, we really need to focus on putting all this together, making sure everybody fits in good and take our time in doing it right. Asylbek Osmonov: Just to clarify 1 thing in my mind, I call provision, but that's 1 I meant like specific results, we put specific reserve on that loan provision expense. Operator: The next question will come from Jon Arfstrom with RBC Capital Markets. Jon Arfstrom: I might have missed this, but Kevin, can you touch on the warehouse lending business and your outlook there? Kevin Hanigan: Yes, warehouse as you know, Jon, averaged $1.207 billion, I think, for the quarter, but we closed out at $1.430 billion something, maybe $1.432 billion or $1.433 billion. So it ended up the quarter really strong. It's backed off a bit from there. I think yesterday, it closed at about $1.240 billion, $1.238 billion, something like that. I think it will be higher on average in the second quarter than it was in the first. So I'll call it $1.3 billion to $1.25 billion. David Zalman: Because even our own mortgage company, we're finally seeing where they're making money, and most of our mortgage companies are doing pretty better. Yes, so it probably ought to be a little better. Jon Arfstrom: Okay. Good. And then maybe also, Kevin, you talked about construction and being a little more cautious there due to competition, but there was still decent growth for the quarter. Was that acquisition-driven? Or is there activity that you guys are putting on the balance sheet now? Kevin Hanigan: No. Construction has been weak. What I was saying is we're losing out on a lot of construction deals because of the competition in the market is willing to do it with less recourse and way cheaper spreads to SOFR and that we are looking at establishing a bucket for a handful of clients that would be our A+ rated clients where we might be willing to do things at a little cheaper rate and a little less recourse. David Zalman: Yes. I mean, the bottom line is we lost some really larger deals, $100 million-plus deals because, again, we just weren't willing to go down to the pricing and the terms and conditions that those guys are willing to do and we could buy on, not have the risk to still make the money. Jon Arfstrom: Okay. David, one for you. That's maybe an odd question with your Stellar team in the room, but you got beat up last quarter on the pricing and during the quarter on the price paid. Just curious how you're thinking about it a quarter later. It sounds like you still believe the accretion is there and the 2027 EPS numbers are there. But and maybe Stellar is doing better than planned. But how are you feeling about this quarter later? Just it's a big deal, obviously. David Zalman: I couldn't be happier. I think it's a great deal. I mean I think there's a huge difference between 1 bank and another bank. And I think I'm not just saying is because these guys are in here. If we were ever to sell our bank, I wouldn't sell for anything less on a multiple that these guys that we pay for. So I think it's top-notch. I think you are going to -- I thank all the analysts -- in the end of 2027 when we make the money, we're going to make, I think everybody going to say, I know it the whole time. But right now, I got to prove it. But you guys are all going to say, well, we knew it the whole time, and that's when the stock is going to go to $95 or $100. But which I'm telling you it's going to happen, and I feel better than I have in 3 years about all these different deals. Kevin Hanigan: Yes, Jon, this is Kevin. Look, we did get a little dinged up, right? We -- the market thought we paid a little too much, and they thought -- they thought we were using estimates that were greater than the market had for 2026. But I think we did it based upon a deep dive of due diligence and knowing these people really, really well in the course of putting the acquisition together and feeling comfortable with their internal numbers. And it's really rare for us to put out numbers that are above the consensus when we're doing a public deal. It's rare for anybody to do. We did it. And I think they've proven up with a clean quarter that's really good this quarter. And my guess is when we look back at all of this, the estimates that we used for Stellar for 2026 are going to be better than the one -- they're going to -- we're going to end up doing better than even the ones we. David Zalman: Well, I would even go a step further that and Bob can jump in if he wants, but I know this goes from American and probably for Bob, both, if they wouldn't have got the price they wouldn't have done the deal. I mean they know what they're worth. Bob, you may jump in and say that, but I wouldn't. I mean, I wouldn't do a deal if we knew we were worth more. H. E. Timanus: Absolutely, David. I'm kind of thinking now we didn't pay it enough. David Zalman: I knew that was... Operator: This concludes our question-and-answer session. I would like to turn the conference back over to Charlotte Rasche for any closing remarks. Charlotte Rasche: Thank you. Thank you, ladies and gentlemen, for taking the time to participate in our call today. We appreciate your support of our company, and we will continue to work on building shareholder value. Operator: The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
Operator: Good day, and welcome to Ionis' First Quarter 2020 Financial Results Conference Call. As a reminder, this call is being recorded. At this time, I would like to turn the over to Wade Walke, Senior Vice President of Investor Relations, to lead off the call. Please begin. D. Walke: Thank you, Sabrina. Before we begin, I encourage everyone to go to the Investors section of the Ionis website to view the press release and related financial tables we will be discussing today, including a reconciliation of GAAP to non-GAAP financials. We believe non-GAAP financial results better represent the economics of our business and how we manage our business. We have also posted slides on our website that accompany today's call. . With me this morning are Brett Monia, Chief Executive Officer; Kyle Jenne, Chief Global Product Strategy Officer; and Beth Hougen, Chief Financial Officer. Holly Kordasiewicz, Chief Development Officer; Eugene Schneider, Chief Clinical Development Officer; and Eric Swayze, Executive Vice President of Research, will also join us for the Q&A portion of the call. I'd like to draw your attention to Slide 3, which contains our forward-looking language statement. During this call, we will be making forward-looking statements that are based on our current expectations and beliefs. These statements are subject to certain risks and uncertainties, and our actual results may differ materially. I encourage you to consult the risk factors contained in our SEC filings for additional detail. And with that, I'll turn the call over to Brett. Brett Monia: Thanks, Wade. Good morning, everyone, and thank you for joining us today. Ionis entered 2026 with significant momentum, which continued to accelerate through the first quarter of this year. Our performance to date highlights our strong execution across the business, which positions us to fuel substantial growth for years to come. We are very pleased with the continued success of Tryngolza. Demand continues to grow, reflecting both a compelling clinical profile and strong launch execution by our team. The launch of Tryngolza is now also underway in Europe through our partner, Sobi, expanding access to this transformational therapy for people with FCS. We also continue to advance our launch of DAWNZERA. We're very encouraged by the strong early trajectory and the breadth of prescribers across patient segments. Outside the U.S., DAWNZERA received European approval earlier this year and our partner Otsuka has now initiated launch activities across the region. Together, Tryngolza and DAWNZERA give us a strong foundation of a successful commercial execution as we look ahead to 2 additional independent launches this year with more to come. We are on track for the launch of olozorsen in severe hypertriglyceridemia, which represents our first independent launch in a broad patient population. We are pleased to have received priority review by the FDA with the PDUFA date of June 30, reflecting the significant unmet need in SHTG and the groundbreaking results from our landmark core and CORE 2 studies. In these studies, we demonstrated profound and highly statistically significant reductions in triglycerides and acute pancreatitis events, along with favorable safety and tolerability. Today, based on HCP demand and payer research, we are increasing our annual peak sales estimate for olezarsen from greater than $2 billion to now greater than $3 billion, positioning olezarsen to become Ionis' first wholly owned multibillion-dollar medicine as the new standard of care for treating patients with severe hypertriglyceridemia. Zilganersen for Alexander's disease is our second planned independent launch this year and the first from our industry-leading neurology pipeline. Zilganersen is the first and only medicine to demonstrate clinically meaningful and disease-modifying benefit in Alexander's disease, a devastating and orphan fatal leukodystrophy with no approved treatments today. We submitted our NDA in January. And based on the results of our pivotal study, the FDA accepted our NDA with priority review and a PDUFA date of September 22. Overall, we are on track to have 3 independent medicines for 4 indications on the market in 2026. Tryngolza for FCS and SHTG, DAWNZERA for HAE and Zilganersen for Alexander disease. This marks a major step in Ionis' Evolution is a fully integrated commercial biotech company. Complementing our wholly owned portfolio is our partner pipeline, a rich pipeline that continues to advance toward multiple value-driving events this year. Bepirovirsen our potential first-in-class medicine for chronic hepatitis B is on track to launch in the U.S. and Japan this year by our partner, GSK. And just this week, the per version was granted Breakthrough Therapy designation and and accepted for priority review by FDA with a PDUFA date of October 26. Next month at EASL, GSK will present the unprecedented results of the Phase III program in which bepirovirsen achieved statistically significant and clinically meaningful functional cure rates in patients with chronic hepatitis B. We also remain on track for data from 2 major cardiovascular outcome trials from our partner pipeline this year. The pelacarsen Lp(a) HORIZON trial in patients with elevated Lp(a) and cardiovascular disease and the eplontersen cardio transform trial in transthyretin-mediated cardiomyopathy. Including these programs, along with pepireversen, we expect 5 partner-led launches by the end of next year, creating a diversified stream of royalties and milestones for Ionis with multibillion dollar potential well into the next decade. In addition to our commercial and pipeline achievements, we also delivered strong financial results in the first quarter. As a result of this strong Q1 performance and outlook for the balance of the year, today, we are announcing a significant improvement to our financial guidance, which Beth will cover in details in a few moments. Ionis has achieved a great deal of late. Our pipeline and our launches are delivering tremendous value, and we continue to strengthen our financial position. But even more importantly, we are well positioned and committed to build on the success to drive far greater value for patients and our shareholders. And with that, I'll turn the call over to Kyle. Kyle Jenne: Thank you, Brett. As we enter 2026, Ionis is capitalizing on the exceptional launch momentum we generated in 2025 to drive even greater impact. We are set up for continued success with our independent launches. Tryngolza, demand is accelerating. DAWNZERA early launch metrics are tracking extremely well. And enthusiasm continues to build for our upcoming olezarsen launch in SHTG and zilganersen launch in Alexander's disease. Bingo continues to build on the strong performance from last year. Q1 was our strongest quarter in terms of demand with patient starts increasing significantly versus prior quarters and patients on treatment are doing extremely well. . Our patient finding initiatives continue to identify appropriate FCS patients, and we are successfully converting prescriptions to patients on treatment. We are seeing ongoing expansion in both breadth and depth of prescribing with more clinicians initiating Tryngolza and existing prescribers writing additional scripts. Prescribers span a broad mix of specialties, including cardiology, endocrinology and lipidology, which is exactly the prescriber base we want as we prepare for the broader SHTG population. Physicians remain highly satisfied with Tryngolza's overall profile. Efficacy, safety, tolerability and the patient experience, and that is translating into an accelerating rate for new patient starts. Additionally, we are highly encouraged by the updated ACC and AHA clinical practice guidelines, which singles out olezarsen as the recommended treatment to lower triglycerides and reduce pancreatitis risk in patients with FCS. Outside the U.S., our partner, Sobi, is now in the early stages of launching Tryngolza for FCS in Europe. This is expanding access for FCS patients and will bring in additional revenue over time. Following the groundbreaking CORE and CORE 2 data and SHTG, we conducted extensive market research with high-volume lipid specialists, cardiologists and endocrinologists. That work consistently showed a clear understanding that preventing pancreatitis is the key treatment goal in SHTG and that current options fall short. Strong recognition of all olezarsen's differentiated clinical profile, especially the acute pancreatitis data and the very low number needed to treat. And HCPs have stated a high intent to prescribe across a range of patient types with initial use expected for individuals with triglyceride levels above 880 milligrams per deciliter, or above 500 milligrams per deciliter, with a history of acute pancreatitis or other high-risk comorbidities, including progressive cardiovascular disease and type 2 diabetes. In line with our commitment to patient access and to a successful transition into the broader SHTG market, we recently announced an important pricing decision for Tryngolza. Effective April 1, we set the new annual wholesale acquisition cost to $40,000, which applies to the current FCS indication and will be maintained for the anticipated SHTG indication across both doses. Importantly, by establishing a new price ahead of the June 30 PDUFA date, we are integrating olezarsen into 2027 payer contracting cycles, positioning us for accelerating access following approval. From a go-to-market standpoint, our full U.S. field organization is now in place, trained and deployed. Today, that team is focused on supporting Tryngolza for FCS and deepening our relationships with the key specialists who also treat SHTG. With this expanded footprint, we are positioned to engage approximately 20,000 high-volume SHTG prescribers across the country. The DAWNZERA launch is gaining significant momentum in what is largely a switch market in the U.S. We are seeing increasing adoption across all patient segments. Patients switching from existing prophylactic therapies, patients who were previously using on-demand treatment and treatment-naive patients. Our free trial program has been very effective with high conversion to paid therapy rate to date. Just as importantly, feedback from both physicians and patients has been consistently positive, highlighting DAWNZERA's strong efficacy, its differentiated RNA-targeted mechanism, the positive switch data, which HCPs described as "differentiating and motivating" and DAWNZERA's patient-friendly profile that includes a self-administered auto-injector that can be stored at room temperature for up to 6 weeks. We are also seeing a growing base of repeat prescribers, which is a key indicator that Dawnzera is providing a substantial benefit for patients. While it will take time to fully transition appropriate patients off legacy therapies, especially in a well-established market like HAE. The launch fundamentals give us confidence that DAWNZERA will contribute significantly to the increase in our commercial revenue in 2026 and beyond. Outside the U.S., DAWNZERA is now approved in the EU and our partner Otsuka has initiated launch activities. Over time, we expect ex U.S. markets to become an important contributor to the global DAWNZERA franchise. Finally, we are preparing for our first independent launch from our neurology portfolio with Zilganersen for Alexander's disease. On the back of the positive Phase III results, we now have FDA priority review with the PDUFA date set of September 22, and our expanded access program is underway. On the commercial side, our focus has been on continuing to strengthen current relationships and build new relationships with a highly specialized community of leukodystrophy and rare neurology HCPs, further advancing partnerships with patient advocacy groups, and ensuring the right support infrastructure is in place for diagnosis, treatment and ongoing care. Our medical affairs team has been engaging with top leukodystrophy centers, sharing data and helping to build awareness of Alexander's disease. Our marketing and access teams are finalizing the launch strategy, and we will hire the customer-facing team closer to approval. Zilganersen is not only an important medicine for people living with Alexander's disease, but it's also a template for how we will commercialize future rare first-in-class neurology therapies emerging from our pipeline. With 2 independent launches building momentum, 2 additional launches anticipated this year, and a strong pipeline behind them. We believe Ionis is well positioned to change the lives of patients around the world. With that, I'll turn the call over to Beth. ? Elizabeth L. Hougen: Thank you, Kyle. The strong operational execution you've heard about this morning translated into very strong first quarter financial results. We delivered year-over-year revenue growth and maintained disciplined expense management while continuing to invest in our current and upcoming independent launches. First quarter total revenues were $246 million, an increase of 87% compared to the first quarter of 2025. This increase was driven by year-over-year commercial revenue growth from Tryngolza and DAWNZERA and substantial R&D revenue, including approximately $95 million of milestone payments from multiple partnerships. Commercial revenue increased over 42% year-over-year in the first quarter, driven in large part from Tryngolza and DAWNZERA growth. Tryngolza delivered over $27 million in product sales reflecting continued strong demand that was offset by an anticipated decline in net price. DAWNZERA contributed meaningfully to commercial revenue, delivering $16 million in the first quarter. an increase of 125% compared to the prior quarter. Collectively, our expanding commercial portfolio positions us for robust revenue growth. and is expected to represent an increasing share of total revenue year-over-year. Operating expenses for the quarter were in line with expectations and increased to 29% year-over-year, primarily driven by commercial investments supporting Tryngolza and DAWNZERA and launch readiness activities for olezarsen in SHTG and Zilganersen in Alexander's disease. We ended the quarter with cash of approximately $1.9 billion. The change in cash from year-end 2025 was primarily related to $633 million we used to repay our 0% convertible notes, which were due on April 1. The strength of our balance sheet is the result of our prudent fiscal management which enables us to make strategic investments as we advance and launch our wholly owned medicine. Our Q1 performance underscores the value of our diversified revenue model, which combines growing commercial revenue with substantial and recurring R&D revenue from partner programs. Based on our strong year-to-date financial results, accelerating launch momentum and positive outlook for the rest of the year, we are improving our 2026 financial guidance. We now expect total revenue in the range of $875 million to $900 million, an increase of $75 million versus prior guidance, with total revenue weighted slightly more towards commercial revenues. For the first time this year, we are also providing product level guidance for Tryngolza and DAWNZERA. We expect Tryngolza product sales to be between $100 million and $110 million for the full year. and generally in line with 2025 full year Tryngolza revenue. Our guidance assumes a significant decline in second quarter Tryngolza revenue based on the updated price effective April 1 and and a steady return to growth after the June 30 approval for SHTG. We are projecting Denver product sales to be between $110 million and $120 million for the full year. Our guidance assumes DAWNZERA will continue to be a significant contributor to year-over-year growth in 2026, with revenue steadily increasing as the launch advances. We also anticipate significant R&D revenue from existing collaborations, including potential development and regulatory milestones across our partnered portfolio demonstrating that R&D revenue is indeed an important financial accelerator. In fact, we recently learned that the first patient initiated treatment in the Phase III program for salanersen, which triggered a $45 million payment we will recognize in the second quarter. Over the balance of the year, we also are eligible to earn additional milestones tied to sapoblirson, Vibro pelacarsen and other partnered programs as they advance. We expect our 2026 operating expenses to increase in the low-teen percentage range compared to last year. This modest increase reflects our commitment to financial discipline as we bring multiple medicines directly to patients and advance our pipeline. The key drivers of expense growth will be sales and marketing investments to support Tryngolza and DAWNZERA and to ensure successful launches for olezarsen in SHTG and Zilganersen in Alexander's disease assuming approvals. We anticipate our R&D expenses to remain steady this year, similar to last year. As late-stage studies reach completion, we are redeploying our resources towards the drugs in our pipeline that we expect to fuel our next phase of growth. Our focus on improving operating leverage is enabling us drop the full increase in revenue guidance to the bottom line. As a result, we expect a non-GAAP operating loss between $425 million and $475 millionm a $75 million improvement over our previous guidance. This is similar to our 2025 operating loss after adjusting for the one-time sapablursen license fee we earned last year. We are projecting a 2026 year-end cash balance of greater than $1.6 billion. This reflects the repayment of the 0% convertible notes, which were due on April 1. The strength of our balance sheet, combined with our diversified revenue streams supports our continued strategic investments in ongoing and planned launches as we advance our wholly owned pipeline. Our financial outlook reflects accelerating commercial launches, a progressing pipeline and a diversified revenue base, positioning us for continued growth and keeping us on track for cash flow breakeven in 2028. And with that, I'll turn the call back over to Brett. Brett Monia: Thank you, Beth. First quarter and our outlook for 2026 underscore the strength of Ionis today. With 2 successful independent launches underway, 2 more independent launches anticipated this year, a robust pipeline advancing toward multiple near- and midterm catalysts and a solid financial position that supports the continued investments we are making to maximize the value of our commercial medicines and pipeline. With all these key elements in place, we're confident in our ability to accelerate revenue growth and deliver increasing value for patients and for all Ionis stakeholders. Now in closing, I want to highlight that this week at Ionis, we are holding our annual YWeek. It's a time when our employees come together to hear directly from patients and caregivers about their personal stories and reinforce our purpose, which is bringing better futures to people in need. I've never been prouder of the impact we are having on patient lives and clinical medicine, and I'm even more excited about the greater impact we are positioned to make in the near term and sustainably well into the future. And with that, we'll now open the call up for questions. Sabrina? Operator: [Operator Instructions] the first question comes from Jessica Fye of JPMorgan. Jessica Fye: So you once again raised peak expectations for Trungolza. Can you just spend a little time elaborating on what enabled you to increase it from at least $2 billion at JPMorgan to now at least $3 billion? And can you also talk about your expectation for gross to nets on Trungolza following this price reset? Brett Monia: Yes. Jess, thank you for the question. So our increase in peak product sales for Trungolza and SHTG and SCS combined in the U.S. to $3 billion was based on several factors. As you recall, we increased the price or the peak sales to $2 billion in January based really solely on the Phase III data and some preliminary HCP demand research that we had conducted. The demand was very high. Since then, we've completed our HCP demand research. But more importantly, we completed our payer research, which landed on our $40,000 annual WACC price, so price as well as priority review. Those are the biggest drivers of the increase in peak sales that we have put out today. As far as gross to net, we're not commenting on that at this time. Operator: The next question comes from Mike Ulz of Morgan Stanley. Michael Ulz: Congratulations on the progress. Maybe just a question on the Tungolva trajectory for the year. You mentioned return to growth in the second half, really driven by the SHTG launch. Just curious in some of your market research, are you picking up on maybe any pent-up demand? Could we anticipate a bolus early in the launch here, just given the groundbreaking data? Brett Monia: Kyle, would you take that, please? Kyle Jenne: Yes, Mike, I appreciate that. And I think what's important first is the strong performance that we saw in Q1 in terms of demand. We are -- it's the best quarter that we've had in terms of the FCS patient population, the number of scripts that were received and the number of patients that are starting on therapy. So that actually lends us a lot of confidence, not only in the FCS space, but also as we get closer to the June 30 PDUFA date in SHTG, I think it's indicating that there is a lot of interest in using olezarsen very broadly in this patient population. In terms of the launch in SHTG, we do know that there are a number of patients that are waiting, right, especially the patients that have a history of acute pancreatitis, patients that are above 880, and those are really the patients that we're going to focus on out of the gate. The trajectory, I think, is going to be modest at the beginning here in 2026. I think the revenue guidance that Beth shared of $100 million to $110 million is consistent with that expectation, and we'll see it steadily grow over time with that focus being on the highest risk patient population. But some of the dynamics here, as typically seen is it takes some time for the HCPs to be educated on the label. We've got to get those patients into those centers in order to get the prescriptions and then get the execution of the scripts to turn into patients on treatment. So it will be a build over time, and it will accumulate, and we expect modest and steady growth throughout the back half of this year. Operator: The next question comes from Gary Nachman with Canaccord Genuity. Gary Nachman: Congrats on the progress. So again, on SHTG, -- just talk about how you expect the payer access to ramp up the timing of that, when you think it will really kick in -- and you got updated guidelines for FCS. Will you be able to get that for SHTG as well? And how long before you think you could expand to a less severe patient population over time? Brett Monia: Kyle, do you want to take -- do you want to start and I can touch on the guidelines. . Kyle Jenne: Sure. On the payer access piece, Gary, part of the price change decision that we made on April 1 to change the WACC price to 40,000 is directly with working with those payers, right? It fits into the annual review cycle as they're getting ready for their 2027 decisions to be made. So we believe that it will help us get ahead of SHTG a little bit, not only in 2026, but also will help us in anticipation of -- that being said, some payers or all payers will actually wait for the final label, right, before they make any payer coverage decisions. because they want to see what the indication statement is. They want to see what information is in the label, including acute pancreatitis and some of the other clinical study data. that will be included in the label. So it will take a little bit of time. Some payers will say, we're not going to review anything for 6 to 9 months, for example, that standard policy with some payers. But we hope that we'll be able to get ahead of that with the payers that do review earlier by making that price change and also with our current interactions that we're having leading up to the SHTG approval. So we're going to work quickly, and I think we're in a good spot right now in terms of the way that we're approaching the payers. . Brett Monia: And Gary, to your other question, we were very pleased by the fact that the cardiovascular treatment guidelines for FCS, a single do Trengolza as the treatment of choice for this disease indication. And we applaud the aggressiveness that they are taking to update their guidelines for treatments. And we believe that SHTG will be part of that in the future, which, again, we believe Tryngolza will be a treatment of choice for severe hypertriglyceridemia. They've been very, very supportive of the new treatments that are coming out, and we think that they will move pretty quickly. We're also pleased by the fact that they have increased the -- or updated their guidelines on Lp(a) testing, which bodes well for a potential positive Phase III readout for pelacarsen and the subsequent launch. So -- it's great news for patients, and it's great news for our pipeline. Unknown Executive: And in terms of the less severe patient population, we'll start with the over 880 and over 500 with history of However, those same physicians that are treating that patient population also have patients that are 500 to 880, for example. So the education will be ongoing. We're in the right segment HCPs in terms of our targets, right, focused on cardiology, endocrinology and lipid specialists. So they'll see a mix of those patients. So I think some of those patients will already be picked up, especially if they have comorbidities, type 2 diabetes and/or ASC -- but the broader population will take a little bit of time just for awareness and for more of the data and information to come out and more experience of using olazarsen in the SHTG population. So there's a lot of optimism and a lot of excitement around the category and around the use of a product like this because they've never seen the triglyceride-lowering effects that they're going to see on top of standard of care and they've never seen the outcomes in acute pancreatitis like they've seen with the core and CORI data. Operator: Next question comes from Jason Gerberry with Bank of America. Chi Meng Fong: This is Chi on for Jason. On olezarsenSHTG, could you give us an update on the levels of liver fat you've observed in the core open-label extension studies -- to what extent those open-label extension study data have been incorporated into the NDA as the FDA reviews the totality of the safety data -- and when would you expect to present the updated OLE data later this year? Brett Monia: Yes. Let me start, Chi. Thank you for the question, and then I'll pass it on to Eugene. Maybe you can comment on where we are in the regulatory process for SHTG briefly. But we're very pleased with the ongoing open-label extension data that we're continuing to accumulate with respect to MRI assessment of hepatic fat fraction. As you recall, the increases in hepatic fat that we saw were relatively minor, interested with other modalities that have taken that silencing approach in lowering APOCIII in this patient population. And it's completely logical, based on the mechanism of inhibition of APOCIII which leads to a rapid and substantial clearance of triglycerides in large part through the liver. . And we've always felt that the changes that the observations in liver fat that we've seen here, again, no clinical sequelae associated would be transient based on deliver just needing to have a little bit more time to clear out the delivery that's coming -- that's been shunted through delivered. And that's what we're seeing in the long-term extension data. We're seeing a return to baseline in liver fat. Again, no clinical sequelae associated with anything in the long-term extension. And we look forward to presenting the data in the second half of this year at a major medical congress. So stay tuned for that, Eugene, you want to provide an update on regulatory? Eugene Schneider: Yes. The applications under review. Everything is going as planned. Of course, the emerging safety data has been provided to the agency as part of routine day 90 safety update. So that's under review now with no questions asked so far. . Brett Monia: I'll also add that the discontinuations in the long-term extension are extremely low. We're seeing excellent compliance with long-term treatment in the open-label extension. So stay tuned. We're very much looking forward to presenting the results. Operator: The next question comes from Elly Merle of Barclays. Unknown Analyst: This is Tejus on for Eli. -- in FTE, you have a set of competitor readout coming up later this year. Curious just how you would frame those data in the context of the space and if any outcomes there would impact your peak sales view and SHTG. Brett Monia: We'd rather not comment on competitor data that doesn't even exist yet today. I mean, we're looking forward to seeing any additional data that comes out this year, next year and years to come in SHTG from other programs. All I'll say is that the Phase III data that we presented at American Heart Association and the late breaking clinical trial session last year is incredibly compelling. It's going to be -- it's a very high bar to me with respect to efficacy, with respect to safety, with respect to tolerability, 85% reduction in acute pancreatitis which has resonated very well in the HCP community, as Kyle highlighted earlier in his prepared remarks, 72% reduction in triglycerides on top of standard of care. We're focused on our program. We're ready to launch in June, and we're not -- and I'll just leave it right there. Unknown Executive: I'll just add, this is a large market, greater than 3 million patients that are potentially addressable here. We have a lot of confidence in the greater than $3 billion peak that we've put out there. That's really based on the Phase III clinical trial outcomes that we have. It's based on our HCP demand research. It's based on the comprehensive payer research that we've done and also the final pricing decision that we made. So we stand behind the increase, and we're excited about launching this program and getting it to as many patients as possible after the June 30 PDUFA date. . Operator: The next question comes from Jay Olson with Oppenheimer. Jay Olson: Congrats on the quarter, and thank you for this update. Maybe I'll shift gears to DAWNZERA. Can you talk about how you expect the competitive landscape to evolve in HAE and any feedback that you're getting from patients and physicians on DAWNZERA? And any color that you're getting on what percent of patients are currently on every 8-week dosing. Unknown Executive: Yes, happy to, Jay. Thanks for the question. The competitive landscape obviously is evolving. I mean there was some recent announcement as late as this week related to some of the dynamics in the marketplace. Keep in mind that in the United States, over 75% of the patients are currently on a prophylactic treatment. This is a switch market as we understand the dynamics to be. And we are really pleased with the momentum that we're seeing in terms of the interest in using DAWNZERA, which is the first RNA-targeted therapy modality in order to treat these patients. The patient and HCP feedback has been extremely positive when they've been able to transition over to DAWNZERA or start as a naive patient. What led into this in terms of our market research is consistently being played out in the market. Really, this is about efficacy, it's about tolerability and convenience. And all 3 of those things are stacking up very nicely with the profile of DAWNZERA, and patients are responding very positively to the therapy. Now the majority of patients start on a 4-week dosing schedule. This is to make sure that they get transitioned over that they're well controlled and then they have the option for the labeled indication to move over to every 8 weeks if they choose to do so. So as early in the launch as we are right now, you would anticipate that the majority of patients would be on a 4-week regimen. And we will expect over time that they'll be able to progress on to an 8-week schedule as they're doing well on therapy and we saw that in the clinical trial as well. So patients are doing great. Momentum is very strong, and we're encouraged by what we're seeing in terms of the metrics with the launch at this point. Operator: The next question comes from Moritz Reiterer with Guggenheim Securities. Moritz Reiterer: This is Moritz for David. I'll continue on, on era. Your 2026 guidance for DAWNZERA is essentially above what consensus was going into the quarter. So I was just trying to understand a little bit better what data drove this guidance number. And also if you could comment a little bit more on the current mix between new patient starts versus switches and how you expect this to evolve through the end of the year. Unknown Executive: Yes, I'd be happy to touch on that. Thanks for the question. We had a very strong first quarter, $16 million in net product sales. This is a 128% increase over Q4 and I just spoke about the momentum that we're seeing in this market and the dynamics and also the receptivity by both HCPs and patients as they get started and gain experience with DAWNZERA. So all of those things that I just described are really what is encouraging us, and I think where we feel very confident that $110 million to $120 million in sales this year is very achievable. In terms of the new patient starts, the majority are switches, right? This is a switch market, greater than 75% of the patients are on a prophylactic therapy in the United States. . So it's going to take time and time to build the revenues quarter-over-quarter. But it's happening the way that we expected it based on what we're seeing in the trends with Q4 as well as Q1. In addition to that, we are seeing some patients that haven't been on a prophylactic therapy before start on DAWNZERA. So those patients, in addition to those that are being treated with an acute therapy only today that are starting on DAWNZERA. Those 3 patient segments, I think, speak to the fact that the profile is very strong in what patients and HCPs are looking for. We have a differentiated mechanism of action. And our sales execution and market access teams are doing a great job in terms of supporting these patients to get started and stay on treatment. Operator: The next question comes from Yaron Werber of Cowen. Unknown Analyst: This is Steven on for Yaron. Congratulations on the progress. On the collaborative revenues for the rest of the year and for maybe 2027. Can you talk about what you're projecting because those came out a bit higher, I think, than consensus may have. Further on zilginersen, can you talk about how many patients awareness efforts have found any new updates to the size of the market. You had mentioned before that about 50% of patients have been identified. Any updates on sizing there would be helpful. Brett Monia: Do you want to start and then Kyle, take the second part. . Elizabeth L. Hougen: Sure. So on the collaborative revenue for this year, the way to think about is we've raised our revenue guidance for the total year to $875 million to $900 million. That is slightly weighted towards commercial revenue, so you can think about that split being slightly more weighted towards commercial revenue versus R&D revenues. Obviously, we've already realized and recognized $95 million in milestones plus our ongoing collaborative revenue, which put us well over $100 million, closer to $130 million, $140 million for the first quarter. We've got a host of other milestones that we could potentially earn over the remainder of this year, plus our ongoing collaborative revenue from renew a cost share and amortization. So that is all the items that really give us confidence in the overall collaborative revenue for this year. And then for '27, we've got think about it this way. There's some very large potential milestones for approvals coming in '27 with the Phase III data that we're expecting to see from from pelacarsen, in particular. And those milestones are likely going to drive collaborative revenue in '27. Brett Monia: And our launch preparations are going really well, right? Kyle Jenne: Yes. For Zilganersen, I just -- I want to just reinforce the excitement that we've got around this program. This is going to be our first anticipated neurology launch program and to be able to potentially bring this therapy to patients living with Alexander's disease, I think, is really an exciting opportunity for the community and also exciting for Ionis. In terms of the approach here, we're really going to be focused on the patients that are currently on the clinical trial in helping get those patients moved over so that they can maintain treatment. The second area that we'll focus on are patients that are going to be enrolled in our expanded access program, which is ongoing and going very well. . And then as you asked, what about the patients that are currently being identified and how do we help get those patients on treatment. We believe that there are approximately 300 or so Alexander's disease patients in the United States. About 50% of those have been identified thus far. Some of them are on therapy that I just referenced. But we are doing some expanded work through our omnichannel and through our nonpersonal promotion campaigns to help identify more and more of these patients. And really, what we want to make sure of is that they have the opportunity to experience sogonersen as the patients in the clinical trial did to potentially have the positive outcomes that we're seeing in that trial. So patient identification will be a key area of focus. And we're doing that while we're really making sure that we're going to take care of the patients that are on treatment today and those that are awaiting treatment that have already been identified. Operator: The next question comes from Luca Issi of RBC Capital Markets. Unknown Analyst: A quick question on why now. What happened to for the quarter. Drug is actually down 35% versus the fourth quarter what drove the weakness here? And it looks like AstraZeneca is flagging the availability of the drug now as a prefilled syringe to be administered by a healthcare provider. Did that have a negative impact on gross to net? Any color there is much appreciated. Unknown Executive: Yes. So in Q1, we continue to see very strong demand in terms of patients on therapy as well as new patient starts. So demand is still there. Oftentimes, you see some some January, February pressure as it relates to reauthorizations and the timing of those reauthorizations, which drove some of the pressure early in the quarter. But we expect to see that pick up in subsequent quarters and return to revenue growth as we move into Q2 and beyond in the U.S. You asked about the prefilled syringe. Really that's been put out there for optionality, right? It's flexibility of dosing and it's to allow HCPs to determine if they want to use the auto-injector or if they want to be able to treat these patients in some of the major centers with the prefilled syringe. So it's really optionality for the program. That is not impacting the gross to net at this point. It's way too early to see any impact of that. And so I would just keep an eye towards future quarters. And again, this is the hereditary polyneuropathy space. The market is growing rapidly in the cardiomyopathy space and the eye towards cardio transform readout and getting ready for that launch is definitely where the line of sight is. Operator: The next question is from Yanan Zhu with Wells Fargo Securities. Yanan Zhu: Great. So wondering for the FCS, you mentioned continued growth in demand. Could you help quantify that a little bit? In terms of percent growth, given that the price change making it difficult for us to appreciate. And then can you talk about how to think about SHTG in 2027, what kind of growth could we expect from the initial launch quarters in 2026. Obviously, you guided for peak revenue, $3 billion. Any sense that how long that might take? Any color would be super helpful. Brett Monia: Yes, and let me start and then I'll -- and Kyle already touched on what the expectations are for 2026 launch in SHTG -- you can cover that again, but maybe comment on 2027. But for FCS, as Kyle mentioned earlier, our first quarter of this year is our strongest quarter to date. -- on patient demand and gaining access to Tryngolza for FCS. And that's purely a product of patient finding and the great experiences, the HCPs and patients are having with Tryngolza in managing their disease from an efficacy standpoint and from a tolerability standpoint. So demand has never been higher. We're thrilled with what we're seeing, and we think that, that's going to bode quite well for the SHTG launch trajectory. Kyle Jenne: Yes. I think what's important, again, is to mention that in 2026, the revenue guidance is $100 million to $110 million for olazarsen this year. We expect that to grow steadily over time. As I also described, the focus initially is going to be on the high-risk SHTG patient population, over 880 or over 500 with history of -- and then as we get into 2027, I would expect that more and more patients will start to come on board that are broader than that, Type 2 diabetes, ASCVD, et cetera, as I described, and the launch momentum will build. And so will the patient base as we get these patients on as HCPs get experience in seeing the triglyceride lowering levels and seeing the reduction in acute pancreatitis that were demonstrated in Core and Core 2. And I think that experience and that evidence ultimately will help us drive the trajectory into next year. Operator: The next question comes from Salveen Richter of Goldman Sachs. . Unknown Analyst: This is Mark on for Salveen. -- are -- you kind of touched on the Doner quarterly dynamics, but we were wondering what are the specific drivers for the quarter-over-quarter jump? And are there quarterly dynamics we should be aware for the rest of 2026? And how are you thinking of these dynamics going into 2017 and beyond? Kyle Jenne: Yes. The real quarter-over-quarter growth is coming from the switch cadence that we are expecting to see, right? This being a switch market, and we expect that to continue throughout the course of this year. But that's the big driver, right? We know that there's a need. We know that the profile of DAWNZERA meets the need of many of those patients being efficacy, tolerability and convenience. And we've got the data with the Switch data to help support how to move those patients over from existing prophylactic treatments over to DAWNZERA. And as HCPs are gaining experience, we're seeing more and more HCPs not only prescribed for the first time, but we're also seeing those that have used the treatment before, use it again and again. . So I think that plus payer coverage tells us that we've got an optimistic outlook in terms of what 2026 looks like. And I think the $110 million to $120 million guidance is in line with that expectation. Eugene Schneider: And we have time for 1 more question, please. . Operator: The last question comes from Myles Minter with William Blair. Myles Minter: Congrats on the car. Just on the TTR cardiomyopathy market, if I did settle for a potential generic entry from Vindemax in mid-2031 versus something like in 2035. Does that change the way you're AstraZeneca are thinking about the cardiomyopathy moving market moving forward? And how much emphasis you're going to place on that are stabilized of background therapy subgroup in cardio TTR transform. Brett Monia: The news that has been emerging this past week or so on genericizing tafamidis versus brand pricing is not come terribly surprising to us. is consistent with our product sales guidance that we've put out there with AstraZeneca previously. We believe we remain completely and believe that the filing or class will end up being the mechanism of choice for TTR amyloidosis. We believe that the silencer class will be utilized as first-line treatment. -- as well as in those patients that inevitably progress on stabilizers and combination usage to your question. We'll also be will be utilized very, very robustly, especially if there's data supporting that combination usage will add further benefit to these patients that inevitably are progressing on current treatments. . And our study is designed to actually generate the data that we believe could be convincing to HCPs who are asking the question whether or not a combination of a stabilizer with a silencer will add further benefit to these patients. So -- it's the largest study ever conducted in ATTR cardiomyopathy and the combination subgroup is quite sizable. So we're looking forward to the data in the second half of this year. and we're prepared to submit the NDA by the end of this year and to launch next year. So thank you, Myles, for that -- thank you for the question, Myles. Thank you, everybody, who joined us today and participated on our call. We're looking forward to an outstanding year and sharing our progress along the way. So until then, thank you, and have a great day, everybody. Elizabeth L. Hougen: Goodbye. Operator: Thank you for attending today's presentation. You may now disconnect.
