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Operator: Hello, everyone. Thank you for joining us, and welcome to the Delek Logistics Partners First Quarter 2026 Earnings Call. I will now hand the conference over to Robert Wright, EVP and Chief Financial Officer. Robert, please go ahead. Robert Wright: Good morning, and welcome to the Delek Logistics Partners First Quarter Earnings Conference Call. Participants joining me on today's call will include Avigal Soreq, President and Chairman; Reuben Spiegel, EVP; as well as other members of our management team. As a reminder, this conference call will contain forward-looking statements as defined under the federal securities laws, including statements regarding guidance and future business outlook. Any forward-looking statements made during today's call involve risks and uncertainties that may cause actual results to differ materially from today's comments. Factors that could cause actual results to differ are included in our SEC filings. The company assumes no obligation to update any forward-looking statements. I will now turn the call over to Avigal for opening remarks. Avigal? Avigal Soreq: Thank you, Robert. DKL reported $132 million in adjusted EBITDA in the quarter, and we are very confident about achieving full year EBITDA guidance of $520 million to $560 DKL saw a strong execution in the first quarter despite some challenges associated with Winter Storm Fan. These results are a reflection of strength in all segments, advancing our position as a premier full-service provider of crude, gas and water in the Permian Basin. Now let me talk about each one of the business in detail. Starting with gas. We have successfully completed the drilling of our first AGI well, taking additional step towards completing our industry-leading comprehensive sour gas solution. We are very excited about providing a comprehensive capability to our customer, further supporting long-term oil gas production growth in the Delaware Basin. Moving to crude. Both DPG and DGG crude gathering operations continue to see strength despite some challenges tied to well shut-in related to winter storm fern. We have increased our overall gathering capacity and look forward to further optimizing and growing the business over the rest of the year. Our water business continued to perform strongly, and we are exploring additional opportunities in this space. Rouven will share further insight on these developments. The combined gas, crude and water offering in the Permian Basin has increased our competitive position and build a strong platform for growth. We will continue to capture the growth opportunities in a disciplined manner, managing leverage and coverage. We also intend to remain good stewards to our stakeholders' capital. Our Board of Directors has approved our 53rd consecutive quarterly distribution increase. raising the distribution to $1.13 per unit. This is an extraordinary achievement, and we're extremely proud of our team and the financial prudence that brought us here. Delek Logistics is thermally positioned as a strong independent full suite midstream service provider. With the foundation we have built and the opportunities ahead, we are confident in our ability to continue delivering sustainable growth and long-term value for our unitholders. I will now hand it over to Robin, who will provide more details on our operations. Reuven Spiegel: Thank you, Avigal. As Avigal mentioned, we are excited about DKL's future and recent rally in group prices, along with the strength of our 3 service platform is presenting incremental opportunities to further increase our advantage Permian position. The strength in third-party business continues to increase our economic separation from our sponsor DK. In 2026, on a pro forma basis, we expect approximately 80% of our run rate EBITDA will come from third parties. Turning to our business. We continue to work hard to bring an industry-leading sour gas solution in the Delaware basin. The first step in the process was to complete our processing capacity expansion. As Abigail mentioned, we have completed the drilling of our first AGI well. And currently, we're in the process of completing the build-out of the sour gas gathering infrastructure such as compressor stations before transferring the system to operations. We are in sync with our producer customers and the system is expected to be in line with producer needs. As we have mentioned in the past, while our ramp-up has been slower versus our initial expectation, both our Sargas system build out, we expect to see a step change in our utilization. The step change in utilization is likely to bring forward the need for additional processing capacity. We are looking at our options and continue to explore innovative ways to add capacity along with making selected investments that will support future expansion of the Libby complex. Our Delaware crude gathering volumes were impacted by well shut-ins because of winter storm firm and the colder than normal temperature during the quarter. We have seen these volumes recover in the second quarter and expect Delaware crude gathering volumes to continue to increase over the rest of the year. Our crude gathering business is in a very strong place, and our combined crude and water offering is yielding great results. Moving to our Water business. I'm very pleased with the start we have had in our produced water gathering business. Our larger water footprint in the Permian Basin post our acquisition of Citi and H2O Midstream, along with the rising water cuts in the basin, accentuating the need for increased innovation to meet customer needs. We believe produced water gathering and disposal will require a platform approach as permitting for new SWDs remain limited and producer activity shifts across the basin. We look forward to updating the market as we bring forward these solutions. With that, I will pass it on to Robert. Robert Wright: Thank you, Ruben. As Avago and Ruben noted, we began 2026 with strong momentum, continuing to advance the Delek Logistics growth story. While we are delivering meaningful financial and operational progress across the partnership, we remain equally focused on achieving our long-term leverage and coverage targets. Despite approximately $10 million in headwinds from Winter Storm Fern, we outperformed expectations in our growth trajectory, and we're able to achieve our best first quarter results to date. This performance reinforces our confidence in the outlook for the balance of the year. . We continue to make solid progress on our planned growth capital spend of $180 million to $190 million, which we expect will yield approximately $75 million in incremental EBITDA on a run rate basis. From a balance sheet perspective, we exited the first quarter in a position of strength, having upsized and extended our revolving credit facilities to $1.3 billion, now maturing in 2031. This increased available liquidity to approximately $1.1 billion. We ended the quarter with an adjusted leverage ratio of 4.05x, providing meaningful financial flexibility to execute on our growth agenda while maintaining a disciplined capital structure. Turning to our results. Adjusted EBITDA for the quarter was approximately $132 million compared to $123 million in the same period last year. Distributable cash flow as adjusted totaled $72 million, and our DCF coverage ratio remained stable at approximately 1.2x. We are also pleased to announce our 53rd consecutive distribution increase, bringing the quarterly distribution to $1.13 per unit. In the Gathering and Processing segment, adjusted EBITDA for the quarter was $83 million compared to $81 million in the first quarter of 2025. The increase was primarily due to increased margins recognized within the segment. Wholesale Marketing and Terminalling adjusted EBITDA was $14 million compared to $18 million in the prior year. The decrease was primarily due to the impact of the 2024 amended extend agreement with Delek. Storage and tranportation adjusted EBITDA in the first quarter was $25 million compared with $14 million in the first quarter of 2025, the increase primarily reflects the impact of the January 2026 related party transaction. Finally, the investments in pipeline joint venture segment contributed $18 million this quarter in adjusted EBITDA compared with $17 million in the first quarter of 2025 driven by strong performance from the Wing to Amster joint venture. Moving now to capital expenditures. Total capital spending for the first quarter was approximately $50 million. Of this amount, $42 million was gross capital, primarily related to the drilling of our first AgeWell in addition to the build-out of new sour gas gathering infrastructure. The remainder of the spend was directed towards other growth projects, including advancing new connections across our crude gathering systems. Looking ahead to 2026, as Avigal mentioned, we remain confident in our earnings trajectory and are reaffirming our full year 2026 EBITDA guidance to a range of $520 million to $560 million. With that, we can open the call for questions. Operator: [Operator Instructions] Your first question comes from the line of Doug Erwin from Citi. Douglas Irwin: I just wanted to -- First question, just wanted to start with the guidance range and how you're thinking about it in today's macro environment. Does the low end of that range look like an easier lift today than when you gave it kind of earlier in the year. I'm just curious what you're hearing from producers on your acreage as well as if you might have any pockets of direct commodity or spread exposure you might be able to take advantage of in the current environment. Unknown Executive: Yes, Doug, you nail it, right? So our optimism around our guidance is being driven from 2 things, right? One is the macro environment, and I will talk about it in a second. And second is our execution, our strategy. So on the macro side, obviously, the premium risk that you have between brand TI is going to change. It's very obvious that the premium risk that we had last year on brand is not the premium risk we see today. And the second, obviously, is that we see a lingering effect for the macro, even after the kinetic event is over, which will emphasize probably the Shell -- the U.S. shale as a safe harbor for crude supply around the globe. So that's put us in a very good position, both in the Midland area and on the Dara area. Our combined offering of gas, crude and water is a unique offering that gives our customer offering that not many does, and that position us very well and also the development we see around our gas business. was giving a comprehensive solution. It's also where we are seeing a very encouragement development. With that, I will levittoRuven to give his insights. Reuven Spiegel: Thank you, Avigal. If we look at our -- at the segments, water is performing above our expectations. And the combined water and crude option is opening opportunities for continued growth. Crude is solid, and we are seeing opportunities in our Delaware business. And in addition, we enjoy some tailwinds from the Iran conflict. And finally, gas will ramp up in the second half of the year. So with that said, we feel very comfortable at our guidance range. . Douglas Irwin: Great. And maybe just following up on the gas ramp in the second half of the year. Could you maybe just provide a little more detail around kind of what's left to do on the gathering side and what that timing might look like? And then just curious how soon after Web 2 ramps you might be positioned to be able to announce the next expansion and just what that build cycle might look like, just given that you've already spent some of that early CapEx on future expansions. Reuven Spiegel: Yes. Thank you for the question. We actually made a lot of progress this quarter, as we mentioned in the prepared remarks, it has been a multistep process. One of the critical path was drilling the AGL well. which we completed successfully. And now we're focusing on completing all the associated infrastructure like the compressor stations. We do expect our gas utilization to reach capacity in the next 3 to 6 months. In addition, as you mentioned, we have already made some selective investments and we're looking at different ways to make additional processing capacity available in the most cost-effective manner. . Operator: Your next question comes from the line of Gabe Moreen from zoo. Gabriel Moreen: You catalyzed a little bit with some, I think, growing in water comments. So can you maybe just talk about what you're seeing? Is there some systems whether it's private equity, producer backed, what you might be seeing out there size-wise, materiality, Just curious on those comments. Unknown Executive: Yes, absolutely. I will give some higher view around it and Mario energy around the topic, he will chime in. So obviously, we're not going to be specific about deals and size until we are fully ready to say. But the combination of crude, water and gas in the area we're operating in a meaningful and sizable way is giving us a tailwind, and we are very happy about that. We have a very good strategic discussion. And I think that the strategies and location and execution, that's the combination we are trying to achieve and we're very happy about that. oven, do you want to chime in? Reuven Spiegel: Yes. Thank you, Avigal. We are likely to see continued growing need for water with each barrel of produced oil. Water is already produced on a very large scale and the demand keeps growing. So we believe there is a need for effective treatment, a more comprehensive approach for gathering treatment and disposal in particular with the length of time and complexities that needed to get permits today. So we're looking at ways to come up with creative solutions around this, and we'll probably give more color and updates when we are ready in the near future. . Gabriel Moreen: And then you mentioned, I think, the impact on volumes from some of the winter storms that I think they're recovered at this point. I'm just curious also WAHA seems to be a fairly big factor based on where natural gas is pricing in the basin. Are you seeing any shut-ins that are Waha related or producer timing delays because of pricing in the basin? Unknown Executive: Yes. So you're right, your observation. It was an event that was -- it was a close event. It was not a lingering event but it was when it happened, it was meaningful and then it came back to normalcy. But Robert, our CFO, will chime in and give you more color around it. Robert Wright: Yes. Thanks, Avigal. Primary impacts were on crude, both in the Midland and Delaware Basins and also a little bit on the gas processing side. as we stated in our remarks, very limited impact, if any, to our water business overall. But it did have an approximate $10 million headwind to our results for the period. That said, as you saw, we did have very strong performance throughout the partnership for the first quarter. and our outlook for the remainder of the year remains strong with firm behind us. But I'll pass to Mohit as well to talk about the Waha question. Avigal Soreq: Gabe, so we've discussed this in the past. Waha is an important piece of the Permian story, and you covered this very well. And you know that a lot of resides pipelines are going to start coming up in the second half of this year. which is going to relieve a lot of pressure that some of our producer customers have faced in terms of takeaway capacity on the natural gas side. Overall, these 2 developments, as Avigal mentioned at the beginning of this call, higher call on shale crude as a result of the Iran conflict. And the Waha gas prices and finding a floor based upon incremental restogas takeaway capacity that's going to come online is a very positive development for DKL because we are in the right neighborhood. And as producers have capacity to put this gas into the right market, you will see more production to come in. And all 3 of our business, gas water and crude will benefit from that. So we are excited about how this year plays out as far as the gas take capacity is considered. Operator: Thank you for the questions. There are no further questions at this time, and we have reached the end of the Q&A session. I will now turn the call back to Avigal Surek, President and Chairman, for closing remarks. Avigal Soreq: Thank you. I want to thank my colleagues around the table. I want to thank the investor that join us today and believing us and sticking to the stories. -- to the story, and I want to thank our Board of Directors and most importantly, our employees that does nights and days to make our company the best we can. Thank you, guys. Operator: This concludes today's call. Thank you for attending. You may now disconnect.
Operator: Good day, and welcome to the Kite Realty Group Q1 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 speaker, Mr. Bryan McCarthy, Senior Vice President of Corporate Marketing and Communications. Please go ahead. Bryan McCarthy: Thank you, and good afternoon, everyone. Welcome to Kite Realty Group's First Quarter Earnings Call. Some of today's comments contain forward-looking statements that are based on assumptions of future events and are subject to inherent risks and uncertainties. Actual results may differ materially from these statements. For more information about the factors that can adversely affect the company's results, please see our SEC filings, including our most recent Form 10-K. Today's remarks also include certain non-GAAP financial measures. Please refer to today's earnings press release available on our website for reconciliation of these non-GAAP performance measures to our GAAP financial results. On the call with me today from Kite Realty Group, our Chairman and Chief Executive Officer, John Kite; President and Chief Operating Officer, Tom McGowan; President and Chief Financial Officer, Heath Fear; Senior Vice President and Chief Accounting Officer; Adam Jaworski and Senior Vice President, Capital Markets and Investor Relations, Tyler Henshaw. [Operator Instructions] I'll now turn the call over to John. John Kite: Thanks, Bryan, and good morning, everyone. We entered 2026 with an ambitious set of operational and strategic goals. And through the first quarter, we are firmly on target. Tenant demand remains healthy, our signed-not-open pipeline remains elevated and the underlying fundamentals of our portfolio have never been stronger. This is a result of deliberate work over the past 2 years to reshape KRG into a higher caliber, faster-growing and more resilient company. We have sold over $600 million of noncore assets, entered into strategic and transformational joint ventures, repurchased shares at pricing well below consensus NAV and repositioned the portfolio squarely toward higher growth and higher quality grocery-anchored, lifestyle and mixed-use assets. These actions are proactive, decisive and disciplined designed to capitalize on the disconnect between public and private market values while fundamentally elevating the company. The KRG you see today is significantly improved from where it was 24 months ago. The first quarter was another clear example of that discipline in action. We repurchased 6 million common shares for approximately $152 million and sold Coram Plaza on noncore lower growth asset. Together with the activity completed in 2025, we have now repurchased 16.9 million shares for $400 million at an average price of $23.67, representing a compelling arbitrage buying our own stock at an FFO yield meaningfully wider than the yields at which we have sold lower growth assets. As we advance through 2026, we will continue to evaluate capital recycling opportunities that further optimize the portfolio and support our long-term strategic objectives. None of this is possible without the strength and versatility of our balance sheet. Our ability to sell assets, repurchase stock, enter into strategic joint ventures, fund growth and continue investing in the portfolio is a direct result of the disciplined financial posture we have maintained over multiple years. We remain committed to operating with conservative leverage, ample liquidity and meaningful financial flexibility, which allows us to stay opportunistic while continuing to protect the long-term durability of the platform. That discipline is translating directly into operating performance. Demand for space in our high-quality centers remains exceptionally healthy, and our first quarter results reflect both the strength of the portfolio and the quality of our execution. Same-property NOI increased 3.6% in the first quarter, a strong start to the year. During the quarter, we executed 151 new and renewal leases, representing over 700,000 square feet. Blended cash leasing spreads were 13.5%, including 31.3% on new leases. Our non-option renewal spreads were 12.3%, demonstrating the continued mark-to-market potential embedded within our portfolio. Our lease rate stands at 94.7%, a 90 basis point increase year-over-year, reflecting the continued absorption of our inventory by high-quality, well-capitalized retailers. During the quarter, we signed new leases with a variety of sought-after concepts, including on running reformation, Warby Parker, Total Wine and Barnes & Noble. ABR per square foot reached $22.89 at quarter end, a 6.5% increase year-over-year. Our signed-not-open pipeline remains elevated at approximately $36 million of NOI, representing a 350 basis point spread between our leased and occupied rates. The average ABR for leases in our signed-not-open pipeline is $28 a square foot. Embedded rent escalators are the first stone in the foundation of long-term total return, contractual growth that compounds over time. 2 years ago, our embedded rent escalators were just 156 basis points. Today, they stand at 182 basis points. As we advance towards our 200 basis point target, that trajectory is driven by factors within our control: strong lease structures, disciplined merchandising and the deliberate reshaping of our portfolio. Simply, but KRG is an inceptional position. We have a better portfolio, a rock-solid balance sheet, a more durable growth profile and a team that continues to execute with urgency, discipline and focus. I want to thank the entire KRG team for the hard work that got us here and for the continued energy commitment and conviction required to keep raising the bar. I'll now turn it over to Heath. Heath Fear: Thank you, and good afternoon. After the first quarter, KRG is exactly where we want to be, on offense on plan and operating proposition of strength. We are elevating the portfolio, sharpening the platform and building momentum for another highly productive year. Turning to our results. KRG generated $0.52 of NAREIT FFO per share and $0.52 of core FFO per share in the first quarter. Same property NOI increased 3.6% in the first quarter driven primarily by a 250 basis point contribution from higher minimum rents, a 55 basis point improved in net recoveries and a 45 basis point improvement in overage rent. On our last call, I indicated our expectation for same property NOI growth in 2026 to be lower in the first half of the year and accelerate the second half. It's important to note that the 3.6% result in Q1 exceeded our expectations as a result of higher-than-anticipated average rent, lower-than-anticipated bad debt and the reversal of a large real estate tax reserve. As for the trajectory of same-property NOI for the balance of the year, we anticipate a moderation into the second quarter, followed by a reacceleration to the back half of the year as the rents from our large signed-not-open pipeline begin to commence. Due to our performance in Q1, we are increasing our 2026 same-property NOI range by 25 basis points at the midpoint. As illustrated on Page 5 of our investor deck, the uptick in our same-store guidance is being offset by a corresponding reduction in our recurring but unpredictable items. As a result, we are affirming our NAREIT FFO and core FFO guidance of $2.06 to $2.12 per share based on a same-property NOI growth range of 2.5% to 3.5%. Our bad debt reserve of 95 basis points of total revenue at the midpoint, reflecting our actual first quarter results blended with a continuing assumption of 100 basis points for the balance of the year. And interest expense net of interest income, excluding unconsolidated joint ventures of $121.2 million at the midpoint, up from $121 million. This guidance fully incorporates the incremental $100 million stock we have repurchased since our last earnings call and further contemplates $170 million of 1031 acquisitions scheduled to close in the second quarter. This represents a $60 million increase as compared to original guidance and $145 million of noncore and/or tax loss driven dispositions with $12.5 million closed in the first quarter and the balance closing in the back half of the year. This represents a $30 million increase in the disposition pool as compared to original guidance. As a reminder, the aforementioned 1031 acquisitions or noncore sales are not completed, it could result in a special dividend for 2026. The changes in our transaction assumptions are opportunistic and a continuation of our disciplined focus on matching sources and uses in an earnings-friendly manner. John alluded to, moving to the back half of the year, we will continue to evaluate opportunities to further refine our portfolio, provided that we're able to prudently deploy the proceeds. Our balance sheet remains one of the strongest in the sector. As of March 31, our net debt to EBITDA was 5.2x, consistent with our long-term range of low to mid-5s. It is worth thing to step back to appreciate the level of transactional activity we've executed over the past 18 months while still maintaining one of the lowest leverage profiles in the sector. We have access to over $1 billion of total liquidity, providing us with significant flexibility to pursue value-enhancing opportunities. Thank you to the KRG team with a relentless efforts in driving our results and creating long-term value for our stakeholders. Operator, this concludes our prepared remarks. Please open the line for questions. Operator: [Operator Instructions] Our first question will come from the line of Cooper Clark with Wells Fargo. Cooper Clark: As we think about the share buyback program moving from $300 million to $600 million, just curious about the willingness to potentially upsize disposition volumes even higher in the back half of the year as we think about the $145 million of noncore assets contemplated in the back half given the demand for product in the market today and the ability to improve portfolio quality with potentially minimum dilution as we think about buybacks, coupled with 1031 acquisitions? John Kite: Sure. Cooper, I think as we said in the prepared remarks, we're going to continue to evaluate the market and evaluate the opportunities. We want to execute what we have in front of us in terms of the 1031 opportunities to try to close on in the next quarter. And it's always going to be a function of where cost of capital is, what the opportunities are to reposition the capital. So I think we're trying to make it clear that we're reviewing that. That's a potential opportunity. If you go and look at what we've done in the last year and you include and what Heath has said is in the guidance, I mean, you're talking about if we execute on that, that's like $750 million approximately of sales. So this is significant. We continue to try to do that in a very meaningful way in the sense of how we manage the total portfolio, manage the balance sheet and manage protecting earnings as good as we can. So that's a long-winded answer of saying, yes, that's a possibility, but a lot of factors involved in that. Heath, do you want to add to that? Heath Fear: No, those are okay. Cooper Clark: Great. And then moving towards the economic occupancy side, I believe current economic occupancy is about 260 basis points below your historical highs as many of your peers are near or above historical high economic occupancy. So curious if you could just talk about the opportunity set there longer term, and how much the SNO pipeline may contribute to higher absolute economic occupancy levels in the back half of '26 and '27 as we also contemplate some more regular weight churn? John Kite: Sure. I mean we think we're bullish on our ability to continue to push occupancy higher, both economic and lease rate. We are -- year-over-year, we're up obviously sequentially, slightly down, which is not unusual in the first quarter. If you look back over the past 4, 5 years. I think 5 years, probably 3 of those first quarters are slightly down sequentially, but what we're focused on is the year-over-year growth. We do think there's real opportunity based on lack of supply and continued strong demand. But as we tried to point out, we're very focused in on proper merchandising, and we're very focused in on getting the right retailers in the right spaces and trying to pursue this embedded rent growth that is going to pay dividends in the future. So we're not in a super hurry to hit any particular number, but we do feel like there is really strong demand. And that's part of what we're doing in terms of repositioning the portfolio is in the sense that this stronger portfolio will be able to maintain higher occupancy over longer periods of time. So again, yes, we believe we have plenty of room to run. Heath Fear: I would add a lot of attention, questions and comments have been around the transactional activity and refining the portfolio. But at the end of the day, one of the biggest opportunities in front of us is that core opportunity in leasing. If you look across the, you said in your question, Cooper, we've got the most room to run in terms of just growing organically. So all this other stuff is certainly moving us along, but let's not lose focus that, that we've got the most occupancy run left. Operator: One moment for our next question and that will come from the line of Samir Khanal with Bank of America Securities. Samir Khanal: I guess, John or Heath, maybe expand on your comments on capital recycling, maybe broadly, kind of what you're seeing in the transaction market, the interest level that you've gotten for your assets that you could potentially sell down the road? John Kite: Sure. I'll start with that, Samir. I mean it's -- there is a strong demand for open-air retail, and it's coming from really many, many avenues. And I would say in the last 6 months, 9 months, but even 6 weeks, you see a lot more institutional capital positioning to want to be in the space a rotation, if you will. So that obviously puts -- that puts pressure on cap rates to move down over time, and we really still haven't seen a movement in interest rates. So if that happens in addition, that would be additional fuel. But really, even without that, the demand is strong. I think when people look at their portfolio and they look at how they balance it and they look at risk-adjusted returns, our product screens well. So you have seen that. I mean -- but we still have this ability. We hope to continue to do what we're doing, which is to -- if we're going to recycle capital, we want to recycle it into higher-growth assets and honestly, if you look at Page 6 of our investor deck, it kind of shows you what we're doing. And then I think a couple of pages later, which is the Page 6 shows the increase and decrease that we've had in various product types. And then a couple of pages later, you see the embedded rent growth, and it's just you can chart that, that's going up. And as long as we're able to sell these lower growth assets at yields well inside the stock yield, that's attractive. Now how we deploy that capital comes down to a complex set of -- complex set of items based on taxable income and 1031 opportunities and stock price, et cetera. But it's really a real estate exercise, I want to remind everybody of that. We are very focused on the real estate exercise. But obviously, the equation relates in the sum of what do we do with the capital. So it's complex, but right now, we think there's opportunities. Heath, do you want to? Heath Fear: I would just say, Samir, there isn't a pocket of historical retail capital that hasn't been reignited. So the breadth of the demand is just incredible. And frankly, it's better to be a seller right now than it is to be a buyer. With that said, we do have some traction on some of these 1031 acquisitions that we've been talking about. So yes, but the market is very, very constructive right now. Samir Khanal: Got it. And then I guess my second question, Heath, is on the guidance, right, side, you raised same-store low end, high end, but we didn't see a follow-through on FFO. Maybe EPC can unpack that. I think that would be helpful. Heath Fear: On Page 5, you'll see that the same store did boost us up $0.5 on a full year basis, but then that was offset by a corresponding reduction in recurring but unpredictable item. Basically, that item is still there. It's just being pushed into 2027. So timing-wise, we thought it was '26 and it's being pushed into early '27. So nothing happening there. So that's why the same-store bump didn't flow through the FFO. John Kite: The other thing I would add to that, Samir, is obviously, we held Q2, Q3, Q4 bad debt at 100 basis points. I think the first quarter was closer to 75%, but I think we view it as very early in the year. I think we're always reticent in the first quarter to really jump on to too much. You still got 75% of the year to unfold. So I think you can look at it as prudent in my opinion, to not jump on a lot of these things that may or may not happen. I think bad debt and then just recurring but unpredictable are 2 big categories. I mean, especially on recurring unpredictable, I think if you look at last year, we were like $21 million. I think our guidance is closer to $10 million. So we'll see how the year plays out. A lot of things left to happen, but the core business is very strong. . Operator: One moment for our next question. And that will come from the line of Todd Thomas with KeyBanc Capital Markets. Todd Thomas: Beyond the capital recycling that you have lined up right now and with what's under contract, would you move forward with the dispositions without new investment opportunities lined up? Or is the plan really only to activate incremental dispositions if you have something on the buy side? John Kite: Todd, I mean, as you know, our goal is always to kind of pair these things. We've got the same where we like to do stuff in pods, buying and selling. But of course, we're also opportunistic. And if we think that there's a really excellent opportunity to recycle out of a lower growth asset at an attractive yield versus other yields than that is possible that we would do that in front of knowing exactly where that capital would go. Again, this is what a really strong balance sheet before you that opportunity to be forward thinking. But the goal is to always try to couple these things. So we'll see how that plays out, Todd. Todd Thomas: Okay. And then does the current disposition pool the, I guess, $145 million, although I think you mentioned the $12.5 million was included in that in the first quarter. Does that pull include City Center. Can you provide an update on progress for that asset disposition? Heath Fear: It does include City Center, Todd and listen, we hope to have transacted on City Center by now. But as we said in the past, it's a complicated vertical asset and the plan is still to transact before the end of the year. Operator: One moment for our next question. That will come from the line of Michael Goldsmith with UBS. Michael Goldsmith: First question is just on the same-store NOI growth for the quarter. It sounds like it was pleasantly -- you were pleasantly surprised with the upside to that number due driven in part by maybe upsides to the overread the net recovery. Is there anything in the backdrop that is driving those numbers maybe higher than you were expected? And maybe what would you kind of see as kind of the run rate number for the second quarter before it reaccelerates as the sale starts to kick in? Heath Fear: Yes. It was basically -- the outperformance was ratable between 3 things. It was bad debt, overage and also that real estate tax reversal. And again, as I said in my opening remarks, you'll see it moderate into the second quarter and then reaccelerate to the back half of the year. So to your earlier point, it was higher than we had anticipated. And moving into the back 3 quarters, we still have opportunity to outperform on bad debt. We had 80 basis points -- I'm sorry, 75 basis points of bad debt in the quarter, we're still assuming 100. So there's still some things that we hope to be able to outperform in the same-store line as we move throughout the year. Michael Goldsmith: For the record, I'm not complaining that the number is higher -- communicate... Heath Fear: You were not complaining. We were happy. Michael Goldsmith: And then you highlighted a significant arbitrage between asset sale yields and your equity buyback yield. Stock has been doing well. Shares are up 8% this year, up 10% in the last month. So at what point would you think to slow or pause your repurchases and have to look into -- start to look at some other ways to reallocate from here? John Kite: Yes. I mean, obviously, as we alluded to, that is one of the variables as we move through the year. As we sit here today, we're still in a pretty good position as it relates to discount to NAV and core FFO yield relative to where we think we can sell assets that we would want to sell, but that's a moving target, and we'll see how that goes. It's just kind of one of those things it is what it is. I'll address it as it comes. But I think right now, our strategy is, again, it's really real estate based and future growth based. So we will figure out how to best do that. If this isn't part of the plan, there are other things we can do. Obviously, last year, we did pay a special dividend, and we'll see how that goes in the future. But we'll just -- it's just too many variables to really say, Michael, where that's going to be tomorrow or a month from now. Heath, do you want to add to that? Heath Fear: That's great. Operator: One moment for our next question. And that will come from the line of Floris Van Dijkum with Ladenburg Thalmann. Floris Gerbrand Van Dijkum: Just curious, the $36 million SNO pipeline, not all of it is same-store. I think only 84% of it is in the same-store pool. Could you maybe -- is that Legacy West that's not part of the same-store pool and maybe talk about the upside there and when that becomes -- when that will get recognized in same store? Heath Fear: It's really 2 elements there, Floris. One of it is Legacy West and we have an annual same-store concept. So Legacy West won't be in the same-store bucket that we've owned it for a full calendar year. So you will see it in 2027 as part of the same-store pool. The other piece that's not included in same store are the leases that we're executing aloud. So those are the 2 major components outside of same-store that comprise the same the signed-not-open pipeline. Floris Gerbrand Van Dijkum: Got it. And maybe as my follow-up question, I know you put a little thing out there about -- obviously, you've done a lot of anchor repositioning. You've added a number of new grocery concepts to your portfolio, a number of trader goes and a couple of Whole Foods you talk about the returns on capital there, presumably, that's the return on -- direct return on invested capital. Maybe talk about -- I'm curious to Centennial, we were out in Vegas with you guys on your 4 x 4, I can't remember what it was, or maybe it was NAREIT or maybe ICSC. But obviously, you repositioned one of those boxes into a Whole Foods. What is that done? What do you typically see in terms of the [indiscernible] effect to shop leasing and rents in your portfolio when you add one of those grocers to your property. And what would you say would be your fully adjusted return on capital if you were to include those things in there? Thomas McGowan: So Four's, there's no doubt that if we bring a Trader Joe's, we bring in Whole Foods, there's tremendous impact, and it's just that continual shop that occurs through the day. And -- both of those are tremendous drivers for us. So without question, when you have a new retailer or a new grocery like that, when new deals are going into committee, it helps tremendously plus that consistent shop helps drive additional sales throughout. So you have the cap rate compression component. And in addition, you have the lease up through new committee deals and you're driving sales inside your existing tenant base. So we always find a way to generate strong returns on these boxes. But if you carry that in, that factor grows incrementally to a number probably 2 to 3x more than what that would start off with in terms of like 200, 300 basis points. So it's wildly attractive for us to reposition like that. John Kite: Floris, the returns we're generating on capital are like in the 30% range. It depends on the deal. It could be 20%, it could be 40%. So -- but generally speaking, that's just return on capital spend for that retailer. We don't look at it relative to the -- how that might impact the adjacent space other than the ability, as Tom said, to drive a cap rate down by adding a grocer. And again, it's not all about that. It's about merchandising, too. When you look at adding how much we've done in terms of adding Trader Joe's and adding Whole Foods. Then the next thing you know the quality of the surrounding shop grows. And maybe that's why our ABR and our signed-not-open is $28, right, versus the portfolio average of $23.50, I guess, somewhere close to that. So I think it's definitely moving us in the right direction. Floris Gerbrand Van Dijkum: But by the way, your ABR growth even year-over-year is 6.5%, which is, I think, pretty juicy. I mean is that one of the highest growth that you've experienced? John Kite: Yes. I mean, it's been a pretty good growth rate over the last 5 years, actually. I don't have it in front of me, but 6.5% is pretty strong. And when you look at our ABR and you add into that our embedded rent growth and compare that to the peer group, it doesn't reflect where we trade. . Operator: One moment for our next question. And that will come from the line of Michael Mueller with JPMorgan. Michael Mueller: Maybe somewhat of a follow-up. But aside from general portfolio leasing capital, is there any visibility as to how much your annual development or major redevelopment investment could grow to over the next say, 3 to 5 years? John Kite: Michael, that's -- we don't generally, as you know, we don't throw out a number at the beginning of the year and say we're going to spend x million on development, redevelopment because we don't like people to chase the target versus chasing great opportunities. We've been pretty moderated on that in the last couple of years because of the significant spend that we've had in just the lease-up portfolio, which is obviously on a risk-adjusted basis, a much higher return. But as we look out over the next 3 years, that begins to slow down in terms of the internal lease-up capital because we're spending about a little over $100 million a year right now over the next 2.5 years. And so when that moderates through this lease-up, as Heath said earlier, then all of a sudden, you have a lot more choices to deploy free cash flow. And we have a very long history in development and redevelopment, and we know how to do it, and we know how to judge risk. So I would say we will pivot more to that over the next couple of years, and you're going to see us do some smaller projects over the next couple of years. And I think our view is we'd rather have more projects of smaller size than a couple of huge ones. Right now, we have we have a large one in our development at One Loudoun. But frankly, it's very manageable against a $7 billion balance sheet. So long-winded way of saying, I think we can lean into that as we -- as the lease-up firms up over the next 2 years. Heath Fear: I would add, we shouldn't construe the lower development spend now with the development opportunity in the portfolio and lowest hanging fruits Loudoun. We still have 35 acres of land after we're done with this expansion. I think it includes another 1,100 multifamily units, another 1.7 million square feet of commercial. So we've got lots of opportunities in the portfolio, but as John said, the current priority right now is leasing. And when that spend starts to climb, we will -- that pipeline will pick up. Thomas McGowan: Loudoun is moving along very nicely in terms of the lease-up as well. Michael Mueller: Got it. Okay. And second, I apologize if I missed this some place, but what's the range of cap rates for the 1031 in noncore sales? John Kite: We didn't have an exact cap rate range, Michael. But I think in terms of the 1031s, we continue to see opportunities for stuff that we want to own a very high-quality assets kind of like in the 8% to 9% unlevered IRR range. That's kind of what we're pursuing. And as we've said before, the type of stuff that we're selling is kind of in the 7% range depending on what it is. So that's where the trade is currently. Operator: One moment for our next question. And that will come from the line of Alexander Goldfarb with Piper Sandler. Alexander Goldfarb: John, as we look at the SNO pipeline, pretty good ramp from now through '28. But just sort of curious, is there -- is there a way to accelerate this? Or is a lot of this just dependent on their people already in that space and you have to wait for those leases to expire? And then just the time it takes to move for the tenants to build out the space move in, just trying to understand any way to accelerate this timing versus it's structural, and there's really not much you can do because of all the moving pieces and perhaps existing leases that are already there. John Kite: Yes, Alex, it's -- obviously, we're always trying to accelerate the build-out of these spaces in the SNO pipeline. The majority of or a lot of this, I should say, a lot of this space was former anchor space, right? So that's going to have a longer gestation period. And as you know, those generally on average between lease signing and rent commencement could be 15 to 18 months, depends on what it is, depends on the level of construction. Also, don't forget that we have to deal with municipalities in multiple markets that slow you down despite the narrative that, that's changed. I don't think it's changed that much. So yes, we like to accelerate that. We absolutely would. I mean, in one regard, you're just pulling forward something you know you're going to get, but NPV-wise, it makes sense. So we're pushing hard to accelerate, but I think it is what it is. And the good news is the demand is there, the snow is strong. And as I said earlier, if you look at the rents, it really reflects where we're going as a company. So that's a very positive thing to take out of that. Thomas McGowan: Alex, we're doing everything we can, whether it's permit expeditors starting drawing right out of a real estate committee. We try to pull every lever, and it's a huge objective around here to move those up. Alexander Goldfarb: Between you and John, Tom, I never have to worry about not moving quickly. The second question is on the heels of a quorum sale and you talked about more dispositions. Have you sort of outlined how much more of your portfolio you think -- I don't want to say it's a quorum like, but how much more doesn't fit as you think about where you want to take the portfolio? Is it still 10% more, 20% more? Or do you think that most of the lower-performing assets are gone, and now it's really sort of fine tuning based on opportunity? I'm just trying to figure out how much of sort of definitely, we got to sell versus, okay, these are potentials if we have opportunity for something accretive on the other side? John Kite: Yes. I mean I think, obviously, we do a robust analysis of the portfolio all the time. There definitely are assets that we believe don't fit the future KRG, as we talked about in the prepared remarks, we still have a goal of pushing our embedded rent growth to 2 versus where we are today. So there's work to do there. And these are -- some of these assets that we're selling, Alex, are high quality but lower growth, and there are a few like you mentioned quorum that just didn't fit at all. And so there are a handful of properties like that probably the bigger number would be the properties that just don't have the growth profile that we're looking for. And that we also think are potentially a little more tethered to at-risk future tenant issues, right? So there is a portion there, but it's not a huge portion, and this is more methodical around the underlying future growth and real estate quality. Heath Fear: And I'll just add. I'm sorry, Alex, go ahead. Alexander Goldfarb: You go, and then I'll follow up. Heath Fear: I was going to say, when we started this disposition program is the best we could to ensure folks, this is not a multiyear program that's going to result in FFO dilution over 3, 4, 5 years. This was trying to get this done in '25 and '26. And as John said, there's a handful of left and we can get it done and we deploy the proceeds in a prudent manner, we will. But if we don't, that's okay, too. We're always sort of cycling out of 1, 2, 3 assets a year, and that's sort of the expectation, but I can get it done this year, we will. Operator: One moment for our next question. And that will come from the line of Alec Feygin with Baird. Alec Feygin: So one for me is about Legacy West. Curious how it's performed versus initial expectations? And if there's been any incremental opportunities with new tenants expanding from Legacy West to other assets in the portfolio? John Kite: Yes. Thank you for that. Legacy West has performed marvelously. It's been a great asset for us and our partner. We've made really significant progress in a short period of time on increasing rents, particularly on the retail front. As you followed, I'm sure we've announced lots of new leases that we've signed out since we bought it. And the mark-to-market on the rents has been exactly what we thought it would be when we acquired the center, the ABR and the retail component was like $65 a foot, and we're doing deals north of $100 a foot routinely. So that's spectacular. The multifamily side has picked up a lot in the last quarter quite well. The office is really strong. This is really high-quality office and a very sought after a little slice of a fabulous submarket in Plano. Obviously, AT&T has recently announced their global headquarters there, which is just one of a few major announcements that they've had in Plano. So we feel really good about that. And in terms of transferring of opportunities to other parts of the portfolio, that was another reason that we wanted to add it to our portfolio. And when you now look at, for example, our top 3 lifestyle assets, South Lake, Legacy West and One Loudoun, you look at the NOI it's generating versus the -- I think it's about 15% of our ABR now just those 3 assets, but it's like 5% or 10% of our total GLA. It shows you the strength of that, and now we're doing deals across the portfolio with these high-quality tenants that now are very aware of KRG. So it's been a massive win for us, a massive win for our partner, and we're looking forward to trying to find more of those opportunities. Operator: One moment for our next question. And that will come from the line of Craig Mailman with Citi. Craig Mailman: Maybe I'll go back to your comment about the strength of the operating portfolio to maybe step away from cap rate cycle for a minute. Just as -- just looking at [ kind of the ] percent leased here over the last several quarters, Anchor obviously, has been doing well, but small shop, you briefly got over 92% and space down slightly below it. I mean, what's the time frame or the outlook internally to get this maybe the 93% plus? And what's been kind of the obstacle to ramp it as quickly as you ramped Anchor? Heath Fear: We don't guide to occupancy, Craig, but we have said publicly before that we think by the end of this year, we should be at occupancy levels that are approximating our historical highs right before COVID. But the good news is that we don't think that that's at all, and we've seen a lot of our peers sort of bus through their historical high watermarks, and we intend to as well. At the end of last quarter, we were at 92%, I think, in the small shop space, which was 40 basis points away from where we were at a historical high, took a seasonal step back but we can think we can lease way through 92.5% to maybe 93% or 94% of the small shop space. On the anchor side, the step back at this quarter on a sequential basis was related to Value City. But again, we are busy backfilling those boxes and making great progress. So we're very, very bullish on our occupancy opportunity. And again, it is the largest and most meaningful opportunity in the peer set, right? So we've got -- as I said before in the past, everyone's on a peak on their occupancy gains in terms of their same-store. Ours is coming at a different time, and we're going to start seeing that in the back half of this year at '27. Thomas McGowan: And one other thing that we've been doing, Craig, is we've been very proactive in terms of trying to improve the mix. So if somebody is coming off of a nonoption scenario, I mean, what we'll do right away is we'll just say, "Hey, if we can do better, we're going to move them out and end up with a better quality tenant". So we've been doing a lot of that inside these numbers, and we'll continue to do it. But we're absolutely in and up with great decisions and great tenants. John Kite: Craig, I think you remember me talking a couple of years ago about the fact that we're never going to lease space quickly. We're going to lease space in a very, very diligent way, and that's part of what Tom means is that can we take deals maybe faster by accepting a tenant that we don't love or a rent structure that we don't love, particularly rent growth, yes, we could. But if you look at our statistics relative to the peers, I mean, there's no doubt we were, in my opinion, a market leader in rent growth in the small shop space, right? And if you look at where we were in 2019 versus where we are today in 4% a year small shop growth, it's incredible in terms of the number of tenants we've been able to convert, it's to 4% or north of 3%, right? So if you do a bunch of deals at 2% rent growth, you're going to do them faster. But if you're diligent about this and you end up with the right tenants that are growing at 3.5% to 4% in the shops, you're going to thank me for that in a couple of years. Craig Mailman: No, that makes sense. I appreciate the detail there. And then maybe actually shifting back to the capital recycling. John, I think you said $750 million of kind of sales is what you guys have left. Is that right? John Kite: No. What I said was if you look at what we sold last year and then you combine what Heath pointed out that we are targeting to sell this year combined, that's like, I think, close to $750 million. That's what I said there. So we'll see if we hit that, that we still have to do another $130 million, I think, this year to get to that number. And that's just what we have identified, Craig. Craig Mailman: Got you. I guess the gist of my question was going to be if you could snap your fingers today, kind of where would the mix of kind of neighborhood, regional power lifestyle ultimately be to where you feel like the risk-adjusted returns are maximized. And maybe as you look at what you would have to sell to get there, kind of how much of it is the more difficult bucket versus there's definitely pockets of capital that would want to -- would be sort of easy to mediate difficulty? John Kite: Yes. I mean, obviously, everybody kind of classifies what's power versus what's a community center, maybe a little differently. But if we -- if you look at how we have identified it in our investor presentation, our power is down 500 basis points and we're at about 19% of our portfolio relative to ABR is in power, we've said we'd like to get that down to I don't know, 12%, 13%, 14%. But there's some really high-quality assets in there. And then if you look at our regional community versus our neighborhood community and shop and grocery, we'd like to pivot that more to the neighborhood side as well. So maybe the same amount, maybe another 5% to 10%. But really, in the end, it's not going to be about, oh, we've got this perfect composition on a percentage basis, it's going to be more about the embedded rent growth and the quality of the real estate, Craig. And again, I would challenge you to look at where our -- where we trade, where our ABR is, what our embedded rent growth is and what the higher multiple guys are at. And it is what it is. And as long as it's there, we'll continue to try to take advantage of that in the way that we can. Certainly, the private institutional investors are well aware of that and well aware of what's going on in our space. And it's odd to me, but it is where it is, which I keep saying it's odd to me, but that we wouldn't actually, as a group, trade at a premium for liquidity, but it's actually vice versa. You're trading at a discount for the liquidity, which is quite odd. But at any rate, I do think there's a real opportunity there to improve that, Craig. But we're going to have to take it one step at a time. We've identified what we have and we'll see. We still got 3 quarters of the year left. And as Heath said, if those opportunities avail themselves, we'll try to take advantage of that. And then after the end of this year, then we would think, man, we have the portfolio composition is really good. And then again, as he said, we're just back to the normal paired trades, a couple of deals here, a couple of deals there. Operator: I'm showing no further questions in the queue at this time. I would like to turn the call back over to Mr. John Kite for any closing remarks. John Kite: Well, I just again want to thank everyone for joining us today, and have a great day. . Operator: This concludes today's program. Thank you all for participating. You may now disconnect.