Operator: Good morning, everyone, and welcome to the Vulcan Materials Company First Quarter 2026 Earnings Call. My name is Jamie, and I will be your conference call coordinator today. Please be reminded that today's call is being recorded and will be available for replay later today at the company's website. [Operator Instructions]. Now I will turn the call over to your host, Mr. Mark Warren, Vice President of Investor Relations for Vulcan Materials. Mr. Warren, you may begin. Mark Warren: Thank you, operator. I'm joined today by Ronnie Pruitt, Chief Executive Officer; and Mary Andrews Carlisle, Senior Vice President and Chief Financial Officer. Before we begin our prepared remarks, please note that a press release and a supplemental presentation related to this call are available on our website, vulcanmaterials.com. Today's discussion may include forward-looking statements, which are subject to risks and uncertainties. Details on these risks, other legal disclaimers and reconciliations of any non-GAAP financial measures are defined and described in our earnings release, supplemental presentation and other filings with the Securities and Exchange Commission. For the question-and-answer session, we kindly ask that you limit your participation to one question, and this will allow us to address as many questions as possible. during the time we have available. And with that, I'll turn the call over to Ronnie. Ronnie Pruitt: Thanks, Mark. We appreciate you all joining us for our call this morning. At Vulcan Materials, safety is a fundamental expectation of our employees each and every day. And I am proud of our industry-leading safety performance that we carried on from last year into our first quarter of this year. Another key expectation is driving continuous improvement in our underlying business. Our teams delivered a solid start to 2026 by executing well on the commercial and operational plans that we laid out for the year. We generated $447 million of adjusted EBITDA, a 9% increase over the prior year. Gross profit margin expanded in each segment. SAG expenses were lower than the prior year adjusted EBITDA margin grew. Trailing 12 months aggregate cash gross profit per ton continues to move higher with strong realization of our January 1 price increases and our disciplined approach to operational execution. Currently sitting at $11.38 per ton, we are aligned across the company to drive this highly important metric to $20 per ton and win the future in aggregates. Aggregate shipments in the first quarter support the anticipated return to growth for 2026. Shipments increased 5% compared to the prior year due to both improving demand and fewer extreme weather days than in the prior year. On a mix adjusted basis, aggregates freight-adjusted price improved 4% over the prior year's first quarter, in line with our expectations. The sequential growth from the prior quarter demonstrates the success of our January 1 price increases and discussions are already underway for midyear increases. Pricing continues to compound across our footprint. Aggregates freight-adjusted unit cash cost of sales increased 4% compared to the prior year, also in line with our expectation. I am very pleased with our operator's ability to execute on the [ bulk wave ] operating to drive efficiency in our plants and help mitigate inflationary increases in our input costs. Better weather this year allowed us to make more progress on our annual plans for stripping and project work than we did last year's first quarter, impacting the total unit cash cost of sales year-over-year comparison. I am confident our teams are focused on the right things to continue to enhance our core and drive compounding improvements in our durable aggregates business, even as the macro environment continues to be very dynamic. We remain equally focused on opportunities to continue to expand our reach through acquisitions and greenfield projects, including several bolt-on acquisitions we expect to finalize in the coming months. From a demand perspective, we still expect strong public activity and improving private nonresidential opportunities to drive year-over-year shipments growth in 2026 and mitigate the ongoing challenges facing residential construction. Trailing 12-month highway awards in our markets are up 12% from a year ago, and public infrastructure awards are up 17% over the same time frame. These levels far outpaced the U.S. as a whole. Our footprint is advantaged. And this public demand provides a solid foundation for shipments and supports a healthy pricing environment. Legislators in D.C. are actively working on a reauthorization bill for future highway funding upon the expiration of the Infrastructure Investment and Jobs Act later this year. We expect the new build to provide higher levels of funding for highways and bridges than the current build. We also anticipate a smooth transition between funding programs given the significant amount of IIJA funds that are yet to be spent. On the private side, non-res continues to benefit from accelerating data center activity. With approximately 650 million square feet under construction or announced, we anticipate data centers and other related investments to be a positive catalyst for future aggregates demand. We are especially encouraged to also now have active projects related to the energy build-out, necessary to support rising data center power needs. Currently, 60% of all large projects, both public and private, are within 50 miles of a Vulcan facility, highlighting the advantage of our footprint. Our scale, quality and customer service makes us a supplier of choice on these large complex projects. Residential construction continues to be impacted by affordability. Longer term, there remains a fundamental need for additional housing and we are well positioned to benefit from an eventual recovery. As I said earlier, we continue to expect overall growth in aggregate shipments in 2026. The pricing environment remains healthy. And while we are currently facing geopolitical uncertainty, and incremental near-term headwinds in terms of energy input cost, I am confident in our ability to remain focused on the things we can control and to drive durable growth in our aggregates-led business momentum from our solid start to the year and continue to expect to deliver between $2.4 billion and $2.6 billion of adjusted EBITDA for the full year. Now I'll turn the call over to Mary Andrews to provide some additional commentary on our first quarter performance before we take your questions. Mary Carlisle: Thanks, Ronnie, and good morning. The earnings from our aggregates-led business continue to compound and drive attractive cash generation. Over the last 12 months, we generated $1.8 billion of cash from operations, which we have deployed for capital expenditures to maintain and improve our existing asset base, for greenfield and other growth projects to enhance our franchise, for capital returns to shareholders, and for debt repayment to further strengthen our balance sheet. Approximately 70% of our trailing 12 months capital expenditures of $686 million were utilized for fixed plant mobile equipment and land projects at our existing facilities. The remaining 30% was invested in greenfield and other growth projects, including a new quarry site in South Texas, several rail distribution properties in key markets and new production facilities in Arizona and South Carolina. Capital returns to shareholders totaled over $800 million over the last 12 months, with $262 million of dividend accompanied by $550 million of share repurchases. This includes $149 million of share repurchases during the first quarter. Total debt of $4.6 billion at quarter end was approximately $350 million lower than a year ago and resulted in net debt to adjusted EBITDA leverage of 1.9x. The balance sheet is well positioned to support an active acquisition pipeline. Additionally, we expect that the announced divestiture of our California concrete assets will close during the second quarter, providing even more capacity for continuing to strategically grow our aggregates business. SAG expenses in the first quarter were 2% lower than the prior year. Trailing 12 months expenses of $562 million were 7% of revenue, 20 basis points lower than the prior year period. We remain focused on investing in technology and talent to drive our business performance while also leveraging our overall expenses. We are also focused on continuing to improve our return on invested capital through compounding improvements in our business and disciplined capital allocation. Our trailing 12-month return on invested capital improved 30 basis points from year-end 2025 and to 16% at quarter end. We are confident we have the right strategy to continue to deliver value for our shareholders. And now Ronnie and I would be happy to take your questions. Operator: [Operator Instructions]. We'll hear first from Trey Grooms with Stephens. Trey Grooms: So clearly, you guys are off to a very strong start to the year. Ronnie, could you maybe walk us through some of the key puts and takes in the quarter across price, volume and cost? And then also as we look ahead to the balance of the year, how are you thinking about these drivers in light of the recent moves we've seen in diesel and the broader macro backdrop? Ronnie Pruitt: Yes. Thanks, Trey. Look, I agree with you. It was a solid start. And I think it reinforces the trajectory for another year of earnings growth. Our performance in the quarter was really a direct result of strong operational and commercial execution, and it definitely positions us well to deliver the earnings expectations that we laid out in February. On the volume and price side, we saw a healthy acceleration of our backlog tons converting into shipments, particularly within the data center space, which was supported by more normalized weather within our footprint. With regards to pricing, we said coming into the quarter, the year-over-year comparisons were going to be difficult as we continue to lap the hurricane relief efforts from 2 of our higher-priced markets in Tennessee and North Carolina. But that alongside with some pricing mix, which was a shift towards base products and our current backlog driven primarily by data centers as well as more public work, but these things were known variables. And so they played out as anticipated, but pricing at the lower end of our full year guidance, but we expect that continue to accelerate throughout the remainder of the year. On the cost side, I was very pleased with our team's execution. Keeping a total cash cost growth only to 4%. The run-up in diesel price really began in February, and the impact is really reflected in some of our March [ calls ]. But we have a proven track record of offsetting these types of fluctuations through our bulk way of operating also our Vulcan web selling and our commercial disciplines. So the more normal weather also meant we were able to keep pace with plant projects like stripping and painting and some other efficiency investments that we did during the quarter. And as you recall, last year, those types of investments were delayed with more inclement weather in the first quarter of last year. So overall, I think the fundamentals of the business are performing as expected and really in a good position as we head into the heart of our shipping season. But let me turn it over to Mary just to give you a couple more points of context. Mary Carlisle: Trey, one thing I would add that I think further underscores the solid fundamentals that Ronnie talked about and really highlight the compounding results versus noisy year-over-year quarters, and he referenced some of the hurricane relief work last year and obviously inclement weather. So I think if you step back, and look at 2024 and see that aggregate cash gross profit per ton is up 23%, and our total cash cost of sales and aggregates has increased only 1%. To me, these metrics clearly show the solid execution of our teams and the compounding margin growth that they're delivering. And that gives us a lot of confidence in our ability to execute for the rest of the year. Operator: We'll turn next to Garik Shmois with Loop Capital. Garik Shmois: Just wanted to follow up on that a little bit. Just given a lot of the moving pieces here as you look forward and some of the diesel cost impacts that are starting to hit. Just wondering if you can go in a little more detail just the confidence that you have in reiterating the full year guidance today. Ronnie Pruitt: Good question. And so let me start with -- I'm going to dig deep into kind of how diesel impacts our business. And so if you think about the 2 parts of diesel to us or the price of the diesel, but the more important part is the usage of diesel. And so as I look at our business, our downstream as well as our delivery costs are really covered through surcharges that kicked in immediately. And so have really had no impact on the cost of our doing business downstream and delivery. But when I look at the operational side, I'll start with what we do in the plants. And so from a stripping aspect is the first step of what we do stripping is just really equipment, labor and fuel. And stripping is also something that isn't necessary to uncover future reserves, but it's not something we're doing just in time. Stripping is something we can push forward or pull back depending on what macro environment we're in. And so those are things that we have the ability to fluctuate on. And then when I look at loading and hauling within the pit. And so you start with that [ hall ] to the primary, again, this is something that uses diesel equipment and labor. But this is where our [ VWO ] processes kick in because when we talked about process intelligence and investment we've made with [ VWO ], a lot of that is focused on our critical product size production and impacting yield. And so when we're doing that, for every ton we get to the primary, we're more efficient in how we produce products. And so that definitely impacts the use of fuel. And then when you get into the plant itself, there's not much fuel used within the production process. So from the primary all the way through the secondary. But again, the process intelligence and [ BWO ] is very impactful on the front end and the back end. And so again, it's an opportunity for us to really focus on the efficiencies and how we're earning fuel. And then the actual load out process. And so when you're loading trucks or rail, a lot of our larger plants, we have been systems. And so there's not much mechanical process there from a diesel consumption side. But we do -- at a lot of plants we load with loaders. And some of the things we're doing, our operators are doing there, instead of idling loaders, you're turning off engines. And so we've got a lot of things we're doing to make sure that we're focused on the usage of fuel in this time of uncertainty with the volatility that we've seen. So all of that being part of the variability of our production process, which is the beauty of aggregates. On the selling side, remember, half of our sales is really to fixed plants and half of our sales is to more of the real-time quoted stuff. And so we're moving those things fast. We've already announced midyear price increases. And so again, I think as you look at what we've been able to accomplish through the history of aggregates is our ability to take headwinds and turn them into a positive story on the back end. And so is this a short-term headwind? Yes. Is this something that we're going to be able to control on the back end? Absolutely. And I'll let Mary Andrews just give you a little more insight into the numbers behind the fuel headwind. Mary Carlisle: Yes. The only thing Garik, I would probably add is, I think Ronnie gave some great examples of levers that we're using to -- as we navigate this current fuel situation. The second quarter is where we expect to feel the squeeze of the higher diesel most acutely before some of these pricing actions that we've already taken begin to flow through. So the way I would probably think about it is we would have initially expected aggregate cash cost of sales on a year-over-year basis to look very similar in the second quarter as the first quarter. And that's still the case, excluding diesel. So I think with diesel, now your cash cost of sales on a year-over-year basis could approach maybe double of what it was in the first quarter, so closer in that high single-digit range. And again, with the full expectation that the margin impact will moderate as we move into the second half of the year. Operator: We'll turn now to Anthony Pettinari with Citi. Anthony Pettinari: Ronnie, Mary Andrews, you mentioned midyear increases. And I'm just wondering if you can give us any more detail in terms of magnitude, percentage of your markets that might cover timing? And then I'm just curious, you're obviously seeing a lot of inflation in diesel. Are there any other costs outside of fuel, metal, parts equipment where you're seeing maybe knock-on impacts from the Middle East conflict in terms of costs that may be a little less obvious to us? Ronnie Pruitt: Yes, good question. We have not seen any other impacts as of yet. We are monitoring that. And again, as the -- if we go back to 2022 with the inflationary things that happened back then, and our discipline around being able to move pricing quickly when those inflationary environments hit us. So I would tell you from a process side, we went out with midyears several weeks ago, a little earlier than we did last year. We went out with all of our markets. We're very disciplined in that. We will always be very opportunistic when it comes to using inflationary pressures or any other headwinds. I mean we're going to capture that. And so -- we sent that out in all markets. And remember, like I said earlier, about half of our shipments really are represented by that fixed plant. And then within that fixed plant side, if I break that down to the concrete side and the asphalt side, and I would tell you, the asphalt side of our business is really more heavily tied to public and the larger private nonres piece of where that's at. So they have a very active market. There's situations within each of the DOTs that they have indexes on longer-term projects, and so the asphalt producers are covered on that. And so I don't think we see a lot of resistance on the asphalt side. Within the concrete side, look, the concrete guys are still facing the headwinds of residential. And so those conversations will be probably a little more healthy and spirited. But again, it's not something that is unexpected. I mean we have a long track record of recovering cost. And my hope is that our concrete customers use that as a reason why they're going to have to go out because they're already -- they feel diesel costs immediately. And it hit them on their delivery costs immediately and hopefully, they have the same surcharges in place. But over time, I think we've proven that these headwinds, we will be able to over time and we will be able to pass that along. And the beauty of aggregate is -- we also -- we keep that in our pocket. We don't give that back. Operator: We'll hear next from Steven Fisher with UBS. Steven Fisher: Congratulations on the good execution. Just a follow-up again on clarifying some of these points here, particularly on the near-term expectations. I guess what's the expectation we should have for pricing in the near term, say, Q2, and I guess that would be inclusive of the diesel? Do those surcharges get recorded in the pricing you're going to report? And then on the cost side, it sounds like you're expecting, Mary Andrews, upper single-digit growth in costs. So how do we think about that in light of, let's say, the low single-digit guidance you still have for the full year with the first quarter? It sounded like it's going to be in at least mid-single digits. Ronnie Pruitt: Yes, I'll take the first part, and I'll let Mary Andrews talk again about the second part. Our delivery is not. So we report freight-adjusted. And so when we talk about price, that's freight adjusted. So all the stuff that we're talking about with surcharges does not get reported on our pricing because we don't think it's the right way to look at that. But when it comes to kind of cadence of pricing, we said going into the year, because of the comps of last year first was that our pricing would have started out at the lower end and accelerate through the year. And I think this opportunity that we have with midyears just confirms that our pricing trajectory will be backward half more accelerated than the first half of the year, but we anticipated that. We also said that in the first part of the year, as these data centers continue to grow, the mix impact, which we called out, we continue to see a lot of shipments from our backlog converting the shipments faster because of the size of these projects, but also the speed of these data centers, meaning once they're announced, they're going really quick, which is a good thing and it will play out on the cost side of our business as well because when we're continuing to improve the yield of our plants with the amount of base shipments, that's a really good thing on our cost. But I'll let Mary Andrews walk you through kind of the puts and takes on the model. Mary Carlisle: Yes. So Steve, from a cost standpoint, at this point, we do still believe that we can deliver that low single-digit cost for the full year, where we fall within that range, the diesel situation and how it continues to develop, I think will a big role in that. But Ronnie highlighted some opportunities that we have to -- even on the cost side, focus on efficiencies, pull some levers to make sure that we're making good decisions given the macro environment. So I feel good about the full year guidance and just wanted to give you insight into what that could look like for second quarter from a cost standpoint. And that was always our expectation that costs would be higher in the first half of the year, moving lower in the second half of the year. So as we said today, 2026 is playing out like we expected. Operator: Great. Thank you very much. We'll hear next from Michael Dudas with Vertical Research. Michael Dudas: Ronnie, following up on interesting comments on the data centers and the time to market and speed. Is that -- could that be contributory on like volumes, given the acceleration of some of these projects. And there are other heavy markets or even public markets that are trying to move quicker to try to get the funding or try to get the projects through, given some of the funding uncertainties? And can that be helpful to have maybe a quicker conversion on your total backlog and get some efficiencies and volumes through the system? Ronnie Pruitt: Yes. I would -- I mean I'll go back to my prepared remarks and I look at our advantaged footprint. And as I stated in my prepared remarks, in our specific markets on a trailing 12 months, public contract awards are up 12% and we're seeing in the rest of the country, double-digit declines in places. And so it amplifies that we're in the right markets and the public side continues to be strong. When I look at starts and kind of the flow of -- before the expiration of the bill, I think the states are doing a really good job. I think all the money will be targeted towards the job they want, which is really where they have to get as the money has to be allocated, and that allocation is going well. Across our footprint, I'm seeing how we start up in Arizona, New Mexico, North Carolina, South Carolina, all really, really good spots for us. Coastal Texas, North Texas, Georgia on the infrastructure side. So we're seeing good momentum there. On the private side, and again, as I stated, 60% of our large projects that started last year are within 50 miles of a Vulcan facility. And so that just shows you again, we're in the right markets. And where we're seeing momentum in construction growth is really because of our advantaged footprint. I mean that's not the same stats you're going to see across the rest of the country. And so again, our business model is proven. And over a long period of time, we've been able to say that any headwind that faces us, we're going to be able to capture that over the long term. But I think as we look forward in saying that our confidence in 2026 returning to growth, it's because of these things I'm talking about on the public and private side. We're not seeing it on residential. We are seeing some green shoots on multifamily but it's really being driven by -- that's the necessity of jobs that have been created in some of those markets and people are moving there, and there's nowhere to move. And so the multifamily side, we're seeing a little bit of green shoot and -- but the majority of our confidence right now is really going to be based on the public and private side. And remember, only 45% of the dollars are actually spent. And so even with the expiration in the middle of reauthorization now, we have confidence that the transition between those funding bills will be very smooth. Operator: We'll turn now to Kathryn Thompson with Thompson Research Group. Kathryn Thompson: I just want to focus a little bit on the federal highway bill reauthorization coming up in September. And as is typical each year, this happens, there's a lot of noise leading into the debate. What we are hearing from a wide variety of contacts is that early discussions or funding sizes of $600 billion to $700 billion. But the health bill now is closer to $500 billion to $550 billion, both of which are still increases from where we are currently. Could you give your perspective in terms of what you're hearing and what you're seeing and how you think about the cadence? And as one contact said, we don't see the bill going backwards in funding. It should be going forward? And how much credence does that statement have? Ronnie Pruitt: Yes. Thank you, Kathryn. And I think your sources are pretty good. And consistent with what we're hearing. I mean, if you think about the kind of the process, I mean, I think where we're at today, the Transportation Committee is in the middle market. So we think we'll get a first reading sometime mid-May. And so as it comes out, as you know, I mean, this is a negotiated process between [ dollars and the Ds ]. The [ Ds ] are -- we're hearing being a little more aggressive towards wanting to spend more. But I think there'll be a lot of negotiations. And as you know, there's bits and pieces of that throughout the country that people are going to want to get their piece of them. But I think, overall, directionally, your numbers are very consistent with what we're hearing. Obviously, as it gets to the senate, it's a little more complicated with a number of committees that has to go through. But look, I think we're in a good position of -- could it get done by midterms? It could. But historically, we've seen continuing resolutions are probably going to be the path. But again, with the dollars that are left to be spent, the momentum we see in starts, the backlog visibility that we have within the public jobs that we've booked gives us a lot of confidence that there's just not going to be a disruption and even under a continuing resolution, the dollars keep spent at the same level. And so I think we're in a really good position. I think it's good momentum. I think the bipartisan part of this is it's good for the economy, it's good for job creation. And I think both sides of the -- I'll like to take that as a win. And so the funding side, I think they're making progress, what they're going to do with electric vehicles, with registrations, all that's being considered. But I think your sources are correct. And I think we walk away today thinking we're in a really good position and confident the bill will get done and pretty confident it will be at a higher level than the previous bill. Operator: Now we'll hear from Keith Hughes with Truist. Keith Hughes: So we get a lot of questions on specifically the second quarter, the drag from what we know today on diesel prices. Can you give any kind of dollar figure of what that's going to do in the quarter, understanding you're going to be going for us good selling prices to offset that? Ronnie Pruitt: Yes. I'll let Mary Andrews get into the numbers. But I think, Keith, if you look at it kind of as we step back overall and say, on a typical year, and I would tell you, over the last 2 years, we burned about 57 million gallons of diesel a year. And so trajectory and if you look at that, it's really variable with the tons we're shipping is the tonnes we're producing and you got to play where your inventories. But all that, if you just step back and said that's kind of the range of the diesel we're going to burn. And obviously, that's going to fluctuate pull stripping and delay some of that with diesel costs because we think this is a temporary situation, and we're not planning long term for diesel to be that. But if it is, we're more than prepared to fight that headwind through our commercial efforts. And so I think that's kind of the context of it. But Mary Andrews, why don't you give him a little more data on -- Mary Carlisle: Yes. I mean I think given those pieces Ronnie described, you're looking at probably $25 million in the second quarter. If you think about the amount of diesel where we would burn and retail diesel today is a couple of dollars higher than it was coming into the year. So that's probably a good round number to think about on the diesel side. The other place that we'll feel the energy impact is on liquid asphalt. But some of our -- about 1/3 of our work is indexed, so the impact will be a little bit less there. And that's one, same thing. Over time, we'll use pricing to catch up and maintain our margins at the healthy levels that we've seen over the last couple of years. And one other thing to keep in mind just as it relates to the downstream is in our original guidance. We did not have the California ready-mix business. That contributed about $10 million of cash gross profit in the first quarter. we still own it today. We do expect that to close soon in the second quarter. But I would think about the downstream at this point with the contribution from the ready mix being a helpful offset to the near-term energy headwinds that we could see. Keith Hughes: Okay. Okay. Great. Let me ask one other real quick back on Kathryn's question. There was a political article a couple of weeks ago talking about this $500 million to $550 billion from the Republican headed Transportation Committee. Some of the Democrat comments are actually for a higher bill than the, call it, $550 billion. I guess my question is based on from your lobbying groups. Is there actually close to bipartisan support around these numbers we're talking about? What is your sense on that? Ronnie Pruitt: I think the -- I mean I think they both see the need for it. And I think the dollar amount is really both of them doing their work on a lot of different information that comes to them on what are the real needs from both a growth of the infrastructure system as well as the maintenance of the infrastructure system. So I think when you talk to -- and Sam has announced his retirement, and so he's still leading it as of today, but -- he's also been involved in 7 reauthorization bills. And so it may be something that he wants to get done before his retirement. But they're also -- they want to know where we're going to get the funding from. And so a lot of it is how is it going to be funded and where all those mechanisms going to hit -- but I think the beauty of the $550 million to $700 million, whatever that leads out is when you think about this bill versus the last bill, it's going to be a more pure highway and infrastructure bill with a lot less other stuff that was in the last bill. And so we look at it as all signs of positive what degrees that is. The politicians will have to figure that out. But again, I mean, you know this gives us long-term visibility into a very meaningful portion of the supply side and the demand side of our markets. And so we think we're in a good place. Operator: We'll go next to Phil Ng with Jefferies. Philip Ng: Congrats on a solid quarter. Ronnie, Mary Andrews, I think you guys both kind of highlighted M&A as the avenues to deploy capital, balance sheet is in a great spot. Are you seeing any choppiness in terms of sellers in this current backdrop? Or it's been -- Ronnie, any color in terms of markets that you're targeting, size of these deals? Is it pure play aggregates, virtual in grid? Just give us a little more perspective what you're seeing out there and what's compelling to you? Ronnie Pruitt: Yes. Good question. When we talk about one of our cores is expanding our reach. And we said at Investor Day that we were willing to look outside of our footprint as we continue to focus on aggregate led. So number one, I would tell you the things we're going to focus on are going to be aggregate that business. If they happen to come with downstream, as we've proven in the past, we'll address that and decide whether we want to be in that business or not. And we've proven in the businesses that we didn't want to be in, that we would exit those businesses. But I would tell you, it's -- the footprint of where we're looking is really the high-growth areas and how things have changed both with demographics as well as public funding as well as some of the private non-res side and the data center is driving a lot of that. But as we look forward, we also see the energy that is needed to support these data centers is going to be another tailwind to us as we have begun really booking some energy projects. We're quoting a lot, and we've actually started booking some. And so I think the energy backdrop in a lot of these states is going to be critical as they try to fulfill the needs of this data center construction. But -- but so I would tell you very active. From the seller side, I think headwinds with energy or anything, obviously, they have to look at that. Does that accelerate them? In some cases, it could because they weren't expecting this cost to be like this, and it may accelerate their desire. But I would tell you, over time, these are generational changes. These are families that have to make that decision. And so there's a lot of complexity to that. And I think a lot of the macro stuff obviously plays into their family conversations. But I don't know that it moves the needle on faster or slower. I think it's just another something we deal with. But I would remind you also, part of our growth efforts is our greenfield and the investments we continue to make in our downstream. And as I look forward to this year, I mean, we've got 3 new plants coming online, 1 in Arizona, 1 in Texas and 1 in South Carolina that we've talked about is our greenfield strategy. From a distribution side, we have 7 yards that we'll be bringing online this year. Several of them, a couple in Texas, 1 in Florida, 1 in California, 1 in South Carolina. And so we continue to invest in the business to protect our franchise to enhance where the growth of our core market is. And that's why we said, as we continue to expand our reach, we can control things we do internally to protect the franchise that we have externally as we look at growth opportunities, we wanted to expand that. And so some of those newer markets is where we'll be looking. And again, as I said in my prepared remarks, we got several of them that we think will be coming to close before the end of the year. So I think we're in a good position. Operator: We'll hear next from Angel Castillo with Morgan Stanley. Angel Castillo Malpica: Just 2 parts, one on the full year and then one on 2Q. I guess on the full year running, I think you mentioned that you don't expect the big prices to be kind of longer lasting and you kind of [ be that ] as a little bit more temporary. Just wanted to clarify, I guess, the full year guide at this point, just want to guess clarify, it does assume diesel prices remain at current levels? Or are you anticipating that to come off in the second half? And then kind of related to that, I guess, depending on what your assumptions are, midyears you typically talk about as being beneficial to kind of the following fiscal year. So should we think about it as being any offsets in the second half of this year being more woken wave operations driven? And then on the second quarter, apologies if I missed it, but I just wanted to clarify, I guess, what is kind of your expectation on price volume and gross profit per ton when you kind of put all the pieces together? Ronnie Pruitt: Let me unpack all that. So first, I would start with kind of where our assumptions are. And I would tell you, I mean, the assumptions that we're making in reinforcing our earnings for the full year is really a combination of the history of our business. And so if fuel stays up for the remainder of the year, then our pricing will reflect that. If fuel comes back down, then our margins will reflect that. And so we're very flexible in our ability to go out and capture whatever those headwinds are. And I think our business model has proven that time over time over time. And so I'm confident in that as we build out and look at what we anticipate for the remainder of the year. I mean, we would love to say that this thing is temporary, but we're planning for it to be longer, and we have that accounted for in our guidance. And so I'm not worried about that headwind. As far as growth in the second quarter, again, as we looked at the cadence of our quarters, we said our pricing was going to start out at the lower end because of the comps over year-over-year on some of the hurricane recovery work and it was going to accelerate through the year. And I think that's going to play out exactly like we've laid it out. On the demand side and our shipment side, I mean I think we experienced more normal weather in the first quarter, and I think that contributed to the growth in our shipments that we saw I think also the size of these projects and the speed of which these projects are shipping is also something that is -- weather impacts those. And so as we see more normal weather, I mean our contractors aren't out there going, okay, we're going to ship this much during the first quarter, and then we'll stop and then we'll start the second quarter. I mean they're building these projects -- they don't care about a calendar. They care about what's happening today, what's happening with the weather they're experiencing. And if they can go forward faster, they're going to do that. And especially with this data center work, I mean, these companies are looking for return on these large investments, and they don't get a return that thing being under construction. They get a return when it's finished. So the speed of those things are obviously critical to the process of the job. And so I think we see second quarter continue to play out that we would expect, again, based on normal weather, that our shipping levels would continue to be as expected as we planned out in the year, and as we laid that out, they're going as expected. And so I don't see a lot of noise right now within the shipping side or the demand side. I think those are some visibility that we have through our backlog and our bookings. Mary Carlisle: Yes. And Angel, one thing we highlighted coming into the year in terms of how to think about earnings overall was to think about more normal seasonal spreads than to think purely about year-over-year comps. And so as we sit here today, I think one might think is look at historically what our business kind of looks like first half, second half and given the strong start that we got and the contribution that we got in the first quarter, and what our expectations are for the second quarter. I think we'll still land in that probably [ 45-55 ] type split. And as I highlighted earlier, the diesel headwind in the second quarter, we'll squeeze us a bit there. Operator: We'll hear next from David MacGregor with Longbow Research. Joseph Nolan: This is Joe Nolan on for David. I just wanted to I just wanted to touch on the nonres business. You've obviously talked about the strength in data centers, but just in some of the other verticals, like warehouses, manufacturing and commercial, if you could just talk about backlogs and demand within those businesses? Ronnie Pruitt: Yes. We're -- as we went into the year, we said we were data centers were leading private nonres. We said we thought we would see some of the green shoots in warehousing. And we've seen some of our markets turn positive, but from a very low starts very low rate. So I think those are opportunities for the future as those markets play out. But when I look at kind of buildings and non-res side, I mean, we've got good momentum going and in Texas with some fuel energy-related projects, some LNG projects that started back, we're shipping on some manufacturing type projects that we started back shipping on in Illinois, we've seen both data centers as were some warehouse stuff that has really kicked in. And so I think it's a combination. I mean, data centers is obviously growing at the fastest pace within our private non-res category. But I mean, the energy side is very encouraging. And we're in a lot of active conversations around energy projects. And I think the energy companies are in the middle of planning a lot of those projects. I think that -- those type of projects, obviously, we'll have more permitting and things that they have to do from a timing perspective. I'm not sure they'll move as fast as what some of the data centers have. But in the end, it's all really forms of good forward-looking demand on the private nonres side. And so it's a mix of different types of projects. But again, data centers has been kind of the lead of that. Operator: We'll turn now to Michael Feniger with Bank of America. Michael Feniger: Ronnie, just if we do get a CR, does that change your view at all on 2027? And how that looks up? Does that shift us from a growth market to maybe flattish or we're still maybe in growth [ go ] because of the dollars left spend? Ronnie Pruitt: Yes. I don't think it changes it. And I'll give you a couple of reasons why. One, the point you make is we still have dollars that are going to carry over. I mean when we look at our bookings and backlog is a lot of those projects from a federal side are multiyear projects. And so not only are they booked and we're shipping on them, but also the dollars that are carrying forward will project well into '27. But I'll also remind you that only third of highway and funding is really the federal side. And so when we look at the state side and then we look at other measures that the states have put in, we look at these public-private partnerships, we look at toll authorities, there are a lot of growth projects out there right now that are very small in federal dollars and larger and other funding that gives us a lot of confidence that, again, I've said it in the past, and I'll continue to say public is probably the least of my worries. I mean I just think we're in a really good position to get the funding in place, and there's other ways the states have gotten creative around funding their own programs. And so I think -- as I look forward, I don't see '27 being a problem when it comes to public. Michael Feniger: Great. And Ronnie, just on the pricing side, I know we started Q1 at the low end that was something you guys always talked about with that plus 4%. Just with the miners, are we exiting above that 4% to 6% range on the full year growth? And you referenced 2022, how you guys respond to inflationary pressure. You guys are very quick to get that price increases in there and we saw that in the numbers. Is there anything different that we should think about 2026 and versus 2022? Just in terms of the demand environment coming out of COVID versus maybe where we are now, are there differences or similarities and how we should kind of look at that 2022 period where you guys are quick to respond to inflation versus where we are now today? Ronnie Pruitt: Yes, I think there are. I mean, there's lots of differences, and there's always differences on the demand side. And so as I look at the difference between 2022 and 2026, 2022 coming out of COVID, residential really took off. And so a lot of that midyear and first of the year pricing, again, we reference that back to the customer base was a lot of our fixed plant stuff, which the concrete guys back then, we're experiencing some really good tailwinds when it came to the majority of their market being tied to single family, that's a different -- I mean that's not happening today. If that accelerates, and we've said if the third leg of our stool, public private nonres and single-family or resi, if that's our [indiscernible] tool kicks in, obviously, it's going to give us a lot of tailwinds when it comes to both the demand side of our products as well as the pricing side and that momentum. But I think originally, what you said, I mean, I think it's absolutely right that our confidence is that our pricing throughout the year will continue to build momentum. So exiting that, obviously, we'll be -- we'll need to be at the higher end of our range because that's just the math. And so we have confidence in our ability to do that. And I think it's too early to call what's the success of midyear is going to be because it's choppy. I mean it's every individual market. I mean these are local markets that we have active conversations going on with our customers, and we want to be their supplier of choice. And so in the end, we're going to be disciplined around that. But I would tell you we have good momentum. The quarter played out exactly what we expected. And I think the rest of the year, we have all the mechanisms in place to continue to reinforce the earnings of the business. Operator: We'll turn next to Ivan Yi with Wolfe Research. Ivan Yi: Can you comment on transportation cost, truck rates are currently about 20% to 30% year-over-year. Are you able to fully pass through these higher costs to your end customers? And on that, you hire truckload rates incentivized moving more volumes to rail where you can? Ronnie Pruitt: Yes. So I guess I'll answer the back half of it. When it comes to rail, I mean, you can move more to rail, but you also have to have the rail yard to be able to do that. And so our rail yards are a really extension of the operating plants that those markets support. And really the significance of that is our ability to capture the value of those products at the yards in distribution costs, which would include rail distribution, we're able to capture that. And a lot of those yards are really in high-growth markets. That's why we put yards there because that's where the growth is, and it helps us supply that market and it limits the amount of distribution cost to get there. On the overall delivery side, as I said early on, we have surcharges in place to capture that. Delivery to us is really a pass-through, we don't try to make money on delivery. That's a third party. We have owner operators that do that. And so we do provide that service to our customers, but it's not something that we see as a headwind or a tailwind. It's just the cost of doing business. You got to get the rock to the job. And so delivery to us is a pass-through, and we have surcharges in place to make sure we're not paying the penalty on any fuel cost increases. Mary Carlisle: Yes. And one other thing, Ronnie talked a lot earlier about the -- our advantaged footprint in terms of where we are an advantage we also have is not just geographically where we are, but what our positions are in those markets. And so I think over the longer term, if you think about those positions in an environment of rising transportation costs, it can serve to widen our logistical mode advantages. Operator: And we'll hear next from Rohit Seth with B. Riley Securities. Rohit Seth: Just back on the volumes, [indiscernible] up 5%. So you booked a little bit of cushion here on into the rest of the year. Can you provide a sense of how the quarter played out, the cadence from January to March? And then if you have any comments on April? Ronnie Pruitt: Yes. I would say when we talked about more normal weather, really the more normal weather we experienced was really more in the smile of the U.S., it's really more California-based and then in the South and Texas and then across the Southeast. I mean we saw a lot of very cold start to the year in Illinois and in our Northeast markets. And I would tell you, our shipments reflected that. I would tell you, we started off slower in January, and we built momentum through February and into March. And so really, weather for us, it's 2 parts. I mean, precipitation rain is one thing, and rain obviously affects the day that we're shipping, but the cold start to the year in the Northeast and the cold start to the year in the middle of the country, it definitely had an impact on, one, you're not laying mix and one you're not for in concrete, but 2, you're not operating. I mean, so -- we really got off to a slower start in January in some of our northern markets, but that's typical. I mean, that's not something that caught us off guard. I mean, we knew that was going to -- that's what we planned for it to be cold in Chicago in January. So I would tell you the quarter from a cadence side, I think it played out exactly like we said. And I would tell you, as we got into March, I mean with drier weather and with warmer temperatures, again, the size of these projects matter and where our footprint is matters. And when I say literally 60% of these large projects are within 50 miles of a Vulcan facility, that matters and their ability -- and we highlighted this in our Investor Day when we talked about the complexity of these jobs and how much they want a supplier that can have redundancy, they want suppliers that can meet their production schedule. And some of these schedules literally can drift up 30% or 40% in their schedule as far as the demand perspective, and so that matters. I mean I think our size and location is very critical when it comes to where these projects are going. And so I would anticipate, again, I mean, as we get into the second quarter, I think that cadence will be. But we also said we started off 5% up. We said we still believe we're going to be in growth, but we didn't say we raise our expectations on the overall demand of our products. We think it's still going to play out through the remainder of the year in that low single-digit carry-on. Mary Carlisle: Yes. And that's really based on a seasonally adjusted basis, we feel like we're right on track for our full year guidance. I think as you think about the rest of the year, one thing to keep in mind is that seasonally adjusted last year's second quarter was weaker than where we finished the year. So we'll have easier year-over-year comps in the second quarter than we will in the back half. But in terms of the -- again, a lot of noise in the quarters, but in the -- for the full year guidance, we think we're on track to deliver that modest growth for the year. Rohit Seth: Any thoughts on April? Ronnie Pruitt: I think April is going as expected. Rohit Seth: Okay. And then just a last follow-up. Are you seeing any project cancellations or anything getting pushed out to the [indiscernible] maybe just delaying waiting for it to normalize? Ronnie Pruitt: We have not. We're paying very close attention to that because I mean that's a possibility, obviously. But we have not seen anything as of the date with either public or private side, we've seen any projects that have been canceled or delayed. Operator: Thank you, everyone. With no further questions in queue, I would like to turn the floor over to CEO, Ronnie Pruitt for closing comments. Ronnie Pruitt: Thank you, and thank you all for your interest in Vulcan Materials. I'm proud of what our teams have accomplished in the first quarter, but we're never satisfied, and we're always looking ahead. We're committed to continuous improvement and long-term value creation for all of our stakeholders, and we look forward to speaking with you at our next quarter. Thank you. Operator: Ladies and gentlemen, that will conclude today's event. Thank you for your participation. You may disconnect at this time, and have a wonderful rest of your day.
Operator: Greetings. Welcome to the STAG Industrial, Inc. First Quarter 2026 Earnings Conference Call. [Operator Instructions]. Please note, this conference is being recorded. I will now turn the conference over to Steve Xiarhos, Vice President, Investor Relations. Please proceed, sir. Steve Xiarhos: Thank you. Welcome to STAG Industrial's conference call covering the first quarter 2026 results. In addition to the press release distributed yesterday, we have posted an unaudited quarterly supplemental information presentation on the company's website at www.stagindustrial.com, under the Investor Relations section. On today's call, company's prepared remarks and answers to your questions will contain forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995. Forward-looking statements address matters that are subject to risks and uncertainties and may cause actual results to differ from those discussed today. Examples of forward-looking statements include forecast of core FFO, same-store NOI, G&A, acquisition and disposition volumes, retention rates and other guidance, leasing prospects, rent collections, industry and economic trends and other matters. We encourage all listeners to review the more detailed discussion related to these forward-looking statements contained in the company's filings with the SEC and the definitions and reconciliations of non-GAAP measures contained in the supplemental information package available on the company's website. As a reminder, forward-looking statements represent management's estimates as of today. STAG Industrial assumes no obligation to update any forward-looking statements. On today's call, you will hear from Bill Crooker, our Chief Executive Officer; and Matts Pinard, our Chief Financial Officer. Also here with us today are Mike Chase, our Chief Investment Officer; and Steve Kimball, our Chief Operating Officer, who are available to answer questions specific to their areas of focus. I'll now turn the call over to Bill. William Crooker: Thank you, Steve. Good morning, everybody, and welcome to the first quarter earnings call for STAG Industrial. We are pleased to have you join us and look forward to discussing the first quarter 2026 results. Q1 industrial leasing velocity and volume were healthy, both market-wide and within STAG's portfolio. Year-over-year absorption continues to improve. Notably, the multiyear weakness in demand for big box product has reversed with vacancy in larger spaces decreasing in many markets. This has not been limited to larger spaces, however, with strong activity in the 150,000 to 250,000 square foot segment of the sector where STAG's portfolio predominantly sits. The market is benefiting from a more recent demand driver tied to the rapid acceleration of data center construction. 3PLs supporting these data center developments have resulted in a new segment of leasing demand for traditional warehouse facilities. Since the beginning of 2025, we have signed 8 leases totaling 1.6 million square feet to data center-related tenants. New supply also remains subdued with approximately 40% of new supply constructed for build-to-suit projects, above historical averages. We continue to expect national vacancy rates to peak in the coming months with an inflection point in the back half of 2026. Capital markets have remained stable to start the year and industrial product remains 1 of the most liquid asset classes. We see momentum in the transaction market with the pipeline growing and transaction volume increasing. Our internal pipeline has increased to $3.9 billion. In February, we acquired a 750,000 square foot building located in Platte City, Missouri for $80.7 million at a reported cap rate of 6.1%. The newly constructed Class A building features 36-foot clear height, ESFR, ample trailer parking and heavy power. Strategically located within a northwest submarket of Kansas City, the building benefits from close access to highways and the Kansas City International Airport. The building is 100% leased for 12 years with 3.2% annual rental escalators. In terms of our development platform, we have 7 buildings or 1.8 million square feet of development activity that is not in service as of the end of Q1. These buildings are in various stages of development and have an expected stabilized yield of 7.1%. Subsequent to quarter end, we have signed two new development leases. We agreed to a 73,000 square-foot lease at our casual drive development in Greenville. That building is now 100% leased. We also executed a lease totaling 45,000 square feet and 1 of our Charlotte development projects. That building is now 90% leased. With that, I will turn it over to Matts who will cover our remaining results and guidance for 2026. Matts Pinard: Thank you, Bill, and good morning, everyone. Core FFO per share was $0.65 for the quarter, an increase of 6.6% as compared to last year. Leverage remains low, with net debt to annualized run rate adjusted EBITDA equal to 5. Liquidity stood at $806 million at quarter end. During the quarter, we commenced 37 leases across 6 million square feet, generating cash and straight-line leasing spreads of 20.9% and 39.6%, respectively. This is a quarterly record in terms of total operating portfolio square feet leased. Tenant demand is strong and in many industries, including air freight and logistics, retail and containers and packaging. Retention for the quarter was 69.5%, we are maintaining our retention guidance of 70% to 80% for the year. As of today, 79% of our forecasted leasing for 2026 has been addressed at levels consistent with our initial guidance and at levels equal to our previous years at this point. We still expect cash leasing spreads of 18% to 20% this year. Same-store cash NOI grew 4.1% for the quarter. Credit loss was minimal for the first quarter as well. At this point, we are maintaining all guidance for the year. 2026 guidance can be found on Page 21 of our supplemental package, which is available within the Investor Relations section of the website. I will now turn it back over to Bill. William Crooker: Thank you, Matts. I want to thank our team for the great start to 2026. SAG has set the foundation of sustainable growth in 2026 and will continue to benefit from a strong balance sheet, ample liquidity and broad market diversification. We will now turn it back to the operator for questions. Operator: [Operator Instructions]. Our first question comes from Craig Mailman with Citigroup. Craig Mailman: Bill, you noted similar to peers that the leasing market is healthier here today. I'm just kind of curious, you guys did maintain retention guidance and quicker backfills on spaces that have come back to you or anything encouraging on that front because I know you guys were a little bit worried about that as a source of occupancy to outside. William Crooker: Yes. Thanks, Craig. Yes, I mean, it's certainly a higher lease expiration year. And that's driving our guidance -- our occupancy guidance for the year. With respect to what we're budgeting, it's still 9 to 12 months of lease-up time for assets when they go vacant. I will say we had good activity in Q4. That has continued in Q1. We had a large amount of square footage leased in Q1, it was 6 million square feet. So activity is really strong. We're seeing it from multiple industries. We're getting a lot of RFPs. It feels really good. But with all that being said, we have not changed our lease-up assumptions at this time. But the momentum from Q4 has continued into Q1 and into Q2. Craig Mailman: And then just a follow-up here. You mentioned, I think, 8 leases, 1.6 million square feet to data center supply tenants. What markets are you seeing that in predominantly? And do you think that this is concentrated in your portfolio or it grows a little bit as just the proliferation of data centers takes hold? William Crooker: Yes, it certainly feels like it's going to continue to grow. I mean South Carolina, we're seeing a lot of it. We had 3 leases in South Carolina, 2 in the Greenville Spartanburg market. Nashville, 1 of our -- the lease we signed in Nashville was a data center-related tenant. And then we saw some in the Midwest in Wisconsin 1 lease there. We had a lease we signed in Ohio and also in Charlotte. So it's really that Southeast Midwest markets is where we're primarily seeing that demand. And that's where a lot of our portfolio is concentrated. So we anticipate further demand from data center-related tenants. Craig Mailman: Not to ask a third one, but like what type of tests are there 3PLs? Or are they equipment manufacturers or servicers, who are you leasing to? William Crooker: Yes. So one was a 3PL to one of the largest 3PLs in the world serving a meta data center contract. We have some tenants that are distributing generators to data centers. We have some light assembly of racking of power conversion systems in one of them, one is manufacturing battery components. So it's a variety of things supporting data center developments and just the operations. And these are long-term leases. I mean the weighted average lease term is a little over 8 years and the leasing spreads we achieved that 1.6 million square feet, was about 35%. So good economics, long-term leases, strong credits backing these leases as well. Operator: The next question comes from Michael Griffin with Evercore. Michael Griffin: I appreciate the commentary on the leasing front. It seems like it's been a good start to the year. I realize you haven't -- you've maintained your guide across the board. But maybe, Bill, if you can give us a sense of updated thoughts on market rent growth expectations. I think at the beginning of the year, it seemed like you were flat to up 2%. Does it feel like we're above the midpoint on that? I realize things can fluctuate around, but any commentary there would be helpful. William Crooker: Yes. I mean, I think this is part of the theme of Q1 calls, especially with us, where we just put out our annual guidance a couple of months ago, we had pretty good insight into where things were trending to start the year. activity is probably a little bit stronger than what we initially thought. But with all that being said, we maintain our guidance really across all components of that. With respect to market rent growth, our guide was 0% to 2%. That will -- that we're going to maintain that guidance as well at this time. That will likely trend higher on a quarterly basis as we move through the year as we see that vacancy rate -- market vacancy rate peak in the coming months. So everything is panning out as we thought a couple of months ago, maybe a little bit more optimism in the portfolio just given the activity we're seeing and the leases we're signing and the discussions we're having with tenants. So -- but it's still early in the year, right? We're 2 months past our original guidance we put out. Michael Griffin: Great. That's helpful. And then maybe for my follow-up, you're at about 80% of your 2026 leasing goal seems pretty good so far. I don't want to put the cart before the horse, obviously. But as you look to maybe 2027. Are you starting to have those conversations? I mean does it feel like as you look even at the year ahead, you're running maybe ahead of where you were relative to expectations? Or anything you can glean on maybe those '27 conversations would be helpful. William Crooker: Yes. I mean, it's a little -- it's obviously a little early for 2017, but we do -- especially for renewals, we start this conversation typically 12 months in advance. So when you look at leasing plan, we're about 25% through that at this point, and that's pretty comparable to the last few years. Operator: The next question comes from Nick Thillman with Baird. Nicholas Thillman: Maybe I wanted to touch a little bit on what you're seeing on the acquisition front. Is there any sort of change in the pool of assets you're looking at? Are you willing to take on increased demand environment? Are you willing to take a little bit more value add? Or is -- I guess, bucket, the development, value-add versus core acquisitions and what you're underwriting today and how that sort of trended over the last 90 days or so? William Crooker: Yes. I'll let Mike jump in in terms of kind of what we're seeing broad-based. But with respect to identifying a certain profile of asset and focusing on that I mean we're fortunate enough that we've got the people, the processes in place and the systems in place to underwrite a large amount -- a large number of transactions. So we'll look at everything and depending on what meets our criteria and if we can meet the price, then we'll buy it. So it's not like we're going to shift materially into value-add or materially into long-term stabilized leases. We'll acquire what meets our investment criteria at that time, but we'll look at everything. Just one thing on the, call it, the acquisition side, sourcing side, and then I'll pass over to Mike for more of the broader view is we did yesterday just acquire a piece of land adjacent to one of our buildings in Dallas, Texas. It's about a 3 -- it's a land is large enough to fit about a 340,000 square foot facility. So we're going to start development of that facility shortly. So it was good to put that land under contracted shovel-ready that transaction is going to be about $38 million at a 7.4% yield on cost. So excited to get that going. And that's just an example. When we're looking at a number of development opportunities. We're looking at a number of value-add opportunities, stabilized opportunities, some small portfolios. So it really depends on what meets that investment center. And if I didn't mention that transaction, that PSA Land is in Dallas, Texas. So -- and with that, I'll pass over to Mike to share any more commentary on that. Michael Chase: Sure. And I think another thing just to mention on that piece of land, that's a committed fill-to-suit where we already have it tenant committed for that building on the land that we just bought yesterday. Just looking nationally, it was a strong end of '25. So Q4 came in from an investment sales perspective, came in pretty strong. That's carried over into Q1 of '26. So that stability and momentum in the capital markets has resulted in an increase in confidence from both buyers and sellers in the market. So that also resulted in an uptick of deal flow of more buyers coming to the -- coming off the sidelines and into the market. So there's been good deal flow that we've seen in Q1 and that's continuing into Q2. William Crooker: Yes. I mean you see that in our pipeline to our pipeline is $3.9 billion, about 70% of that is single transactions, 30% portfolios. And just on the seller side, I mean, those Empire side bid-ask spreads pretty tight now. So we expect just the overall industrial transaction market to pick up here as we move through Q2. Michael Griffin: That's helpful. And then, Bill, I know you've mentioned just some of these partnerships you've had with regional developers and sounds like Dallas might be an opportunity that you just locked in here as well. But I guess, longer term, are you thinking about getting a little bit more concentrated now that you're building these relationships with these developers I guess, are you guys being a little bit more submarket focused and looking for a little bit more growth in end markets and underwriting that. I guess more commentary there would be helpful because it's something that we've talked about in the past. William Crooker: Yes. So just backing up on the piece of land we bought, that was sourced by us. We had a tenant in our portfolio that's on an adjacent site that wanted to do a build-to-suit. So we were able to source the land, and go through all the approval process. So that was done on balance sheet. That's not being partnered with anybody. With all of our developments, we look at the submarkets and make sure that those buildings fit the submarkets I mean these buildings that we're putting up meet the teeth of the demand in these markets. So that's first and foremost. We appreciate the partnerships we have with our development partners. We want to grow those. We're trying to grow those. In some respects, we are growing those. And there's also some opportunities to expand partnerships with new partners. So all that's on the table. If you were to ask what's our best use of capital today is probably on the development side. I mean, just as one in Dallas, it's a 7.4% yield. So that's our best use of capital is harder to acquire that land and takes longer to develop it. but we like the opportunity, and we'll do it either on balance sheet or with existing partners or with new partners. Operator: Next question comes from Jason Belcher with Wells Fargo. Jason Belcher: I guess, first, Q1 same-store was pretty solid at 4.1%. The guidance was unchanged at 3, suggesting somewhat of a possible slowdown. Can you talk about how you expect that to take shape or how we should be thinking about the cadence of that metric for the rest of the year? Matts Pinard: Yes.So cash same-store of 4.1% in the first quarter is very healthy. But really what we know is talk about the economic impact to occupancy decline. In the first quarter, occupancy decline was only partially reflected in the same-store number, meaning a good portion of the nonrenewals occurred near the end of the quarter. So basically, the second quarter is going to reflect the full impact of that vacancy. So put it a different way, the 4.1% includes impact of the 60 basis points of average occupancy loss, not 120 basis points of actual occupancy loss of period end. So all of that's related to the first quarter. So the 4.1% does not account for the fact that this space is vacant for the entire quarter. But the first quarter cash same-store was fully anticipated. It was included in our guidance. As you said, we continue to expect cash sales or growth of 3% at the midpoint. So no change in the guidance. This was expected. It really comes down to the impact of occupancy over a full period. Jason Belcher: Great. And then secondly, could you just give us an update on where your embedded rent increases are trending for newly signed leases and also remind us what the average escalator is across the portfolio is at this point. Matts Pinard: Yes, absolutely. The weighted average escalator across the portfolio is 2.9%, almost 3%, and that's going to increase every quarter because every lease that we're kind of coming across our desk starts with anywhere in the 3% to 3.5% range, call it, 3.25 on average of the leases that we are signing. So again, just mathematically, that 2.9% will continue to increase. Operator: The next question comes from Eric Borden with BMO. Eric Borden: Matts, you just touched on this a little bit about the same-store, but just on the occupancy front, you started off the year with positive leasing, but had a few known move-outs in the back end of the quarter. how should we be thinking about the quarterly occupancy cadence just for the balance of '26, and as we look to the rest of the year, should we expect any additional known move-outs? Matts Pinard: Yes, exactly. So with the no move outs, we didn't change our guidance. We're at 75% at the midpoint retention, which is basically spot on what we've averaged as a public company and what you can see from any other institutional quality industrial portfolio. But the same store being 60 basis points of average occupancy loss and 120 basis points of period-end occupancy loss. So that resulted in 96.6% occupancy in the same store. And I just want to pause you, that's a very healthy level. As Bill mentioned, our budgets assume 9 to 12 months of lease-up. So space that rolls vacant in our budget lease-up next year, not this year. If we think about the cadence, we expect the trough occupancy to occur in the second quarter with occupancy increasing during the second half of the year. And that basically squares with our view that at the end of this year, we're going to start to see equilibrium in market rent growth acceleration. Again, the change in Oxy's fully anticipated, we had messaged it. It's included in our initial guidance. We continue to expect average occupancy in the same-store pool to be 96.5% with no change to our guidance. Eric Borden: Great. And then just going back to the increasing data center demand, how are you guys thinking about underwriting that tenant base in terms of power availability, building specs CapEx needs and credit duration just versus your traditional warehouse timing? William Crooker: I mean, one of the themes we're seeing across a lot of tenants is they want more power, right? And whether that's today or in 5 years in their lease term, maybe because they plan to automate their facility more or whatnot. But power is certainly something tenants are looking for. with respect to the spaces that we lease to the data center tenants, I mean, some of them had excess power and some did not. So it's your traditional warehouse that is just being used for a different use. It's the same example of we've had warehouses that were regional distribution centers that second tenant was a light assembly tenant and then the third tenant was warehousing, right? So these are can be used for multiple uses. We're just seeing an incremental demand driver from data center peers. Operator: The next question comes from Jessica Zheng with Green Street. Jessica Zheng: Just following up on the data center piece. So for the construction tenants that sized the longer-term basis, do you know if they're surveying like multiple data centers in the area? And if not, do you know if they will be servicing the data centers operations after the construction completes Yes, I'm just curious about the kind of the sustainability of this new tailwind here? William Crooker: Yes. So some of them are servicing the data centers that are already complete, and it's just servicing their ongoing operations. Some are servicing the development of it. and some are servicing multiple data centers and some are servicing just one data center. But where these warehouses are located. There's multiple demand drivers within those markets. I mean, we have at least two of these data center leases in the Greenville Spartanburg market, and we spoke about that market many times. It's one of our top markets, and there's consumption in that market for warehousing and local distribution. There's regional distribution related to the inland port. There's now data center demand there. There's the BMW plant that creates a lot of demand there. So these are functional buildings that can meet many of the demand drivers is just this incremental demand driver of data centers. Jessica Zheng: Okay. And then additionally, I was wondering if you could just kind of walk through your other markets and kind of highlight the ones with relative strengths and weaknesses right now? William Crooker: Yes. I mean if you look at kind of markets that are a little weaker, it's -- we have one asset in San Diego that's proving to be a little challenging now Memphis is a little slower, Pittsburgh a little slower. Let's say, our markets that have probably been improving the most, the Greenville Spartanburg and Charlotte. And then if you want to move a little further to our best markets, Houston has been a great market. Nashville -- and the Midwest big-box distribution markets have really started to perform extremely well. I mean that's a trend we're also seeing is big box leasing has been strong, and a lot of these markets are -- have very low vacancy rates for big box distribution. So that's your Columbus, our Louisville, your Indies. Operator: Next question comes from Henry Newell with RBC Capital Markets. Unknown Analyst: Just wondering about where you're seeing underlying private market valuation trends in your specific markets and if you're seeing them being impacted by really what's going on macroeconomically or geopolitically at the moment? William Crooker: Yes. I mean depending on the transaction, whether it's a -- I assume you're talking cap rates just to clarify the question? Unknown Analyst: Yes. William Crooker: Yes. So I mean, individual transactions, I mean, we just bought one transaction in Q1. We're close to putting a couple of others under LOI. I mean those are transaction transacting at and around where we're buying assets, right? Sometimes 25 basis points or 50 basis points inside of that, and that's why we don't win the deal, right? So they're trading at are a little bit lower than what we're willing to pay. And then portfolios because there's a lot of capital still chasing this asset class. We're still seeing a slight premium for portfolio. So anywhere from a 25 to 50 basis point portfolio premium on private transactions. Operator: At this time, I would like to turn the floor back to Mr. Crooker for closing comments. William Crooker: Thanks, everybody, for participating in the call. We appreciate the questions and look forward to seeing you all soon. Thank you. Operator: You may disconnect your lines at this time. Thank you for your participation, and have a great day.
Operator: Thank you for standing by. At this time, I would like to welcome everyone to the Welltower First Quarter 2026 Earnings Conference Call and webcast. [Operator Instructions]. I would now like to turn the conference over to Matt McQueen, Chief Legal Officer and General Counsel. The floor is yours. Matthew McQueen: Thank you, and good morning. As a reminder, certain statements made during this call may be deemed forward-looking statements in the meaning of the Private Securities Litigation Reform Act. Although Welltower believes any forward-looking statements are based on reasonable assumptions, the company can give no assurances that its projected results will be attained. Factors that could cause actual results to differ materially from those in the forward-looking statements are detailed in the company's filings with the SEC. And with that, I'll hand the call over to Shankh for his remarks. Shankh Mitra: Thank you, Matt, and good morning, everyone. As usual, I'll review business trends and our capital allocation priorities and the team will follow the usual cadence. We started the year on a strong note with the business continuing to fire on all cylinders. While the heightened geopolitical tension and macroeconomic volatility dominated the headlines, our niche need-based and private pay rental housing business did not miss a beat. Driven by a combination of strong organic growth and acquisition activity, our total revenue for the quarter increased 38% year-over-year, while adjusted EBITDA was up 36%. Most importantly, we delivered another quarter of strong bottom line part share growth with FFO per share increasing 23% while we continue to deleverage our balance sheet and invest in people and systems. Our balance sheet provides us with substantial firepower and flexibility. These results exceed our already high expectation coming into the year, enabling us to raise the midpoint of our full year FFO per share guidance by $0.11 to $6.28. The pronounced mix shift of our portfolio resulting from a transformative 2025 capital allocation activity has already begun to manifest itself. During the first quarter of this year, we reported 16.4% total portfolio same-store net operating income growth, by far the highest in our history. This is largely a function of combined strength from a senior housing operating portfolio, which now comprises 74% of our same-store NOI, up from 57% first quarter of last year. This is the first time in history the annualized in-place NOI from our shop portfolio exceeded $3 billion. During the first quarter, U.S. outperformed from an occupancy perspective with nearly 400 basis points of year-over-year growth. On the other hand, Canada, with higher overall occupancy levels than U.S. and U.K., posted growth closer to 300 basis points, but generated RevPOR growth of 6%, giving you some perspective of the out of the possible as our overall portfolio leases up. Ultimately, all 3 regions made strong contributions, and we achieved nearly 10% organic revenue growth in the quarter. And the subdued expense growth driven by scaling and the Welltower Business System, same-store NOI growth increased 22%, marking 14th consecutive quarter in which sharp growth exceeded 20%. Drilling a bit further, the growth of RevPOR, the unit revenue continued to exceed ExpPOR or unit expenses by a wide margin resulting in another quarter of significant operating margin expansion of 320 basis points. Perhaps the most remarkable stat of the quarter was the circa 20% NOI growth gated by the communities with 95%-plus occupancy. While I consider our recent senior housing results to be somewhat satisfactory, I'm convinced that the best years of this business are squarely in front of us. With the total senior housing portfolio occupancy at 87%, there is significant capacity in the system for us to drive multiple years of outsized occupancy gains, along with continued pricing opportunity. And with the operating leverage inherent in our high fixed cost business, margin should continue to drift higher. But as we have talked about during our most recent calls, what we remain most excited about and our most meaningful opportunity to drive bottom line growth is through the expanded role that technology, data and innovation will play in our business with the ultimate goal of improving the experience of our customers and site level employees. The structural change driven by the Welltower business system should continue to impact virtually every revenue and expense line item driving the margins even higher. This digital transformation, which we are striving for, coupled with in-place above-market compensation and benefits for our site level employees, should result in lower turnover and lead happier customers. As I mentioned last quarter, Manga Grant is a clear example of how we are putting these ideas into action. As I've written extensively in my annual letter, which came out a few weeks ago, we have built a system of scaled economic share amongst all participant in the ecosystem. While shareholders will certainly benefit as we extend the duration of our growth, we want our operating partners, site level employees, residents and their families to benefit meaningfully as well. This is the only way to build and sustain a network effect in a complex adaptive system like ours. Turning to investment activity. Almost exactly a year after Liberation Day, the conflict in Middle East has led to another period of significant capital markets volatility creating a dynamic similar to that of last year. Recently, a spike in interest rates and gapping out of spreads has resulted in retrading of deals and various parties walking away from their new found love of senior housing. It is almost comical to see how predictable tourist capital's behavior can be. Many of our counterparties have seen this movie before and opted to bypass the theater and instead transacting with us directly in privately negotiated deals. However, some of the first-time sellers have learned the hard way that 5 to 6 months time line required to reach a signed definitive agreement in real estate is an eternity in today's world. We behave exactly how we always have: running a first-class business in a first-class way and never walking from a handshake. Over the last 60 days, we have been busier than ever, generating an incredible amount of activity, which Nikhil will describe to you shortly. But to provide some additional context, we completed $3.2 billion of investments during the quarter and have closed or under contract to close an additional $7.3 billion of investments. Our investment pipeline remains robust, visible and actionable in all 3 of our regions. In addition, often overlooked is our disposition activity which totaled nearly $3 billion in the quarter as we continue to rotate capital into opportunities, which we believe will both amplify and extend the revenue growth curve further into the future. Overall, we have completed $11 billion of dispositions since the beginning of 2025, which has meaningfully dilutive -- which has been meaningfully dilutive to our 2026 earnings per share. However, calling our portfolio of lower growth assets, we have meaningfully extended our growth curve in outer years. For example, the assets we acquired in fourth quarter of last year are expected to deliver 10x level of growth in 2026 than the assets we have sold. Not selling this unprecedented volume of assets would have been easier and frankly, more fun as 2026 FFO per share would have been meaningfully higher, but we always have and always will choose hard, over easy and long term over short term. We have a long and hard year of execution in front of us, but our team has never been more fired up as it is today. We shall see what the market gives us in this summer leasing season. With that, I'll pass it over to John. John Burkart: Thank you, and good morning, everyone. As Shankh mentioned, we are pleased with our start to the year having delivered the portfolio same-store NOI growth of 16.4%, the highest level in our company's recorded history. Once again, our results were driven by our senior housing operating portfolio, which delivered a 14th consecutive quarter in which the same-store NOI growth exceeded 20%. During the first quarter, portfolio year-over-year same-store revenue increased 9.5%, driven by a 370 basis points of occupancy gains and strong pricing power with RevPOR growth of 5%. Revenue growth was consistent across all 3 regions, led by the U.K. at 9.7%, followed by the U.S. at 9.5% and Canada at 9.2%. However, peeling back the onion, both the U.S. and U.K. reported occupancy growth of nearly 400 basis points and RevPOR growth just shy of 5%. On the other hand, as Shankh indicated, Canada reported occupancy growth of roughly 300 basis points, but RevPOR growth of nearly 6%. Ultimately, our goal is to provide a top quality customer experience and to be fairly paid for it. and that's showing up through a combination of occupancy and rate growth. Moving to expenses. We remain encouraged by the trends we are observing across most line items, but particularly with respect to labor, which is almost SHO expenses. This is best reflected by comp for or compensation per occupied room, which increased 20 basis points year-over-year, near the lowest level of growth in recorded history. As a result, expense per occupied room or ExpPOR was up just 40 basis points. This is largely a function of scaled economics in the business, whereby a growing number of communities are now either fully staffed or approaching those levels. As occupancy continues to grow, the need to add additional staff has moderated, leading to a meaningfully higher flow-through or incremental margins. In fact, during the quarter, we achieved a flow though margin of 64%, while our same-store NOI margin increased 320 basis points to 30.9%. As for the future, we believe that significant upside exists. The combination of our same-store communities at 95% occupancy, posting NOI growth of roughly 20% and approximately 45% of our same-store SHOP assets operating below 90% occupancy with the opportunity for materially increased revenue and NOI via occupancy gain creating potential for years of compounding per share growth ahead. While we take nothing for granted due to the operational intensity and persistent challenges which exist in the business, we are confident that through the efforts of our best-in-class operators and continued rollout of the Welltower business system across the portfolio, we will continue to drive outside levels of growth well into the future. It's still early in the year with the peak leasing season ahead, and we will see what the market gives us. But our goal remains consistent, partnering with our -- operating with our operators to deliver an exceptional resident employee experience. Our Welltower operations and asset management teams, including the Tech Quad, continue to make leaps, nonincremental steps on this front and remain committed to maintaining this momentum through a relentless focus on operational excellence. With that, I'll turn it over to Nikhil. Nikhil Chaudhri: Thanks, John, and good morning, everyone. Since our last call, the macroeconomic and geopolitical backdrop has once again introduced meaningful volatility into the capital markets. Escalating conflict in the Middle East, combined with renewed stress in private credit, has driven a more pronounced risk-off tone, evidenced by higher treasury yields, elevated volatility across risk assets and growing signs of strain within private lending markets. Credit spreads have widened in recent weeks. Redemption activity in certain semiliquid vehicles has increased and defaults have continued to trend higher. As Sean said, we have seen this movie before. In periods like this, when capital becomes less reliable and execution risk rises, our position strengthens. Our reputation as the highest quality counterparty backed by our incredible balance sheet becomes increasingly differentiated. Sellers place a premium on certainty of close, lenders become more selective. And when that happens, the opportunity set expands. That is exactly what we are seeing today. As a result, we have seen a meaningful increase in our investment activity. Our investment volume for the year now stands at $10.5 billion, an increase of $4.8 billion since our last call in February. During the first quarter, we closed 41 transactions totaling $3.2 billion. Of these, 37 were sourced off market, continuing to reflect the strength of our relationships and our origination platform. The majority of our acquisitions activity was highly granular, single-asset transactions where our teams operated as local sharpshooters supported by insights from our data science and machine learning platform, welltower.ai. These transactions added 37 communities and over 4,200 units to our seniors housing portfolio. On the disposition side, during the quarter, we completed the remaining $520 million of the previously announced $1.3 billion of dispositions in our Integra JV as well as an additional $1.3 billion of OM sales to Kayne Anderson. With $6.7 billion of sales now complete, we expect the remaining approximately $500 million to be completed during the second quarter. Turning to new activity. We have already closed on additional $4.2 billion of transactions in the second quarter, comprised primarily of our previously announced acquisition of Amica Senior Lifestyles in premium markets across the GTA and Vancouver. The incremental $3.1 billion of activity is comprised primarily of newer vintage seniors housing assets with roughly 95% sourced off market across a number of transactions. I'm also pleased to provide an update on our U.S. seniors housing equity fund. As I mentioned on our last call, we held our final LP close in the fourth quarter of 2025. Since then, consistent with the acceleration in activity in our balance sheet, the entire $2.5 billion of fund capital is now fully committed. While we were significantly oversubscribed, we made a deliberate decision to limit the size of the fund. Our focus was simple, raise the right amount of capital, not the maximum amount of capital. We also structured and are scheduled to deploy the fund in a way that avoids many of the common friction points for LPs. With 1.5 years still left in the investment period, capital is being put to work quickly and high conviction opportunity minimizing the typical J curve of returns. In addition, we have avoided the use of subscription lines to manufacture IRRs, remaining focused instead on driving real equity value creation over time. I'll leave you with a few thoughts. What we're seeing in the market right now is not new, but it is meaningful. Periods of volatility separate long-term capital from short-term tourists. In these moments, speed, conviction and underwriting and consistent execution aren't just advantages, they're differentiators. That's where we have focused our time. Our platform is built to identify opportunities at a very granular level, move with speed and engage directly with counterparties. We are disciplined in how we deploy capital, valuing assets based on in-place performance while keeping the value add from WBS for our shareholders. We remain price disciplined with unlevered IRRs and discounts to replacement costs being our guiding principles and with terms like accretion, notably absent from our investment committee conversations. Our focus on win-win outcomes and target pursuit of the truth rather than woven narratives, continues to drive our ability to source opportunities off-market and deploy capital thoughtfully, even in more uncertain environments. With that, I'll turn the call over to Tim to walk through our financial results. Tim McHugh: Thank you, Nikhil. My comments today will focus on our first quarter 2026 results, performance of our triple net investment segments, our capital activity, our balance sheet and liquidity update, and finally, an update to our full year 2026 outlook. Welltower reported first quarter net income attributable to common stockholders $1.02 per diluted share and normalized funds from operations of $1.47 per diluted share, representing 22.5% year-over-year growth. We also reported year-over-year total portfolio same-store NOI growth of 16.4% driven by 22.1% growth in our SHOP portfolio, which now makes up 74% of our same-store NOI. Now turning to the performance of our triple net properties in the quarter. In our seniors housing triple-net portfolio, same-store NOI increased 3.9% year-over-year and trailing 12-month EBITDA coverage was 1.23x. Next, same-store NOI in our long-term post-acute portfolio grew 2.6% year-over-year and trailing 12-month EBITDAR coverage is 1.32x. Moving on to capital activity. In the first quarter, we raised $4.4 billion in gross proceeds through dispositions and equity issuance, allowing us to fund $3.3 billion of investment activity and end the quarter with a net debt to adjusted EBITDA ratio of 2.73x, more than half a turn reduction from just a year ago. Subsequent to quarter end, we used free cash flow to pay off $700 million unsecured bond maturity in April, highlighting the strength of our balance sheet and the cash flow generating capacity of the portfolio. We ended the first quarter with $4.9 billion of cash on hand, which together with approximately $1.4 billion of incremental disposition activity, along with assumed debt and funding of transaction activity with OP units, positions us to fund roughly $7.3 billion of investment activity through the remainder of the year with a meaningful portion, again, expected to be sourced through capital recycling. Taken together, this net investment activity and continued cash flow growth from the in-place portfolio, our expected result in year-end net debt to adjusted EBITDA of approximately 3x, modestly below our prior expectations. Before turning to our guidance, I want to come back to a point I highlighted last quarter around how our portfolio transformation and what we describe as Welltower 3.0 is reshaping our growth profile. What we're seeing play out in the first quarter is a clear validation of the mix shift we spoke to, with Q1 marking the highest level of total portfolio same-store NOI growth we've delivered in company history. Importantly, that growth is anchored by the strength of our in-place portfolio. Our initial guidance last quarter already reflected a high level of year-over-year visible earnings growth. And our updated outlook this quarter demonstrates the continued momentum we're seeing in the ground. As we continue to increase our concentration in senior housing operating, we believe the Welltower 3.0 portfolio is positioned to deliver a meaningfully higher rate of sustainable compounding than its predecessor. Moving on to guidance. Last night, we updated our full year 2026 outlook for net income attributable to common stockholders of $3.24 to $3.38 per diluted share and normalized FFO of $6.21 to $6.35 per diluted share or $6.28 at the midpoint. Our normalized FFO guidance represents an $0.11 increase at the midpoint from our prior normalized FFO range. This increase is composed of a $0.03 increase from senior housing operating NOI, a $0.07 increase from investment and financing activity and a $0.01 increase from better-than-expected income tax and other with some offset from higher G&A expectations. Underlying this FFO guidance is an estimated total portfolio year-over-year same-store NOI growth of 12.25% to 16%, driven by subsegment growth of outpatient medical, 2% to 3%; long-term post-acute, 2% to 3%; senior housing triple net, 3% to 4%; and finally, senior housing operating growth of 16.5% to 21.5%. This is driven by the following midpoints of the respective ranges: Revenue growth of 9.2%, made up of RevPOR growth of 5% and year-over-year occupancy growth of 350 basis points and expense growth of 5.3%, equating to export growth of just below 1.3%. And with that, I will hand the call back over to Shankh. Shankh Mitra: Thank you, Tim. I would like to make 3 points before opening up the call. First, I want to take a moment to acknowledge the passing of David Simon, a true legendary figure, not just in real estate space, but all of corporate America. David was a visionary in every sense of the term, growing a small portfolio of regional malls into one of the most well-respected companies in the world. He was a legend, a true pioneer, recognizing the enduring value of highest-quality real estate where shoppers and retailers could come together in vibrant environments. And the Simon ecosystem thrived under his leadership. Just think of the long-term success of so many of America's great retailers, which would not have been possible without the setting that David created for them to grow and thrive. Of many of his qualities, one, I personally appreciated the most is that he was unapologetically himself. He spoke his mind with clarity and conviction and remained relentlessly focused on creating long-term value for his investors. The stellar returns Simon delivered for its shareholders under David leadership was no accident. He navigated the company through multiple recessions and structural changes in the industry via thoughtful countercyclical capital allocation, a focus on operational excellence and maintain utmost balance sheet discipline. He was unquestionably a stalworth and a true visionary, but also a friend, a mentor and a fellow Board member at Columbia. He was the one who encouraged me to take the lead from buy side to the corporate side, an advice, which I will never -- which I'll forever be grateful for. He leaves behind a legacy that extends far beyond the real estate sector, setting a standard for what great leadership looks like. Our deepest condolences to Simon family and those who are close to David. Second, roughly a year ago, we launched our private fund management business establishing a capital-light revenue stream and another avenue to drive POR share growth for existing investors. During the first quarter of this year, we identified another additional revenue through which to expand our capital-light business by unlocking from an existing balance sheet asset, the monetization of our data science platform. As many of you know, since 2016, through the efforts of multidisciplinary team of PHD computer scientists, engineers, statistician and mathematicians, we have pioneered the application of data science and machine learning in real estate investing. This was instrumental in driving over $80 billion of acquisition and disposition activity over the last 10 years. Given the modular and portable nature of the platform, we launched our first external partnership during the first quarter, licensing bespoke, supervised and unsupervised models to public storage and a leading global private equity firm. These models enabling the real-world application of AI by accelerating capital allocation decisions from 5 to 9 months to mere weeks and significantly increasing velocity to market. Ultimately, our mission is to scale real estate investing, which is historically was an unscalable business. More to come on this front in months and quarters ahead, but we have been incredibly busy since the announcement in March as many highly respected real estate, non-real estate and sovereign wealth funds have reached out to us to explore similar partnerships. Lastly, as I described in my annual letter, we have recently witnessed a surge of talent density that have -- we have been attracting to the company, particularly with respect to Tech quad. Following our ethos that hire A people we have been successfully attracting the highest caliber technology and data science professionals to execute our vision. Aiding our effort is what is called or rapidly spreading narrative around who is the next on the disruptive path of AI, which is releasing an extraordinary pool of talent into the market. This talent pool is increasingly focused on identifying businesses that cannot be replaced by AI, including sectors classified as halo or hard acid low obsolescence such as housing for rapid aging population. We are thrilled with the progress made by Tech Quad in reimagining our technology ecosystem to improve the resident and site level employee experience. Our newest addition to our team will only accelerate these efforts. Nonetheless, our biggest opportunity to drive POR share growth is through unlocking greater value for our existing assets with the most immediate and impactful way of being the implementation of Welltower Business System, our end-to-end operating platform across our senior housing portfolio. In a maximum growth, maximum gain wall, the fastest way to move the dial is to narrow the focus. Our relentless and manacle focus on the digital transformation of the business and dramatically improving customer and site level employee satisfaction will be the force multiplier on the attractive beta of our business. And with that, I'll open the call up for questions. Operator: [Operator Instructions]. Your first question comes from Ronald Kamdem with Morgan Stanley. Ronald Kamdem: Great. I just wanted to double-click on one of the comments you made on the 95% occupied portfolio and the same growing 20%. Wondering if we could sort of double-click and get some more color around whether RevPOR, ExpPOR margins mix anything that could be interesting? Shankh Mitra: Thanks, Ron. First, I clearly don't want you to run with that idea that that's what we are suggesting happen. But that is definitely something that I found in our data to be more surprising. A very significant part of our portfolio today is 95%-plus occupied, give or take, 50%. And that portfolio grew circa 20% net operating income, as I said. And for -- clearly, for a couple of reasons, obviously, you got pricing power increases as capacity comes down in the system. That happened -- that part of the portfolio had give or take 6%-plus RevPOR growth. And with the expenses, major execution on the expense side that John mentioned through our operators and the contribution from Welltower Business System, it just landed to be an extraordinary number. So we were very happy about it. We do think that, that sort of gives us confidence that will have double-digit NOI growth for a long time to come in our portfolio as the portfolio leases up, we'll see what market gives us as we sort of get through the next few years as the portfolio leases up. Operator: Your next question comes from John Kilichowski with Wells Fargo. William John Kilichowski: Shankh, you kind of hit on this at the end of your opening remarks, but could you talk more about the growth of the talent density and the data science platform given what you described as a halo sector? And how much this has accelerated the growth outlook of the business in your mind? And then if you could also maybe just talk to how investors should be thinking about the medium-term potential for earnings contribution from this business? Shankh Mitra: Yes. John, let me take the first -- second part first, and then I'll go to the first part. If you just think about it, we built this data science capability, machine learning capability over the last 10-plus years to deploy capital on our balance sheet, on our books. And then we realized recently from -- at the really encouragement from some of our largest sovereign wealth partners in our fund business, that there could be a much bigger sort of application of this, which you have seen our first partnership announcement. We're in the building mode of this business, where there's something substantial come out or not, we will see in the future, but I can tell you that since the announcement was made under early March on public storage as well as the other PE pharma, I mentioned. Our phones have been ringing up the hook. We have been exploring a lot of the opportunity with a lot of people. Real estate -- great real estate companies, many non-real estate companies such as banks and others, major sovereign wealth funds, which I mentioned to you at the first ones who actually told us that could be a significant opportunity of that nature. We'll see where it goes. Whether sort of what remains a true major force behind our capital allocation and everything else sort of becomes a fun project or we just sort of take this as a a whole new business, we'll see what happens, right? Going back to the first part of your question, I have ever heard of this concept of halo even, say, 90 days ago. I heard that, as you know, probably that I personally interview most of the people who comes to our organization. And I heard it increasingly from the talent that was coming through. And many of the businesses which are sort of impacted or people avoid that potentially impacted or frankly, a different level of talent pool I've never seen. And just in last -- since the last call, we have hired either data scientists or software engineers with the backgrounds that we look for, whether it's computer science or math, PhD, hired from the top quant funds, I never thought that will come and work for a real estate company let alone a senior living company. Or we started to see talent from people who are code breakers and 3 agencies. We're never -- 90 days ago, if you asked me, I would not have told you that we would attract talent from that kind of places. It's talent density is increasing. We are trying to explore problems that we never thought that we will -- obviously, we think about there's a granularity of those problems, right? One granularity is obvious is we talk about housing prices, for example, in real estate. Housing prices of what? Most industry uses housing prices, as a median house price in the ZIP code, right? We today use every housing prices in an entire area, okay? That's an interesting idea. How about you think about what you have hidden? Is there other hidden signals such as -- I'm going to make this up, the price of which futures, the impact of that in housing assets in Great Plains? I totally made that up as we're going through. But those that the hidden insight we want to discover and understand we -- and that kind of people are in the industry is kind of overall in the world, but not in our kinds of industry. And that's what we are trying to attract and see where we can take the business, right? We'll see what happens. But thank you for the question. Operator: Your next question comes from Michael Goldsmith with UBS. Michael Goldsmith: I'm here with Justin On the topic of capital allocation, Ventas recently acquired this portfolio. did you evaluate that opportunity? And maybe more broadly, you have the best cost of capital in this space. How do you think about accelerating accretive growth versus maintaining your discipline? Shankh Mitra: We don't -- Michael, we don't comment on other deals that our colleagues in the industry do. We did look at the portfolio, and we think that is a very high-quality portfolio that our colleagues are went us will do very well with. But I don't really want to get into it. When it was brought to us a few months ago, it was in a structure that was not something we find particularly, at that point, palatable. I've mentioned many, many times that we have problems with encumbrance on assets and when it was brought to us, there was an encumbrance of assets of existing operators and asset management and all of those kind of things, which I don't want to get to, but I think they're high-quality real estate and our colleagues at Ventas will do very well. On your other part of your questions is accelerating capital allocation. I want you to understand, this is what I wrote in my annual letter, which under a section called cognitive dissidence of acquisition volume. And I want you to understand that what we are trying not to do, we're not -- it's not a deal shop. That's why Welltower is different from our predecessor company. We want to allocate capital in a particular product market niche where we think we can add significant value. This is not a cost of capital business for us. We don't compete on cost of capital. We compete on ability on the data science side, on WBA side and a network of extraordinary operators who can drive higher value for customers and employees and for us and themselves. That's the model. So not everything -- if the goal was to do more, we would not be selling $12 billion of assets in the last 12 months, right? So -- and we are getting -- we're seeing everything like we always have, as Nikhil said, 90%, 95% of everything sort of we do comes to us off-market. And frankly speaking, that makes sense, right? Because we'll tell you as a seller within a day or 2 whether we want to transact and probably within 3 to 5 days, give or take, what will transact at what price we'll transact at. So fundamentally, as a seller, you have nothing to lose for by coming to us. And so that's how the business rolls, and we'll see what market gives us. If we never buy another asset or we go back to the period pre-COVID where we sold -- we're net sellers and we sold $16 billion of assets, we will be just fine. Our goal is to grow per-share value for existing investors not do deals. Operator: Your next question comes from Mike Mueller with JPMorgan. Michael Mueller: First, that was a nice David tribute. When I think assignment over time, one thing that stands out is David's ability to walk away from deals whether it was or the first shot at Can you talk about an example or 2 of steering clear from a big transaction that didn't sit well with you? Shankh Mitra: Yes. Thank you very much. I always think of -- I was e-mailing back and forth with him a couple of months ago. David was the one on the best and most exciting day of my buy-side career called me and said, "Your carrier has speak today, leave the industry and come join me on the dock side." And that's how this whole thing started rolling. I think many of you -- I think we have had the conversations over a period of time. He was an extraordinary leader. Extraordinary leader. And it was something I had admired. I knew him for a long time. We're in the Columbia Business School Board. It was just in -- I was in all with leadership skills, not just his financial success of total returns and all of those things. But one of the things, as you mentioned, look, we -- David able walk away from deals and many times he did it. Believe it or not, many times when you walk away from transaction and you do it in the right way so that you're not burning bridges, you tell people why you walked away you can still maintain the relationship. One of the largest transaction we have done in this company is the largest transaction we have done in this company is Barchester, Believe it or not, I walked away from that deal twice right? So we -- there are many -- I don't want to get into granular transaction. Every day of the week our team walks away from transactions, tell the counterparties why we walked away, whether we walk away because we don't like the product market fit, we walk away because we don't like the income rentals that I just mentioned or written extensively about. We're respectful to the marketplace in the industry. And we're direct, right? Nobody will tell you that we have ever said something we didn't do it. We are very direct to people. And then it's just -- we do a very small fraction of what we see. Nikhil, what do you think [indiscernible] Nikhil Chaudhri: Yes, 10%. Shankh Mitra: 10%-or-so. So by definition, we walk away from 90% of what we see. But sometimes something like Barchester, we walk away. And eventually, it happens when the time is right from a pricing standpoint or on a structure standpoint. But very, very good question, Michael. Thank you. Operator: Your next question comes from Michael Carroll with RBC Capital Markets. Michael Carroll: Shankh, I know that the WBS model continues to evolve, I mean, how beneficial are these new partnerships that you're creating with PSA and others to take WPS to the next level. I mean, I'm assuming that Welltower is getting access to more new data that they didn't have access to Bulfor. I guess, how beneficial could that be as you kind of refine those systems? Shankh Mitra: Mike, think about in our SHOP technology in 2 different -- completely different segment, which that's obviously the interconnect at some levels, which is one is our data science platform, which is focused on allocation of capital and finding granular opportunity and changing the velocity that exists in this business from months to days right? And that's one idea. The other idea is operational side of the business, which we call Welltower Business System, which we're building out, and I mentioned about Tech Quad and how Jeff and Tucker and Swagat and Logan and all these they are also taking that to a new level. Welltower Business System, which is the operational side of the business, is not something that we are collaborating with public storage. Public storage or people like that don't need our help to think about operationally how they should run the business. That industry is years ahead we're actually hiring from that industry who can help us to do it, right? On the other hand, our collaboration is on the data science side, which we have been at this for 10-plus years. And that's why we have changed the real estate investing business, where this latency of the system is 5 to 9 months and we have taken that today, right? So I don't want you to confuse the two and understand how -- where the collaborations are coming. We have given you many examples on our business update, the kind of problems that we are going after that people run people are coming to us. For example, obviously, real estate examples are easy, and you can see it on examples, whether that's multifamily, other types of asset classes. So storage, obviously, you mentioned, all other types of asset classes. But people are coming to us with problems that are location-type problems, but not necessarily specifically real estate problems. For example, a big bank has come to us and asked us whether we can help them on predicting whether most profitable next branch -- bank branches should be? These are the types of problems that we are exploring, and we'll see where we get to. But thank you for your question. Operator: Your next question comes from Jim Kammert with Evercore ISI. James Kammert: Shankh and team, is there a way to leverage the data science into other geographies beyond your core U.K., U.S. and Canada? Or are those markets structurally don't have private pay or other cultural issues that leave you unlikely to pursue in terms of external growth? Shankh Mitra: The short answer is, yes, it can be, in fact, on -- just for fun we're having this conversation with an investor -- a significant investor in Japan, and we built a model over 3 weeks, our guys did to show them like how to apply that in Japan, right? I know obviously, we don't have as much of a data and we haven't bought like gobs and gobs of data, but it is absolutely scalable across geographies and product types and beyond real estate product that I just mentioned. Operator: Your next question comes from Richard Anderson with Cantor Fitzgerald. Richard Anderson: So Shankh, you talked about doing the hard things, not the easy things and making decisions with that mindset. And I'm thinking as you're talking about data analytics and all these sort of tangential opportunities that sort of spin out of senior housing platform. And then I think about Amazon, which once upon a time sold books and now they're what they are today or Berkshire Hathaway, which was an insurance company and is what it is today. Do you have aspirations along those lines where senior housing -- because we can talk to our blue in the face about how great it is, and you guys are doing a fantastic job. But longer term, this is not going to always be a 20% growing type of industry. Are you thinking about senior housing as sort of a bed from which you grow other businesses outside of data centers or data analytics if you get my point, right, you become like a diversified vehicle. Is that kind of in your mind today? Shankh Mitra: No. Let me answer that question. We are not trying to go from senior living to other asset classes in real estate. In fact, we're doing exact opposite, right? We are selling out of all other asset -- other types of asset classes and focusing our balance sheet capital, our balance sheet capital, if you will, our book into 1 asset classes, which we think we have competitive advantage. However, if you think about we have built capabilities, right, such as this data business that we talked about could potentially become more than a platform that we use for an internal application, we'll see where we get to. We're not trying to become a diversified company. I do not believe diversification -- I do not believe in diversification. In fact, I believe diversification is the worst word that has been taught to investors, right? So if you think about -- you gave a Berkshire Hathaway example, if you think about -- look at Berkshire, you will see they've made the almost entirety of the return in 5 things -- 5 names, right? So you think about it as -- we believe in concentration. We genuinely believe that capabilities, you cannot be good at 5 different things. But your question is a much more nuanced one, which is we -- right or wrong, our whole idea 10-plus years ago was very much that we want to understand the truth. We noticed that the real estate business people talk in heuristics rule of thumb. And we wanted to know the truth, and that's what we found. I give an example, right? People use housing prices. Housing prices are what? Housing prices and average housing prices, mean housing prices, median housing prices, we're talking about a block group, we're talking about ZIP code. What are we talking about, right? So these are the things now I can complicate this problem many times over, right? You can think about it depending on product, how long people are willing to drive? You'll notice in real estate, people talked about distance as your competition not drive time. But again, without getting into too much of this conversation, we do believe that our job, that what we are trying to do is to optimize over the -- optimize the duration of the growth over a very long period of time. That's what we're trying to do. So today, a lot of that is obviously coming to the mix shift and everything, but we do believe that there are 2 other things that can potentially add pretty significantly. One is our asset-light businesses, which is fund management business, the data science business. And as you know that we are obviously the fees we are getting, obviously, that is a reflection of our data science business. So it's interconnected nature of it. And the other thing, Rich, is just something I want you to think about is what is the potential -- untapped potential of our balance sheet, right? So we are thinking about sort of years ahead of what this platform could look like. We're thinking how do we deliver a significant per-share growth opportunity for existing shareholders when things will not be as good in senior living, as you might say. But I do think that senior living as a business will remain our primary focus of the way to deploy our own balance sheet capital. Operator: Your next question comes from Vikram Malhotra with Mizuho. Vikram Malhotra: Shankh, I guess one other thing in your letter I really enjoyed is reading about the hummingbird and how they fly very differently and achieve lifted at a discount. So in that vein of sort of a different approach, just I guess 2 questions. One, going forward, is there something WBS or the team can do to sort of monitor reduce CapEx levels in senior housing, something that usually bites people where there's too much CapEx load? And then secondly, when you think about supply/demand, on the supply side, we still have not seen it start. Is there something different about your relationships or your markets which can limit supply perhaps longer than people perceive? Shankh Mitra: So second question was supply and the first question was CapEx and hummingbird. So the idea of hummingbird, I don't want to repeat it, I wrote extensively about it, you can read it and sounds like you have read it. The idea is continuous improvement of candles will not give you a light bulb or Henry Ford will tell you that you can improve horse carriages as long as you want, but you're not going to get a Model T, right? So you got to think about the business in a completely different way, which is reimagining what the entire value chain looks like. And if you sort of take our first principal approach to say, what are my goal is and you start from the customer, right? And solve, okay, how do I remove friction of customers and the people who the customers see as product, which is the site level employees, you can get very far. How far we will get to, we'll see in the future. And now let's talk if take the question of CapEx that you talked about, right? John gotten into this in details. The CapEx in this business because of the sort of short-term private equity type mentality, which I'm not actually denigrating private equity. If I got paid on short-term IRR, I would have done the same probably. But if you just think about it like people take a very piecemeal approach, right? One year you do roof because you have to then next year, you go back and do the gutters; the next year, you go back and fix your skylights and that's not how full cycle CapEx should work. On our particular -- if you look at our cash flow, you were obviously -- Vikram, you're seeing that CapEx is improving and it's improving for 2 reasons. One, CapEx is a concept that is not an idea that you should think about in terms of available or occupied room, you should think about all available room. Because if you think about you are doing, say, first impression, it is not going to be whether you have 40 people in the community or 400 people in the community, right? It will be on all the rooms. As the system is filling up, obviously, you are getting the scaling effort or as the NOI is going up, you're getting the scaling efforts. Second, CapEx today, 2 years ago, we didn't -- we obviously did all CapEx that was outsourced to operate us. Today, we have 200 people team, which works for us. And that team is working with our operators to figure out how to do CapEx the best, how to do lifestyle -- think about lifecycle cost and executing where the best sort of execution we can get. And that's just started to see that scaling effort over the last, say, 6 months. And I think you're going to see a lot more going forward. And what was the second question? Did I answer both of the questions? Yes. Supply -- so look, the fact of the matter is -- the supply currently is a very low start you are seeing. I would expect that -- I personally think about supply it's almost a Pavlovian response to participants in the market when we see the supply. It's sort of almost a third rail and people think supply equals to oversupply. Why that makes sense? Last decade, every unit of supply was oversupply because demand was flat. I think about supply and the impact of supply in terms of oversupply. You can see the demand growth and you can sort of think, okay, how long it takes to bring supply in the market. We have a slide on our presentation and that sort of walks you through. And you can see sort of what's the oversupply sort of can be. I personally think that supply will chase demand for a long period of time, just because what the demand growth looks like and the constraint of supply that is in. In our markets, in senior living 1 of the biggest constraint of supply on top of everything else that you can think about is availability of quality operators, right? That's a big constraint in the market. No bank will lend to you if you have a operators, especially after what they have gone through last cycle. And as you know, and this is something that you brought up Vikram, that I don't think we have people have asked us over the last 3 years. At the bottom of COVID, when we were the only people, only people who were actually allocating capital and leaning into senior living, we forged 25 to 30 long-term partnership with our operators, different developers, who were mostly exclusive or near exclusive in nature in our markets, which we believe will provide a governor on quality supply. And we'll see how this plays out. But thank you for your question. Operator: Your next question comes from Farrell Granath with Bank of America. Farrell Granath: I also wanted to touch on a comment that you made in your annual letter, where you highlighted several operational heroes. What was some of the best operational advice that took away from those organizations? And how are you applying and executing on that advice across the portfolio? Shankh Mitra: That's an interesting question. Farrell, some of the heroes we mentioned was not just operational, also capital allocation and culture and many other things. However, I will tell you, I personally believe and probably because of the influence of Charlie, one of the most well-run operational company in this country is a company called It's a private company, who's CEO -- long-term CEO, Peter Kauffman, has been a great friend and mentor of mine over a long period of time, and he's a true hardcore operator in the aerospace defense sector. So first, people will tell you, first thing is before you get advice from people, you need to understand the credibility of their advice. Lots of people have lots of advice in things that they have no expertise in. I routinely see people have never ran lemonade stand and have opinions on how multibillion-dollar company should be run. So that's sort of first you have to have a filtering mechanism to understand who has expertise. But beyond that, and the best operational advice that I actually got that operations can be meaningfully improved from systems and process and technology, but operations is not about any of those things. They can be enabler. Operations is all about people. So if you have -- if you're in L.A. and you have an hour, let me know, I'll help you go visit Peter and you will see what a well-run factory could look like and with all the focus of people. But anyway, thank you for the question. Operator: Your next question comes from Austin Wurschmidt with KeyBanc Capital Markets. Austin Wurschmidt: Just going back to an earlier question about the portfolio of assets that are 95%-plus occupied. I guess as we continue to understand as you put the possible, within the 6% RevPOR growth for those assets, you indicated the benefits of capacity coming down and just pricing power are street rate increases exceeding increases on in-place customers within this subset of assets? And are you also seeing a greater benefit from high ROI ancillary income opportunities? Shankh Mitra: Thank you so much. You were a little further from the mic, but if I understand your question was on the 95%-plus are we seeing even within the pricing, are we seeing greater opportunities off [indiscernible] So you hit on something extraordinarily important. I have a particular belief that just because you can doesn't mean you should. And this is something I'm boring you with reputation and details. Clearly, it sounds like you read my annual letter. There's a whole section on trade-offs that I would like you to go back to and will say in many places, in place customer rate increases could be meaningfully higher than what we are comfortable with, and I'm fine with that. I'm fine with that. So how do you -- if you are, if you say, okay, I'm not going to give customers 15%, 20% increases, how would the RevPOR will change? It will change because of the point you just made, right, which is not an existing customer increase, but it comes from the street rate. This is a fundamental negative mark-to-market in this business. because of the person who leaves versus the person who comes in, there's an acute difference between the 2. However, when you have in this kind of assets and its overall trading market when everybody else is full the street rate goes up and that's the impact you see in the overall RevPOR, right, which is a function of 3 different pricing, not just existing customer increases, increasing street rate. You picked up on something very important, and I think that will be a lot of driver as you sort of go forward in many, many of the markets. And ancillary opportunities such as a lot of the other such as community fees and others also play an impact on that as well. Operator: Your next question comes from Juan Sanabria with BMO Capital Markets. Juan Sanabria: I'm just curious if you could talk a little bit about market share and the opportunity that's still left to consolidate a fragmented industry recognizing that you guys have a very targeted approach, hoping you could help us understand how much is left to consolidate, if you will? There's been a little bit of political pushback in Canada, and there's overviews or reviews going on in the U.K. So in that context, just hoping you could help us understand how you think about the addressable market and the opportunities remaining? Shankh Mitra: Yes. Juan, so if you just take a step back and think about from a customer standpoint, roughly, give or take, call it, 7% to 8% or call it, 10%. Let's just do easy math, 10% of the people who can use our product, use our product. So 90% of the people fundamentally don't use the product who can use our product, right? So it's just a small portion of the -- of your customers use the product. Within that small portion, we're probably 7% of the industry. So we're a very small portion of even the existing product. And -- so our -- so from that standpoint, if you just think about it, a 7% of 10%, you can imagine, like were insignificant from a customer standpoint, right? They just that -- those are the numbers. Now having said that, if we're 7%, say, of the entire base of products, does that mean that our opportunity -- and as you mentioned that obviously, it's an extraordinarily fragmented industry. Does that mean that our -- and I think the average operator or owner operator as of like 10 communities or 1,000 units or something like that. It's a very, very small. Does that mean that 7% of the industry is our TAM is 15x.? The answer is no, right? Our TAM is probably -- we're very focused on -- even within senior living, we're very focused on the highest price point or the highest quality assets in the market, so very much of the very focused on the highest, highest end of this business. That product market niche is what we have made our bet on. And that probably is -- the TAM is probably 2x to 3x, not 15x. That's how we kind of think about it. We see what the opportunities are. As I've mentioned in previous questions and in my annual letter, we would be comfortable if we never bought another asset. So the goal is not asset aggregation, goal is to pick where you think you can add significant value, and I think our team is doing a pretty good job of. And we'll take the -- we'll go forward with that and see what market gives us. Operator: Your next question comes from Nick Yulico with Scotiabank. Nicholas Yulico: I wanted to ask on the investment side. This quarter, the loan funding was a little over 50% of the investments. So if you could just remind us sort of what the approach is there and where you're able to get -- what type of yield on that loan funding? And then also, if you could also break out of the $7.2 billion investments in April so far? What percentage of that is loan funding. Shankh Mitra: Let me start, Nikhil you go. First is, you were seeing that, Nick, just to remind you that remember, that when we did the transaction, we took back $1 billion-plus in participating pref, and that's what showed up in the loan book, right? So it's not really a loan, it's a participating loan. It's with an equity derivative attached to it, but that's what you're seeing. Rest of it, you can see -- think about it as a refill of the HC1 loan and other loans that got paid off. Some of it is just a bridge too hard of some of the assets and skilled nursing assets we sold. They will be gone as takes a long time, as you know. When that happens, they will be gone. But overall, that's the construct is that piece showed up. From your second part of your question, which is $7.2 billion. I do not recall, Nikhil, you might recall. Nikhil Chaudhri: I think the next specific question was what's closed in the second quarter. So of the $4.2 billion that's closed, as I said in my prepared remarks, Amica, which is north of $3 billion, is the vast majority of that. There might be 1 or 2 small loans, but it's been predominantly asset acquisitions. Shankh Mitra: So -- that's -- I think you asked about the pipeline as well. That is maybe also the same thing. It's all just in 1 quarter, that piece landed, and that's what it looks like it's elevated. As you look back in the whole year, you'll not see it. And as you said, there's a remaining $500 million of sales left as part of the transaction. So as that happens, of course, that will come with some additional participating pref funding. Operator: Your next question comes from Seth Bergey with Citigroup. Seth Bergey: I was hoping you could just touch on the transaction market more broadly. First, I guess, the impact of competition and then how prevalent is retrading deals walking away because of the capital markets? And then Shankh, I think you mentioned kind of time to close. And I was just curious, kind of well towers due diligence and time to close versus kind of the average for other buyers in the market? Nikhil Chaudhri: Yes. I think let's start with the competition piece. As I said in the prepared remarks, regardless of whatever period we look at transactions that have closed, the pipeline and I say this every single quarter as an update, that give or take our transaction activities between 90% to 95% off-market. And so by definition, in that regard, there is no competition. But what we've seen is over the last couple of years as more capital has come into senior living, previously, when we would say no to one of those off-market opportunities, it wouldn't get done. Now what you're seeing is, given that there's a more robust marketplace, if we say, no, more likely than not, somebody else to end up buying those assets. So that's certainly happening. Then your second question was about our speed. Well, I think as Shankh said earlier, it takes us a couple of days to within a very narrow range, have a view on what an asset should be priced thereafter in assuming there is a meeting of the minds, then it's the traditional diligence process, which involves site visits, finalizing business plans with operators, third parties, negotiating legal documents and we parallel path all of that, just given upfront, how much information we have from our data platform on what to expect from an asset. And so we can parallel path all of that, and it takes us roughly 30 days from when we first see something to close something. In comparison to the broader market process, Shankh wrote extensively in his last annual letter last year, a typical process takes 6 months from starting to think about, hey, we're going to sell something to get BOVs from a bunch of different advisers to then picking an adviser to then populating all the information and creating a really pretty offering memorandum to then negotiating NDAs, to then having a first round process, to then having a second round to the process, finally picking a winner and then most transactions occur in a way that you first negotiate a contract, then you have a 30- to 60-day diligence period where you find financing for the asset and eventually close on it. So 6 months is a long time, if you think about what macro looked like 6 months ago versus it does today, a lot changes. So -- and given that the price -- the buyer is not going hard until 30 days before closing, so 5 months into 6 months, there's a lot of uncertainty. And we have, in the last 2 months, seen a lot of transactions that we liked, but weren't comfortable with the pricing get away from us to then come back to us. So that's certainly happening, and it happens all the time. Shankh Mitra: I'll just add 2 more things, right? So we are -- one of the very few SHOP who actually go and visit every single assets that we buy. That is not -- predominantly, that is not a percentage of we visit every single asset that comes on our balance sheet and walk on average, 12 people from Welltower go walk assets, not just our investment team, our asset management team, structural engineers. So we go and do this every single asset, which is very important for you to understand. And just to take the second question is, from our standpoint, is the reputation is our currency of business. If we tell people going to do something, we do it. I might as well give people bad news upfront than try to drag them through the process and then 5 months later, I said these are the 5 different things. I didn't like the color of your nails, so it will be retreated, right? And that's sort of what happens in this business every day. That's very standard people accepted in real estate business to do, we just don't do that, right? We are always comfortable in the trade-off of short-term money versus long-term reputation that works out for us over a period of time. And hopefully, overall, our execution over the years will tell you that if you take a long-term approach, if you take a reputation approach, if you take an approach of running a first-class business in fast way, it generally works out for you. Operator: Your next question comes from Omotayo Okusanya with Deutsche Bank. Omotayo Okusanya: Shankh, I wanted to talk a little bit about just, again, the overall business model and again, the growth mode you're in, you definitely need a specific type of operator and SHOP to kind of realize your strategy. So I'm just curious, at this point, are you still seeing opportunities to bring more operators into the fold or does the strategy really become doubling down on the operators you have? And if that's the case, what becomes kind of the next level of incentive you can provide for your current operators to even have further better alignment? Is it stuff like the munger grants? Or kind of what else is kind of out there that can really kind of align the 2 to continue to kind of deliver the results you've been delivering? Shankh Mitra: Yes. Thank you very much. It's a very, very important question that we reflect on and debate and talk about -- look, we sort of think about this business as a complex adaptive system. And as we think about this business as a complex adaptive system, we have after years and years of thinking through this every line item we have sort of come to a point where we have a very good idea. If you just -- if you were sitting in it in one of our sort of conference room, with our one of our operating partners and our people. Again, you will not be able to say who works for Welltower, who works for this operator, they are all working very collaboratively and not trying to say this is your side, this is my side, and that's just not. That type of collaboration trust takes a long time to build, which we have built with a handful of our operating partners, and we're doubling down with them every day. Having said that, are there a couple of people that we have long respected over time that we want to do business with? The answer is yes. At the same time, you will see -- if your question is, are we in an expansion mode from a number of operators we do business with or we're in a sort of flat or we're shrinking? The answer is, unequivocally, our view is that we're shrinking, right? The number of people that we business with. That is in -- because we are doubling down with our existing partners, we have built these collaborations and we are not trying to be everything to every people, every product, every operator we have found the like-minded, a lot of like-minded operating partners, who are truly our partners. That's not sort of they take partnership very seriously. They are extraordinarily focused on excellence like we have. They want to treat their people right. They want to treat the residents right. They want -- they take reputation as the currency of business. And those are the type of cultural alignment, not just technological systems, money and everything, financials and everything has to work out. But the cultural element is the most important, and we are doubling down with them. And sometimes, we do find somebody like Amica that we tremendously respected over the time. And then when the stars align, and we go together and meeting of the mine happen. The same applies for Barchester. But generally speaking, our goal is to do more with our existing partners where the alignment has already happened. But it's an extraordinary question that we reflect on every day. Operator: Your next question comes from Michael Stroyeck with Green Street. Michael Stroyeck: I just wanted to go back to an earlier question on applying the data science platform to new geographies. Has the company underwritten any transactions in geographies outside of the U.S., U.K. or Canada? Or are there any additional countries that Welltower could be interested in entering down the line on balance sheet? Shankh Mitra: Yes, Michael, very, very good question. I'm glad that you asked the clarifying question. We have no desire to go to any other countries other than the 3 countries we are in from a capital perspective and balance sheet perspective. That comment was entirely on the capital light on the data science side. And obviously, we think that is imminently scalable across geographies, across asset classes. But from our standpoint, on a purely capital-light basis, we're trying to -- everything we are doing should tell we genuinely believe that in today's world, which is a maximum gain, maximum growth world, the fastest way to get to what we're trying to do is to narrow the focus, not extend the focus. Tim McHugh: Yes. And Michael, to directly answer your question, no, we have not underwritten anything, something we've even signed an NDA to get information beyond the 3 markets. Operator: That concludes the Q&A session of the conference call. Thank you for your participation. You may now disconnect, and have a wonderful rest of your day.