Operator: Greetings, and welcome to the NOG's First Quarter 2026 Earnings Conference Call. [Operator Instructions] As a reminder, this conference call is being recorded. It is now my pleasure to introduce your host, Evelyn Infurna, Vice President, Investor Relations. Thank you. You may begin. Evelyn Infurna: Good morning. Welcome to NOG's First Quarter 2026 Earnings Conference Call. Yesterday after the close, we released our financial results. You can access our earnings release and presentation in the Investor Relations section of our website at noginc.com. We will be filing our March 31, 2026, 10-Q with the SEC within the next few days. I'm joined this morning by our Chief Executive Officer, Nick O'Grady; our President, Adam Dirlam; our Chief Financial Officer, Chad Allen; and our Chief Technical Officer, Jim Evans. Our agenda for today's call is as follows: Nick will provide introductory remarks followed by Adam, who will share an overview of NOG's operations and business development activities, and Chad will review our financial results. After our prepared remarks, the team will be available to answer any questions. Before we begin, let me remind you of our safe harbor language. Please be advised that our remarks today, including the answers to your questions, may include forward-looking statements within the meaning of the Private Securities Litigation Reform Act. These forward-looking statements are subject to risks and uncertainties that could cause actual results to be materially different from the expectations contemplated by our forward-looking statements. Those risks include, among others, matters that we have described in our earnings release as well as in our filings with the SEC, including our annual report on Form 10-K and our quarterly reports on Form 10-Q. We disclaim any obligation to update these forward-looking statements. During today's call, we may discuss certain non-GAAP financial measures, including adjusted EBITDA, adjusted net income and free cash flow. Reconciliations of these measures to the closest GAAP measures can be found in our earnings release. With that, I'll turn the call over to Nick. Nicholas O'Grady: Thank you, Evelyn. Welcome, and good morning, everyone, and thank you for your interest in our company. I'll be very brief this quarter by highlighting 9 key points. Number 1, business activity remains stable with few observable changes since we last reported. Number 2, potential changes to activity in 2026 remain a TBD for us as the effect of the Iran war is only now going to be potentially seen in AFE activity. We will update our investors accordingly throughout the year. Number 3, the higher long-dated pricing stays, the more likely we see a sustained change in activity, especially as we head into 2027. Number 4, in the meantime, we've seen a reversal of curtailments in the Williston, and this will drive better capital efficiency throughout 2026. Number 5, it was a banner first quarter for our ground game with an incredible 41 deals done, while overall capital remains controlled. Number 6, the current geopolitical storm is showing some key benefits and a few negatives to the business. We are seeing wide swings in oil differentials, which are likely benefiting our realizations materially, some in the Permian, but particularly in the Williston. On the gas front, Permian production remains hamstrung by limited takeaway for the time being, but we remain financially well insulated with significant basis hedges at less than $1 off Henry Hub. Number 7, our leasing program remains materially underappreciated as through this effort, we've added over 70 net locations in the last year. Free cash flow yields aren't free when comparing us to peers that are just depleting away their inventory. Number 8, while all eyes are on Iran and the wide swings in spot prices, it is the longer-dated strip that matters. The improvement in the 2027 and 2028 strip are what drive growth in undeveloped activity and in asset prices, and these improvements should help stabilize activity going forward, lubricate the M&A market, reduce bid-ask spreads and drive up our competitiveness. We have several exciting large-sized package prospects in evaluation and more coming as the M&A market heats up. The backlog has improved in both size and quality, which is highly encouraging for our business model. Number 9, regardless of what happens in Iran, we believe things have been set in motion that will materially improve the long-term strip's outlook, absent significant economic turmoil. That bodes well for activity, acquisitions and for our investors. Given our hefty free cash flow generation despite adding inventory, our improved balance sheet and our reputation in the marketplace, there is a huge opportunity for our business to find meaningful growth paths. Again, thank you for your interest in our company. We remain focused on growing our enterprise the right way, and as always, our company run by investors for investors. With that, I'll turn it over to Adam. Adam Dirlam: Thank you, Nick. As a whole, Q1 activity was in line with expectations. Production was strong, particularly in Appalachia, where we continue to see promising results from our growing asset base and with our Q1 program right on plan, showing strong IPs. The Williston also outperformed as multiple operators contributed meaningful return to sales volumes from prior curtailments, along with performance gains from recent IPs. Uinta and Permian rounded out the quarter with performance in line with expectations. We ended the quarter with 43.7 net wells in process and 9.2 net AFEs, with the Permian representing roughly 1/3 of our wells in process and approximately 60% of AFE inventory. Well proposals have held steady at 216 consents, squarely in the 200 to 230 range we saw throughout 2025. And based on our conversations with operators, our forward activity view is unchanged from what we laid out on the fourth quarter call. However, the next few months will be instructive for activity changes as it pertains to the expectations for the remainder of the year and 2027. On the ground game, we set a new quarterly record with 41 transactions in Q1, adding over 5,100 net acres and 6 net wells. Our Appalachian leasing program continues to perform well, but we were also able to close deals across all of our respective basins. Most transactions occurred early in the quarter ahead of rising commodity prices, and our pipeline continues to deliver as we diligently evaluate opportunities. Our ground game will stay central as we leverage NOG's proprietary infrastructure to grow our portfolio through smaller acquisitions and evaluate further joint development opportunities. Larger M&A opportunities have also picked up, and we are evaluating over $10 billion in assets across 8 transactions that are currently in the market. As expected in this environment, there is a fair amount of variability in asset quality, but it has been encouraging to see higher quality assets coming to the forefront. Given the consistent number of opportunities afforded to us, we remain discerning and, as always, will prioritize packages that are resilient in any commodity environment and those that create long-term value. With that, I'll turn it over to Chad. Chad Allen: Thanks, Adam. In the interest of time and to avoid repeating standard financial metrics available in our release and presentation, I will focus my comments on the overall performance drivers and outlayers encountered in the quarter. Our first quarter financial results and production cadence were largely in line with internal expectations with no major disruptions. And despite the persistent macro volatility faced by the industry, NOG's diversified and scaled platform continued to deliver, outperforming internal estimates on production and EBITDA for the quarter. First quarter total average daily production was over 148,000 BOE per day, up 6% sequentially, a record for our company. Our oil-to-gas ratio was an even 50-50 split as our Appalachian JV reached its peak in terms of well deliveries. GAAP net income was impacted by 2 noncash items. The first was a noncash mark-to-market loss on derivatives of approximately $521 million, which was the result of a huge run-up in oil prices during the quarter due to the war in Iran. Hedges settled in the quarter was only $17.6 million loss, comprised of an $11 million gain in natural gas hedges, offset by a $28 million loss on our oil hedges. The second item impacting net income was a noncash impairment charge of $268 million. As we have discussed on prior calls, NOG accounts for its assets under the full cost method as opposed to the successful efforts method, which does not perform historical price-based asset test. We are one of the only companies among our peers that utilize the full cost method. I should mention, given the recent change in oil prices, if they stay at current levels, this should be the last impairment charge for the year. We also continue to evaluate a potential shift to successful efforts longer term to avoid such optics. Moving on to pricing. Natural gas realizations have continued to be weak in the first quarter, coming in at 72% of benchmark prices, reflecting ongoing Waha market weakness due to constraints in the Permian. We expect gas realizations, specifically in the Permian to remain weak for at least the next couple of quarters until planned infrastructure projects come online in the back half of 2026. I do want to point out that inclusive of our Waha basis hedges, our gas realizations in the Permian were 53% or $1.86 per Mcf versus a negative 1% or negative $0.02 per Mcf that are included in our corporate gas realizations. So we are well insulated from a risk management perspective for the rest of the year. CapEx in the quarter, excluding non-budgeted acquisitions and other was $270 million, which includes the success we had in our ground game. The $270 million of capital was very balanced with 31% to the Permian, 27% to Appalachia, 24% to the Williston and 17% in the Uinta Basin. Approximately $227 million of the total spend in the quarter was allocated to organic development capital. We still expect CapEx cadence to track at approximately 60-40 split between the first half and the second half of the year, subject to change with activity behavior from our operating partners. After closing our joint Utica acquisition during the quarter, we exited the quarter with debt well within our comfort zone and our balance sheet remains in a healthy spot. Our leverage and liquidity were further enhanced by the nearly $230 million equity offering we completed late in the first quarter. We currently have over $1.2 billion of liquidity available to us with an additional $175 million of untapped liquidity. And given all the work we've done on the maturity wall last year, we have plenty of runway to execute for years to come. With respect to our 2026 guidance, we have not made any updates given the significant level of volatility in commodity prices, our industry and in the macro generally. Directionally, we are currently trending towards the higher end of the low activity scenario we laid out last quarter, but we still got a wide range of potential outcomes for the year. I'd anticipate that we'll be able to start tightening those ranges and narrowing our 2026 guidance by our second quarter call. That concludes our prepared remarks. Operator, please open up the line for Q&A. Operator: [Operator Instructions] And your first question comes from the line of Neal Dingmann with William Blair. Neal Dingmann: Nick, my first question is just on incremental activity. Specifically, you all mentioned in your prepared remarks and release that you suggested operator activities remained flat. But I'm just wondering, based on your recent conversations and what you've seen sort of happened historically, both in this period and prior, what in addition to the 12 months now surpassing $80 do you think has to happen in order to see what I'd call more sustainable change in activity? And if -- when and if this happens, do you believe it occurs sort of equally in your Bakken, Permian and Uinta plays? Nicholas O'Grady: Yes. Thanks, Neal. Good morning. I'd say this, one, when you think about our original guidance, it didn't contemplate a war, right? And so it really -- it comes into the fact that we're seeing obviously a huge surge in short-term prices and a decent surge in the long-term strip. But because it's being driven by geopolitical things, I think you're seeing a little bit more caution than you normally would from operators. One of the reasons we haven't made any substantive changes to guidance just yet is just that there is a lag factor, which is that I do think, and as I mentioned in my prepared comments, it's likely that we will see an increase in activity over time. And that's really going to be driven by the long-term strip. The average spud to sales time is -- it can be faster, but I'd say, on average, it's sometimes around 150, 160 days. And so when you're making that decision today to pick up a rig to drill an additional pad, you're not capturing $100 spot oil, right? You have to make those decisions based on the future. And I think nobody from our operators, they don't want to have egg on their face and commit to a bunch of new activity, sign up a bunch of stuff and then have some resolution in the Gulf and suddenly, they feel like they're falling on their face. That being said, as we continue to draw oil out of storage, I think what's inevitable is that the long-term strip is going to have to reflect that, right? And so it's around $70 on a 2-year basis today. I think the reality is that's probably enough in order to certainly incentivize activity, M&A, all those sort of things. But I think you may see it creep higher just to really give people a buffer to ensure they can feel good about making those investments because that's really what drives that. For us, I think, frankly, just right now, what happened in early March really only starts to affect us right now, and we're really just asking for some grace to really see over the next several months of how this plays out. I do -- but I do think -- look, I think we've talked about this from a guidance perspective. I think we're certainly confident in the high end of the low end. And then I think from there, I think we just want a little bit more time in order to narrow that band. But I think we'll certainly get it done by, call it, the second quarter. Neal Dingmann: That's more than fair. And then my second question, just on -- typical on capital allocation. Specifically, I know talking to some of the operators, they seem to simply look at oftentimes just sort of mid-cycle pricing assumptions as what I'd call a primary driver between deciding if you're just leaning into share buybacks or more, I guess, ground game and M&A. But again, you all seem unique because you seem to have more ground game opportunities than most. So again, I'm just thinking, when it comes to capital allocation, is it simply looking at a mid-cycle price and how cheap your shares are or versus a ground game return? Or what's involved in that? Nicholas O'Grady: Yes, that's right. I mean I think what I'd tell you is that we have to manage a bunch of things, right, which is that like, at the end of the day, a share buyback is a high return proposition, especially when prices were low, and we did do some buybacks at the end of last year. But I'd also tell you that one of our goals as a company, one of the long-term goals is you really have to -- you have to grow your business over time, and it's not what a share buyback does where you just now own more of the same thing. And so ultimately, the opportunity when prices are low countercyclically to acquire assets, which is why we were really so busy in January and February, ultimately can provide some of the best long-term value when you talk about that mid-cycle. I mean, I think oil was $57 in January or February, right? That's certainly below what we would view as a mid-cycle oil price. And so anything you're acquiring during that period of time is likely to deliver a really high return, as do buybacks. And I think it can all be part of the mix, but it's really about that balance. Operator: And the next question comes from the line of John Davenport with Johnson Rice. John Davenport: So from the previous quarter, you guys kind of beat on natural gas pricing, specifically in Appalachia. I was just curious if that's going to be an ongoing trend both for next quarter and the second half of the year? I know the strip for natural gas hasn't looked all too strong in the past couple of months. So just curious what your thoughts are on that. Nicholas O'Grady: Yes. Yes. Well, as a 2-stream reporter, it's a little bit different, right, because our NGL yield is in there. So what I would tell you is that, as it pertains specifically to Appalachia, certainly -- and some of our Appalachian gas is getting kind of on-water NGL prices, right? So we're certainly getting a huge benefit there. Appalachian differential is the bulk of our prices at M2 and M2 has certainly been better. I mean it's one of the few basis areas where we're actually losing money on our hedges. So M2 has been sort of tighter and it appears even it obviously tends to dip seasonally, but it's certainly been better than what the averages have been for the last several years. And so we're definitely seeing an improvement there. In terms of our overall differentials, I think Chad talked a little bit about this in guidance, but I would tell you that we're seeing likely significantly better-than-expected oil differentials, which is really the biggest driver to our revenue given it's about 80% of our revenue. And then we're seeing, in aggregate, worse gas differentials, and that's 100% driven by Waha pricing. At the financial level, it's not having as much of an effect at the bottom line because of our hedge position. But at the end of the day, at the actual spot realizations, I think there's probably downward pressure in the short term. Obviously, I'm not -- I think there's something like 4 Bcf a day of expansions going on in the Permian. So I think it certainly will improve from some of the doldrums we've seen in April, but that's going to take some time this year. John Davenport: Okay. Yes. Perfect. And I was also curious, you mentioned you are evaluating, call it, $10 billion in potential large M&A transactions. Curious where -- what the locations of those might be along with -- just give us some characteristics that you guys are looking for on those opportunities. Nicholas O'Grady: I'll set the table, I'll let Adam finish it, but I'd say this, one, it's been -- and consistent with the last several years, it's definitely more diversified. There's some stuff all over the place. And as our capabilities have expanded, obviously, we've seen more than we ever have from, call it, Canada to every single subbasin in the U.S. What I would tell you is that we are seeing -- typically, people are willing to sell PDP latent properties even in low price environments, especially in the days of ABS and things like that, where they view they're getting relatively good prices for them. When the long-dated strip was $57 coming into this year, people -- that -- if you think about a DCF exercise, that's what drives the value of undeveloped inventory. And so assets with strong undeveloped inventory, which are the characteristics we're looking for, really, we're starting to dry up on the oil side. That has obviously inverted completely. We're seeing higher-quality Permian assets in particular, coming to market. And so I think, for us, you are right now at a little bit of a -- it might seem counterintuitive given how high spot prices are. But with the strip closer to what we would view as a mid-cycle price today, it really does help the long-dated M&A. And so my point would be, if oil prices went from $100 to $75 in the spot market today, it's not going to have as much of an impact on the value of those assets versus that long-dated stripping to here. Adam, I don't know if you want to add to that? Adam Dirlam: That's right. I mean I think the biggest difference that we're seeing between kind of 2025 and where we stand today has been kind of a pivot from the gas-weighted quality assets that we were looking at last year to more of the oil weighted, which is obviously expected. I think you've got a number of operators post consolidation now starting to kind of socialize their assets. You've got private equity groups that are obviously taking a look at the strip and coming to market. And so based on my prepared remarks, you're certainly seeing a fair amount of variability, but the quality is starting to improve, especially on the oil side. Operator: And the next question comes from the line of Paul Diamond with Citi. Paul Diamond: I just wanted to quickly touch on you guys hedge book. Looking forward to the curve and the big -- I guess, big bug of swaps you guys hold, how should we think about any strategic shifts for the rest of the year given the volatility, and as you said before, the war that no one expected? Nicholas O'Grady: Yes. I don't think that you'll see much in terms of fireworks in terms of the swaptions. We don't really have that many swaptions remaining this year to be candid. And what few ones we have will either be exercised or roll forward. But I wouldn't expect any major shifts to our hedge book specifically for this year. And then for next year, we've started hedging, Paul, but not in a significant action at this point. And I think it's just -- we're just trying to be patient as we go through the -- we really want to see the conclusion of what happens in the Middle East before we really make a call on 2027. Paul Diamond: Got it. Makes perfect sense. And then as you guys talked about the net wells in process, the current split is I guess third Permian, third Williston and then split even otherwise. Any reason to think with what you see in that range right now that, that shifts? Or is that kind of -- should we think about that as more locked in for the next year or so? Nicholas O'Grady: Being an expert, I'll leave it to you. Adam Dirlam: Yes. I mean, I guess what I would be looking towards is probably more like the election activity, right? And so if you look at that, you're seeing about 2/3 related to the Permian and you're starting to see a fair amount of Williston acceleration as well. And so I would expect kind of the Permian and the Williston to be the front runners. Obviously, we've got a fair amount of activity in Appalachia, and that will also be dependent on, obviously, the transaction that we just closed as well as the ground game leasing program that we've got in place. And then the Uinta is really just kind of steady as it goes. So Permian and Williston is probably where I'd be looking to. Nicholas O'Grady: Yes. And I'd say, I think my guess would be just given the gas situation in the Permian right now, that the acceleration you see there really is probably later in the year just as you get closer to a resolution there. And on the Uinta, I think there are some options for some acceleration, but we'll have to see [indiscernible]. Operator: And the next question comes from the line of Noel Parks with Tuohy Brothers. Noel Parks: I was wondering, and it's definitely interesting to hear about the different parties, the private side coming to the table and so forth and -- but I was wondering, for operators, where do you think things stand now around sort of basin rationalization in the wake of some of the big transactions of the last year or so now being fully digested? And I guess I'm just curious if you think overall across your basins, you're seeing operators more inclined to sort of expand their footprint or sort of core up and narrow them down right now? Nicholas O'Grady: Yes. No, I don't know if I want to speak for them completely. I would say this that we -- Adam had talked extensively last year about that he thought that post a lot of this consolidation, we would see rationalization. We are starting to see that. So we're seeing several large companies put packages of noncore assets sometimes in good basins to sell. And so I do think that we're seeing some rationalization. We're seeing that in the Permian, the Eagle Ford, I'm trying to think of where else. I think there's a large Williston package coming at some point this year. And so we're definitely seeing that to some degree. I think, look, consolidation is a trend that I think continues. It both benefits and hurts us sometimes. Obviously, it tends to hurt us in the sense that you probably have less aggregate activity, but it helps us from a cost efficiency and from a returns perspective. And so I don't know if you want to add to that, Adam? Adam Dirlam: Yes. I mean, going back to your initial question, I would just say that 2 things can be true at the same time. And ultimately, it's going to be dependent on the philosophical approach from the operator, right? And who did they consolidate with, where are those positions? And then ultimately, what does that integration difficulty look like? Because from our experience in talking with our operating partners who have gone through this, some can go very smoothly and others cannot. And so I think you're going to see some large asset packages, but then you're also going to see other operators that might take small pieces, non-op and kind of just kind of layer that out into the market kind of as they go. So I think you're going to see a little bit of everything. Noel Parks: Got it. And I'm just wondering, are you seeing anything happening kind of in the sort of off the beaten path gas plays? I'm thinking a little bit about Mid-Con, Rockies, just as people look ahead to longer-term supply and sort of thinking about underutilized infrastructure and so forth and maybe some capital finding its way there? Nicholas O'Grady: Yes. I mean, look, there have been some major consolidations on the private side in like Rockies gas and some of the legacy assets, and there have been some companies that have put together some really good assets. And in some cases, some of the wild swings in differentials out there over the last couple of years have made those really, really sound investments. I'm not sure that's necessarily something for us per se. And I say I'm not sure we really haven't evaluated a ton of it. So we don't -- things like the San Juan Basin or the Piceance, we just -- we've never really evaluated them at any extent. So I can't really speak to them. I'd say this in general, though, if you think about the life cycle of shale, and this is consistent with my public comments everywhere, in general, there is more life in the core basins of gas in the U.S. than there is in the core basins in oil. And so I think the necessity to really step out isn't quite there. We have decades of gas inventory internally here alone. We don't really write in our core basins. I don't know if you'd want to add to that. Adam Dirlam: No. I think the only other thing I would add is, I mean, you obviously have seen kind of the ABS market come into play with maybe some more PDP-heavy type assets, Mid-Con, Eagle Ford, things like that. And typically not the sandbox that we play in, but we're always having conversations about how we could potentially be helpful there. So we'll continue to explore it. So... Nicholas O'Grady: Yes. I mean we've done a number of -- as you know, we don't have any assets in the Mid-Con. We've have done dozens of evaluations at this point. And it's just a more complex area. It's not really as uniform. And so it doesn't mean it's bad, but I think we'd have to be really highly selective if we ever enter that basin just -- with them, and most likely, we would do it with an operating partner. Adam Dirlam: And then what are we looking at relative to what's in our own backyard. Nicholas O'Grady: Correct. And so far, it has sort of lost in the tug of war from a return on capital perspective that is amenable forever. It's just we have yet to find an asset that really... Adam Dirlam: Compete. Nicholas O'Grady: Compete it, that's right. Operator: And the next question comes from the line of Phillips Johnston with Capital One. Phillips Johnston: Just wanted to follow up on the earlier question about the oil swaptions and just ask about some of the accounting nuances for those swaptions. I think most of us understand that the vast majority of those swaptions that expire at the end of this year are required to be listed for 2026, even though the majority of them would actually turn into swaps for '27 or even beyond rather than this year if they're ultimately exercised. So I guess I understand that nuance, but I just kind of wanted to square that with the makeup of the hedge liability on the balance sheet where it looks like close to 65% of the hedge liability is classified as current. Chad Allen: Yes. That's because of the expiry, right? Just as you stated, Phillips, right? We have to -- because of when that expiry is being, in some instances, or most instances 12/31/2026, it's got to sit into the current bucket there. Phillips Johnston: Okay. Okay. So that makes sense. It's basically the same... Chad Allen: Yes. For accounting purposes, it's got to be treated for the bank's counterparty election date. Nicholas O'Grady: But it's not really how it works. Chad Allen: That's not how it works. No. And you'll see in our 10-K -- or 10-Q, sorry, some updated disclosures with respect to kind of how the swaptions roll out. But again, like what we've mentioned before, Phillips, we certainly -- we actively manage this portfolio. Nicholas O'Grady: It's a nothing burger to be candid. Chad Allen: Yes, it is. Operator: And I'm showing no further questions at this time. I would like to turn it back to Mr. Nick O'Grady for closing remarks. Nicholas O'Grady: Thanks very much for your time this morning. We look forward to talking to you in the coming weeks. Appreciate it. Operator: Thank you. And ladies and gentlemen, this concludes today's call. You may now disconnect.