Operator: Good morning. My name is Cindy, and I will be your conference operator today. At this time, I would like to welcome everyone to the EMCOR Group First Quarter 2026 Earnings Conference Call. [Operator Instructions] I will now turn the call over to Lucas Sullivan, Director, Financial Planning and Analysis. Mr. Sullivan, you may begin. Lucas Sullivan: Thank you, Cindy. Good morning, everyone, and welcome to EMCOR'S First Quarter 2026 Earnings Conference Call. For those of you joining us by webcast, we are at the beginning of our slide presentation that will accompany our remarks today. This presentation will be archived in the Investor Relations section of our website at emcorgroup.com. With me today are Tony Guzzi, our Chairman, President and Chief Executive Officer; Jason Nalbandian, Senior Vice President and Chief Financial Officer; and Maxine Mauricio, Executive Vice President, Chief Administrative Officer and General Counsel. For today's call, Tony will provide comments on our first quarter 2026 and discuss our RPOs. Jason will then review the first quarter numbers, then turn it back to Tony to discuss our guidance before we open it up for Q&A. Before we begin, a quick reminder that this presentation and discussion contains certain forward-looking statements and may contain certain non-GAAP financial information. Slide 2 of our presentation describes in detail these forward-looking statements and the non-GAAP financial information disclosures. I encourage everyone to review both disclosures in conjunction with our discussion and accompanying slides. And finally, as a reminder, all financial information discussed during this morning's call is included in our consolidated financial statements within both our earnings press release issued this morning and in our Form 10-Q filed with the Securities and Exchange Commission. And with that, let me turn the call over to Tony. Tony? Anthony Guzzi: Yes. Thanks, Lucas, and I'm going to start my discussion on Pages 3 and 4. Good morning, and thanks for joining us today. I'm pleased to report another outstanding quarter for EMCOR. Our first quarter 2026 results demonstrate the sustained momentum we have built over many years with strong execution across our business segments, and continued growth in our core market sectors and geographies. In the first quarter, we generated revenues of $4.63 billion, representing year-over-year growth of 19.7% and organic growth of 16.8% when adjusting for incremental acquisition contribution and the sale of EMCOR U.K. Operating income reached $404 million, with 8.7% operating margin, while diluted earnings per share of $6.84 represents an increase of 30% versus the first quarter of 2025. This reflects our strategic positioning in high-growth markets and operational excellence across our construction and services platforms. These results demonstrate our customers' continued confidence in EMCOR as one of their partners of choice for complex mission-critical projects. Our Construction segment once again performed extremely well in the quarter. The Electrical Construction segment generated year-over-year revenue growth of 33.1% with a 12.1% operating margin, while the Mechanical Construction segment achieved 28.9% revenue growth with a 10.9% operating margin. This performance reflects the range of our capabilities across both trade and geographies. It also takes into account increased customer scope and our reputation as one of the premier specialty contractors for complex, fast-paced projects. Our Construction segment's growth was driven primarily by increased activity in network and communications, which is where our data center business rests. Institutional, manufacturing and industrial, health care and water and wastewater market sectors. Within our Mechanical Construction segment, we also benefited from increased commercial market sector revenues, driven primarily by the resumption of demand for warehousing, distribution and logistics projects. Our teams continue to leverage our prefabrication and our virtual design and construction capabilities, excellence in labor management and planning, large project coordination and execution and a disciplined focus on contract negotiation, administration and the adherence to those terms. The U.S. Building Services segment delivered solid results, led by impressive performance in our Mechanical Services division. While we still face slight revenue headwinds within our site-based business, we've begun to see the benefits of the restructuring on the cost side, which reduced overhead costs, and we have a more profitable contract portfolio mix. Our Industrial Services segment generated revenue growth of 6.4%, and that was driven by our Field Services division. Now I'm going to turn to Page 5. Our remaining performance obligation positions strengthened significantly during the quarter, providing excellent visibility for sustained growth. Our RPOs totaled $15.62 billion at the end of the quarter versus $11.75 billion in the year ago period and $13.25 billion as of December 31, 2025. This represents year-over-year growth of 32.9% and sequential growth of 17.9%. These diverse RPOs reflect continued strong demand across many market sectors, with particularly robust activity in Network & Communications or data centers, where we continue to expand our geographic footprint and scope of services to better serve our customers. We see no sign of slowing demand in this vertical, where customer investments in AI infrastructure, cloud infrastructure and overall digital transformation are driving unprecedented levels of activity. We are pleased with the quality and diversity of our work booked outside of the data center space, including the notable awards within water and wastewater as we continue to win new projects in Florida; institutional, driven by demand for upgraded live space by certain colleges, universities; and health care as our customers continue to modernize their facilities while seeking to make them more flexible and responsive. The strong operational and financial performance I've outlined demonstrate the effectiveness of our strategic initiatives and the depth of our execution capabilities. Our teams continue to deliver exceptional results for our customers while maintaining disciplined financial management and operational excellence and continued good contract negotiation and adherence to the contract terms we negotiate. With that context, I will turn it over to Jason, who will provide a detailed review of our first quarter financial results. Jason Nalbandian: Thank you, Tony, and good morning, everyone. Starting with Slide 6, which shows revenues. I'm going to cover the operating performance for each of our segments as well as some of the key financial data for the first quarter of 2026 as compared to the first quarter of 2025. As Tony mentioned, revenues of $4.63 billion established a quarterly record for EMCOR, increasing 19.7% or 16.8% on an organic basis when excluding acquisitions and adjusting for the sale of EMCOR U.K. Revenues of Electrical Construction were $1.45 billion, increasing just over 33%. This segment generated increased revenues from the majority of the market sectors we serve, with the most significant growth coming from Network & Communications, where revenues increased by nearly 50%, driven by strong demand for data centers. While this accounted for 2/3 of the segment's growth, we did experience notable revenue increases across a number of other sectors, including hospitality and entertainment due in part to progress made on a stadium project and institutional as a result of certain public sector projects. In the quarter, our Electrical Construction segment also benefited from greater levels of short duration projects and service work. Mechanical Construction revenues of $2.03 billion are up nearly 29%. Similar to Electrical, this segment once again experienced the greatest growth from the network and communications market sector where revenues increased by 86%. Increased cooling requirements and advancements in liquid cooling, particularly for AI data centers continue to drive opportunities for this segment. Beyond data centers, Mechanical generated quarterly revenue growth from the majority of the other sectors in which we operate. Notably, institutional revenues doubled year-over-year manufacturing and industrial, including food processing, was up 34% and commercial increased by 33%, driven by warehousing, distribution and logistics projects, largely within fire protection. During the quarter, this segment also benefited from increased service revenues as we continue to expand our maintenance and inspection base, both within traditional mechanical services as well as our fire life safety offerings. On a combined basis, our construction segments generated revenues of $3.47 billion, an increase of 30.6%. I should note that this performance established new quarterly revenue records for each of these segments. Moving to Building Services. Revenues of $772.6 million grew by 4%, driven by our Mechanical Services division, which generated a 6% increase in revenues. From a service line perspective, the most significant growth was seen in repair service, service maintenance and building automation and controls. Revenues of our Industrial Services segment were $381.8 million, an increase of 6.4%. The greater contribution from our field services operations due primarily to progress made on a large solar project was partially offset by a reduction in revenues with our shop services division due to lower heat exchanger sales and related services. I'll turn to Slide 7 for operating income. We generated operating income of $403.8 million or 8.7% of revenues both of which are records for EMCOR for a first quarter. This represents an increase in operating income of 26.7% and operating margin expansion of 50 basis points versus the prior year. When adjusting for the acquisition transaction costs, which were incurred in Q1 of 2025, operating income grew by 23.1%, and operating margin increased by 25 basis points. Once again, if we look at each of our segments, due to the growth in revenues, operating income for Electrical Construction increased by 28.2% to a quarterly record of $174.5 million. Operating margin of 12.1% compares to 12.5% a year ago. With consistent gross profit margins, this segment continues to execute well across its project portfolio with the year-over-year decrease in operating margin, primarily resulting from an increase in intangible asset amortization given the 1 month of incremental expense from the Miller acquisition. Mechanical Construction had operating income of $221.6 million, an 18.7% increase. From an end market standpoint, this segment generated greater gross profit across many of the sectors in which we operate with the largest increases generally tracking in line with the growth in its revenues. Operating margin of 10.9% compares to 11.9% in last year's first quarter. As we anticipated when we exited 2025, operating margin in this segment decreased due to a shift in mix that included a greater percentage of revenues from projects where we're acting as either a construction manager or a prime contractor and which inherently carry lower-than-average gross profit margins due to reduced markups on materials, equipment and subcontractor costs. In addition, we had an increase in the number of GMP or cost-plus projects, particularly in newer geographies or on projects where scope or design are still evolving. Together, our construction segments grew operating income by nearly 23% and earned a combined operating margin of 11.4%. Building Services generated operating income of $40.4 million, which represents an 11.1% increase and operating margin of 5.2% expanded by 30 basis points. This segment benefited from strong performance within its Mechanical Services division, which experienced a favorable mix, given the greater volume of higher-margin service and controls projects. Also, as Tony mentioned, while we do face some headwinds within our site-based business, the restructuring we did last year has proven to be successful, resulting in both reduced overhead costs and a more profitable contract portfolio. And lastly, operating income for Industrial Services was $12.8 million, an increase of 89.1% and operating margin of 3.3% expanded by 140 basis points. As a reminder, and contributing to the favorable year-over-year comparison, the results for this segment in last year's first quarter were negatively impacted by a $4 million increase in the allowance for credit losses which negatively impacted operating margin for Q1 of '25 by 110 basis points. Excluding this impact, the remaining increase in operating income and operating margin was primarily a result of greater gross profit and greater gross profit margin within its Field Services division. If we quickly turn to Page 8. I'll cover a few items not included on the previous slides. Gross profit of $864 million increased by 19.5% and our gross profit margin of 18.7% remained consistent with that of the prior year, which represents a record level of performance for a first quarter. SG&A was $60.1 million or 9.9% of revenues compared to $404 million or 10.4% of revenues a year ago. With the top line growth we experienced during the quarter, we are pleased with the operating leverage we attained as evidenced by the decrease in our SG&A margin. And finally, on this page, diluted earnings per share was $6.84, which represents an increase of 30% or 26.4% when excluding the transaction costs in last year's first quarter. And finally for me, let's turn to Slide 9, which covers our balance sheet. Our balance sheet, including $916 million of cash on hand and $1.25 billion of working capital remains strong and liquid and enables us to continue to fund organic growth, pursue strategic M&A and return capital to shareholders. During the quarter, we returned $105 million of cash to our shareholders through stock repurchases and our quarterly dividend. Although not shown on this page, due to an increase in accounts receivable, given our strong organic revenue growth and coupled with the payment of the prior year's incentive compensation awards, cash flows from operations in the first quarter were essentially neutral. However, for the full year, we remain confident in our ability to generate operating cash flow at least equivalent to net income or up to 80% to 85% of operating income consistent with previous years. With that, I'll turn the call back over to Tony. Anthony Guzzi: Yes. Thanks, Jason, and I'm going to be on Pages 10 and 11. Given our strong start to the year and the strength of our remaining performance obligations, we are raising our full year 2026 guidance. We are increasing our revenue and diluted earnings per share guidance to a range that reflects our confidence in the sustained operational excellence that we have exhibited and strong market momentum. . Such guidance reflects the demand that we are seeing and our success of winning and executing large-scale projects across many geographies and market sectors. We now expect to earn revenues between $18.5 billion and $19.25 billion and diluted earnings per share of between $28.25 and $29.75. As a reminder, EMCOR's business is characterized by project cycles and timing that can create quarterly variability. However, our guidance reflects our current expectation of continued strong operating margins throughout 2026, supported by disciplined project selection and execution. We are focused on maintaining pricing discipline while delivering exceptional value to our customers. Our sustained success is built on focused execution across a number of key priorities that differentiate EMCOR and position us for continued growth. I'm now going to highlight 4 of them. The first one is our training, peer learning and our productivity initiatives. We continue to leverage our training programs, our virtual design and construction capabilities, prefabrication facilities and capabilities and advanced project planning and delivery methodologies. We are committed to improving our means and methods every day, sharing knowledge across our organization and investing in workforce training, retention and expansion. Second item is a contract management discipline and negotiation. We deliver exceptional results for our customers. However, we do protect our rights and interests through careful contract management, negotiation, particularly on complex fast-paced projects. Third, we're known for field service -- field leadership excellence. One can argue that is our core product. Our field leadership excellence from frontline [ foreman ] and superintendents to project managers and executives and subsidiary and segment leaders make EMCOR an employer of choice in our industry. And finally, supporting all of that is our commitment to invest with discipline and for the long term. We maintain a disciplined approach for how we grow organically and through acquisition. This, coupled with a return of cash to shareholders through dividends and share repurchases has provided the foundation for our compounding record of success over the past decade and provides balance to our approach to capital allocation. These interconnected priorities create a sustainable competitive advantage that drives superior, durable performance across many diverse geographies and market sectors. The fundamentals of our business remains strong with sustained demand across several key market sectors, we will continue to always face macroeconomic challenges. In fact, I can't remember a time when we haven't had them, such as geopolitical events, rising commodity prices, but our team has consistently demonstrated the ability to navigate complexity and continue to deliver results. Our success is a direct result of their dedication, their resilience expertise, which results in executional excellence from our teammates across the organization. I want to thank every member of the EMCOR team for their contributions to our outstanding first quarter performance and over the long term. And for everything you do to serve our customers, keep each other safe, and drive our success every day. Thank you for your time this morning. We will now open the line for questions. And Cindy, I will turn the call over to you. Operator: [Operator Instructions] Our first question comes from Adam Thalhimer of Thompson, Davis. Adam Thalhimer: Congrats on the strong Q1 and the record orders. I guess I wanted to start on the book-to-bill and orders. I mean, I think at 1.5x that was a record book-to-bill for you guys. And Tony, you broadly talked about the pipeline, but I'm just curious if you can give more detail on the pipeline and what the expectation should be for orders for the rest of the year? Anthony Guzzi: Well, I think I'd go back to something I said in our book, right? Orders come when they come, projects come when they come. There's variability quarter-to-quarter both on bookings. And when projects start, when they close, and what the pace of contracts are. So you know I'm not going to tell you what I see for orders for the rest of the year other than to say this. We continue to see, and I said it in my script, we continue to see no slowing of demand, especially in data centers and really across other key market sectors. I don't think we surprised by the demand we're seeing in water and wastewater in Florida, and we're winning a little more maybe than we thought we would. I don't think we're surprised by the demand -- continued demand over multiyears in health care. We continue to see a strong manufacturing and industrial business. I mean projects can come in there a little lumpy. And then it can also come in smaller task orders thereafter. I think the market has surprised us the most over the last 6 to 9 months or 2 to 3 quarters has been the institutional market. That has shown more resiliency than we would have thought. But I think that's a result of the market positioning we have in some key markets with some universities that are spending money. I also think that we weren't surprised by the resumption in warehousing and logistics and the transportation network work that we're seeing and return in the commercial market sector of that because we could foresee that based on the customer spending patterns. I would say right now, we will continue to grow in excess of nonres like we have historically pretty significantly. And we will continue to win important new projects and penetrating current geographies we are and investing in new geographies, even if they may seem adjacent across the data center space. One area I'd always remind people, because I know the question is coming about high-tech manufacturing. I think that's a market of choice for us. We are well positioned in several key markets, especially in the Mountain West and in Arizona, and we're positioned there specifically across the trades of fire life safety and mechanical and some electrical. And we have the ability in other markets to serve specialty fire life safety in just about every high-tech market that exists. We look at that as a flex market. They can be very difficult customers to work for, in some cases, especially in the semi market. And sometimes, we're making a mix management issue within the geographic market to maybe serve a larger data center campus that maybe go after the next semiconductor fab. But again, we feel good about demand right now. Spending patterns remain and things are pretty much unraveling for the year, much like we expected. We're not chasing margin percentages right now. We're much more focused on growing margin dollars, which is what you actually spend and invest for the long term. Adam Thalhimer: That doesn't set me up well for my next question, which is on margin percentages. But so high level -- that was great color. But high level, I did want to see if I can get at the margin potential in the back half? And maybe a way to do it is just Jason, I mean, you ran through a bunch of issues that impacted you in Q1 in terms of markups and mix? And maybe you can just talk about how those issues play out as the year unfolds. Jason Nalbandian: Yes. I think we said this exiting last year, and I think it still holds today. But if you look at that guidance range we provided, we do have some lower margin scenarios in there, which anticipate a changing mix. I think we believe execution is going to remain strong throughout the back half of the year, which gives us the opportunity to replicate last year's record margins at 9.4%. So I think some of these mix dynamics will remain with us throughout the rest of the year. I also believe what we've said kind of over the last several quarters and looking at kind of a rolling 12- to 24-month average, I think that holds true. Just understanding it's going to fluctuate quarter to quarter just based on that mix as you kind of saw in mechanical this quarter. But I think the fundamentals to hold, and I think really no significant change from what we said year end. Anthony Guzzi: Yes. And I think I'm always careful of false precision. We give a range for a reason. Could we be on top of that range a little bit, but it's not going to -- we don't think substantially at this point. They would take something an execution that we're not seeing right now or we take a booking that happened in year that had to be done very fast at superior margins. So we have a pretty good handle on what our mix looks like. And I think that's one of the things that's a little bit different than us and some other folks. Some of these companies are becoming one market companies. We are diverse by nature because of the geographies we serve and some of the companies we have that are earning very good returns that have nothing to do with data centers. And we do a little better in the data center market. We do on a margin percentage, but we should. These are fast-paced jobs. They require a very strong dedication of our resources. And look, they come with risk, right? I mean at the end of the day, we're always balancing contract risk versus execution versus type. And sometimes that leads us to take a contract structure that may have inherently lower gross margins, but on a risk-adjusted basis and then it could lead to follow-on work that comes in a fixed-price way, which will then allow us the opportunity to grow margins over time. But we feel good about where the margins are on a year-to-date basis. I think the year started out pretty much like we thought, which quite frankly, just stronger revenue than we expected. And we're winning in markets right now and that feels really good. Operator: The next question comes from Brian Brophy of Stifel. Brian Brophy: Yes. Nice quarter. Tony, you touched on my question at the end of -- end of your last answer in terms of potentially shifting some of this mix away from GMP to cost plus -- excuse me GMP and cost plus to fixed price over time. I guess help me understand, is that kind of a deliberate decision on your guys' part to start off with maybe some lower risk structures in these new geographies? And I guess, what is the -- what's the needle mover. What needs to happen for you guys to potentially move these to more fixed price and increased opportunity for higher margin over time. Is it just you guys need to get comfortable in the new geography? Or is there something else? Anthony Guzzi: No, look, first of all, it's not only our decision, right? Some of our customers prefer to operate in a GMP mode because they anticipate they're going to have a fair number of change orders and they want to get started on the job. So it's not only our decision. When it is our decision, I think you outlined it right. We have to get comfortable that we know the pace of build and the cost. I mean I'll just remind folks of last year, right? We had a -- I hate to always bring up bad news, but this is why we're in the -- how we have to think about the business we're in. We were in a market that checked 3 of the 4 blocks other than it was relatively new for the size we were trying to build. And at the end of the day, we took a fixed price. We didn't get the acceleration change order quite what we thought we should price it right and therefore [indiscernible] So that didn't make us shy away from fixed-price work. But it shows you when you don't get it right, you own it. And so contract structure is not only our decision, it also comes from our owners. And we typically work together. Now I think most owners if we think we have a good handle on what it looks like, and they can get a fixed price that looks like it can fit their budget, and it takes away all the auditing and contract stuff that goes with a GMP contract they're more than happy to move away. The other variation on that is we can get 50% into or 60% into a GMP job, we both feel comfortable with we've locked in cost and scope and therefore, we will change it to a fixed price contract. So I'd like to tell you there's 4 or 5 variables here that variables could be up to 6 to 12 of contract administration and structure. And ours is always towards the best outcome for us and our owner and also the best risk-adjusted outcome. Jason, you got anything to add on that? Jason Nalbandian: Yes. I don't think anything has changed overall in terms of our appetite for fixed price work or what we see in terms of the market and our customers. I think it's very much specific geographies, specific opportunities and specific customers in the quarter, which drove the revenue mix to skew more towards GMP... Anthony Guzzi: Especially in mechanical, which makes sense because you're doing more of these AI data centers now. And unless we're doing fabricated structures for those AI data centers, you can argue modular structures that have really as part of our build or somebody else's build, they do start those things up more GMP, and we would prefer they do that as they work out their designs. Jason Nalbandian: Yes. And that's the comment I tried to make about the designs evolving and the scope still evolving. Brian Brophy: Understood. That's very helpful. And then just as a follow-up. Any update on access to craft labor, labor tightness? Any notable changes you guys have seen there over the last few months? Anthony Guzzi: No, no notable changes. We're continuing to recruit heavily with the unions, especially in the Southeast, Texas, Oklahoma through the Midwest. We're working in a very cooperative fashion. One of the things that have benefited us is some of the programs, and that's one of the appeals of Miller. They are excellent at this. They have a pro trade program that allows a quick training program of 2 to 4 weeks, gets people functional, allows us to bring them in at the right classification and get them functioning safely and productively on a job site and that's something we're continuing to expand and grow across other EMCOR subsidiaries to grow our craft labor force. I will say that our -- and I've talked about this before, our real bottleneck, and it really hasn't been a bottleneck because we have this great amount of work to work on its supervision. We have to create more foreman. We have to create more general foreman, we have to get project engineers to be able to move to project managers, project managers to be able to move to project executives. That's how we really grow. Our constraint -- yes, we have to build fabrication shops, whether they're on-site in tents or whether they're offsite in our fixed facilities, we always have to be thinking about that curve. We don't like to get too far ahead of that curve because there may be other ways to skin that cap on fabrication, like on-site fabrication and other things. But we always have an eye towards developing that supervision level. I said it in my remarks, our core product is really [ field ] labor supervision and leadership, and we just apply in these trades, and we do that very well. And therefore, if you're doing that well, you become an employer of choice because trade craft people typically like 4 or 5 things, right? First, they like to know they're going to get paid every week, and their benefits are going to get paid and in no particular order that you're going to give them the safety equipment and tools that they need to be safe, that you have a good safety program. That the supervision they're working for actually knows what they're doing and can really share means and methods and are plugged into our network to gain more knowledge on means and methods that they're working for people up through the chain of command and understand the work they're doing. And finally, that if they do a good job and so choose they want to be part of one of our core teams, that we have ongoing work and that they want promoted that they have an opportunity to be promoted. EMCOR emphatically checks all those blocks in our subsidiary companies. And I think that's why you have -- it's difficult. Our guys are slogging away at it every day on mix management. I think we've been able to meet the moment as far as recruitment and retention of trade excellent [indiscernible] Operator: The next question comes from Justin Hauke of Robert W. Baird. Justin Hauke: Great. I guess -- so we already talked about, obviously, the first quarter, really strong revenue trend. The RPO is up 18% quarter-over-quarter. I think that's an organic record for you. But the revenue guidance only tweaked a little bit higher. You're looking for kind of 9% to 13% growth for the year and you just did [ 20% ]. So I guess I'm just trying to understand -- I know you've got some tough comps, but what's the conservatism in that outlook that would have the trends decelerate to kind of the more mid-single digits from what you put up at the start of the year bookings. . Anthony Guzzi: I think you just said it in your last sentence, we just started the year. We're sitting here in the first quarter. We have 3 quarters in front of us. I think we'll know a heck of a lot more on the revenue trend as we exit second quarter and based on what we see at the end of the year. And it's still -- I mean even sitting here with these RPOs, Jason and I still think we have to book 40% of our work. Jason Nalbandian: For the remainder of the year. If you're taking -- let's just use the midpoint of our revenue guidance range, if you take into consideration what's in RPO that we believe will burn through the rest of the year and what we earned in the first quarter, we still need to book about [ 30% ] of our work. Anthony Guzzi: And we think we can do that and if we can book more of that and execute it within the year, that's how the revenue guidance will creep up, and we'll have much better visibility as going -- said simply, we feel good about the revenue trend in the business. We feel good about our RPO bookings. We feel good about the margin in those -- in the RPOs. But we're sitting here in first quarter, April and we'll have a much better view of that when we talk to you again in late July. Jason Nalbandian: I think in the quarter, we made significant progress on a few jobs. Some of that accelerated maybe a little bit more than we expected. When we look at the rest of the year, I think where we land in that guidance is really going to depend on how quickly we mobilize on some of the new work we just booked, right? We had a lot -- we had strong bookings in the first quarter. So how quickly do those jobs mobilize, how quickly do we assemble a labor force and how quickly do they start burning. That's what's really going to dictate where we land. Justin Hauke: All right. And just so previously, it was 40% to 45% of kind of new work you had to book and you're saying it's 30%. I just want to make sure... Jason Nalbandian: you're right, Jason, given we have 1 quarter behind our belt and the strong bookings we had in the year. . Justin Hauke: Yes. Okay. And then I guess going back to the GMP contracts versus fixed price, can you give us -- I just would be curious to know kind of what's the mix in the RPOs today of what your contracts look like today versus a year ago or maybe 5 years ago in terms of [indiscernible] more fixed price . Anthony Guzzi: I don't think we could do that analysis from 5 years ago with any precision because things change halfway through a lot of times, and it ends up something different. I think versus a year ago, I think incrementally, it's moved a little more to GMP, and I would say this is not analytically for size. But I think that's mainly a mechanical and it's mainly driven by, I think, the larger scope of work which we're guessing, I mean, do we know that emphatically, we have a pretty good idea because of the power requirements and rack cooling we're doing, which is driven primarily, which we think by AI data centers. . These are some of the large language model data centers. And we think that's the case because of where some of them are being built. And a lot of this -- we can tie all that together because of access to power and proximity and all that. So I think that's really the difference. Where that will and later, we'll see and not all GMP contracts are built the same way. But at the end of the day, there has been a little bit of a mix shift to there. And it only takes a couple of points to change 10 bps or 15 bps or 20 bps of margin. I would offer, though, that we wouldn't take these things if we weren't driving more margin dollars by doing it versus other opportunities. . Operator: The next question comes from Avi Jaroslawicz from UBS. Avinatan Jaroslawicz: So I just want to discuss this acceleration in organic growth that we saw here in Q1. It sounds like -- some of it was due to increased mix of prime contracting pass-through revenues that you called out. Just when we think of that relative to the high single-digit to low double-digit organic growth that you've discussed previously within the construction business, is that kind of upper single to low double-digit framing around your self-perform work? Or was that including the prime contracting... Anthony Guzzi: It was all in -- I mean I think the preponderance of what we do is self-perform. But there's 2 places where it's more pass-through. One is, I think we don't even call it pass-through. We don't pass anything without a markup in the construction business. But it'd be primarily in our water and wastewater business, which we have a great team executing very well down in Florida. And it would be in our -- the 1 thing we do at EMCOR on an EPC basis at scale. Yes, we do chiller plants that way. We do other things. But the one place we do it at scale is in the food processing business. It's a very good business. It's a multi-trade package. But we have more of that revenue passing through right now in our manufacturing and industrial market sector and comes at a little over margin. But if you look at it on a return on capital basis, it's very, very good work. And when we look at projects, Avi, we look at it both ways. We look at a project like that, almost the way we look at an acquisition. With the cash flows look on that project versus what we've invested to do it, what does it allow us to do from a further with the customer, both from an aftermarket basis and also follow-on work. We have customers that we've been on site doing large projects every 3 to 5 years, we made continuous presence at those sites, doing small fixed-price projects and maintenance projects. I don't want to say for nothing's ever forever, but we've been there 20 years almost now. So that's a part of the business. Those are the 2 places where that pass-through revenue is the most significant. And that can affect margins 10 or 15 bps in a quarter to the negative. But again, I'll go back they generate really good margin dollars and a really good return on capital on those projects. Jason Nalbandian: And in this quarter, it was the food processing, right? We still have the water and waste water in our backlog. I think that's what you could see as the year progresses, and this quarter was very much coming from food processing though. Avinatan Jaroslawicz: Okay. Got it. Makes sense. Yes, I was in part, looking at the water and wastewater growth in the quarter. And so just trying to piece it all together. Anthony Guzzi: I'll get ahead of one of the other questions and somebody can maybe drop out of the queue. We're not forgoing any data center work to do this work. It's either a different team that does this kind of work or a different market sector -- I mean different geography. We're not forego different skills and capabilities. We're not forgoing any projects in the data center or high-tech world because we're doing water and wastewater or food processing. so Really Incremental growth at the end of the day. . Avinatan Jaroslawicz: Okay. That makes sense. And then just also, when we last spoke, you framed productivity and pricing together contributing about 5 percentage points to construction revenue growth this year. What do you have embedded for that in the updated guidance? Is it still about 5%? Or has that picked up? Anthony Guzzi: I think the way we termed it is less than half, right, at the lower end. So about 30% to 40% of our growth comes from pricing and productivity. But then now you have to tie that also into mix, right, Jason, to get to that answer. I don't think there's anything different than what we've done historically. Operator: The next question comes from Sangita Jain of KeyBanc Capital Markets. Sangita Jain: So if I can ask a follow-up on the mechanical margin discussion. Were these projects later on have incremental phases that you will then take on a fixed price? Or is the nature of these projects such that even the follow-on phases will be GMP? Anthony Guzzi: Well, the margin headwind in mechanical, some of it's GMP, others mix because of the food processing work, we hope to have fall on phases over a number of years. They won't be as large. Jason Nalbandian: I think it's true we determined what that contracting mechanism is, right? They could be fixed price in the future, on some of these jobs, if we get more comfortable with our labor force, we get more comfortable with the design. They may stay GMP because we do have a couple of customers who just prefer GMP work. So I think it's going to be dependent on the individual jobs, and I think we'll know more as the year progress. . Anthony Guzzi: I think we're beating this a little too hard right now collectively on the phone. We contract lots of different ways. And sometimes, our fixed price work on something like food processing because we're servicing more as a prime is a fixed-price contract. It doesn't have the same market characteristics and margin opportunity, the fixed-price contract can be on a single trade contract doing a data center or a manufacturing plant or a hospital. . Other parts, we're doing GMP work on data centers because a customer can't nail down a scope or a new geography or that's their preferred way of doing the business. And they do that, that way across their whole portfolio. I think we always think about operating in bands of margins. And as long as we're sort of within that 12- to 24-month look on bands of margins, we're performing pretty well. And then we take it a separate step further, At the part we're in a business, I think anybody that knows us, EMCOR is a return on invested capital type mentality. And if we can generate more margin dollars and balance that against the margins, we're happy. I know we're all trying to nail down this number of whatever percent for the year. A, we're not that good. That's why you have a range. And b, we have 12,000 projects going on right now, all kind of different contract structures. Is it a little bit incremental towards GMP, I look at that as a positive because maybe [indiscernible] off the table where we shouldn't have been taking the risk on a fixed-price contract and allows us to penetrate a customer further. So I think we're trying to put too fine a point or something that you can't put a fine point on. Jason Nalbandian: Yes. And I just go back to those 12 to 24 month averages to Tony's point, if you look at mechanical prior to this quarter and you look at those 8 quarters, margin for mechanical was as low as 10.6% and as high as 13.6%. So we're still right -- we're bouncing around those 8 quarter averages. And so I don't see anything here that's fundamentally different. Anthony Guzzi: Yes. We grew mechanical operating income, 18.7% and we grew electrical operating income 28.2%. I'd say on any given day, sign me up for that. . Sangita Jain: Understood. That's very helpful. Can I follow up on the 1.5 book-to-bill? And can you give us a little bit of a look as to -- are you being able to book the onward dated backlog? I know this space has traditionally been more of a book -- a short-term booking cadence business, but can you tell us at least some of these large projects give you a longer look into your performance maybe next year. Jason Nalbandian: Don't think in a significant way. I mean, I think if you look at the end of last year, we would have said at the end of '25, 82% of that RPO is going to burn within 12 months. Where we sit today, we say 78% is going to burn within 12 months. So a little bit longer, a little bit more extending beyond the 12 months, but not in a significant way. If you look at our total RPO, I'd be surprised if $6 billion to $6.5 billion goes even into '27... Anthony Guzzi: And that will [indiscernible] Jason Nalbandian: Yes, of course. Operator: The next question comes from Tim Mulrooney of William Blair. Timothy Mulrooney: Jason. Just a couple of quick ones here. So I heard you say that productivity and pricing is contributing, I don't know, which said like 30% to 40% of total growth this year and you're growing, call it, 10% to 12% organically, if you exclude contribution from acquisitions. So this implies pricing is maybe adding 3 to 4 points to growth, which I'm just wanting to confirm is directionally correct. And the reason I want to is because that surprises me a little bit, like we're hearing about pricing being very strong, particularly around AI infrastructure, EMCOR are critical to the whole process, but you're not the largest cost bucket for a long shot. So it seems to me that pricing would be a lot higher than 3 to 4 points, but maybe I'm missing something. Anthony Guzzi: I think -- look, I think in general, when contractors talk about strong pricing, a lot of times, they got to execute the work. And so we're saying our expectation going into the year on pricing is we're working with really smart customers. We never assume our customers don't have alternatives. I've never assumed at any time in my career and that we want to be with these contractors, these customers long term. I think when you look at our gross margins, and you look at our execution over a long period of time, and our ability to retain customers and at times we replace other contractors on site, but I don't remember us ever being replaced on a site. I think we get the price productivity execution just about right. I've never been the guy that's going to sit here. There's people throwing work at us, and we just get it in buckets. And some of my peers that say that I'm not sure they have the long-term view of the market that we have with pricing really means in contracting. Price in our business comes in a lot of different ways. If the assumptions you're making on the productivity of your labor, especially as you move further down the labor curve and there's more of a mix of people who are less familiars or more untrained, pricing also can cover what you expect on unforeseen job conditions, you don't get an adversarial relationship with customers who are going to work with a long time. if there are small changes on a job. So maybe you're giving up some of that in the execution of the job to retain the customer. I think the pricing environment is good, and I think we're almost getting paid for what we're worth. But I would take probably better contract terms, better change order administration and give up some price any day as we execute these large, fast-paced jobs for what are some of the most sophisticated customers in the world. Jason, you have something to add on that? Jason Nalbandian: No, I just think when you look at the number of jobs we're executing today versus the number of jobs a year ago, and you kind of back into the growth rate in jobs or even average contract values, I think it supports what we're saying, which is that really volume demand and productivity are the core drivers of our revenue growth. Operator: Our next question comes from Manish Somaiya of Cantor. Manish Somaiya: Congrats again to the team. A couple of questions. Maybe, Tony, for you first. When I think about the contracts that you're being awarded, especially the mission-critical projects, are you seeing both electrical and mechanical scopes or is that... Anthony Guzzi: I mean we don't -- I think underneath your question, are we combining electrical and mechanical scopes and bidding the jobs that way? Absolutely not. But are we on some sites, both electrically and mechanically, Yes. But do we make decisions contingent on that? Absolutely not. These are separate scopes of work. These are separate themes. Now if we're fortunate enough that we have 2 EMCOR companies on that site, or even 3 when you include fire life safety, does the job tend to go better for the owner in those cases? . Probably, Yes. Our guys know each other how to work together. They work with the same VDC tools, the integration becomes better on the drawings. They can talk to each other and get coordination better on the job sites ot prevent [indiscernible] stacking. But do we specifically bundle the 2 things together and bid it as a package. No, we don't do that, almost never. I don't want to say never. Nothing's never, but we almost try not to do that. Jason Nalbandian: But if you look at our bookings and you say, okay, there's a significant increase in data center bookings or networking communications RPOs. That's coming from both mechanical and electrical... Anthony Guzzi: Electrical. Jason Nalbandian: When you look at the revenue growth within each segment, let's just, again, look at Network & Communications, round numbers, electrical is up $240 million and mechanical is up $280 million. So we're seeing that growth in both, and we're seeing the bookings from both. Manish Somaiya: Okay. That's super helpful. And then, Jason, on the cash flow aspect, how should we think about the cash flow use reversing over the course of the year? Is that second half weighted typically or some of that comes... Anthony Guzzi: Yes. I think if you look at the pattern we've had over the last 2 years or so, we think that pattern will hold true through the remainder of the year. Q4 tends to be the strongest for us from a cash flow generation perspective. Q1 tends to be the weakest. But if you look really over '24 and '25, we expect those patterns to be about the same. . Manish Somaiya: Okay. And then just, Tony, back to you. Maybe if you can just talk about the M&A pipeline, what you're seeing out there, what are still the missing pieces within EMCOR geographically or product-wise? And then maybe if you can also just give us a sense as to what you're seeing so far in the second quarter. Anthony Guzzi: I won't answer that... Manish Somaiya: In terms of demand. Anthony Guzzi: I won't answer that question. We're reporting on the first quarter today. Look, our acquisition pipeline is good. Deals happen when they happen. Our primary area of interest is electrical construction. We're a medium-voltage company or line voltage company. We're not really looking to grow our -- the high-voltage market or the T&D market, we do have a position there, but it's mainly in the Mountain West and it's a very good company, but we're not looking to become [ Quanta ] in the T&D business. We're going to continue to do low to mid-voltage acquisitions in Electrical. We still have places where we can expand geography or strengthen geography in a lot of cases now. I think what we've had great success with is either buying an acquisition of scale, which is a Miller. That's a great example of that. But we also have many examples in EMCOR, which is, I think, where you create the most value is when we take an electrical contractor that was just a good industrial or health care contractor could do really sophisticated work. We know that there's customers that want us to do data centers in that market. We were able to come in and take that group of folks and take their core business, to have them continue to do that through our peer learning and health. We can then have them expand into data centers. And that comes at a much better valuation than the folks that are doing 80% of their work in data centers that everybody is frothy over and want to spend 12x or 15x earnings. We're not going to do that for one market company and a one sector company. Secondarily, we buy construction. We've tended to do that more buy and then take a larger platform like Batchelor & Kimball, and grow organically. And the reason that sets up they could do that well is because the amount of prefabrication on a mechanical job, they can take more labor hours off the job, and therefore, they feel much more comfortable. And then that's sort of the fire protection story too, which is the other part of mechanical that we would grow through acquisition inorganically. And with the fire protection, we're both growing the construction capability and the aftermarket capability. The other area of interest for us is, of course, the mechanical service space. We do both. They're not large compared to the construction acquisitions, but we'll do larger acquisitions there. There, we're buying footprint. We're buying technician capability and sometimes those acquisitions are small as a couple of million dollar asset deal to open up a market or strengthen our market, whether it's a certain type of equipment, a certain kind of capability. And then we also love to continue to support our customers through building controls and automation and mechanical services acquisitions, where we're one of the more significant independent building controls, and we have a number of different brands we're dealer for, and we have good capability, and that's both on the front end of the business and the design, the development of the user interfaces and of course, the installation and the commissioning to make sure it works. Those are our primary interests as we grow through acquisition. I would also argue that we also are not immune to doing the right kind of fabrication acquisition. We haven't done a lot of that to date, but we would do that if we thought we could add -- we have ongoing work that we could take some of that capacity and then also kit up some call it modular more than we're doing today. It's not something we've done, but it's something we look at all the time. Jason, I miss anything? Jason Nalbandian: I think that's a good summary. Operator: Our next question comes from Adam Bubes of Goldman Sachs. Unknown Analyst: This is Anuj on behalf of Adam. So wanted to understand what is your prefabrication capacity today? And how much capacity do you plan to add this year? And additionally, if you can discuss the puts and takes of internalizing fabrication versus leveraging fabrication for third-party sales? Anthony Guzzi: Look, I think the best way to think about how we think about it is to look at our CapEx spending. We don't necessarily look at it as -- we're destined to add this much square footage and I think you got to take the fabrication that we do and break it into 2 or 3 pieces. One is the traditional fab we do just about every contract that we have, which they're doing some pipe fabrication, a little bit of fittings on the sheet metal side and they do that to support the aftermarket and the smaller projects in our market. We do a lot of that. The second fabrication is more dedicated fabrication, especially in our larger mechanical and electrical contractors. And that breaks into 2 pieces, too. There's -- especially electrically, there's almost a catalog we can do. That said, we're taking all these different parts from distributors and OEMs, put them together, so it almost kits out to the site. And then there's job specific where we're making conduit racks and different bands that we're doing specific to that job. It looks more like what we do on the mechanical side. Where there, we can have pretty significant pipe shops, pipe rack shops that do a variety of sizes from small board to large board. And then we also have sheet metal shops where we're hoping to generate off those coil lines, somewhere between 800,000 and 1.2 million pounds a year. Now again -- and then there's the third part of that is part of that fabrication if we can do on job site in a tent and bring equipment in and not have to move it as much, we do that, too. So we're much more adaptable maybe than some others of fabrication. And I think that distinguishes us from other people is, for the most part, you never say everything is ever, but for the most part, EMCOR is fabricating for EMCOR and doing it as part of our job design. We do have cases where people want us to build than other people installed, but that's a small minority of our fabrication versus others. And I think part of that is because we tend to have our trades focus on it. We're not a multi-craft workforce, maybe like a nonunion workforce can be in some markets. And my discussion about if we did fabrication and looked at it that way, that would be a fabricator would buy that we think we can bring more value to by looking at more multi-trade work. Jason? Jason Nalbandian: I'd just say, if you look -- Tony made the point about our CapEx over the last several years, and we've said it before, if you take even just a 3-year look, our CapEx, if you look at a CAGR is growing twice what our revenue is, and that's those investments we're making in prefab. If you look at '26, I think we'll spend somewhere between $115 million and $125 million on CapEx. And I think a significant part of that will be fitting out fabrication facilities or upgrading the ones we have today. Unknown Analyst: That helps. And just 1 more follow-up. So demand remains particularly in your data center business. So what if anything, sets the ceiling on level of growth you can achieve from a capacity standpoint? Is it labor equipment procurement, et cetera? Anthony Guzzi: Well, it's emphatically not equipment procurement because on data centers, most of the major equipment is being bought by the owners. For the owners through the GCs because they're deciding what size they want to do it. So we really have nothing to do with what they're doing on the major end product equipment in data centers. In small cases, we still do, but for the most part, the owners buying the equipment. I think I've addressed where the bottleneck could be. We've been great at producing leaders. Our bottleneck is fill leadership and it gets to the frontline leaders, foreman, general foreman and project manager project executives. . No one can grow without that constraint. We feel pretty good about being our growth targets we have out there, we wouldn't have taken the work. And so therefore, we feel pretty good that in this quarter, that year-over-year, it's up plus 30%, up plus 17% sequentially. We feel we can fill the teams either through increased scope or the teams that we've built to service that demand. And law of large numbers eventually tells you that your growth rate is going to slow, but the dollars stay up. And I'd say the same thing about -- that's my whole margin point. We're in the search for margin dollars right now more than margin percentages. All right. Thank you all. We'll see you again at the end of July, and thanks for your interest in EMCOR. Bye.
Operator: Good day, and welcome to the Brinker International's Q3 F '26 Conference Call. [Operator Instructions] It is now my pleasure to turn the floor over to your host, Kim Sanders, Vice President of Investor Relations. Ma'am, the floor is yours. Kim Sanders: Thank you, Holly, and good morning, everyone, and thank you for joining us on today's call. Here with me today are Kevin Hochman, Chief Executive Officer and President of Brinker International and President of Chili's; and Mika Ware, Chief Financial Officer. Results for our third quarter were released earlier this morning and are available on our website at brinker.com. As usual, Kevin and Mika will first make prepared comments related to our strategic initiatives and operating performance. Then we will open the call for your questions. Before beginning our comments, I would like to remind everyone of our safe harbor regarding forward-looking statements. During our call, management may discuss certain items, which are not based entirely on historical facts. Any such items should be considered forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. All such statements are subject to risks and uncertainties, which could cause actual results to differ materially from those anticipated. Such risks and uncertainties include factors more completely described in this morning's press release and the company's filings with the SEC. And of course, on the call, we may refer to certain non-GAAP financial measures that management uses in its review of the business and believes will provide insight into the company's ongoing operations. And with that said, I will turn the call over to Kevin. Kevin Hochman: Thank you, Kim, and good morning, everyone. Thank you for joining us as we discuss our financial and operating performance for the third quarter as well as our outlook on the remainder of fiscal '26. Q3 Chili's same-store sales of plus 4% marked our 20th consecutive quarter of same-store sales growth and outpaced the casual dining industry by 420 basis points. This strong result was rolling a plus 31% from last year for a 2-year cumulative comp of 37%. A list of the top 500 largest restaurant chains for all of 2025 just came out, and I'm proud to say Chili's is now the #2 casual dining brand for sales in addition to maintaining our status as the #1 casual dining traffic brand. To put our sustained growth into perspective, if Chili's nearly $1 billion of sales growth in calendar '25 was its own business, it would be larger than most of the restaurant chains on the list. After delivering a plus 15% in calendar '24, we often were getting asked what's going to be the next Chili's? With the 21% we posted in calendar '25, the answer was resoundingly Chili's. And in 2026, our sales growth has consistently outpaced the industry with our outperformance continuing to accelerate from 320 basis points better in February to 550 points in March and now 560 points month-to-date through April. Chili's momentum is sustaining, driven by quarterly improvements in food service and atmosphere as well as continuing to make Chili's more fun, more easy, and more rewarding for our team members. These experience improvements, coupled with our everyday value leadership, represented by a per person average guest check that is $3 to $4 below competition, are supporting a powerful flywheel of traffic, sales, growth margin expansion, and reinvestment into our business. Now I'll give some updates on the Chili's business. We spent Q3 continuing to work on the fundamentals, preparing for our new chicken sandwich platform launch and bringing in new guests with relevant marketing to experience Chili's. In Q3, our restaurant teams remain squarely focused on the fundamentals of the guest experience. From a food standpoint, our primary focus was chicken breading and cooking perfection, which involved retraining the teams on perfect execution of hand-breading our chicken crispper and chicken sandwich lineup, which will ensure those items are freshly cooked, hot and crispy. A key differentiator of our chicken sandwich is that we hand bread the chicken in restaurant. We believe a freshly breaded filet tastes better than chicken that has been breaded and fried by machines in a factory, frozen, shipped hundreds of miles and then refried in a restaurant. And in anticipation of our Q4 chicken sandwich launch, our teams were busy ensuring restaurants were ready for the guests that will come in, including reinforcing daily procedures for sparkling clean restaurants and emphasizing key areas to double down on Chilihead Hospitality, our differentiated customer service that drives memorable experiences to grow sales and traffic over time. While our competitors ramp up limited time offers, we spent the quarter investing time in operations, training and culinary resources into everyday capability that more closely correlates with long-term sustainable traffic growth. We believe doing fewer things bigger and better is a more sustainable way to build traffic and grow our business over time. The result is continued momentum on the business, attracting new guests in and retaining the ones we have converted. Dine and GWAP or Guests With A Problem continued its 3-year decline, finishing the quarter at 1.9%. Food grade finished at 75% and intent to return was also an all-time best at 79%. Our operational improvements continue to deliver better experiences for our guests, and our tokenized cohort tracking yielded similar results from previous quarters. New guests are coming into the restaurants and following the pattern of existing guests on frequency, which gives us confidence growth will continue to sustain. Our chicken sandwich platform launched on April 14, with our new menu drop. The lineup features 2 sandwiches at our $10.99 3 for Me opening price point, the Big Crispy and the Spicy Big Crispy, which includes fries, a bottomless Coca-Cola drink and bottomless chips and salsa. Given a wide range of guest preferences, we also offer 3 flavored chicken sandwiches, Nashville Hot, Signature Honey Chipotle, and Buffalo with 2 sides as well as well as the Big Crispy Deluxe with lettuce, tomato and bacon. All sandwiches are served with our Chili's Signature house-made ranch for dipping and dunking that our guests absolutely love and pour on everything. This adds an additional point of differentiation you can only get at Chili's. The sandwich platform was launched behind our Better Than Fast Food Campaign, this time tapping into an insight we have seen among consumers frustrated with what they call shrinkflation, where portion size is reduced to offset rising input costs. For example, a post went viral a few months ago when someone posted a photo where a famous fast food chain's burger pickle was actually thicker than the burger patty itself. We believe Chili's over-the-top generous portions are a great way to resolve the biggest challenge facing our customers today. In a world of rising inflation, how do I get the best value for my money? Our TV ads both show and tell our chicken sandwich is way bigger than the leading fast-food restaurants most premium chicken sandwich. And at $10.99, this addition to the 3 for Me platform is the perfect antidote for corporate shrinkflation. The launch campaign geared a before your eyes demo of a balancing scale holding our Chili's Big Crispy in one pan with its lighter fast food foil in the other. The scale is not in balance with the new Big Crispy demonstrating it is the exact opposite of shrinkflation, weighing down the scale heavily. In fact, our test conducted in the Dallas-Fort Worth area, weighing a large sample size of sandwiches, the new Big Crispy filet was over 80% bigger than the leading fast food restaurants premium chicken sandwich filet. I know many of you are interested in specifics on how the launch is performing. And while it's only been 2 weeks in market with only 1 week on TV, initial response to the new sandwich platform has been encouraging. So far, the overall platform is selling 161% more sandwiches than prelaunch and is significantly outpacing the numbers we saw in the 200 test locations. From a total business standpoint, we have been comping in mid-single-digit sales in April with positive traffic, which is rolling a plus 29% in April, driven by the Big QP launch in the prior year. As I said earlier, we have accelerated our sales outperformance versus the industry to 560 basis points in April, which only includes 2 weeks of chicken sandwiches. So while it's still early, the initial results on both the platform and the total business are both encouraging. I also want to give an update on our north of 6 initiative and how it will be a key to continued sustainable comp growth. A question we get asked a lot is with all the traffic growth you've had in the past few years, do you still have capacity for more? So let me start with the numbers. Our average traffic is now back to 2013 traffic levels, but that's still about 20% less weekly guests from our peak in 2000 to 2005. And our north of 6 restaurants serve anywhere from 20% to 80% more guests than our current average restaurant traffic. So the first point is we know we have a lot more capacity in the buildings. The second question is, what are we learning from the north of 6 restaurants? And first of all, the dramatic business simplification has been a huge enabler for our restaurants and the direction we are getting from the managers of north of 6 restaurants is we need more simplification. So our teams are going to challenge every requirement that slows down our restaurant teams. We'll continue to remove items and processes that don't help the guests or team members. And the new initiative I'm most bullish about is speeding up cycle time, meaning looking at everything that goes into the total time of kitchen prep and the dining experience and finding ways to simply remove time. For example, if one of our restaurants are on a wait on the weekend, the average wait time is about 15 to 20 minutes. That number is pretty good. But remember, that's just an average, which means there are about half our restaurants with longer waits. If we have enterprise project teams studying every bit of that wait to understand what are the bottlenecks we need to remove to reduce that cycle time, whether it be at the host stand, taking orders, kitchen ticket times, checking out with the Ziosk payment system and ultimately resetting tables for the next wave of guests. Chief Operating Officer, Aaron White, and our cross-functional teams are hard at work to reduce cycle times across the entire dining experience. I look forward to sharing new additional initiatives, which should be a continual tailwind for traffic on future earnings calls. On the Maggiano's business, we are continuing to make progress in its turnaround. When you adjust for Christmas Day falling in Q3 of this fiscal and the January weather, we did see sequential improvement in traffic and comp sales. Customers are noticing more abundant portions, more generous family style and the return of classic Maggiano's dishes like eggplant parm and Gigi's butter cake. Value scores are improving. We still have a lot more opportunity ahead of us with service and removing non-value-added process to improve Maggiano's dine-in times. But the important thing to know is we are making sequential progress. This turnaround, like the Chili's turnaround, will take time. But as long as we focus on important areas of food service and atmosphere and make progress every quarter, I'm confident we'll return this business to growth. As a reminder, Maggiano's is only 8% of our company sales and low single-digit percentage of our profit contribution, but it can be a source of growth in the future given the white space opportunities. To close out, I want to do some recognition of our integrated marketing team and our supplier partners on industry recognition. The industry-leading publication Ad Age named Chili's the brand of the year for the second straight year, an award that has never ever been awarded to the same brand 2 years in a row. This is an award recognizing the best work in all industries, not just restaurants. In addition to Chief Marketing Officer, George Felix and our Marketing Vice Presidents, Jesse Johnson and Steve Kelly, we have developed a deep bench of directors, managers and a collection of world-class agencies in various disciplines who have delivered the results over the past 3 years to earn this industry recognition. And the last bit of recognition I want to do is to congratulate our driver, Carson Hocevar, and the entire Spire race team for their first ever NASCAR Cup series win in Talladega last Sunday, driving the #77 Chili's car. Carson is a servant leader to his team and his fans and always makes those around him feel special. He's a perfect representative of what we like to call Chilihead hospitality that our guests experience in our restaurants. And hats off to our Mooresville, North Carolina, Chili's restaurant team and Area Director, Rachel Austin, who stayed open late Sunday night for Carson and the Spire team to celebrate their victory with a lot of triple dippers and a few Presidentes. To close, Chili's delivered another strong quarter, rolling big numbers from prior year. The quarter got stronger as we moved out of January, and we accelerated our market share growth as the quarter closed and now into April, driven by the chicken sandwich launch. Yes, there are macro headwinds the industry is experiencing, but Chili's is well-positioned to continue winning in this environment given the improvements in food