Operator: Good day, and welcome to the Orion Group Holdings First Quarter 2026 Financial Results Conference Call. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the conference over to Margaret Boyce, Investor Relations for Orion. Please go ahead, ma'am. Margaret Boyce: Thank you, operator, and thank you all for joining us today to discuss Orion Group Holdings' First Quarter 2026 Financial Results. We issued our earnings release after market last night. It's available in the Investor Relations section of our website at oriongroupholdingsinc.com. I'm here today with Travis Boone, Chief Executive Officer of Orion; and Alison Vasquez, Chief Financial Officer. On today's call, management will provide prepared remarks, and then we'll open up the call for your questions. Before we begin, I'd like to remind you that today's comments will include forward-looking statements under the Federal Securities laws. Forward-looking statements are identified by words such as will, be, intend, believe, expect, anticipate or other comparable words and phrases. Statements that are not historical facts are forward-looking statements. Our actual financial condition and results of operations may vary materially from those contemplated by such forward-looking statements. Discussion of the factors that could cause our results to differ materially from these forward-looking statements are contained in our SEC filings, including our reports on Form 10-Q and 10-K. With that, I'll turn the call over to Travis. Travis, please go ahead. Travis Boone: Thank you, Margaret, and good morning, everyone. Thank you for joining us today to discuss our first quarter 2026 results. We delivered a solid start to the year, supported by disciplined operational performance and a healthy $24 billion pipeline of opportunities. This translated into top and bottom line growth and good cash flow generation. Our teams continue to execute at a high level, positioning us well for the remainder of 2026. In our Marine segment, demand for mission-critical maritime infrastructure continues to build, particularly across defense and port modernization projects. With the Iran conflict and disruption of traffic through the Strait of Hormuz, American Naval superiority in domestic energy and petrochem security are front and center. These are meaningful drivers of public and private maritime build-outs that Orion is well positioned for. On another note related to the conflict in the Middle East, you may have heard that the administration paused the Jones Act related to the disruption in the Strait of Hormmoz. This is a temporary pause specifically related to the transportation of bulk petroleum and fertilizer products. Previous administrations have made similar actions related to emergencies or disasters. While this limited pause of the Jones Act does not impact our business, we are strongly opposed to any and all Jones Act modifications. It does not align with the America First approach the administration has so publicly promoted, and this action has had little to no impact on reducing fuel prices in the United States. The President's 2027 budget proposal released earlier this month includes a $1.5 trillion defense budget, a historic increase to fund the expansion and modernization of U.S. shipyards, dry docks and waterfront infrastructure, alongside expanding investment in maritime security and uninterrupted global transportation lanes. This budget prioritizes investment in hard assets tied to U.S. national security, a central theme to Orion's long-range growth outlook. Our commercial clients are signaling a growing need for investments that increase energy security and supply diversification, particularly in North America. Buoyed by elevated product prices that support investment economics, we are seeing an acceleration of early work to support energy, chemical and petrochemical projects that include meaningful marine infrastructure to increase export capacity. With the addition of J.E. McAmis in February and continued investment in our people and fleet, our team is well positioned to deliver the maritime infrastructure projects critical to our national defense strategy and commercial resilience. Turning to Concrete. This team delivered a fantastic quarter across all key metrics with strong revenue and impressive adjusted EBITDA expansion. Registering a 1.1x book-to-bill in the quarter and executing with excellence, concrete is firing on all cylinders. Data center development continues to be a primary pillar for this business. Investment by hyperscalers and green lining of projects continues to advance at a very brisk pace. In the quarter, data centers accounted for around 40% of concrete revenues. And with the current composition of backlog and pipeline, we believe data centers will continue to be a central driver of profitable growth for our Concrete segment going forward. We also continue to see growing opportunities across our other sectors, including advanced manufacturing, transportation and cold storage. Investments in these areas are driven by reshoring of manufacturing around long-term domestic production strategies, increasing demand for expanded distribution and fulfillment networks and a favorable regulatory environment. With our recent expansion into site civil, earthwork and underground utilities, we are seeing the size and scale of concrete pursuits and awards increase while also enhancing execution certainty and control for our clients and our own delivery teams. All in all, an outstanding quarter of bookings, execution and teamwork for our concrete team. Our backlog is growing and our pursuit pipeline remains healthy with broad-based opportunities across both segments as we move through the year. Our $24 billion pursuit pipeline is currently evenly distributed over time with roughly $8 billion in opportunities for 2026, $8 billion in 2027 and $8 billion in 2028 and beyond. At the end of the quarter, backlog stood at $668 million and included almost $220 million in new awards and change orders booked in the quarter. Representative awards included a couple of midsized port modernization and dredging projects, a bridge project for an Army base, a couple of good wins for the McAmis team and a nice mix of concrete projects. We've continued the bookings momentum into April and have been awarded well over $200 million in new work that is not yet under contract, so it is not in our backlog, including a $100 million port renovation project, a $40 million dredging project and a $24 million data center project. These new awards set us up nicely for a strong second quarter. With growing backlog and a robust pipeline, we are pleased to reaffirm our full year 2026 guidance. I'll now turn it over to Alison to discuss our financials. Alison? Alison Vasquez: Thanks, Travis. We're pleased to report first quarter revenue of $216 million, GAAP net income of $4.7 million, adjusted EBITDA of $8.7 million and adjusted EPS of $0.05 per share. As compared to the first quarter of 2025, these results represent a 15% growth in revenue, 7% growth in adjusted EBITDA attributable to strong momentum and expansion of services in our Concrete segment and solid, consistent, predictable project execution across the company. Before turning to segment performance, I want to briefly highlight a change to our segment reporting this quarter. We have revised our presentation to begin reporting 3 segments: Marine, Concrete and Corporate. We believe this disaggregation of corporate out of the results of Marine and Concrete will provide greater transparency into the underlying financial performance of each segment and is much more consistent with how we manage the business. Prior results have been recast to conform to the current presentation, and we've included a full recast of FY 2025 in our investor presentation posted on our website. Our Marine segment reported revenue of $110 million and adjusted EBITDA of $12 million, representing an 11% margin compared to $127 million in revenue and adjusted EBITDA of $17 million in the first quarter of 2025. These decreases were primarily due to the ramp down of several large projects and early starts on new projects kicking off. Our Concrete business had a standout first quarter, as Travis talked about, reporting revenue of $106 million and adjusted EBITDA of $8.6 million, representing an 8% margin as compared to revenue of $61.5 million and adjusted EBITDA of $2.8 million in the prior year quarter. These results represent a high watermark for both revenue and adjusted EBITDA and are the direct result of outstanding productivity, execution and momentum. We also benefited from the expansion of services that Travis mentioned earlier. From a balance sheet perspective, we ended the quarter with just over $70 million of debt that included $53 million of outstanding borrowings under the UMB credit facility, which we used to fund the McAmis acquisition in the quarter. Our net leverage remains at a healthy level, providing meaningful balance sheet flexibility as we look ahead. All in all, we are pleased to reiterate our full year 2026 guidance initiated last month. That's it for me. Back to you, Travis. Travis Boone: Thanks, Alison. As we move through the year, our focus remains on executing our work safely, maintaining discipline across the organization and delivering consistent results. I want to thank our shareholders for their continued support and recognize our teams across the business whose work every day drives our performance. Before I open the call for Q&A, I'd like to encourage our stockholders to cast your votes and participate in our virtual annual meeting coming up on May 19. You can find the details in our proxy materials and on our website. Finally, I'd also like to take this opportunity to recognize and thank Tom Amonett and Peggy Foran for their service on our Board. Each of them will be retiring from our Board at the annual meeting, at which time the size of our Board will decrease from 8 directors to 6 directors. With that, I'd like to open it up for questions. Operator? Operator: [Operator Instructions] The first question will come from Tomo Sano with JPMorgan. Tomohiko Sano: So I'd like to ask about the guidance. Given the solid start of the first quarter and the positive project updates in April, there was no upward revisions to your full year guidance. Is this due to conservative assumptions in your outlook? Or does it reflect some lag in the Marine segment despite the strong performance in Concrete? Could you elaborate on the key factors behind maintaining the current guidance, please? Alison Vasquez: Sure. I'll start and Travis can fill in. I would say, I mean, we just initiated the guidance last month, and we had a pretty good view. I think we continue to have a good view -- we have -- given what Travis talked about in the call with regards to bookings post end of the quarter with the $200 million plus, especially more heavily weighted toward Marine, we're feeling more confident with just kind of what that path looks like as things come into focus. But I would say from a first quarter perspective, the results came in pretty much right in line with what we expected from a profitability perspective. So we felt like it was prudent just to kind of hold where we are. And then as the year plays out, we'll see as those cards get debt. Travis Boone: Yes, Tomo, we generally, we want to underpromise and overdeliver. So we're going to take a conservative approach to things like this generally, and we're going to hold the line for now and see how things progress over the next quarter or two. Tomohiko Sano: And if you could talk about adjusted EBITDA margins contracted year-over-year in the faster quarters. But could you elaborate on your concrete plans for the margin recovery after second quarters, please? Alison Vasquez: I would say that the margin impacts were attributable to just to the phasing of kind of where we are on projects, specifically in Marine. I mean, I assume that we're talking about Marine, which had -- the margins came down in that business during the quarter. But really, just as a I think, attributable to just phasing of where we are on projects. As we wrapped up many projects toward the end of last year, a lot of goodness will generally come into the numbers we're kicking off. And as we kick off new projects, we generally are a bit more conservative in where we kind of set the stakes initially. So I would say that it's really kind of more of a timing item. We don't see -- we aren't seeing any signals that there would be any consistent or persistent margin degradation over time. If anything, we're seeing the opposite just with just the pipeline and the number of opportunities that we're seeing on the horizon. And then I mean, concrete had a pretty monster step-up in their EBITDA contribution for the quarter. I'll say that we benefited in our concrete business from good weather. We -- a lot of times, we'll talk about bad weather, but I mean, this is a quarter where we benefited from good strong momentum throughout the quarter, good strong utilization and activity throughout the quarter that was not interrupted by weather. And as the concrete projects get larger, we have opportunities to keep our teams on programs to allow them just to have consistent utilization and execution over time, which ultimately serves to lift the margins as there are all those starts and stops. So there weren't -- I wouldn't say there are any big good guys that helped concrete in the quarter. I would say that the margins that they delivered were really a product of just really strong execution, good momentum, uninterrupted momentum. And I mean, thanks to the skies, too. Operator: The next question will come from Aaron Spychalla with Craig-Hallum. Aaron Spychalla: First for me, good to hear the order activity continuing to pick up into April. You noted seeing acceleration for early work on the energy and petrochem side. Just can you talk a little bit about the time line from that early work and when those could maybe turn into project awards? And just any thoughts on what those could look like size-wise, content-wise? Travis Boone: I think we're just -- we're seeing a fair amount of activity. I think increased urgency to get projects breaking ground and getting going and there's, I think, a lot more conversation about, I think the sort of disruption in the global energy world has woken some things up as well as kind of, I think, probably put some -- like I said, put some urgency into getting projects underway. Alison Vasquez: Yes. And generally, as we start seeing the early signals of projects coming to us. And so this is, I mean, mostly on the marine side where we're seeing our larger commercial clients begin the signals of greenlighting projects -- and there may be a period of 3 months, 6 months or a year. But I would say as we look out on the horizon, there will be certain projects that will move forward very quickly. And there will also be another set of projects that will move forward to try to get the permitting and all the things that they need to do within this administration. So I think that also -- I mean, there are some time lines that are in there. But we do have a good number of clients and programs that we see with the momentum picking up. And on those that are quite serious and are more advanced from a permitting perspective, we would expect those to move forward more quickly. Aaron Spychalla: And then maybe second, you kind of highlighted an uptick in activity with the Department of Water and the Coast Guard. Can you just guys talk a little bit about what some of those opportunities look like and how you're thinking about timing on those as well? Travis Boone: The uptick in -- on the President's budget Yes, sorry. Yes, on the President's budget, there were quite a few -- it was a huge uplift in the budget for military. Now of course, the President's budget is a -- the way it works in reality, it's a bit of a wish list that still has to get put in place by Congress. And so I would say it's directionally, that's the way the administration would like to see things go. And so we'll see how it plays out. But it is good signs, good indicators of what is likely to come out of Congress, assuming they can get a budget passed. Alison Vasquez: Yes. And I mean, even just putting the proposal out there for $1.5 trillion, I mean we're at $900 million now. So even if it goes up to $1 trillion, that's still a very large increase. We would expect to benefit from that, especially with just the emphasis on naval superiority, naval dominance, marine infrastructure resilience. Those are all themes that are central to this budget and I mean, really kind of to the world that we're living in right now. So it's very much accentuated by what's going on in the Middle East. Aaron Spychalla: Understood. And then maybe one last for me. Just with higher fuel prices, some of the kind of tariff developments on maybe Section 232 expansions. Just any margin or backlog sensitivity, any actions you might be taking there on the business side of things? Travis Boone: The fuel side is something we're watching. I mean we tend to build in contingency in our bids and things like that for fuel spikes. And we buy in advance on parts of our business where we burn a lot of fuel, things like that. So we're generally at the moment, okay. We're watching it close. It is something that if it becomes a very long-term situation with high fuel prices, we could see some minor impacts, but it's -- right now, we're in a kind of watch-and-see mode and make sure we're protecting ourselves as much as we can. Aaron Spychalla: And then just anything on maybe like steel or anything coming out of the Section 232 expansions? Travis Boone: We talked a lot about tariffs, I don't know, about a year ago. And we're generally in pretty good shape with how we bid and bid our work to be, again, either with contingencies in place or we have locked in prices. So we're generally in pretty good shape on the tariff side of things. Operator: The next question will come from Min Cho with Texas Capital. Min Cho: Congratulations on your standout quarter for Concrete. And I understand that weather was helped you guys a little bit here. But just given the level of backlog that you have, do you feel like this level of revenue and margins are sustainable in the intermediate term, again, assuming that kind of taking weather out of it? Travis Boone: Yes. I think the -- between the backlog and the activity we're seeing and the kind of outreach we're getting from owners as well as our general contractor partners, it seems to be like it's going to continue. We don't see a cliff coming or a slowdown happening there. It seems it's very, very active at the moment, a lot of activity that we expect to see coming in throughout the year. Min Cho: That's excellent. Obviously, EBITDA of about $9 million, clearly suggesting back half weighted outlook. So can you just talk about like what specific drivers, maybe volume, mix or margins that gives you the most confidence in achieving this guidance and where you could see some risk to -- the greatest risk or greatest upside? Travis Boone: Yes. I think it's a timing thing as far as our marine business, a little light this quarter just with timing of projects and things like that as far as -- and then concrete really kicking hard in this quarter. And I think we'll see as far as the confidence goes between the backlog and the projects we've won already in the first month of second quarter here. It's been pretty active quarter this second quarter, and we're very confident in the pipeline and backlog we should be able to build this year and work we can deliver in the latter half of the year. I know it's not unlike probably different reasons, but 2024 was a pretty similar year, a little lighter first half and a pretty heavy second half. It's looking to be a similar type sort of shape to the graph as a couple of years ago for different reasons. Min Cho: Yes. Excellent. And then just finally, Alison, what was J.E. McAmis' contribution to adjusted EBITDA in the quarter? Alison Vasquez: It contributed positively. But I would say that their contribution was more in opportunity pursuit and building backlog for the future. They won some really nice awards that they'll continue to execute through 2026 and into 2027. And very importantly, they have been very integral in supporting some other really interesting opportunities that we're looking at. So I would say that their contribution was meaningful. Like I said, they did contribute from a profit and a revenue perspective, but nominally, but I would say that the meaningful part of their contribution was really in just scaling their true expertise across both projects that we have currently in flight right now and also in guiding, advising and pretty meaningfully supporting some high-value pursuits. Operator: The next question will come from Gerry Sweeney with ROTH Capital. Gerard Sweeney: I may do something blasphemous and just start with concrete, if that's okay. I appreciate the courtesy. Listen, concrete, really, really great quarter, obviously. And I know you're working on the Iowa projects. But I'm really curious as to what's your visibility on data center work. Some of our other clients are seeing tons of work coming down the pipe, especially as sort of the build-out of these facilities start to expand. And I'm just curious how much visibility you have? And what's the market opportunity this year into next year and even maybe a little bit forward as we look at these... Travis Boone: Yes. As we've talked before, but generally speaking, visibility into data centers is pretty minimal until it's kind of go time, right? They're fairly secretive about where they are, what they are, who's doing, whatever. Everything is kind of a big secret until it's go time. And so the visibility is always going to be somewhat limited compared to, say, public sector project in the marine side of the business. However, the activity, as you mentioned, you're hearing is heavy. There's activity really kind of going in several directions. And it seems like there's a lot of big stuff in the works. We're having lots of conversations about really large projects that -- with our key partners and some of the owners that we work with regularly. And it's looking really good for the year for data centers for us. Gerard Sweeney: And separately, obviously, Iowa was one that you highlighted previously. And I think as you do that and maybe some other projects, does that sort of elevate you in terms of reference projects and just bring you more and more into the circle per se? Travis Boone: I mean, generally speaking, I mean, Gerry, we've done over 50 data centers now. It's a big -- it's -- we've got a lot of them under our belt. So definitely we're one of the key providers in this space, especially in the Texas market, where there's a lot of them underway and planned. And so definitely, we're kind of -- I wouldn't say we're making decisions with the owners. But I would say we have a seat at the table in a lot of the early conversations. Gerard Sweeney: Got it. One more question. What about sort of the derivative or knock-on effect? Obviously, as these projects more and more come on to the drawing board and they're hitting sort of shovels in the ground. What does that do to just general capacity in the concrete market and even help margins with other projects? And it's got to be pulling talent and capacity into the data center market and maybe raising pricing or margins in other sectors as well potentially. Travis Boone: Yes. I think the data center world, I mean, we're seeing it in Texas for sure, where -- and it's not just concrete, but a lot of the trades that are working on these projects, there struggles to find people, find resources, even things like housing and food in some of these more remote areas for the -- all the workers that have to be on these sites. And so it's definitely -- there's resource challenges, whether it be people, equipment, materials, whatever. And it's the -- I think the owners are finding a way to make it happen. The owners, the general contractors and the teams on the site are finding ways to make it happen. It's a kind of do or die sort of approach that these owners have and everybody is finding a way. Gerard Sweeney: Got it. That's it for me. I'm gonna save my marine questions for the follow-up, if that's okay. Travis Boone: All right. Sounds good. Thanks. Operator: The next question will come from Liam Burke with B. Riley Securities. Liam Burke: Your operating cash flow year-over-year was very strong on what typically would be a slower cash flow quarter. As we look into the balance of the year, is there any priority to delevering even though the balance sheet is still in pretty good shape? Alison Vasquez: I think the balance sheet is in good shape. I mean we'll look at opportunities over time. I mean, I would like to potentially carry a little bit less. But I mean, I think we're in a very healthy place. We're right at 1.5x net leverage. And so I think that's a good place for us to be. We might have opportunities to bring that down, but that's not our highest priority. I would say our priority in terms of our capital deployment would be in opportunities to expand just our positioning from an organic growth perspective and whether that means some investments in key equipment, key people, key things that we need to be able to ensure that we are well positioned for the pipeline and converting the organic pipeline maintaining that healthy balance sheet and then potentially other options. But I would say that sitting at a 1.5x net leverage is a good place for Orion to be, especially with the interest rates that we negotiated earlier this year. And so I think that we're real comfortable right there. And -- but we'll -- it's always something that we factor into -- from a capital allocation strategy. But usually, we find some productive uses and especially in a growing business that will require some amount of working capital contributions, we'll probably tend to run around that 1.5x, I would expect on a steady state. Liam Burke: So I would gather with your organic opportunities, plus it sounds like McAmis is coming on very nicely, both from an addition and plus the synergies you're gaining. M&A is not one of the options in terms of allocation. Alison Vasquez: I wouldn't say that. Travis, I mean, well, I'll let you start, Travis, and I'll... Travis Boone: Yes. Well, she said it. I wouldn't say that. We're going to be -- as far as M&A goes, we're going to be very disciplined about the things we look at, and we'll be -- but if something comes along that makes good sense and is a reasonable bite, we would be -- we might be interested in it. Operator: This concludes our question-and-answer session. I would like to turn the conference back over to Travis Boone for any closing remarks. Travis Boone: Thanks, everyone, for taking the time to join the call today. We look forward to speaking with you in the next quarter. Operator: The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
Operator: Greetings, and welcome to the Euronet Worldwide First Quarter 2026 Earnings Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. It is now my pleasure to introduce your host, Ms. Stephanie Taylor, Head of Investor Relations for Euronet Worldwide. Thank you, Ms. Taylor, you may begin. Stephanie Taylor: Thank you. Good morning, and welcome to Euronet's First Quarter 2026 Earnings Conference Call. On the call, we have Mike Brown, our Chairman and CEO; and Rick Weller, our CFO. Before we begin, I need to call your attention to the forward-looking statements disclaimer on the second slide of the PowerPoint presentation we will be making today. Statements made on this call that concern Euronet or its management's intentions, expectations or predictions of future performance are forward-looking statements. Euronet's actual results may vary materially from those anticipated in these forward-looking statements as a result of a number of factors that are listed on the second slide of our presentation. In addition, the PowerPoint presentation includes a reconciliation of the non-GAAP financial measures we'll be using during the call to their most comparable GAAP measures. Now I'll turn the call over to our Chairman and CEO, Mike Brown. Michael Brown: Thank you, Stephanie. Good morning, and thank you, everyone, for joining. I'll begin my comments on Slide #4. The first quarter here in 2026 represented a solid start to the year as we navigated what continues to be a fluid operating environment. Importantly, we continue to make meaningful progress on our growth initiatives that we believe will position Euronet as a long-term winner in the payments and cross-border space. We are pleased by the broad-based strength across our business, which drove 19% growth in adjusted EPS alongside accelerating momentum in several of our key digital efforts. Highlights include 35% growth in Ria Digital transactions and a 42% growth in new digital customers, the addition of approximately 2,300 new merchants in our Merchant Acquiring business, Dandelion delivering its strongest quarter to date and 3 EFT payment infrastructure deals signed and continued the expansion of our CoreCard client base. During the quarter, we continued to face headwinds from immigration policy and ongoing economic pressures and the conflict in the Middle East introduced additional volatility across parts of our business. These impacts were most pronounced within the Money Transfer segment. We believe the softness associated with these factors is transitory, and we remain focused on what we can control, continuing to operate the business efficiently, executing our long-term growth initiatives across all 3 segments and maintaining financial discipline. We remain confident with our full year outlook, supported by our strong balance sheet and our historically disciplined balanced approach to capital allocation. We believe that we are well positioned to execute against our strategic priorities and deliver adjusted EPS growth in the 10% to 15% range for the full year. Next slide, please, Slide #5. During the first quarter, the EFT team continued to expand our banking and payments infrastructure business with a particular focus on growing the REN platform, our ATM-as-a-Service offering and our merchant acquiring network. As a reminder, these are key offerings within EFT that we believe will play a significant role in accelerating growth at Euronet for years to come. Starting in Europe, in Austria, we implemented an ATM-as-a-Service banking infrastructure agreement with bank99. Under this long-term agreement, Euronet will provide full outsourcing services for bank99's ATM fleet across the country, reinforcing our role as a long-term infrastructure partner to leading banks. In Poland, we signed an agreement with UniCredit Bank to deploy cash recyclers across its branch network. This deployment also allows UniCredit's customers to access Euronet's market-leading depository network. In Latin America, the REN team signed its first banking infrastructure agreement in the region with Banco Itau in Paraguay. This agreement enables the bank to take full ownership and management of its ATM network, allowing it to exit the country's centralized ATM monopoly and then transition to a modern independent processing model with direct scheme connectivity. I want to highlight the strategic importance of these banking infrastructure agreements. Across several European markets and even at an EU level, regulators are developing standards and in some cases, formal regulation that require banks to maintain ATM networks to ensure customer access to cash. By leveraging Euronet's REN technology and scale, banks can meet these requirements while delivering a better customer service at a significantly lower cost. For Euronet, these agreements generate long-term recurring revenue and deepen our position as a critical infrastructure provider. In addition to these core platform wins, we continue to expand our product footprint with existing relationships. In Ecuador, we extended our partnership with Banco Guayaquil through a 3D Secure agreement. This is notable for 2 reasons. First, it demonstrates our ability to cross-sell incremental REN products to existing clients; and second, it represents the first deployment of this product in Latin America, highlighting the cross-geography synergies resulting from our 2024 Infinium acquisition in Malaysia. We also saw continued momentum in merchant acquiring, adding approximately 2,300 new merchants to our existing portfolio. During the quarter, we further strengthened our position in Spain through the announced acquisition of PaynoPain. This transaction enhances our ability to offer digital merchants a comprehensive and flexible suite of omnichannel payment solutions tailored to a wide range of customer needs and industries. Overall, I am pleased with the EFT Group's solid start to the year. Their continued focus on expanding banking and payments infrastructure continues to provide long-term recurring revenue while also providing state-of-the-art technology for banks, merchants and fintechs, around the world. With that, let's turn to Slide #6, and we'll discuss epay. During the quarter, epay continued to make steady progress expanding its digital content distribution capabilities across both established and developed markets or developing markets. We extended our digital content distribution relationship with Revolut into Brazil and Mexico for a total of 22 countries. Revolut is a banking super app and one of the most successful fintech companies in the world with over 65 million global users. This expansion reflects continued demand from global partners to leverage our distribution infrastructure across global markets. We signed and launched a B2B agreement with Apple for distribution through corporate benefits, a leading European employee benefits and rewards platform, across 6 countries. In Japan, we signed a content distribution agreement with Roblox, adding another global brand to our network. This agreement represents continued progress in expanding epay's presence in key digital entertainment markets. We also advanced our alternative payment initiatives during the quarter. We launched Amazon Paycode in partnership with Italy-based LIS PAY, increasing consumer access to alternative digital payment solutions through additional payment channels. In India, we launched Google Play and Apple Gift Card codes on Zepto, a leading quick commerce platform. This launch expands our distribution of key digital content and supports our strategy of partnering with digital platforms to capture the evolving consumer purchasing trends. Overall, epay continued to execute on its growth strategy during the quarter with incremental expansion across geographies, partners and product offerings. We expect this trajectory to continue as we seek to leverage existing infrastructure into high-growth adjacencies, which we will discuss in greater detail at our upcoming Investor Day. The team remains focused on building its global distribution network to support long-term value creation. Now let's go on to Slide 7, and we'll talk about Money Transfer. In the first quarter, we continue to make progress in our Money Transfer segment, but a few external factors masked these positive developments. Pressure on transactions initiated in the U.S. retail business to countries south of the border remained persistent, largely due to the continued effects of U.S. immigration policy, where the industry has continued to experience a 1-2 punch of lost customers from deportation and a virtual freeze in replacement immigration. To a lesser extent, we also saw some impact from the geopolitical developments in the Middle East. While these factors affected our reported results for the quarter, we do not view them as indicative of underlying weakness across our global business or long term in nature. While we faced challenges in the physical retail channel, we received benefits in the digital channel. The U.S. immigration policy, combined with a 1% remittance excise tax and our targeted investments in new customer acquisition, resulted in accelerated digital transaction growth of 35%, new customer growth of 42% and digital revenue growth of 42% year-over-year. The average spend per transaction increased approximately 6% and gross profit per transaction improved year-over-year. Dandelion also posted its best quarter on record. So while external pressures remain, we stayed focused on execution. expanding our digital cross-border payments capabilities, including the launch of real-time payment services in 9 new markets and continuing to scale the Dandelion network. I want to emphasize an important differentiator in our Money Transfer business, the strength and the scale of our global cross-border payments network. Today, that network reaches more than 4 billion bank accounts, 3.7 billion wallet accounts and more than 4 billion debit card accounts as well as over 600 payout cash locations. The unparalleled reach, speed and product differentiation powers Ria, Dandelion and xe with real-time consumer and corporate payments at lower cost than competitor networks. While cash pickup remains a critical service for a large portion of our remittance consumer base, we continue to see Ria, Dandelion and xe customers gravitate towards the convenience of digital payout. Our account deposit transactions grew 12% this quarter and now represent 44% of the money transfers transactions and 58% of the principal transfer. We see account deposits as the solution to driving long-term sustainable growth in cross-border remittances and payments. During the quarter, we remained focused on expanding digital payout capabilities in key corridors. We made a minority investment in the MIO Wallet, a fintech venture, which enables digital cross-border payout capabilities in the Dominican Republic. We also continued to invest in future-ready payment infrastructure. In partnership with Fire Block, we established stablecoin rails during the quarter. The initial deployment enhances our treasury management capabilities. And over time, we expect to expand functionality, including enabling our global assets across all 3 segments to serve as on and off-ramps for stablecoin users. This is important to understand as our ability to operate in a licensed and compliant manner across many countries, particularly in emerging markets, positions us to facilitate stablecoin movement in a way that few fintechs can. Turning to Dandelion. We continue to expand the client portfolio with the launch of 2 new partners. Master Remit, a leading money transfer operator in Australia and New Zealand; and U-Transfer, a South Korean-based fintech specializing in cross-border remittances and foreign exchange. In addition, we signed agreements with 5 new clients, further broadening the platform's reach. These additions underscore both the growing demand for Data Lion's capabilities and its role as an increasingly important driver of long-term growth. Overall, the Money Transfer segment made measurable progress during the quarter with a continued focus on disciplined expansion, digital enablement and investment in scalable payment infrastructure. We remain focused on executing against our long-term strategy. With that, I'll turn it over to Rick to walk you through the financial results in more detail. Rick Weller: Thanks, Mike. Good morning, everyone, and thank you for joining us today. I'll start my remarks on Slide 9. We delivered revenue of $1 billion, operating income of $72 million, adjusted EBITDA of $126 million and adjusted EPS of $1.58. Adjusted earnings per share increased 40% from $1.13 in the prior year. Excluding a onetime tax charge of $0.20 per share in the prior year, adjusted earnings per share increased 19% from $1.33. You can see we are on track to meet the guidance range we shared with you earlier in February. Further, this quarter, we continued our track record of producing strong free cash flows. And because we didn't have any large pending acquisitions or other capital requirements, we repurchased $100 million of our shares. Given the timing of the repurchases, there was only a marginal benefit of about $0.02 per share in the first quarter adjusted EPS. But we know this repurchase will continue to support per share earnings in the future. I'll point out that our operating income of $72 million includes $5 million of additional noncash purchase price amortization reflected in the GAAP purchase accounting for the CoreCard acquisition and an additional $3.5 million for noncash share-based comp. Excluding these 2 noncash items, our operating income would have grown 7%. Slide 10 shows our first quarter year-over-year results on an as-reported basis. Most of the major currencies we operate in strengthened compared to the dollar. To normalize the impact of the currency fluctuations, we have presented our results adjusted for currency on the next slide. I'm on Slide 11 now. The EFT segment delivered strong revenue growth in the first quarter of '26 with constant currency revenues increasing 19%, driven by a combination of double-digit growth in REN and merchant acquiring, certain interchange rate increases and the full quarter inclusion of the CoreCard acquisition completed in the fourth quarter of 2025. Morocco, Egypt and Philippines led the way for the geographical expansion of our ATM footprint, together with deepening our banking outsourcing partnerships. ATM expansion was modest with installed ATMs and active ATMs up 1% after deinstalling approximately 1,400 nonperforming ATMs. In Poland, interchange increased during the first quarter with certain schemes implementing new interchange rates that include both fixed and variable components. These rate increases reflect a similar theme where we have seen rate improvements across Europe. Looking ahead, we expect to continue to see improvements in interchange rates and direct access fees or DAF, as regulatory requirements evolve across Europe, where approximately 15 countries have implemented formal ATM cash access frameworks. These changes are designed to preserve customer access to cash while supporting the long-term sustainability of ATM networks. As additional bank branches decline, independently owned ATM networks are increasingly filling the gap, enabling banks to lower cost while still meeting regulatory requirements for access to cash. As these trends evolve, we expect pricing structures to adjust to support accessible ATM networks. Adjusted EBITDA increased 12%. Operating income remained relatively flat, largely due to the approximately $5 million increase in noncash purchase price amortization related to the CoreCard acquisition. Absent this $5 million increase, operating income for the segment would have grown 21%. These double-digit operating results reflect the earnings leverage of revenue growth while exercising disciplined expense management. Operating margins were consistent year-over-year after adjusting for the inclusion of the $5 million noncash purchase price amortization. In epay, the segment delivered solid results for the first quarter of 2026 with revenue increasing 2% on a constant currency basis. Operating income rose 13% and adjusted EBITDA increased 12% on a constant currency basis. Results benefited from the absence of a $4.5 million onetime operating tax impact in the prior year first quarter. epay revenue and gross profit per transactions were consistent to improving. In the Money Transfer segment, revenue declined 4% on a constant currency basis. Operating income was $38.9 million and adjusted EBITDA $45 million, both down year-over-year. Total transactions decreased 2% to $43.9 million, while digital transactions grew 35%. New digital customers increased 42% and the network locations expanded 4%. The decline in constant currency revenue was primarily driven by immigration-related pressures impacting transfers between the United States and Mexico, the implementation of a 1% remittance excise tax paid on cash transactions in the first quarter and reduced volumes in the Middle East. These headwinds were partially offset by growth in markets outside the U.S., continued strength in consumer-to-consumer digital transactions and the expansion of our Dandelion cross-border payment network. While constant currency revenue per transaction came in a bit, gross profit per transaction improved, driven by a favorable mix toward account-based payouts, improved payout rates and more efficient network routing, highlighting the strength of our cross-border payments network. Operating profit benefited from expanded gross margins, which were reinvested in digital marketing to support long-term growth, resulting in lower operating profit year-over-year. At the consolidated level, despite a more challenging macro environment, we delivered solid earnings growth, supported by strong performance in EFT and continued momentum in our digital channels. While Money Transfer faced near-term pressure, the underlying fundamentals of the businesses remain intact. Turning to the full year guidance. I'd note that as we continue to see the benefits of our key digital growth initiatives, we are seeing a corresponding evolution in our seasonal earnings profile. In prior year, earnings were more heavily weighted toward ATM tourist activity. As we continue to diversify the business and expand our digital products, we expect the second and third quarters to represent a lighter portion of full year earnings than in the past. As Mike mentioned earlier, our current operating momentum and pipeline of growth initiatives give us confidence in our ability to deliver adjusted earnings per share growth of 10% to 15% in 2026. Let's now turn to Slide 12 for a few brief comments on the balance sheet. As you can see, we ended the first quarter with $2.1 billion in unrestricted cash and ATM cash. Total debt was $2.6 billion at the end of the quarter. The increase in cash and debt was due to an increase in cash in ATMs in preparation for our tourist season in Europe as well as cash generated from operations, partially offset by share repurchases and working capital fluctuations. During the first quarter, we repurchased $100 million of our shares. Share repurchases remain a core component of our capital allocation strategy, funded primarily through our strong recurring operating cash flows. We believe share repurchases have been an effective use of capital and underscore our confidence in the long-term value of the business. Over the past 4 years, we have returned, on average, approximately 85% of our annual earnings to shareholders through share repurchases, reflecting a strong return of capital to shareholders. Our broader capital allocation framework continues to prioritize maintaining an investment-grade balance sheet, investing in organic growth, pursuing disciplined and strategic M&A opportunities and returning excess capital to shareholders. With this, I will turn it over to Mike to wrap up the quarter. Michael Brown: Thanks, Rick, and thank you, everybody, again. To close, we are pleased with the solid start to this year. We continue to benefit from product and geographic diversity, which allow us to deliver good results despite a complex and uneven macro environment. Our digital initiatives are clearly delivering results. We're seeing accelerating adoption across the business, driving meaningful mix shift and operating leverage. That progress reinforces our confidence in our strategic direction and the investments that we have made to develop an industry-leading global payments network and expand digital access for our customers and partners. At the same time, our core platforms continue to scale globally. Long-term infrastructure agreements, expanding networks and continued partner wins across the portfolio are strengthening the durability and reach of the business. We also remain disciplined on how we allocate capital. We are balancing organic growth and innovation with selective M&A opportunities while continuing to return capital to shareholders in a way that supports long-term value creation. Our balance sheet and cash generation remains strong, providing us with the flexibility to execute and give us confidence in our full year outlook while continuing to build long-term value for our shareholders. Thank you for your time today, and we look forward to seeing you at our Investor Day on May 20. With that, we will open the floor for questions. Operator, will you please assist? Operator: [Operator Instructions] Our first question comes from the line of Vasu Govil of KBW. Vasundhara Govil: I guess the first one on the strong acceleration in the ESC segment. Just could you maybe help us think through how much was the contribution from CoreCard versus just organic growth in that segment? Michael Brown: Yes. So CoreCard was a little bit squirly this time, Vasu. So we were able to pick up about $30 million in revenue. However, 40% of that $30 million was card stock purchases in anticipation of issuing lots of cards and that 40% was at almost no margin. So -- but it is exciting that they bought so much card stock because they are -- with that contract, they're expecting to launch and issue a lot of cards. Vasundhara Govil: Got it. So like should we be then modeling $30 million less the 40% as we look through the rest of the year in the EFT segment from CoreCard? Michael Brown: Yes. I think that would be -- we'll see what we do, but for sure, you don't want to count that $13 million or whatever it is, the 40% of $30 million, you don't want to count that chicken every single quarter. Vasundhara Govil: Got it. And then just on the Money Transfer segment, I know there are a bunch of different macro headwinds ongoing. But just on the U.S.-Mexico corridor, I wanted to get a sense for whether you've seen the headwinds stabilize there? Or is it still continuing to get worse? And in light of the geopolitical events in the Middle East, just curious what you're seeing in terms of trends in the month of April. That would be super helpful. Michael Brown: Okay. So let me tell you, in the month of April is the first month of the new quarter. I have -- for the last year, the last 3 quarters, the first month has always been pretty good. And then the following months gets crummy. And so I think it would be not in our best interests to expect what April does is going to look -- is going to end up being for the quarter. We'll just say that it's a very choppy environment, a lot of unknowns out there. We continue to do well in comparison to our competitors. Our digital business is growing like crazy. And so we're feeling pretty good about Money Transfer, but the reality is I think anybody who gives you a number for the quarter based upon April is really going out on a limb. Operator: Our next question comes from the line of Rayna Kumar of Oppenheimer. Rayna Kumar: I just want to go back to Money Transfer for a second. I see that you're still growing agent locations. I think it was up 4% in the quarter. Like what are your expectations going forward on increasing physical locations just given the ongoing pressure from U.S. immigration and from the Iran war? Michael Brown: Well, this pressure -- this macro pressure that we see is certainly not in our favor, but it's also not in the favor of our competition. So what we believe is we will continue to add more physical locations because some people just prefer to transact that way, whether they pay with a card or not. And so we will -- we expect a continued growth there. And maybe there will be some opportunities for us to just be aggressive and get these agents quickly because we're doing so well really as a company and the agents and the competitive pressures are not what they used to be. Rayna Kumar: Got it. That's helpful. And then on CoreCard, just like your thoughts on how that pipeline for CoreCard is looking? It sounds like CoreCard had a strong quarter. How should we think about it for the year? Michael Brown: I think I said this on the last call, Rayna, when we bought CoreCard, in our business plan, we really didn't expect to sign a new deal for the first 18 months because that's kind of the closed cycle of signing new deals. We have been absolutely kind of floored and positively surprised with the fact that we're selling new deals as we speak. And we've got a very strong pipeline in process. So we're going to -- by the time we get to that 18 months when I thought we wouldn't close a one, we're going to have a lot of deals under our belt, and that's going to -- and that's the goal. We want to make sure that by the time the Apple business goes away, which we don't -- we're not quite sure when that will happen, but it will be sometime after the end of '27. We want to make sure that we filled that bucket and then some. Rayna Kumar: Got it. If I can just sneak in a modeling question. Just, Rick, how should we think about interest expense for the rest of the year? Rick Weller: Rayna, we've got about $700 million in our Eurobond that matures in May. And we would expect that we'll finance that maturity with something that will be probably a couple of hundred bps more in interest cost. So if you would factor that into it, I think that would be pretty consistent. Operator: Our next question comes from the line of Pete Heckmann of D.A. Davidson. Peter Heckmann: Interesting dynamic playing out, has taken some time. But in terms of countries looking at ATM fee frameworks, I guess, are any of those alone, do you think significant to the near-term outlook of your business, particularly Poland, I think you have a fairly large number of ATMs there? Is the change in interchange rates there enough to really move the needle? Michael Brown: Yes. I mean all these deals, whether it's that or the infrastructure plays are all really good deals. And yes, they all move the needle a little bit. But in total, they continue to move our needle upward. And that's the nice thing with where the world has kind of gone to. Now that we've had this kind of backlash with all the bank branches in Europe being closed, citizens are demanding access to cash. Already 15 countries are mandating cash access with more in the works. One, even Switzerland put it into their constitution. So we know that somebody has to bear that load and us as an independent provider with scale, best scale in Europe puts us in kind of the catbird seat for long-term infrastructure plays in these respective countries. So -- and every one of them is a good deal. So we're -- that's one of the things that really has changed over the last 2 years. We've always done infrastructure deals, but they are accelerating now based upon the legislative and political environments within these countries. Rick Weller: And Pete, I'd just add that all of that just gives us greater confidence in the long-term durability of the business. Peter Heckmann: Okay. That's helpful. And... Michael Brown: Yes, we're just -- in the old days, we were 100% focused on tourist-related revenue for ATMs. That has really changed. Peter Heckmann: Yes, definitely, definitely. Okay. And then I missed it on Bilt. For some reason, I was confusing that was Bilt when you first mentioned it. But with Bilt, is that a U.S. card for... Michael Brown: Yes, it is. It's a very successful U.S. card. It is basically targeted to customers who rent their housing and then they get extra points and rewards and so forth if they use the Bilt credit card to pay their landlords for their rent. It's spelled B-I-L-T, by the way, if you want to look at it. Operator: Our next question comes from the line of Gustavo Gala of MCH. Gustavo Gala: I'm going to keep it to one. It's a little bit long. So with the Investor Day coming around, you guys have consistently delivered double-digit CAGR on revenue, but the multiples continue coming in. What is -- was the Investor Day attendance correct? I think one of the things that has come up is a time to stop trade like it's implying terminal decline. And as part of the Investor Day, is the Board considering any structural actions, anything from a spin-off, strategic review, anything that could help crystallize value? Michael Brown: Well, the -- I mean, the Board will consider anything that kind of pops up. We have to do that. We're a publicly held company. But when you look at our digital initiatives and our growth aspirations for each of those, we're pretty excited about where we're going without that. And our whole industry, as you know, you track a lot of these people, the whole fintech segment is down probably 30%, 35% from a year ago. We kind of fell into that vortex with them. But the nice thing is we -- structurally, we've got a growing, booming business. We've got some challenges with the immigration policy here in the U.S. and money transfer. Otherwise, Money Transfer continues to grow very well. And we've got this network that is without peer and allows us to sell infrastructure deals to lots of people. So I mean, we're not planning on doing anything aggressively with respect to that. When you've got as many growth drivers as we have and accelerators as we have, we'll just keep putting more money on the bottom line, and we will do acquisitions. And if the acquisitions aren't there, we will consider stock buybacks as we have in the past. Operator: Our next question comes from the line of Mike Grondahl of Northland. Mike Grondahl: Two questions. One, could you talk a little bit about the double-digit revenue growth you saw at REN and merchant acquiring? Just kind of what's driving that? And then secondly, have you seen any effect of this $100 oil in your end markets or customer activity? Michael Brown: I'll answer the last one first. Well, the Middle East is not just $100 oil, there's a little volatility going on there right now, and that has affected our Middle East transactions in Money Transfer. With respect to the $100 oil, we haven't seen any direct effect. We do consider the fact that there'll be a derivative, first or second derivative for that is with $100 oil, is that going to push up inflation? Is that going to reduce people's spend, et cetera, just across anybody's business? So that is something that we consider, but we haven't really seen any direct effect of that so far. Now I'm trying to remember what the first question was, yes, double-digit growth in -- in REN. I'll tell you, REN just continues to do well. We're accelerating. We're doing more deals. Remember, when we started REN, it was all in Asia. Now we're signing deals. As you know, we've got one -- we've got Bank of America here in the U.S. We've got several deals in Latin America. REN is one of those things where it is modern technology and the banks don't have modern technology. So what you just need is some reference customers in their geographies. And that's what we're doing, doing more and more deals on account of that. Rick Weller: I think and you add to that, Mike, that over the years, we've been just adding to the product functionality of the REN platform. As you may recall, it essentially started out as a switching product. But even here a couple of years ago, and we made reference earlier in the presentation on the deal with the 3D Secure. We acquired this little piece of business in Malaysia that directly lines up with it. The CoreCard thing directly lines up with it. So as you go into a bank and you talk to them about their payment infrastructure needs, it ranges from switching to credit, to debit, to real-time switching, to security, to payment transactions. This is where we get the leverage across our segments where we're selling to customers that we have in multiple segments. And so it's not unusual that we will have a bank customer that we have in the -- let's say, a REN customer that we also talk to them about a Dandelion product. So I think it's the addition of more and more product into the portfolio, and it's the momentum that takes a while to kind of build the momentum. These are long sales cycles, et cetera. So I think it's the combination of those that come together to really give us that momentum we're seeing. Michael Brown: And I think we've got a couple of things up our sleeve for the Investor Day, too. We're finding that REN typically is used by banks and fintechs. We will talk in the Investor Day how we've leveraged that platform into new verticals that we see a lot of potential growth in. So more news on that to come. Operator: Our next question comes from the line of Josh Levin of Autonomous Research. Unknown Analyst: Two questions from me. First, your competitor, Western Union said the Middle East was actually a source of strength for money transfer, meaning the war spurred some higher transfer activity. It sounds like you had the opposite experience. How might we sort of reconcile those comments? Second question, you launched stablecoin payouts. Can you give us some sense of the specific unit economics for stablecoin transaction compared to a traditional FX-based remittance? Michael Brown: The advantage that stablecoin gives us -- I'll answer the second question first. The advantage that stablecoin has -- gives us at this point in time is basically just treasury float. So we're able to -- what we have -- the way money transfer works, an immigrant comes into either digitally or into one of our physical locations, they give them $300. They've got to send that to their mom in the Philippines. What happens is, we estimate what those numbers are every day. We prefund the Philippines correspondent bank in advance. And then over weekends, it's multiple days of prefunding. So with stablecoin, we can kind of do that ad hoc. So you don't have as much float. You can really do it -- as we get better and better at it, it's going to be kind of instantaneous. And so it just -- it helps us on the float side. Rick Weller: I think when you take a look at what happens really at the consumer level, there's a huge range of what's out there. If you're a very -- doing very large transactions, you can execute those at nearly -- at very, very small rates, very few basis points to do large transactions. You get down to the consumer level and you see numbers that range from 3% to 4% to get on the chain and 3% to 4% to get off the chain. So if it's costing you 6% to 8%, think of this in relationship to the money transfer industry, where you generally see something like sub-3% in terms of total consumer cost to send a transfer. So I think that there's a lot of evolution that is to yet develop out there. But we would see on the low end, the transactions are not being more economical, at least today, what we see out there than what you see in your traditional technology that we move money. Important thing is that we've got the technology ready to go. And as the use cases develop, we've got one of the best networks, if not the best network, as Mike said, to deliver on and off ramps around the world. Michael Brown: And with respect to your first question on the Middle East, you said that our competitor has said that the Middle East has been an opportunity for them. For us, we don't have as big of a Middle Eastern contingent of agents and everything. So it might be kind of country-specific as opposed to more broad-based. Rick Weller: And I think that there might be a couple of aspects of the business in there where they have some increasing volume to a certain country that we don't operate or send to. And there might be some movement in certain agents that they have there that they benefit from. So I think it... Michael Brown: Yes, you might remember, they did quite well a couple -- a year ago or so to Iraq. We don't have Iraq as a payout. And so all that gets kind of mixed in there. Rick Weller: Yes. Hats off to them for doing that. I think that's nice work. But I think it's different underlying business circumstances that we see over there. Operator: Our next question comes from the line of Cris Kennedy, William Blair. Cristopher Kennedy: Mike, you mentioned Dandelion had one of its strongest quarters on record. Can you just provide a little bit more color on those comments? Michael Brown: Okay. So we've got a couple of big customers and then lots of little customers in Dandelion. So we don't really -- we're not talking about its numbers specifically because it would give us a competitive disadvantage as we bring on new customers. But it was great to see good, strong double-digit growth, best quarter ever. Dandelion is one of those things where every quarter it's a bigger quarter than the last one because more and more people are using it more often. So I really can't give you any quantities, but really, as far as our digital endeavors, it's going to be a big one. Rick Weller: And I would just add to that, that continuing on a similar line as REN. I think we begin to see the momentum build. Clearly, we've been focused on the business. It's a long sales cycle, but we're continuing to see that momentum build. As you noticed, we made a mention of a number of other wins that we had in that category. So I think as we continue to see our sales success, we'll continue to see that business do nicely. Michael Brown: And just as an example, our very first big bank customer was HSBC. About every month is a new record for them. It takes a while for these banks to communicate to their customers, the ability to send money cheaper and quicker than they could through the old Swift channels. And so as more people find out about it, more and more people use it. So there's this kind of innate ramp-up. And there's more places as that bank as an example, there are more customers that they haven't even begun to market it to, but they will as their confidence grows, and we just have to work with bank bureaucracy. Cristopher Kennedy: Understood. And then, Rick, you mentioned the three drivers of improving gross margin in the Money Transfer side. Can you just talk about the sustainability of gross margins on that segment? Rick Weller: Yes. I would expect that we continue to see that, Cris. It, I think, speaks to the strength of the network and our volume. So it gives us a good opportunity to negotiate rates with payout agents. It gives -- the bigger our network, the more choices that we have to route a transaction and more customers going to send money to accounts. And remember, this account could be a bank account. It could be a wallet account. So it's account-based and account-based are lower cost payout structures for us. So Cris, I think we'll continue to see the benefit of this really, really impressive network we've built. Michael Brown: Operator, do we have any more questions? If not, we can close -- we have one more, I think. Is that right, operator? Operator: Yes. We have one more question. I'll go ahead and bring them up now. We welcome Darrin Peller with Wolfe Research. Darrin Peller: Can you hear me okay? Michael Brown: Yes, perfectly. Darrin Peller: All right. Just one question is more on the margin structure and the margin expectations on the Money Transfer segment. I know you expected it to be decent. I think you had expected 50 to 70 bps of margin improvement in the year. Just you were working through some of the restructuring that would help that despite some of the headwinds. I saw noticing margins were down year-over-year now. So just what is your conviction on that front first? And then overall, just thinking about that segment, I mean, it seems like this is hopefully in terms of the headwinds may not persist forever. But I'm curious how you think about approaching that segment given the context of the political environment and the migration that could last for a while? Rick Weller: Yes. On the margin, I'd say, Darrin, we would expect to see that to be a little bit more back-end loaded. As we entered the year, a number of those programs are being worked on. In fact, some of the expense it takes to implement some of those things that we did is, again, a little bit more front-loaded. So the benefit will deliver a little more on the back end of the year. And as it relates to -- I guess I'm going to say broadly your question on the industry. Well, when we take a look at Money Transfer and think of it over the years. I mean, I can't remember a time in history that immigration has not been -- has not, not happened. if you add up the population of all the developed countries, you only get to about 20% of global population, which means that 80% of the population continues to live in lesser developed countries. And as with most humans, when they have an opportunity to improve their rotten life, they do that. And when they do that, they're very loyal to their -- they do that for their families, and they send money back home to their families. So I think certainly, we are experiencing the impact of a different political environment. You can take a look over the years on how that kind of attitude has moved positive, negative, positive, it ebbs and flows with politics. We also have an economy that's dependent upon a certain amount of immigrant labor. And so we believe that we will continue to see in the future what you have over the history. And it's a point of time that we get through. I don't think you throw in the towel because of a particular immigration policy this year in the U.S. As we said, we saw the growth in our markets outside of the United States. So we continue to believe it's a great -- it's a big and growing market for sending cross-border money, has great margins to it. So we see long-term potential to it despite the challenges that we have to work through. But we're also glad that we've got a very good durable diversified business, which gives us the ability to weather that. Michael Brown: And you've seen our results over the last year even where we have outgrown our competitors, so we are picking up more market share. So as some of this stuff settles down in the U.S., we're going to be in a better position, plus we continue to grow overseas. Darrin Peller: Okay. That's helpful. Mike, I may have missed this earlier, but just a quick follow-up on the Iran conflict. What were the implications on travel that you're seeing? Or from your perspective, what kind of impact is that having on the EFT segment right now? Michael Brown: So far, we've... Darrin Peller: More traffic. Michael Brown: Yes. So, so far, we haven't seen anything. There are kind of threats that there may be some flights that may be canceled if they're not able to get fuel for the summer, but we don't know for sure. So we'll just have to see what happens. The interesting thing is the one thing that the conflict has done is if you look at Europeans and where they travel, a lot of them liked to go to places like Dubai, to Turkey, et cetera, on their vacations. They're probably not going to do that this year. So a lot of these people are going to stay a little bit closer to home where they can either take a short airplane ride or a train ride to their vacation, and that probably would be a benefit to us. Rick Weller: And I think we've shared with you in the past that 75%, 80% of our cross-border transactions in Europe really come from Europeans going cross-border as opposed to people coming into Europe, so maybe we'll see. But at least what Mike said a little bit ago is something that may be an opportunity for us as opposed to a challenge. Michael Brown: Thank you, Darrin, and thank you, everyone, for joining us today. We'll sign off. Operator: Thank you for your participation in today's conference. This does conclude the program. You may now disconnect.