service and atmosphere and our industry-leading everyday value. That formula has proven quarter after quarter to be resilient in driving traffic and outperforming the industry. Now I'll hand the call over to Mika to walk you through fiscal '26 third quarter numbers. Go ahead, Mika. Mika Ware: This quarter marks our 20th consecutive quarter of same-store sales growth and our second year of traffic gains, evidence of the durability of our results and the sustainability of our strategy. With the end of fiscal '26 in sight, we expect average annual unit volumes for the year to approach $5 million. These higher sales levels and strong unit economics continue to support our Invest to Grow strategy. We maintained strong business momentum this quarter, achieving positive same-store sales despite last year's positive 31% comparison, including 4% growth at Chili's. While winter storm burn affected Chili's January sales, growth returned to mid-single digits after weather conditions improved. In both February and March, Chili's comparable restaurant sales increased 5.9% with positive traffic, reflecting the underlying strength and momentum in our business, which we expect to continue throughout the rest of fiscal '26. Turning to our financial results. In the third quarter, Brinker reported total revenues of $1.47 billion, an increase of 3.2% over the prior year, with consolidated comp sales of positive 3.3%. Our adjusted diluted EPS for the quarter was $2.90, up from $2.66 last year. Chili's top line sales growth was driven by price of 4.6% and positive mix of 0.6%, offset by negative traffic of 1.2%. Weather and a holiday shift negatively impacted sales and traffic at Chili's by approximately 2.1% during the quarter. For Maggiano's, the brand reported comp sales for the quarter of negative 4.6% with negative 10.4% traffic, partially offset by positive mix of 0.6% and price of 5.2%. Weather and a holiday shift negatively impacted sales and traffic at Maggiano's by approximately 2.1% during the quarter. At the Brinker level, restaurant operating margins were 18.4% for the quarter compared to 18.9% in the prior year due to higher food and beverage costs and higher restaurant expenses, partially offset by sales leverage. At Chili's, we continue to make investments in food by upgrading the quality of ingredients and making recipe improvements for items such as ribs, frozen margaritas, queso, nachos and our bacon cheeseburger to improve the guest experience and ensure value across our entire menu. In addition, we prioritize actively repairing and maintaining our facilities to provide a comfortable and fun atmosphere. At Maggiano's, we continue to execute the Back to Maggiano's strategy, which is designed to improve our value proposition, optimize our service model and ensure our atmosphere is clean and well-maintained by making the investments needed to improve the business. Food and beverage costs for the quarter were unfavorable by 60 basis points year-over-year due to unfavorable menu mix with 4.6% commodity inflation, mainly due to beef offset by price. Labor for the quarter was favorable 60 basis points year-over-year. Top line sales growth offset wage rate inflation of approximately 3.4%, additional investments in labor and higher health insurance costs. Restaurant expense for the quarter were unfavorable 50 basis points year-over-year due to higher repair and maintenance costs and general inflation impacting expenses such as utilities, rent, to-go supplies and delivery fees offset -- partially offset by sales leverage. Advertising expenses for the quarter were lower than expected and flat to the prior year at 2.9% of sales due to a portion of spend that shifted from the third quarter to the fourth quarter of this fiscal year. G&A for the quarter came in at 4.0% of total revenues, 10 basis points favorable to prior year due to sales leverage and lower performance bonus accruals, partially offset by an increase in restaurant center support resources to support our growth. Depreciation and amortization for the quarter came in at 3.7% of total revenues and decreased 10 basis points year-over-year due to sales leverage and lapping accelerated depreciation from the prior year due to the retirement of the CTX and Impinger ovens. This was partially offset by an increase in our asset base from new equipment purchases. Third quarter adjusted EBITDA was $223.7 million, a 1.4% increase from the prior year. Our adjusted tax rate declined year-over-year to 18.7% compared to 19.3% in the prior year, largely due to the impact of a prior year tax catch-up associated with stronger-than-expected performance. Capital expenditures for the quarter were $51.2 million, driven by capital maintenance spend. At the end of the second quarter, we completed our first 4 reimages at Chili's, and the learnings were used to inform our long-term reimage and new unit growth strategy. As we shared last quarter, we plan to complete another 8 to 10 reimages during the remainder of this fiscal year and another 60 to 80 during fiscal 2027 before getting to a planned cadence of 10% of the fleet every year starting in 2028. Regarding new unit growth plans, our goal is to continue to ramp up to a new run rate by fiscal 2029, and we expect to share more details on our strategy and plans at our Investor Day later this year. At Maggiano's, our main focus areas will continue to be guest-facing repairs and maintenance, supplemented by a smaller reimage program. Our strong free cash flow provides sufficient liquidity to maintain our disciplined capital allocation strategy, allowing us to invest in restaurants, keep debt levels low and return excess cash to shareholders. We continue to support this approach by repurchasing $108 million of common stock under our share repurchase program in the third quarter. In addition, we are planning to call our $350 million 8.25% bonds early in fiscal 2027 using the liquidity of our $1 billion revolver, which would provide interest expense savings in fiscal 2027 and the flexibility to continue reducing leverage if we choose. In terms of our expectations for the balance of the year, as noted in this morning's press release, we're updating our guidance for fiscal 2026 to include the following: annual revenues in the range of $5.78 billion to $5.82 billion, adjusted diluted EPS in the range of $10.60 to $10.85. Capital expenditures in the range of $240 million to $250 million; weighted average shares in the range of $44.7 million to 45 million. Our guidance assumes wage and commodity inflation in the low single digits and a tax rate of approximately 19%. April started the quarter on a strong note with continued mid-single-digit sales growth and positive traffic. In addition, our outperformance versus the industry is accelerating, and we remain confident we will lap the fourth quarter with mid-single-digit sales and positive traffic at Chili's. Looking ahead, our results show that our strategy is sustainable and that we're positioned for continued growth. At Chili's, we will build on our momentum by continuing to bring in new guests and drive loyalty through relevant and innovative marketing, menu innovation and strong operations and our industry-leading everyday value. We're confident these strategies will support our ability to drive growth, invest strategically in the business and deliver value to shareholders. I look forward to providing further details at our upcoming Investor Day scheduled in Dallas for Thursday, September 17. With our comments now complete, I will turn the call back to Holly to moderate questions. Operator: [Operator Instructions] Your first question for today is from David Palmer with Evercore ISI. David Palmer: Two questions, if I could. Just I know you said some stats on the chicken sandwich, but if you wouldn't mind, so forgive me if I'm making you repeat yourself, but any stats on that would be helpful, the mix of the product, the perceived lift to same-store sales when you exclude any of the noise that might be out there, new guest repeat, customer sat scores associated with it? And then is your experience that the lift from that -- a product like that will rise over time with the TV campaign, consumer trial for a product like that? And then just a big picture question. As Chili's approaches $5 million in AUV, and I'm not asking you to front run your Analyst Day out in September, but how are you thinking about the big levers from here and how they'll be different to get the next $1 million or $2 million? How should we be thinking about your big hairy goals here from here and how you get there? Kevin Hochman: Okay. So 2 big pack questions. So I'm going to start with the chicken sandwich first, and then I'll address the second one about sustainable growth in the second. So from a chicken sandwich standpoint, we don't have really much more to share because it's only been 2 weeks of launch. We've had 1 week of merchandising only and then 1 week of TV. And we're seeing 161% more chicken sandwiches today than we did pre the launch, which is significantly higher than what we saw in the merchandising-only test market. So -- and in fact, the first week where we were merchandising only, we did see higher lifts than we saw in the test market. So that's all good. As far as like what's the feedback been, anecdotally, we've heard mostly very, very positive, both in the reviews that we see online as well as in talking to our team members. The first thing that people tend to say when they see it is, "Oh my goodness, this is a really big sandwich," which is exactly what we're going for. Inflation is how we position the sandwich and the price point and the size, especially when we compare to our fast-food foil. So that's all working. Over time, we're going to see whether it continues to maintain. So we'll be able to answer your questions about repeat rates and we have all that tokenized data, but that's going to take a few quarters to really understand that. But right now, we feel very, very bullish about it. Typically, when things mix a lot, they tend to be generally overall more incremental from a magnitude standpoint. So the fact that we're beating the test market is very encouraging. And then we obviously saw some acceleration in traffic driven by the sandwich over the past 2 weeks, which feels good, too. So it's too early to declare this thing is successful. But so far, we're really encouraged by the data that we're seeing. Now on the second question, David, on what are the next drivers of sales over the next 3 years, we're kind of a repeat record on this. There will be new initiatives behind this, but it's still going to be focused on food service and atmosphere. So from a food standpoint, we talk about the other menu categories that still need renovation, plus we'll have some innovation on the core categories that we've already renovated. So that will continue. From a service standpoint, I think the big unlock of north of 6 that we're understanding over the past 3 months is this idea of cycle time. So the idea of how do we take the throughput that we're seeing in the north of 6 restaurants and expand that throughout the system. They do a lot of things differently to get higher throughput. So like the example I gave in the prepared script, was at the host stand, right? So typically, in a north of 6 restaurant, they either have more staffing at the host stand than what the labor card says and/or they have more senior level of staffing, either paying a more senior host or sometimes having a manager be in the door during busy peak times, right? In addition to that, there's software behind that when we use the seating system that we need to make sure the teams are trained on, they're using consistently so that when we quote wait times, they're more accurate because we need to use that all the time. So there's a bunch of work that we need to do for the host rollout that we're learning from the north of 6 restaurant. That will go in Q2 of next fiscal, but that's like one example of reducing cycle time, which I think is going to improve throughput, not just for north of 6 restaurants, but more importantly, the entire system. And then on atmosphere, the big thing is the reimage. And you're going to be able to see that when you're here for the Investor Day. We're going to take you out to the restaurants, so you can see them for yourselves of what we're doing. The next 8 to 10 that we're doing in these 3 months is really going to be finalizing what are the things that we want to invest and what are the things that we don't want to invest in so that when we start with 60% to 80% next fiscal and obviously get to the 10% run rate in fiscal '28, we're off and running with the best possible package with the best possible payback. So we're very bullish about the growth levers in front of us. And obviously, I even talked about our world-class marketing, which continues to get stronger and stronger and bring new guests in. So we're very, very bullish about the continued sustained growth of this business. Operator: Your next question is from Chris O'Cull with Stifel. Christopher O'Cull: Kevin, just given the recent volatility in consumer sentiment, have you observed any canary in the coal mine type behaviors such as check management or softness in lower income spending? Kevin Hochman: The answer is we're seeing a little bit of check management. So as we've seen traffic accelerate behind Chicken Sando launch, we've seen a little bit of check management in desserts and in alcohol. Our alcohol sales are still way up with the growth that we've had with the business, but we are seeing some incidents start to slow. And here's what I would tell the team is let's control what we can control. So we can continue to win market share with the best food service and atmosphere in the industry with industry-leading value, and we need to stay focused on that. Whatever happens to gas prices in the macro, that's out of our control. But what we can control is staffing our restaurants for peak. We can control serving great food and with wonderful service in a clean and inviting environment. And if we continue to do that, we'll continue to grow market share, we'll be able to hang on to our business. And then obviously, if the macro gets any better, we'll be able to grow even faster behind that. So I'm kind of like a broken record on it. It doesn't matter what happens with the macro. It doesn't matter what happens with external factors. Our indicated action for this team is improved food service and atmosphere and good things will happen, and we're just going to stay focused on that. Christopher O'Cull: Makes sense. And then, Mika, I know margin flow-through was impacted, I think, by R&M expense this quarter. Can you help us walk us through how to think about flow-through in the fourth quarter? And were there any significant headwinds on any line items that we should be aware of? And then maybe whether the new sandwiches to the platform are margin accretive or margin neutral? Any color would be helpful. Mika Ware: Okay. Great. Yes. So I know the flow-through, we continue to invest back in the business with this invest to grow strategy. So that's part of it is that we don't flow it all through when we put it back in. We saw that food and beverage was up a little bit year-over-year. We continue to invest in labor. And then our restaurant expense, like I said, the R&M, we caught up with a lot of the deferred maintenance. Now we're shifting to preventative maintenance, which takes a little bit of time for that to start really coming through that you can see some opportunities or some reduction in future expenses. But we are seeing a lot of give and take in there. If you look at our R&M just over the first 3 quarters, you can really see that we've kind of established a run rate. So it's pretty steady. I think some of the volatility is really lapping the prior year. And we'll continue to look at that and get more efficient in our spend, but that's kind of one of the drivers there. Looking forward on margins, I think in the fourth quarter, you're going to see probably similar margins. Maybe food and beverage are going to creep up a little bit. We have a beef contract that came due, a state contract that's going to be a little bit more. I think we'll continue to leverage the labor that will probably offset any of that increase. And then you'll see very similar, I think, to restaurant expense this quarter as a percent of company sales. I think you'll see something there. So I expect margins to be similar from Q3 to Q4, and I expect margin growth to happen, return to margin growth in Q4. And I'm very confident in what I stated at the beginning of the year is that, taking a step back, we're going to grow our margins year-over-year at 30 to 40 basis points. I'm very confident about that moving forward. Operator: Your next question for today is from Dennis Geiger with UBS. Dennis Geiger: With all the focus on the chicken sandwich, all 6 varieties of which are delicious, as you know, you put up great results in April, even with just a couple of weeks of the sandwich seemingly, even as you talked about that acceleration in traffic with the sandwich. But I'm curious if you could talk a little more about sort of ex the sandwich, some of the key drivers of that momentum that you've been seeing, especially as we kind of go into 2027? Or said differently, even if, let's say, the sandwich incrementality is not a significant step change in trend, do you think that sort of the mid-single-digit type of comp trajectory is still within view? Kevin Hochman: Well, the answer to your last part of the question is yes. I still think that mid-single comp is still within purview. The recipe for success for us is just to continue to improve the fundamentals, so foodservice and atmosphere. That's why every earnings call, I talk about the improvement on Guest With A Problem and GWAP and food grade and intent to return because what I tell my team is if it's not better than the previous year, what belief do we have that we're going to continue to grow. So we have to continue to improve those things because we're not going to like LTO our way to growth that we see others do. So we want to use those resources on the things that drive long-term traffic and sustainable growth. And if we believe in that, those metrics have to continue to improve. And that's why when we budget the year, we have some food news that has to do with upgrading the permanent menu, but most of our initiatives have to do with improving food service and atmosphere on the kind of the core thing, like the thing like Q2 hosting, what we're going to launch for next fiscal. That's all about throughput and driving traffic. That's not a new piece of food that's necessarily going to drive traffic. It's going to drive traffic through taking the demand that we're already having come to the restaurants and making sure they don't leave, right? So the recipe for success right now is to continue to improve food service and atmosphere, continue to improve the fundamental metrics, right, and then let the world-class marketing team create excitement so that people come into the restaurant and try it for the first time. And that's why we also share the token data because the idea is, hey, we are bringing -- we are putting new guests into the funnel every quarter. And then when we look back over the next 6 to 12 months, they start looking like existing guests. And that's the key. If the fundamentals continue to improve, then the new guests that come in will start looking like existing guests, and we've just got to keep that flywheel going. That traffic growth obviously drives sales growth. Sales growth drives revenue growth -- drives profit growth. We're able to reinvest some of that back into the business to continue the flywheel and drive traffic growth, right? That's the recipe that's worked the last couple of years, and that's the plan for the next 3 years. Operator: Your next question is from Jeff Farmer with Gordon Haskett. Jeffrey Farmer: Mika, I think you just said that there's an expectation that you can grow margins by 30 to 40 basis points sort of on a go-forward basis or at least in '27. But beyond continued same-store sales momentum, what dynamics do you see contributing to that level of margin expansion? And hopefully, I got that 30% to 40% -- or 30 to 40 basis point number correct in the question. Mika Ware: Yes. Well, the 30 to 40 basis points was referencing this fiscal year, what we guided, very confident in that. But I do think that we will be able to grow margins over time. And it will primarily be from sales leverage because that's our strategy is to grow the top line. But we do think there can be opportunities now that we have gotten through the turnaround, we've stabilized the teams. We've attracted better talent. This does give you an opportunity to just be more efficient in your spend, and I think we'll look for ways as we move forward to do that as well. But even with the sales growth, I do think that we can continue to leverage margins. Jeffrey Farmer: Okay. And then just one quick follow-up. As it relates to menu pricing moving into FY '27. I think you guys have been back-to-back mid-4% in '25 and '26. How are you thinking about menu pricing as you move into FY '27? Mika Ware: Yes. So the very first thing, most important thing for us is to protect our value proposition. We're going to protect that $10.99 industry-leading value, have it there for those that need it. And then we also want to make sure we have value across the entire menu for everyone. And with that being said, moving forward, I do think that we'll continue to invest in food service and atmosphere, but we will probably be on the lower end of our stated pricing range. So moving forward, we'll have to -- we're always going to make sure that we can price for inflation, but we're going to make sure we balance that with making sure value is there for our guests. Operator: Your next question for today is from Andrew Strelzik with BMO. Andrew Strelzik: I know there's a lot of focus on the food initiatives and the menu initiatives that you guys have planned. But I was hoping you could talk a little bit more about the operational and service improvements and those kind of legs of the stool there. How much more room for improvement is there? What are kind of some of the bigger opportunities that you see kind of going forward to drive that? Kevin Hochman: Yes. It's frustrating, but it's also really exciting how much more opportunity we have. So look, we didn't even touch on the technology initiatives that are happening from an operational standpoint. We continue to improve our KDS system. We have a -- we're just kicking off now an entire back office redo, basically taking all these antiquated systems and getting to -- it's not an ERP system, but the idea that all the back-office systems could be connected. So it's going to be way more usable for the team members, hopefully, help for throughput as well as retention. That's the big one. We still are working on -- we're rolling out right now our team member handheld initiative, which is a complete upgrade to the interface. That's gone a little slower as we rolled it out just as we've seen some glitches. We paused it to get it fixed and it's rolling back out now, which should be done by next quarter, which is a huge one. So that's all the technology initiatives and there's a lot more than that. We have what we call Supermarket Simple that's going to be rolling out in the next quarter, which is all about removing the friction that happens at the end payment with the Ziosk where either a discount didn't come off that the guest expected or they accidentally left a different type of tip and we need to get that reversed. These are all things that hold the tables. I'll give one example. This one simple example that happens about 7 times a day where we've got to reverse something out on the Ziosk. We added it up. It was like over 20 years where the tables tied up for the guests waiting for that to get reversed by a manager. And that's an example where we can fix that very quickly with an update from Ziosk. So there's a huge amount of technology initiatives. And then from an operational standpoint, really the big push now has been the north of 6. So we're moving from kind of defense of just removing a bunch of stuff and making it much easier for our team members to operate. We're now moving to offense on accelerating cycle time. So whether that's the host stand, whether that's ticket times, a great example we'll see in very busy restaurants is their ticket times will be a little bit inflated. We'll go to the labor card to understand are they scheduling enough cooks. The answer is no. And it's like that's a clear indicated action that we can continue to take on more traffic and get those ticket times down. So ticket times, even the checkout time that we talked about earlier. So there's a ton of initiatives that are coming. We'll be giving a lot more detail at Investor Day on the new things that we haven't talked about before. But I remain very, very bullish about our ability to improve the operations, continue to get GWAP and intend to return scores better and better as well as the most important thing right now is to get throughput going. Andrew Strelzik: Great. Okay. And then I wanted to ask also on the remodels, and I know it's very early days, but can you just remind us kind of spend levels? How should we think about the types of lifts that we might be able to expect there as that continues to build? Or maybe kind of are there different levels that you're testing? How should we think about that? Mika Ware: Andrew, yes, so it's really early with only 4 restaurants that we've done so far. But we are optimizing the spend. The good news is we did 4 different levels of spend and the lowest level of spend is getting the same sales lift. So we are getting a sales lift in these restaurants. We're optimizing the spend. But we'll have more of that to share once we have a bigger test group with the 8 to 10 and then the 60 to 80. So more of that, again, will come in September when we just have a little bit more time to read the test, but very encouraged with the spend and the sales lift that we're getting in the early 4. Operator: Your next question is from Jeffrey Bernstein with Barclays. Jeffrey Bernstein: The first question is just on the new unit opportunity. Clearly, new unit growth is more of a stable driver of top line than comps. But can you talk maybe a little bit about the changes in the new units you anticipate versus existing, maybe the cost to build and return requirements. I know the Investor Day will offer more color, but just how you think about the U.S. total addressable market for a brand that most people view as fairly mature. And then I had one follow-up. Mika Ware: Okay. Thank you, Jeff. Yes. No, we're really excited about our new unit growth strategy. So our first step was to really build up the team. We have a great leader with Richard Ingram. We have a lot more insights, a lot more analytics. Just the whole team is phenomenal. So we've really started gearing that up. Primarily in the past, we've really stuck to some of the states, our biggest states that we always have done a great job in California, Texas, Florida. We continue to build there. We've been very successful, and we'll still build there. But there's a lot more opportunity across the United States for us to build in different markets. So it seems like Chili's is everywhere, but Chili's is not everywhere. So again, we'll kind of spell that out and give more detail on how and why we think we have a much larger addressable market, but we are going to be able to ramp up our unit growth. And so next year, you won't see it next year just because there's usually about an 18- to 24-month cycle, but we can already see the teams are ramping up for F '28, and we expect to get to our new growth run rate in F '29. As far as the units go, we're making sure we're using a lot of the fun elements from the reimage. And then we're working with the operators and all the insights we have, again, with the north of 6 restaurants just to make sure that we have these restaurants exactly how we want them, especially with the new unit volumes that we're experiencing to make sure that they are designed for optimal throughput. So a lot of exciting things to come. We have a very strong team. We're ramping up the growth, and that's going to be a great lever for us as we move forward. Jeffrey Bernstein: Understood. And the follow-up, just Kevin, I think you noted that Maggiano's was -- I think it was high single-digit percentage of sales, low single-digit percentage of operating profits. I know the turnaround is on track, but seemingly take time. Just wondering whether there's any incremental interest in adding a second brand of greater scale, maybe something more meaningful in terms of sales and profit contribution. Clearly, you have the credibility, you have the playbook to strengthen maybe more of a national brand now that Chili's is seemingly in a much more stable and consistent growth position. Just wondering whether there's any incremental interest or what it would take to maybe get you to think about a potential brand of more scale to add to the portfolio. Kevin Hochman: Jeff, we get asked that question a lot. What I tell my team is we need to be able to turn around a smaller brand first before we take on more risk of a bigger brand. So it's -- just because we have the playbook on Chili's doesn't necessarily mean that the same leadership team can do the same thing on other brands. And I'd rather prove it on a pretty risk-free opportunity like Maggiano's versus take the big swing for the first time on something a lot bigger that could put more -- put undue risk on the business that we don't really need to do right now. We're very bullish in continuing to be able to grow Chili's and do that profitably. And so we can prove out our beliefs about our ability to turn around other brands with Maggiano's. Right now, part of the Maggiano's turnaround is also just unifying the system so that we could be ready for a third brand should we be able to turn around Maggiano's. So for example, one of the big issues in Maggiano's is its kitchen throughput. It has a very antiquated kitchen display system. We're now in process of putting them on the Chili's kitchen display system. If we're able to do that successfully, which we should be, it's pretty easy, then as we do updates as we learn more about the Maggiano's business, it's much easier because they can use the same team. It's much easier than having them to have to learn a completely different system, right? So part of the Maggiano's turnaround is not just the financial improvements of Maggiano's, which is we all want, right? It's also proving to ourselves that we could have a model like some of our biggest competitor in casual dining does an exceptional job being structured to be able to plug in new brands. And so that's a big part of the Maggiano's turnaround, not just the financials, but actually structuring the company to be able to do that. But I will tell you, until we are able to do that, I would caution us from trying to get a third brand. We have no business doing that until we can prove that we can handle our second brand. Operator: Your next question is from Jon Tower with Citi. Jon Tower: On the north of 6 initiative that you're going after, I'm just curious, it sounds like there's a need to invest in some labor. So I'm curious if you could speak to where you see and think labor needs to go over time across the system? And then I've got a follow-up. Kevin Hochman: Yes. So right now, when we look at the north of 6 restaurants, they don't all invest labor in the same places. I mean generally a trend for the extremely high-volume restaurants, they do invest more labor than what the model tells them. The typical positions are either in buster or server assistant. Sometimes it's servers and then sometimes it's hosts. Once in a while, it's cooks too. to get throughput there. So it really depends on the restaurant and what they need and the types of experience of people that are in the restaurant. So it's not a one size fits all. As we think about the budgets that we're setting for our fiscal '27, there are some north of 6 investments baked into the numbers that we'll be sharing as part of our guidance when we come out with that a quarter from now. So just to be very clear, there will be some investments that they will be baked into the guidance that we provide. And then beyond that, there's a lot of other things that we're working on. Some of them don't really have to do with investments, just deploying different types of labor deployment or instruction. So we'll make sure that all of that is clear for you guys and that nothing is surprising. Mika Ware: So I would like to add on to that. So also remember, with our labor model and especially the north of 6, as we have more guests in the restaurant, it naturally scales up. So I don't know that it's a true -- really -- it's not going to be like -- I'm not anticipating it to be a really big investment. Also, when Kevin talks about some people are already spending more than our labor card, that's not just the north of 6. We have scaled that back to a lot of the restaurants, we're saying staff for the traffic you want. So a lot of that is built in our current run rate. We're going to formalize it next year. It will be an investment. There will be some investment, but it's not going to be as material as it has been in the last few years when we really had to staff up to just get that base model right. I feel now it's more of a lot of fine-tuning on the investment side. Jon Tower: Got it. I appreciate all that color. Maybe just flipping to the remodels. I know it's early in the process. But I'm just curious, as you're going through with the first 4 stores and now the planned, I believe, 8 to 10 more coming, are you seeing an opportunity to maybe do anything different in the back of the house as well with respect to either equipment or any of the processes that you've got -- or the build, hence, the processes get better in the back of the house? Mika Ware: Yes. So -- and it may not necessarily be tied directly to the reimage program, but we're always looking at the heart of house. We have a whole cross-functional team that is dedicated to looking at the equipment. Again, north of 6, part of that is to optimize the heart of house equipment packages. Do we need to add an extra fryer? Where do we need? At what levels do we add a separate combi oven? So we're looking at all of that. We're also thinking about that as we design the new prototypes on making sure that we have the space laid out just right and that we have the model built for those higher volumes and the equipment that we'll need moving forward. So it's absolutely a focus that we continue to look at different pieces of equipment, how do we improve either the quality of the food or the speed of our service. And so we have a whole team just working on that at all times that we could deploy. Operator: Your next question for today is from Brian Harbour with Morgan Stanley. Brian Harbour: With the reimages, are there elements of that, that sort of help with throughput? Or is that more of just like an aesthetic thing? Could you talk about that a little bit? Mika Ware: Yes. So right now, it's more of the exterior, the inside is paint and just how the look and the feel of the restaurant. But we're always looking at our tables where, for example, in one of the previous reimages, we put in some big community tables in the bar. Well, we realize a lot of people don't like sitting at the community table. So as we go through, we make sure that those community tables are gone, those are separate tables. So any time we have the opportunity to update the tables or optimize the tables, we're doing that. And we're making sure we look at that really not necessarily in the reimages, but in the new units as well that we have the optimized tables and we have the most tables to help with throughput. Kevin Hochman: Yes. But it's other than the tables, it's mostly cosmetic throughput. Our 2030, Heart of the House restaurant team is focused on what is the equipment that can improve throughput. So like an example that we're looking at right now is a new type of grill. A flat top that all of the space is usable. It's really consistent in terms of heat across the grill. So you can put more burgers and they cook more evenly. That's an example that would have improved throughput. In addition, there's -- they have a manual clamshell attachment that would be able to cook on both sides. We tested computer clamshells a few years ago and thought they were not as reliable as they need to be, but this one likely would be more reliable. So that's an example where the equipment would give us more throughput and lower ticket times on burgers, which is obviously a huge part of our business. But I would consider that kind of separate from the reimage program. Brian Harbour: Okay. Got it. Makes sense. Mika, how are you feeling about food inflation at this, I guess, more as we think about like fiscal '27, do you expect that to sort of reset higher? Is it something you'll sort of address with price when the time comes? Or could you talk about that? Mika Ware: Yes. So I mean, it's -- we'll probably give you more -- I'm going to give you more details in next quarter when we set guidance for next year. But there's always puts and takes, but there is going to be pressure with beef. I mean that's clearly out there. Luckily, that's not the total basket for us. We're a varied menu, so we have different opportunities. Obviously, we sell a lot of chicken as well. But yes, we're going to continue to see pressure in commodities as we move forward. It will probably be similar levels that you've seen us in the past or this last half of the year, we've had that mid-single-digit inflation. So I'm anticipating that will be something similar as we move forward into F '27. Operator: Your next question is from Brian Vaccaro with Raymond James. Brian Vaccaro: Congrats on the continued strong momentum. Mika, just following up on that last question on commodity inflation. Did I hear correctly that you do expect low single-digit inflation in the fourth quarter? And maybe just any clarity on what's breaking a little bit more favorably for you even in the near term compared to the mid-4s you did in the last quarter? Mika Ware: No. So it's mid-single digits in the fourth quarter, and that's what I expect to continue into next year, Brian. And so beef will continue to be a pressure for us. I was just saying there could be some gives and takes out there on different contracts. But in general, we're going to have inflation. It will probably be in the mid-single digits next year as well is what I'm anticipating now. More specific details to come as I give guidance next year. I'm just kind of giving a guideline now. We'll give more information on that next quarter. Brian Vaccaro: Okay. Sorry, I thought I misheard the lows. So that's helpful clarity. Advertising. Yes, that's great. On the advertising front, I think you said it was flattish year-on-year as a percent of sales in Q3. Just ballpark, how much do you expect ad spend to be up year-on-year in the fourth quarter? Mika Ware: So in the fourth quarter, it will probably be in the $5 million to $6 million range for the fourth quarter. Brian Vaccaro: Okay. All right. That's helpful. And then just a bookkeeping one for me. Can you share the sales mix of 3 for Me, kind of how that splits between $10.99 and the higher tiers and also on Triple Dipper? Mika Ware: Absolutely. So we continue to have about 20% of our guests eat on the 3 for Me platform. Approximately 40% or a little bit less are eating on the $10.99. That converts to total 3 for Me is about 12% or almost 13% of our guests. But on the $10.99 version, less than 5% are actually eating -- of our total sales is $10.99. So that's being pretty steady for us, I would say, as we move through. What was the second piece of your question, Brian? Brian Vaccaro: Triple Dipper. Mika Ware: Triple Dipper. Yes, they're hanging in there. So last quarter, it was right at 16%, and that's where it is now. So hanging in there with the Triple Dipper. Operator: Your next question for today is from Nick Setyan with Mizuho Securities. Nerses Setyan: I think I heard you guys say ad spending went a little bit into Q4 from Q3. Can you just remind us what the year-over-year growth was in Q3, what it will be in Q4? And then how are you thinking about ad spend in fiscal '27? Can that grow as a percentage of sales? Is it going to be flattish? And in terms of just spending by quarter, that would be great or at least directionally. Any color there would be very helpful. Mika Ware: All right. Sure. So advertising in the third quarter ended up being fairly flat year-over-year on a dollar basis and a percent of sales basis. It will pop up a little bit. We had to move some things into the fourth quarter just some timing of some things, how they happened. So in the fourth quarter, I expect that to be a little bit higher as a percent of sales and probably, like I said, $5 million to $6 million up year-over-year. Next year, again, more color when I give guidance for next year, but I would expect it to be similar as a percent of sales, a similar amount there. There's always inflation on ad spend. So we will be spending some more dollars, but probably a similar percent of sales as we move forward. I don't have the cadence yet, Nick, to share on quarter-to-quarter in F '27. Again, we'll get into more of that at the end of this fiscal year as we kind of guide for next fiscal year. Operator: Your next question is from Andrew Charles with TD Cowen. Andrew Charles: Great. Mika, you talked about the likely mid-single-digit inflation in 2027 led by beef and plans to roll off price as you're prioritizing value. And so I know we're going to give the specific guidance next quarter, but I'm just thinking qualitatively, what are the opportunities to drive margins just beyond sales leverage while you cited that you're not immune from the industry's contracting alcohol mix as well? Mika Ware: Right. So moving forward, again, we feel like our strategy is a top line strategy. So we will get margin leverage from that. But we will look into ways, I think, as the brand -- we've kind of been in this turnaround mode. We're getting more into the stabilized mode where we have, again, a lot more talent, stabilized teams. And what we've seen over time is as turnover goes down, you have better talent, you always get more efficient in whatever you do. That could be labor, that could be how we spend the dollars. For example, R&M is one that we spent a ton of money in over time. We do think, like I said, we had a lot of deferred maintenance. Now we're moving into preventative maintenance. We also think there's going to be opportunity now to just find ways to have more efficient spend as we move forward. And we have a lot of initiatives kind of behind the scenes working on that. So there'll be just different areas of the business. Again, labor. I think labor is one that as the teams continue, turnover goes down, productivity goes up. Like we said, we may have to invest in some pockets. But at the same time, we're having teams that just get better and better at what they do and you have some natural opportunities there. So we'll continue to look across the whole brand. We've had a lot of growth the last 3 years. There's probably a lot of opportunity to optimize some of those expenses as we move forward. So that will -- again, will be more things that we look at in the future, but I think there will be opportunity there. But even excluding any margin initiatives, I still think we can expand margins and grow the top line. We feel really great about our mid-single-digit same-store sales and mid-single-digit growth over time as we move forward. Andrew Charles: That's helpful. And then as we think about the ramp in new stores, and you talked about how 2029 more of a steady rate. And again, we'll hear more about this at Investor Day on the specifics. But just kind of curious, I mean, are you piloting opportunities to lower the cost of the box as we get ahead of this to better understand kind of what the Chili's of the future really looks like? Mika Ware: Yes. I mean, absolutely, we always look at how can we optimize costs in the box. I mean I will say just over time, especially post-COVID, there has been inflation in how you build the restaurants. The great news is we took our AUVs from around $3 million to we talked about approaching $5 million. So that gives us a lot more opportunity. With our improving AUVs, that doesn't give us a lot of opportunity to necessarily shrink the box because we're trying to accommodate more guests, but we are always looking at that. But what I will tell you is the returns we've seen even on the restaurants we've been growing over the last few years have been great. We feel really confident in that, and we're really set up to build some restaurants with some great returns as we move forward. But we're always looking to see if there's opportunities to optimize the box and our spend. Operator: Your next question for today is from Chris Carril with KeyBanc Capital Markets. Christopher Carril: So I guess just following up on earlier questions about the check. Can you update us more specifically on how you're thinking about the mix component of check moving forward here over the near to medium term? And Kevin, I believe you mentioned the $3 to $4 check gap to the competition. So any additional thoughts on the long-term check opportunity would be helpful. Mika Ware: So Chris, do you mean on the check? Just we're always looking for opportunities to grow mix. But right now, like Kevin said, just recently, we've seen some softness in mix, though it was very interesting that as soon as we saw softness in mix, we saw our traffic start to accelerate. So again, that's why we feel very confident about mid-single digits and positive traffic as we finish up this fiscal year. Now moving forward, we're always looking for opportunities to grow check. We've done a great job of it over the last 3 years. We'll look to continue to optimize. But if I'm thinking longer term, we know what that pricing strategy is with the same-store sales, we talked about that range. And then I think we're really going to be focused on growing traffic on top of that. Kevin Hochman: Yes. As far as like what guidance we give the teams on $3 to $4 below category, we don't think about it that way. That's more of an output that we report out to everybody about -- it's a verifiable demo that we're lower priced than our competitors. The way we think about value is -- and we need this across the entire menu is how do we create abundant value everywhere in our menu so that when people leave Chili's, they're like, wow, that was an incredible value. And we've been slowly renovating our menu to get to that value across the entire menu. We started with burgers and fries and fajitas, and we have it in margaritas. And now we obviously did in chicken crispers. Now we're doing chicken sandwiches. The next to go will be salads and steaks, and we did it with ribs actually last year, where it's a much more abundant value. Even if the price is a little higher, you get 50% more ribs that are meatier and it's a bigger plate. So that's the way we think about it. It's like when we're in the test kitchen with our operators, we're like, hey, is this something that's going to be wow value? And if it's not, we got to continue to work on it. And then the outcome is the things that we report to you on price and how we're lower than the competitor. But the important thing is when I get a plate at Chili's, do I feel like that was wow value that I want to come back for. Christopher Carril: Got it. That's helpful. And then just turning to Maggiano's. Now that George is overseeing marketing for Maggiano's in addition to Chili's, can you maybe speak to how you're thinking about marketing for the brand and what that could look like when you do begin to see signs of traffic stability and growth? Kevin Hochman: Yes. It's -- we're less than 50 restaurants. So it's never going to be this big national TV thing that like Chili's has. So what George -- the lens that George is bringing to the business right now is empathy for the guest experience because at the end of the day, we've got to improve food service and atmosphere at Maggiano's if we want to grow traffic over time. So he's looking at things like menu presentation, family style, the entire guest experience from the time you get into the lobby to when you sit down to when you check out. These are all things that we need to bring a guest empathy lens to, and that's primarily what he's focused on right now. Should we get that into a place that we're really excited about, will we do some demand creation? Probably. But given that it's -- we're not a national brand, we don't have Maggiano's everywhere, it's never going to be like what you see at Chili's. Operator: Your next question for today is from Christine Cho with Goldman Sachs. Hyun Jin Cho: Could you give us a quick update on the off-premise trends and whether that channel has proven more resilient in the increased kind of check management standpoint? And I know there has been clearly a stronger emphasis on elevating the in-restaurant experience. But do you see an opportunity to lean further into the off-premise channel going forward? Mika Ware: Yes. So our off-premise, it's been hanging in there. it's usually been about, what, 23%, 24% of total sales. So it's been pretty steady. It did have the same negative traffic that the dine-in did or the overall brand did this last period. But with that being said, we do think there's opportunity. We've really been focused on the dine-in experience, and we think there is opportunity to, again, take friction out of that whole guest experience with off-premise. We can think -- we think that we can improve that experience, get better throughput. So it will be a focus as we move forward. Kevin Hochman: Yes. I mean the big opportunity is just the overall experience of picking up. It's not -- the improvement that we've made from the dine-in, we still have opportunity to do on to go. Our quote time calculator hasn't been updated in a while. And since our ticket times are so much faster, a lot of times we quote times that are way longer than when the food is actually made. So we've got to get that thing updated. We've got to make the experience for pickup a lot more seamless, ideally with some order boards, so you would know where your order is and whether it's ready to be picked up. And then we just made some investments in packaging that are already in all the numbers that you guys have to make the actual experience, getting the food at home a whole lot better. So to me, the important thing is let's get the fundamentals right before we go try to put any kind of gas on it, and we've got some work to do there. Operator: We have reached the end of the question-and-answer session. And I will now turn the call back over to Kim Sanders for closing remarks. Kim Sanders: Thank you, Holly. That concludes our call for today. We appreciate everyone joining us and look forward to updating you on our fourth quarter and fiscal year 2026 results in August. Have a wonderful day. Kevin Hochman: Thank you. Mika Ware: Thanks, everyone. Operator: Thank you. This concludes today's conference call. You may disconnect your phone lines at this time, and have a wonderful day. Thank you for your participation.
Operator: Good day, and thank you for standing by. Welcome to Ashland's Second Quarter 2026 Earnings Call. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to your first speaker today, Sandy Klugman, Director of Investor Relations. Please go ahead. Sandy Klugman: Thank you. Hello, everyone, and welcome to Ashland's Second Quarter Fiscal 2026 Earnings Conference Call and Webcast. My name is Sandy Klugman, and I am Ashland's Director of Investor Relations. Joining me on the call today are Guillermo Novo, Chair and CEO; William Whitaker, CFO; as well as our business unit leaders; Alessandra Assis, Life Sciences and Intermediates; Jim Minicucci, Personal Care; and Dago Caceres, Specialty Additives. Please note that we will be referencing slides during today's call. We encourage you to follow along with the webcast materials available at ashland.com under Investor Relations. Please turn to Slide 2. As a reminder, today's presentation contains forward-looking statements regarding our fiscal 2026 outlook and other matters as detailed on Slide 2 and in our Form 10-Q. These statements are subject to risks and uncertainties that could cause future results to differ materially from today's projections. We believe any such statements are based on reasonable assumptions, but there is no assurance these expectations will be achieved. We will also reference certain adjusted financial metrics, both actual and projected, which are non-GAAP measures. We present these adjusted figures to provide additional insight into our ongoing business performance. GAAP reconciliations are available on our website and in the appendix of these slides. I'll now hand the call over to Guillermo for his opening remarks. Guillermo Novo: Thanks, Sandy, and welcome to everyone joining us. I'll start with a brief overview of our second quarter performance, then William will review the financials and outlook, followed by a deeper business unit detail with the team. Please turn to Slide 5. Overall, second quarter results reflect resilient underlying commercial performance amid stable demand conditions with pricing and portfolio mix action remaining a central focus across the organization. Life Sciences delivered steady results supported by resilient pharma demand. Injectables, tablet coatings and high-purity excipients continued to drive growth, marking a fourth consecutive quarter of volume gains. Progress across our innovate and globalized pillars remain strong with continued adoption of differentiated new product introductions. Personal Care generated broad-based portfolio growth, driven by strong volume gains and execution across biofunctional actives, care ingredients and microbial protection. Biofunctional actives delivered robust double-digit year-over-year growth, while microbial protection continued to gain share following our globalized investments. Specialty Additives operated in a mixed market environment. Coatings volumes grew year-over-year, reflecting share gains and new product traction, while construction sales remained lower, reflecting deliberate portfolio mix actions and slightly softer demand. Overall results returned to flat year-over-year, which is an important step forward given that we have not yet fully lapped our prior year China impact. Intermediates operated in a stable but trough level environment with results impacted by both commercial and operating effects of the Calvert City outage. The team will cover more later, but operational performance was impacted by specific issues during the quarter, all of which are internal and not reflective of underlying demand trends. Despite these headwinds, commercial execution across much of the portfolio was solid, and we continue to see encouraging demand trends in Q3. Please turn to Slide 6. I'll now walk through our second quarter results, which reflect disciplined execution across the portfolio in a mixed market environment. Teams remain focused on cost control, operating discipline and customer service while managing through operational headwinds during the quarter. Structural actions taken over the past several years continue to support the underlying economics of the business, even as near-term performance was pressured by temporary execution challenges. Working capital was a key strength in the quarter, driving strong operating cash flow and reinforcing our focus on cash discipline. Looking across the portfolio, the quarter demonstrated resilient underlying performance and continued progress in strengthening the business foundation with demand conditions generally stable across the portfolio and margin pressure primarily driven by specific operational issues rather than end market weakness. Please turn to Slide 7. First, our consumer-focused businesses, principally Life Science and Personal Care continue to provide stability, supported by resilient end market demand. Second, innovation and globalization initiatives are gaining traction with accelerating momentum in higher-value applications across the portfolio. Innovation has already exceeded our full year target after 2 quarters, reflecting the strong pipeline execution and commercialization. Third, structural actions taken in prior periods are now embedded across the business, enhancing margin durability and positioning the portfolio to benefit as operating conditions normalize. Teams remain focused on disciplined execution and targeted corrective actions. Before turning the call over to William, I want to emphasize 3 themes for this quarter: Resilient consumer-focused demand, accelerating innovation and globalization momentum and continued commitment on improving execution. I'd like to now turn the call over to William to provide a more detailed review of our second quarter financial performance. William? William Whitaker: Thank you, Guillermo. Please turn to Slide 9. Second quarter sales were $482 million, up 1% year-over-year, reflecting resilient demand conditions across much of the portfolio. Volumes were relatively stable overall with growth in Personal Care offsetting softness in Intermediates, while Life Sciences delivered steady. Pricing declined modestly year-over-year, primarily reflecting carryover impacts from prior period pricing actions supporting targeted share gain activity generally across the segments. Foreign exchange was a meaningful tailwind, contributing approximately $16 million or 3% to reported sales. Adjusted EBITDA was $98 million, down 9% year-over-year, reflecting approximately $10 million of previously disclosed temporary impacts, including the Calvert City start-up delay and weather-related operational disruptions during the quarter. Excluding these discrete items, underlying performance reflected softer pricing, offset by disciplined cost control and foreign exchange benefits, consistent with the resilience we are seeing across the portfolio. As previously discussed, Calvert City impacted results in the second quarter. Repairs are now complete and the facility is back online. Adjusted EBITDA margin was approximately 20%, down 220 basis points year-over-year, largely reflecting these temporary operational disruptions. Adjusted EPS, excluding intangible amortization, was $0.91, down 8% year-over-year, consistent with the EBITDA decline. Cash generation and conversion was notable strength in the quarter. Cash flow provided by operating activities totaled $50 million, up from $9 million in the prior year, driven by disciplined working capital management, including meaningful inventory reductions. Ongoing free cash flow was $29 million, representing solid conversion driven by working capital improvements and reduced capital expenditures. We ended the quarter with total available liquidity of approximately $939 million and net debt just over $1 billion, resulting in net leverage of roughly 2.7x. The balance sheet remains strong, providing flexibility to support operations, invest in strategic priorities and maintain disciplined capital allocation. With that, I'll turn the call over to our business unit leaders for a closer look at segment performance. Alessandra, over to you for Life Sciences. Alessandra Assis: Thank you, William. Good morning, everyone. Please turn to Slide 10 for Life Sciences. Life Sciences sales were $172 million, flat year-over-year. Results reflect resilient pharmaceutical demand, partially offset by softness in select non-pharma end markets and modest pricing pressure. Pharma delivered low single-digit growth for a fourth consecutive quarter. supported by strength across differentiated cellulose excipients, injectables and tablet coatings. Outside of pharma, nutrition and other non-pharma markets remained softer, reflecting customer order timing rather than underlying market deterioration. Pricing declined modestly year-over-year, largely reflecting carryover impacts from prior period actions while remained stable sequentially. Foreign exchange contributed approximately $6 million to sales during the quarter. Looking at our globalized initiatives, Injectables continued delivering quarter-over-quarter growth with a record second quarter results. Positive lead indicators on sales pipeline, new product uptake and new orders signal continued growth momentum in this high-margin segment. [indiscernible] continued its double-digit growth trajectory versus prior year, fueling capacity release initiatives. Turning to innovation. Growth was supported by expanding adoption of low nitride oral solid dosage excipients and high-purity injectable and bioprocessing products. New product success in this segment reinforced Echelon's differentiation in regulated, high-value markets fully aligned with our growth strategy. Looking ahead, we have positioned the second half of the year for multiple new product launches across oral solid dose injectables and Crop Care, supporting sustained growth and portfolio renewal. These initiatives continue to reinforce portfolio differentiation and long-term growth opportunities. Turning to profitability. Adjusted EBITDA was $50 million, down 11% year-over-year. Adjusted EBITDA margin was 29%, reflecting the combined impact of modestly lower pricing and higher costs, including approximately $5 million of weather-related disruption and Calvert City start-up delays during the quarter. These headwinds were partially offset by favorable mix, disciplined execution and foreign exchange, which contributed approximately $3 million to EBITDA. Importantly, underlying pharma demand remains resilient and recently announced pricing actions are now being implemented across the portfolio. Life Sciences continues to benefit from durable end market fundamentals, strong customer engagement and sustained momentum across our Innovate and globalized pillars. Please turn to Slide 11 for Intermediates. Intermediates operated in a challenging but stable trough market environment, consistent with expectations entering fiscal year 2026. Demand conditions remain stable with sales and pricing at trough levels across the BDO value chain. Sales were $35 million, down 5% year-over-year, reflecting continued pressure across the BDO value chain and commercial and operating impacts related to the Calvert City outage. Merchant sales were $26 million compared to $27 million last year as our relatively steady volumes were partially offset by modest pricing pressure and disciplined commercial actions, including controlled merchant activity. Captive BDO sales were down approximately $1 million year-over-year, primarily reflecting the Calvert City impacts during the quarter. Foreign exchange provided a modest $1 million benefit to sales in the quarter. Turning to profitability. Adjusted EBITDA was $5 million, up from $2 million in the prior year quarter. The improvement reflected disciplined cost management and favorable manufacturing input actions, which more than offset Calvert City-related impacts and ongoing pressure across the BDO value chain. Now I will turn the call over to Jim to discuss Personal Care. James Minicucci: Thank you, Alessandra. I'll now highlight our Personal Care results. Please turn to Slide 12 for Personal Care. Personal Care delivered resilient results, supported by broad-based demand and strong execution across the portfolio. Sales were $150 million, up 3% year-over-year or 4% on a comparable basis, driven by growth across all 3 business lines. Biofunctional actives delivered another quarter of double-digit growth, supported by continued adoption of [indiscernible] and customer expansions across Europe and North America. Microbial Protection delivered robust growth across the portfolio and geographies, driven by new customer wins and continued share expansion. Within Care Ingredients, the portfolio remained resilient with strong growth across hair and skin care categories, particularly in Asia Pacific and Latin America. Previously reported customer-specific outages from the prior quarter have now returned to more normalized levels. Foreign exchange contributed approximately $5 million to sales during the quarter. Turning to innovation. Biofunctional Actives recently launched Essernonite, our 2026 flagship ingredient. Essernonite targets key skin longevity markers and was recognized with an industry award at the In-Cosmetics Global event earlier this month. Care Ingredients launched a new hair care conditioning polymer from our VR technology, which is already gaining customer adoption. Overall, Personal Care continues to benefit from strong momentum across our globalized and innovate platforms, reinforcing growth in consumer-focused applications. Turning to profitability. Adjusted EBITDA was $43 million compared to $44 million in the prior year quarter. The slight decline was driven by operational outages from weather-related events, which were predominantly offset by volume growth and mix. Adjusted EBITDA margin was approximately 29%, demonstrating the strength of the portfolio and benefit of ongoing commercial and productivity efforts. Foreign exchange contributed approximately $2 million to EBITDA. In summary, Personal Care delivered robust sales growth across all 3 business lines, demonstrating strong margin resilience, disciplined execution and meaningful progress across its innovate and globalize initiatives. With that, I'll turn the call over to Dago to review the results of Specialty Additives. Dago Caceres: Thank you, Jim. Please turn to Slide 13. Specialty Additives operated in a mixed demand environment during the second quarter with performance varying by end market and region. Overall results reflected disciplined commercial execution with targeted pricing actions supporting share gains and specific operational headwinds. Sales were $134 million, flat year-over-year as volume growth for the second consecutive quarter was largely offset by softer pricing and the lapping of a difficult prior year comparison following share losses in China. Breaking down the segments, Architectural Coatings returned to year-over-year growth, supported by share gains and new product traction. Volume trends improved relative to prior quarters as commercial initiatives gained momentum, while underlying demand remained generally flat with continued regional variability. Construction volumes were lower, reflecting deliberate portfolio mix management actions associated with network optimization and relative muted end market demand. Other end markets were mixed with volumes growth in Performance Specialties offset by softer energy demand tied to customer-specific impacts in the Middle East. Pricing declined modestly year-over-year, reflecting targeted share gain opportunities. Foreign exchange contributed approximately $4 million to reported sales. Turning to profitability. Adjusted EBITDA was $16 million, down from $26 million in the prior year quarter. Adjusted EBITDA margin was 11.9%, reflecting softer pricing and higher manufacturing-related costs, including approximately $2 million from weather-related disruptions, a discrete bad debt reserve related to a Middle East energy customer as well as productivity challenges associated with the Hopewell scale-up, notably regarding the HEC scale-up. Product quality and customer service levels have been maintained and achieving profitable scale remains a key operational focus. While near-term performance has been impacted, these actions are expected to enhance long-term reliability and cost efficiency across our cellulosics network. All other sites continue to operate reliably and our global network supported uninterrupted customer supply. Overall, the focus remains on targeted actions to improve operational performance, strengthen cost control and advance differentiation across the applications, positioning the business to benefit as market conditions normalize. With that, I'll turn the call back to William. William Whitaker: Thanks, Dago. Please turn to Slide 15. Given recent geopolitical developments in the Middle East, I want to briefly highlight how Ashland is positioned in this environment. Starting with exposure. Ashland's direct exposure is limited and manageable. The Middle East and North Africa represent approximately 5% of total sales, largely concentrated in Turkey and Egypt, and we have no manufacturing footprint in the region, which significantly reduces operational risk. From a cost perspective, Ashland is structurally advantaged. We are less reliant on petrochemical and energy-intensive feedstocks across our portfolio. Energy-intensive inputs represent roughly 15% of sales with the majority sourced from North America, supporting lower cost volatility and more resilient margins as energy prices fluctuate. The team is advancing pricing actions to address cost escalation. And given the additives represent a relatively small share of our customers' overall cost structure, we expect to be able to recover these increases. From a demand standpoint, visibility remains solid, supported by a strong order book and a portfolio concentrated in resilient consumer-facing end markets, including pharma and personal care. Finally, based on prior dislocations, we expect security of supply to become increasingly important to our customers. Ongoing geopolitical disruptions, antidumping actions and reassessments of single region sourcing are reinforcing the value of reliable diversified supply chains, positioning Ashland as a preferred partner for critical applications. Taken together, while the environment remains dynamic, Ashland's limited exposure, advantaged cost structure, resilient demand profile and supply chain reliability position us well to manage volatility. Please turn to Slide 16. I'd like to spend a few minutes on our execute agenda with a specific focus on manufacturing, including the challenges we encountered at Hopewell, our progress across the broader commitment and how this ties to our longer-term cost savings targets. Starting with Hopewell. Our HEC scale-up has progressed more slowly than planned, which impacted second quarter performance. As Dago mentioned, our product quality and customer service have been maintained. However, productivity, yield and cost performance did not ramp as expected. These challenges are execution related and internal, and we have taken targeted actions to address them, including tightening operating discipline, increasing leadership focus on the site and advancing specific technical work streams. While productivity has been below expectations, results have stabilized, and we are seeing sequential improvement. We continue to take targeted actions, though the financial benefits will take time to flow through the results. Importantly, the issues at Hopewell do not change the strategic rationale for the consolidation. The site remains critical to simplifying the network and lowering the structural cost base of our cellulosics platform. Outside of Hopewell, manufacturing optimization efforts continue to progress in line with expectations. VP&D and small plant consolidation initiatives remain on track with benefits weighted towards the second half of fiscal 2026. As a result of timing delays at Hopewell, our fiscal 2026 manufacturing optimization benefit has been reduced by approximately $10 million to $12 million. That reflects delayed realization, not a reduction in the underlying opportunity. Stepping back, our longer-term manufacturing optimization targets remain intact. We continue to expect $50 million to $55 million of sustainable annual cost savings with an opportunity to reach approximately $60 million as China volumes recover. Execute remains a core pillar of our strategy, focused on simplifying the footprint, improving reliability and strengthening cost competitiveness. While near-term execution has been uneven, the actions underway are designed to ensure we deliver the full value of the program over time. I'll address how this translates into our outlook and expectations for the remainder of fiscal 2026 in a moment. Please turn to Slide 17. I'd now like to briefly update you on the progress across our globalized and innovate platforms. Starting with Globalize. Performance has accelerated year-over-year with incremental contribution increasing approximately $8 million to $11 million fiscal year-to-date. Globalized businesses delivered double-digit year-over-year growth in the quarter and incremental sales are ahead of plan to date, reflecting continued traction from prior investments across our regions. Turning to Innovate, momentum has been even stronger. Innovate has already exceeded its full year target after just 2 quarters, reflecting accelerated commercialization across the portfolio. Performance has been supported by continued strength in high-purity pharma excipients with emerging contribution from GLP-1-related applications. In the quarter, Innovate delivered approximately $10 million of incremental sales, taking us past our original $15 million full year target. This reflects the strength and depth of our innovation pipeline, particularly in [indiscernible] as well as successful new product introductions across other parts of the portfolio. Based on the progress to date, strong executions across both platforms reinforce our confidence in delivering our fiscal 2026 $35 million combined revenue commitment from Globalize and Innovate. Please turn to Slide 18. I'll now walk you through our updated fiscal 2026 outlook, which reflects current operating conditions and a prudent view on near-term execution while maintaining confidence in the underlying strength of the portfolio. For fiscal 2026, we are updating our guidance as follows: For sales, $1.835 billion to $1.87 billion and adjusted EBITDA of $385 million to $400 million. We also expect adjusted EPS growth to be mid-single to high single-digit growth and ongoing free cash flow conversion of approximately 50% of adjusted EBITDA. The updated outlook reflects softer energy-related demand tied to the Middle East conflict, reduced EV-driven demand and slower-than-anticipated productivity at Hopewell. This is partially offset by resilient demand in core end markets, ongoing price actions and continued growth across our globalized and innovate platforms. In addition, key assumptions underlying the outlook include Life Sciences and Personal Care are expected to remain resilient, supported by stable end market fundamentals, continued portfolio progress and encouraging early third quarter demand trends. Specialty Additives and Intermediates markets remain stable at trough levels with any recovery in coatings expected to be gradual and regionally uneven. Raw material and logistics costs are trending higher, reflecting geopolitical-driven volatility, although recent pricing actions are expected to offset these impacts. Performance remains second half weighted, consistent with historical seasonality. Given these factors, we believe it is appropriate to remain prudent while continuing to manage production, inventory and free cash flow with discipline. With that, I'll now turn the call back to Guillermo to discuss our technology platforms and share some closing thoughts before we open the call for questions. Guillermo? Guillermo Novo: Thank you, William. Innovation remains a core driver of Ashland's long-term value creation and the progress we're seeing in fiscal 2026 reinforces the strength of our pipeline. Slide 19 highlights 3 innovation platforms that demonstrate how we are translating science into scalable, differentiated growth opportunities across multiple end markets. Importantly, these are scalable technology foundations supported by customer collaboration, regulatory progress and clear paths to commercialization. Starting with transformed vegetable oil. This platform continues to move towards early commercialization. Customer trials are progressing in crop care, regulatory milestones are being achieved and TVO-based solutions are expanding into personal care, coatings and industrial applications. Turning to super wedding agents. Customer feedback remains strong, particularly in personal care. Originally developed within Specialty Additives, this PFAS-free silicon-free technology is expanding across multiple end markets. Finally, bioresorbable polymers continue to gain momentum across high-value medical applications, including long-acting injectables and medical devices. Beyond these platforms, we continue to advance adjacent innovation programs across personal care and coatings, including new multifunctional starches, pH neutralizers and next-generation rheology solutions with multiple global launches planned in fiscal 2026 and early regulatory progress supporting broader commercialization. Taken together, these platforms demonstrate Ashland's ability to translate science into scalable growth, combining strong technical capabilities, global manufacturing expansion and deep customer relationships to support value creation over time. Please turn to Slide 20. As we look ahead, I want to briefly outline the leadership priorities guiding our actions as we strengthen the foundation of the business and position Ashland for sustained performance beyond 2026. Our full year expectations reflect both the underlying strength of our portfolio and the reality that our operating performance this year has fallen short of our standard. While the market environment remains mixed, the fundamentals of the business continue to provide resilience. Performance in the second quarter was impacted by specific internal manufacturing challenges. These issues are disappointing, but they are internal and within our control and addressing them is a top priority for the leadership team. We are making targeted disciplined actions to improve operational reliability, cost performance and consistency of execution. At the same time, several elements of our strategy continue to progress. As William highlighted, innovation and globalize momentum remains strong. Cash generation and balance sheet discipline remains central supporting resilience in a volatile macro. Portfolio simplification and structural actions are strengthening the foundations for improved performance as execution stabilizes. As we move forward, our priorities are clear: Operational -- operate safely and reliably with a focus on consistent customer service, stabilize and improve manufacturing execution, execute pricing actions to offset raw material inflation while actively managing supply chain volatility to strengthen resilience, convert innovation momentum into commercial results using our global platforms. Fiscal 2026 is a year of strengthening the foundation. While near-term manufacturing performance has fallen short of our expectation, the strategy remains sound and our actions are focused on restoring delivery against our commitments. With a more focused portfolio, resilient end markets and clear operational road map, we are positioned to manage near-term challenges while building towards improved performance in fiscal 2027. I want to thank our Ashland employees for their continued commitment during a demanding period. And I thank our shareholders for their continued engagement and support. Operator, please open the line for Q&A. Operator: [Operator Instructions] Our first question comes from Josh Spector of UBS. Joshua Spector: I was wondering if you could talk a little bit more about price/cost dynamics. I think from the prior energy cycles, you guys have been a bit more of a beneficiary because of some of your back integration and then it's just a matter of timing for pricing to catch up. But you've lowered your sales guidance for a couple of different reasons rather than raising it with higher pricing. So I'm curious if you could talk about that a bit more around how you expect that to play out in the second half or if that's a little bit more of a longer duration thing or if I'm just thinking about it in the wrong context here. Unknown Executive: Thanks, Josh, for your question, a critical question in this environment. Let me answer first on pricing and then on how we adjusted some of the guidance. So first and foremost, on the pricing, we're moving. We've announced each business is executing on that, given cost differences in different regions. It's region by region, product line by product line that we're doing it. Like in 2022, we're moving quickly. We're not a big part of the cost of our customers. We're not as petrochemical exposed. So our increases overall to cover cost is not that significant. So the quicker we can move, get out of the way of our customers, they've got bigger problems that they need to address. That's our objective. So we are moving at that, and we're already starting to get some of that benefit and will start flowing through this month and into the coming months. We're moving -- just also to clarify, we're moving both on price increases and surcharges. That depends on contracts, how we need to move. I think the market understands the dynamics Obviously, you have to do the dance with customers on timing, magnitude and all that, but we're making very good progress. If you look at our guidance, I think we are -- it's a very uncertain environment right now with many things. So our trim of the high end of the sales guidance was really more driven by things we know. Energy & Resources, we are seeing -- it's not a big part of our overall exposure, but we do have some business in the Middle East, and we're seeing that coming down both in terms of sales. Also, we had some credit issues, but we believe will recover later on. But right now, in this environment, I think it is having a little bit of impact. And also, we're seeing a lot of delays in the EV projects for intermediates. So that's basically what's driving it. On the pricing side, it is an upside. And we didn't put it up or factor that in, but there's still a lot of uncertainty in the macro market. And I think the biggest issues that we're looking at is will demand start picking up again in North America, for example, coatings. North America and Europe, we're not seeing any improvement. So we want to be prudent on that. So I would keep the pricing dynamic more of an upside in these numbers. Joshua Spector: Okay. That's helpful. Maybe just quickly within Life Sciences. I think you noted the downturn you saw in Nutrition and talked about customer order timing. And I know that's relatively small, but do you have visibility to that coming back? Because I think most of your comments broadly where demand was more resilient across Life Science and Personal Care, and that's kind of maybe one outlier to that dynamic. Unknown Executive: Yes. No, we're trying to be transparent on the specific segments. I'll ask Alessandra to comment. But overall, I would say Life Science and Personal Care are moving positively. We're not talking, for example, we've lapped all the things, but just to be clear, in the case of Personal Care, as an example, we did have some sales last year. So the growth is actually a little bit stronger. So overall, all the segments are doing pretty well. But Alessandro, if you want to talk -- it's not a big issue. Alessandra Assis: Yes. Just talking a little bit about the non-pharma nutrition. So we have had -- as we talked about, we have had recent wins and the ongoing commercial activity does support the growth that we are projecting for the third and fourth quarter. Josh, it is timing. There was some order timing on Nutrition, but we are confident on on the wins that we're seeing and the commercial activity. It is just a timing, but we see the improving traction. Operator: Our next question comes from Laurence Alexander of Jefferies. Kevin Estok: This is Kevin Estock on for Laurence. Just on your revised outlook, so $385 million to $400 million EBITDA, I guess, could you help frame what sort of what needs to go right from here to get to the top end of that range, maybe particularly around like operations and pricing realization? Unknown Executive: I think as we said in the other one, pricing is an upside. So the net impact of pricing and macro demand outlook and it's probably mostly in Specialty Additives and Intermediates. There is opportunity for some upside there. Those are the 2 big things, and we're just being prudent and conservative in terms of not including them at this time given the uncertainty. And we're listening to our customers. If you look at the coatings customers in North America, Europe, nobody -- everybody is being more prudent. So I think it's better to be prudent and perform on the upside if those markets get strength. just to add a little bit more, as you think about the range on the guidance, it's mostly on the sales side. So as you look at the lower end of it, at the low single-digit year-over-year growth rate, most of that's driven by some of the activity on the pricing side, which, of course, then implies flattish volumes otherwise. But as you look on the higher end of it, it's closer to a 6% to 7% sales growth rate, and it's balanced across both volume and price. And as you look at the volume side, credit to the team, it's been a really strong start on the Globalize and innovate, and we expect that to continue. So what gets you on the higher end is your delivery growth outside of the Global and Innovate. Operator: Our next question comes from Jeffrey Zekauskas of JPMorgan. Jeffrey Zekauskas: If you total up all the onetime events in Specialty Additives in the quarter, how much was that? And do you expect Specialty Additives operating income to grow in the third quarter? Unknown Executive: So Jeff, 2 comments that I would say, in line with the question, but I'll broaden it a little bit. The bigger year-to-date impact was the Calvert City, which impacted all the business, mostly life science and personal care. And that was equipment failure, downtime. It was just waiting to get the equipment delivered. It was just the lead times. We weren't -- there was nothing that we were doing in that period of time other than waiting. So it was more of an absorption impact, and that was the bigger impact for the full year. And obviously, we have a little bit of the weather and all that. But focusing on Calvert and Hopewell. Calvert was the big one. That plant is back on stream and producing did impact sales per se, but a lot of absorption. We're moving back. Hopewell is -- it had some impact in this quarter, but it's really moving forward. Our production rates are not where we want them to be. So the plant is operating -- the budget is above our expectation and the production rates. We're not producing at the rate we want. So again, from an absorption perspective, those are the big impacts. I would say between the 2, I would say 20-ish in the -- between the weather and Calvert on the front end and another $10-ish on the Hopewell in the back end, just to be very high level on some of those products. So for us, this is -- to be very clear, all the other areas are performing per our expectation. If would have should have could have, but $30 million is an internal issue, does not reflect some of these -- our overall core performance. So overall, this should have been a much better year. We're very frustrated, obviously, as everybody is on our operating performance, but those are internal things. We're working them. As I said, Calvert is back online, and we already have the resources the investments in place going on in Hopewell to get the productivity back in line. The other issue that I would point out in terms of our EBITDA impact is we are not planning to make significant inventory rebuild, okay? Given the uncertainty, we are focused right now on specific product lines. The Calvert City outage did help us bring down inventories and normalize them. There are specific products that we're going to build up. Similarly, with the HEC, we built up inventories for the Parlin transition, and that is coming. And we will build on specific product lines, but it's not a broad base. We feel very good of all the changes that we've made in the sense of timing. We've reduced the overall cost structure of the company. lin out, we've reduced the operation of specific units in our BT&D network. All that has reduced our cost base and our need for absorption. So that puts us in this uncertain environment in a better, more stable operating environment in terms of our normal production rates that we need to do. So these are specific plant issues that we're addressing at this moment. And Jeff, on the specific question around Specialty Additives operating income or EBITDA in the second half, a key piece of the Hopewell adjustment, right, the 10 million to 12 that we cited material sits within Specialty Additives. So on that basis, I would expect Specialty Additives down year-over-year. Jeffrey Zekauskas: Okay. And then in the intermediates and solvents area, there have been all of these different duties that have been placed on U.S. producers and offshore producers in Europe. Does that affect you? And when you think about the EBIT or EBITDA generation of I&S, what's the trajectory from here? Are we going down or up or nobody can tell? Guillermo Novo: So Jeff, I would say 2 things. And I would split up our back integration, which is BDO related and the competitive dynamics. So BDO costs are increasing for China overall production. So we would expect that if you look at our -- we're in this business to support our VP&D back integration that should be favorable from a competitive environment perspective because the cost structure for Europe and Asia is going up. We're mostly U.S.-based natural gas, butane based. So we're in a good position. So that's favorable for the entire company. If you look at specifically intermediates, we don't sell a lot of BDO. It's more the derivatives. We are seeing pricing. The business is operating stably in the trough the trough now for several quarters, but it's stable. I think the issue right now is as price inflation comes, that will drive some improvements. Hopefully, given our lower cost structure, that will be an upside potential. Just today, Alessandro was mentioning the [indiscernible] BDO numbers came up. So prices are increasing overall in the U.S., 5% to 6%. So there is good momentum to support. But I don't know if you have anything else you would add, Alessandra. Alessandra Assis: Yes. No, that's right. We announced price increases this month we are implementing. And Thermo, as you mentioned, right, the cost implications, U.S. versus China are different. And we do see a market stabilization and less erosion from a pricing standpoint. Prices are have started to move up with the cost implications. But availability remains -- it's basically this market are different when we look at -- when you compare to other markets that are -- other segments, right, being impacted by the Middle East conflict. So definitely, even though costs are going up, there's still a supply-demand dynamics and not a lot of impact from availability. The availability is not changing significantly in this market with the Middle East conflict. So we are moving forward with prices increases, but of course, managing the supply-demand dynamics. Unknown Executive: And Jeff, on the margin side, the Lima -- we did slow down Lima as part of the Calvert City because obviously, that feeds into the Calvert City. So we had to slow that down. So it did have an impact in terms of absorption. But all that is now normalizing with Calvert City picking up. So the cost side should be more normalized as we move forward. Operator: Our next question comes from Michael Sison of Wells Fargo. Michael Sison: Just curious how you think about 2027, I know it's a little bit early to give any specific guidance. But just directionally, what the run rate should be? And what are the pushbacks that we should see next year? Guillermo Novo: So Mike, just high level and then, William, if you want to give other comments. I mean we're not ready to talk about 2027, but just high level, what we're seeing right now. Obviously, macro uncertainty is what everybody questions. We don't have a crystal ball. But I would say if you look at this year, the business mix, we've done all the work. It is performing as we expected. All the businesses, obviously, Life Science and Personal Care on resilient. So we would expect that to continue. The Specialty Additives is stable. I think we're gaining volume. coatings as an example, this year, we will get volume growth for the year, and that's about share and going back into the market. I feel very good about what Dago and the team is doing. The response now is much more high-end response in the market. We're launching a lot of products with different price points. So we're not just dropping price. We're giving customers, hey, choices on different price points of what we can do. We can be competitive. We can change cost performance. So I feel SA is well positioned to continue to drive share gain. And obviously, the expectation would be -- is more the question would be is North America and Europe going to start to improve. We don't see China improving a lot in the foreseeable future in terms of macro demand in the construction side. We've streamlined the manufacturing. I'll repeat it, this has been a challenging year of internal operating issues, but our cost structure, the footprint changes, all those things make us stronger, more competitive and we have a lower cost base. So that should continue taking out a lot of these issues that we had this year, that should be additive to next year's performance. It should have been additive to this year's performance. The Globalize and Innovate continue with good momentum. So we'll still continue to work that. Then we continue to improve our systems and processes to give more visibility to our regional management teams as they start driving their P&L. We're pushing a lot of these activities to the front line so that they can have more ownership and accountability for driving performance. So our goals moving forward remain, if you look at the 5 5% growth is a target overall for the market, plus or minus a few percentage points, getting back to the 25% EBITDA margins and 55% free cash flow conversion. And just, Mike, we don't want to get into -- we don't want to be premature to get into the specifics on '27, but just a couple of things to keep in mind that we spoke to. One, first half this year at the VLO, right, both the outage as well as the extension as well as weather, which is a $20 million impact in the first half of this year. Two, the team continues to do a really good job. So we're focused on [indiscernible], of course, because it's not in line with our expectations, but BP&D and the small plant consolidation, all of that work is progressing. And so you'll continue to expect some carryover benefit from that. Hopewell, the team is doing work. We're committing to improving operations, particularly in the second half this year. We'll start to get some carryover sequential benefit going into fiscal '27. Of course, this is very dynamic on price raws. But right now, of course, that's a key piece of the carryover next year, some of the pricing activity as well as raw material. And then to Guillermo's point, volume growth contribution, mix benefit over time as we drive to globalize and innovate. And really, the only piece on the offset side, of course, is that we have to manage cost inflation. So I think there are several things that point to a nice recovery going into fiscal '27 and a lot of it's in our control. Operator: Our next question comes from Steven Haynes of Morgan Stanley. Steven Haynes: I wanted to just come back to the price/cost dynamic for a second. Is there any way to maybe just put a finer point on the magnitude of how much price you're expecting to achieve versus how much cost is going up? I'm just a little -- and maybe I'm sorry if I missed this somewhere earlier in the call, but is the midpoint of the guidance assuming that that's neutral this year? Or is it expected to be a net positive or net negative? If you could just put a finer point around all that, that would be helpful. Guillermo Novo: Thanks, Steven. It's a good and it's an important question. So I think, first of all, let me just anchor on what we've said in the call, and then I'll add some additional color. So the good news for us, right, is that we purchased a number of our raws that are from the U.S., right? And so even those that are energy-intensive or petchem derived, a lot of that is sourced in the U.S. And so the way that we've been sizing this is around the percent of sales, just to help from your framework perspective. So overall, we group energy-intensive raws as well as petchem linked raw materials and freight because freight is obviously moving to. That's roughly 20% of sales. 15% is the raw material basket, 5% is freight, so 20% overall. So even though we are well positioned, we're, of course, not immune to what's going on in the world from a volatility perspective. Some of our processing inputs are up, of course, and that varies a great deal by product line and by region. So if you isolate that 20% exposure of sales and assume it's up 10% to 15%, you'll get a sense of the increase that we're seeing on the cost structure. As I'm sure you can appreciate, there's lagged components, both on pricing and raws. I would say on the raws side, the lag is a bit longer. So you do get some favorable price raws benefit in the second half on that basis because of our inventory position. But I'd say really the key piece for us is given that magnitude, 10% to 15% on that 20% of sales, the team believes it's a manageable exposure for us, and it's one that we can manage to cover. And overall, I mean, we're talking -- you could get 20%, put an inflation number to that. That's raw material, we're in the single digits. We've announced -- it depends by region. There are product lines that are much higher. So I don't want to generalize, but 3% to 8% in general has been sort of the numbers that we've been giving, I would say, if I average out some of the numbers. We don't want to get into specific. We're negotiating with customers and all that and the specifics, but it's a very doable number for us, and we've had a good track record in moving that through. Operator: Our next question comes from Chris Parkinson of Wolfe Research. Christopher Parkinson: So just a broad-based question. When you look globally at pretty much every one of your competitors and knowing it's fairly fragmented, but across VP&D, across cellulose, across HEC, essentially every single supplier has been raising price. And I'm a bit confused in terms of the disconnect in terms of the customer acceptance or, let's say, not acceptance as quite yet in terms of that because it doesn't seem like anybody is really budgeting into kind of the middle part of this year. And at the same time, in certain geographies, people are potentially facing even shortages based on the fact that the supply is at fairly low availability right now. So what are you actually hearing from your customers? Is this a when, not an if? Or just how would you kind of characterize the dynamics heading into the middle of the year? Guillermo Novo: I don't think it's an if. I mean things are moving. So we're -- like I said, we're moving across the board. Everybody understands the dynamics of what's going on and we're moving. So we're not questioning our need or ability to do the pricing. That's moving, and we expect that to deliver. What we're trying to make sure everybody understand is that we are not as petrochemical exposed. So our numbers are the necessity. We don't make -- our margin expansion isn't driven by increasing prices in this kind of environment. We want to recover our inflation, our margins so that we don't get erosion into it. And I think our customers know that. But we do -- our overall margin performance is driven by value pricing and by managing our cost structure. And value pricing is going very well, especially as you look at some of the newer products. The price increase inflation is going very well. Obviously, this year, we've taken a lot of strategic actions on the cost, but that's where I would say we underperformed in our internal with 2 of the plants. Christopher Parkinson: And just as a very quick follow-up, just in the personal care market, at the beginning of the year, I'd say the end of '25 into '26, there were some rumblings of some inventory destocking here and there. At the same time, it does seem like you're seeing pretty substantial improvements, especially in some of the biofunctionals. What are you hearing from customers in terms of the balance of the year in terms of end market demand, inventory management? It seems like things are back on track, but what is your degree of confidence on that? Guillermo Novo: Do you want to comment Chris, so in Q1, in the December quarter, as we mentioned, excluding some of the specific customer outages, we were up low single digit, and we continue to see momentum in this quarter as we're up low to mid-single digits. I would unpack that into 2 parts. There's the base and then there's the actions that we're driving. So if you look at our biofunctional actives, the base continues to perform well. And we've had really good success expanding our customer base and getting our new products adopted and ramped with customers. Similar, microbial protection, the base is holding well, and the team has done really a phenomenal job converting our pipeline and continuing to gain share in that business line. And even our care ingredients, that was the one that was impacted by the customer outages in Q1. They're back online, and that's going to continue to flow through the balance of the year. So as we look out through the rest of the year, we see the market remaining relatively stable. There's the things that we're driving in our globalized business lines that we expect to continue to flow through. And then we'll continue to monitor how the base performs through the balance of the year as it is dynamic, although we still see fairly robust demand. Operator: Our next question comes from David Begleiter of Deutsche Bank. David Begleiter: Guillermo, just on the price/cost fill in F Q3, how much of a tailwind is that dynamic? And what would you expect as well for F Q4? How much of a tailwind, a dollar EBITDA tailwind do you expect price loss to be for you guys in F Q3 and [indiscernible] Guillermo Novo: So I mean, for the price raws, the inflation, most of it will start hitting us a bit later. So our issue is getting the pricing in line. I mean the costs are coming up and it will flow through into our inventories for now. But we want to make sure that we're getting our costs -- our pricing in place to cover that as we move forward. So we haven't really outlined specifics on the price increases and the flow-through, but that's already starting to come this month, and it's building in. So we'll be reporting more as we go forward. But it's more of a timing issue. We do -- I would say, for the spot business, I think we'll be moving spot non-contract business, we will be moving in faster. I think we have a lot of contract business, especially if you look at pharma and some of our bigger customers. And that's where we're working with them on the timing. But we're not uncertain about the magnitude of the increase that we're getting at this point in time. But we don't have a specific number to give you at this point in time. David Begleiter: Great. And on the revised EBITDA guidance, was there a change to incentive comp accruals for this year? Guillermo Novo: Not significant. I think the biggest issue would be on the Specialty Additives. Obviously, there was some impact on -- given some of the operating issues, but we're working it, but it's not a significant impact overall because we -- for the majority of the organization, it's business by business in terms of incentive comp. Operator: Our next question comes from John Roberts of Mizuho. John Roberts: What's the route engineering cause of the Hopewell ramp-up issues? Are you doing something differently there than at other HEC sites? Guillermo Novo: Yes. The whole issue in Hopewell, remember, we shut down Berlin. We changed the mix of the plant significantly. We had just brought on some investments in capacity at the end of last year in terms of HEC overall capacity, but the mix change is really what is driving the productivity. So we're putting a lot of investments in, in terms of enabling the new mix. So we're producing -- we're getting the products we want, but it's not at the production rates that we wanted. And I think that's the biggest issue. But the teams are already working on it. The budgets were a little bit higher, and that is, I would say, 2 things. One is on our own performance. The other one is we are putting more resources to drive those improvements in the near term. David Begleiter: And then in Personal Care, there was a range of growth from high single digits in skin care to low single digit in Oral Care and Home Care. Is there just more innovation going on in skin care that's driving that? Or is there something else just in the comparisons to cause the unevenness? Guillermo Novo: Let me -- a high level, but then you can comment. So it depends on the product line. Obviously, a lot of the biofunctional actives and actually micro goes into the skin care and those areas. So it's a product mix. And it's the base business, but Jim can give more color on especially on the base business. Absolutely. Yes. So John, as you mentioned, I mean, a lot of our innovation and globalized businesses are both focused in skin and hair, and that is the majority of our Personal Care business, and we're seeing really nice growth in both of those segments. In Oral Care, we also -- and as no surprise, we've shared it in the past, we do have sometimes order pattern timing. And so we are seeing some shift again this year in order pattern timing, fine for the full year. And so that's driving some of maybe the lower comps on a prior year basis. And you'll see that step up as we go through the balance of the year in oral. Operator: Our next question comes from Mike Harrison of Seaport Research Partners. Michael Harrison: I had a question on Life Sciences. The last time we went through a round of supply chain disruption and kind of an inflationary cycle, you guys ended up picking up some market share kind of temporarily in the pharma space and then you ended up giving it back. Just curious, could we see that kind of dynamic again given maybe some of the challenges that your competitors are seeing in Europe and Asia? And how would you approach the situation differently to make sure that you're generating more durable share gain with some of your customers? Guillermo Novo: So Mike, let me high level and Alessandro, if you have anything specific, but just at a high level. I mean in this level of uncertainty with the war, all the news and analysis that we're getting would be, hey, if this persists, the cost structures for China or Asia in general, India would also be impacted and also for Europe would increase. So we are one of the few large producers in that product line from the Western world and we're U.S.-based. There's not a lot of other production at our scale in the U.S. Most of our competitors are either in Europe or in China. So there is an opportunity. I think as Alessandra said, there is not a shortage at this point in time. So that would be not an issue of cost. I think, would be more of an issue of availability, especially for Europe and for China. So there is an opportunity that, that could evolve as we move forward. I think what would we do? Obviously, I think, one, just this risk reinforces for customers the need to be balanced in terms of their supplier base and having a balance and a U.S.-based good energy costs, good position from a cost structure is obviously a favorable reminder for everybody, and I think that plays well for us. But obviously, we can do if that scenario starts to play out, there's things that we can do in terms of contracts and how we want to play it. But I think importantly, we would also be very clear with everybody on what's -- what are some of these share shifts that are permanent versus that would be transitory. And -- but we would maximize our performance as orders come in. But if you want to -- anything else you would add? Unknown Executive: Yes. As Guillermo mentioned, there is not a shortage at this time, but we are seeing as we have the largest -- the broadest portfolio from an excipient standpoint in the pharma industry. We are a reliable, high-quality supplier. So definitely, we have seen in the last month. I mean, customers nervous about their business continuity plans, BCP plans and looking at dual sourcing. So that opens opportunities for where we didn't have participation. So definitely, we see this as -- there are opportunities. And as Guillermo mentioned, making this more with long term as far as agreements. But definitely, we expect to see life sciences, specifically pharma continue to deliver healthy growth in the second half of the year and going forward, we see the resilience of the pharma demand, and we are working on basically capitalizing on the momentum of our globalized Innovate, which are areas where we have opportunities to grow our market share. So definitely, the disruption, we don't see a shortage, but it does bring us opportunities from -- as our customers work on their BCP plans. Guillermo Novo: One last thing, Mike, just on your comment, but just broader than just the VP&D question. I mean, there's a lot of uncertainty. And depending on how these things go, there's a lot of upside that can come in intermediates, I mean shortages. If things get worse, there's a lot of upside. We don't have a crystal ball. We don't think it's prudent just to be overly positive with the guidance that we're giving, especially on the revenue and the core businesses, the core performance of the business portfolio. I think we're in a healthy growth, healthy momentum, and we don't want to be overly optimistic and surprised on that side of the equation, and we're being transparent about it. I think on the EBITDA side, same thing. If that picks up, it will translate into greater EBITDA. But again, we're going to be more conservative. I think we're acknowledging our internal issues, but we want to be -- we're very pleased with all the broader external macro issues. And we do recognize that there is upside on pricing impact and that there is upside on -- if demand tightness increases. Operator: Our last question comes from John McNulty of BMO. John McNulty: I just wanted to revisit the commentary around the innovate part of your kind of midyear progress. So I think you were looking for $15 million for the year, and you're at $16 million already. I think you did $6 million in the first quarter of sales, that means $10 million in the second. So clearly, things are coming in, I think, better than what you expected and you're on pace for potentially coming in double what the target was going to be. I guess can you help us to think about where you expect to end the year in terms of a run rate, just so we can think about how some of that innovation may drive growth as we look into 2027? Guillermo Novo: I think the way you described it is sort of how we see it. I mean this is a cumulative metric for the year. So if we already gained the business and it's at a certain run rate, if it continues, we will continue with that level of performance. So that's sort of our expectation. As a reminder, I mean, we're -- from a dollar perspective, it's a lot of the core innovations that we've been working on, and it's a very, very healthy growth, both, I would say, right now, pharma and personal care driving a lot of it. But we're launching a lot of new products. So I think there's -- the opportunities for continued momentum there, both with core in the near term. And I would highlight that I'm very excited on the progress that the team is making on some of the new platforms in significant projects, be it in personal -- especially in personal care and the Specialty Additives. In Life Science would be more ag pharma takes a longer pipeline. So it's going to take a little bit longer for those things to take off. But all of them, we're really confident -- we've proven the value -- the technical and performance value of these platforms. The teams are now really working on product development, specific customer projects to tailor the technologies for them. So both in the near term, but more importantly, in the long term, we see continued momentum there. Operator: I am showing no further questions at this time. I would now like to turn it back to the CEO, Guillermo Novo, for closing remarks. Guillermo Novo: So thank you, everyone, for your time and your interest. Just wanted to reiterate the 3 big points that we made. From the business side, we're really happy with the overall performance of the businesses, the market trends, be it resilient life science, personal care, stable, specialty additives with growing momentum around share gains, Intermediates stable on the trough with opportunities depending on market dynamics to improve, globalize and innovate very strong. Competitive dynamics have been -- continue to be strong, but stable. So that is giving us room to really start to drive our own agenda moving forward. And we haven't seen any significant prebuying of our things. So overall, the business side of things are moving probably stronger on the stronger side of our expectations. We are moving on pricing, and there is upside in terms of the financial impact there. We're muting that a little bit just with caution on demand outlook in core markets that we don't have a crystal ball, and we're not seeing the immediate recovery. Coatings, North America, Europe is a big example. So we're following the lead of our customers and what they're saying. And lastly, it's the real issue for the outlook changes that we have is more our operating performance and our manufacturing, 3 issues that have impacted us, 2 are behind us. Calvert City, the equipment failure and the delays in getting the replacement equipment, which impacted our absorption, weather impacts. And right now, the big focus for us is Hopewell and getting it back on productivity. We are frustrated with that part of the performance, but we're working on it. That's in our control. It does not represent a view of the broader portfolio or all the bigger strategic actions, and we're confident that we will be overcoming that in the near future. So thank you for your time. We look forward to connecting with you after and answering any other questions you may have. Operator: Thank you for your participation in today's conference. This does conclude the program, and you may now disconnect.
Operator: Good day, and thank you for standing by. Welcome to OGE Energy Corporation 2026 First Quarter Earnings and Business Call Update. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to your first speaker today, Casey Strange, Investor Relations Senior Manager. Cassandra Strange: Thank you, Stephanie, and good morning, everyone, and welcome to our call. With me today, I have Sean Trauschke, our Chairman, President and CEO; and Chuck Walworth, our CFO. In terms of the call today, we will first hear from Sean, followed by an explanation from Chuck of financial results. And finally, as always, we will answer your questions. I would like to remind you that this conference is being webcast, and you may follow along at oge.com. In addition, the conference call and accompanying slides will be archived following the call on that same website. Before we begin the presentation, I would like to direct your attention to the safe harbor statement regarding forward-looking statements. This is an SEC requirement for financial statements and simply states that we cannot guarantee forward-looking financial results, but this is our best estimate to date. I will now turn the call over to Sean for his opening remarks. Sean? R. Trauschke: Thank you, Casey. Good morning, everyone. Thank you for joining us on today's call. This morning, we reported consolidated earnings of $0.24 per share, and the first quarter typically represents approximately 10% of our company's earnings for the year. Even with milder weather in the first quarter, we remain confident in our 2026 guidance and in the foundation we are building for 2027 and beyond. Chuck will discuss the first quarter financial results in more detail shortly. Looking forward, our planned actions for the remainder of 2026 are setting the course for the rest of this decade. I'm pleased to let you know in the coming days, we will file long-term special contracts with Google to serve multiple previously announced data centers in Oklahoma with the Oklahoma Corporation Commission. Google is the customer previously referred to as customer X and their expected load and ramp rate is consistent with our 2026 IRP. We work closely with Google to ensure broad customer protections, including minimum charges. Google will also pay 100% of the cost to connect to the grid and its fair share to power the data center sites. We've also secured capacity from 2 solar facilities currently under construction. We look forward to creating similar opportunity for communities in the future as we leverage our low electric rates to drive investment and foster economic growth for many years to come. As discussed last quarter, we are continuing to add generation through a thoughtful, measured approach. We commissioned the 98-megawatt tinker power plant in February and expect 450 megawatts of new CTs at Horseshoe Lake to come online in the fourth quarter. While also breaking ground on 2 additional 450-megawatt units. And we're still advancing the 300-megawatt Frontier Energy storage project. So including the aforementioned capacity agreements, this 1.7 gigawatts of capacity strengthens our system today and positions us well for continued growth ahead. These investments reflect a disciplined strategy to support customer growth while maintaining reliability and competitive rates. Continuing on the regulatory front, 2026 remains an active year. In Oklahoma, we are finalizing a stand-alone large load tariff and expect to file it with the Oklahoma Corporation Commission no later than July 1, providing a clear, durable regulatory path for future large load activity. We continue to prepare for a rate review filing later this year with new rates anticipated in '27. In August, we expect preapproval of the Frontier Energy Storage project. And as projects emerging from the RFP process we are -- process are selected and negotiated, we also expect to seek pre-approvals on a rolling basis rather than waiting for the full portfolio of projects to be complete, and we anticipate filing for these preapprovals throughout the balance of this year. In October, we expect to complete the acceptance of the notices to construct on directly assigned SPP transmission projects. So taken together, these investments underscore a deliberate forward-looking strategy to support customer growth and demand. The actions we are taking this year establish a clear foundation for the remainder of the decade while leveraging our low rates as a significant competitive advantage. With respect to competitive dynamics, we continue to believe our in-state pricing is a meaningful advantage in driving new business that we will protect. Importantly, we have not seen the type of price escalation some have pointed to in other markets, and we have the customer protections, oversight and regulatory framework in place to ensure it does not develop that way here. Last quarter, I updated you on recognition the company and our team received for our culture. And today, I can add another one to that list. In addition to being named a top workplace in Oklahoma, we were recently named the National Top Workplace by USA TODAY. We operate in a highly competitive labor market, and it's fulfilling to see our people, our culture, drive results, innovation and belonging. I couldn't be more proud to work alongside my outstanding colleagues. Their commitment to our purpose is evident every day and continues to drive excellence. and our commitment to making Oklahoma and Arkansas better places to live, work and play drives us to our North Star of delivering reliable electricity at low cost. Again, the steps we are taking in '26 will set the stage that drives our future success. So with that, thank you. I'll now turn the call over to Chuck. Chuck? Charles Walworth: Thank you, Sean. Thank you, Casey. Good morning, everyone. I'm pleased to review 2026's first quarter results with you and provide an update on our 2026 financial plan. Let's start on Slide 7 and discuss first quarter results. Consolidated net income was approximately $50 million or $0.24 per diluted share compared to $63 million or $0.31 per share in the same period of 2025. In our core business, the electric company achieved net income of approximately $58 million or $0.28 per diluted share compared to $71 million or $0.35 per share in the same period of 2025. The decrease in net income was primarily driven by mild first quarter weather and the timing of O&M year-over-year, partially offset by lower depreciation and interest expense on assets placed in service. The holding company reported a loss of approximately $8 million or $0.04 per diluted share, consistent with the prior year. Although first quarter weather was soft, there is plenty of runway left in 2026. We expect to achieve our consolidated earnings guidance of $2.43 per share with a range of $2.38 to $2.48, assuming normal weather for the balance of the year. Our service area continues to perform well with customer growth just under 1%. Weather-normalized load was stable year-over-year, reflecting temporary outages at a few large customers, particularly offset by strength in the public authority and oilfield sectors. Looking ahead, today's announcement reinforces a meaningful growth tailwind, building on a historically strong trajectory with approximately 24% load growth over the past 5 years. Underlying demand remains healthy, supported by strong local economies and our low-cost reliable business model. Against that backdrop, we continue to see strong momentum across our service area. As Sean mentioned, we will file energy service agreements with Google to serve its previously announced data center facilities in Muskogee and Stillwater. This is an important milestone and the result of a disciplined approach to structure, terms and risk allocation. The addition of a large high load factor customer allows OG&E to spread fixed system costs over a significantly larger customer base, creating downward pressure on rates for existing customers. Equally important, agreements like these include robust long-term customer protections, including multiyear commitments with minimum charges and exit provisions to mitigate stranded cost risk and strong credit support to fully back customer obligations. Working with Google, we've secured generation capacity from 2 solar facilities that Google had previously announced and that are currently under construction. These facilities will provide 600 megawatts of nameplate capacity, and we will request preapproval from both Oklahoma and Arkansas commissions for these CPAs. Turning to financing. In April, we completed a debt issuance at the electric utility, which satisfies our financing needs for 2026 under the current plan. As a reminder, we issued equity late last year to support incremental capital added to our long-term plan. And together, these actions position us well from a balance sheet perspective. We have flexibility between now and May 2027 to exercise the approximately 4.6 million shares in the forward equity agreements. We continue to target credit supportive metrics and expect to maintain FFO to debt around 17% over the planning horizon. Turning briefly to credit. Last week, Moody's revised the outlooks for both OGE Energy and OG&E to stable from negative and affirmed all ratings. Moody's cited a generally constructive regulatory framework in Oklahoma and Arkansas, including improvements to cost recovery mechanisms. They also pointed to balance sheet actions, including the 2025 equity issuance as supportive amid a growing capital program. Notably and consistent with our planning outlook, Moody's lowered the parent level downgrade threshold to 17%. Later this year, we also expect additional clarity on several important projects. In August, we anticipate an order in our Frontier battery storage pre-approval case. And this October, we plan to accept final notices to construct from SVP for our direct assigned transmission projects. As these projects are approved, we will roll them into our capital plan and communicate our financing strategy just like we did last year. In closing, we remain confident in our financial plan and our ability to execute through 2026. The actions we're taking this year are setting the foundation for the next 5 years of results. We are advancing a disciplined strategy that balances customer affordability and prudent investment, supported by a balance sheet that remains a key strength. With our financing plan for the year complete, important regulatory filings moving forward and guidance affirmed, we believe the company is well positioned to deliver results consistent with our commitments. With that, I'll turn back to Sean, and we'll be happy to take your questions. Operator: [Operator Instructions] Our first question comes from the line of Shar Pourreza. Whitney Mutalemwa: This is Whitney Mutalemwa on for Shar. So just to start off with the legislature process. Since the last update, HB 2992 has moved further along in Oklahoma and now it explicitly requires separate large load tariffs and cost causation protections. Does that legislation materially improve like your negotiating position with large load customers? Or were you already headed towards that substantially the same framework on your own? R. Trauschke: Yes. I would -- Whitney, this is Sean. I think it's clearly supportive of the direction we've been heading in our discussions with not just Google, but other large load providers. Protecting the existing customer base has been paramount to us from day 1. And I think what's important about the legislation is both of the authors of the legislation and the Senate and the House, we have and had for many years, good relationships with them. And we all want the same thing. We want the protection for customers, and we want the continued economic development and growth for the state. And so I think there's great alignment there. Whitney Mutalemwa: Of course. And just like as a mini follow-up, on the regulation side, obviously, you've pointed to an Oklahoma rate case review. Midyear and then potentially some Arkansas activity later in the year. So how are you thinking about just sequencing these rate filings so that you're preserving that like constructive recovery, but you're also avoiding the perception that large load-driven investment is crowding too much on customer bills at once? R. Trauschke: Yes. I think your use of the word sequencing is a good one. We're going to take these bids we're getting back from the RFPs. We're going to look at those and try to file those as quickly as we can. As we said in our remarks, we're not going to provide a full portfolio filing. We're going to file them as the negotiation is complete. And then we're going to have to sequence in there those rate filings in Oklahoma and Arkansas as well. So there's a full agenda for sure. But again, our intention around the large load tariff is to actually protect those customers. Operator: Our next call is Nicholas Campanella of Barclays. Michael Brown: It's Michael Brown on for Nicholas Campanella. My first question is, since you haven't filed the large tariff yet, can you discuss what you're looking for in this tariff? And what type of upfront capital commitments would you be requiring for your customers? And how can that kind of change your financing needs? R. Trauschke: Yes. Michael, I didn't get the middle part of that you [indiscernible] out there. You talked about capital commitments. Can you repeat that? Michael Brown: Okay. Since you haven't filed a large tariff yet, can you discuss what you're looking for in this tariff? And what type of upfront capital commitments would you be requiring for your customers? And how can that change your financing needs? R. Trauschke: Yes. So I think we would fully expect any large load customer to pay all those [indiscernible] payments, make those in advance. I think our tariff is consistent with the legislation in terms of looking for contract terms and security, looking for pricing structures and charge allocations such that you do preserve or protect the existing customer base and really setting a threshold around service eligibility in terms of what is a large load. Is it 75 megawatts? Is it 100 megawatts, things like that. But that's how we're thinking about it. In terms of the initial upfront, the connection to our system, that wouldn't really change our financing plans. Obviously, as we begin adding additional resources to serve this load, that will change our financing plan. And as Chuck mentioned, once we get that approved, he'll share with you exactly how he's going to finance that. Michael Brown: My next question is when taking into account the multifaceted piece of the upside with Google, the transmission and the IRP, how are you thinking about the impacts to your EPS CAGR and when you would be ready to communicate the new plan to investors? Charles Walworth: Yes, Michael, this is Chuck. It's going to be just like the playbook that we did last year. So these catalysts are -- some are coming this year and then some coming maybe early next year. But in terms of the transmission, we should have line of sight to that by Q4 of this year. And that's a pretty substantial opportunity and then coupled with the Frontier battery case as well. So as soon as that's buttoned up in terms of having an order on that, we'll be prepared to layer that into our plan and discuss financing and then how that impacts earnings as well. But again, it's not just a this year event, right? I mean, so those are two big opportunities, but then that will be shortly followed by the outcome of the generation RFP as well. Michael Brown: My last question is, can you provide the short-term and long-term load update? Charles Walworth: Yes. So in terms of short term, we maintain our guidance for the year at 4% to 6%. And then longer term, that's going to be -- we haven't given guidance on that. But clearly, from this Google announcement and the knowledge that it was previously customer X, which was basically a gig in our plan by 2031 in relation to our system, we're somewhere just under a 7-gig system. And I think that can kind of give you an order of magnitude in terms of the size of this. Operator: Our next call is from Julien Dumoulin-Smith of Jefferies. R. Trauschke: I got to tell you, Stephanie is doing a great job with the name. She nailed yours. She named Shar. She's doing a great job. Julien Dumoulin-Smith: Absolutely. I appreciate it very much. It's very kind. Well, look, let me take it from the top here. I mean let me ask you -- I mean, the 5% to 7% here, how are you thinking about that? You're already at the top end through '28 into the base plan. And right, you've got this incremental Frontier, you've got this SPP transmission. And then in theory, then you've got RFP participation, right? So -- and again, I suppose that's a little bit of an unknown in terms of how far that goes. But do you want to remind us here? I mean I didn't hear in your script any comment about 5% to 7%. So I don't mean to needle you here, but it seems like it might have been slightly omitted here. Charles Walworth: Yes. Julien, this is Chuck. Thanks for the opportunity to address that. So you're right. I mean we didn't mention that because it's unchanged in the near term. So 5% to 7% and pointing to the upper end, upper half of that through the next few years. But really, the catalysts that we're talking about, those are going to take us beyond that period, right? So I think your observation is spot on that this really allows us to extend that runway. But again, keeping with our tone and philosophy, we're not really going to get into that until those projects are rolled into the capital plan. But clearly, those catalysts are out there to extend that expectation. Julien Dumoulin-Smith: Right. Absolutely. And actually, Chuck, just sticking with the focus here on the financing plan. How do you think about this Moody's FFO to debt threshold, right? I mean kudos on finally getting that done. I know it's been in the cards for some time, getting that thing down to 17 from 18. You guys didn't blink. You held your line here. But how should we think about the common equity needed to fund the incremental CapEx above the base plan? I mean how do you think about that now and here? How do you think about JSNs at this point? But again, obviously, kudos on the move here in creating capacity? Charles Walworth: Yes. Thanks for that comment, Julien. Yes, I mean, it is great confirmation of our plan. But again, I think it didn't just happen overnight. It's -- I think underlying that is our long-term track record. And so that means the onus is on us to extend that track record into the future and be prudent in that aspect. So it still means we got a lot to live up to, right? But clearly, I think coming at this point, when we've got these large opportunities in front of us, that coupled with our reaffirmed balance sheet strength, that's just -- it's like a multiplier effect, right? So yes, really, really, really pleased with that, and it's just great timing from that standpoint. In terms of your question about forms of equity, look, I mean, we've always maintained that we've got the full toolbox at our disposal. We thought it was very important to do common equity next year. When it comes time for the next round, we'll evaluate that in the context of the market at that time, and we'll do what's right. Julien Dumoulin-Smith: Awesome. Excellent. And then if I can go back a little bit on what you were alluding to earlier, but I just want to clarify this, right? Obviously, kudos on translating Google into a formalized construct. I feel like that's been in the cards for a little bit here. How do you think about the total gigawatts that are incurred there and the opportunity here? I just want to make sure we're hearing this right here. And as much as what is the ramp in gigawatts relative to what you guys have discussed previously? Is there something incremental to this, call it, 1.9 gigawatts, if I'm adding it up right, I mean there's a few different ways to read it. Is there something incremental there that one should be considering that would be ownable? I heard the solar comment about the capacity contracts that would be a purchase agreement. But beyond the 1.9, is there something incremental here with Google that we should be cognizant of? Charles Walworth: So with this announcement, this announcement is consistent with what's in our IRP, okay? So this one by itself is not incremental. It's just consistent with the plan. In terms of the solar contracts, if you recall, the 1.9 was a winter need. It was the winter of [ '31-'32 ]. And the rough math from the SPP is it's going to be somewhere around a 20% accreditation on solar in the winter. So our kind of high-level estimate is that's going to change that 1.9 to 1.8 for that time frame. But that's just with this contract, obviously, anything additional to this would be above and beyond that. Julien Dumoulin-Smith: Got it. Okay. Excellent. Fair enough. And then just specific, I'd love to hear the cadence of conversations, whether that's expanding Google further or other data center contracts. We've heard from some of your peers in adjacent states. Obviously, we saw this ERCOT update recently. How would you characterize the state of conversations for whether it's a further Google expansion or other contracts in as much as you all have been on a roll? Charles Walworth: I would characterize it as continuing and consistent. Operator: Our next call is from Aidan Kelly of JPMorgan. Aidan Kelly: I just wanted to go back on like the large load kind of developments here. And maybe just see if whether you kind of plan to indicate new resources CapEx as they get preapproved even or if they wait for full approval to add to the plan? Charles Walworth: I'm sorry, I'm not sure I totally follow your question there. Could you repeat that? Aidan Kelly: Like do you plan to like telegraph like the new resources CapEx as they get preapproved? Charles Walworth: Yes, yes, 1.5%. Yes. No, clearly, we are in the middle of an RFP right now. So there's not really any detail -- I mean, the bids haven't even been opened on that yet, but they will be soon. But yes, once those do the evaluation, do the selection, then we'll make the filing. So really, you'll have some pretty good indication as to what the possibility is once we make those filings. And then once they're actually formally approved, that's when we'll layer that in. But you'll actually get some pretty good color on that before they're approved. Aidan Kelly: Great. Appreciate the input there. And then just kind of want to go back to the 600 megawatts of nameplate capacity with the solar facilities. Just like a simple question here. Like is that in the plan? Is it separate from the IRP filing? Just any color on how that kind of coalesces with the generation opportunities? Charles Walworth: Yes. So that's where I was going with on that previous question. So it's -- it was not -- it was not included as a resource in the 2026 IRP that showed a need of 1.9. And so again, since that was a winter number, adjusting for that's going to be lower that to about a 1.8 need. So that's kind of the walk forward on that. Operator: Our next question is from Paul Fremont of Ladenburg Thalmann & Company. Paul Fremont: Congratulations. I guess my questions are sort of mostly focused on the Seminole to Shreveport line. The SPP write-up sort of that came out at the end of last year is suggesting an in-service of mid-2028. Is that sort of a realistic time frame that this can all be done in? Or should we look for some delay in that? Charles Walworth: Paul, this is Chuck. That's part of what we're still going through. I mean, yes, that was the SPP's date, but that didn't really -- that was more of a -- from a modeling perspective, that didn't take into account any expectations on an actual construction time line. So that's part of the process we're going through right now is firming that up, and that's what we'll have clarity on by the early Q4 time line this year. Paul Fremont: Great. And would that be built on existing right of way? Or would you need to sort of put into place new rights of way? Charles Walworth: So it's new. And so that's part of the process also is just doing the line routing on that. Paul Fremont: And my understanding is you're still negotiating certain things with AEP. Is that -- how much of the line is going to be sort of Arkansas versus Oklahoma? Or what exactly sort of remains to be negotiated with AEP? Charles Walworth: So on this one, it's really Oklahoma and then probably Texas into Louisiana, but it's -- that's part of what we're working on is where exactly those -- where that crosses state boundary. So that's going to play into that. So still work in progress. Paul Fremont: And then my last question, with respect to the battery, how -- have you determined whether there's an additional equity need that will go with the battery? Charles Walworth: Again, we -- since it's not approved yet, it's not in our plan. So we'll do -- because again, we'll probably have timing clarity on that right around the same time as the transmission. So we'll probably take a holistic view of it at that time. Paul Fremont: So then the CapEx update that we should expect is more likely going to be third quarter versus, let's say, second quarter? Charles Walworth: Yes, I think that's fair. Operator: And at this time, we're going to make a final call for question. [Operator Instructions] And our next question will come from Stephen D’Ambrisi of RBC Capital Markets. Stephen D’Ambrisi: I mean, Julian took like six of them. So I really only have one question left. And I guess what I would say is just given what's happened with some of, call it, the capacity contracts, how do you think you're positioned to effectively win or what percent -- what are you messaging to the commission and to stakeholders about the benefits of having the potential incremental generation as opposed to working with developers and securing capacity contracts and just the risks and benefits that come with that? R. Trauschke: Yes. Thanks, Steve. I think we've been consistent. We've certainly had this discussion with the commissions about this. It's our intent to own and operate these assets. There's reasons from time to time to layer in some of these capacity type agreements to kind of bridge you during construction. But thinking about some of the severe weather events going back to Winter Storm Uri, there was no doubt that the assets that we owned and we operated ran and performed very well. And I think that's what everyone is looking for. So it'd be our expectation that we own and operate these assets, whether we build them ourselves or we were to purchase them from somebody, though, I'm not sure really -- we get too excited about the difference there. What we're focused on is making sure that we're the ones holding the ball, so to speak, when the severe weather comes in. Operator: This concludes -- we don't see any additional questions. So this concludes the question-and-answer session. And I'd like to now turn it back to Sean Trauschke. R. Trauschke: Thank you, Stephanie. Great job today, and thank you all for joining us today and for your continued support. Have a great day. Operator: Thank you for your participation in today's conference. This does conclude the program. You may now disconnect.