Operator: Good day, and thank you for standing by. Welcome to the CTO Realty Growth Q1 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, Jenna McKinney, Director of Finance. Please go ahead. Jenna McKinney: Good morning, everyone, and thank you for joining us today for the CTO Realty Growth First Quarter 2026 Operating Results Conference Call. Participating on the call this morning are John Albright, President and Chief Executive Officer; Philip Mays, Chief Financial Officer; and other members of the executive team that will be available to answer questions during the call. I would like to remind everyone that many of our comments today are considered forward-looking statements under federal securities laws. The company's actual future results may differ significantly from the matters discussed in these forward-looking statements, and we undertake no duty to update these statements. Factors and risks that could cause actual results to differ materially from expectations are discussed from time to time in greater detail in the company's Form 10-K, Form 10-Q and other SEC filings. You can find our SEC reports, earnings release, supplemental and most recent investor presentation on our website at ctoreit.com. With that, I will turn the call over to John. John Albright: Thanks, Jenna, and good morning, everyone. We are pleased to report a strong quarter to start the year, highlighted by a robust leasing and strong same-store NOI growth as well as the $81.6 million acquisition of a high-quality shopping center in Texas. Our strategic focus on shopping centers located along growth corridors primarily in the Southeast and Southwest markets of the United States, along with the proactive asset management and leasing continues to produce strong results. Starting with retail leasing. During the quarter, we executed leases, renewals and extensions totaling 153,000 square feet, including 146,000 square feet of comparable leases at an average cash rent increase of 14%. Our leasing activity for the quarter was spread across our portfolio, but particularly positive at [indiscernible] Crossing in Orlando, where we signed a lease with Williams Sonoma to fill the former Mattress Firm space. And just after quarter end, we signed a lease with Pottery Barn Kids to fill a space that had been vacant since we acquired the property. Combined, this activity has increased [indiscernible] Crossing to 97% leased and improves the quality of the tenant roster and value of the asset. Further, our only shopping center with leased occupancy below 90% is now Carolina Pavilion at 83%, and we are in active negotiations with tenants for all the remaining vacancy. We look forward to providing announcements of this leasing activity at this shopping center in the future. We are also making strong progress with the 6 outparcel opportunities we discussed on our last call. During the quarter, we signed a lease with Swig for a drive-through customized beverage store at Marketplace at Seminole Towne Center located in Orlando. And just after quarter end, we signed a lease with Cooper's Hawk at Ashley Park located in Atlanta market. In addition, we have executed LOIs or in active lease negotiations for the remaining 4 outparcels. We continue to expect these 6 outparcels to generate low double-digit unlevered yield on approximately $30 million of investment. We anticipate that this $30 million will primarily be deployed and begin contributing to earnings in 2027 with the full benefit expected to be recognized in 2028. We also look forward to providing additional announcements related to this initiative in the coming quarters. Reflecting our leasing progress at quarter end, our portfolio was 95.4% leased and our Signed-Not-Open pipeline totaled $6.2 million of annual cash base rent, representing approximately 5.5% of in-place annual cash base rent. We believe this pipeline of new lease revenue will provide a meaningful earnings tailwind beginning as we move through 2026 and into 2027. Further, leasing activity completed over the prior year for which tenants have commenced paying rent is already beginning to benefit NOI. For the quarter, same-property NOI for shopping centers increased 6.8% compared to the comparable prior year period. Excluding the benefit of certain nonrecurring items, same-property NOI for shopping centers grew at a healthy 4.2%. Moving to investment activity. During the quarter, we announced an acquisition of Palms Crossing, a 399,000 square foot open-air center located in McAllen, Texas for $81.6 million. Palms Crossing is anchored by Best Buy, Hobby Lobby, Burlington Coat Factory, Barnes & Noble and Nike and is currently 98% leased and benefits from strong cross-border shopping. This property has also provides the opportunity to develop 2 additional outparcels beyond the 6 discussed earlier. With this acquisition, Texas is now our third largest state by ABR and combined contribution from Georgia, Florida, North Carolina and Texas increased to 85% of total ABR. On the property recycling front, Madison Yards located in Atlanta is under contract with a nonrefundable deposit, and we expect the sale to close in May. Madison Yards is 99% leased and the anticipated sale would enable us to extract value from a stabilized asset while also reducing our AMC Theatres exposure to only 2 locations, which are both high performing. Further, the anticipated sale, along with Palms Crossing acquisition will complete the recycling proceeds at a positive cap rate spread contributing to future earnings growth. As we move forward, we're evaluating additional property sales, focusing on recycling capital from stabilized properties into assets at positive initial yield spread with the potential for value-add opportunities and higher earnings growth in the future. Now turning to our structured investments. During the quarter, we received full repayment of our [indiscernible] $30 million preferred investment in Watters Creek Village. This repayment was expected and represents the only structured investment scheduled to mature in 2026. More notably, just after the quarter end, we completed a $75 million preferred equity investment in a Class A premier retail property located in the Southwest. This preferred investment yields 12% and has a term of 2 years. This activity increased our structured investment portfolio by $45 million to $158 million subsequent to quarter end with a weighted average yield of 11.6%. In summary, 2026 is off to a great start, and we are in a great position to sustain our growth in the quarters ahead. Our portfolio continues to perform well and is supported by embedded growth drivers, including in-place below-market rents, our Signed-Not-Open pipeline, planned outparcel developments and disciplined capital recycling. Collectively, we believe that these initiatives can support meaningful earnings growth for several years to come and contribute to our increased guidance for core FFO and AFFO per diluted share to new ranges that imply approximately 12% growth at the midpoint. And with that, I will now hand the call over to Phil. Philip Mays: Thanks, John. On this call, I will briefly highlight our earnings, provide an update on our balance sheet and discuss our raised 2026 outlook. Starting with operating results. For the first quarter, core FFO was $16.9 million, a $2.5 million increase compared to $14.4 million reported in the comparable quarter of the prior year. And on a diluted share basis was $0.52 per share versus $0.46 per share. AFFO was $18.2 million for the quarter, an increase of $2.7 million compared to $15.5 million reported in the comparable quarter of the prior year and on a diluted share basis was $0.56 per share versus $0.49 per share. The growth in both core FFO and AFFO was primarily driven by leases executed over the past year that have since commenced paying rent, although it did include approximately $0.01 related to nonrecurring recovery benefits from final 2025 CAM, real estate taxes and insurance billings that tenants recorded in this quarter. With regards to property operations, as John mentioned, same-property NOI for shopping centers increased 6.8% in the first quarter compared to the comparable quarter of the prior year. Excluding the nonrecurring recovery benefits discussed earlier, same-property NOI for our shopping centers still increased a healthy 4.2%. Given the relatively small size of our same-property NOI, $200,000 impacts quarterly growth by approximately 100 basis points. Accordingly, unusual and nonrecurring items like this can occasionally skew our same-property NOI, so we want to highlight the impact of such items when appropriate. Notably, shopping center properties represented 97% of total same-property NOI for the quarter. Total same-property NOI, including our few noncore properties, increased 3.4% for the quarter. This growth was impacted by one tenant as previously announced, vacating 98,000 square feet at our Albuquerque property at the beginning of December 2025, which more than offset the nonrecurring recovery benefits recorded. As a reminder, this vacancy has been fully leased to the state of New Mexico, which is expected to commence paying rent in late 2026. Moving to the balance sheet. At March 31, 2026, we had total debt of $651.8 million with a weighted average interest rate of 4.6%. Further, we ended the quarter with approximately $125 million of liquidity and leverage at 6.4x net debt to pro forma adjusted EBITDA, which is consistent with the end of 2025. During the quarter, we opportunistically utilized our common ATM program to issue approximately 733,900 common shares at an average price of $19.59 per share for total net proceeds of $14.2 million. Notably, these proceeds, combined with the repayment of our $30 million Watters Creek preferred investment and higher NOI enabled us to maintain leverage at a consistent level even with the acquisition of Palms Crossing completed in this quarter. Now turning to guidance. For the full year 2026, we are increasing our core FFO outlook to a new range of $2.06 to $2.11 per diluted share and our AFFO outlook to a new range of $2.19 to $2.24 per diluted share. Key assumptions reflected in our guidance include increased investment volume, including structured investments of $175 million to $250 million, same-property NOI growth for shopping centers of 3.5% to 4.5% and general and administrative expenses of $19.7 million to $20.2 million. And with that, operator, please open the line for questions. Operator: [Operator Instructions] Our first question comes from the line of Jay Kornreich with Cantor Fitzgerald & Company. Jay Kornreich: I guess I just want to start out with the new $75 million Southwest preferred equity investment at the 12% yield. I guess what attracted you to that investment? And how do you anticipate, I guess, the draw schedule occurring -- sorry, how do you anticipate the draw schedule occurring going forward? And in terms of funding sources for it, I guess you can use $30 million from the Watters investment, which was prepaid, but how do you think about funding the incremental $45 million? John Albright: Yes. We've already did the investment. So it was like it was one closing. And so as you mentioned, the Watters Creek was recycled into that. And we'll basically have, as we mentioned, an asset sale coming up and so forth, which will bring down leverage. But otherwise, we just use the balance sheet for the balance of it. Jay Kornreich: Okay. And then just going back to the original 10 vacant anchor spaces that we've talked about. I think there's still 3 remaining to be signed. Can you just give an update on how those conversations are progressing and when you think you could get a lease signed and ultimately rent payment beginning? John Albright: Yes. It's going really well as far as terms have been agreed upon moving to leases, but these things with these large national companies go really slow. So I would say, conservatively, I would say, 3 months and hoping to do it before then. But every time you think these things would take 30 days, it drags. So -- but we are -- the good thing is even though the lease may take that long, we're working right away on basically engineering drawings and what needs to be done to outfit the space for the tenants. So that's not going to -- we're not going to wait for the lease to be signed to get that work done. So the lease commencement will kind of stay kind of probably take, call it, 9 months or so to kind of get the tenant in place, but that part won't move even though the lease may drag out. Operator: Our next question comes from the line of Matthew Erdner with Jones Trading. Matthew Erdner: I'm just curious what's going to lead you kind of towards the high range of the investment guidance versus the bottom end? Because I think if you lean towards the bottom end, it will probably be one more structured investment. And given the timing of Madison Yards, should we expect anything to kind of happen in the second half of the year from an investment perspective? John Albright: Phil, I'll let you kind of address that, but I'll start with some of the pipeline. We do have structured investments that we are working on. It's relatively small, but that's something that could happen here in the next 30 days. And as far as acquisition pipeline, we do have our eyes on a couple of things, but they're not going to happen until they're not even out in the market yet. They're being prepared for market. So we hope to be more active probably in the next kind of 4 months. And then we'll -- as mentioned in our prepared remarks, we'll have some recycling going on, which will kind of happen in the next probably 3 months. Philip Mays: Yes, Matt, it's Phil. And you're correct in your assumption. So the small structured investment John referred to would put us right around the low end of the range. And then if we complete some of the larger property acquisitions in the pipeline, it would push us up towards the higher end of the range. Matthew Erdner: Got it. And then kind of as a follow-up to that, are you guys assuming that outparcel at Forsyth, there's 10 extra acres there in the investment guidance for this year? Or would that be additional? Philip Mays: Yes. So they won't contribute to earnings in this year. It's one of the pads that we've identified. So part of the -- where we've discussed $30 million of capital earning low double-digit yield unlevered. It's in that group. But any earnings from that will not be in this year, Matt. Operator: Our next question comes from the line of Craig Kucera with Lucid Capital Markets. Craig Kucera: With the preferred equity investment you made here in the second quarter, I think -- and it sounds like you've got another potential small one. I think that brings CTO's exposure to structured investments to around 11%, maybe closer to 15% when fully funded relative to undepreciated assets. Are you thinking about a cap or target on that as a percentage of the balance sheet similar to PINE? John Albright: Yes. Thanks for the question. So I would say that most likely, the cap will be -- it will definitely be below 20% and maybe more in line with the 15%. And so as you've seen at PINE, sometimes it will go a little higher as we anticipate some payoffs happening. But roughly 15% feels like a good place for us. Craig Kucera: Okay. Great. And thinking about investment guidance, you've done $156 million year-to-date. I think you started out the year guiding to sort of 8% to 8.5%. The preferred equity down here this quarter is 12%. Has that sort of yield range changed at all because of that? John Albright: Yes. So the cap rates, I can kind of go into kind of what we're seeing on cap rates. And then as we see more visibility on what we'll be buying and kind of the structured finance kind of give you a better mix outcome. But in general, the acquisitions that we're seeing are kind of in the 7.5% to 8% range. And then with regards to structured finance, something in the kind of 10% to 13% range. And so you kind of have that little blend. Craig Kucera: Okay. Great. That's very helpful. Just a couple more for me. Looking at your space that's expiring this year, it looks like it's significantly above the average in the portfolio, particularly on the anchor space, are mostly on the anchor space. You had, I think, a 24% cash increase in rent spreads last year. Do you -- I think you had [ 14% ] this quarter. Are you thinking something in the double-digit range is possible this year? Or is that going to be a little tougher? Philip Mays: Yes. I mean I think the spreads, you would see them kind of continue in the range they've been, Craig. Are you referring to '26 when you say this year, right? Craig Kucera: Yes, in '26. Philip Mays: Yes, yes. So the expiring rents are a little higher, right? I think they're closer to [ '25 ] where we've been signing a lot of leases. But we're not only working on '26, we're also working on '27. I mean they start early. So I think while the spreads could come down a little just because the average rent and the leases expiring in '26 could bring it down a little. But generally, it still should be close to where we've historically been recently. Obviously, any one quarter can bounce around a lot just because it's not a lot of [ GLA ] in one quarter, but for the full year, should be pretty good. Craig Kucera: Okay. That's helpful. Just one more for me. Philip Mays: What's driving that? -- there's fewer anchors in there, Craig. So that's what's left is small shop. So a little higher ABR. Craig Kucera: And just one more for me. I think last quarter, the implied ABR recognition in the Signed-Not-Open pipeline was about [ 2.9 ] million for 2026. I think now we're looking at [ 1.8 ] million in the updated deck. Can you give us a sense of how you're anticipating the timing of that [ 1.8 ] million in '26 and sort of how we should think about modeling '27 from a Signed-Not-Open pipeline recognition perspective? Philip Mays: Yes. So about [ 1.5 ] million rolled off the pipeline from last time and got -- and commenced. And then with new leases, we kind of filled that back up, signing about [ 1.5 ] million. So the total the Signed-Not-Open pipeline did not move much. What did go in went in relatively closer to the beginning of the quarter. So it was in there for most of the quarter and it's reflected in the quarter's run rate. With what's left in the Signed-Not-Open pipeline, I think it will be a little more Q3, Q4 weighted. And then generally, almost all of it is in place, albeit maybe later in the year, prior to '27. So you should get pretty much the full impact of the Signed-Not-Open pipeline in '27. I think there's one tenant that pushes to early '28, but almost everything should be recognized in '27. Craig Kucera: I'm sorry, are you saying recognized as of sort of that early '27 or throughout '27? Philip Mays: Early '27. So it should -- just other than one tenant, I think they're all -- you should get the full benefit of the Signed-Not-Open pipeline for '27. There's one tenant you won't get the full benefit of until '28 because they'll open during '27. But what's left for '26 will be later in the year, and then you'll get the full benefit in '27. Operator: Our next question comes from the line of John Massocca with B. Riley Securities. John Massocca: Maybe thinking about the Madison disposition. I know we can kind of back into the numbers a little bit on our own given your disclosure. But is it right to think that that's at about a 6% cap rate? I know it kind of depends a little bit on the NOI margin at that specific asset, but does that sound roughly correct? John Albright: It's a little higher than that because of the AMC Theatres. John Massocca: Okay. All right. And then maybe kind of more big picture as you're thinking about your leasing pipeline and some of the vacancy that's left. And I know a lot of that's been addressed because a lot of it is in Carolina Pavilion. But is there any kind of hesitancy you've seen in retailers and frankly, in recent weeks around signing deals just given some of the macro uncertainty out there, some of the uncertainty about how some of the headline stuff maybe impacts the consumer. Just curious how the kind of leasing trajectory has been on a super recent basis. John Albright: There's been no hesitancy with pushing forward on leases. We have not seen any pullback whatsoever on any category. John Massocca: Okay. And then the in-place portfolio, any new tenants or any kind of notable increase to the watch list? I was just curious if there's any kind of pushes and pulls there. Anything coming out of the watch list even too? John Albright: No. I mean really, as I've said in prior calls, it's really some of the smaller type tenants and maybe restaurant oriented, but there's been no notable change one way or the other on the watch list. John Massocca: Okay. And then last one. There's been a decent amount of M&A in the space in kind of recent years, including a notable comp to you all recently. How does that impact kind of your disposition and acquisition outlook? Is there stuff that maybe comes out of those transactions or a competitor maybe not being in the space that increases the likelihood of you closing certain deals? Does it indicate something you can do on the capital recycling side that is interesting? Just kind of curious if the events outside of your control kind of changed the dynamics around how you're operating the business? John Albright: Yes. I would just say that there's just a lot more capital out there and that price point of that transaction was fairly aggressive. So it's helpful on our recycling side for sure, but not helpful on our acquisition side. So we pride ourselves on being fast to kind of address an acquisition. We can move fast. And the groups that are out there on the acquisition hunt are much larger kind of institutional and they take a lot longer. So just being a little bit nimble is an advantage for us. Operator: Our next question comes from the line of Gaurav Mehta with Alliance Global Partners. Gaurav Mehta: I wanted to ask you on the acquisition that you made, Palms Crossing this quarter. On the value-add upside, can you maybe talk about where the rents are on that property versus where the market rents are? John Albright: Yes. I mean the market rents are below market, but there's not really any sort of play where we're going to get a tenant out and we're going to have a huge mark-to-market on lease-up. I would just say that we do have a little bit of vacancy, and we have an outparcel that we didn't pay any money for that we're working on. So that's where the growth is going to come over and beyond what we bought. But they are below market, but not something that you can kind of get to anytime soon. Gaurav Mehta: Okay. Second question on the guidance, just a clarification. On the Madison Yards, I didn't see that listed in the guidance assumption. Is that included in your guidance, the disposition? Philip Mays: No, we didn't put a disposition volume out there. Currently, that's the only near-term and planned disposition. Operator: So I'm showing no further questions at this time. This concludes the question-and-answer session. Thank you for your participation in today's conference. This does conclude the program. You may now disconnect.
Operator: Good day, everyone. My name is Leila, and I will be your conference operator today. At this time, I would like to welcome you to the Ford Motor Company's First Quarter 2026 Earnings Conference Call. [Operator Instructions] At this time, I would like to turn the call over to Lynn Antipas Tyson, Chief Investor Relations Officer. Lynn Tyson: Thank you, Leila, and welcome to Ford Motor Company's First Quarter 2026 Earnings Call. With me today are Jim Farley, President and CEO; and Sherry House, CFO. Joining us for Q&A is Andrew Frick, President of Ford Blue and Model e, Alicia Boler-Davis, President of Ford Pro; Kumar Galhotra, Chief Operating Officer; and Cathy O'Callaghan, CEO of Ford Credit. Jim will give a high-level overview of the business, and Sherry will provide added texture on the financials and guidance. We'll be referring to non-GAAP measures today. These are reconciled to the most comparable U.S. GAAP measures in the appendix of our earnings deck. You can find the deck at shareholder.ford.com. Our discussion also includes forward-looking statements. Our actual results may differ. The most significant risk factors are included on Page 19 of our deck. Unless otherwise noted, all comparisons are year-over-year. Company EBIT, EPS and free cash flow are on an adjusted basis. Upcoming IR engagements include Navin Kumar, CFO of Ford Pro at the Deutsche Bank Global Auto Industry Conference in New York on May 19. And now I'll turn the call over to Mr. Farley. James Farley: Thank you, Lynn, and thanks to all of you for joining us. I wanted to thank the Ford team, all of our dealers and our partners for a strong start to this year. Our results this quarter, $43.3 billion in revenue, $3.5 billion in adjusted EBIT, reflect a sharp execution and the momentum we are building for our Ford+ plan. Accordingly, we're raising our full year adjusted EBIT guidance to between $8.5 billion and $10.5 billion. These results are encouraging, but the bigger story is the modern Ford that's now taking shape. For 5 years, we have relentlessly built the foundation of Ford+. We strengthened our industrial system, made real progress on quality, cost and advanced our software capability and customer experience. Earlier this month, we took the next step in that evolution by establishing an end-to-end organization, product creation and industrialization. We unified our advanced technology, digital and design teams with our global industrial system. This change aligns with the most intensive product and software rollout in our history. By 2030, almost all of our global volume will feature next-generation electric architectures and in-house software. This applies to every propulsion type as we deliver and scale high-quality software-defined vehicles. This new organization allows for faster decision-making and reduce complexity. This is the moment we integrate the digital soul of the vehicle, the software or the silicon and the user experience with our world-class industrial execution. Among other things, this alignment will support our high-margin software and physical services revenue, which was over $15 billion last year. And we expect to grow that $15 billion nearly 8% annually through the end of the decade. This service growth is driven by offering customers indispensable digital experiences and investing in aftermarket sales with a focus on customer uptime, expanding our parts catalog and enhancing our service network. We're also learning -- we're also leaning into the Skunk Works model to improve all of Ford. They've done an incredible job creating the UEV platform, which represents a step change in efficiency and cost, especially for the EV market. But at Ford, we're now integrating these Skunk Work breakthroughs back into our mainstream products and processes. We're applying their advanced tools and physics-based cost modeling to the highest volume internal combustion and hybrid lines. This, of course, will reduce our costs and improve quality across the board. Our product pipeline is aggressive. Between now and '29, we will refresh 80% of our North America portfolio and 70% of our global portfolio by volume. This includes the next-generation F-150 and Super Duty, among many others. It also includes the launch of our universal EV platform in 2027 from our Louisville assembly plant in Kentucky. We are scaling that plant for significant volume to accommodate a variety of vehicles off that single platform. And speaking of electrification, our strategy remains focused on powertrain choice, not nameplate complexity. By the end of the decade, 90% of our global nameplates will offer electrified powertrains, including advanced hybrids, extended range electric vehicles and full EVs. Our financial health is driven by a leaner, more effective industrial system. We're on track to deliver another over $1 billion in material and warranty cost improvements this year, and we will never stop. Our focus on quality is paying off. J.D. Power has recently ranked Ford #4 in the 2026 U.S. Customer Service Index, our best performance in 30 years. Finally, we remain resilient in the face of global uncertainty regarding the conflict in the Middle East. Of course, our priority is our team and the safety of them. We're monitoring the situation and working to minimize risk and find opportunities in much the same way we have navigated the pandemic, the semiconductor shortage, tariff headwinds and others. We have the muscle memory to find cost offsets, adjust our product mix quickly and proactively manage our supply chain in times of stress and crisis. My main message today is this, Ford is a fundamentally stronger, more modern company. We have a foundation built on industrial fitness. We have the technology, and we now have the unified organization to not just deliver but to compete to win. Ford is focused on execution, quality and thrilling our customers. Over to you, Sherry. Sherry House: Thank you, Jim, and hello, everyone. Before I walk you through the details of our performance this quarter, let me start with a few items I know are top of mind for you. First, in Q1, we recognized a $1.3 billion benefit related to IEEPA tariffs. This onetime adjustment largely benefits Ford Blue and Ford Pro at about $700 million and $500 million, respectively. They are related to IEEPA tariffs paid between March 2025 and February 2026. Second, our Novelis recovery is progressing as expected. We still expect a $1 billion improvement in EBIT year-over-year weighted towards the second half. This is net of $1.5 billion to $2 billion of onetime incremental costs to secure alternatively sourced aluminum until the Novelis facility is operating at full throughput later this year. Third, relative to U.S. inventory, we expect to remain within our target of 55 to 65 retail days supply for the year. F-Series sales remain healthy as inventory recovers from the Novelis supply disruption. America's best-selling truck delivered year-over-year retail share improvement of 30 basis points in March, and we are carrying that momentum into Q2. Our team is effectively managing tight retail day supply by helping dealers fill inventory gaps while ensuring high demand trim levels are in ample supply. We are also producing a richer mix of product as we continue to ramp Novelis. And importantly, on average, we are spending less on incentives than our competitors. In fact, for the quarter, F-150 had the highest retail share, highest average transaction price and the lowest incentive spend per unit versus our key competition. Now turning to the quarter. We delivered adjusted EBIT of $3.5 billion or $2.2 billion, excluding the impact of the IEEPA. The strength in the quarter versus our original guidance was primarily supported by a change in calendarization of cost improvements and timing of investments, growth in software and physical services and higher net pricing. Our global revenue grew by over 6% despite a nearly 4% decline in volume, which was expected as we exited low-margin products like Escape in North America and Focus in Europe. In the U.S., we had our highest Q1 share of revenue in 5 years, led by large utilities and trucks. Adjusted free cash flow was a use of $1.9 billion in the quarter, more than explained by unfavorable timing differences, higher net spending and changes in working capital. On a full year basis, we expect timing differences and working capital to be favorable. Our balance sheet is strong with $22 billion in cash and over $43 billion in liquidity, and we remain committed to our investment-grade rating. We repaid our convertible debt without refinancing it and also relaunched our anti-dilutive share repurchase program, which we completed in the quarter. And earlier this month, we successfully renewed our $18 billion corporate credit facilities for another year. Our strong liquidity position provides us with the flexibility to manage in this dynamic environment and invest in higher return growth opportunities like Ford Energy. It also allows us to pay consistent shareholder distributions. In fact, yesterday, we announced the declaration of our second quarter regular dividend of $0.15 per share payable on June 1 to shareholders of record on May 12. Now turning to segment highlights. Ford Pro achieved EBIT of $1.7 billion against the backdrop of Novelis-related production disruptions. Ford Pro continues to deliver higher margins through a powerful ecosystem of vehicles, software and physical services. We are scaling rapidly and increasing recurring revenue, which bolsters resiliency. In fact, paid software subscriptions grew to 879,000, a 30% year-over-year increase. By integrating innovations like Ford Pro AI, we can help commercial fleet managers instantly identify maintenance needs, leverage large data models on fuel usage to lower costs and optimize routes amongst other features, all designed to provide better predictability, productivity and profitability, which our customers require. As we look ahead, the 2027 model year order books are just starting to open, and we are seeing positive early indicators. Ford Blue delivered $1.9 billion in EBIT, supported by the sustained sales performance of F-Series and go-to-market discipline, evidenced by Q1 incentive spend below industry average. Additionally, our off-road performance trims now account for nearly 1/4 of U.S. sales and Maverick and F-150 continue as the best-selling hybrids in their segments. Importantly, Ford Blue's Q1 performance highlights the strength of the underlying business and excluding IEEPA, is representative of its ongoing run rate. For Ford Model e, EBIT was a loss of $777 million as we now start to benefit from the portfolio changes announced in December. In addition to investing in a leaner, more profitable portfolio, we are actively matching supply with demand globally to optimize profitability. And in the quarter, we benefited from a nearly 35% improvement in our Gen 1 losses. We also continue to step up our incremental $1 billion investment in UEV platform and Ford Energy as we progress throughout the year ahead of their launches in 2027. As a result, we expect first quarter to be the strongest quarter for Model e this year. Ford Credit delivered a solid quarter with EBT of $783 million, up $200 million, reflecting improvements in financing margin and enabled by a high-quality book of business. Results also benefited from favorable performance on our derivatives. Our portfolio performance is strong, and we maintain a highly disciplined approach to capital reserve and risk management practices. So let me turn to our 2026 outlook. For the full year, we now expect company adjusted EBIT of $8.5 billion to $10.5 billion, adjusted free cash flow of $5 billion to $6 billion and capital expenditures of $9.5 billion to $10.5 billion, which reflects our shift toward higher return growth opportunities, including $1.5 billion for Ford Energy this year. Our guidance does not include the potential impacts of a sustained conflict in the Middle East or a significant downturn in the U.S. economy, which could have a material impact on industry demand. Our full year segment outlook stays steady with Ford Pro EBIT of $6.5 billion to $7.5 billion, Model e losses of $4 billion to $4.5 billion, Ford Credit EBT of about $2.5 billion. And for Ford Blue, we have increased our guidance by $500 million to $4.5 billion to $5 billion, driven by a stronger underlying business. Our guidance continues to assume a U.S. SAAR of 16 million to 16.5 million units and flat industry pricing. Now some context and important puts and takes for the year. We have the $1.3 billion one-time IEEPA tariff benefit, but we now expect commodity headwinds of just above $2 billion, about $1 billion higher than our previous estimate, largely due to higher aluminum pricing driven by global supply constraints. Note, though, this excludes Novelis-related aluminum costs. The impact of ongoing tariffs is unchanged at about $1 billion and is now a part of our run rate costs. This excludes the IEEPA benefit and Novelis temporary costs. As Jim mentioned, we're on track for $1 billion improvement in material costs and warranty reductions on top of the $1.5 billion of cost reductions we delivered in 2025. We continue to expect a net $1 billion improvement from the Novelis recovery. And as I mentioned earlier, about $1 billion of incremental investment in Model e to support the ramp of UEV platform and Ford Energy. Our Q1 performance highlights the benefits of our Ford+ priorities, rigorously optimizing revenue across every segment through leading products and high-growth services, improving operating leverage and exercising smart, accretive capital allocation decisions. The increase in our full year adjusted EBIT guidance underscores these benefits. Thank you. And I'll now turn it over to the operator so we can take your questions. Operator: [Operator Instructions] Your first question will come from Joseph Spak with UBS. Joseph Spak: Sherry, maybe just to pick up right up on the commodity increase. You mentioned about $1 billion. I'm just trying to contextualize what you're assuming here because I think in the past, you talked about, call it, an $8 billion steel aluminum buy, I think 40% of that is aluminum. There's been some hedging, and this is really only 9 months. So I know prices have really gone up, but it looks like a pretty big number. So I just want you to help understand what you're thinking for the balance of the year? And then how you would advise investors to sort of think about that rate heading into '27. Sherry House: Sure. Well, it's going to be a bit hard to be able to predict 2027 at this point given the volatility that we've seen in the commodities. But let me just tell you in the near term, what I'm seeing. So with respect to steel and aluminum, in particular, even before the Middle East situation started, we were already seeing global industry shortages, and that was first. Then you had the Middle East. And then you have to remember that Ford also has the aluminum supply shortage with respect to our primary aluminum supplier, which is Novelis. These costs are not related to Novelis. We package those separately. We talk about those separately. And when I talk about a $1 billion year-over-year improvement due to Novelis, that includes all the tariff costs. But this is related to the exposures that we have in aluminum and steel predominantly. Joseph Spak: Okay. And then I guess just a second question, maybe -- is there any update you could provide us on the Novelis timeline? I mean, I think there was some preliminary thought it could come online in the summer. Are we sort of on track there? And if that happens, how are you thinking about that headwind you mentioned? I'm just trying to sort of figure out the phasing timing because I guess my prior assumption was that most of that Novelis headwind would have been more in the first half if it was sort of expected to ramp through the year. But I'm not quite certain that, that's sort of still the case. So maybe you could just help us with some of that cost phasing timing. Kumar Galhotra: Yes. Joe, this is Kumar. Your assumption is correct. We are still expecting the hot mill to restart in May. There are two aspects to bringing any mill back online. There's the restart itself and then there's the ramp-up. So all the enablers for both of these aspects are on track. In the event the relaunch doesn't go according to plan, we do have contingency plans in place. That means we have additional aluminum supply to ensure our plant production schedules aren't interrupted. So the mill should be back online. And if we have any hiccups, we have contingency plans for the rest of the year. James Farley: And Joe, as you would expect -- it's Jim, we have by grade, we have several grades by step in the process. We track it every day. We know exactly the situation we have, the float we have. And we also have learned how to back up the aluminum supply, as Kumar said, in case the mill ramps slower or the actual start date is later. Operator: Your next question will come from Dan Levy with Barclays. Dan Levy: We know within the guidance that effectively the IEEPA refund is being offset by the raw mats. So really, the net of the guidance improvement coming from improved operations. Maybe you can just [Technical Difficulty] in the improved operations beyond the warranty material, which looks like that's consistent. And how much runway do you have on this? And can this offset any increases in raw mats that you might be seeing in '27 just given the staggering of costs that are going to be hitting? Sherry House: Yes. So as we look at kind of what's the -- basically the basis of our $1 billion raise versus guidance, it's going to be software and physical services is one of the biggest components there. The Ford Pro business continues to have very high paid subscribers. We now are up at 879,000, as I said in some of our prepared remarks, that's 30% on a year-over-year basis. The enterprise is also doing quite well across the physical services and the software. The other item that was really big for us in Q1 was the net pricing. As we said, the share of revenue, highest in 5 years. And this was really led, as we said, by full-size utilities and trucks. And then we did have some timing differences in cost. So some items hit in Q1 that we were expecting to hit in Q2, and that was very favorable for us. So we took all that underlying performance into consideration, we felt that $0.5 billion was the amount to be able to pull through for the full year, and that's why our guidance reflects that. Operator: Your next question will come from Andrew Percoco with Morgan Stanley. Andrew Percoco: I did want to come back to the guidance here, and maybe I'm missing some of the moving pieces. But if I just look at your first quarter performance, $3.5 billion of adjusted EBIT. I think you had been essentially signaling sequentially flat, which would have been like $1.1 billion for the first quarter. So you essentially beat by $2.5 billion in the first quarter, of which a little bit over $1 billion is from IEEPA. But that would imply like even though that's offset by some incremental cost headwinds on the commodity side, it would imply downside or some incremental costs elsewhere if your guide is only increasing by $500 million. So can you maybe just help us break down some of those moving pieces in case I'm kind of missing anything in that bridge? Sherry House: Yes, I don't think you're missing anything in the bridge. It's just as I said, we had the three components that were really driving this performance, and we're pulling through the amount of it that is sustainable. Some of it was timing differences. So we didn't want to put timing differences into a guidance raise. Andrew Percoco: Okay. Got it. And then, Jim, maybe one for you. There's been a lot of headlines recently around some potential partnerships between Ford and some of the Chinese OEMs. And even outside of Ford, there's just a lot of focus in the marketplace around some of these vehicles coming out of China eventually potentially making their way into the U.S. Can you just give us your updated thoughts on what that could look like and maybe any involvement that you might be interested in doing there? James Farley: Sure. I'm sure glad there is a lot of focus on it. As America's largest auto producer, we are totally dedicated to a thriving U.S. auto industry and, of course, safeguarding our country's industrial base. And that's just not economic vitality. It's also national security as a country. And when we see China and Japan and South Korea, they've really prioritized their domestic auto industry and manufacturing for the same reasons that I mentioned. I would say, to answer your question, we leverage global partnerships and even IP sharing, including with the Chinese OEs to grow our business around the world. And -- but we are really fully committed to a level playing field here in the U.S. and also safeguarding our home market because of the importance of the auto industry and our industrial base. So how I would think about it is Ford continues to be a global company. We want to have the rights to win around the globe. We need IP and partnerships outside the U.S. to do that. And when it comes to the U.S. industry itself, we are extremely protective as we should be like China, South Korea and Japan are. What that means in specific policies that will play out in our strategy as a company. But as America's #1 auto producer, you can understand our perspective. Operator: Your next question will come from Alex Perry with Bank of America. Alexander Perry: In the materials, I thought it was interesting. I think you said the off-road performance trims account for 25% of the overall sales mix. Can you give us a little bit more on the strategy here and a little more color on how this has trended historically? Is the strategy to prioritize some of these higher-margin trims while production remains constrained? And maybe just remind us on the profitability of some of these off-road trims versus company average. Andrew Frick: Yes. Thanks. This is Andrew. Thanks for the question. Yes, that is part of our strategy. It's a big piece of why our Blue business is doing well, overall. In fact, if you look at our wholesales this past quarter and the first quarter, they were relatively flat, but we had an improved mix of Explorer and Expedition. We phased out Escape. We're in the sell-down of that and our F-Series remains strong. And we actually -- we grew our share in the off-road space, 25% of our volume, but our share actually grew by 0.7 point, which was really important. So -- and that's because we're able to lean into across multiple vehicles now, series like Tremor and Raptor and really drive those mixes. So it is relatively more profitable, and it all plays back to our overall strategy of leaning into our profit pillars and winning with passion products. James Farley: No boring products. Alexander Perry: Perfect. Really helpful. And just a follow-up on commodities. Can you just remind us how you're sort of hedged across the various commodities? And with the $2 billion commodity headwind, does this assume that prices sort of stay where they are today? So if they were to come down, this would provide a little bit of cushion in the guide? Sherry House: Yes. The forward forecast that we gave you does -- the guidance we gave you assumes that they stay where they are, which, as you would know, the forward curves are up. We have a large number of contract types that we use. We have -- in some cases, we have fixed costs, other contracts, multiyear contracts. We have a lot of contracts that are based on indices and the impact is a quarter lagging. So you're going to have a range there. We also look at natural hedges that we have in our business as well. So when we look to hedge, we're taking the entire portfolio into consideration. And we feel that we've got a pretty good handle to be able to provide you what we did in terms of commodities for the balance of the year. If they go up substantially from here, we obviously will be back sharing that with you. But you're right, if they go down, that will be a net positive to the business. Operator: Your next question will come from Mark Delaney with Goldman Sachs. Mark Delaney: I was hoping to start on the comments the company -- spoke about in his prepared remarks on software and physical services. I think you said you expect the $15 billion of revenue coming from those areas to grow at a nearly 8% rate annually through the end of the decade, which is a pretty good outlook over several years. So can you help investors to better understand what's driving that degree of revenue growth over the coming years? And more importantly, what does that mean for EBIT? James Farley: Sure. This has been a critical part of our path to 8%. And we've been planning for many years. As you can imagine, before I answer your question directly, we've had to invest a lot in our advanced electric architectures, and our dealers have had to invest a lot in dealer capacity for the service. Really, our focus is on two key areas. We have a lot more focus than these two, but these are the ones driving our business. The first is our aftersales parts business. This is a really key focus for the Ford team. We see growth in Pro. Our dealers are massively investing in capacity for Pro, but we are also becoming a lot more successful in wholesaling parts from our dealers to third-party repair shops throughout the U.S. As I mentioned, we're going to expand our parts catalog in terms of price and diversity, and we're going to start to focus on not just Ford parts, but multi-make parts. And I think the other key distinguishing element for Ford is that we have started to really get good at remote service. Almost 20% of all Ford's repair now is done outside the dealership at our customers' location. And for our Pro customers, they're especially excited about this because they don't have to come in the dealership. And this has really expanded our revenue on aftersales. Inside the company, we're very focused on improving our repair order duration that gives our dealers more capacity, so to speak, without having to build any more capacity. I think you know our growth in ADAS, our growth in Pro Intelligence that Sherry mentioned are both signature parts of our integrated services that seem to be growing about 30% to 40% a quarter with very high margins. When you look at the margins of the part business and the software business, this $15 billion that will be growing at 8% a year is highly profitable for the company. It also has a different revenue risk than our vehicle business. It's more of an annuity and a lot of it tends to be anticyclical. That means that when the car business goes down, people tend to repair their vehicles. So this fitness we're developing on the parts side will help us on the anticyclical side. That gives you, I think, some window. And hopefully, we'll be giving you more and more insights as to our ADAS strategy and Pro Intelligence product rollout in the coming years. Mark Delaney: That's very helpful. My other question was on the pickup market. And Ford obviously has a very strong franchise in that segment with the F-Series, but you've also spoken to adding more product with the UEV-based pickup model coming in and then also the ICE truck you've talked about coming out of the Tennessee factory. We've also seen competitors lean into that segment more. So as you think about all the new models coming into the pickup space, maybe talk more on how much of the market you think pickups can make up in the future? And then as you think about more supply coming into pickups, what are implications for profit margins in that important category? Andrew Frick: Yes. Thank you for the question, Mark. This is Andrew. And I think it's important when you talk about the truck business, maybe to look at it through the lens of both retail and commercial because they're both really important parts of those -- of both customer groups. On the retail side, the truck business has historically been with the full-size pickup and medium pickup. But what we've been able to do is really expand that -- the pickup segments themselves. Maverick has created a whole new segment. And we've been able to really take advantage of that. In fact, we've -- if you look at the trends in the market, you've seen a lot of car buyers go into truck and even utilities go into truck. And we think that trend will continue, especially with the type of packaging that we're going to be able to provide. It worked on Maverick, and we are really excited about the UEV pickup and the packaging that, that has to really appeal to not just truck buyers, but to source from SUV buyers as well. So we see the pickup market growing, and it's really growing across segments and price points on the retail side. And Alicia, maybe on the commercial side. Alicia S. Davis: On the commercial side, I'll just ask -- I'll just comment similar to what Andrew said. we have commercial buyers that buy pickup trucks from Maverick size all the way up to our F-750, and we have products in those segments. And we also have diverse powertrains, and we see that continuing to grow. We continue to have strong orders for 2026 right now from fleet customers, and we continue to see -- we just opened our '27 model year order books, and we're starting -- we're seeing some early indicators. So we know the demand is there, is strong, and we want to make sure that we have offerings from the very beginning, Maverick all the way to the higher pickup trucks. James Farley: How we like to think about it is that we want to future-proof our truck business. To do that, we want to offer customers more choice on the powertrain side and tie the powertrains to other benefits that a truck customer would want like a hybrid for Pro power on board. And part of protecting is not just having an affordable electric pickup or hybrid throughout our lineup, but it's also having a flow of customers that move through our lineup over time. On the Pro side, it helps us with adjacency sales. But on the retail side, those Maverick, those UEV sales, they are a juggernaut for loading our whole pickup business and the strength over time because we haven't seen our competitors invest like we have. I think the other thing that gets maybe overlooked about Ford's pickup strategy is our global strategy. Ford is really #1 or #2 in most markets around the globe. There are large pickup markets in Thailand, Africa, the Middle East and South America. And Ranger is #1 or #2 in every one of those segments, and we are future-proofing those lineups now as we speak with different powertrains and even more affordable options. And this is critical because we're seeing new competition in those markets from the Chinese. And so our pickup strategy is a global strategy. We're trying to learn from the past where we're trying to future-proof it in a way from oil shocks or movement of powertrain to actually price points. Operator: Your next question will come from Emmanuel Rosner with Wolfe Research. Emmanuel Rosner: Could you give us a sense of expected cadence of earnings over the rest of the year? And in particular, maybe drivers of the much lower pace of earnings over the rest of it. With having done $3.5 billion in the first quarter, that means you're guiding at midpoint for $6 billion combined over the next 3, which is quite low, I guess, by historical standard. I understand that commodities is obviously going to get sequentially quite a bit worse, but then I would have thought the Novelis cost would also start going away in the second half. So maybe some of the puts and takes and the cadence, please? Sherry House: Yes. So as you move into the next half, Obviously, one of the big things is you're not going to have the repeat of IEEPA, it's $1.3 billion. Positive, as you said, with respect to Novelis as we start to gain more volume, but we are going to be hit more as we're more towards the end of the year on commodities, as I alluded to earlier. And also, the other thing is we are investing more in our launches right now, and that's going to be in BESS, our battery electric stationary storage business, the UEV platform and also Oakville in Canada. So we have those investments that are going in and ramping as we exit the year. And that's -- there's cash elements of that, too, not just CapEx. So that in commodities, non-repeat by IEEPA, but then the positive is Novelis. Emmanuel Rosner: Okay. And cadence-wise, sorry. And then I have another follow-up question, but any sense on -- is the degradation mostly in the second half? Or is the second quarter ex-IEEPA also quite a bit lower? Sherry House: Fairly consistent, I would say, it's Q2, Q3 and Q4. Emmanuel Rosner: Okay. And then my second question is on free cash flow. Can you give us a bit of color on why free cash flow was almost a burn of $2 billion when EBIT was quite robust even ex-IEEPA. But I think most importantly, in the guidance, you're not flowing through any of the improved EBIT to the full year free cash flow guidance, even though it seems to be driven by better underlying performance. Why is that? Sherry House: Yes. So let me hit your first question first. So with respect to the $1.9 billion usage in the quarter, it's very typical for us as you move from Q4 to Q1 to have a usage of cash. And that's because of the higher working capital that is needed. We're typically at that point, you are drawing down on inventory. You're not typically producing as much the last couple of weeks of the year. That was amplified for us with the Novelis disruption as well, and you're paying out your payables. So you're going to have that negative start. In addition, for us, this quarter, our net spending was up. And as I said, we're investing in our future. We've been really transparent about $9.5 billion to $10.5 billion this year, and you're spending on UEV, you're spending on BESS, we're spending on the future. And then also, there's timing differences in there, and we pay our compensation bonuses in Q1. You also have timing differences associated with marketing and incentive spends that are taking place as well. So those are the big components. We do expect this to reverse. We do expect our free cash flow guidance to stay at $5 billion to $6 billion. The big change, as you know, was the IEEPA tariff of the $1.3 billion, and that we don't have certainty as to when that is going to come in. So we did not put that in the guidance at this time. If we get certainty that, that's going to be sooner, then we will certainly update accordingly. And we thought it's a little bit early to be pulling through some of the other cash items given some of the volatility that we're working through. Operator: Our next question will come from Edison Yu with Deutsche Bank Research. Xin Yu: I wanted to come back to something that, as you mentioned earlier about the U.S. industrial base. How sensible or how realistic is it for Ford to play a bigger role in the kind of defense complex in terms of supplying the Pentagon? James Farley: Well, thank you for your question. As a most American company, Ford has always called the answer to duty to support our country. It was ventilators in COVID, and of course the arsenal of democracy. We work with -- as you know, we are very successful with our government sales and business in Pro. And so we have very close relationships through the vehicle side. What I'd be able to say at this point is two things. First of all, we are in early discussions with the U.S. government on some defense-related projects. We're not going to go into details of those today. In addition and I would say equally important is Ford's role as an anchor customer on onshoring critical minerals and many other supply chain vulnerabilities we have in our country. And I think you should expect Ford to play an outsized role in manufacture-grade semiconductors, critical minerals like batteries and rare earths. And our supply chain is heavily engaged not only with our government, but new companies that are starting to emerge in our country to onshore some of this capability. And I think maybe perhaps in the short term, that's the biggest role Ford can play in helping our country. Xin Yu: Understood. Understood. And then a separate topic, just coming back to autonomy. It seems in robotaxi, there's a lot more appetite now for some of these tech companies like Uber and NVIDIA sort of quasi-subsidize the OEMs. Has your kind of thinking about robotaxi maybe evolved over the last 3 or 4 months? James Farley: I would say, yes, not just over the last 3 or 4 months. It's something we've been, frankly, watching carefully as it evolves because we were involved in Argo and are very well aware of both managing the fleet and the SDS system itself and the progress. We kind of knew from Argo what to look for as robotaxis became -- the SDS itself became more proficient, and we're starting to see that now. I think how you should think about Ford's approach is that we are completely focused on having the most efficient EV and the lowest cost of ownership in North America, number one. And number two, because of our Pro business, we have the most fit, repair and fleet management capability for new fleets -- all fleets. And that capability can be applied to all sorts of different fleets. That's how we think about the market as it emerges. And I think that's all we're prepared to say at this point. Operator: Your next question will come from Ryan Brinkman with JPMorgan. Ryan Brinkman: Is there an update you might be able to provide on the relatively recently announced Ford Energy business? Has there been maybe proactive outreach to Ford from companies that you have existing B2B relationships with on the Pro side of the business? How would you characterize that interest? And maybe just remind on potential timing there. James Farley: Thank you, Ryan. Well, as you know, we are committed to over 20 gigawatt hours of capacity starting in the fourth quarter of next year. That will be mostly Kentucky 1 and a little bit of Marshall. Marshall will be really focused on UEV, but has some capacity for our energy business. So that's the timing starting fourth quarter next year. The plants are coming online. We are on track in the industrial manufacturing capability of doing DC block. It's not just the batteries themselves, it's the containers, it's the management of the battery. That's all coming together as we expected. We are very active in contracting customers as we speak. We've had a lot of inbounds and a lot of interest in Ford because they understand that we have the best tech. We have a lot of advantages financially, and we have a great service and sales capability. And of course, the company has deep relationships with a lot of these as vehicle customers. So they know us. They know through Pro that we're a reliable company. And all I would say, Ryan, is that the energy business is a key element of our bridge to 8% margin. Ryan Brinkman: Great. And then just as my follow-up, around the same time that Ford Energy was announced, you also broke news of the new strategic partnership with Renault. So I was just wondering if there might be any kind of update you can provide there, too, given that the first vehicles that were announced were electric vehicles, and I think that's an important piece of solving the puzzle in Europe, but I met with Hans Schep during the quarter. He is super energized about Renault on the commercial vehicle side in Europe. What do you think the broader potential for collaboration there might be? James Farley: Thank you, Ryan, for your question. It's very pertinent. At this point, all we would say is that we believe that on the passenger car side, Renault has fully cost competitive platforms. And we intend to take advantage of that as Europe continues to electrify amidst the Chinese competition on passenger cars. On commercial, we have a very successful relationship, as you know, with Volkswagen, both on the pickup and the van side. And we have nothing to announce today, but certainly, John, myself and the whole team are very focused on taking advantage of the Renault relationship across all of our businesses. And our commercial business at this point is still very profitable in Europe. We see it as the core of our profitability in the future on the vehicle side. And so we will do everything we need to, to maximize our scale and our cost advantage on commercial in Europe. Operator: Our next question will come from Colin Langan with Wells Fargo. Colin Langan: Just if I'm looking at Slide 10, there's a $900 million of other. It's kind of unusual to have such a large item. Any color on what that is? And then also looking on that slide, cost is only $700 million positive and includes the IEEPA. I think the target is that you're supposed to get $1 billion of cost benefit for the year, which would mean underlying cost is actually worse year-over-year in Q1. So what is driving the weaker Q1 cost? Sherry House: Well, first off, let me just hit on your question on other. That's really related to services, both physical and software. So that's where that's showing up. Colin Langan: So you had $900 million of software EBIT? Sherry House: So we also had compliance benefits, services, physical and software credit as well. Colin Langan: Okay. And then the cost piece, is that just the cost savings pick up in the second half of the year? Sherry House: This cost savings, if you're on Slide 10, was related to the -- you're talking about the Q1 bridge going from $1.3 billion in Ford Pro to the $1.7 billion? Colin Langan: Yes. Well, I was just saying in the bridge, it's $700 million positive, but that includes $1.3 billion of IEEPA -- for the year. Sherry House: That's right. Colin Langan: So that mean ex-IEEPA, it was negative. So I'm just wondering why it's negative if the target for the year is $1 billion positive. Sherry House: You have Novelis in there as well. Colin Langan: Okay. And then just lastly, if I go to Slide 18 and I add up all the items, it does seem like it's a little short of some good news. It seems like about $900 million short of all the items listed on that slide. What is that? Is that volume? You didn't mention regulatory savings, just other cost savings that we're kind of missing in the walk? Sherry House: I would say, yes, it's a variety of other savings throughout the company as well. So we thought that really, it's -- cost is fairly flat on a year-over-year basis. We're really presenting very close to what we presented in the past. The big changes as we've gone into this guide is we have the $1.3 billion resulting from the IEEPA Supreme Court ruling, then we had the increase in the commodities, which is offsetting. So when you look at all of that together, you're really looking at a pretty flat picture year-over-year because we already had a number of items that were offsetting. Operator: Your next question will come from James Picariello with BNP Paribas. We can hear you, please go ahead. James Picariello: So I first want to ask about what's the level of confidence behind the 150,000 Novelis recovery units based on what you've seen in your own production through the first quarter? Just where are we at on that? And then as we think about the raw materials, right, the $2 billion now in core commodities plus the $1.75 billion in alternative aluminum sourcing, what was captured in the first quarter on that combined bucket for raw mats? And just how should we think about the cadencing for the rest of the year? Kumar Galhotra: So on the Novelis recovery and the rebuild of the mill, I would say the confidence is high. As Jim and I stated earlier, the restart date is on track. All the enablers for the ramp-up are on track. And belt and suspenders, if anything does go off, we have contingency plans, which means we have additional aluminum supply to ensure production. So we feel good about the second half aluminum supply. James Farley: And not only our supply perspective, but also, as Andrew said in the speech, we have -- we're in a really good stock situation, too. So we're very confident we're going to need those units. Alicia S. Davis: And I can just comment as well from a Pro perspective, we still have very strong '26 model year orders. We just opened up '27. Those are we're seeing positive indicators. And when you think about the Novelis impacts, we really postponed fleet orders, and they're going to be required and needed in the second half, and we haven't lost a customer. So we are very confident in the demand in the second half of the year. Sherry House: Yes. And I guess I would just say that... James Picariello: Just on the cost side... Sherry House: Yes. We continue with respect to Novelis to expect a total cost of between $1.5 billion to $2 billion. We're tracking on target with respect to that. I think you had a specific question in Q1 related to temporary cost to source aluminum. It's about $300 million. So that would include tariffs, expedited freight and warehousing as well. These things aren't straight line, and there's just a lot of factors that are involved. James Picariello: Got it. That's helpful. And then just as we think about the $1 billion in the UEV platform and the Marshall plant, is that more second half weighted or pretty ratable through the year in terms of just the investment, and that's still tracking towards the $1 billion, right? Sherry House: So it's going to be -- the UEV investments, we're already making some of those. We're going to continue to make them through Q2, Q3 and Q4. They will go up a bit as you get to Q3 and Q4. And then we also -- as I said, we've got BESS in there as well, and we also have the Oakville launch during that period of time also. So three major items that are increasing in terms of investment. Operator: Your next question will come from Itay Michaeli with TD Cowen. Itay Michaeli: Just a couple of questions on the UEV platform. I'm just curious sort of what's left to do here as you prepare for next year's launch? And maybe thinking even out to 2029 towards your breakeven or profitability objective for Model e, how should we think about roughly the number of top hats that you're planning to launch on that platform? And maybe just lastly, if I can sneak it in. In the past, you've mentioned using some new suppliers for UEV. Any more updates you can share on how that's going? Kumar Galhotra: So Itay, this is Kumar. Answering your first question on the, let's say, the industrial launch of the product, there are four major pieces to it. There's the hardware of key new parts like mega castings UEV has its own software platform. So development and testing of that platform. Third is the readiness of our suppliers with all the parts that are coming from suppliers. And lastly, number four is equipment installation at our plant. We're in the middle of all four of these right now and all enablers and all indicators, early indicators of these four work streams are on track. So we feel good about it. Your second piece of question, number of top hats. As we've mentioned, it is a platform. We plan to have high volume at Louisville. But I think it's -- we don't want to give away our plan to competition by talking about how many top hats or which top hats. It would be too early to do that. James Farley: The launch is bigger than the industrial launch. So we want to give you a little bit of insight into the demand creation because that's critical for us. Andrew Frick: Yes. This is Andrew. We're confident on our launch plan. In fact, we're right on track to share our plans with dealers and take customer orders later this year. And what we're really excited about is some of the EV market trends that we're seeing and the EV volume really heading towards the affordable space, which really favors this affordable UEV platform, positioning us right in the heart of the market. So we're really pleased with that. James Farley: I think the market is already predisposed to this price point. But now it feels like in the U.S., the EV market is moving even closer to the UEV platform. And there's really not much choice on a fully specced, highly capable technological vehicle platform that's really affordable. There's not a lot of choice for customers. A lot of compliance vehicles, but this is a real legitimate fully capable product for customers. So we think the market is really moving, and we understand that. That's why we're working so hard on the demand creation. I think UEV is on -- as far as the new suppliers, do you want to mention anything about the new suppliers, Kumar? Kumar Galhotra: Yes. I would say that the UEV team took a very interesting approach. We did the toughest and the most complex commodities. We designed them in-house. This gives us a lot of control over those commodities, and it gives us the ability to source those commodities at the highest quality and the best cost price points from new suppliers. And these new suppliers have been great partners, and we are working towards using that capability, both the process as well as the new supply base in the rest of our portfolio. James Farley: What's exciting for me is to see the team's pollination of the UEV process, new suppliers, new way of developing a vehicle, new IT tools that the development team uses, it's really starting to spread across the company. And to me, that's very encouraging to see because the greatest gift for UEV will likely be what it gives our -- all of our other models and our team as a whole. Operator: This concludes the Ford Motor Company First Quarter 2026 Earnings Conference Call. Thank you for your participation. You may now disconnect.
Operator: Good afternoon, and welcome to PROCEPT BioRobotics First Quarter 2026 Earnings Conference Call. [Operator Instructions] As a reminder, this call is being recorded for replay purposes. I would now like to turn the call over to Matt Bacso, Vice President, Investor Relations, for a few introductory comments. Matthew Bacso: Good afternoon, and thank you for joining PROCEPT BioRobotics First Quarter 2026 Earnings Conference Call. Presenting on today's call are Larry Wood, Chief Executive Officer; and Kevin Waters, Chief Financial Officer. Before we begin, I'd like to remind listeners that statements made on this conference call that relate to future plans, events or performance are forward-looking statements as defined under the Private Securities Litigation Reform Act of 1995. While these forward-looking statements are based on management's current expectations and beliefs, these statements are subject to several risks, uncertainties, assumptions and other factors that could cause results to differ materially from the expectations expressed on this conference call. These risks and uncertainties are disclosed in more detail in PROCEPT BioRobotics filings with the Securities and Exchange Commission, all of which are available online at www.sec.gov. Listeners are cautioned not to place undue reliance on these forward-looking statements, which speak only as of today's date, April 29, 2026. Except as required by law, PROCEPT BioRobotics undertakes no obligation to update or revise any forward-looking statements to reflect new information, circumstances or unanticipated events that may arise. During the call, we will also reference certain financial measures that are not prepared in accordance with GAAP. More information about how we use these non-GAAP financial measures as well as reconciliations of these measures to their nearest GAAP equivalent are included in our earnings release. With that, I'd like to turn the call over to Larry. Larry Wood: Good afternoon, and thank you for joining us. Over the past 6 months, we have taken decisive actions to reset the organization. We have sharpened our focus on operational excellence, accountability and commercial discipline. Our first quarter performance reflects the early impact of these efforts. We are encouraged by our Q1 results and the momentum we are building, having reported total revenue of $83.1 million, representing an annual growth of 20%. Starting with procedures. We completed approximately 12,200 U.S. procedures in the first quarter of 2026. While our commercial realignment initiatives modestly affected Q1 procedure growth, performance was largely in line with expectations. The team is adapting well, and we expect the full benefit of these changes to materialize in the second half of 2026. Regarding handpieces, we believe field inventory levels and customer purchasing behavior have normalized with handpieces sold representing approximately 95% of procedures in the first quarter. On a weighted average basis, we continue to expect approximately a 1:1 ratio of handpieces to procedures for the full year. Turning to U.S. systems. We sold 49 Hydros systems, which included 2 replacement systems. We remain confident in our full year system plan and are encouraged by the early positive customer response to the AQUABEAM replacement program. With regards to pricing, as we emphasized in our last earnings call, establishing price discipline remains fundamental to long-term value creation. In the first quarter of 2026, U.S. Hydros system average selling prices of approximately $485,000. This represents an all-time high and a 14% increase compared to the fourth quarter of 2025 despite what is typically a seasonally challenging quarter for capital. Given our increased pricing discipline across the organization and strong first quarter pricing, we now expect full year 2026 system pricing to be modestly above our initial guidance range. Additionally, U.S. handpiece average selling prices were approximately $3,500, representing a 5% increase compared to the fourth quarter of 2025 and a 10% increase year-over-year. Now I'll provide an update on our commercial organization. We previously described 2 key changes that we believe are strategically important for long-term performance. First, we realigned our commercial team into an integrated regional structure where our clinical and sales functions now report to a common regional leader. The new structure creates a single point of accountability at the regional level to ensure clinical and commercial activities are coordinated around customer success and procedure growth. Second, we are continuing to advance our dedicated launch team to drive more consistent launches, reduce variability in activation and accelerate procedure volume ramp for customers. We view launches as a key lever for improving downstream utilization and overall performance. The realignment of the commercial organization and implementation of the launch team was finalized in early Q1 and as expected, resulted in some short-term disruption in the first quarter. We view this as a normal transition period as teams ramp, establish account relationships and standardize new operating processes. Most important, we believe these changes, along with our marketing programs, better position us for sustained high growth. We will continue to manage through the transition thoughtfully, and we expect the benefits to build as the organization settles into the new model. Now let's look at gross margins and how we are progressing towards profitability. In the fourth quarter of 2025, we reported gross margins of 61% and indicated this level was temporary. We guided to full year 2026 gross margins of approximately 65%, reflecting expected improvement. Driven by increased price discipline and better leverage of our cost structure, we delivered first quarter gross margins of 65%. With this strong start, we expect gross margins to increase modestly on a sequential basis throughout the year. We will also continue to manage operating expenses as we work toward achieving positive adjusted EBITDA in the fourth quarter of 2026. Turning to regulatory and clinical updates. In March, at the 41st Annual European Association of Urology Congress in London, the EAU updated clinical guidelines to give Aquablation therapy a strong recommendation as a surgical treatment for men with BPH and moderate to severe LUTS, reflecting the high quality of evidence and favorable patient outcomes. The therapy is now recommended as an alternative to TURP, especially for patients seeking to preserve ejaculatory function. This upgrade for prostates 30 to 80 milliliters and the additional notes for treating prostates greater than 80 milliliters is supported by multiple clinical trials, including WATER and WATER 2, all of which demonstrated durable improvements in urinary symptoms, preservation of ejaculatory and urinary function and effectiveness across a wide range of prostate anatomies. A strong recommendation from one of the most respected global guideline bodies reflects the strength of the clinical evidence supporting Aquablation therapy and reinforces its role as a modern surgical option for physicians seeking to deliver durable symptom relief while preserving quality of life outcomes that matter most to patients. At EAU, we also announced the first international launch of Hydros in the U.K. This milestone marks the beginning of a broader global expansion. Specifically, in the first quarter, we sold 7 new Hydros systems in the United Kingdom at an average selling price of over USD 400,000. Building on the recent approval and strong clinical momentum, including the rapid adoption at high-volume NHS hospitals, our U.K. capital pipeline continues to grow nicely. We have also received FDA clearance on our second-generation FirstAssist AI software, an advancement in personalized image-guided planning for Aquablation therapy. This milestone further strengthens the capability of the Hydros robotic system and enables more precise identification of prostate anatomy and more complete treatment planning to help surgeons plan with greater confidence and consistency. We remain deeply committed to advancing the standard of care in urology through our continued innovation for the millions of men affected by BPH. Lastly, we are approaching the completion of patient enrollment in the WATER IV study and based on current trends, expect to be fully enrolled by the end of May. We have been very pleased with the pace of enrollment, which is on track to be completed in less than 18 months. For a clinical trial of WATER IV size and complexity, the speed of enrollment highlights strong surgical interest and a patient willingness to participate, factors we believe will ultimately translate into broader market adoption post approval. Based on current time lines, we expect to present the WATER IV primary endpoint at AUA in the spring of 2027. With that, I will turn the call over to Kevin. Kevin Waters: Thanks, Larry. Total revenue for the first quarter of 2026 was $83.1 million, representing 20% year-over-year growth. U.S. revenue for the quarter was $72 million, reflecting 19% growth compared to the prior year period. Turning to U.S. procedures. We completed approximately 12,200 U.S. procedures in the first quarter of 2026, representing approximately 30% year-over-year growth. The percentage of handpieces sold to procedure volume was approximately 95% with handpiece average selling price of approximately $3,500. As a result, total U.S. handpiece and other consumable revenue was $43 million in the first quarter of 2026, representing 13% growth compared to the first quarter of 2025. Turning to U.S. systems. Total U.S. system revenue was $23.4 million in the first quarter, representing 25% year-over-year growth. We sold 49 Hydros systems at an average selling price of approximately $485,000 for new U.S. systems. Additionally, the 49 systems include 2 replacement systems, representing the early stages of what we expect to become a growing replacement cycle. We exited the first quarter of 2026 with a U.S. installed base of 765 systems. International revenue in the first quarter of 2026 was $11.1 million, representing year-over-year growth of 25%. Moving down the income statement. Gross margin for the first quarter of 2026 was 65% compared to 64% in the first quarter of 2025 and 61% in the fourth quarter of 2025. The improvement was driven by increased pricing, cost discipline and favorable product mix. Total operating expenses for the first quarter of 2026 were $86.6 million compared to $71.6 million in the prior year period. The increase reflects continued investment to support commercial expansion, ongoing innovation across our BPH platform technology and increased funding for our WATER IV prostate cancer trial, positioning us to drive long-term growth and expand our clinical and technology leadership. Net loss for the first quarter of 2026 was $31.6 million compared to a net loss of $24.7 million in the first quarter of 2025. Adjusted EBITDA was a loss of $18.1 million in the first quarter of 2026 compared to a loss of $15.8 million in the prior year period. Cash, cash equivalents and restricted cash totaled $249 million as of March 31, 2026, providing a strong balance sheet to support our strategic priorities. We expect cash usage to improve throughout the year, driven by greater operating leverage and improvements in working capital. Moving to our 2026 financial guidance. We continue to expect full year 2026 total revenue to be in the range of approximately $390 million to $410 million, representing growth of approximately 27% to 33% compared to 2025. This guidance range continues to assume international revenue to be in the range of $50 million to $51 million. Additionally, we continue to expect 2026 total U.S. procedures to be in the range of 60,000 to 64,000, representing growth of approximately 39% to 48%. With respect to new U.S. system pricing, we now expect pricing to range between $450,000 and $460,000 for the remainder of the year, depending on customer mix between individual accounts and large IDNs. While first quarter U.S. system revenue and pricing exceeded expectations, and we remain encouraged by both pricing and sales momentum, our focus is on ensuring this performance is sustainable. Based on current trends, we have strong confidence in our full year total revenue guidance. We will provide further detail on these metrics as the year progresses. Turning to gross margins. We continue to expect full year 2026 gross margin to be approximately 65%. This includes $5 million to $6 million of tariff expense compared to $1.3 million in fiscal 2025. Our gross margin guidance does not reflect any potential benefit from previously paid tariff refunds, which could provide upside to 2026 gross margins. We continue to expect full year 2026 adjusted EBITDA loss to be in the range of $30 million to $17 million. This guidance reflects positive EBITDA in the fourth quarter of 2026 at both the low and high end of the revenue range. In the second quarter of 2026, we expect total revenue to be in the range of $91 million to $95 million, representing growth of 15% to 20%. I would now like to pass it back to Larry for closing comments. Larry Wood: Thanks, Kevin. In closing, while we have undergone significant change over the past 6 months, we believe these steps are essential to driving sustainable, high growth and to establishing a clear path to profitability. In summary, while we are mostly complete with our U.S. commercial realignment initiatives and expect more consistent commercial execution over the course of the second quarter as reflected in our total revenue guidance. We have established pricing discipline across the organization, which we believe is critical to our long-term success. The U.S. capital pipeline continues to build, increasing our confidence in the sustainability of higher average selling pricing and the conversion of this pipeline into sales. Lastly, WATER IV enrollment is ahead of schedule, and we expect to complete enrollment in May. In closing, I want to thank our employees, customers and shareholders for all their support to help us along our journey to becoming the standard of care for BPH. At this point, we will be happy to take questions. Operator? Operator: [Operator Instructions] And our first question comes from Matthew O'Brien of Piper Sandler. Matthew O'Brien: The first one is just a broader question kind of on the puts and takes that we saw here in Q1, the strength on the capital side. I'd love just to hear about where that originated plus the ASP benefit that you're getting. And then on the handpiece side, I don't know, Larry, if there's a way to kind of frame up some of the disruption that you saw this quarter and then kind of how long it should linger and when we should be past that? And then I do have a follow-up. Larry Wood: Yes. Thanks, Matt. I think the capital quarter was pretty broad-based. We didn't really have a lot of large IDN orders or anything like that. So it was pretty broad-based. And I think that also contributed to the ASP upside. But we did certainly implement pricing discipline, much like what we did with handpieces, we implemented that on capital as well. And so that's just an important part of our journey toward profitability. On the handpieces, the realignment of the sales force has been complete. And I think we're just in a very just natural transition phase where we're reestablishing account relationships and backfilling some of the key positions for people that have moved over to the launch teams. But we expect the momentum on procedures to build throughout the quarter -- sorry, throughout the year. And we remain, I believe, on track related to our guidance, and those are certainly our goals. So we're not where we want to be yet, but I think we've made the changes we need to make and we're building. And I think the team is going to continue to grow into these roles, and I'm excited about what the future looks like. Matthew O'Brien: Okay. I appreciate that. That's very helpful. And then on the second question on the guide side. Just if I'm looking at the roughly -- I think it was $93 million midpoint of the range for Q2. Just talk about plus all the -- again, the ASP benefit you're going to get on the system side. Just talk about the confidence in the -- especially the back half, it seems like it's a little bit more loaded than normal to get to the midpoint of that range and just the confidence there getting to the midpoint or even higher just again, given the ASP benefit that you're talking about on the system side? Kevin Waters: Yes, Matt, I'll take that. So regarding Q2, in our prepared remarks, we did say that we are guiding to new systems in the $450,000 to $460,000 range even with the strength that we saw in the first quarter. And I would definitely suggest our confidence in executing within our guidance range this year has increased with our Q1 performance. But we did just feel it's prudent to maintain current expectations as we continue to emerge from the recent commercial realignment. But look, we feel good about the full year across all metrics. And as I said in my prepared remarks, it will probably be the end of Q2 where we start to formally update some metrics around pricing and volume given what we've seen in the first 6 months here. Operator: And our next question comes from Nathan Treybeck of Wells Fargo. Nathan Treybeck: So procedures were flat quarter-over-quarter. Is there any way to quantify how much of this is driven by disruption from the commercial or changes in the inventory destocking? And I guess, have you seen any underlying softening in demand or referral funnels? Larry Wood: No. I think what we saw in Q1 was just sort of some normal seasonality that we see when we start the year, and that's not uncommon for us. And so I think that was all pretty normal. It's hard to quantify the sales force part of it in terms of people growing into their new roles and just sort of the normal seasonality we see in Q1. But we're going to continue to drive procedures throughout the course of the year. And we had strong system placements and the combination of strong system placements along with our launch teams. We think [indiscernible] is going to be a contributor to procedures as we get deeper in the year, and we have more launch team systems in the field, and we think that's going to help us. Nathan Treybeck: Great. And for my follow-up, so handpiece sales were below your target of 1: 1 procedures. You mentioned inventory rightsizing is completed, but can you help us understand how much residual destocking impact there was in Q1? And could handpieces fall below procedures in upcoming quarters? Larry Wood: Yes. No, we tried to guide that for the full year, we're going to be 1:1 on handpieces, and we still remain very confident that that's going to be the case. And I think the bottom line is we have -- if we're 95%, I'm not going to really apologize for it. And if we're 105%, we're not going to brag about it. I think handpiece sales are always going to fluctuate a little bit based on the number of systems we launch and all these other sorts of things. So I think that it's normalized. The number that we're focused on are procedures because eventually, procedures and handpiece sales have to equalize out over time. It's not going to be about how much inventory people carry. It's going to be how many procedures we drive. So we feel like that is largely normalized now, but we remain confident in the 1:1 full year ratio that we provided at our investor conference. Operator: And our next question comes from Mike Kratky of Leerink Partners. Michael Kratky: Maybe just one quick one. You mentioned the $450,000 to $460,000. Was that the full year average? Or was that for the remainder of the year? Kevin Waters: I would classify that as for the remainder of the year. You could put in -- that puts the full year average more towards the upper end, probably around $460,000 when you average that out, Mike. Larry Wood: Yes. And just to add to that, part of our thinking on this is we didn't have a lot of big IDN orders in Q1. And when we get larger IDN orders, that can sometimes have a little bit more effect on price. But I think even broader than that, we don't want to get out over our skis on ASP commitments because there are certain places where we want to maintain some flexibility. But we are driving price discipline across the organization, and we're going to continue to do that. Michael Kratky: Understood. And maybe just as a quick follow-up. But Kevin, totally appreciate your comments on the prudence and maybe some conservatism for now given it's early in the year, but you're reiterating your U.S. systems revenue guidance in the backdrop of the higher ASPs. Is there anything fundamental from a number of units sold perspective that is maybe changing? Or is this really just as usual? Kevin Waters: Look, I don't think it's changing, but I definitely believe the Q1 performance gives us greater conviction and confidence around achieving our full year guide. That should be implied with our performance. But at the same time, we're just coming off a Q4 shortfall. We're coming off a commercial realignment. And we just want to make sure that we maintain current expectations and not get out over our skis, as Larry mentioned, but our confidence in executing the full year on systems, particularly with the Q1 performance is higher today than it was when we gave guidance in February. Operator: And our next question comes from Richard Newitter of Truist. Richard Newitter: Maybe just to start, I'm trying to get a sense for -- of the new initiatives or the kind of the way you're approaching the market and the selling organization that you outlined. Can you highlight where you're seeing or where we should expect to see the proof points or the benefits show up fastest? Like are there -- I think there were 3 main ones that you had. Like where are you seeing the improvements show up most meaningfully and soonest? And I get that you're pointing more to the back half, but I'm just curious where it's most evident that the progress is going the way you want it to be going in the first half? Larry Wood: Well, I think we have a lot of confidence in our launch teams. I think we moved some of our more senior people over there with a lot of experience. And I think the key thing there is the more systems we put in the field that we do under the launch team model, which is going to build throughout the year that we will continue to see benefit of that. And I think that's one that we have great confidence in. The patient awareness activities, we're running multiple pilots on that. And when those pilots read out, it will help us really prioritize what things are most effective and what things we should be driving. And I think that's just a prudent way to approach some of these new marketing programs. But I think it's also really important for people to understand that there's always just going to be a lag between driving patient awareness and a patient getting a procedure. It's not that patient gets new information, they get an e-mail, they see something on social media or maybe they hear a radio ad and they show up at a doctor and they get treated the next day. They have to come in, they have to schedule their appointment, they have to go to work up. I think most systems in the country probably schedule people a month out or so. So there's always going to be a natural lag between some of these initiatives and actually seeing the patients get treated. But we're encouraged by all of the things. I think we spend a lot of time with the sales team, and I think people have good conviction about the changes we've made and the new roles that we have for people. But it still just takes time for people to reestablish account relationships and to get some of the new people trained to backfill some of the launch teams. But I think these are all very natural things. They're not like -- they're not things that we think are going to be a struggle, but that's why we've always modeled, and we tried to be really clear about this at the investor conference. These things are going to contribute more in the back half of the year than they are in the early part of the year. Richard Newitter: Got it. That's really helpful. And then just -- this is now the first quarter or the first few months that you've been able to really see how physicians would react to kind of the physician fee payment changes that happen to all respective procedures going down, including yours. I guess what are you hearing and seeing out there? Do you feel better or worse unchanged versus kind of the way you were talking to us before we obviously have these changes in place. Larry Wood: I think we had pretty much factored those things in, in February when we spoke before. And I don't think anything has remarkably changed from what we talked about in February. I think the economics for all these procedures are what they are. It is really about driving the clinical benefit and making sure patients understand how differentiated our procedure is versus competitive procedures. And I think when physicians understand that as well and patients understand it, I think that's what drives therapy adoption and taking share from competitive procedures. But I don't think anything has meaningfully changed on that. Operator: And our next question comes from Josh Jennings of TD Cowen. Joshua Jennings: Nice to see the solid start to the year. I wanted to start off and just follow up on the reimbursement question. And just is there any way you could help us frame up the potential for Aquablation procedure to kind of move up in the APC level as we go through these proposed rules and then final rules over the next couple of months? Larry Wood: Yes. We haven't built that into our modeling. And I think one of the important things to remember, Josh, is that even when these codes change, they always collect actual costs. Medicare doesn't pay for value, they pay for resource consumption. And so that's just not -- I think if you make our economics the primary part of the story here, you're always going to be sort of chasing those ghost. So what we're focused on is at the current levels of reimbursement exists, how is this an economically solid procedure for hospitals and then how do we drive patients in. And I think the other part about it is how do we help hospitals be efficient with the procedure? How do we help them be efficient with procedure time? How do we help them be efficient with discharge, be efficient in avoiding complications. And when we do that, I think the economics for this procedure work well. But we haven't factored anything into our guidance about changing APC levels. If that happened, it would be certainly an upside to reimbursement. Joshua Jennings: And then just a follow-up. Sorry if I missed this in the earlier remarks, but sounds like there was more positive reception than anticipated for replacement systems, Hydros replacements. Any new outlook just in terms of how replacements kind of factor into -- through the rest of 2026? And maybe just remind us why you expect replacements to pick up next year. Larry Wood: Yes. Thanks, Josh. Yes, I think just in simplest terms, given a typical capital cycle, and we just really launched our replacement program kind of at the beginning of the year, the fact that we got 2 replacements already in, I think we were very encouraged by. And I think we've had a lot of customers now that they realize they can get a trade-in value for their legacy system, which helps them with a replacement strategy. I think we just probably feel confident that replacements are going to be something that we're going to really hone the program in this year. And I think it's going to be a much bigger part of our story in 2027. But we're encouraged with our early start, and we just got to continue to drive execution on that. Operator: And our next question comes from Chris Pasquale of Nephron Research. Christopher Pasquale: Besides all the moving pieces you guys had going on, there was also quite a bit of severe weather during the quarter. These cases are reschedulable if the need arises. Did you see procedures getting pushed from 1Q into 2Q because of that? Or was all of that disruption sort of contained within February and March? Larry Wood: Yes. Thanks. Chris, I mean certainly, there were some severe weather in the year, and we know that there are some case cancellations and whatnot. How many of those cases came back on the schedule and how many of those patients got something else. I think it would be really difficult for us to say. I think most of that's probably out of the system at this point because most of that happened early in the quarter. I don't think it materially impacted our quarter. And I'm sort of just not really inclined to attribute anything to weather or weather-related issues. Our numbers are our numbers. They have to stand alone. If there's severe weather and cases get canceled, it's our team job to make sure that they get rescheduled and they get done. So we just don't really make any allowances for that here and just keep people focused on the execution that we control. Christopher Pasquale: Yes. Fair enough. I'd love to hear a little bit more about the U.K. opportunity and what that looks like. International, small part of the business today has been a consistent outperformer. Can you talk a little bit about sort of what you think the denominator is for that particular market? And are there other areas that you're excited about in terms of next steps internationally? Larry Wood: Yes. When I stepped into the role, I really felt there's opportunities in international. But international isn't a very homogeneous place. There's a lot of variation, obviously. And so some countries have really solid reimbursement and the capital opportunities there are solid. And so we focus on those places and the U.K. is certainly our biggest place in Europe. We were excited to launch Hydros. I think we had a great showing at the AUA and combined with the latest guidelines, I think it was an overall very positive meeting for us. We continue to evaluate what other markets in Europe that we should be looking at as opportunities, but it's not going to be everywhere. But I think over time, it's Europe and international is going to become a bigger and bigger part of our story, but that's going to just take time to develop. Operator: And our next question comes from Stephanie Elghazi of Bank of America