Operator: Welcome to the First Quarter 2026 Phillips 66 Earnings Conference Call. My name is Rob, and I will be your operator for today's call. [Operator Instructions] Please note that this conference is being recorded. I will now turn the call over to Sean Maher, Vice President, Investor Relations and Chief Economist. Sean, you may begin. Sean Maher: Hello, everyone. Good morning, and thank you for joining Phillips 66 First Quarter 2026 Earnings Conference Call. Participants on today's call will include Mark Lashier, Chairman and CEO; Kevin Mitchell, CFO; and Don Baldridge, Midstream and Chemicals, Rich Harbison, Refining; and Brian Mandell, Marketing and Commercial. Today's presentation can found on the Investor Relations section of the Phillips 66 website, along with supplemental financial and operating information. Slide 2 contains our safe harbor statement. We will be making forward-looking statements during today's call. Actual results may differ materially from today's comments. Factors that could cause actual results to differ are included here as well as in our SEC filings. With that, I'll turn the call over to Mark. Mark Lashier: Thank you, Sean. Geopolitical events in the Middle East drove unprecedented commodity price volatility during the quarter. To put this in context, March was the first month that price moves in major crude oil, refined product and European natural gas benchmarks all exceeded the 95th percentile. In the face of this volatility, we remain focused on operational excellence. Our team is executing safely and reliably. The majority of our assets are in the U.S. We have pipeline connectivity to some of the lowest cost and most reliable hydrocarbon corridors in the world. This positions us to reliably supply energy to support global demand. Due to the closure of the Strait of Hormuz, a significant amount of global refining and petrochemical capacity is down. We, however, continue to operate at high utilization supplying products to our customers. Additionally, we have global placement optionality through our commercial organization. This quarter has seen a significant and favorable shift in market fundamentals. First, the importance of U.S. sourced hydrocarbons has increased due to a need for diversification and access to reliable supply. Second, unplanned downtime in global refining assets has reduced inventories and will support margins. Finally, reduced petrochemical production globally due to downtime and higher naphtha prices has reduced inventories and will also support margins. As a reminder, 80% of CP Chem's capacity is on the U.S. Gulf Coast with competitive ethane feedstock. Recent global events show the importance of reliable domestic energy supply. Our Western Gateway Pipeline project will address long-term refined products needs, improve supply flexibility and increased reliability for the West Coast markets. We're excited about the future due to our strong asset footprint culture of operating excellence and attractive fundamental outlook across all of our businesses. Anchored by the strength of our balance sheet, we're confident in our ability to navigate market volatility and capture opportunities. Brian will now share more on Slide 4 about how our commercial organization is one of our competitive advantages. Brian Mandell: Thanks, Mark. We have a strong commercial organization with 6 offices across the globe. Our business enhances our asset footprint by optimizing feedstocks, delivering products into the marketplace and capturing value. We capitalize on geographic dislocations and turn volatility into opportunity. . With our expertise in global market dynamics, we're ahead of the game, we have an asset-backed trading model and can leverage our physical footprint to take advantage of opportunities. We trade over 6 million barrels of liquid hydrocarbons every day. This creates optionality and economic value. Markets are fluid right now and volatility is likely to persist into next year. Recent disruptions have created multiple opportunities. For example, we move Bakken crude oil to our Beaumont terminal on the U.S. Gulf Coast and then leveraging the Jones Act waiver to our Bayway Refinery. We displaced international crudes with domestic grades into our refining system and sold the international barrels into tight overseas markets. We placed gasoline from our U.S. Gulf Coast commercial blending facilities into the West Coast using the Jones Act waiver. We leveraged our global footprint to deliver LPGs and naphtha produced at our Sweeny hub to global petrochemical customers around the world. Commercial performance is included in the results of our operating segments. Enhancing their margins and improving market capture. Moving to Slide 5. The recent shock to the global energy system has been universal. Refining capacity has been damaged, logistics have shifted arbitrage routes have changed. We are watching these and other signposts closely to capture additional value. The differentials between global indices and physical markets have spiked and forward markets are heavily backward dated. This dynamic reflects tight global crude oil balances. The outlook for product markets looks even tighter, and we expect refining margins to be constructive through the remainder of the year. Our market analysis, commercial capabilities and global footprint enable us to optimize the flow of molecules around our system. Our team maximizes the margin uplift across our value chains. Here are 2 examples of how we are optimizing our system. First, we've added 2 dozen originators around the globe. They speak the language. They know the culture, and they know how to source deals that unlock more value and optionality providing long-term access to key global markets. Second, we've tripled our vessels on time charter in the past 2 years, securing roughly half of our waterborne crude slate. The global tanker fleet has become tight with limited spot availabilities and a large share of sanctioned vessels. This has caused freight rates to increase to historic levels by locking in our freight rates early, we reduced the cost of crude to our refineries. We optimize around our refineries, pipelines and terminals to ensure that we're leveraging every molecule and driving additional value from our fundamental knowledge of the global markets. Backed by world-class assets, we find opportunity and volatility to deliver greater shareholder value. Now I'll turn the call over to Kevin. Kevin Mitchell: Thank you, Brian. On Slide 6, first quarter reported earnings were $207 million or $0.51 per share. Adjusted earnings were $200 million or $0.49 per share. As a result of a sharp increase in commodity prices during the first quarter, the company's financial results were impacted by mark-to-market losses of $839 million related to short derivative positions used as economic hedges to manage price risk on certain physical positions. We had a use of operating cash flow of $2.3 billion. Operating cash flow, excluding working capital, was approximately $700 million. Capital spending for the quarter was $582 million. We returned $778 million to shareholders including $269 million of share repurchases and $509 million of dividend payments. We increased the quarterly dividend 7% on an annualized basis. I will now cover the segment results on Slide 7. Total company adjusted earnings were $200 million. Midstream results decreased mainly due to lower volumes, largely due to impacts from winter storm burn, lower margins associated with customer recontracting and accelerated depreciation associated with a Permian Basin gas plant. In Chemicals, results increased mainly due to higher polyethylene margins. Across refining, marketing and specialties and renewable fuels, results decreased mainly due to mark-to-market impacts. In Corporate and Other, the pretax loss increased primarily due to the inclusion of costs associated with the decommissioning and redevelopment of the idled Los Angeles refinery site. Slide 8 shows cash flow for the quarter. We started the quarter with a $1.1 billion cash balance. Cash from operations, excluding working capital, was approximately $700 million. There was a $3 billion use of working capital, mainly reflecting an inventory build and an increase in cash collateral on derivative positions, partly offset by the net benefit in our payables and receivables positions associated with rising commodity prices. We funded $582 million of capital spending and returned $778 million to shareholders through share repurchases and dividends. Our commitment to return greater than 50% of net operating cash flow to shareholders remains unchanged. The company increased debt in the first quarter. Given the sharp increase in commodity prices, we issued a term loan and increased borrowings on short-term facilities to manage the margin collateral requirements. We ended the quarter with $5.2 billion in cash. We are well positioned to manage further commodity price volatility through significant liquidity and including a high cash balance and cash generated from operations. Slide 9 shows the projected path from the current debt level to year-end 2026 and 2027 debt. We remain fully committed to a total debt balance of $17 billion by year-end 2027. Consensus cash from operations for 2026 and 2027 is approximately $8 billion. In the remainder of 2026, we expect operating cash flow, working capital benefits and the reduction of cash balances as markets stabilize to enable us to reduce debt to approximately $19 billion. In 2027, we expect operating cash flow to enable us to reduce debt by a further $2 billion to $17 billion. This is consistent with the capital allocation framework we have previously laid out. with approximately $2 billion each to dividends, share repurchases, capital spend and debt paydown. Looking ahead to the second quarter on Slide 10. In Chemicals, we expect the global O&P utilization rate to be in the low 80s, driven by the uncertainty of operating levels at CPChem's joint ventures in the Middle East. In Refining, we expect the worldwide crude utilization rate to be in the low to mid-90s. Turnaround expense is expected to be between $120 million and $150 million. We anticipate corporate and other costs to be between $430 million and $450 million. Moving to Slide 11. Mark will now provide some final thoughts. We will then open the line for questions. Mark Lashier: Great things happen when preparation meets opportunity. The current environment is attractive across all our businesses. We've prepared by focusing relentlessly on what we control: cost, culture, competitiveness and capital with discipline, all in the service of safe, reliable operations that deliver strong shareholder returns. Our teams are performing, and we're pressing in and capturing those opportunities. fully prepared fully committed to execute and win when we win, you win. Operator: [Operator Instructions] Steve Richardson from Evercore ISI. Stephen Richardson: I was wondering if you could start on the mark-to-market adjustments and wondering if you could give us some color on some of these impacts by segment, if you could. And I know you addressed this in the 8-K, but if you could get into a little bit of how the volatility that you witnessed was outside the bands of expectations? And can you also just be sure to hit on how you think about that draw of liquidity, what it means going forward? And would it -- any impacts it may have on your shareholder return commitments? Kevin Mitchell: Yes, Steve, this is Kevin. Let me walk through some of that detail. So as we laid out in the first quarter, we saw an $839 million mark-to-market loss from an income statement that impacted refining M&S and renewables and the specific amounts by segment were detailed in the press release. . This is broadly consistent with what we put out in the 8-K. We said approximately $900 million. At that point, that was our best estimate at that point in time. And so I think it's important to make it clear that these are mark-to-market impacts on paper hedges that we have in place to offset physical purchases those purchases are mark-to-market at the end of each month, but the physical inventory is not. And so there's a net impact through the income statement. I do think it's important to emphasize that we do this to protect economic value. There is -- this is a risk mitigation tool. We've been doing this for some time. It's a standard practice. And in the normal course, the impacts of these mark-to-market transactions are just not that significant, not that material. But as Mark mentioned in his comments, we saw unprecedented volatility across the commodity markets in which we participate that course this, we'll see as a sort of outsized impact. as you look ahead in terms of what you can expect on a go-forward basis, it's very much a function of where the commodity prices move from end of March, I think through, say, the end of the year. And if we were to use the forward curve as of end of day yesterday, we'd recover by the end of the year, about $500 million of that $893 million. And it's a commodity-by-commodity calculation on a quarter-by-quarter basis. So based on the forward curve, if that were to play out as reality, that's what you see come back in that context. From a cash standpoint, we have -- at the end of the quarter, we had a total of $3.2 billion out on margin associated with all of this activity. That differs from the income statement effect because there are other barrels being marked where we actually do a corresponding impact to reflect the physical gain. And so you have more paper activity than is subject to the income statement related mark-to-market. That cash impact will come back -- 2 ways it comes back. One, directly in falling prices, you'll see the reverse effect. But in normal course, because this is a continual process as volatility subsides, we effectively consume this cash through a normal purchasing activity. So just to put some context around that, $3.2 billion out on margin at the end of March, at the end of yesterday, it was $2.1 billion, even though the absolute price levels are pretty similar to where they were at the end of the first quarter. And so we'll see that come down as we work our way through the year. And then as we get into -- what does this mean in terms of capital allocation, debt reduction, share buybacks, big picture. And I covered it in the earlier comments and the slide that we put in the presentation on debt targets, we think we will be able to utilize between working capital benefits and the remainder of the year, operating cash flow and as the market stabilize, we don't need to carry that much cash, which is what we showed at the end of the quarter and still do. But we can draw down that cash, get debt down to about $19 billion at the end of this year and then down to our target $17 billion next year, all while still returning 50% of our operating cash flow back through dividends and buybacks and quite frankly, we used Street estimates for cash generation in that calculation, but I feel pretty optimistic that there's upside there as well and we'll hold true to that. So 50% back to shareholders and the other excess will just accelerate debt reduction. Stephen Richardson: That's great. Thanks for the fulsome answer, Kevin. I was wondering if I could just hit as well, we've got you on CPChem. The consultants have full chain margins up, I believe, $0.33 at last check for the second quarter. I was wondering if you could talk about what you're seeing in your business and your view on capturing this with obviously a very high utilization rate on the U.S. Gulf Coast into the second quarter and the balance of the year? Mark Lashier: Yes, absolutely, Steve. This is Mark. CPChem is well positioned to go out and capture those margins. There can be some contractual step-ups that occur, but they're certainly out there aggressively pushing that -- you've seen the supply and demand situation tightened up dramatically with the limitations coming out of the Middle East. And additionally, you've seen limitations for producers in Asia that, frankly, some countries in Asia are selectively moving hydrocarbons away from petrochemical production and into energy use to protect that. And so that further tightens things up. And the cost curve has dramatically shifted as the price of oil has gone up versus low-cost ethane in North America, you see that price floor going up, driving the margin increases. And then there's this factor that prior to Venezuela prior to the activities in Iran. China was accessing deeply discounted crude and so they were converting that into a deeply discounted naphtha and then pouring that polyethylene to the world market. We think that somewhere in the $0.05 to $0.06 per pound advantage versus what the cost curve should have been. Now that's been eliminated with the things that have been going on. And so it's very constructive for CPChem. They can operate from the U.S. Gulf Coast at high rates and over 80% of their capacity is in the U.S. access to advantaged ethane feedstocks that have been -- that feedstock cost has been stable versus what's been going on in the rest of the world. So they're very well positioned to go out and capture those margins. Operator: Neil Mehta from Goldman Sachs. Neil Mehta: Yes. Mark and team, the standout number from this quarter was really the worldwide market capture, which ticked up to 138%. And maybe you can bring this to life a little bit. What -- can you give us a couple of examples of dynamics that specifically drove that strength? And then when we think about sort of a mid-cycle market capture rate, you've talked about mid-90s type of utilization. I think there are a lot of investors on the call who were thinking that 2Q could be lower than that mid-90s number, though, just because of the backwardation in the curve. And just your perspective of that is actually achievable as we set up for Q2. Kevin Mitchell: Yes, Neil, it's a great question. Brian was -- he was pretty humble in his opening remarks, but we always talk about optionality and creating optionality and what he and his commercial team demonstrated in Q1 is leveraging that optionality. If you think about moving Bakken crude to New Jersey without using a train and leveraging the shipping logistics that they've at least in advance. So we've got an advantage over shipping using the Jones Act waivers, all those things lined up to where Brian and his team could take full advantage of that and to drive that. And that's what drove that pretty remarkable capture number, and we're really proud of what they've been doing. They weren't sitting around watching the world in a crisis. They were -- they were moving things to take advantage of the optionality that we've created and we're prepared for. So Brian, you can go ahead and talk a little bit more about what your folks have been up to. Brian Mandell: And as Mark said, with the huge amount of volatility in the market with market dislocations and just the integration of our businesses, there was a lot of value to be had in the market. Just maybe some examples, we profited from a long RIN position, including RINs, we generated at a RIDEA renewable facility. And we were also able to roll some lower cost RINs for prior year into this year. We had really strong results in our European and Asian trading businesses. As I mentioned earlier, and as Mark mentioned, the time charters that we put on over the last couple of years really helped in the elevated freight market. And reduced our accrued costs into our refineries. And then finally, you saw some of the product differentials like on octane and Jet were higher than the indicator. So that helped as well. So to give you some context maybe going forward, if we use our refining indicator, it includes a lot of the impacts already. It's embedded in the indicator. Historically, an average for the year would be -- in Q1, we captured -- benefited from all the commercial opportunities I just mentioned. Normally, in Q2, beginning of summer driver season, we would think about mid-50s so just thinking about some of the tailwinds and headwinds, tailwinds, things like butane blending. We think there'll be more butane blending to the RVP waivers. Strong Jetter octane dips can help us there and additional commercial value. And I think we'll continue to see some of the same value we saw in Q1. But then there's some headwinds, as you said, backwardation and inventory impacts and even turnarounds if we had some in Q2 would impact capture. So I'd start with the mid-90s and think about what you think the market will look like in Q2 and then work our way from there. Neil Mehta: Is it fair to say mid-90s is a good starting point, though, based on plus [indiscernible] Brian Mandell: Mid-90s would be a good starting point. . Neil Mehta: Okay. All right. And then Kevin, can you hit Slide 9 again, maybe in a little bit more detail because this is on the pushback since the 8-K came out that I know you and we have gotten on the PSX stores is leverage pretty elevated. And I think part of that is you're just holding excess cash. And so if you could spend a little more time just unpacking this slide because I think it is important. Kevin Mitchell: Yes. And that is a really important point that we've effectively, from a debt and cash standpoint, we sort of gross up the balance sheet by borrowing more than we need from a normal day-to-day standpoint but being positioned in the event that we see more extreme volatility and have a need on, for example, margin calls in the event that significant price increases. It does feel like since the end of the first quarter, that dynamic has settled down a little bit. I mean the markets still continue to fluctuate. But we've been in this -- if you look at crude in the sort of $90 to $110-ish band over that period. And so our expectation is as market conditions stabilize, we'll be able to draw that cash down. And clearly, that will have an offset on debt. Likewise, on working capital. We had a big working capital use in the first quarter. We expect that to more than come back over the course of the remainder of the year through the combination of normal sort of annual trends. First quarter is usually a working capital use for us. It was exacerbated by the margin calls this year. but we expect that we recover that and end up our projection is a slight working capital benefit for the year -- for the full year. That's our assumption. And then operating cash flow. We expect to have healthy operating cash flow, and that will go to debt reduction. And as you roll into next year, we continue to have that sort of $8 billion of of operating cash flow, then a couple of billion of that can go to debt reduction pretty comfortably. All that gets us to our projected $17 billion target. And I will emphasize that if we see a continuation of strong margin conditions in refining and chemicals, that will further enhance the cash generation will enable us to pay down the debt quicker and also enable us to return more cash to shareholders. Operator: Manav Gupta from UBS Financial. Manav Gupta: I have more of a theoretical question. What I'm trying to get to the bottom of this, based on your preliminary comments, it feels your refining system, which is in the U.S. mostly is relatively insulated from these crude supply disruptions and other things that are happening in the world where certain refining assets may be very good, but can't run. You are relatively insulated from these things. And what I'm trying to understand is -- does that mean somebody like a Philips or even any U.S. refiner in this environment is structurally better off than their global counterparts. And if that is the case, in your opinion, is this the time to be bullish U.S. refining? Or is it this time to be bear issue as refining, if you could help us answer that. Brian Mandell: Hi, Manav. It's Brian. You're absolutely right. This is the time to be bullish, U.S. refining. If we look at what's happened in the marketplace, it started in Asia, moved to Europe, but U.S. has been relatively insulated on supply. Refinery runs are strong, consumer demand is healthy. Crude production is relatively stable. And this kind of highlights how we're immune to the crisis, although not to the higher prices. But largely, our crude -- for instance, at Phillips 66, we only purchased about 1% of our crude from the Middle East. Our crude is generally from Canada from the U.S. and from Latin America. And of course, from Canada and the U.S., it's all pipeline connected. So we are in a very, very good position. Mark Lashier: And I would add to Brian's comments and you think about the activities that they undertook in the first quarter, they do interface with the rest of the world, so they're able to move around and leverage domestic supply and push normal imports out into what the global markets are demanding. And then in addition to that great position in North American refining CPChem is rock solid in North America petrochemicals and the high-density polyethylene value chain. So all of our product lines, all of our businesses really have tailwinds in this environment. And we think that those tailwinds will persist for a considerable amount of time. Manav Gupta: We completely agree. Quickly pivoting to -- sometimes people don't forget that you actually own a significant amount of renewable diesel capacity in the U.S., you never actually entered into a JV to split your capacity. Renewable diesel margins were negative. Everybody was losing money, but we are in a very different environment. Given the size of your footprint, would it be fair to say year-over-year, you could see a material free cash flow inflection in your renewable diesel business, given where we are right now. Brian Mandell: Well, absolutely. Even if you just think about the Ringman of the current blended RIN is more than twice what it was in 2025. So just a credit value alone. And we are running very, very well right now, in fact, above nameplate capacity. So you should see a substantial difference than prior year. Operator: Doug Leggate from Wolfe Research. Douglas George Blyth Leggate: Brian, I wonder if I could direct this to you. So we've got extraordinary margins, you pointed out multiple times, that it's steeply backward dated and I get the bullish near-term outlook question and duration and what breaks it. And we're seeing a lot of airlines cutting capacity or balancing demand through demand disruption, you could argue versus physical supply constraints. What's your response to that in terms of margins are great, but what's your view on duration? And then I've got a follow-up for Kevin, please. Brian Mandell: Thanks, Doug. Our view is throughout this is going to last throughout the rest of this year and into early next year. If you think about what's going on, it's less about demand destruction and more about demand constriction, trying to manage the need for products. And we kind of think of it as a race to the top. We're watching very tight food markets and crude prices keep moving up $106 today on TI, 118 on Brent. And as crude prices move up, products are going to have to move up even further to open up the refinery margin to keep refiners producing the products that the world needs. Clearly, the world is tight. And as you mentioned, it's jet fuel is the tightest. So it's the refinery margins are going to have to keep opening. And we saw that even for instance, in our European refinery recently, where we saw the gasoline crack were somewhat weak compared to the distillate crack, which seemed to be slowing down European refineries. And then all of a sudden, the gasoline, in fact, made a large move to the upside, opening up margins so that European refiners could produce the products that they need. So I think we'll continue to see that through this year and through the early part of next year, even if the straits are opened in the next month or 2 months. Douglas George Blyth Leggate: 2 Brian, would you treat this as -- would you [indiscernible] this or treat it as a windfall? Brian Mandell: What was the question? . Douglas George Blyth Leggate: Would you annuitize this? Or would you treat that as a windfall? Brian Mandell: In other words, are the margin is going to persist. Yes, I think we see them persisting for longer than the straights being closed. Annuitize it. I don't know that we're at the point where we would annuitize anything, but we see it more than just a few months phenomenon. Douglas George Blyth Leggate: So this is my follow-up question, which is for Kevin. Kevin, your share price is 5% off is high. And I think Mark just said we wouldn't annuitize this. This is the opportunity to permanently shift this windfall to your equity value comes from debt reduction versus buying back your shares? Why is that not the right answer if this is indeed a windfall. Kevin Mitchell: Yes, Doug. So you are correct that debt reduction is -- creates equity value as well. And debt reduction is a priority the $17 billion target that we laid out there is a target. If we have significant excess cash generation, we will reduce debt below that level. I'm not going to go so far as to say we will stop buying back shares so it can all go to debt reduction. I think having -- maintaining a degree of balance through the cycle on capital allocation. We've been pretty clear on the 50% return of which at current levels, about half of that is the dividend and the other half is buybacks. But as the absolute level of cash generation increases by definition, if you take 50% back to shareholders, that's an increasing amount also going to the balance sheet. And so we view it as a balance across the board. As of right now, while we may only be a few percent off of our high, we still think there is good value in our share price. And so we feel comfortable with that plan and capital allocation. Operator: Joe Laetsch from Morgan Stanley. Joseph Laetsch: So I wanted to start on the macro, just given where product prices are today. Can you talk about the demand trends that you're seeing within your system in the U.S.? Are you seeing any signs of demand destruction on gasoline and diesel, but the inventory levels in the U.S. have drawn to at or below the 5-year range on products, things are starting to look pretty tight. . Brian Mandell: Joe, this is Brian. We haven't seen much demand destruction, probably 1% or down for products, both gasoline and diesel. And then in terms of our system, we've actually done really well. We added over 500 franchise stores last year in marketing. So we're actually seeing a lot of value from the good work the sales team has done in marketing. But we haven't seen demand disruption in the U.S. Joseph Laetsch: That's helpful. And then I wanted to just ask on the refining side. So utilization rates of 95% in the quarter were solid, even with some maintenance and some third-party pipeline impacts as well. Can you just talk to some of the drivers of the performance during the quarter and then as part of that operating costs, they continue to trend in the right direction. And I recognize there is variability quarter-to-quarter with throughput and natural gas costs. But could you just touch on what inning you think you're in, in terms of cost reduction efforts and the path to the $550 per barrel? Richard Harbison: Yes, Joe, this is Rich. Thanks for the question. Yes, first quarter, I'll start with the cost per barrel and then maybe look back at some of the regional performance opportunities that we see last quarter. The cost per barrel 1Q was $6.21. That's actually $0.80 per barrel improvement year-over-year. So good movement there. I'm very happy with what the team has accomplished on that front. Quarter-over-quarter, as you indicated, it was slightly higher. And that's primarily due to fewer barrels processed in the quarter. And that was a combination of planned maintenance activity as well as there's just fewer days in the quarter and the first quarter of the year, and that does have a material effect. Total process inputs were down about 2% quarter-over-quarter. Seasonally, higher natural gas price was also a big player in this prices gone all the way. I think, averaged about $4.87 per MMBtu at the Henry Hub. We normalize that back to the $3 annual natural gas price, which is the basis we've used for the $5.50 target, the number moves into the low 5.80s on a dollar per barrel OpEx basis. So that says we're well within striking range here of this $5.50 per barrel target in 2027. The organization is really working hard. They've actually got over 200 initiatives that we're actively pursuing right now which are forecasted to drive $0.15 to $0.20 per barrel out of the base operating costs. And these are structural changes in our cost profile and continuing a trend that we've started here well over 4 years ago now. And maybe an example of 1 or 2 of these One of them is really changing our approach to how we clean FCC boilers. It doesn't sound like something very exotic but that actually will, once accomplished, will drive down our annual cost by well over $3 million. And another example is really acid consumption in our sulfuric acid alkylation units and we're working on tightening up the process controls and the temperature controls on those -- that strategy is projected to save another $2 million per year. So it's racking these wins up 1 by 1 by 1 across the system, and the team has been doing a fantastic of doing that. So the balance of the closure, I see us continuing to increase our availability and utilization of the assets, the continued maturity of our reliability programs as well as something I've mentioned before, which is increasing our total process inputs by filling up the downstream units, behind the crude units, using all that discipline that we put in for the crude unit side to apply it to the downstream units. So this remains an ongoing execution story, and I'm very happy with the way the organization is progressing it, and we do see additional upside on that. On the market capture, regional performance side of the business, Brian covered a lot of that generally at the macro level. But what we saw on the refining side was cargo prices coming in a little bit lower for us in refining. And some of that's just the anomaly of pricing, you got prior month pricing that's coming in on crude deliveries and really good work by the European office to capture strong results. And especially on the jet side of the business, the Kerosene fuel is those prices disconnected from traditional tied to distillate. On the Gulf Coast, we saw the same -- a similar story, jet production there quarter-on-quarter was very high. That's for us, and it was also very timely with the Jet pricing blowing out coming out of the Gulf Coast area as well. And then in the central corridor, this is where we had a lot of our turnaround activity focused for the quarter. So we did see the market capture actually go down a bit there, and that was related to maintenance activity at Wood River and Borger facilities and some mark-to-market impacts that Kevin had pointed out earlier in the call here. And last but not least, the West Coast was in a pretty good spot. As you mentioned, there was some impact with third-party pipeline operations there that slowed down our Pacific Northwest operations. But short of that, the team did a fantastic job of capturing the marketplace. Operator: Philip Jungwirth from BMO Capital Markets. Phillip Jungwirth: How does -- on midstream, just how does the higher crude prices change, how you're thinking about investment opportunities? If it becomes clear, there's going to be a greater call on shale. We see the public raise CapEx. Just would you be willing to look more at organic growth here -- if so, which parts of the value chain would that consistent GMP pipeline frac or exports? And then just last, just how much sensitivity is there around the $4.5 billion midstream EBITDA target by year-end '27 if we do see higher U.S. volumes? Donald Baldridge: Phil, it's Don. When I think about the crude prices and the activity. What I would say, first and foremost, that the capital discipline, returns, those are very important to us. I mean certainly, as opportunities evolve, whether that's volume growth in the field where we can add gathering and processing capacity to serve our customers and fill our value chain up we'll certainly pursue those opportunities. We've got growth plans in place. You'll see us continue to add capacity as the customer needs evolve. I think that's a sooner the fairway of our midstream growth plans. You'll see that we try to maintain a balanced value chain. What I mean by that is adding -- gathering and processing capacity, making sure we've got the downstream infrastructure, but also being mindful of what capacities are needed in the market. Again, going back to staying focused on capital discipline, staying focused on the returns that we can generate with those organic growth opportunities. In terms of and our $4.5 billion target. We feel very good about that target, the path that we are on. Certainly, the fundamentals are bright. Coupled with our execution and commercial successes, we feel very comfortable with where we are on that trajectory as well as the ability staying that growth beyond 2027. Phillip Jungwirth: Great. And then coming back to Chemicals. Once the Strait opens up, how do you see the progression for getting back to normal operations for CPChem where you are guiding the lower 2Q utilization, but obviously benefiting on the margin front in the Gulf Coast. And if you could also just comment on the broader industry that would also be helpful just in terms of what does that scenario look like, steps to take and time duration to get back to normal. Mark Lashier: I think as far as CPChem is concerned, the assets in the Middle East that are offline are in good shape. The bigger question is then the greater infrastructure in the Middle East and what challenges there may be. I think that there's probably a greater sense of urgency to get crude oil and refined products moving and then petrochemicals may be a next layer. So I think that revival from the Gulf will be a little lag behind the energy recovery and then you're going to see the system need to repopulate the inventory chain, the logistics chain, and that will take some time. So I think you'll see this have some legs on it. Now we've got 2 big projects underway, too. And those projects, the Golden Triangle project in the U.S. and the RPP project in Qatar, are both proceeding as expected. And there's been no disruption in the progress of the LPP project. In spite of what's going on, everybody's been safe. everybody is doing what they need to do to get that project going. And both those projects will come online fully in 2027, you'll see Golden Triangle polymers starting to commission things later this year and they're making great progress. And so I think they will contribute capacity at a time when it will be really sorely needed, I think. And so there'll be good progress from multiple dimensions for CPChem as this crisis resolves itself. Operator: Lloyd Byrne from Jefferies. Unknown Executive: Mark, Kevin, team, thank you for having me on. Can I start by following up on Neil's question on capture. And I know you commented on how well positioned your transportation is, but how does that impact second quarter capture or maybe even third quarter if rates continue to go on like this. Brian Mandell: You should see a benefit -- given that we locked in our shipping rates over the last couple of years and shipping rates are so elevated, you should continue to see a benefit from shipping rates, particularly in our Atlantic Basin region. Unknown Analyst: Okay. And let me ask a follow-up of -- I don't know whether Don is on, but maybe Mark can answer it. You can comment on Western Gateway and obviously, a very good open season. Just what are the hurdles left and kind of the timing for FID. Donald Baldridge: Lloyd, this is Don. I appreciate the question on Western Gateway. We are quite excited about where we are on the Western Gateway project, the progress we've made to date and where we find ourselves at the end of the second open season. How I see the path forward here is to complete the JV arrangements with Kinder Morgan as well as execute the transportation agreements with the third-party shippers, we've got a team that's working hard to get that done. I would say with the successful conclusion of that work over the next couple of months, I'd expect we would be in a position to FID this project mid- to late summer, again for 2029 in service date. And one of the things I plugback on just the progress we've made and what we've learned through the open season, is really twofold. One, I think there is a strong market interest in having a new build pipeline built to Phoenix and be able to deliver reliable, secure transportation fuels to the west. And then two, there's strong support from the state and federal groups, agencies and officials in having this pipeline in service as soon as possible. So that gives me a lot of confidence that Western Gateway is the right project at the right time and we'll deliver the right returns. Operator: Jason Gabelman from Cowen. Jason Gabelman: I know you reiterated the $4.5 billion of EBITDA on midstream 1Q obviously moved sequentially lower particularly in the NGL business quarter-over-quarter. Can you just help us, I guess, bridge quarter-over-quarter decline and remind us how you get to that $4.5 billion and perhaps given Western Gateway and potential for continued activity? Do you see what type of upside do you see from that $4.5 million? Donald Baldridge: Sure, Jason. Appreciate the question. And just in summary at the very onset, absent the impact of volume from winter storm earn, we're right where I expected us to be from a quarter 1 performance. We continue to have great commercial success, not only in the growth, but also in the recontracting, which -- that has some impact in Q1 and maybe unpack that a little bit. When we think about our renewals, we're quite proactive in how we do that. We tend to renew those a year prior to their expiration dates. The ones that came up for this quarter, we had renewed those and what was exciting about that is we had renewed those for 10-year plus terms. For me, that really validates the success of our customer service the success of our relationships with our customers, that execution gives me a lot of confidence in our ability to continue to grow into our $4.5 billion target by 2027. If the fundamentals are bright, the execution by the team is strong. And as we look through with Western Gateway, whether it's some of the follow-on expansion when we talk about additional gas plants, that gives me confidence that we can sustain this growth rate beyond just 2027. Jason Gabelman: Got it. And I neglected to ask about the LPG export ARB opportunity in the current environment. So if you could just talk about how you're thinking about that. . Unknown Executive: Sure. In the near term, most of our windows are spoken for, either with our term customers or by ourselves, from our time charters, where we've had success is really in our delivered time charter market, where the team in Singapore has been able to optimize deliveries, be able to take advantage of the volatility much like what you just heard Brian talk about. I think, overall, what this shows is the importance and the strength of the Gulf Coast LPG export capability. So I think this will continue to be a good tailwind for Gulf Coast exports, and we expect Freeport to be a beneficiary of that outlook. Jason Gabelman: Great. And my follow-up is just on some of the assets you have on the West Coast. One, given Western Gateway, does that make Ferndale any more or less quarter of the business than it previously was? And maybe can you also talk about the opportunity to sell down part of the interest in the renewable diesel plant as your peers have done and as that market has strengthened here. . Mark Lashier: Yes. Absolutely. From a Ferndale perspective, Ferndale is integrating well into the California market, and we see the 2 things complementary there. They're more targeted at Northern California, Western Gateway is a Southern California opportunity. And so we still see strong tailwinds for Ferndale as they enhance their capability with CARB and sustainable aviation fuel and blending and so they're in a strong position and Western Gateway will come in and provide some stability in Southern California. The other question about renewable yes, I think that we'll see what the market does. The asset is running strong. we would always entertain any interest, but it's a great asset, world-class asset runs like a Swiss watch, and we're seeing great value from that asset today. Operator: Theresa Chen from Barclays. Theresa Chen: On the midstream front, with the crude price outlook likely risk to the upside over the medium term and potential re-acceleration of activity in second-tier basins, can you talk about utilization and the ability to expand your path for NGL assets that are now or soon will be connected to Kinder's double age conversion now an NGL surface. . Is there renewed growth, if there is renewed growth in associated gas, either in the Bakken or in the Rockies itself, how much incremental pipe capacity could you have on your Rockies to Sweeny NGL system? Or would that require a significantly more investment? Mark Lashier: Teresa, I appreciate the question. In the Rockies, right now, actually, our DJ production, we're seeing some record volumes. So it's very exciting to see the volume in that area. And certainly, as you alluded, there's opportunities, whether that's in the Powder River Basin or the Bakken for additional development. We certainly have a well-positioned NGL network out of Colorado that flows through our system in multiple different routes and feeds into our Sweeny complex. We've recently restarted our Powder River NGL pipeline to be able to take some early Bakken barrels. If there's growth in that area, we would certainly look at opportunities to be able to expand capacity to be able to fill the downstream pipes that we have out of the Rockies. So that is certainly an area that we're keeping an eye on. Theresa Chen: And in regards to Western Gateway, now that the commercialization process is done what range of total CapEx and expected to build multiple on a 100% basis, can you share at this point regardless of how the economics would be split between the partners? Mark Lashier: We still need to kind of work through some of the final details with our partner in terms of scope and connections with our perspective of shippers. So we're probably premature to have that information out there, but it will be out there shortly. Operator: Matthew Blair from TPH. Matthew Blair: Just one question for me. Could you talk about the Canadian crude market? It looks like WCS Hardisty is one of the most attractive crudes out there. Are the wider dips relative to TI due to any pipeline constraints coming out of Canada? And then the market structure impacts that you talked about earlier for U.S. inland barrels, would those apply to Canadian barrels as well? Or are they not affected by that? Brian Mandell: I say the -- clearly, the WTI WCS differentials have moved wider for very tight levels earlier on this year. They're now next month at almost $18 off. And a couple of reasons. The first reason is that light sweet crudes from the U.S. are being pulled to Asia. And so that's tightening up light sweet crudes and medium sours. And the second reason is that the Venezuelan barrels on the market and also some planned and unplanned outages at refineries have put some pressure on the heavy grades. And so that's kind of widened the WTI, WCS and our kind of view is they're going to stay wide for some period of time. We're in a very strong position with our Mid-Con portfolio and our pipeline position, which is a competitive advantage, given the Canadian crudes to our refineries. And we benefit from those widened differentials, as you mentioned. And currently, just as a reminder, our sensitivity is $140 million of additional earnings for every dollar wider at the dips to come. Operator: And this concludes the question-and-answer session. I will now turn the call back over to Sean Maher for closing comments. Sean Maher: Thank you for your interest in Phillips 66. If you have any questions or feedback after today's call, please retain to Kirk or myself. Thanks, and have a great day. Operator: This concludes today's conference call. Thank you for your participation. You may now disconnect.
Operator: Welcome to Avnet's Third Quarter Fiscal Year 2026 Earnings Call. I would now like to turn the floor over to Lisa Mueller, Director of Investor Relations for Avnet. Please go ahead. Lisa Mueller: Thank you, operator. I'd like to welcome everyone to Avnet's Third Quarter Fiscal Year 2026 Earnings Conference Call. This morning, Avnet released financial results for the third quarter of fiscal year 2026 and the release is available on the Investor Relations section of Avnet's website, along with the slide presentation, which you may access at your convenience. As a reminder, some of the information contained in the news release and on this conference call contain forward-looking statements that involve risks, uncertainties and assumptions that are difficult to predict. Such forward-looking statements are not a guarantee of performance, and the company's actual results could differ materially from those contained in such statements. Several factors that could cause or contribute to such differences are described in detail in Avnet's most recent Form 10-Q and 10-K and subsequent filings with the SEC. These forward-looking statements speak only as of the date of this presentation, and the company undertakes no obligation to publicly update any forward-looking statements or supply new information regarding the circumstances after the date of this presentation. Please note, unless otherwise stated, all results provided will be non-GAAP measures. The full non-GAAP to GAAP reconciliation can be found in the press release issued today as well as in the appendix slides of today's presentation and posted on the Investor Relations website. Today's call will be led by Phil Gallagher, Avnet's CEO; and Ken Jacobson, Avnet's CFO. With that, let me turn the call over to Phil Gallagher. Phil? Philip Gallagher: Thank you, Lisa, and thank you, everyone, for joining us on our third quarter fiscal year 2026 earnings call. This was an outstanding quarter for Avnet, one that reflects both strong execution by our teams around the world and improving market conditions. Over the past several quarters and really over the past couple of years, our team has been operating in a challenging market environment. Throughout that period, we remain focused on the things we can control, supporting our customers coordinating closely with our supplier partners, managing inventory and working capital discipline, investing in our people, digital capabilities and distribution centers with a long-term view. This quarter's results and our June quarter guidance demonstrates that focus positioned us well coming into the beginning of the up cycle. We delivered financial results that came in well above our expectations including record sales in our electronic components business. As data center and AI demand proliferates throughout the market, we also saw broad-based demand across most of our core end markets. which translated into meaningful operating margin and EPS improvement. Before we give more color on the business, I wanted to take a moment to mention we're closely monitoring the current geopolitical environment and remain mindful of the potential broader macroeconomic impact. The conflict in the Middle East had no material impact on our Q3 results outside of some increases in freight expenses due to rising fuel costs. Now turning to our third quarter. We achieved sales of $7.1 billion, driving a 3.5% operating margin in our electronic components business and a 5.2% operating margin in our Farnell business. We also reduced inventory days 77% below our near-term target of 80 days. Our double-digit year-on-year sales growth was led by another quarter of record revenues in Asia, along with better than typical seasonal growth in the Americas and Europe. From a demand perspective, market conditions continue to improve across the majority of the verticals we serve, which includes data center, industrial, aerospace and defense, transportation, consumer and networking. The third quarter was led by strong demand in industrial, networking and our data center end markets. Year-over-year, we also saw broad-based improvement across most verticals led by the data center. Over the past 90 days, -- the lead time environment has shifted component lead time trends are increasing across many product categories. We have seen lead time extensions in over 50% of the product categories we track traversing semi doctors and interconnect passive electromechnical with stability being reflected in the balance. While lead time extensions continue in components supporting data center and AI builds, they are now spreading the broader set of products supporting diverse end market applications. Customers are increasingly recognized as the challenges of a tightening supply environment and are turning to Avnet's proven expertise to help manage their component supply chains. Our backlog is growing and our book-to-bill ratios are well above parity in all regions. In the December quarter, we saw early indicators of certain component price increases. During the March quarter, we have seen price increases across a few suppliers and technologies, most predominantly related to memory. We expect to see additional price increases over the next several months, and majority of which are being driven by increases in the underlying input cost of components. Ken will give more color on the impact of pricing during the quarter in his comments. Now with that, let me turn to highlights of our business. Our Electronic Components business delivered a record sales quarter, driven by growth across all regions and strong execution. Demand creation activity remained robust. Design wins continue to convert to sales and our interconnect passive and electromechanical or IP&E business outperformed, reflecting the benefits of our technical capabilities and our focus on the total solution selling. In Asia, sales reached another record high of $3.5 billion in a quarter that is usually impacted by the Lunar New Year holiday. This marks our seventh consecutive quarter of year-on-year sales growth in the region, which now represents almost 50% of our total sales. Demand increased across all the geographies and verticals we serve, led by the data center, industrial and networking markets. In March, I would be able to spend some time in China. With our Asia leadership team, including visiting with local customers and suppliers. This trip reinforced my belief in the opportunities for growth we see in the region that our Asia team is capitalizing on. In EMEA, we're pleased to see continued rebound in the region with sales growth both sequentially and year-on-year for the second consecutive quarter. EMEA is experiencing growth across a number of verticals, including industrial, networking and early signs of the long-term opportunities we see in aerospace and defense. Overall, I would say the market conditions in Europe are improving, although the demand environment is still mixed. We are seeing improvement in our strategic differentiators, including leading indicators in our embedded business, as customers and suppliers are looking for board and display level solutions. I was able to spend some time in Germany in late March, meeting with several of our IP&E suppliers and customers at our Avnet Apicus Technical Conference. The outlook and momentum I felt coming out of Europe was more encouraging than just even a few quarters ago. In the Americas, sales grew both sequentially and year-over-year marking our third consecutive quarter of year-on-year growth. Most end markets showed sequential growth led by networking, while aerospace and defense, networking and industrial were the strongest end markets year-over-year. Our Americas region recently hosted an IP&E Summit, bringing together leaders from our top suppliers to reinforce our focus and commitment to accelerating growth in the IP space. Our IP business had a record quarter, growing 25% year-on-year. We carry a world-class portfolio of IPD products and solutions and are benefiting from this multiplier effect as every active simulator chip requires surrounding IP components to function, think connectors, capacitors, passes, resistors and sensors, among other technologies. We continue to see success, driving conversations with customers about the full solutions we can provide with both our semiconductor and IP&E product offerings. Turning to our other value-added drivers of profitable growth. We continue to benefit from our field application engineers, complemented by our digital design capabilities and tools. Our Demand Creation revenues increased sequentially by 16% and from a design opportunity standpoint, the leading indicators remain positive, which bodes well for future design wins and downstream revenue. Our supply chain services offerings continue to grow and expand with many OEMs and that are household names. We are seeing opportunities and wins across many of the same verticals, where we are experiencing strong growth in the core business. These include transportation, data center and networking, among others. We believe we have the opportunity and capabilities to be the leading supply chain services and solutions provider in electronic components industry. Now turning to Farnell. We are seeing steady progress in Farnell's performance and recovery. Sales grew double digits year-on-year for the third consecutive quarter. Gross margins and operating margins expanded in line with expectations and the business remains on track with its return to double-digit operating margins over the next several quarters. Our [indiscernible] focus is gaining traction as we leverage Avnet's scale and relationships with pronounced capabilities and offerings. This unique combination differentiates Avnet and strengthens our value proposition to suppliers and customers. Farnell's continued investment in its e-commerce platform, customer experience, and inventory proposition positions us well as demand accelerates. Throughout this cycle, we remain committed to investing in the future of Advent with a focus on the long-term opportunities we see for the demand of electronic components. Our bankability has never been more critical. The proliferation of electronic components continues at a rapid pace with emerging opportunities in drone technologies, robotics and edge AI as just a few examples of the future trends. We have made substantial investments in our digital platforms and capabilities, supply chain and distribution center infrastructure and engineering resources. These investments are not just about near-term efficiency. There about future-proofing our company and ensuring we can support increasingly complex supplier and customer needs as technology and supply chains evolve. At the same time, we have stayed disciplined in managing expenses optimizing inventory and allocating capital. We have consistently said we will balance reinvestment in the business with returning capital to shareholders, all while prioritizing and maintaining a strong balance sheet and we have delivered on those commitments. In closing, I'm extremely proud of what our team has accomplished, and I'm excited for the continued recovery in our business. These results reflect not only an improving market environment, but also the resilience, experience and dedication of our team. With the breadth of our supplier [ Loncar ], our diversified customer base and the strength of the end markets they serve, we are well positioned to deliver sustainable growth and improve returns into the future. We are thrilled by the momentum of the business and are confident in Avnet's ability to execute at a high level. So with that, I'll turn it over to Ken to dive deeper into our third quarter results. Ken? Ken Jacobson: Thank you, Phil, and good morning, everyone. We appreciate your interest in Avnet. Our sales for the third quarter were approximately $7.1 billion, above the high end of our guidance range and up 34% year-over-year. On a sequential basis, sales were higher by 13%. Regionally, on a year-over-year basis, sales increased 39% in Asia, 31% in Europe and 27% in the Americas. During the third quarter, sales from Asia were 49% of total sales compared to approximately 47% of sales in the year ago quarter. From an operating group perspective, electronic components had record sales during the quarter as sales increased 35% year-over-year and increased 13% sequentially. In constant currency, electronic component sales increased 31% year-over-year. Cornell sales increased 24% year-over-year and 6% sequentially. In constant currency, Farnell sales increased 18% year-over-year. As Phil mentioned, supply dynamics have been driving some price increases, especially in memory. And in the third quarter, we saw the impact of these pricing increases in our sales growth. Approximately half of the sequential sales growth and approximately 1/4 of the year-over-year sales growth was attributable to higher memory pricing. For the third quarter, gross profit margin of 10.4% was down 68 basis points year-over-year and slightly lower sequentially. Electronic Components gross profit margin was flattish sequentially and down year-over-year, primarily due to a combination of higher percentage of sales coming from our Asia region as well as some differences in product and customer mix in the Western regions. We reported higher gross profit dollars as a result of the previously mentioned price increases. Although the pass-through of these price increases has less of an impact on gross profit margin. As a reminder, when component prices increase, we communicate the changes to our customers and pass through the corresponding increases. From a Farnell perspective, gross profit margins were up 34 basis points year-over-year and were up 49 basis points sequentially, in part due to an expected improvement in product mix of on-the-board components. Turning to operating expenses. SG&A expenses were $519 million in the quarter, up $83 million year-over-year and $27 million sequentially. The sequential increase in SG&A is primarily from a combination of higher sales volumes, including related incentive compensation expense as well as foreign currency. Foreign currency negatively impacted SG&A expenses by approximately $3 million sequentially and $22 million year-over-year. Excluding the impact of foreign currency, SG&A increased approximately 5% sequentially and 14% year-over-year. As a percentage of gross profit dollars, SG&A expenses were lower sequentially at 70% compared to 74% last quarter. As our business grows, we expect to continue to maintain our disciplined expense management and drive efficiencies in our business while still making investments in the future. We expect our SG&A expenses as a percentage of gross profit dollars to be in the mid-60s percentage-wise over the next year. For the third quarter, we reported adjusted operating income of $221 million and the total Avnet adjusted operating margin was 3.1%, an increase of nearly 40 basis points from last quarter. This represents the third consecutive quarter of adjusted operating income margin expansion. Adjusted operating income also grew more than 2x sales compared to last quarter. By operating group, Electronic Components operating income was $235 million and EC operating margin was 3.5%. And the nearly 40 basis point sequential increase in EC operating margin was led by the business recovery in Europe. This is EC's second consecutive quarter of operating margin expansion and is the highest EC operating margin since the first quarter of fiscal 2025. We continue to gain momentum in EC with the recovery of both Europe and the Americas, we currently expect our EC operating margin to reach our 4% near-term goal within the next fiscal year. For new operating income was $24 million, and their operating income margin was 5.2%. And which was up 55 basis points from last quarter, reaching its highest level in 3 years. This is Farnell's sixth consecutive quarter of operating margin expansion. Similar to our EC business, we see momentum in Farnell and expect to continue driving operating margin expansion with the near-term goal of getting back to double-digit operating margin by the second half of calendar 2017. Turning to expenses below operating income. Third quarter interest expense was $63 million, and our adjusted effective income tax rate was 23%, both consistent with expectations. -- adjusted diluted earnings per share of $1.48 exceeded the high end of our guidance for the quarter. Adjusted diluted earnings per share grew more than 3x sales compared to last quarter. Turning to the balance sheet and liquidity. During the quarter, working capital increased by $145 million sequentially, primarily due to an increase in accounts receivable driven by the growth in sales. Working capital days decreased 11 days quarter-over-quarter to 76 days. From an inventory perspective, Inventory increased by $168 million or 3% sequentially. The increase in inventories was primarily driven by an increase in certain memory products to support supply chain services engagements and from an overall increase in inventory received at the end of the quarter. inventory net of accounts payable decreased by $115 million compared to last quarter. We ended the quarter with 77 days of inventory, achieving our near-term target of below 80 days earlier than anticipated. Our EC business had 70 days of inventory and our Farnell business had just over 200 days of inventory. As a value-added distributor in the center of the technology supply chain, inventory is a critical enabler for our business. We remain focused on making the necessary inventory investments to position ourselves appropriately to capture the numerous opportunities we see in the markets we serve. We continue to prioritize servicing our customers' and suppliers' inventory needs through an overall pipeline of inventory and through a variety of supply chain programs to meet expected customer demand. Our return on working capital improved over 300 basis points sequentially from both higher operating income and the reduction in working capital days. Continuing to expand our return on working capital is a focus across all of our businesses. We expect to achieve our near-term goal for return on working capital of 16% by the second half of fiscal 2027. In the third quarter, we used $54 million of cash flow for operations to support $800 million of sequential sales growth. We anticipate a use of cash flow from operations in the fourth quarter to continue supporting the sales growth, primarily in the form of accounts receivable. Cash used for capital expenditures was $17 million during the quarter. In line with our stated priorities, we ended the third quarter with a gross leverage of 3.6x and down from 3.9x in the second quarter with approximately $1.7 billion of available committed borrowing capacity. We believe we are on track to reduce our leverage to our previously stated target of approximately 3x by the end of the calendar year. Returning excess cash to shareholders remains a core priority of our capital allocation program. In the third quarter, we paid our quarterly dividend of $0.35 per share or $29 million bringing our year-to-date shareholder return to $224 million, including both our dividend and share repurchases. Once our leverage returns to our target levels, we expect to use a portion of free cash flow to repurchase shares. We have $226 million remaining on our existing share repurchase authorization. Turning to guidance. For the fourth quarter of fiscal 2026, we're guiding sales in the range of $7.3 billion to $7.6 billion and diluted earnings per share in the range of $1.70 to $1.80. Our fourth quarter guidance assumes current market conditions persist and implies a sequential sales increase of approximately 5% at the midpoint. The sales guidance implies sales growth across all electronic components regions. This guidance also assumes similar interest expense compared to the third quarter, an effective tax rate of between 21% and 25% and 83 million shares outstanding on a diluted basis. This was a strong quarter with solid execution and continued recovery in the West. We are proud of our team for continuing to demonstrate the value we bring to our customers and suppliers. There is always opportunity for improvement, and our goal continues to be to ensure that we remain well positioned to meet our current customer needs while taking advantage of the positive market conditions we are seeing today and are expecting in the future. With that, I will turn it over to the operator to open it up for questions. Operator? Operator: [Operator Instructions]. Our first question comes from the line of Melissa Fairbanks with Raymond James. Melissa Dailey Fairbanks: I must have hit star one early enough for a change. Congratulations on a great quarter. Glad to see the continued progress in everything. So I know you mentioned you've seen some pricing increases from some suppliers. Obviously, memory was a very significant piece of that. But is there any way of contemplating how much of your revenue growth outside of memory has been driven by higher ASPs, even if it's just for some of the higher value components, not just the price hikes or like absolute that volume growth, have you quantified volume growth recently? Philip Gallagher: Melissa, thanks for the comments. This is Bill. Not -- not -- I mean, the memory -- we just wanted to be fully transparent on that because it's frankly so public right now. I know you have a question on that. a lot of them are sort I think more of the price increase will start to come into play this quarter as April 1. So we didn't have a whole lot to calculate as far as a percentage of growth based on ASPs and the balance of the technologies. And if there were ASP increase, they already would have been in the run rate from the prior quarter. You know what I mean. So effectively, it was the bulk was memory. It might change for here in the June quarter. Ken Jacobson: Melissa, I would just add, I think as we go forward with other price increases, we don't expect those to be anywhere near the magnitude we saw in memory and it won't be everything. Melissa Dailey Fairbanks: Okay. Yes. Hard to replicate that level of price increases. Maybe digging in a little bit further, you mentioned that you've had incredibly strong growth across industrial networking and data center. Are you able to quantify how much those markets contribute to overall components revenue? Philip Gallagher: Yes. So roughly, you said industrial at somewhere 50%, 60%, probably? [indiscernible]So industrial is in the 30-plus percent right there. We've been that way. Historically, it's coming back pretty strong, actually, year-on-year. So that's roughly the numbers. Melissa Dailey Fairbanks: Okay. Perfect. Can I squeeze in one more? Philip Gallagher: Yes. Melissa Dailey Fairbanks: You mentioned longer lead times are spreading across more of the portfolio. I know IP&E has had some tightness for quite some time and then some of the memory or storage stuff. But just wondering if there are any areas where you're seeing stock outs yet or maybe even double ordering the [ cabo ] phrase? Philip Gallagher: Well, let me work backwards on that. On the double ordering more -- our suppliers will see more of that more because they could see similar orders from the same customers to multiple channels. tougher for us to see that. We'll see inflated demand or inflated forecast from the customers, right? So we'll -- and we do -- we are pretty disciplined around that if somebody is using 100 pieces a month for years and all of a sudden at 500 pieces per month like, okay, what happened, right? This is an example. So we are doing our dentist to track that and call that out as much as we can from an analytics standpoint. As far as lead times go and stock outs, no, it's mostly memory right now. However, we are, for sure, seeing lead times, you already mentioned the IP. They've gone out a bit not to stock out levels by any stretch, but they've been leaking out a bit by discrete a tad, analog is about flat to up a tad, but it's been up storage -- storage is going to up and that's going to be tied to memory more than likely, right? lead times about memory to want to push out the storage. So yes, that's about the picture right now. Melissa Dailey Fairbanks: Okay. Perfect. I appreciate all the detail. I know you have the data. I just had to write that or ask the right questions. Thanks, Guys. Operator: our next question comes from the line of William Stein with True Securities. William Stein: Great to see another strong quarter, and I hope you're right that we're sort of in the beginning of this upturn. Phil, you mentioned strength in AI data centers driving demand. Can you remind us what your exposure is to that end market? Is that simply traditional component distribution where the ODMs are using the channel? Or is there some sort of supply chain services associated with that? Any characterization of that exposure or sizing, for example, would be helpful. Philip Gallagher: Yes. Thanks, Will. Thanks for the comments. Yes. So I think we estimated a couple of quarters ago is somewhere in the 5% to 7% range, probably increased a little bit closer to 10% to 15% that we have exposure. And to be clear to your question, to go directly into the data center. And that would be, I don't know what you call it traditional anymore, but it's definitely tied to supply chain, it's more in the core and traditional product lines. And we don't -- as you know, we don't carry video. So it's not that and the bulk of that is selling into directly the hyperscalers and data centers is more an ag and within agent Taiwan. That's what we try to track is and work in track is what other verticals are being impacted with the expansion of data center, right? Industrial and others are also seeing a lift, and that's our sweet spot, right? So the -- it's directly to the data center we're tracking is the number I gave you. And then you got the, I call it the n-minus-one factor, right? What is the -- the industrial segment is I'd like to mention customers names you can imagine in power, power management, heating, cooling, HVAC, et cetera. They're also increasing -- and we're trying to determine how much is tied to the data center. But I hope that answers -- and yes, we are expanding our supply chain as a service opportunities as well, but that's not as much in that number that I gave you, every more services revenue. William Stein: One other, if I can. I was a little surprised to see components grow faster than Farnell in the quarter. I think based on your comments, it sounds like that's more memory driven, maybe there's less of that in Farnell. But I would just expect that at this point in the cycle when things are -- you're just starting to hear about lead times stretch prices increasing shortages starting to show themselves that perhaps Farnell starts to be a more prominent part of the business. Is that -- is that on the comm in your opinion? Or anything you can talk about the sort of performance differential between these two because Farnell has quite a bit of gearing on the margin side. Philip Gallagher: Yes. No, thanks, Will. I think part of it is they've had now 3 quarters of double-digit year-on-year growth. So they've kind of gotten a lift ahead of some of the core balance of the quarter outside of Asia outside of Asia. The other thing is they have a lesser percentage of their business is on board components, right? So their percentages are lower because of the MRO test and measurements. A big part of their business. So it's not all apples-to-apples, like everything we have. They're not 90% on board to or 90% sevelectorn IP like we are in the core. So I think that's the biggest delta difference. And then the other one is their strongest region typically the largest region is in Europe. And as we said in the script, although we're encouraged with what we're seeing in Europe ones, for sure, oxygen in Europe, and that's great news for us. It's still a little bit more spotty than what we see in other regions. So what we need is for Farnell to accelerate its growth in Europe as well. And that -- you're absolutely right. that will help the margin mix too. And they don't have as much memory. Yes, they don't -- the volumes of memory and the core is much higher. So that would also impact I hope that answers it. William Stein: It mostly does. Maybe just let me tack on maybe half question. Is this perhaps related to inventory work down that's still perhaps we're done with that for the most part, but is there still more of that that's going to really make the difference in the Farnell business customers truly depleting so that they have to come reorder? Philip Gallagher: Yes. I think I sure hope so. I think most of that's behind us. There's still probably somewhat visibility to everybody's inventory and the end customers. But I think for the most part, that is behind us. And we did see -- I mean, it's. We have seen revenue per line item is increasing, the lightens themselves are increasing. So the signs I mean, we're actually pretty pleased with where the progress we're making in for now. There's still work to do, and I know that seems on this call right now. So they know that we have our long-term marching orders there, and we're just going to continue to work towards those goals. Operator: Our next question comes from the line of Joe Quatrochi with Wells Fargo. Joseph Quatrochi: Maybe a few if I could. I think you said 50% of the sequential increase in revenue this quarter was related to pricing. Any help on how that contributed to this increase in EBIT on a sequential basis? Ken Jacobson: Yes, Joe, I think how I'd characterize it as we kind of try to get at in the script as we pass on prices, right, it does -- we maintain the same gross margin, but get incremental gross profit dollars. So I think it contributed to the overall drop-through in operating leverage. Now again, I think a lot of what we saw outside of the guidance and where the lot of the beat was, was in Asia. So continue to see that trend in Asia being strong, which now is close to 50% of our UC business. So -- but it helped the operating margin leverage like the other sales. But didn't have a meaningful impact on the gross margin. Joseph Quatrochi: Right. And I guess like on the EBIT dollar increase sequentially, fair to say that it was more than 50%. Ken Jacobson: I would say it was probably around the same as the sales growth in terms of the percent that coming from there. Joseph Quatrochi: Yes. Okay. And then I guess, as we think about just like what's embedded in the guidance, I think you said earlier, right, we've seen a round of price increases across maybe more of the broad analog mixed-signal space that kind of started taking place in April. So how do we think about that contemplate, I guess, in the 5% sequential growth for the June quarter? Ken Jacobson: Yes, I would say I think it's in there, at least what we know. But again, it's less pronounced than what we saw last quarter, right? So I think it's already kind of in the Q3 run rate for the memory pricing and then some of the other things are just a much smaller percentage. And again, it's not everything. And the timing is kind of throughout the quarter versus everything at the beginning of the quarter. So think about, yes, it might be double-digit increases in price, but it's to 0, let's say, on average right? If it's a like 100. Joseph Quatrochi: Yes. Yes. Okay. And then maybe just last 9 on the inventory, can you just kind of update us how you feel about your inventory positioning across just kind of the broader line card and where you see that going over the coming quarters? Ken Jacobson: Yes, I think we feel generally good. And again, I think Phil commented on the book-to-bill and the backlog, right, which is one of our challenges we've had over the past several quarters is trying to get that visibility so we can make sure our suppliers are building the right parts that are needed. So I think we feel good. There's still opportunity we have to some things that are in excess and some things that are aged right, continue to turn that and move that and convert did good inventory. But again, we're going to keep investing in inventory we want to make sure we're prepared and we've got enough to support the needs of the customers and the overall demand but we're happy with the progress on the inventory days, and we'll continue to work that where we have opportunities and continue to reinvest, especially in the IP side of things. Farnell still has some continued investment to make as well. So they're improving their inventory days as well, but there's still some things we want to make sure they're prepared as well. So again, I think you see it here continuing to kind of work down as we continue to grow, but still opportunities for some investment and some overall efficiency there. Philip Gallagher: Yes, Joe, I'll just add to that. I mean it's our life point, right? So inventory sometimes gets a bad word. It's we don't want to aging. We don't want too much of anything that we don't need, but we're constantly balancing that. And it's critical to obviously our suppliers that we've got the appropriate inventory and as importantly as lead times go out, that we're pipelining and part of that message is to our customers to continue to give us, as we talked in the script, more visibility longer term. And that's starting to happen, still not across the board, but that's starting to happen as well. So right now, we feel good with our inventory position. We'll continue to improve it. That means both the hopefully turning it but adding the appropriate inventory from SKU standpoint and to that point, Farnell, we've actually added -- and this is key back to Will's question even from an NPI or new product introduction, but we've added over almost 60,000 SKUs later another 70,000 additional SKUs just this year, and a lot of that is in the IP&E space, but as well across the board and semiconductor. So may we have a good handle on right now, and we feel pretty good about the position with inventory overall. Operator: Our next question comes from the line of Ruplu Bhattacharya with Bank of America. Ruplu Bhattacharya: So you beat guidance for fiscal 2Q, you're guiding above seasonal for fiscal 4Q. Based on the visibility that you have -- do you think that you can maintain above seasonal growth for the second half of calendar '26? Philip Gallagher: Well, we don't typically -- as you know, we don't typically guide out that far, right? But again -- and I really remain vigilant on this route. So we're just managing the bookings, managing the backlog and Yes, it looks positive at this point in time that we'll continue to see some growth as we get through the year. Summer is always tough to judge, right, with the holidays and whatnot. But we're not seeing anything that would really negate at this at this point in time. I think it's the important one. Ruplu Bhattacharya: Okay. Maybe I can ask a follow-up to Ken on margins and specifically on incremental margins, revenues leaked quite a bit. You came above the high end of guidance. Were you -- was this the incremental margin that you were expecting in the core business? And how should we think about that as we move forward? And has your expectation for Farnell margins changed? Initially, you had guided on the Farnell side, 50 to 100 bps of improvement every quarter. I think on the call, you said that you'll get -- you're targeting double-digit operating margin now by sometime in the second half. I think you said of calendar '27. How should we think about that incremental margin on that side of the business? Ken Jacobson: Yes, I'll start with the last one first about Farnell Ruplu. And I would say, I think we're tracking pretty well. We saw a nice uptick in gross margin because the on-the-board component mix as expected. I think Phil mentioned here is that Europe really comes back, and we've had a couple of quarters of growth there now, but it's not the same as what we're seeing in Asia, for sure, or even in the Americas. In terms of the growth in Europe, both at Farnell and for the core business. So I think as that continues to recover, which we're monitoring, you'll get some more uplift there. So we feel good about the progress and the guidance implies improvement in that range. We were expecting in terms of the fourth quarter. I think for the quarter itself, going back to the last comment, a lot of that beat came from Asia, right? We expect it to be down a little bit because of the Lunar New Year, and it was up. And so that's impacting the overall operating margin. But I think, in general, we had good progress on operating margin expansion in and let's say, the guidance implies further improvement there. So we're tracking pretty well and have a few quarters in a row now. And then the combination of the two helps the Avnet Inc. operating margin expand. So it's still a few quarters away from kind of where our near-term milestones are, but I think we're making good progress and feel good about that. And then obviously, the broader leverage and operating income dollars is much growing much faster than the sales, which is what we'd expect. Ruplu Bhattacharya: Okay. Let me just ask a clarification on that. So on Farnell margins, where do you think that can get to by the end of this calendar year so that we set our expectations. And then on -- maybe my last question would be, you talked a lot about memory. How much is memory as a percent of revenue or as part of the product line? Like how big is that in terms of your product line or in terms of revenues? Ken Jacobson: A few different questions there. So I think we said 50 to 100 basis points a quarter for the Farnell improvement. So if you take that by 3 quarters left in the calendar year, you get $150 to $300 million, right? So I think that's not changing. And then from a memory perspective, obviously, with where pricing has gone, it's become a bigger percentage. So think about roughly in the low double-digit range. And that's primarily a core business kind of comment. EC, Farnell has much -- would be a much smaller concentration. Operator: And there are no further questions at this time. I will now turn it back to Phil Gallagher for closing remarks. Philip Gallagher: Okay. Thank you, and thanks for everyone attending the call, and I appreciate all the callbacks and the questions. So again, thanks for attending today's call. We look forward to speaking to everybody at our upcoming conferences and our fourth quarter and fiscal year 2026 earnings report in August. Okay. Thanks a lot. Operator: Ladies and gentlemen, this does conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation.