Securities. Stephanie Piazzola: I wanted to ask on Q1 procedures were a little light of the Street and grew 31%, and you're still expecting a ramp in procedures to 50% growth in the second half. So can you remind us what's driving that acceleration and your confidence in that? Larry Wood: Yes. Thanks for the question. I think we always expected the first half of the year to be slower than the second half of the year. And we always expect to see a little bit of seasonality in Q1, and we certainly did see that, but it was pretty much at expected levels. We implemented all of our organization changes in the sales force early in the year. And so people are growing into those roles and they're reestablishing account management. The launch teams are starting to launch systems under the launch team model. They started in the quarter. But it takes time for those to build and for those to contribute. So I think it is a combination of people maturing the roles, reestablishing these account relationships. I think in the back half of the year, we start seeing more benefit from some of our patient activation activities. And I think we get the full benefit of all of our newly launched systems this year and those contributing at a higher level than what we've seen historically. But the more systems you place under that model and the better they do, the more that builds for the back half of the year. So that's what's driving that. Stephanie Piazzola: Got it. And then on the Q2 guidance, the midpoint of $93 million is a little below the Street at $95 million. So maybe could you help us understand that? I'm just curious what's changed on your view of Q2, maybe it's some of what you had just talked about, but is there more lingering disruption from the commercial organization changes than you thought or anything else? Kevin Waters: No, this is Kevin. Nothing has really changed in our thinking. If anything, as I said earlier, I think we feel more positive in our initial guide today than we did when we provided that a few months ago. And we have never provided Q2 guidance as part of Investor Day. So this is really the first time and really just sticking with the philosophy right now that we think it's prudent to keep expectations reasonable and give us a chance to outperform as opposed to getting out ahead of ourselves. But there's nothing unique or different in Q2, and we continue to feel good about the trajectory on both systems, procedures and our international business. Operator: And our next question comes from Suraj Kalia of Oppenheimer. Suraj Kalia: Larry, Kevin, congrats on a good start to the year. So Larry, a lot of commentary on handpieces and procedures. Maybe if I could ask one question slightly differently. So of the 47 (sic) [ 49 ] Hydros systems, right, you've given your site numbers in the U.S. Our rough math, Larry, is suggesting it's around the 17-ish number of procedures per site per quarter, roughly in that ballpark. Maybe if you could talk to what are you seeing in utilization in your sites? Where do you think your share capture is within those sites? And is this the bogey that we should be thinking about as we map out the year and new store same-store sales? Larry Wood: Yes. Thanks for the question. We talked about this a little bit at the investor conference. Our sites are highly variable. And so trying to create averages and trying to create average utilization, especially when we have a mix of AQUABEAM and a mix of Hydros. And going forward, we're going to have a mix of kind of our launch team launch systems and some of our legacy systems. I just think it's hard to be able to create an average. And I appreciate why everybody wants to do that because it's easy to just plug into a formula. But I think what people should be focused on is just our pure procedure growth. We put our procedure numbers that we expect to do this year. We put our ASP numbers, we put our system numbers on the board, and that's what we just have to go drive to. So the key for us is showing growth quarter-over-quarter on our procedure growth. And that's what we're going to be driving to. And I think I'm certainly not focusing the team on -- go to our lowest utilization places and trying to bring into the mean. We map out literally every system in the country and say, where are the biggest opportunities, where are their under-usage, where are there share shifts, where are there motivated people. And so that's just our focus. But I would just continue to focus on procedure growth quarter-over-quarter. Suraj Kalia: Fair enough. And Larry, one follow-up question on WATER IV. So you'll have a readout in spring '27. Let's assume it's positive, right? Logic tells you there would be a collateral pull-through both on the BPH side and on the prostate cancer side, right? But Larry, should we think about, is it going to be a symmetric payoff? Or do you envision there could be some level of asymmetricity? In other words, let's say, superiority, there is some kink somewhere. Does it impact BPH? So how are you all thinking about that? Larry Wood: Yes. That question may be about my education level. I'll say like I don't know the WATER IV data. Nobody knows the WATER IV data at this point. And I don't want to speculate about data. But I think just broadly speaking, the more positive that data is, the more disruptive it has the potential for being -- for patients with prostate cancer. And obviously, anybody that already has a system that's already trained would be able to adapt quickly to treating those patients, and we would certainly do everything we could to facilitate that. But I think it's just going to matter most of the strength of the data and how doctors interpret that as it relates to where this fits in treating patients with prostate cancer. All of those things being said, we think it's a perfect adjacency for us. It's rare that you can get this kind of leverage out of the same exact system, the same exact handpiece and largely the same users, and that gives us leverage all of our sales force as well. So we're just focused on running a great trial and then presenting that data when it comes out at AUA next year. And we're all cautiously optimistic it's going to be positive. But we'll have a lot more view once the data is public and we can talk about it and be more granular. Operator: And our next question comes from David Rescott of R.W. Baird. David Rescott: I wanted to ask on procedure utilization. I think at the -- I recall at the Analyst Day, you had called out different levels of procedure contribution from that class of systems sold pre-'25, those sold in '25 and those expected to be sold in 2026. And so just curious on the progress you've seen so far in Q1, maybe how that level of contribution from the different groups have stacked up relative to your initial expectations? And then what your expectations are through the rest of the year from that segmentation perspective to get to the lower end, the midpoint or upper end of the procedure guide for the year? Larry Wood: Yes. I'll just say that we're still early in the launch model and the ability of those systems to contribute significantly to our overall total number is just very limited at this point. I will say we remain extremely confident in the launch team model. And I think when we saw the readout from our pilot that we shared at the investor conference, and I think we -- for all the same reasons, we continue to believe that, that's going to be a very important part of our story. And it really just comes down to making sure as many systems we sell as possible start off great because our view is when they start off great, they tend to stay great. And they tend to get established and they become a huge part of how BPH gets treated in those accounts. But we don't want to get too far ahead of ourselves, and I think it's too early to declare victory on any of our programs yet. We just remain laser-focused on all of them and making sure we're tracking the metrics. We're tracking the progress that we're making, and we're driving our procedure numbers and doing that to the very best of our ability. So that's our focus now. We're just sort of head down and trying to drive the organizational excellence that we need to get where we need to go. David Rescott: Okay. And then maybe on this system ASP in the U.S. that you delivered in the quarter and then the subsequent guide through the remainder of the year. You called out this pricing discipline maybe as being a factor for the higher ASPs you saw in the first quarter, but obviously also shows that there clearly is an appetite maybe at least from the centers' perspective of paying a higher price for some of these systems. So maybe can you help reconcile why the guide for the second half of the year -- or sorry, for the remainder of the year would assume an ASP below what you delivered in the first quarter? And is there a potential for what you saw in Q1 to maybe be a more realistic number as you go through the year from a system ASP perspective? Larry Wood: Yes. I think as Kevin said earlier, a little bit of it comes down to customer mix. We talked about it a little bit in our Q4 number. We had probably more IDN sales in Q4. And so that took our ASP down a little bit from what we've seen earlier in the year last year, and we had less IDNs in Q1. We are going to continue to drive price discipline, and we're going to continue to try to get the highest ASP that we can, and we think our value proposition is very strong. But we don't want to react to one quarter and get out over our skis for what the whole year ASP is going to be. So what we're just trying to do is be measured about that. And that's why Kevin covered that we're now thinking that you can model at $450,000 to $460,000 for the remainder of the year, and we think that that's a good modeling number. We'll certainly update that quarter or next quarter where we land. And depending on how that quarter lands, I think it will give us a lot more confidence in how durable the pricing ASP is going to be. But I'm very pleased overall with the operational discipline that we're showing. We guided -- if you go back and look at handpieces, we guided handpieces this year that you should model in $3,500. We were able to achieve that in Q1. And so I think that bodes well for us for the rest of the year. We're going to continue to drive that same sort of transition on systems. But as Kevin and I both said, we just don't want to get out ahead of ourselves. Operator: And our next question comes from Mason Carrico of Stephens. Mason Carrico: I'll keep it to one. Could you characterize, I guess, what percentage of the sales funnel today is being driven more by bottoms-up surgeon champion versus top-down admin of these larger systems? Are you seeing the new launch team attract more surgeon champions to deals that are sourced top down today versus, I guess, where you guys were 6 months ago? Larry Wood: Well, yes, I'll start and then maybe I'll ask Kevin to add a little bit of color because he's very deep on our capital cycle and for some of those things. One of the things that is core to what we're doing on the capital side, though, is we don't want to sell a system to anybody, frankly, if there's not a surgeon champion who's established. We want people to always be standing on the dock waiting for the system. We want to have our launch team ready to go. We want to have patients prescreened and we want to drive that system very, very quickly. And I think historically, we just were much looser on that process. If somebody wanted to buy a robot and we haven't identified a champion yet, it showed up on the dock, then the team would start working on that process. And now we just have a much more integrated approach on that, of making sure like when we sell a system that there's a home for it and there's a champion who's ready to go, and then we bring the launch team in and we try to drive case excellence from the very first cases we do with that system and try to establish it as a core therapy within their urology program. And I just think we're just so much tighter about that now organizationally, and we're still building that muscle that that's going to be what I think really differentiates the organizational performance as we move through time. I'll ask if Kevin wants to add anything on customer mix or some of these other things. Kevin Waters: Yes. I'll just add a follow-up point that I think it is a common misconception where we have said and we are seeing great relationships now with the top down with large IDNs. But at the same time, that does not mean we don't have the bottoms-up surgeon support within that IDN network. But historically, we only had the surgeon support, whereas now we're definitely being viewed as a viable technology across a much broader hospital network. And that is what we're seeing. But to remind you, our Q1 results did not have any of those large IDN sales. So that's just another factor as well that gives us confidence in the full year system guidance. Larry Wood: Yes. I guess just to finish the thought, it's really both. If you have top-level administrative support, you don't have a surgeon champion, you can get the capital sale, but you're not going to get the pull-through on procedures that you want. If you have a surgeon champion that you don't have the administration that's supporting, bringing a new therapy in, then you're going to struggle with the capital sale and that cycle is going to go a lot longer. And I think what we're just really trying to do is just be super integrated about that and drive to where we have both pieces of those puzzles because when those 2 things come together really strongly, I think that's where we really drive utilization to where we want it to be. Operator: And our next question comes from Brandon Vazquez of William Blair. Max Kruszeski: It's Max on for Brandon. I'll just do one quick one as well. First quarter gross margin was 65%. You guys reiterated the full year expectation of about 65%. Can you just walk us through some of the puts and takes given some of the revenue mix and ASP dynamics on the year and how that relates to gross margin and how we should be thinking about cadence for the rest of the year? Kevin Waters: Yes, I can walk you through the year. Good question. So you pointed out in Q1, we did deliver 65% gross margin. That was driven sequentially by higher handpiece and system pricing and just our overall ability to leverage our overhead expenses. And as we move throughout the year, Q2 and Q3, you should think of very modest expansion in the next 2 quarters, somewhere in the 10 to 20 basis point range over the next 2 quarters. But when you get to the fourth quarter, you have a multitude of factors. You have favorable revenue mix towards higher-margin handpieces. We have improved overhead absorption. And then just in general, we have total revenues, and we should be exiting the year in the 66-plus percent range, but that will still translate to a full year margin at 65%. And definitely coming off of Q1, landing at our full year guide in Q1 at 65% gives us a greater degree of comfort with our full year margin guidance. Operator: Thank you. This concludes our question-and-answer session and also today's conference call. Thank you for participating, and you may now disconnect.
perator: Good day, and thank you for standing by. Welcome to the Constellium First Quarter 2026 Results 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, Jason Hershiser, Director of Investor Relations. Please go ahead. Jason Hershiser: Thank you, Shannon. I would like to welcome everyone to our first quarter 2026 earnings call. On the call today, we have our Chief Executive Officer, Ingrid Joerg; and our Chief Financial Officer, Jack Guo. After the presentation, we will have a Q&A session. A copy of the slide presentation for today's call is available on our website at constellium.com, and today's call is being recorded. Before we begin, I'd like to encourage everyone to visit the company's website and take a look at our recent filings. Today's call may include forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Such statements include statements regarding the company's anticipated financial and operating performance, future events and expectations and may involve known and unknown risks and uncertainties. For a summary of specific risk factors that could cause results to differ materially from those expressed in the forward-looking statements, please refer to the factors presented under the heading Risk Factors in our annual report on Form 10-K. All information in this presentation is as of the date of the presentation. We undertake no obligation to update or revise any forward-looking statement as a result of new information, future events or otherwise, except as required by law. In addition, today's presentation includes information regarding certain non-GAAP financial measures. Please see the reconciliations of non-GAAP financial measures attached in today's slide presentation, which supplement our GAAP disclosures. And with that, I would now like to hand the call over to Ingrid. Ingrid Joerg: Thanks, Jason. Good morning, good afternoon, everyone, and thank you for your interest in Constellium. Before we start, I wanted to say we are very pleased with our first quarter performance, including record adjusted EBITDA. We are also raising our outlook for the full year and expect 2026 to be a record year for the company, both in terms of adjusted EBITDA and free cash flow. Okay. Let's begin on Slide 5 and discuss the highlights from our first quarter performance. I would like to start with safety, our #1 priority. We delivered strong safety performance in the first quarter with a recordable case rate of 1.16 per million hours worked versus 1.91 in 2025. Despite this strong achievement, our safety journey is never complete. We remain focused on this critical priority every day, including achieving our safety target to reduce our annual recordable case rate to 1.5 per million hours worked. Turning to our financial results. Shipments were 370,000 tons in the first quarter as higher shipments in A&T were offset by lower shipments in PARP and AS&I. Revenue of $2.5 billion increased 24% compared to the first quarter of 2025 due to the higher revenue per ton, including higher metal prices. Remember, while our revenues are affected by changes in metal prices, we operate a pass-through business model, which minimizes our exposure to metal price risk. Our net income was $196 million in the quarter compared to net income of $38 million in the first quarter last year. The main drivers of the increase were higher gross profit and favorable changes in other gains and losses in the quarter versus last year. Compared to the first quarter last year, adjusted EBITDA increased 93% to $359 million in the first quarter this year, so this includes a positive noncash impact from metal price lag of $97 million. If we exclude the impact of metal price lag, which, as you know, is the way we view the real economic performance of our business, we achieved an adjusted EBITDA of $262 million in the quarter. This represents an all-time record for the company and is up 78% versus the $147 million in the first quarter last year. Adjusted EBITDA was up in each of our operating segments in the quarter versus last year, including a new quarterly record for PARP and a new first quarter record for A&T. Our free cash flow was $5 million in the quarter. And during the quarter, we returned $28 million to shareholders through the repurchase of 1.2 million shares. In March, we announced that our Board approved a new $300 million share repurchase program that expires in December 2028 and that will replace our existing program following our Annual Shareholders Meeting this May. We delivered strong results this quarter, which were ahead of our own expectations despite macroeconomic and geopolitical uncertainties. During the quarter, we benefited from current market dynamics, including supply shortages of automotive rolled products in North America, improved aerospace and TID environment and highly favorable scrap and metal dynamics in North America. Before turning the call over to Jack, I wanted to make a few comments regarding the expected impact from the conflict in the Middle East. In terms of metal supply, we do source some metal from the Middle East today, both slabs and billets, but they represent a small percentage of our overall needs. As such, we believe the impact on metal supply for us is limited at this stage, and we should be able to resource through a combination of internal and external metal flows. On energy, most of our energy costs are locked in for 2026. For the small portion, which we chose to leave open, the impact of higher energy costs should be modest. In other cost categories, we are beginning to see some inflationary pressures in freight, lubricants and coatings, but we expect the net impact from this to be manageable. We currently do not expect any impact on our supply chain from lack of freight capacity. In terms of other indirect impacts from the Middle East conflict, we have not seen much end market disruption at this stage, so we will continue to monitor it closely. To wrap up on this topic, the overall impact from the conflict in the Middle East appears digestible at this point. The longer-term impacts remain uncertain and difficult to predict, but we are confident in our ability to manage our business in any environment. With that, I will now hand the call over to Jack for further details on our financial performance. Jack Guo: Thank you, Ingrid, and thank you, everyone, for joining the call today. Please turn now to Slide 7, and let's focus on our A&T segment performance. Adjusted EBITDA of $102 million increased 24% compared to the first quarter last year and represents a new first quarter record for A&T. Volume was a tailwind of $32 million due to higher shipments in both Aerospace and TID. Aerospace shipments started the year strong and were up 13% in the quarter versus last year. TID shipments were up 18% versus last year as we continue to see increased demand from onshoring in the U.S. TID also benefited from automotive coil shipments from Ravenswood due to the current supply disruption in automotive rolled products in North America. Price and mix was a headwind of $2 million due to unfavorable mix in the quarter, mostly offset by improved contractual and spot pricing in Aerospace and TID. Costs were a headwind of $16 million, primarily as a result of higher operating costs given higher activity levels. FX and other was a tailwind of $6 million in the quarter due to the weaker U.S. dollar. Now turn to Slide 8, and let's focus on our PARP segment performance. Adjusted EBITDA of $151 million increased 152% compared to the first quarter last year and is a new quarterly record for PARP. Volume was a headwind of $6 million in the quarter as higher automotive shipments were more than offset by lower packaging shipments. Packaging shipments decreased 6% in the quarter versus last year, though underlying packaging demand remained healthy in both North America and Europe. Automotive shipments increased 12% in the quarter as we benefited from the current supply shortages in North America of aluminum automotive body sheet. Price and mix was a tailwind of $26 million as a result of improved pricing and favorable mix in the quarter. Costs were a tailwind of $65 million, primarily as a result of favorable metal costs given higher throughput and improved productivity in our recycling and casting operations, continued improvement in scrap spreads and significantly higher metal pricing environment in North America. FX and other was a tailwind of $6 million in the quarter. Now turn to Slide 9, and let's focus on the AS&I segment. Adjusted EBITDA of $24 million increased 50% compared to the first quarter last year. Volume was a $4 million headwind as a result of lower shipments in automotive and industry extruded products. Automotive shipments were down 3% in the quarter, mainly due to weakness in Europe. Even though the automotive markets in North America are relatively stable, our automotive structures business was negatively affected by the current supply shortages of aluminum automotive body sheet and its impact on production of certain platforms in the region. Industry shipments were down 5% in the quarter versus last year, though industrial markets in Europe have stabilized at these low levels. Price and mix was a $2 million headwind in the quarter. Costs were a tailwind of $11 million, primarily due to lower operating costs. FX and other was a tailwind of $3 million in the quarter. It is not on the slide here, but our holdings and corporate expense was $15 million in the quarter. Holdings and corporate expense was up $4 million from last year due to higher labor costs and unfavorable foreign exchange translation. As we said last quarter, we expect holdings and corporate expense to run at approximately $50 million in 2026. It is also not on the slide here, but I wanted to summarize the current cost environment we're facing. As you know, we operate a pass-through business model, so we're not materially exposed to changes in the market price of primary aluminum, our largest cost input. On other metal costs, which includes our recycling profits, we have seen unprecedented levels of volatility over the last 18 months. Following the U.S. tariff announcement in 2025, market aluminum prices in the U.S., which includes the LME aluminum price plus the Midwest Premium have risen sharply to historical levels. The current conflict in the Middle East has put additional upward pressure on global market aluminum prices. Spot scrap spreads for aluminum, mainly used beverage cans or UBCs, have also improved to historically wide levels in the spot market today. Both of these dynamics represent a sharp contrast from the lower metal price environment and historically tight scrap spread levels we experienced in the second half of 2024 and through the first half of 2025, during which period we were negatively impacted. As discussed last quarter, we benefited from the improvement in scrap and metal pricing environment in the fourth quarter last year, and we saw more benefits in the first quarter this year. Looking ahead, most of our scrap needs in the second quarter are locked in at favorable levels, and our team is working tirelessly to secure additional scrap supply for the second half in an environment that remains volatile. It is important to bear in mind that recycling is core to what we do as it takes a significant amount of investments and know-how, and we are focused on making the best out of the current favorable conditions and delivering a strong return on our recycling investments for our shareholders. Moving on from metal costs. Inflationary pressures continue today across multiple operating cost categories, including labor, energy, maintenance and supplies, albeit at more normal levels. As Ingrid mentioned previously, we're beginning to see some elevated inflationary pressures in other categories such as freight, lubricants and coatings as a result of the conflict in the Middle East, though we expect the net impact from this to be digestible at this point. Regarding tariffs, we have made progress on pass-throughs and other actions to mitigate a portion of our gross tariff exposure, and we believe at this stage, our direct tariff exposure remains manageable and is consistent with our prior expectations. The indirect positive impacts from the tariffs continue to ramp up, including higher demand for U.S. domestically produced aluminum products, a more favorable pricing environment compared to expensive imports and improved recycling process in the U.S. Put it all together, we continue to believe that the current tariff and trade policies should be a net positive for us. All of the known tariff impacts, both direct and indirect and all of our mitigation efforts to offset the direct impacts are included in our guidance today. Wrapping up on costs, we have demonstrated strong cost performance in the past, and we're confident in our ability to maintain a right-sized cost structure in any environment. Now let's turn to Slide 10 and discuss our free cash flow. We generated $5 million of free cash flow in the first quarter. The increase in free cash flow versus 2025 was primarily a result of higher segment adjusted EBITDA, partially offset by an unfavorable change in working capital and higher capital expenditures. Looking at 2026, we now expect to generate free cash flow in excess of $275 million for the full year. We expect CapEx to be approximately $330 million, which is up from $315 million previously. Unchanged from previous guidance, CapEx still includes approximately $100 million of return-seeking CapEx, primarily related to key aerospace and recycling and casting projects we announced previously at Issoire, Muscle Shoals and Ravvenwood. We expect cash interest of approximately $125 million, in line with prior guidance and cash taxes of approximately $80 million, up slightly from prior guidance, mainly due to the expected increase in profitability for the year. We expect working capital and other to be a larger use of cash for the full year than prior guidance, mainly due to higher metal prices. We expect to use the free cash flow generated this year for our share repurchase program and for gross debt reduction. As Ingrid mentioned previously, we continued our share buyback activities in the quarter. During the quarter, we repurchased 1.2 million shares for $28 million. Since we started the share repurchase program, we have repurchased 14.7 million shares for $221 million. Also, as Ingrid said earlier, in March, we announced that our Board approved a new $300 million share repurchase program that expires in December 2028, and that will replace our existing program following our Annual Shareholders Meeting this May. Now let's turn to Slide 11 and discuss our balance sheet and liquidity position. At the end of the first quarter, our net debt of $1.8 billion was stable compared to the end of 2025. We reduced our leverage to 2.2x at the end of the quarter, which is within our target range. We expect leverage to trend lower in 2026 and to maintain our target leverage range of 1.5x to 2.5x over time. As you can see in our debt summary, we have no bond maturities until 2028, and our liquidity increased by $38 million from the end of 2025 and remains very strong at $904 million as of the end of the first quarter. With that, I'll now hand the call over to Ingrid. Ingrid Joerg: Thank you, Jack. Let's turn now to Slide #13 and discuss our current end market outlook. The majority of our portfolio today is serving end markets benefiting from durable and attractive secular growth trends in which aluminum, a light and infinitely recyclable material plays a critical role. Turning first to the aerospace market. Commercial aircraft backlogs are at record levels today and continue to grow. Major aerospace OEMs remain focused on increasing build rates for both narrow and wide-body aircraft. This is evidenced by higher plane deliveries year-over-year and rising delivery ambitions in the near term. Although supply chain challenges have continued to slow deliveries below what OEMs were expecting for several years in a row now, demand is steady for the most part and aluminum destocking in the supply chain appears to be easing. Demand for high value-add products, which is one of our core focus areas, remains strong. We remain confident that the long-term fundamentals driving commercial aerospace demand remain intact, including growing passenger traffic and greater demand for new, more fuel-efficient aircraft. In addition, demand remains stable in the business and regional jet market, whereas demand for space and military aircraft is strengthening. We believe we are a leading provider of proprietary aluminum solutions for those customers in the space and military aviation markets today. As you know, we are investing in additional capacities and capabilities, such as our third Airware casthouse in Issoire, which we expect to start up by the end of this year to further strengthen our position in the future. Looking across our entire commercial and military aviation and space businesses, we believe our product portfolio is unmatched in the industry, and we have industry-leading R&D capabilities for aluminum aerospace solutions. Turning now to packaging. Demand remains healthy in both North America and Europe. The long-term outlook for packaging continues to be favorable as evidenced by the growing consumer preference for the sustainable aluminum beverage can, capacity growth plans from the can makers in both regions and the greenfield investments ongoing here in the U.S. We continue to see aluminum gain share against other substrates in the beverage market and the majority of new beverage products are launched in aluminum cans today due to its sustainable attributes. Aluminum cans are highly recyclable, and we are well positioned to capitalize on the benefits from recycling packaging materials at our facilities in Muscle Shoals and Neuf-Brisach. Packaging markets are relatively stable and recession resilient as we have seen many times in the past. Longer term, we continue to expect packaging markets to grow low to mid-single digits in both North America and Europe, providing a strong baseload for our operations in both regions. Let's turn now to automotive, which continues to be a bit of a different story in North America versus Europe. In North America, demand is relatively stable, though the tariff environment continues to create some uncertainty. Last year, a U.S.-based facility at one of our competitors was impacted by fire, a very unfortunate event and which has created an interruption in the aluminum rolled product supply chain in North America. The entire industry continues to mobilize to ensure we limit the impact on our customers. We continue to benefit from this in the first quarter this year in both our PARP and A&T businesses as we were able to help our customers during this outage. On the automotive structures side, we are negatively impacted as some OEMs were forced to reduce production on certain platforms impacted by the disruption on the rolled product side. The overall impact in 2026 is a net positive on our results, which we expect to continue throughout the year. Automotive demand in Europe remains weak, particularly in the premium vehicle segment where we have greater exposure. European markets are seeing increased Chinese competition and have lowered their BEV ambitions. Automotive production in Europe is also feeling the impact of the current Section 232 auto tariffs, given the number of vehicles Europe exports to the U.S. Longer term, though, we believe electric and hybrid vehicles will continue to grow, but at a lower rate than previously expected. Secular trends such as lightweighting, fuel efficiency and safety will continue to drive the demand for aluminum products. As a result, we remain positive on this market over the longer term in both regions despite the weakness we are seeing today. As you can see on the page, these 3 core end markets represent over 80% of our last 12 months revenue. Turning lastly to other specialties. These markets are typically dependent upon the health of the industrial economies in each region, including drivers like the interest rate environment, industrial production levels and consumer spending patterns. Industrial market conditions in North America and Europe became more stable in the second half of 2025, and we believe the markets, particularly in Europe, have bottomed after 3 years of market downturn. Nevertheless, we expect the specialties markets in Europe to remain relatively weak in the near term. We do believe TID markets in North America provide us with some opportunities today given the current tariffs make imports less competitive compared to domestic production. We also believe there are some opportunities in land-based defense and semiconductor markets given current market dynamics. As you know, we are focused on niche high value-added applications in most industrial markets. To conclude on the end markets, we like the fundamentals in each of the markets we serve, and we strongly believe that the diversification of our end markets is an asset for the company in any environment. Turning lastly now to Slide 14, we detail our key messages and financial guidance. Our team delivered strong first quarter results that were ahead of our expectations despite macroeconomic and geopolitical uncertainties. We achieved record quarterly adjusted EBITDA, and we returned $28 million to shareholders with the repurchase of 1.2 million shares. I want to thank each of our Constellium team members for their continued focus on strong cost control, free cash flow generation and commercial and capital discipline. Based on our current outlook for 2026, we are now targeting adjusted EBITDA, excluding the noncash impact of metal price lag in the range of $900 million to $940 million and free cash flow in excess of $275 million. Our guidance for 2026 assumes that favorable market conditions will continue into the rest of 2026. These include benefiting from the current supply shortages of automotive rolled products in North America, and improved aerospace and TID environment and favorable scrap and metal dynamics in North America. Our guidance also assumes the recent demand trends in our end markets that I described earlier will continue and the overall macroeconomic environment to remain relatively stable. Looking to the future, we remain laser-focused on executing our road map to delivering adjusted EBITDA, excluding the noncash impact of metal price lag of $900 million and free cash flow of $300 million by 2028. The key drivers behind these targets compared to 2026 performance include executing on various return-seeking CapEx projects, strong cost control and productivity improvements, including our Vision 2028 program and continued price discipline. Our 2028 targets also assume additional growth in markets such as aerospace, TID and packaging. As a reminder, these targets do not include the favorable scrap spread environment we are seeing today or the benefits we expect in 2026 from the current supply shortages of automotive rolled products in North America. To conclude, we are extremely well positioned for long-term success and remain focused on executing our strategy and shareholder value creation. With that, operator, we will now open the Q&A session. Operator: [Operator Instructions] Our first question comes from the line of Corinne Blanchard with Deutsche Bank. Corinne Blanchard: Congratulations. This is a very strong quarter and an amazing lift for the guidance. That being said, so I have a few questions around the cadence maybe that we can expect, especially 2Q versus the second half of 2026. And then the second part of the question would be, can you help us bridge 2027 and 2028. I know Ingrid and Jack, you mentioned that there is no tailwind from the current scrap spread environment. But how do we think about '27 and '28? Do we think of it as EBITDA slightly flat or going down in '27 and then going up again in '28? So that would be very helpful. Ingrid Joerg: First of all, thank you very much, Corinne, and thank you for your questions. I'll start on the first one on the cadence, and then I'll let Jack complete on it. You know that traditionally, our first half of the year is much stronger. We have seasonality in our earnings, but driven by volumes in our respective end markets, particularly the second quarter tends to be quite strong on the packaging side. And then we have higher costs in the second half of the year because of our annual outages in the summer period and around the Christmas period where we do our major maintenance work, which is also driving additional cost and I'll let Jack compete on the sequence of earnings. Jack Guo: Yes. So that's exactly right. And Q2 tends to be seasonally the strongest quarter in the year, and that's our expectation for the time being. And I think just looking ahead, we have good momentum in the business. We have good visibility into the second quarter. Now the macro environment, the geopolitical environment is very volatile, as all of you know, so there's higher degrees of kind of uncertainty, which may impact -- may or may not impact the broader demand in the second half. Ingrid Joerg: Okay. As it relates to our targets for 2028, I think you have to see 2027 as a transition year in the execution of our strategic milestones that we presented some time ago. 2027, we will see the complete ramp-up of our recycling center in Neuf-Brisach. We will have our DC casting pit in Muscle Shoals ramping up in 2027 as well as our Airware casthouse investment, which will start up at the end of this year. So those investments are going to be complete or will start up. So we will have a kind of transition results. We also still believe that 2027 will see a little bit of strength on the aerospace side as destocking may come to an end. I think we all know that the supply chain remains challenged, also particularly on the engine side. But we believe 2027 could be a turning point. Packaging is expected to remain strong and TID North America is also going to be stronger in 2027 from what we can see today. I think on the drawbacks potentially, we don't know the full impact of the Middle East crisis today. We talked about inflationary pressures that we are seeing today. But the end market impact from the Middle East crisis that the longer it lasts may have some impact on some of our markets, and that really remains to be seen. We do not expect any improvement on the automotive side. We expect 2027 to be rather weak on automotive, particularly in Europe and maybe a little bit better in North America. I think these are the puts and takes for the 2027, which is really a transition year to our 2028 guidance. Corinne Blanchard: That's very helpful. Maybe if I may, just quickly, like on aerospace, I know you commented and we saw some new contracts being signed. Can you just talk about expectation or your view on volume versus the high margin that you're getting from [ TID ]? Like how do we think about it for the rest of the year? Ingrid Joerg: Yes. So the contract that we just announced is a multiyear contract with Airbus that is covering various extruded products delivered from our French operations, including some proprietary materials like our Airware aluminum-lithium technology. And it's really cementing the good relationship and partnership that we have with Airbus for a very long period of time. It's more to be seen as a continuation and strong mix for our extrusion business for the future. Operator: Our next question comes from the line of Katja Jancic with BMO Capital Markets. Katja Jancic: Maybe staying on the '26 guide. Jack, you mentioned that your scrap is secured or locked in for 2Q, but that your team is still looking to lock in some for the second half of the year. Can you talk about what does your guide assume for scrap spreads for the rest of the year? Or how should we think about it? Jack Guo: Yes, sure. So the second quarter, as we said, is essentially locked in at this stage. It's important to kind of remain focused on -- for us to remain focused on productivity and operational excellence. And in terms of the economics, if you will, the UBC spread is more favorable in the second quarter compared to our experience, what we experienced in the first quarter. And our assumption is the metal price conditions, which is pretty much at the all-time high, are expected to remain quite elevated, at least over the short term. Now moving to the second half of the year, over -- I would say, over 50% of the needs are locked in at this stage. So there's still quite a bit that's open. The market remains, as you know, highly dynamic where you can use volatile as a word, right? And there are a number of factors that could drive you to a different set of scenarios. So there's a high degree of variation potentially. But for the remaining volume for our guide, we took sort of a middle of the road approach, that's still above our prior expectations for the second half. But it's not as aggressive as the first half of '26, but it's not nearly as conservative as what we have experienced in the second half of 2024 and through most part of 2025. Katja Jancic: Okay. And then maybe your free cash flow generation is going to increase in the rest of the year versus the first quarter. You've been buying back shares. Is there an opportunity for you to accelerate the buybacks versus what you did in the first quarter? Or how are you thinking about it? Jack Guo: Yes. So it's a good question. So number one, I think when it comes to the buyback or just overall capital allocation, our approach has always been kind of maintain a balanced approach. Now more specifically with the share buyback, we're comfortable with the existing pace of running the buyback program. And as a reminder, it's $300 million over 3 years and having a steady pace has worked for us in the past, and we still view buying back shares as attractive. So we look to maintain this similar type of pace going forward. Operator: Our next question comes from the line of Bill Peterson with JPMorgan. William Peterson: Congrats on the strong results and raise. I wanted to ask actually a question, I don't think you really talked about during your prepared remarks. There have been some changes in the Section 232 derivative tariffs. I'm wondering how you're thinking about the potential impacts and how that may have on your business, whether it be supporting prices? Or what are you hearing from your customers on this front? Ingrid Joerg: Thanks for the question, and thank you, Bill, for your comment. I think the last changes on the Section 232 do not really impact us. We have a very, very minor impact in our AS&I business. But overall, it's just a confirmation that tariffs are going to stick. And so we think the indirect benefits of Section 232 will continue for us. So no changes in our other businesses. William Peterson: And then on automotive, you've mentioned about the U.S. being better than Europe, and I think you've benefited somewhat at the margin from the unfortunate incident that you talked about. Is that -- should that benefit really be, in your view, concluded in the second quarter? Or how are you thinking about the cadence of automotive for the remainder of the year, both in PARP and AS&I? Ingrid Joerg: Yes. So I think on the PARP side, we are, at this stage, pretty confident that the benefits we have been seeing from the outage is going to continue. We are supplying basically from Europe. We are maxing out capacity in the U.S., and we are supplying material also from Ravenswood to feed into our rolling system so we can maximize overall capacity. That is allowing us to gain additional qualifications and supporting, obviously, the relationships with customers beyond what we are experiencing today. AS&I is mostly impacted by slower ramp-up of production from -- on a certain platform. And we have no clear visibility of how the full year is going to look. But the impact of it, financially speaking, is rather minor for the company. And it is actually, if you think about the net impact, it remains largely very, very positive. Operator: [Operator Instructions] Our next question comes from the line of Timna Tanners with Wells Fargo. Timna Tanners: I just wanted to drill down a little bit more on some of the discussion about the European market, in particular on the auto side. So getting some questions about the BYD getting built in Europe and the implications for Constellium and any thoughts on aluminum versus steel consumption there and in the U.S. given some reports of switching? Ingrid Joerg: Thank you for the question, Timna. So I think on the European automotive market, it's true that BYD has announced building production in Hungary and in Turkey, if you consider the wider Europe. But the cars that they are building have much more content of steel in the body of the car. So we don't really expect much impact in this. I mean our focus in Europe is mostly on premium vehicles with the German OEMs, but also others. And we do not see any impact at this point. We're also producing mostly local for local, right? We're not generally shipping automotive material across. In the U.S., with respect to switching, we have not seen any evidence of people switching other than normal course of business. So we really expect that the need for fuel efficiency is going to continue. And this is what we see on both sides of the Atlantic. Timna Tanners: Okay. Regarding the scrap spreads, if they persist at these levels, is there a much ability to increase the proportion of your product that's made from scrap? Meaning can you try to expand that production, especially given the tight markets that could persist in the broader U.S. and I guess, Europe? Ingrid Joerg: I'll start and then I'll let Jack continue. So in fact, all of our businesses are using scrap. We mostly talk about UBC for the packaging market, but we're also using a lot of scrap in the rest of our operations. So certainly, with everything that's going on in the market, we have already been working in improving our metal costs through usage of more scrap and different types of scrap and also more difficult types of scrap. You know that the industry is moving towards upcycling scrap streams that exist in the market through sorting technologies, and we are actively involved in this as well. But we also recycle material for our aerospace business, for TID business. And also on the extrusion side, we have a share of recycled content in all of the alloys that we produce today. Jack Guo: And just more broadly speaking, I mean, recycling and casting is core to what we do. So if you look at our capital expenditure profile, especially when it comes to return-seeking CapEx is going towards recycling and casting investment. So that's definitely a focus area for us, Timna. Timna Tanners: Can you quantify any of your ability to expand recycling, again, given that we may have shortages of billet and the market has gotten quite tight there with the smelter disruptions. Is there any ability to expand the amount of finished aluminum you produce using scrap? Ingrid Joerg: I wouldn't say that the shortage of primary aluminum is the main driver for us. I think it's an ongoing program where we continue to use as much scrap as we can find in the market in the alloys and the shapes that are available in the market. So it's quite volatile as well because not every scrap can go somewhere. But it's a focus of us for many, many years already to optimize as much as we can. But it's very much dependent on availability of the right type of scrap in the right moment. So we have potential to improve, but it would be not additional casting output, if you want. It would be a lower metal cost because we would be replacing prime metal with scrap in our operations. Operator: And I'm currently showing no further questions at this time. I'd like to turn the call back over to Ingrid Joerg, CEO of Constellium for closing remarks. Ingrid Joerg: Thank you. Well, thank you, everybody, for your interest in Constellium. As you can see, we are off to a very strong start to the year. We delivered record performance in the first quarter and increased our outlook for 2026. We are very happy with the steps we are making towards our 2028 targets, and we look forward to updating you on our progress in July. Thank you very much. Operator: This concludes today's conference. Thank you for your participation. You may now disconnect.
Operator: Good day, and welcome to the Blackstone Mortgage Trust First Quarter 2026 Investor Call. Today's conference is being recorded. [Operator Instructions]. At this time, I'd like to turn the conference over to Tim Hayes, Vice President, Shareholder Relations. Please go ahead. Timothy Hayes: Good morning, and welcome, everyone, to Blackstone Mortgage Trust's First Quarter 2026 Earnings Conference Call. I'm joined today by Tim Johnson, Chief Executive Officer; Austin Pena, President; and Marcin Urbaszek, Chief Financial Officer. This morning, we filed our 10-Q and issued a press release with the presentation of our results, which are available on our website and have been filed with the SEC. I'd like to remind everyone that today's call may include forward-looking statements, which are subject to risks, uncertainties and other factors outside of the company's control. Actual results may differ materially. For a discussion of some of the risks that could affect results, please see the Risk Factors section of our most recent 10-K. We do not undertake any duty to update forward-looking statements. We will also refer to certain non-GAAP measures on this call. And for reconciliations, you should refer to the press release and 10-Q. This audiocast is copyrighted material of Blackstone Mortgage Trust and may not be duplicated without our consent. For the first quarter, we reported a GAAP net loss of $0.04 per share, while distributable earnings were $0.21 per share and distributable earnings prior to realized gains and losses were $0.49 per share. A few weeks ago, we paid a dividend of $0.47 per share with respect to the first quarter. With that, I'll now turn the call over to Tim. Timothy Johnson: Thanks, Tim. BXMT's first quarter results clearly demonstrate the breadth of our platform and our ability to execute on both sides of the balance sheet amidst an ongoing real estate recovery. Our key competitive advantages drove distributable earnings prior to realized gains and losses of $0.49 per share, marking our third consecutive quarter of dividend coverage. We leveraged our scale and proprietary sourcing channels to capture attractive investments across a range of sectors, markets and strategies, with a focus on several of our highest conviction themes such as diversified industrial portfolios and essential use net lease properties. We also closed our first data center loan this quarter and invested in a diversified portfolio of low leverage loans originated by a leading U.K. bank, investments offering compelling relative value, which Austin will detail further in his remarks. Real estate fundamentals continue to recover, benefiting from steadily increasing values and the sharp decline in new supply across all major property types. The public equity markets recognize this, with REITs significantly outperforming the S&P 500 year-to-date. And despite recent global volatility driven by the conflict in the Middle East, real estate equity and debt markets have remained resilient. U.S. CMBS issuance is up nearly 15% from this time last year and on pace for yet another post-GFC record and spreads hit 15 basis points tighter compared to the beginning of the year. In Europe, we've observed a slightly larger impact with a slowdown in CMBS new issue activity and spreads modestly wider. However, real estate lending markets in the region remain open and active. Just a few weeks ago, we were fully repaid on a GBP 177 million U.K. student housing loan that was refinanced by a bank syndicate and we are aware of several other large recently awarded deals in the market. Importantly, we've observed no change in the fundamental performance across our U.K. and Europe portfolio. Today, BXMT is in an advantageous position. We have a well-invested portfolio generating strong in-place current income, allowing us to maximize return on new capital deployment. Leveraging our scaled platform of over 170 real estate debt professionals, we cast a wide net across the global real estate credit markets, both in terms of sourcing new opportunities and also driving strong capital markets execution, setting up diversified investments to generate highly compelling risk-adjusted returns. To that end, our investments this quarter generated levered returns of 900 basis points over base rates, in line with our investment activity over the past year. We also accretively refinanced $700 million of corporate debt issued $1.3 billion of securitized debt and added a new non-mark-to-market credit facility to our 16 counterparty complex, all further demonstrating the strength and creativity of our dedicated capital markets team. Moving to the portfolio. We continue to be pleased with performance. We received over $600 million of repayments with more than half in U.S. office. We resolved on impaired hospitality loan via foreclosure and we executed on the sale of a multifamily property, the first from our owned real estate portfolio to be capitalized on the supportive capital markets backdrop. While there is more work to do, including the eventual disposition of the remainder of our owned real estate portfolio, the trend in our business is now crystal clear. Resolutions and redeployment are driving earnings that cover our dividend and offer investors an attractive current yield of approximately 9.5%. These initiatives are supported by a compelling real estate credit backdrop with loans secured by hard assets property value is still early in their recovery and spreads still wide relative to other credit alternatives. With this setup, BXMT continues to be exceptionally well positioned with unique insights from our Blackstone real estate platform guiding our strategy and delivering strong results for our investors. I'll now turn it over to Austin to discuss our investments and portfolio in more detail. Austin Pena: Thanks, Tim. Our investment portfolio ended the quarter at just under $20 billion, consistent with year-end as the funding of new investments largely offset repayments collected in the quarter. Our loan portfolio comprises approximately 87% of our investments with our fixed rate and longer duration strategies like net lease and bank loan portfolios, representing 6% and our owned real estate accounting for the remainder. The broad capabilities of our platform were on full display in the first quarter as we closed $540 million of new investments across various geographies and strategies. Q1 investments included $275 million of loan originations with a weighted average LTV of 68%. The GBP 50 million investment in the U.K. bank loan portfolio that Tim mentioned earlier, and $197 million of net lease acquisitions at BXMT share, our most active quarter in net lease to date. Our loan originations were largely concentrated in residential and industrial, sectors with strong underlying fundamentals, where we continue to orient our investment strategy. Of note, we financed several of our Q1 originations through the syndication market on a nonrecourse non-mark-to-market basis, reflecting the sold positions, which are not included on our balance sheet, gross loan originations were over $800 million in the quarter. And our forward pipeline remains strong with over $1 billion closed during closing so far in the second quarter. As Tim mentioned, we closed our first data center loan in BXMT, financing a stabilized asset in Northern Virginia. 100% leased to an investment-grade hyperscale tenant and owned by an experienced sponsor. Leveraging our scale and capital markets capabilities, we originated a fixed rate whole loan and syndicated the senior mortgage, generating a mezzanine loan with a 14% all-in yield and 4.5 years of call protection. With $150 billion of data center assets owned and under development, Blackstone is the largest financial investor in data centers globally. As a result, BXMT sits in an extraordinary position to identify and underwrite investments in this space. With the AI megatrend driving unprecedented demand for compute and supporting critical infrastructure, we see more opportunities in this sector on the horizon. We also made a GBP 50 million investment in a portfolio of granular high cash flowing U.K. bank loans. The loans are backed by over 3,000 properties, primarily in the residential and industrial sectors with a weighted average LTV below 50%. Like the portfolios we acquired from U.S. banks last year, this investment adds diversification and duration with an underwritten term of over 5 years. The investment was sourced leveraging Blackstone's strong relationship with the bank, yet another example of our access to differentiated investments across the world. Our loan portfolio ended the quarter at $16.4 billion across 130 loans with more than 50% in multifamily and industrial and was 98% performing. We upgraded 4 loans this quarter. Additionally, post quarter end, the largest loan in our watch list, our Spanish residential NPL loan was modified, significantly enhancing our credit position. The modification includes a spread reduction and maturity extension in exchange for meaningful additional commitment and credit support from the borrower. As a reminder, this loan has repaid by more than EUR 550 million since origination, including another EUR 20 million last quarter as the borrower sells the underlying collateral. The loan remains performing, paying interest current, and we expect it to continue to pay down over time. We also added 2 office loans to our watch list and impaired 2 loans this quarter, booking modest additional reserves. Both were previously on our watch list. One was our only studio loan, a sector that has faced significant headwinds. Of note, this loan represents less than 1% of our portfolio and is secured by a 25-acre campus centrally located in Los Angeles, across the street from one of the most productive retail assets in the country, providing significant optionality and redevelopment potential. The other loan is secured by a portfolio of 1980s vintage multifamily properties located in Dallas originated in 2022. Older vintage properties in Sunbelt markets like this, have been impacted by a combination of elevated new supply and weaker demand, a different profile than the vast majority of our multifamily portfolio, which continues to attract strong demand and demonstrate steady performance. Across our 46 multifamily loans, we have just 6 with a similar profile, just 2% of our portfolio. One is on our watch list and the rest are all Risk Rated 3 and carry in-place debt yields north of 6%. We continue to make good progress on our own real estate as we leverage our platform to maximize values over time. As we've said in the past, we are not a forced seller. With our strong balance sheet, liquidity and earnings supporting our dividend, we can be patient. We make hold versus sell decisions like we do across our real estate business, using our data, insights and asset class expertise to underwrite go-forward returns compared to where we can reinvest. This quarter, we saw several positive developments. We sold 1 multifamily asset in Texas in line with our carrying value. We hit a key milestone on our Mountain View office asset, where we received local approvals to redevelop the site into for-sale residential, bringing us one step closer to unlocking significant value potential. And our fully renovated Hyatt Hotel in San Francisco continued to see improving performance as Q1 EBITDA more than doubled year-over-year. Finally, turning to net lease. Our portfolio continues to scale, reaching $516 million at share at quarter end, up from $66 million this time last year and with another $120 million in closing. Our dedicated team has assembled a high-quality portfolio, acquiring 260 assets at an average price of $2 million at a discount to replacement cost. The portfolio generates 3x rent coverage with 2% annual rent escalators and lease terms extending over 15 years on average. We believe our net lease strategy continues to provide compelling relative value in today's investment environment, naturally complementing our floating rate lending strategy with long duration, contractually increasing cash flow driving strong current returns. Overall, BXMT continues to demonstrate positive momentum, capturing diversified investments to drive strong earnings power and dividend coverage, underpinned by an investment strategy designed to deliver strong long-term performance for our investors. And with that, I will pass it over to Marcin to unpack our financial results. Marcin Urbaszek: Thank you, Austin, and good morning, everyone. In the first quarter, BXMT reported GAAP net loss of $0.04 per share and distributable earnings or DE of $0.21 per share. DE included $46 million of realized losses related to the resolution of an impaired San Francisco hotel loan. We foreclosed on the property and now hold it on the balance sheet as owned real estate with our basis representing an approximate 70% discount relative to the prior owner's cost basis. DE prior to realized gains and losses was $0.49 per share, covering our dividend for the third consecutive quarter. The $0.02 decline in this metric from the prior quarter was largely due to lower net operating income from owned real estate, reflecting the outsized seasonal benefit from hospitality properties recognized in the fourth quarter results which we discussed on our last earnings call. It is worth noting that we slightly amended our DE prior charge-offs metrics this quarter to DE prior to realized gains and losses. This amendment reflects the evolving composition of our portfolio, though the spirit of the metric remains unchanged, which is to provide investors with a measure that we believe represents the ongoing earnings power of our business. Our owned real estate portfolio generated $14 million of NOI this quarter and included a $3 million tax refund on one of our properties. Excluding this benefit, this represents an annualized asset yield on carrying value of approximately 3.5%, which we estimate is 250 to 300 basis points below yields we are achieving on new originations today. While some asset sales will take longer than others, rotating this capital provides further support to BXMT's earnings power over time. Book value ended the first quarter at $20.20 per share down modestly by 2.7% from the prior period, primarily due to a $0.33 per share increase in CECL reserves and $0.13 per share of depreciation and amortization or D&A related to our owned real estate assets. In total, book value includes $0.57 per share of accumulated D&A and $1.80 per share of total CECL reserves of which $1.30 per share is attributable to the general reserve. Turning to BXMT's capitalization. Our balance sheet remains in excellent shape. We ended the quarter with $1 billion of liquidity. Our Q1 debt-to-equity ratio decreased to 3.7x from 3.9x in Q4 and remains squarely within our target range. We were very active in the capital markets this quarter, taking advantage of robust liquidity and investor demand. We started by repricing approximately $700 million of our corporate term loan in early January, reducing our financing spread by 50 basis points. As a result of our proactive approach over the past few quarters, we ended Q1 with 4 years of weighted average remaining term on our corporate debt with no maturities until 2027. Later in January, we issued our second reinvesting CLO, a $1 billion transaction, largely collateralized by new vintage investments. Reflecting this issuance and the addition of the new lending facility Tim mentioned earlier, total nonmark-to-market borrowings now represent about 86% of total debt. and we continue to have no capital markets mark-to-market provisions throughout our capital structure. In March, we closed our inaugural asset-backed securitization in our net lease joint venture. The transaction was met with exceptional investor demand and was several times oversubscribed driving an accretive execution and resulting in highly compelling structure and terms. And lastly, as Austin mentioned earlier, we also executed several senior loan syndications with attractive terms, underscoring our broad access to various sources of capital, which we believe is one of our key competitive advantages in the market. The benefits of our leading global real estate platform are driving results on both sides of our balance sheet and help position BXMT to deliver attractive risk-adjusted returns to our investors over time. Thank you again for joining us today, and I will now ask the operator to open the call to questions. Operator: [Operator Instructions]. We will take our first question from Tom Catherwood with BTIG. Thomas Catherwood: Austin, maybe starting with you, I know loan originations can be lumpy quarter-to-quarter. But was Q1 activity impacted primarily by the timing of closings? Or was it just with more activity pushed into the second quarter? Or was there something else driving the relatively slower pace in the first quarter? Austin Pena: Yes. Thanks, Tom. Yes, I think there is always a little bit, as you said, of changes quarter-to-quarter in terms of origination volatility and a bit of seasonality that can impact those quarter-to-quarter numbers. As I mentioned earlier in my prepared remarks, when you look at our investment activity this quarter, there was a good amount of mezzanine loans or loans that we financed through the syndication market, which is not included in the roughly $0.5 billion that we mentioned in our reporting. And so when you gross up for those syndicated interests, the quarter was a pretty regular quarter in terms of overall lending activity. And as I also mentioned, we have a very good pipeline, over $1 billion for the second quarter. So I wouldn't read too much into the overall activity this quarter. I think it was a pretty regular quarter in terms of what we typically see and we continue to have a really good opportunity set that we're looking at. Thomas Catherwood: Got it. And very fair point on the syndications, I had not taken that into account. And then maybe turning over to the net lease side of the business, so which has now become a not insignificant part of the portfolio. Kind of 2 questions there, pipeline-wise, you mentioned $125 million in closing. How large -- what's the target that you have internally for that over the near term? And then the second part to it is, this is a competitive sector. It seems like everyone is out chasing net lease deals, be they other alternative asset managers or the REITs. What is it about this platform that's allowed it to do $500 million or I guess that's only your share. So north of probably $700 million of acquisitions in the past year alone. Austin Pena: Yes, thanks. It's a really good question. And as you noted, and as we noted earlier, we had a really active quarter in net lease this quarter, about $200 million of investments at our share and we've assembled what we think is a really great portfolio over the last year or so since we started this business. We do intend to grow this part of our balance sheet and our portfolio to about 3% of the overall portfolio today. And obviously, we look at risk-adjusted returns when we're looking at these investments relative to other things that we can do in terms of allocating our capital, but we would be very happy if this could become at least 10% of our portfolio over time. In terms of what we see in the marketplace today, as you say, there are a lot of players, but we think we have an excellent team. We have a dedicated team of experienced individuals led by someone who has been in this space for 30 or so years, they are finding, we think, really attractive investments. It is a granular investment profile, as I mentioned, about $2 million per property. So it really takes a lot of experience and relationships to identify investments. And when you look at the portfolio that we've assembled, as I mentioned earlier, over 15 years of duration, 2% rent escalators over 3x coverage. We really like that profile. We think it really complements our floating rate lending business, adding duration, adding an upward sloping set of cash flows that we think really provides a very nice complement to the other side of our business. Operator: We'll take our next question from Rick Shane with JPMorgan. Richard Shane: Look, you have 2 loans on your -- in your top 10 that are maturing this year. New York multiuse in Chicago office. One is rated 3, one is rated 4. Can you just talk a little bit about your strategy on those maturities and what we should expect? Austin Pena: Yes. Thanks, Rick. I can take that. I'd say we take a very active approach across our portfolio. We're obviously in conversations with our borrowers about their plans in terms of capital markets execution, really all the time. We go through every loan, every quarter. In terms of those specific deals without getting into specifics, we have dialogue with our borrowers around what their plans might be and I think we'll take a very proactive approach to the extent that their plans are evolving, we will be quite active on that approach. Richard Shane: Okay. I understand you need to be a little bit circumspect on that -- I get it. Second thing is you work through resolutions within the portfolio, and it sounds like you're going to be pretty aggressive there. What should we think about as the sort of ambient CECL reserve rate, general reserve for new originations, so we can sort of think about over time what the convergence back to general reserves would be. Marcin Urbaszek: Rick, it's Marcin. Thanks for joining us. Look, I think our general reserve right now, obviously, there's a lot of factors that go into it. It's somewhere around 100 to 120 basis points. Obviously, that's driven by, like I said, the age of the portfolio, historical loss rates and things like that. So we don't see that changing dramatically. Obviously, as we work through the resolutions and the realized losses become a little bit of a smaller factor over time that might decline. But again, in the near term, we don't see that changing dramatically. Operator: We'll take our next question from Chris Muller with Citizens Capital Markets. Christopher Muller: I'm hopping around calls this morning, so I apologize if I missed any of this. But I wanted to ask about the bank loan portfolio acquisitions. I guess what is driving these? Are the banks approaching you guys to reduce their CRE exposure? And do you expect more of this over 2026? Timothy Johnson: Sure. Thanks, Chris. This is Tim. I'd say it's a bit multi-dimensional. It can depend on the situation, the bank loan portfolio. This quarter was a little bit different in its structure as an SRT structure versus an outright acquisition. So in some cases, it's a capital relief transaction. In some cases, it's driven by M&A activity which we would say is probably the main driver between -- in terms of the portfolio loan sale activity. That's banks in the United States, predominantly going through M&A, a lot of it kind of the fallout from what happened in the regional banking industry in 2023. And that M&A activity tends to accelerate loan sale activity. So I'd say that's the biggest driver, but it does come from a few different dimensions. And I'd say from a sourcing standpoint, this is one of the main areas we spend our time on, both within our real estate debt business and broadly at the firm is working with financial institutions to help deliver them solutions across not just real estate, but the entirety of their credit portfolio. So it's a very, I'd say, diversified ecosystem of sourcing and really built on the banking relationships we have at the firm over a really long time. Christopher Muller: Got it. That's very helpful. And then I guess just a high-level one. The 10-year keeps creeping higher. It's at [ $4.38 ] right now. How is that impacting borrower sentiment that you guys are seeing? Timothy Johnson: Yes, I'd say in terms of borrower sentiment, the good news is that even though the tenure has moved up really as a result of the Mid East conflict and energy prices, the capital markets continue to be very, very active. CMBS issuance this year is up 15% on top of a year last year that was a post-GFC high. So we continue to see borrowers coming to the market. And I think that it might put a little bit of a potential slowdown on sales of real estate. That would be something that you might keep an eye on. But in terms of the credit markets, year-to-date CMBS spreads are actually 15 basis points tighter and so there's good credit availability and good capital availability. So borrowers are able to refinance their debt today and are doing so quite actively. Operator: We'll take our next question from Jade Rahmani with KBW. Jade Rahmani: Can you give any further color on what drove the $55 million CECL provision perhaps you could parse out how much ballpark related to the studio downgrade and what the outlook is there? Marcin Urbaszek: Sure, Jade. It's Marcin. Out of the $55 million, I would say about 20% of that was general -- general reserve and then the rest was on the specific. We don't want to get specific on particular assets. But I think if you look at what was added to the specific pool quarter-over-quarter vis-a-vis the impairments we had. These reserves are obviously a little bit smaller in terms of what we've seen in the past. Obviously, one of the assets is a multifamily. The other one, like you said, is a studio loan. So again, but I don't want to get into particular loans and specifics, but the reserves this quarter were pretty modest. Austin Pena: Thanks, Marcin. It's Austin here. I would also add, Jade, as we mentioned, obviously, you commented a bit on the nature of the loans in my prepared remarks. I think both of these loans were a little bit idiosyncratic in terms of our portfolio. As I mentioned, it's our only studio loan, the multifamily loan had an older vintage asset in a market that's been a bit more impacted by elevated supply, which is quite different from sort of the rest of the portfolio. So I think that's really what's driving things here. So I just wanted to add that additional commentary. Jade Rahmani: On the REO portfolio, can you give any updated thoughts as to time line for resolution. Would you expect to resolve 40%, 50% this year? Or should we think about a more extended time line than that? Austin Pena: Yes, thanks, Jade, obviously, that's a moving -- that's something we look at and we're very focused on exiting those REO assets over time. But as I said earlier in my remarks, we are not going to be a fore seller. We're not going to -- we're going to take a patient approach in terms of a long-term goal of maximizing value for investors. As I said earlier, we had a number of positive developments in terms of a few assets that have been making good progress towards getting to that place in terms of our ultimate exit plans. I mentioned the hotel in San Francisco that's seen good performance, positive elements on the Mountain View office asset. That obviously helps with moving towards that goal. I really wouldn't give a specific time line because I think we're going to be patient, as I said. But obviously, we're focused on exiting that over time because, as Marcin mentioned earlier, we do think that these assets are -- while generating cash flow today, rotating that capital over time will unlock additional earnings power for the business. Operator: We'll take our next question from Harsh Hemnani with Green Street. Harsh Hemnani: I guess, in terms of the SRT transaction, could you provide some details on where the underlying collateral of this loan portfolio is based geography wise? Austin Pena: Yes. Thanks, Harsh. This is Austin. I mentioned a few things in my prepared remarks. As I mentioned, it's a very granular portfolio. It is with a leading U.K. bank. So it's a U.K. focused portfolio, largely diversified across a lot of top markets in that area. What we really like about all of these bank loan transactions that we've completed, including this one, is the fact that these are low leverage, high cash flowing loans with a lot of diversification. And they're originated by banks and they're priced accordingly and they allow us -- these transactions allow us to invest in real estate credit that is at a lower risk tranche than we would typically see in terms of our direct originations, but still generate really attractive returns. And so if you look at the return that we think we're getting here, we think it represents a very compelling risk-adjusted return and a premium to where similar risk tranches would be available in sort of other credit alternatives. Harsh Hemnani: Got it. That's helpful. And then understanding that you can't touch on any specific deal. But maybe more generally, when you're underwriting stabilized data center assets, is it probably fair to assume that the spread on the whole loan may not be adequate to meet your return hurdles? And if we see more data center deals, it would be more similar to what we've seen this quarter where maybe you're retaining a subordinated position in the loan? Austin Pena: Yes. I would say, obviously, we're very excited and about the first data center loan that we're making. We think the space overall is going to grow. We do see a lot of opportunities and the capital needs across the data center sector, we do think it's going to mean, we're going to see more opportunities over time. I think we're going to be very thoughtful about where the opportunities work for us, both from a credit perspective as well as a return perspective. I think the deal you saw us do this quarter reflects our creativity and how to access that market and generate returns that we believe are really quite compelling and certainly meet our return requirements. I think as we look forward, because of the capital needs of the space, we think that there's going to be a growing demand for capital from groups like us. To date, a lot of the activity in the market has been done by the bank market or in other forms of the public markets, but the capital needs, we think, are going to mean there's going to be more things that fit our profile. Harsh Hemnani: Got it. That's helpful. Maybe 1 last 1 for me. I might have missed this, but of course, there's about $1 billion that's closed or in closing post quarter end. Could you maybe share how that breaks down between net lease bank loans and internally originated loans? Austin Pena: I would say it's pretty diversified, Harsh. We continue to see good opportunities, as I mentioned, $120 million that's in our net lease pipeline right now, not sure all of that $120 million will close in the second quarter. That's a little bit timing dependent. But we really -- when we look at our pipeline, it's still quite diversified across profile. And look, quarter-to-quarter, the composition of the investments are going to change. I think what our team is really focused on is really finding the best opportunities out there. Operator: We'll take our last question from Don Fandetti with Wells Fargo. Donald Fandetti: Can you just talk a little bit about what you're seeing in the office market. It looks like you added 2 office loans to the watch list, but also getting repaid as well. So maybe just kind of give us your thoughts. Timothy Johnson: Yes, I'd say it's relatively consistent with what it's been in prior quarters. As you noted, we had a little bit of movement in our portfolio in terms of risk ratings related to office, but I think relatively small in total. And I'd say that broadly, leasing activity market by market, of course, but broadly, leasing activity is picking up and liquidity in the capital markets, debt capital availability, et cetera, continues to be generally on a positive trend. So I'd say the fundamentals although still quite challenged relative to what they've been historically are improving and the capital markets activity continues to be solid and improving as well. Operator: Thank you. That will conclude our question-and-answer session. At this time, I'd like to turn the call back over to Tim Hayes for any additional or closing remarks. Timothy Hayes: Yes. Thank you, Katy, and to everyone joining today's call. Please reach out with any questions.