Operator: Good day, and welcome to the Equity Residential 1Q 2026 Earnings Conference Call and Webcast. Today's conference is being recorded. At this time, I would like to turn the conference over to Marty McKenna. Please go ahead. Marty McKenna: Good morning, and thanks for joining us to discuss Equity Residential's First Quarter 2026 Results. Our featured speakers today are Mark Parrell, our President and CEO; and Michael Manelis, our Chief Operating Officer; Bret McLeod, our CFO; and Bob Garechana, our Chief Investment Officer, are here with us as well for the Q&A. Our earnings release is posted in the Investors section of equityapartments.com. Please be advised that certain matters discussed during this conference call may constitute forward-looking statements within the meaning of the federal securities laws. These forward-looking statements are subject to certain economic risks and uncertainties. The company assumes no obligation to update or supplement these statements that become untrue because of subsequent events. Now I will turn the call over to Mark Parrell. Mark Parrell: Thank you, Marty. Good morning, and thank you all for joining us today to discuss our first quarter 2026 results. I will start us off, then Michael Manelis, our Chief Operating Officer, will speak to our first quarter operating performance, and then we'll go ahead and take your questions. Our first quarter operating results met our expectations with strength in San Francisco and New York, driving our same-store revenue performance. These 2 markets share common elements of strong demand from our target higher earning renter demographic for our well-located apartment homes and low levels of new supply. So let me spend a few minutes now talking about why we are excited for the setup for our business in the back half of 2026 and into 2027. As I said on our last call, we expect deliveries in our markets to be down 35% in 2026 versus 2025. And the forecast for expected future deliveries continues to show substantial declines over the next few years, creating a very positive trend line for our business. Also, our higher-earning customer demographic continues to demonstrate solid financial health with rising incomes, and we also see lower delinquency across our portfolio. Then there is a single-family for sale market that continues to be a challenge in terms of both cost and inventory, translating into customers renting for longer and leading to our record low turnover levels and strong renewal rates. With all those positives, the one missing ingredient is an accelerating job market and current signals there remain mixed. That said, we do see some green shoots in the form of postings on the Indeed job site for heck rolls and other similar high-earning jobs, rising substantially across many of our markets since November of 2025. That provides us cautious optimism even in the [ phase recent ] job cut announcements at big tech firms. But with a portfolio that is more than 96% occupied with much lower levels of new apartment supply for the foreseeable future and limited owned housing choices, it will not take a lot of new jobs to drive more widespread, strong operating performance in the future. On the transactions front, we did not acquire or sell any assets in the first quarter. We did update our transaction guidance for the rest of the year to reflect the likely sale of a couple of properties. This is a continuation of our process of improving the portfolio by selling older capital-intensive assets are assets in places where we have heavy concentrations. As we previously disclosed, we repurchased $220 million of our common shares during the first quarter, bringing total repurchase activity to $500 million since August of 2025. And with that, I'll turn the call over to Michael Manelis. Michael Manelis: Thanks, Mark, and thanks, everybody, for joining us today. I'm going to provide a quick update on our operating performance, including some high-level market commentary, and then we'll begin the Q&A session. So overall, we had a good first quarter with our results, reflecting the continuation of our disciplined operation execution with both same-store reported revenue and expenses generally in line with our expectations. On the expense side of the house pressure from Northeast snow removal costs and utilities, were offset by a very low 20 basis point growth in payroll. On the revenue side, we are starting the spring leasing season in a good position with solid demand and strong physical occupancy of 96.3%. During the quarter, we also saw improvements in bad debt and the financial health of our resident base remains very supportive. Household incomes for new move-ins have increased and rent income ratios have fallen to 19%. Sitting here today, net effective prices have increased just over 4% since January 1, which is in line with normal trends and our occupancy and current demand levels are providing continued momentum into the second quarter. On a cash basis, concession use continues to decrease across most of our markets and is down about 21% across the portfolio as compared to the first quarter of last year. As we have said in the past, an improving supply and demand balance leads first to increasing occupancy levels next to reduced concessions, then to absolute rental rate increases, all of which ultimately drives growing blended rates from leasing activity and future same-store revenue growth. We already see San Francisco and New York, where we are posting strong same-store revenue results as far along in this market performance continuum and expect most of our other markets to make progress to varying degrees as the year progresses. In the first quarter, we reported blended rate growth of 1.5%, which mirrored the blended rate growth from the first quarter of last year on this same-store set and demonstrates a 130 basis point sequential improvement from the fourth quarter of 2025. This sequential improvement included a 260 basis point lift in new lease change and a 30 basis point improvement in the achieved renewal rate increases. Retention continues to be a key driver of our performance, our centralized renewal strategy is performing well as evidenced by 61% of our residents renewing with a 4.7% achieved renewal rate increase, which was slightly better than what we expected. Looking across our footprint, performance continues to vary by market, which was expected. The strength in key gateway markets like San Francisco and New York, which both exceeded our already high expectations for the quarter are offsetting a slower-than-expected start in Boston and Seattle. Together, New York and San Francisco constitute about 30% of our NOI and have the best supply and demand outlooks in the country. Our urban exposure in these 2 markets is particularly unique to equity residential and should be a relative strength for us versus our peers this year. San Francisco continues to be the best-performing market in our portfolio. The tremendous growth in AI is making San Francisco, particularly the downtown, the place to be. Despite a few headline grabbing layoff announcements, the market continues to have good job postings and strong office leasing activity. Looking at migration patterns, we are seeing more residents come to us from out-of-state and outside the MSA, which is a good sign for continued pricing power. Concession use in the downtown submarket where we derive 22% of our NOI here is virtually nonexistent. The overall catalyst here is that strong demand is meeting a market that will deliver almost no new competitive supply in 2026. New York also continues to post excellent performance with demand outpacing supply and has almost no new competitive deliveries coming online in 2026. The large financial institutions continue to produce record profits and employment in the market is very stable. This sets us up for another year of strong results. Boston started the year with challenging weather conditions and is also still feeling the impact in Cambridge around life science funding. Our overall outlook for Boston has moderated as a result, but this is a very seasonal market, and it's still early. Overall, we still think that the city will outperform the suburbs based on the location of the 2026 new deliveries. And while D.C. is performing in line with our modest expectations, pricing power is less than normal, although we expect that to improve as the year progresses, given the dramatic decline in new deliveries. With only 4,000 units being delivered this year, a decline of over 65%, the real question here is whether we will see any improvement in consumer confidence in this market. The current levels of uncertainty are clearly holding back the potential for this market. Any positive shift should allow us to recover from what has been a slower start to the year. Heading back to the West Coast, Seattle is not experiencing the AI-driven demand boom that we're seeing in San Francisco and is currently trending below our expectations due to a slower start to the year. Historically, Seattle has followed cyclical trends from San Francisco, both good and bad, by about a year. And while it's still too early to call, given some of the headline risks regarding layoffs, we still see the potential for this market to tighten up. Today, the market is still working to absorb the new deliveries from 2025. Concession use is down 22% in the quarter, but demand is still price sensitive causing this market to lag normal seasonal improvements. On a positive note, we've seen some good traction in the Bellevue, Redmond submarket with recent office leasing activity announcements and having more residents during the quarter come to us from outside the MSA. Right now, rents are trending positive year-over-year and concession use is very limited in the Bellevue, Redmond submarket. In Southern California, Los Angeles is performing in line with our tempered expectations. While the downtown is starting to feel a little better as the city prepares for the events like the World Cup and Olympics, continued uncertainty in the entertainment business is an overhang on the market and we have still not yet seen any catalyst on the job front that will drive growth in the near term. In our newer markets, we continue to see improving conditions in both Atlanta and Dallas with concession use coming down, which again is an early indicator that the overall market is improving. Atlanta is performing the best, and if the current trends continue, this market should deliver slightly positive same-store revenue growth for the year which is better than what we thought 90 days ago. Turning to Denver. We are seeing some strength in occupancy and initial signs that the market may have bottomed out. With a sizable decline in new starts, improving operating conditions and current competitive pressure easing, our newer markets, excluding Austin, Texas, all have the right setup for recovery through the balance of this year. On the innovation front, we're about 6 months into our full deployment of the AI-assisted application process, which includes screening. As I mentioned, delinquency from new resonance is trending down, resulting in improvements in our bad debt net performance. We're also continuing with the successful rollout of our bulk Internet program, and we'll have about 60% of the portfolio live by year-end. We believe that offering a superior connectivity at pricing that is better than our residents can get on their own is supportive of our goal of delivering a value-add customer experience. As we look ahead, our priorities remain unchanged. We are focused on driving disciplined pricing, reinforcing retention and maintaining tight control over expenses. As we head into our primary leasing season, the environment at a high level is stable and in many areas improving. Portfolio-wide occupancy remains at strong levels to our focus naturally shifts from a reliance on occupancy gains to optimizing pricing. In the second quarter, we expect to see a sequential build in new lease change and strong, stable performance in terms of retention and achieved renewal rate increases. Overall, we are well positioned and we'll maintain our operational agility and strategic focus to deliver sustained value with the best operating platform and people in the industry that combine automation, centralization and a passion to deliver a seamless customer experience to our residents. At this time, I will turn the call over to the operator to begin the Q&A session. Operator: [Operator Instructions] We'll go first to Eric Wolfe with Citi. Eric Wolfe: I think last year in May, we started to see a few signs of an earlier peak in pricing. As you look forward 30 to 60 days, are you seeing anything that would suggest something similar to last year? Or does the seasonality at this point look more normal to you? Michael Manelis: Eric, this is Michael. I think relative to last year, I look at this and say, our setup was pretty good at this time last year as well, and we feel good about the positioning that we have. The strength that we see on the retention side of the business right now gives us a lot of confidence that heading through the spring into the peak that we're going to maintain this position that we have. So I think what we have is a setup that is a little bit [ within ] last year, with the weakening that we really started to feel, I would say, more in the late second quarter or third quarter, we are heading into a place of unprecedented times with such low levels of new supply. But I think if we can maintain this velocity and get over the peak leasing season, that back half of the year with the setup of such limited new competitive supply coming online, really does position this portfolio well. Eric Wolfe: Makes sense. And then you mentioned that rent incomes were at 19% now. Can you just remind me what the sort of lowest that has ever gone. And I don't know if you have an opinion about sort of why rent growth has become a bit more disconnected from wage growth than is typical. Michael Manelis: Yes. I mean I think the range is historically have always been somewhere between 17% to 23% across our markets. And I think at any given time, you've seen this portfolio be 19% to 20%. So it feels like we're kind of right in line with the norms. I think what we saw in this quarter is you just saw a place where incomes have grown and you can see kind of the demand coming in that just have some higher income levels against rents that are in line with kind of normal seasonality, but I think that increase in the income is what kind of caused us to tick down a little bit. Operator: We'll go next to Steve Sakwa with Evercore ISI. Steve Sakwa: Michael, I don't know if I missed it, but did you talk about where renewals were going out for May and June? And I guess, what are you achieving on those versus sending out? And just remind us what your blended spread expectations are for the year? Michael Manelis: Yes. So Steve, this is Michael. So right now, I would say the renewal quotes that are out there really for the next kind of 3 months already at this point. And we're sitting somewhere just over 6% kind of with the quotes and kind of have a lot of confidence in our centralized renewal process. Our centralized renewal team handles all the negotiations. It allows us to kind of execute various strategies across markets and submarkets. This is the time of the year where we tighten up negotiations. So we got a pretty high degree of confidence that we're going to maintain and achieve renewal rate increase somewhere right around that 5% range kind of in the months to come. So in terms of the blended rates right now, we're not changing our full year expectations. We had about a 1.5% to 3% kind of growth rate. And embedded in that was implied new lease change roughly flat renewals somewhere around that 4.5% to 4.75% range. And right now, renewals are doing a little bit better than what we thought. New leases a little bit later than what we thought. So we love the setup heading into the peak leasing season. We love the supply picture in the back half of the year. But at this point, it's still probably too early in the year for us to change that full year outlook for the blends. Steve Sakwa: Okay. And then maybe just on capital allocation for either Bret or Mark. There's obviously been a pretty big dislocation in the public markets versus private market. Have you guys thought about leaning even heavier into the disposition program and kind of taking advantage of kind of what the private market is offering? Either to build up the balance sheet or kind of take advantage of buybacks? Mark Parrell: Yes. Thanks, Steve. It's Mark. I'm going to start, and then Bob will kind of give you a feel for the disposition market. So we are open. We've done a fair amount of net disposition activity. You saw last year, $500 million. We took third, fourth and into the first quarter of this year to deploy those proceeds into the buyback. We're open to doing more buybacks. We like the match of selling these lower-growth assets and buying the stock. So we're very open to that. It's just it kind of comes and goes a little bit. So I'll let Bob talk about some of the assets that are embedded in the increased disposition guidance you saw and some of the other stuff we might expose to the market. And we are open to using the balance sheet, meaning using debt to buy stock back. But you just have to remember that's a very different decision because you're affecting the capital structure of the company. And you can only do that a certain number of times before, obviously, you've used that capacity up. So our preferred means is dispositions. But of course, we are aware that at 4.3x were relatively underlevered and have that opportunity as well. So Bob, do you want to... Robert Garechana: Yes. Steve, it's Bob. And as Mark mentioned, we did introduce disposition guidance for the quarter, for the first time, so a $165 million. And these are assets that we're pretty confident that we're going to execute on, and that's why we introduced them into the mix. I think the critical thing that Mark already mentioned about what we're looking to sell are assets that are perhaps not best suited for our portfolio today, right? So these are assets that have value-add components or growth components or concentration risk. So those do take a little longer, typically to execute from a disposition standpoint because the buyer pool may not be as broad as just down the main fairway. That being said, interest is, I think, the world has seen in multifamily in the private sector is very robust. And so we continue to see bidding tents that are very large. We continue to see interest in our asset class, and we continue to see a lot of private capital. So I think you'll continue to see us execute as we go. Operator: We'll go next to Jana Galan with Bank of America. Jana Galan: Congrats on a great start to the year. And Michael, thank you for all the geographic detail. Can you comment on the magnitude of the decline in concession usage by markets? Just trying to figure out where we could start to see the new leases inflect sooner versus later? Michael Manelis: Yes. I mean, really, the concession dollar amounts across most of the markets are down because this is a low volume of transactions in the first quarter as well. As we think about the concession use going forward, my guess is right now, we're going to see continued elevated cash concessions in the newer market along with kind of probably into the DC and maybe even Seattle markets for the second quarter. So for us, when we modeled the concessions out we still kept the concessions pretty heavy through the expansion market for most of the year. As we turn the corner into the second half of the year, given the decline in supply, we expect concessions to materially decline, especially relative to the increases that we saw in the second half of last year. So I think the expectations right now on a full year for concessions, I would still model somewhere about 20% reduction relative to what we used in 2025. In the second quarter, my guess is that the year-over-year reduction is probably going to be a little bit less than that because the cash concessions are probably going to stay about the same as what we just did in the first quarter. But then as we turn the corner into the second half of the year, we do expect them to be down considerably compared to last year. So concentrated again, newer markets, a little bit in D.C. and Seattle. But outside of that, the majority of the markets are going to continue to see reductions. Operator: Our next question comes from the line of John Kim with BMO Capital Markets. John Kim: Looking at your prior years, it looks like the April new leases tend to be fairly representative of what you end up in the second quarter. So I'm wondering if you feel that dynamic is going to occur again this year at minus 1.1%. Or do you think there's a chance of inflect positively? Michael Manelis: John, it's Michael. No, look, I think you're going to continue to see a sequential build. Our net effective pricing is continuing to grow across this portfolio. So my guess is we should expect to see some continuation momentum of improving new lease change. I don't think it's going to be like materially different than what you can see we just posted, but I don't expect us to end the quarter at minus negative 1% for the quarter. My guess is you'll see each month sequentially build and put us closer to kind of flat. John Kim: Okay. And then New York, it's been several quarters where you've been saying it's been one of your stronger performing markets. Recently, there have been some high-end multifamily assets that traded hands to another public REIT. So I'm just wondering, are those assets that you looked at? Is this a market where you would allocate more capital? Or are you still really focused on some of the expansion markets? Mark Parrell: Yes. Thanks for that question, John. I'm going to just start about New York in general. And I'm going to let Bob talk about the deal that stuff that traded in our interest or relative lack of interest. So we're about 14% allocated to New York Metro, mostly Brooklyn, Manhattan and a little bit of the Jersey Coast and one asset in suburban New York. Pretty unique portfolio. It's performing really well. We're benefiting from all the banks doing so well. We're benefiting from financing of the AI boom, all those things and some pretty limited supply in that market. I feel like we're more kind of in a trading mindset in New York, 14% feels about right to us. So you may see us sell, you may see us buy. But by and large, 14% feels like a really good weighting. And our urban portfolio feels like a uniquely positive thing for us compared to our peer group. And then Bob, if you want to comment on what's sold? Robert Garechana: Yes. We -- I would say that we underwrite everything, whether or not we look at something and bid on something is different, and we did not bid or look at these specifically, but we certainly underwrote them. One of the benefits of our Manhattan portfolio that's also kind of a nuanced approach. It's pretty straightforward and pretty simple in that we don't have a lot of 421-a burn off. We don't have an extensive amount of retail exposure. And so they're pretty straightforward. And that's one of the benefits that you see flowing through to the underlying NOI. The assets that ended up trading were a little more complicated than our liking. So they had more retail components. They had more tax abatement burn-off components. And just frankly, weren't of interest. So we didn't bid or look at them. Operator: We'll go next to Haendel St. Juste with Mizuho. Haendel St. Juste: Great to see the continued strength in San Francisco and New York. It seems like the slowdown, as you mentioned, [indiscernible] was in line with expectation, Boston, Seattle, a bit weaker. But I guess I'm curious, kind of beyond the next few months, New York and San Francisco clearly had momentum. What are you expecting for your coastal markets, the other group, I mentioned, the L.A., Seattle, D.C., Boston, how do you expect them to trend over the next year? Which of those markets are you most excited about? It seems as though there's tougher comps in some cases, weaker demand drivers. So curious how you're -- what data you're looking at, which of those markets perhaps you're more encouraged about over the next 12, 18 months? Michael Manelis: Yes, it's Michael. Look, looking -- sitting here today, you have to focus on D.C. with such tremendous drop-off in the supply. I mean, it's 65% less new units coming online. That will equate to some level of pricing power in that market. So we didn't have -- we have pretty modest expectations for the full year. But I think as you fast forward and go out 12 to 18 months, that market with such little new competitive supply. So I think a few starts actually in the market as well, sets up for another strong year next year. We need a little bit of confidence on the demand side of the equation for us to really see that thing take hold. Outside of that, I've said for L.A., we had muted expectations. I don't know that we've seen anything yet to suggest that we'll model differently for the balance of this year. and we'll kind of see where the entertainment industry is kind of closer to the end of the year before we talk about next year on those. The Boston and the Seattle markets right now, I think they're off to a slow start. Boston had a really horrific winner, cold, lot of snow kind of probably impacted a little bit at the start that we're seeing. I like the setup in both of these markets, and I like the recovery potential of Seattle. The history has shown it follows San Francisco, good or bad, by about a year. So my guess is we'll start talking positively about Seattle sometime here this year or into the early part of next year. Haendel St. Juste: That's great color. Appreciate that. On the -- perhaps on the [ Seattle ] or the expansion market, I think you said and forgive me a misquoting that they have the right setup for recovery into next year. We know the supply is falling. But maybe some color on where you're seeing some improving demand, pricing power or concessions are probably coming off the most. So maybe some color on that comment and which markets perhaps are standing up beyond the maybe the Atlantics of the world? Michael Manelis: Yes. So let me just add, I can't speak about the [indiscernible] I can only talk about the few markets that we own and operate in those. So really, Atlanta, Dallas and Austin, right now, we have 3 properties in Austin. We don't expect any material change in performance this year because there's still a lot of overhang of supply and there's still some new supply being delivered this year. Between Atlanta and Dallas, Atlanta really ticked up a lot for us this last quarter and is now kind of set up to potentially eke out some positive revenue growth this year, which is better than what we thought. So we have seen concessions pull back. We do see kind of good occupancy. We do have kind of that momentum right now heading into the peak that is outperforming what we're seeing in Dallas, but Dallas still sitting here today feels pretty good. It's got -- it's doing a little bit better than what we thought, but Atlanta feels like it's got more momentum right now. Operator: We'll go next to Brad Heffern with RBC Capital Markets. Brad Heffern: Yes. So the Bay Area continues to be very strong, and you talked about AI driving that. There's a lot of investor debate about whether this is going to be a multiyear trend or whether AI ultimately pushes employment the other way. Obviously, nobody knows, but I'm just curious to get your take on how sustainable you see the strength in the Bay Area as being? Mark Parrell: Yes, it's Mark. That's obviously a bit of a speculative question, and I know you probably feel that too. To us, it feels like the AI boom and be honest, the affordability boom in San Francisco is likely to continue. I mean rents downtown, where we have a significant portfolio of just recently moved above rent levels just before COVID. So our resident can certainly reflect back on getting a 30% increase in nominal wages since 2019 and have the rent about flat. So there's room to run there. We see all the office leasing activity, everything around AI. It isn't just the actual creators of AI, it's all the systems that sit on top of it. A lot of this employ in the small groups of people building on top of AI systems, various helpful applications of sorts. So I think there's room to run here. I think this technology there'll be ebbs and flows and valuation, things will happen. But I think there's a lot to come here, and I think the resident can afford it because I think their nominal wages have gone up quite considerably in the San Francisco area. So this deal is pretty persistent to us. And again, the ecosystem of great universities and all the venture capital money in the area and all that is also supportive of this continuing to be a kind of innovation center for everything AI and everything else, technology related, which does seem to me to be the future even if there are kind of fits and starts. Brad Heffern: Okay. I appreciate that. I know it's a difficult question. In the prepared remarks, you talked about residents coming to the Bay Area from outside the market. I was wondering if there are any stats or additional color you can give on that dynamic. Michael Manelis: Yes. So I mean, every quarter, we're looking at where our new move-ins coming to us, what percent come from within the MSA. And then obviously, I've said over the last several years, right, for us to really start seeing sustained pricing power momentum, we'd like to see in some of these markets, a bigger draw from outside the MSA, a bigger draw from outside of the state. And we saw that both in San Francisco and in Seattle specific to the Bellevue, Redmond submarket. So they're not huge percentages. It's like 5% more move-ins. But it's the trend lines that we've seen in San Francisco now where we have multiple quarters of seeing kind of that pattern old, which is really giving us that confidence that we're in a position of pricing power for the next several quarters. Operator: Our next question comes from Alexander Goldfarb with Piper Sandler. Alexander Goldfarb: Mark, just following up on -- as you guys think about dispositions. The markets are certainly interesting, if you will. New York rebounded strong after the pandemic, San Francisco has been a dream case on the other side. You've got the contrast between Seattle and the East side, L.A. versus like Orange County and San Diego. So as you guys assess your portfolio and assets to sell, how are you making the decision which markets sort of may have deeper longer challenges, and therefore, it's worth really downsizing versus which are sort of like the New York or San Francisco, which is at the moment in time and you just have to wait for the pendulum to come back? I'm just trying to think, as you're assessing asset sales and buybacks, how you're thinking about the market? Mark Parrell: Yes. Great question. I'm going to take the market focus. And maybe I'll have you Bob speak to asset challenges because some of these decisions, Alex, we like the market or submarket, but we just have an asset that maybe we don't believe in the capital story or the micro location. So again, just generally, our exposure pre-COVID to California was 45%. Now it's around 40%, getting that number down over time, probably mostly with the reduction in Los Angeles is, I would say, more of a strategic goal of ours. Right now, that's not a terribly salable market, so we can weight that out a little bit. So that's a spot where we maybe have a little less conviction is Los Angeles. And that isn't just the regulation, of course, that's pervasive in California. It's just unemployment stuff. And Bob talked about that on the last call and Michael has, too. It's the entertainment industry really feeling like there's been a paradigm shift away from Southern California and just not feeling like those employment drivers are what we thought they were when we made those investments initially. And a little bit of downtown Seattle. That, again, is an area that has some advantages and has been kind of recovering and fits and starts, but we do have a fair bit of exposure there and probably is another strategic reduction. All that, it's a little bit more tactical. And I guess I'll give it to Bob to talk about that. Robert Garechana: Yes. I mean it really is an overall portfolio strategy approach, really taking an integrated approach to that at the asset level. So we integrate our capital with our disposition and acquisition kind of mindset. So we underwrite every single asset. I just actually went through this exercise with the team because if you're not selling, you're buying. And so we integrate that into our capital plans. We look at what the asset. We make an assessment of what we think the asset performance is going to be going forward. We compare that against our cost of capital, and we decide what can we do about that? What levers do we have? So in some instances, that can mean on a specific asset, we're going to invest that value-added renovation capital. We're doing $90 million of that this year, and we'll get a return that will compensate the shareholders. And in other cases, we see that, that's not an option. And so therefore, we look to sell that in the market when the market allows and redeploy that in something that's more accretive. Alexander Goldfarb: Okay. And then the second question is regarding the stock buybacks, you guys before, have done developer equity programs where you fund a third-party deal, you get fees along the way, et cetera. How is that looking as an opportunity to put capital out, especially if you think about derisking to wholly owned development? How is that looking today versus just straight buying back your stock? Mark Parrell: Yes. I want to draw a distinction. It's been pretty uncommon, Alex, for us to do any kind of investment in development where we don't have a clear path to ownership, like all our deals, the 2 new ones we did, they do have partners in them. But I mean, we have the right and expect to own those assets. It's all been pretty infrequent in my career here where we funded like some of our peers do, a program where it's just funding a development, but we don't have an expectation or a legal right to own it somewhere in the process. So I guess I'd say we don't do that sort of [ mezz ] lending or preferred equity or whatever you want to call it, in development very much. When we do it, whatever the structure is, whether it's called debt or equity, it's intended for us to own the property and there's a path to ownership. Alexander Goldfarb: But I mean as far as the path to ownership, how does that look versus buybacks as you judge the math of doing a third-party development deal where you're going to own it versus buying back your stock? Mark Parrell: Yes. I think that's a great question. Let's use the 2 development deals we started this quarter as an example. Obviously, the stocks thankfully run up a little over the last few days, but we are comparing the stock and our acquisition opportunities and development all the time. So why don't you talk, Bob, about those? Robert Garechana: Yes. And so I think what you're highlighting, Alex, is that like in the new choice, I think the stock is obviously a really compelling choice. It's probably oftentimes the most complying choice. The next decision or the next those compelling choice is probably the development side today. Now you got to risk-adjust it, right? Because the risk and the development is different than the risk in the stabilized portfolio implied in the stock price. But like the 2 deals that we did that we announced or started this quarter, those deals generally on a current yield basis are closer, may not be exactly perfect with the implied cap rate of the stock. But then we're also looking at the IRR, right? And so we're looking at the IRR in the aggregate over time and comparing that to our WACC. And in the instance of the Atlanta deals, you're looking at delivering into -- in the one case, an asset that is in a very supply-constrained area that does exist even in Atlanta. And you're looking -- when you look at reasonable rent growth, we can generate a nice spread on an IRR basis without kind of making too crazy assumptions on rent growth or cap rate compression, we don't have any cap rate compression in our math, that is a premium to our WACC. And so I think you're hitting on a point which is that the development side is probably right now the best other alternative outside of stock because your third choice, which is acquisitions are really tough on it relative to what private capital is underwriting. We're seeing private capital underwrite deals still in that 4 75 to 5 25 kind of spot rate and then IRRs that are probably in the 7 handles, if that. Mark Parrell: I just want to add, Alex, because we don't primarily underwrite based on forward rent growth we're looking at spot construction costs against spot rents. And when we looked at the deal that's in Canton, Georgia, which is north of waste from downtown and Alpharetta, which is more of a close-in suburb our perspective was that based on the rents we see in the construction costs, we see the deal made sense on a risk-adjusted basis compared to the stock. It's tough. It's still below the yield the stock was trading at, at the time. So we acknowledge that. But you also got to look for places to have some growth capital and put some money to work that you think can grow over time. And we just felt like the Alpharetta deal really underwrote extremely well on a basis level. We just saw a deal trade in that submarket at a 4.5 cap rate, and we're building now around to 6. So it's a little bit of triangulation, but the primary dependent thing is how to current construction costs compared to current rents. Operator: We'll go next to Julien Blouin with Goldman Sachs. Julien Blouin: I guess as we think about the ramp in blends we saw from 1.5% in the first quarter of '26 to 3% in April. Was that improvement relatively similar in the established and expansion markets? Or was it definitely stronger established because of New York and San Francisco? Michael Manelis: Julien, it's Michael. I think when I look at the quarter, I would tell you on a sequential basis, almost all of the markets showed around like a 200 basis point kind of improvement relative to the fourth quarter. I haven't really done that analysis for the April numbers. But I'm looking at it and just saying most of the markets, have shown that kind of sequential improvement. Obviously, San Francisco and New York are more like 400, 500 basis point sequential improvement on the new lease side. Renewals have been pretty consistent, where almost all of the markets were equal to slightly better outside of like a D.C. and Boston, which were marginally kind of lower on a sequential basis. So I look at that kind of growth to the April number and say it's kind of in line with what you would expect from a normal kind of pricing trend seasonal curve. And like I said earlier on the call, right now, given our positioning, given where the occupancy is, our pricing trend has continued momentum, right? We're going to continue to see that accelerate through the second quarter. That's going to drive continual like materially different than my comments from prepared remarks about line with normal seasonal trends and which ones aren't. Mark Parrell: Yes. Julien, it's a difference between absolute numbers, which are certainly better in the established markets than they are in the newer markets for us. But I think what Michael is signaling to you is just the momentum or trend line in the case of the established markets is becoming [indiscernible]. Momentum track is the same, just the absolute numbers are still different, right? Julien Blouin: Yes. Got it. That makes sense. And then maybe moving over to Seattle. Are there any forward indicators you're looking at in Seattle that would indicate that it could follow San Francisco? I mean, just so far, it seems like that market had a disproportionate amount of tech layoffs and sort of corporate roles without as much of the AI boost from company creation and job creation. The real-time rent data just continues to deteriorate in Seattle. Michael Manelis: Yes. I mean -- this is Michael. I think Julien, one of the positives that I guess I would point to is really the momentum that we see in Bellevue, Redmond. I mean if you look at some of the headlines around the office leasing activity, you see that kind of momentum kind of taking hold. You look at the migration pattern that I kind of mentioned earlier, where more folks are coming back into the market. Now some of that could be from the Microsoft return-to-office kind of policy change early in the first quarter that we saw. But the setup feels right for that market to kind of show some of that momentum. And I think what we're feeling right now is we still have a little it of overhang from the supply that was delivered in 2025 that we're working through in the city. We also saw a reduction of inbound migration from foreign countries. So typically, Seattle is one of those markets that has a higher concentration of move-ins from kind of outside the U.S., so call it 4%, 5% of our move-ins during that quarter, we're running like 50% of that, Mark. So I look at this stuff and say, kind of longer term, I see the setup and I can see this kind of the recovery indicators kind of taking hold. We probably just need a couple more quarters to get through for it to really kind of follow that trend that we're seeing in San Francisco. Operator: We'll go next to John Pawlowski with Green Street. John Pawlowski: Michael, I have a follow-up question on the new lease conversations. You mentioned the expectation for the full year is flat to maybe slightly negative now for the portfolio. Can you give us a sense for the goalposts? What kind of range new lease growth rates will be for the best swath of the portfolio and the weakest? Michael Manelis: Yes. I don't really have that in front of me, John, for the whole portfolio. I guess what I would look at and say the newer markets are going to continue to still have negative new lease change, right? As Mark just alluded to a second and go off of my comments, we are seeing momentum. We are seeing improvement, but the absolute numbers are still negative. And then you get into markets like San Francisco, right, where we're putting up kind of near 10% kind of change. So I think that's going to be a pretty wide spread when we end the year and looking at some of the newer markets as compared to like a San Francisco. John Pawlowski: Okay. And then Bob, second question about just the disposition or that you have sold or you've potentially brought to market and then pulled off for the last 6 to 9 months. Really the topic is perhaps widening cap rates for more CapEx-intensive lower-quality assets. So I guess, over the last, call it, 6 to 9 months, have you had to change the types of assets you're actually selling? Has there been more re-trading when you bring properties to market and you're not getting a bit? Is there more churn in that kind of disposition pipeline to still hit a reasonable cap rate on the dispose? Robert Garechana: Yes, I wouldn't say that there's any more churn than what we expected or certainly anything different than kind of what we saw last fall versus what we're seeing today. Some of these assets that we're taking to market are unique and they have different opportunities. So those opportunities may not -- we didn't -- like we didn't expect 20 people to show on under the tent, and we didn't get 20 people showing up under the tent because they have kind of the capital components or the value-add components or they may have retail, they may have ground leases or other things. So -- but I don't feel a difference in sentiment like 6 months ago relative to what we sit here today. Certainly, I think what has been consistent is that the smaller the size of the deal, meaning if it's in that $75 million to $150 million range, you get a lot more people showing up, right? If you have a deal that is individually 150 or more, it just gets smaller, right? I think that's just -- that hasn't changed. But it feels the same, again, I haven't been doing this for that long, but it feels the same to me as it -- this right now the spring as it has last fall. Unknown Executive: And I might add, John, too, I think from a capital standpoint, right, I think the secured debt markets are still very supportive of these types of actions in multifamily. There's lots of capital available. So certainly no change from that end. John Pawlowski: Yes. Okay. So you haven't got the sense that pricing like market pricing really hasn't deteriorated at all for maybe larger CapEx-intensive older properties? Robert Garechana: I think that 6 or 8 months ago, I think larger CapEx-intensive assets were very hard to sell, and I think they continue to be hard to sell today. Operator: We'll go next to Nicholas Yulico with Scotiabank. Nicholas Yulico: I know you guys got rid of the blended and new lease pricing by market, which I was sorry to see you go. But I wanted to see if you could maybe just give some commentary on Southern California how that's trending year-to-date on new and renewal leasing versus last year? Have you seen any improvement there? Michael Manelis: Nick, this is Michael. So relative to Southern California for the first quarter, we're still seeing kind of negative new lease change and it's kind of most pronounced, I would say, in Los Angeles. And again, very consistent performance on the renewals. So I think for us, the SoCal portfolio continues to be the story around the Los Angeles kind of market. And sitting here today, right, I've got stable occupancy I've got a pricing trend curve. It's flat year-over-year. I've got less concessions right now in downtown and Korea Town, where we had some of that supply kind of pressure last year. So blends are starting to show some kind of positive momentum here, but it's less than what you normally would have expected. And I think last year, we started to feel some more of this pressure kind of more second quarter, third and fourth quarter. So relative to the first quarter, clearly, we see still some softening SoCal compared to last year. But as we work our way through the balance of the year, just expect kind of moderate performance this year out of L.A. We're not really seeing anything that's going to point to kind of a robust recovery in pricing power. Nicholas Yulico: Okay. And then second question is, Mark. If we look at the multifamily sector, there's kind of a clustering of valuation for the stocks that are in your peer group. What I'm wondering is are you thinking about -- and I know you have -- there is a differentiated strategy here that maybe people don't sort of pay attention to. But are you and the Board, there are conversations to sort of go even more in terms of differentiation and strategy, whether it's investments, platform, sort of how you're managing the balance sheet that you guys are sort of focused on to sort of differentiate yourself versus the peer group? Mark Parrell: Yes. Thanks for that question. We are -- the Board, the management team is always engaged on strategy. It's a topic every meeting. It's a topic between meetings. I think real estate expert investors, of which there used to be more than there are now understood the differences between the big 6 or 7 apartment companies. I mean we do have a different strategy. We're more urban-focused, more less development focused, we're more operationally focused on our kind of excellence and investment in our operations. So I think people that are experts in the area know the difference between us and others. I think the generalist investors, and of course, the index funds don't. And I think it's a little bit hard to know how you can break through that, except I don't know, by some really more dramatic step. But I do think dedicated investors know the difference between us and our peers. And I think more generalist investors probably don't. Operator: Our next question comes from the line of Jamie Feldman with Wells Fargo. James Feldman: Great. I guess here's an opportunity to talk about your operations. So we haven't really talked about the expense side of things. Can you talk about a couple of things here. Number one, the insurance renewal that I think was in March, how that played out? And how that looks versus your guidance? And then just energy costs. Is there anything that's changed your outlook on the expense side given where energy costs are going? Or is there anything you're doing to mitigate expenses? Maybe just talk through that? Or if there's any other expense line items that are meaningfully different than your initial outlook or that you want people to focus on how you're managing them? Unknown Executive: Yes. Thanks for the question. So I'd say maybe I start with the insurance, you're right. We did see -- actually we had our property insurance premiums. They have come down, which we actually viewed as an opportunity to buy some additional coverage. So I think that hedges us against kind of what we've been seeing in annual casualty loss expenses over the last few years. And so I think while property premiums were coming down, we also have seen the offset being general liability premiums have increased as well as some of the general liability expenses that run through our same-store ops. So I think putting that all together, the 4.5% quarter-over-quarter increase we had in the first quarter, that's not unexpected. But -- and was anticipated in our guidance. As far as energy, I would say utilities were up a little bit higher than we probably thought for the year a little bit. And a lot of that results, I think, from one, the number of storms we had early in the year in the Northeast in particular. Obviously, there's a lot of noise and energy costs just generally across the board and electricity and gas were certainly impacted for us in the quarter. We tend to hedge as much as we can. So there's only a small amount that we can hedge in the market. But to the extent we can, we are hedging energy prices. But I'd also say the flip side of higher utility cost being up is on the revenue side, we were able to have higher fees. And you noticed our other income was up about 60 basis points of contribution in the quarter. So that offset a little bit of the higher increases in expenses. Robert Garechana: Sorry. The one thing I was going to add, Jamie, is on the capital side. So we have a number of capital sustainability-driven capital projects. focused on reducing consumption because that's really the lever that you can manage the best, right? Because it's macroeconomic drivers will drive the utility costs. We have a number of projects underway. But to be honest with you, the rise in prices also led us to re-underwrite other projects that may not have otherwise hurdled in terms of what our capital returns would have been but now do. And so we have looked at -- we did a big exercise of looking at accelerating those to manage that both for our own P&L, but also for our residents overall. So we're applying the operational excellence that you've seen in Michael's world just across the platform in order to keep those costs down as much as we can. Michael Manelis: Yes. And Jamie, this is Michael. The only thing I would add there is we do have an energy conservation checklist. So our on-site teams have done a tremendous job every day showing up, going through that checklist and looking for areas of opportunity to reduce the overall consumption. We measure the consumption. We kind of share and highlight and spotlight where we're seeing those successes. And it doesn't take much, right? That little bit of focus of turning down the temperatures in the hallways or common areas by 1 or 2 degrees, starts to show up in some of the bills. It has a lag effect. But clearly, we have the right mindset in place to mitigate as much of the consumption risk as we can. James Feldman: Okay. That's very helpful color. And then we noticed your leasing and advertising is up pretty meaningfully year-over-year. I think it's over 20%, higher use of interactive marketing. Can you just talk about something -- is there anything changing on the AI side? Are you using more resources to optimize your appearance in AI searches? Is there anything to read into that data? And if there is, what are the -- how is it going? Bret McLeod: Yes, maybe I'll start -- sure, I'll start, Jamie, just on the cost side. I'd say it's nothing that we didn't expect. I mean, as Michael talked about, we've got some of our technology innovations that are rolling through that. I would also say specifically to that line item in the quarter, we did have an outsized increase from a write-off of a broker commission we took in the first quarter related to our non resi portfolio. So when a tenant vacates early, we will add off the full amount remaining on the amortized brokerage fees, which we did at 3 retail properties in the quarter. So that was contributing a little bit to the higher number. But otherwise, it was kind of in line with what we were thinking. Michael Manelis: Yes. And then I think just specific to AI, I mean, I do think the industry is changing very quickly and the way that consumers or prospects are finding people by leveraging some of the LLM models that are out there is going to change kind of the ILS environment. Our team is very focused right now on trying to figure out ways to become relevant in that kind of search optimization. Haven't really seen anything take hold and clearly not a driver to the expense that Bret just alluded to, but it's something that the team is very focused on. And we do think over time is actually going to reduce kind of the dependency and overall reduce the L&A expense. James Feldman: Okay. Do you think it can become a strategic advantage? Or does it level the playing field? Michael Manelis: No. I think there's absolutely ways to become more relevant in that environment. And I think the folks that are focused on it and put the right resources to it, will have a strategic advantage. Operator: We'll go next to Michael Goldsmith with UBS. Ami Probandt: This is Ami on with Michael. I was curious, how much of an impact does burning off of concessions have on your blended rent spreads? So are your blended rent spreads artificially boosted by concession burn off? Mark Parrell: They were always reported on the same basis, so they're always net. So they don't -- it's marked. They don't change from like 1 quarter, we reported it with concessions in the next quarter without. So obviously, getting rid of concessions is the beginning of that continuum of improvement, right? You get occupancy, you get confident you take concessions away, then you move up base rents and that it finally leads through the rents or to same-store revenue. So I guess I'd say it's on the continuum. But because we didn't change the basis of calculation, I don't see how that could be true. Ami Probandt: Okay. So not a material impact. And then I guess just to touch on the [indiscernible] that you're monitoring. We know Massachusetts is up. Are there any others that you're monitoring closely? Mark Parrell: Well, Massachusetts is the area of primary focus for us. It's likely to go to the voters. And I think the industry has mobilized just like it was in California to make the same arguments about the industry being more useful creating supply and at this rent control activity as a disincentive. There are a couple of deals we were looking at in Massachusetts to start building that we stopped. And I'll tell you that the 2 deals we are almost done building right now, we might have thought about them differently as well. So it's a very negative proposal for housing supply and long-term affordability. There is a measure in DC we're watching closely as well that will freeze rents for 2 years. A lot of our D.C. portfolio is already rent controlled. So it's a little bit of a different and less meaningful impact directly on us. But again, it's a hard place to do business. The market already knows about this. It's already harder to sell assets in the District of Columbia. So again, I guess the theme I'd give you is capital is sensitive to regulation. And when you do this and deny returns, you're going to have less investment in worse affordability. And I think a lot of smart policymakers like Governor Healy in Massachusetts already know that. So we're going to be hopeful. But Massachusetts is the main show this year. Operator: We'll take our next question from Adam Kramer with Morgan Stanley. Adam Kramer: Maybe a little bit more of a philosophical question. But just with turnover rates sort of as low as they are and even with all of the supply that we've had the last few years seeming to stay really low. Wondering sort of how you view that, right? I sort of recognize that from a same-store NOI perspective is benefit from reduced R&M cost. But just from a sort of renewals versus new lease growth perspective, wondering how you see the sort of lack of mobility sort of within the housing ecosystem currently sort of benefit on the renewal, but maybe hurt you a little bit on the new lease side? Or am I thinking about it incorrectly there? Mark Parrell: Adam, it's Mark. I'm going to try to answer. We've been reading articles, various bank research shops about less labor mobility, and that's been a trend in the U.S., people are moving less frequently. Interestingly, it does look like Gen Z, not surprisingly, younger people move more often and that higher wage folks move more often that describes our demographic pretty well. I think for the country overall, growth has benefited by people moving to where the jobs are. So I think less labor and mobility, less geographic mobility is less positive for the U.S. growth rate overall. But our group of folks will move around the country at their age to find opportunity and maybe aren't quite as tied down as older generations are by family or other considerations. So I think overall, less geographic mobility is bad for the country. But I think for our demographic, we just haven't seen it. And you heard Michael talk about San Francisco. We see the influx and we -- at our Investor Day last year, we talked about New York, which has lost people for a while. And -- but yet Manhattan is doing great for our demographic, and you see that in our occupancy numbers. So I think there's a big overall theme of it being a little bit of a negative. But for us, it's generally been either neutral or a bit of a positive because our demographic is more mobile still. Adam Kramer: That's great color. And then maybe just a little bit of different question. Just wondering about sort of the Sunbelt recovery. So a little bit of a crystal ball question. I know it's difficult. But I guess when you sort of sit here look at as what the supply forecast is for the Sunbelt for your expansion markets, sort of how do you think about sort of the pace of recovery there? Does new lease growth? Could it get positive later this year? Is that more of a 2027 story? I recognize there's nuances by market as well, Austin probably being the softest fundamentals. But just -- yes, I wonder sort of recovering the Sunbelt, the latest thoughts on timing there. Mark Parrell: It's Mark again. And if there's something, Michael, on stat, he can jump in here. But I think we need to see concessions go down. That's what we are seeing, in fact, in Atlanta and just occupancy firming and concessions, and that will be the indicator that rents will recover. The setup in all those markets are markets, which again, are just Dallas, Denver and Atlanta with Austin, a [ laggard], those all have decent forward setups. We just need more job growth there than anywhere else because we have more supply there than anywhere else. So I think they are more sensitive to jobs, and we've said that a few times. I don't know how many jobs you need in the market like D.C., new jobs where there's just going to be so much less supply. So I think those are higher beta markets, and they do have upside. And I think in some -- maybe a year or so, we'll be talking about that second derivative really inflecting up in those markets more than at this point. But what we really see is a bit of a slow recovery with Atlanta in the pole position for us in Austin at the rear. Operator: We'll go next to Omotayo Okusanya with Deutsche Bank. Omotayo Okusanya: Yes. The other income line item this quarter, kind of some strong results coming out of that. Just curious if that's just really being driven more by just expense reimbursement because you have higher occupancy, whether it's kind of other ancillary income sources there that are more sustainable anything onetime in there? Just kind of curious about that line item and kind of what we can expect from it going forward. Bret McLeod: Yes, sure. This is Bret. I said -- as I mentioned earlier, I think we saw, as you noted, the higher rubs income a little bit. We said bad debt was better this quarter by 10 basis points. And then the last thing I'd say is we did see some positive trends in storage and some of the on-site ancillary charges that we've been generating, we're working on as long as -- as well as the continued rollout of the bulk WiFi program from last year. Operator: This concludes the question-and-answer portion of today's call. I would like to turn the call over to Mark Parrell for any additional or closing comments. Mark Parrell: Thank you all for your time today and for your interest in Equity Residential. Operator: This concludes today's call. Thank you for your participation. You may now disconnect.