Operator: Greetings, and welcome to the PureTech Health 2025 Annual Results Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Allison Mead Talbot, Senior Vice President of Communications. Thank you, Allison. You may begin. Allison Talbot: Thank you, everyone, for joining us for PureTech's 2026 Annual Results Webcast. Our annual report will be made available later today, portions of which are also filed with our Form 20-F. This information is available on the Investors page of our website at puretechhealth.com. I would like to remind you that during today's call, we will be making certain forward-looking statements. These statements are subject to various risks, uncertainties and assumptions that could cause our actual results to differ materially, and we ask that you refer to our annual report and our SEC filings for a complete discussion of these items. We undertake no obligation to revise or update any forward-looking statements or information, except as required by law. I also want to remind you that we will be referring to certain non-IFRS measures in this presentation. The presentation of this non-IFRS financial information is not intended to be considered in iCeleation or as a substitute for financial information presented in accordance with IFRS. A reconciliation of the IFRS to non-IFRS measures that we will be referring to today can be found in this presentation and is also available on our Investor Relations website at investors.puretechhealth.com and in our SEC filings. I'm joined today by members of our senior management team: Robert Lyne, Chief Executive Officer; Eric Elenko, Co-Founder and President; Chip Sherwood, General Counsel; Michael Inbar, Chief Accounting Officer; as well as Sven Dethlefs, CEO of our founded entity, Celea Therapeutics. Rob and Eric will discuss our strategic vision and path to value creation, including updates across our portfolio and our differentiated innovation engine. They will also provide a deep dive into the Gallop program, review our financial highlights and outline our anticipated catalysts for the remainder of the year. With that, I will now turn the call over to Rob, our Chief Executive Officer. Robert Lyne: Thank you, Allison. Welcome, everyone, and thank you for joining us today. We are at a pivotal moment in the company's trajectory. Having announced our near-term operational focus in December, I'm pleased today to walk you through our refined strategy and portfolio progress. This next phase of our evolution is designed to translate our proven innovation model into greater shareholder value. As a reminder, PureTech is a Boston-based LSE-listed biotherapeutics company operating a hub-and-spoke model with a proven clinical and financial track record. Programs originate within the PureTech hub based on a thesis of targeting molecules with validated pharmacology and are then advanced through early clinical and technical derisking. At defined value inflection points, we scale them through founded entities backed primarily by external capital. This model is both powerful and differentiated for two reasons. First, it improves how we innovate. We focus on opportunities where the underlying mechanism has already shown evidence in humans, allowing us to reduce technical risk while improving probability of success. Secondly, it improves how we allocate capital. By leveraging external capital at the founded entity level, we maintain portfolio breadth, preserve balance sheet strength and retain long-term upside through equity milestones and royalties. Because we develop these programs internally, we typically begin with full ownership of assets and proprietary IP to which we can attach nondilutive milestones and royalties. This means that in contrast to traditional venture capital investors, we do not need to continue to write large checks for every subsequent funding round in order to preserve a meaningful equity stake. Instead, our model allows for prudent equity dilution, allowing us to retain large equity positions in multiple founded entities whilst they diversify their own shareholder registers. Having a balanced shareholder register makes it easier to raise external equity and is vital if our founded entities are to IPO. Throughout this process, our royalties and milestones are protected, providing optionality for derisking ahead of inflection points and preservation of long-term value for PureTech. This result is a model designed to create superior overall financial returns while limiting concentration risk. Through this model, we have developed meaningful clinical and regulatory success. We have generated 3 FDA-approved therapeutics from our innovation engine to date, including the schizophrenia treatment, Cobenfy. We've also achieved substantial cash flow, generating over 1 billion growth from monetization of our economics in our founded entities, all while continuing to build a diversified pipeline of future opportunities. Looking ahead, our focus is clear: sharpen execution, strengthen capital discipline and ensure that PureTech's distinctive model continues to translate breakthrough science into meaningful value for both patients and shareholders. To deliver on our strategy, we have focused on 4 pillars of operational refinement, a streamlined structure. We intend to operate a significantly leaner and more efficient hub following the completion of the CLA financing. As part of this initiative, we announced this morning our intention to voluntarily delist from NASDAQ, recognizing that the vast majority of our trading remains on the LSE some 5 years after our initial NASDAQ list. This step simplifies our structure and reduces cost and administrative burden for the business, whilst retaining our primary London listing, providing access to both U.K. and global investment community. Launching founded entities early. In recent years, we've advanced certain programs further internally before transitioning them to founded entities. While this allows us to retain larger equity stakes, it required greater capital and operational infrastructure at the PureTech hub level. Going forward, we intend to establish and capitalize these entities earlier in the development life cycle once programs have reached key clinical value inflection points. Since return on capital is typically higher early in the cycle, this approach will allow for the creation of a greater number of founded entities. And we believe, therefore, that overall financial performance from the portfolio will improve. A refined innovation focus. Our innovation engine remains the foundation of future growth. Led by my colleague, Eric Elenko, our expanding innovation team continues to progress their work with this goal in -- over the next 3 years, we plan to generate up to 2 development candidates, each of which has the potential to become a new founded entity supported by external capital, allowing us to drive the next wave of growth for PureTech. Moving to capital returns. Finally, this refreshed strategy strengthens our capital discipline and enhances our flexibility. To ensure shareholders benefit directly from our success, we intend to return a greater proportion of future cash generation to shareholders, particularly in the event of an outsized return, whilst maintaining appropriate operational runway for the business. PureTech's value today is underpinned by multiple distinct components. These include our economics in Cobenfy, Seaport Therapeutics, Celea Therapeutics and Gallop Oncology as well as an innovation engine capable of generating future opportunities. We believe this diversified structure is a meaningful strategic advantage and one that is not fully reflected in our current valuation. Across our portfolio, I'm pleased with the progress that was made during 2025 and so far this year. Celea is our most clinically advanced founded entity developing deupirfenidone for the treatment of idiopathic pulmonary fibrosis. Deupirfenidone demonstrated a robust efficacy with the potential to replace standard of care treatments in its Phase IIb trial and is now Phase III ready. I'm pleased to share today that Celea's fundraising is substantially complete, subject to continued negotiations. Plea has secured multiple nonbinding commitments from external investors in addition to participation from PureTech. Whilst mindful of macro factors, Celea is targeting to close the financing by early in the third quarter of 2026. The financing is intended to support the Phase III SURPASS-IPF trial, which Celea expects to commence in close proximity to closing the financing. This would represent an important value inflection point both for Celea and for PureTech. Next is Gallop, which is another founded entity, which we currently own 100% of. Last week, we announced positive top line data from the Phase Ib trial of LYT-200 in relapsed/refractory high-risk myelodysplastic syndrome, or MDS, and relapsed/refractory acute myeloid leukaemia. We are pleased with the data, which guided our strategic focus to advance LYT-200 for relapsed/refractory high-risk MDS. Gallop is now preparing to engage with the FDA regarding a potentially registration-enabling trial design in this indication. As Eric will discuss shortly, we believe Gallop represents another strong example of our model in action, differentiated science, disciplined development and the ability to attract external capital at the appropriate stage. Seaport is our most operating advanced founded entity. The company has progressed 2 clinical trials for neuropsychiatric conditions in 2025 and 2026. And as many of you will have seen, Seaport filed a registration statement for a potential initial public offering on NASDAQ. This progress further validates our ability to create and scale attractive stand-alone biotechnology companies from within the PureTech hub-and-spoke model. Beyond our core founded entities, we also retained rights to Cobenfy, a commercial stage product that originated in our innovation engine. PureTech is a co-inventor of Cobenfy, which we house in a founded entity called Karuna Therapeutics. Karuna was acquired by Bristol-Myers Squib $14 billion, though we continue to hold significant non-dilutive economic rights. Based on current analyst consensus of BMS sales expectations, the projected value of PureTech is approximately $160 million from these rights through 2033. Due to the nature of our Cobenfy economics, we are only exposed to the early performance of Cobenfy sales and any reduction in analyst forecast of early sales, even if modest, can therefore have a material impact on projected inflows. Nonetheless, we expect substantial financial inflows of PureTech from COBENFY and are confident that it will improve the lives of large numbers of patients around the world. Going forward, we intend to provide regular updates to PureTech's economic forecast of Cobenfy sales based upon evolving marketing consensus at important points during our earnings webcast in the future. We also note that any monetization events from any of our funded entities, including the Cobenfy economics, represent pure upside. We do not factor any potential inflows from these entities into our runway assumptions. Indeed, whilst we have the option to collect royalties and milestones as they fall due, we also have the flexibility to monetize such rights ahead of time. This was the case with Cobenfy, where we have already secured approximately $125 million in payments to date from a previous royalty sale. This provided PureTech with capital that is unaffected by future commercial sales fluctuations and demonstrates our disciplined approach to structuring founded entities and managing upside thoughtfully. Beyond these founded entities, we also maintain the interest in what I'll call our legacy holdings. These are historical founded entities that continue to have the potential to be a source of capital to us, but they are not a current focus of our capital allocation, nor do we currently expect them to have a material impact on the overall value of PureTech moving forward. As our founded entities continue to mature and secure external funding, we intend to provide greater transparency around valuation benchmarks where appropriate. This is consistent with our capital-efficient model of maintaining a lean hub while creating value through externally financed founded entities. It also builds on Seaport post-money disclosure, which we introduced last year. Our objective is straightforward: to help investors better model the embedded upside across our portfolio, bridge what we believe is a disconnect between intrinsic value and current market value and ultimately support stronger shareholder returns. As part of this transparency, we are today providing an update on our Q1 cash position with PureTech level cash and cash equivalents as of March 31, '26, standing at approximately $248 million on an unaudited basis. I would now like to welcome Eric Elenko, our Co-Founder and President. It is no overstatement to say that Eric has been instrumental to our many successes to date. He will walk us through the latest progress at Gallop Oncology as well as share what he and the innovation team are currently working towards. Eric Elenko: Thank you, Rob, and thanks for the kind introduction. As Rob mentioned, PureTech is focused on how we translate scientific opportunity into programs that can ultimately deliver a meaningful impact for patients and value for shareholders. At PureTech, that involves both identifying new opportunities and making disciplined decisions about how to advance them, where to focus, how to allocate capital and how to position programs to reach their next value inflection point. Gallop Oncology being a recent example of our disciplined approach. Last week, we announced positive top line results from the Phase Ib trial of LYT-200, which is being developed through our 100% owned subsidiary, Gallop Oncology. I will briefly review the data, but more importantly, what it means for the program and how we are thinking about the path forward. LYT-200 is a monoclonal antibody that targets galectin-9. It is thought to work through 2 complementary mechanisms in the context of the haematological malignancies we studied in our trial. First, it relieves immunosuppression to enable the immune system to act on the cancer cells. Second, it directly kills cancer cells by inducing cell death through DNA damage and apoptosis. The trial was in relapsed/refractory high-risk myelodysplastic syndrome, or MDS, and relapsed/refractory acute myeloid leukaemia or AML, which are closely related to blood cancers where patients unfortunately typically have poor outcomes. The trial evaluated LYT-200 in a dose escalating manner, both as a monotherapy and in combination with a hypomethylating agent or HMA in patients with MDS and in combination with an HMA and venetoclax in patients with AML. All the patients were heavily pretreated. For example, 100% of the MDS patients had previously received an HMA. The objectives of the study were straightforward, establish safety, identify a dose for further development and generate the data needed to determine whether Gallop should prioritize MDS or AML for a subsequent study. We achieved all 3 objectives. LYT-200 had an excellent safety profile with no dose-limiting toxicities or myeloid suppression, which has historically been a challenge in developing treatments for MDS. We also observed a dose-dependent efficacy response and identified 12 mg per kg of LYT-200 as a dose for the next study. The data were strong across both patient populations studied. And importantly, the study provides the clarity needed to define our next step. I want to provide some additional context on how we arrived at the decision to prioritize relapsed/refractory high-risk MDS as our next indication. This decision reflects both the clinical data generated in the study and strategic considerations. Going into the study, we had preclinical data supporting the potential for LYT-200 in AML, whereas MDS is a more challenging setting to study preclinically. AML and MDS are both myeloid malignancies and are closely related. MDS can progress to AML and they share underlying disease biology. Because of this, it's common in early-stage oncology development to evaluate therapies across both populations within a single Phase I study to efficiently assess safety and initial activity. As a result, the trial was designed to generate the clinical data needed to inform indication prioritization. The data were strong in both MDS and AML. Advancing a potentially registrational enabling study requires significant capital and our clinical strategy has to intersect with our financing strategy. We seek to balance dilution for PureTech with ensuring that a founded entity is sufficiently capitalized to reach a meaningful value inflection point. As a result, it is important to prioritize where we believe we can create the greatest near- to medium-term value. If capital were unconstrained, we would consider advancing both MDS and AML in parallel. We decided to prioritize MDS given that it emerged as a particularly compelling opportunity. Historically, nothing has meaningfully moved the needle for patients with relapsed/refractory high-risk MDS following HMA failure. In fact, literature suggests that 0% to 5% of these patients respond if they're treated again with an HMA. Against this backdrop, the activity we observed in this study was particularly encouraging. The broader competitive landscape, both commercially and in terms of clinical trial patient recruitment are also compelling for MDS. There is only one approved drug, which is applicable to only 3% to 5% of the population. An efficacious drug with an excellent safety profile of the type observed in Phase I would have blockbuster potential. And the competitive pipeline is thread there, and therefore, there is less competition to recruit patients compared to AML. At the same time, we continue to believe LYT-200 has broader potential across other haematological malignancies, including AML, which we intend to explore over time. Consistent with this approach, Gallop intends to pursue third-party capital to support a potentially registration-enabling trial in MDS with the majority expected to come from external investors. Our objective is to ensure the program is sufficiently funded to reach a meaningful value inflection point while maintaining discipline around dilution for PureTech. The next step is interacting with the FDA later this year. In parallel, we are actively generating the next set of programs that will form the basis for future founded entities. Historically, many of our programs and PureTech's greatest successes have come from identifying therapies with validated pharmacology and addressing the specific issues that limited their potential. Our founded entities, Karuna Therapeutics, Seaport Therapeutics and Celea Therapeutics all exemplified the approach. Going forward, innovation will focus on validated pharmacology. We have refined and formalized this approach over the last few decades into what we call the light model, launching innovation from existing pharmacology. As shown on this slide, the life model is a systematic framework for identifying areas of high unmet need, selecting drugs with demonstrated human efficacy, understanding what has constrained their full potential and designing targeted solutions to fully unlock their value. We then conduct focused pillar experiments with rigorous predefined success criteria established in advance of data readout to ensure this process remains highly capital efficient. In addition, any solution must support strong intellectual property and be attractive to both physicians and payers. Importantly, this approach allows us to innovate with greater speed, lower technical risk and significantly greater capital efficiency than traditional de novo drug discovery. Using this approach, we expect to focus primarily on small molecules while remaining open to traditional biologics such as antibodies where the opportunity is compelling. While we consider opportunities across a range of therapeutic areas, we anticipate an emphasis on areas of traditional strength such as CNS. Looking ahead, we aim to progress up to three concept stage pharma programs with modest capital deployment. We define a concept stage program as a therapeutic opportunity that has passed initial internal diligence and is continuing to be derisked. We are currently progressing several promising programs to a concept stage process with the goal of nominating up to two development candidates over the next three years that could serve as the basis for future funded entities. Innovation has historically been the foundation of value creation of PureTech. We're excited about leveraging the best approaches we have learned and applying them to develop new therapies that have the potential to help patients and create value for our shareholders. Now I'll turn it back to Rob. Robert Lyne: Thanks, Eric. We are indeed very excited about the potential with Gallop and the work of the innovation team in progressing the next wave of founded entities. Now I'd like to go over our financial highlights. At the PureTech level, we ended 2025 with cash, cash equivalents and short-term instruments of $277.1 million compared to $366.8 million at the end of 2024. On a consolidated basis, our cash, cash equivalents and short-term investments were $277.3 million at the end of '25 compared to $367.3 million at the end of '24. At the PureTech level, as of March 31, '26, we held unaudited cash and cash equivalents of $248.1 million. On a consolidated basis, our cash and cash equivalents were $248.2 million. Based on our existing financial assets as of December 31, '25, we expect to have operational runway at least through the end of 2028, which is inclusive of our expected participation in certain and fundraisings. Our revenues are mostly driven by milestone-based payments and royalties from license agreements and are expected to continue to fluctuate from year-to-year. On a consolidated basis, our revenues in '25 were $4.7 million compared to $4.8 million in 2024. We reported a lower operating loss of $98.5 million in 2025 compared with $136.1 million in 2024. This decrease is largely due to lower G&A expense as a result of the deconsolidation of Seaport in 2024, which reduced workforce-related costs, including payroll and noncash stock-based compensation expenses and new stock awards granted to founders, directors, employees and executives of Seaport in 2024 prior to its deconsolidation. Decrease is also attributed to lower R&D expenses in 2025, mainly as a result of the deconsolidation of Seaport in 2024. On a consolidated basis, we reported a net loss of $110.1 million for 2025 compared to net income of $27.8 million for 2024. The change primarily due to the absence of $151.8 million onetime gain from the Seaport deconsolidation, which was recognized in 2024. By excluding that item, we saw improvement in operating costs in both G&A and R&D, as mentioned above. Looking ahead, we expect to streamline expenses and operate the lean model following the completion of the SLA fundraise in line with our refined strategy. This measured approach allows us to protect our balance sheet and preserve capital flexibility to fund opportunities with asymmetric value potential. In summary, I am pleased with the operational and clinical progress we are making at PureTech and across our founded entities. At the same time, we remain focused on execution. In 2026, our priorities include advancing SLA and Gallop, both operationally and financially, driving value from our founded entities opportunistically and progressing our innovation engine towards new candidate nominations. We believe our refined strategy positions us well to do so with greater focus, discipline and capital efficiency. In closing, I'd like to thank the various stakeholders who make PureTech what it is today, including our team, shareholders and the broader clinical community who are vital to the important work we do. It's a privilege to lead PureTech at this important moment. We have a differentiated model, a strong foundation and meaningful opportunities ahead, and we remain firmly focused on translating that potential into sustained progress and value creation. I'll now turn to the operator to take questions. Operator: [Operator Instructions] Our first question comes from Miles Dixon from Peel Hunt. Miles Dixon: Forgive me if some of the questions go over topics that you've already talked about, my line dropped a few times. But can I just double check on cash, firstly, I mean, it's a change in the guidance from into 2028 to the end of 2028. Can I just double check on two important points. Firstly, this is at least until the end of 2028, subject to further realization and that it's inclusive of any participation, I know as you said, in entity fundraising, but also specifically for Celea, where the trial cost might be slightly higher? That's the first one. Robert Lyne: Myles, thanks for joining. Yes, no, absolutely. As you say, it's at least through 2028, and that reflects the conservative approach that we take to cash runway. So as you say, we don't factor in any realizations into that cash guidance, and we are assuming commitments into SLA and also support for Gallop as well in that runway guidance. Miles Dixon: Brilliant. And then moving on to LYT-100 and Celea. I mean, obviously, the IPF landscape continues to evolve and heat up, suggesting more and more people are looking at it. But -- and clearly, your data today is great, but how are talks progressing with the funding partners? You said you've used the word substantially complete. But can you give us anything on the profile of this potential partner in the endeavor? Or in the earlier comments that we've just made about cash, I'm assuming that the majority of the kind of liability is going to be settled by the partner in this. If you can just give a bit more color, that would be really helpful. Robert Lyne: Yes, absolutely. So as we're updating today, we've made very substantial progress on this fundraise. Obviously, these things are never done until they're done, and there are various things that need to fall into place before we'll be able to announce any completion of the fundraising. However, we've made very substantial progress now, and we have a clear line of sight to getting this done. As you've indicated, Myles, we are looking to raise a very significant amount of capital in this raise, but the majority of that capital is very much coming from external partners, and that is reflecting our model of leveraging external capital whilst providing the commitments that we need in order to maintain meaningful equity stakes in these founded entities. Miles Dixon: Great. And now just moving on to the other exciting bit of clinical data news Gallop Oncology. Eric, I think I caught you talking about the selection of MDS versus AML. And I very much understand that it was about capital. But could I also ask whether there's any read across from trials, whether it be TIBSOVO and this label extension when you were thinking about potential patient cohort size? And should we make any read across from that? I think it was 170-patient expansion from AML into MDS for TIBSOVO. Eric Elenko: Yes. Myles, thanks for the question. We're prioritizing MDS because of the very compelling clinical data. And really, as you indicated, there's really only the one drug approved in the relapsed/refractory population, which is TIBSOVO. And TIBSOVO because it's appropriate for patients with a specific mutation, that's really why it's limited to that 3% to 5% of the relapsed/refractory population. And that really creates a tremendous need. And if you look more generally with regards to the pipeline and what exists and what's being developed, it's really thread there. And what that means is that a drug that if it is approved in the relapsed/refractory high-risk MDS population has blockbuster potential. It also means from a clinical trial perspective that there's less competition for patients when it comes to recruiting. So the decision with regard to prioritization was driven by the very compelling clinical data we had, but also the other factors that I was describing. Miles Dixon: Great. And then lastly for me before I get back in the queue on Seaport, obviously, some more progress currently being made. Robert, can I just ask, I mean, obviously, the S-1 registration document suggested that you have, I think it was 42% or 43% versus the original 35% that was disclosed. Will you guys be thinking about taking a board seat post any IPO? And I mean, again, you talked about the 3% to 5% tiered royalties that you would have. Is that on all Glyph products on that potential platform or just those in the existing pipeline? Any color that you can give me on those topics would be great. Robert Lyne: Absolutely, Miles. Obviously, we're limited in what we can say at the moment about Seaport given that they're on file for IPO in the U.S. But it is our general practice with founded entities that we don't take board seats once they IPO. And that is a general approach that we've taken in the past and we would expect to be taking going forward. It's also the case that we do have royalties beyond just the GLP application in terms of the economics that we have there from -- and again, that stems from the -- obviously, the developmental work that was done at PureTech around that technology. Operator: We will now move on to our written questions. Our first question is, are you keen to hold a significant stake in Seaport beyond future funding rounds? Robert Lyne: It's a great question because it really goes to the heart of our hub-and-spoke model. We -- obviously, because as indicated just with the Gallop platform, because we undertake developmental work on these programs internally at PureTech at the hub level, we typically start out with 100% ownership of our founded entities. What that means is as we leverage external capital, we often retain very large equity stakes in our founded entities even once they've raised large amounts of capital. So very often, you'll see that even through private rounds and even potential public fundraisings, we typically may end up even at that stage still being the largest individual shareholder. So why do we end up in that situation? Well, look, for us, it has two benefits. One is to PureTech. It means we don't have to keep writing ever-increasing checks to hold our corner and to maintain a significant equity percentage. instead at the PureTech level, we can allocate that cash to other programs, typically earlier-stage innovation, where we will often see the potential for a higher return on capital than we would in investing in later-stage rounds of our founded entity fundraisings as well as capital allocation within PureTech and aiming to increase our overall financial returns, it also allows the founded entities to diversify their shareholder registers. This is vital if they're going to raise external capital, particularly if they do ever want to IPO, that would not be practical in a situation where PureTech was the 100% shareholder of the business. So we see that dilution as beneficial both to PureTech and to the founded entities, but also it's allied with the nondilutive economics, which we retain in founded entities, which obviously are unaffected by the equity dilution that we may see. Operator: Our next question comes from Christian McGlenny from Stifel. Unknown Analyst: I just follow up then on the -- around the new asset formation, the concept stage. Just a bit more around that. I mean, is this sort of ballpark figure in terms of how much it costs to do those sort of concept stage assets? And then just to clarify, were you talking about new candidates on the candidate side, 2 assets, was that over a 3-year period? Or was that 2 assets per year? And then just finally, therapeutic areas of focus here. I mean, you've got a pretty broad spread in terms of your existing portfolio. Is that likely to continue fairly agnostic on therapeutic area? Or do you see some areas where you think are particularly of interest for those sort of new concept assets? Robert Lyne: Thanks for the questions, Christian. Look, just taking them in order, what we find so exciting about innovation is we can actually make really significant progress with pretty modest amounts of capital. So when we're doing very early derisking or proof-of-concept studies, we can make really great progress with 6-figure -- modest 7-figure amounts of investment. And maybe to one of the earlier questions that we just spoke to, you can give an idea then of the kind of return of capital that we can make on that kind of modest early capital deployment compared to later-stage investments in founded entities. So that's one of the reasons that we find innovation so exciting, both in terms of what we can do for patients, but also in terms of the financial returns that we can generate there. And just to your specific question, we're looking at two developmental candidates over a 3-year period in terms of the cadence going forward. In terms of sort of therapeutic areas and how we think about that, I might turn that over to Eric to answer that piece of the question. Eric Elenko: Yes. A lot of our focus is really in areas where we've had historic success and strength. For example, central nervous system CNS is an area of great focus. There are other areas of interest, for instance, I&I. We do maintain a therapeutic area agnostic policy so that if we do see an opportunity that we want to pursue that's available to us -- but given that our approach is proactive, we do tend to concentrate in certain areas and again, particularly CNS being really one of the biggest areas of focus. Operator: Our next question is, thank you for the transparency on the runway to 2028. It's good that you don't pencil in any credency realizations in this guidance. Can you clarify how this runway might be impacted from a more rationalized group post Celea finance completion? Also, what monies have you set aside for funding some of these financing rounds as well? Robert Lyne: So as we indicated, we take a conservative approach in terms of our runway guidance. And so I'm quite right to identify that we don't have any commentary realizations. We also don't assume any other realizations from any founded entities that may come through. We are looking and in our assumptions, we are planning for some reduction in our cost base following the spinout of Celea. Once we get that spinout completed, we'll be looking to revisit that cost reduction and try and reduce that as far as possible to see if we can stretch that runway even further as well as not including any income from any monetizations. We have included participation in both the Celea fundraise, which as we've indicated, is now coming up to a place where we think we've got line of sight to completion in due course. We also are reserving more modest amounts for supporting Gallop oncology as well, which we've guided that we'll be looking to commence fundraising towards the end of this year, looking to try and complete a fundraise by the first quarter of next year. The exact amounts there are still to be determined because it's subject to commercial negotiations on the 2 fundraising structures. But it's in terms of guidance, we certainly expect a significant commitment into the Celea round given the scale of fundraising necessary there for a Phase III, and we would be considering a more modest commitment into Gallop. And obviously, as and when we're in a position to complete those financings, we'll be able to provide full detail on the capital commitment that PureTech will be making. Operator: Our next question is, should we be ascribing any value or realizations from Silica, Vedanta, Sunday, Elvio or Integra? Robert Lyne: Look, we're very proud of the innovation and work that went into these founded entities. However, in terms of helping shareholders understand where we see value in the business at the half year last year, we introduced the concept of legacy holdings, which is where we're now bucketing these founded entities. We are continuing to support those that have operations still where we think that we may still be able to extract some value. However, in terms of modeling guidance, we are guiding that we do not expect material financial returns from any of these assets. To the extent that changes, we'd obviously be delighted to update shareholders. But for modeling purposes, we don't ascribe material prospect of material inflows from these founded entities. Operator: Our next question is, can you outline your thinking on capital allocation, specifically in terms of where potential capital return sits in terms of your updated priorities? Robert Lyne: Certainly. So one of our focuses since we've been refining our strategy over the last 9 months or so has been to put an emphasis on capital returns. We recognize that ensuring that our shareholders participate in the scientific, but also most important, the financial success of PureTech is absolutely critical. This is one of the reasons why we've deliberately taken a cautious approach to our cash runway, ensuring that we are able to fund an ongoing business without relying on realizations coming into the business. Because of that, we will be looking to ensure that when we do have significant financial inflows into the company, which we've had in the past, and we see potential for again in the future, that we will be looking to return meaningful proportions of those inflows back to shareholders directly. The exact form of that return would need to be decided at the time, but it is our intention that those significant wins back into PureTech will result in financial flows back to shareholders directly. Operator: Thank you. That's all we have time for today. I'd like to thank you all for joining, and you may now disconnect your lines.
Operator: Greetings, and welcome to Pebblebrook Hotel Trust First Quarter Earnings Conference Call. [Operator Instructions]. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Raymond Martz, Co-President and Chief Financial Officer. Thank you. Please go ahead. Raymond Martz: Thank you, Donna, and good morning, everyone. Welcome to our first quarter 2026 earnings call. Joining me today is Jon Bortz, our Chairman and Chief Executive Officer; and Tom Fisher, our Co-President and Chief Investment Officer. But before we begin, I'd like to remind everyone that our remarks are as of today, April 29, 2026. Today's comments may include forward-looking statements that are subject to various risks and uncertainties. Please review our SEC filings for a detailed discussion of these risk factors and visit our website for reconciliations of any non-GAAP financial measures mentioned today. Now let's jump into the first quarter financial results. We had an exceptional first quarter with results well above the high end of our outlook across key earnings metrics. Same property hotel EBITDA increased 27.6% to $82.2 million, coming in $8.2 million above the high end of our outlook. Adjusted EBITDA was $73.3 million, up 29.5% from last year and $9.3 million above the high end. Adjusted FFO per diluted share doubled year-over-year to $0.32 and which was $0.09 above the high end of our outlook. So this is a very strong quarter by any measure. Even more important, performance is not narrowly driven. While we had a great setup, the strength was broad across the portfolio and their performance came from both stronger revenues and superb expense control. At the property level, same property occupancy increased 550 basis points, ADR increased 2.8% and RevPAR increased 11.8% and total revenue increased 10.1%. Same-property total expenses increased just 5.6% and driving 327 basis points of hotel EBITDA margin expansion. More than half of the incremental same-property revenue flow through to hotel EBITDA. That reflects the strategic operating initiatives we've been implementing across the portfolio that benefits from our investments in revenue generating in many avenues and strong execution by our property teams and asset managers. The strength extended across the portfolio with 32 exceeding revenue forecast and 34 exceeding GLP forecast in the quarter. In [indiscernible] was exceptional. While benefited from the Super Bowl and a large citywide convention that shifted into the first quarter, all segments, including business and leisure transient were incredibly strong and continue to recover. RevPAR increased a robust 44.5% and hotel EBITDA more than tripled from a year ago, climbing by $11.6 million. Losango also recovered sharply from last year's fire-related disruptions. With RevPAR climbing 31.5% and occupancy growing more than 16 points to 74.6%. Their improvement across LA properties is broad helped by a stronger lease demand and improving entertainment-related group and leisure activity and the ramp-up of our recently renovated and rebranded Hyatt Centric, Delfino in Santa Monica. LA's Q1 same property EBITDA increase, we captured all of the EBITDA loss in the first quarter from last year's files. While San Francisco and L.A. were standout in markets, they were far from the whole story. Our urban portfolio posted RevPAR growth of 14.3%, total RevPAR growth of 12.9% and EBITDA growth of 55.1%. City over Urban Hotels delivered RevPAR growth of 8.7%, driven by a 900 basis point jump in occupancy supported by healthy weekend leisure demand. Chicago also turned in a good quarter with RevPAR increasing 5.6%. Washington, D.C. was our most challenged market in Q1, with RevPAR declining 24.1% and reflecting a very difficult inauguration comparison and continued weakness in government-related travel, though we have seen some recent improvements. Boston was another softer market, with RevPAR down 3% and reflecting lighter citywide calendar, two major winter storms and the rooms renovation of Revere Hotel Boston Common. We expect both markets to improve in the second quarter given the better event calendars. Our resorts also had a very strong quarter, with RevPAR rising 7.5%, total RevPAR increasing 6.7% and EBITDA declining 13.9% and Reserve performance was driven by resilient user demand, healthy on-property spending, favorable holiday timing and the continued ramp-up of our redeveloped assets. We also benefited from an earlier-than-normal spring break, which pulled more spring break travel into March from April. Several resorts delivered double-digit RevPAR gains, including Newport Harbor idle Resort apply Beach Resort and Club, Skamania Lodge, Paradise Point Resort & Spa, [indiscernible] Day Resort and Asana Joya Hotel and Spa. Overall, first quarter demand was encouraging despite heightened geopolitical tensions and increased uncertainty around travel. User demand remained strong, business trends to continue to grow and recover and group was stable. Consistent with broader travel and spending commentary, visibility has shortened somewhat in late March, but we have not seen any material change in booking trends to date. Premium leisure and business travel have remained healthy to date. Weekday RevPAR increased 9.7% overall and 12% in our urban markets, while weekend RevPAR increased 15% overall. Weekend leisure demand remains healthy but the improvements in weekday demand is equally important as it reflects the continued recovery in business transient and group travel and creates more meaningful earnings power as Orbis occupancies rebuild. What losses put out this quarter was the quality of the revenue growth. [indiscernible] revenues again grew up nicely 7.6% overall. Food and beverage revenues increased 7.4% and outlet revenues were up 10.2% and bandwidths and cater revenues increased 4.8%. Guests were not only staying with us in greater numbers. but they are also spending more on property, and that is exactly the kind of revenue mix that supports increased profitability. On the expense side, our strategic operating initiatives again delivered this quarter. Total expenses rose by only 5.6%, while total revenues increased 10.2%. Freediverage revenues rose 7.4%, while food and beverage expenses increased just 3.7%. Sales and marketing expenses, excluding franchise fees, grew only 3.9%, while energy costs actually declined 2.8%. And on a per occupied room basis, total expenses declined 2.8% and total expenses or fixed costs declined 3.2%, demonstrating the favorable benefits of the operating leverage in our portfolio. We are generating more efficiencies from improved labor productivity and technologies, tighter cost controls and continued benefits on property level efforts to reduce energy and water consumption. Some more simply, as revenues improve, our portfolio is flowing more of that upside to the bottom line than it did a year or 2 ago. At a quick point on onetime items because it is important to put this quarter is in a proper context. The Super Bowl contributed about 215 basis points to same-property RevPAR and the recovery loss angles contributed another 285 basis points. Offsetting those benefits, the 2 winter storms reduced RevPAR and by about 115 basis points and the difficult inauguration comparison in Washington, D.C., we reduced it by another 105 basis points. Even after adjusting for those items, same-property RevPAR still grew by roughly 9%, underscoring the overall strength of the quarter. This strong underlying performance translated into higher free cash flow and greater financial flexibility. On the capital side, we invested $11.9 million to our properties during the quarter, including guest room renovations at [indiscernible] and Reversal Boston Common, both of which are now substantially complete. For the full year, we still expect capital investments of $65 in $75 million, which represents a much more normalized run rate and an important tailwind for higher discretionary free cash flow and greater flexibility for debt reduction and share repurchases. We also completed the able first rebranding of Mondrian Los Angeles into the Valor Los Angeles, Perception by Hilton. We believe that strategic change has and will create value for the property, rebranding as an independent franchise hotel with Inturio leverages Hilton's distribution platform pairs it with a strong hospital style operator in Pivot and preserved the distinctive character of psychotic hotel, and we made this change in no cost as franchise-related key money funded the changeover. We appreciate the partnership with both helping and pivot during this strategic transition, and we are excited to work together to drive improved performance at this important property in L.A. Moving to our balance sheet. Our net debt-to-EBITDA ratio declined to 5.5x from 5.9x at the end of last year. We ended the quarter with $24.6 million of cash and restricted cash along with roughly $641 million of capacity on our revolving credit city. Our weighted average interest rate remained a very attractive 4.1% with approximately 98% of our debt effectively fixed and 98% unsecured. As of the start of the year, we've repurchased over 400,000 common shares at an average price of $12.11 per share. higher EBITDA, improved debt metrics and strong liquidity all moved in the right direction. Stepping back to the first quarter takeaway is clear. Despite heightened macro uncertainty and risks, the quarter demonstrated stronger demand across both urban and resort markets, healthy revenue quality and dispense control. At the same time, we're not assuming the balance of the year will be as visible as the first quarter. Recent events in the Middle East higher fuel prices, more fall off more and broader economic uncertainty, cook pressure, travel demand and booking patterns. However, based on our current booking trends and broader travel and spending commentary, the demand environment remains constructive, particularly for premium leisure and business travel. So while we feel really good about the first quarter and the underlying trend line, we remain appropriately cautious on the balance of the year. And with that, I'd like to turn the call over to Jon for more color on the quarter, the financings that we're seeing across the portfolio, the broader industry backdrop and our outlook for the balance of 2026. Jon? Jon Bortz: Thanks, Ray. In our last earnings call, just 60 days ago, we laid out the extremely favorable setup we were looking at for 2026. We also provided a robust outlook for our portfolio for Q1, but a cautious outlook for the rest of the year, given our experience in 2025 with major policy actions, geopolitical events and weather events that negatively impacted us in a material way. Our concern about major geopolitical risks prove warranty. As the conflict in the Middle East began just 48 hours after our earnings call. To summarize the setup for 2026 that we discussed, we have easy comparisons to a year that was negatively impacted by a number of policy and geopolitical events. We have a favorable macroeconomic environment and a uniquely strong events calendar particularly in our markets. We have the best holiday calendar we could ever remember. There is very limited supply growth for 2026 and beyond. And we maintained our view that hotel demand would re-correlate to GDP, absent major policy or geopolitical surprises. In our markets, we highlighted that San Francisco's recovery will continue to build Los Angeles would benefit from Espie related comparisons. Washington D.C. would benefit from easier government-related comparisons passed the tough inauguration comp and our recently redeveloped and repositioned properties were likely to continue to rain. We also believe our upper upscale and laundry positioning would remain outperformers given the continued strength of the marlin consumer. When we look at how the first quarter played out, that favorable backdrop translated into even better results than we were expecting. I think it's fair to call the first quarter low out quarter on both the top line and the bottom line. This setup was accurate and we delivered with a favorable setting. We haven't seen RevPAR and total RevPAR growth at these levels since the third quarter of 2014. The excluding one unusually strong pandemic recovery quarter in 2023 and our same-property hotel EBITDA growth of 27.6% was even stronger than Q3 '14. At the industry level, Q1 demand growth of 2% clearly began to demonstrate its reconnection with GDP growth and industry demand would have been even better but for 2 of the largest winter storms in history to hit in late January and late February. Occupancies increased as demand follow GDP growth While supply grew just 0.6%. In March, we began to see more compression days and ADR growth improved through an impressive 3.8% and with a solid 2.4% increase for the quarter. Industry RevPAR in Q1 increased by a much improved 3.8%. Leisure demand was very strong throughout the quarter, aided by the favorable holiday timing around New Year's and the combined Valentine's Day and Presidents Day weekend. Importantly, that leisure strength didn't just benefit our resorts. Our urban markets, especially San Francisco, Los Angeles and San Diego, all continued to benefit from the post-pandemic return of leisure demand to the cities. The early Easter and school spring breaks also helped March, so partly at the expense of April performance. We likely also saw some benefit in Southern California and South Florida, from traveler ships away from Mexico and from poor snow conditions out West. For Pebblebrook, we saw the same industry benefits in Q1 and more. The event calendar delivered as we captured increased demand from events throughout our portfolio. Our Hollywood Florida resort benefited from demand from the college football national championship game in Miami as our properties just 11 miles from the stadium, far closer than most hotels in Miami and Miami Beach. All of our San Francisco hotels achieved very robust results from the Super Bowl and its week of activities and events in February, and our L.A. hotels saw a lift from the NBA All-Star game and related activities, which were also in February. Our hotels in San Diego, Chicago and Washington, D.C. saw increased demand due to the NCAA men's basketball tournament games in March. Events in Q1 definitely pushed our results higher, maybe even more than we were expected. As Ray indicated, our redeveloped and repositioned properties all continue to ramp up led by Hyatt Centric Delfina Santa Monica, Skamania Lodge, Newport Harbor Island Resort, the Playa Beach Resort and Club, Estancia La Joya Hotel and Spa and Hilton San Diego Gas Line quarter. They all gained significant share in the quarter with more to go for them and many others in the portfolio where we invested so heavily in prior years and we continue to reap the benefits. Business transient continued to recover across the industry and our portfolio during the quarter. We saw even stronger growth in corporate travel in San Francisco and Los Angeles, where both cities are seeing the benefits from return to office policies. Group also grew industry-wide and for Pebblebrook in Q1. We delivered strong group revenue growth primarily driven by a 7.4% increase in group ADR, that was aided by the Super Bowl. We had a fantastic quarter all around, but it's highly likely to be our strongest quarter of the year by far. Looking ahead, we remain appropriately cautious given policy and geopolitical risks, particularly the potential impact of the ongoing conflict in the Middle East. Right now, we're mostly concerned with the potential economic slowdown, driving airline ticket prices, cutbacks in airline capacity in routes and potential jet fuel shortages elsewhere in the world, it could weigh on inbound international travel. As Ray indicated, we're not seeing any negative impact on PACE or bookings at this time, but we're closely monitoring all our data as well as travel data and commentary from others in the travel industry, particularly the airlines. Since our last call, our 2026 room revenue pace advantage versus last year has continued to increase. In the year, for the year pickup in room revenue improved by $12.5 million over the 2 months ended March 31 at an improved for every quarter of the year, which is very encouraging. As of the end of March, full year room revenue pace of $33.5 million ahead of last year, with $21.8 million from Q1 performance and the remaining $11.7 million in quarter 2 for 4. Over 90% of the room revenue pace advantage is in transient revenue with roughly 20% of from higher rates. The $33.5 million advantage is stable, would put us at a 3.8% increase in room revenue for the year. right in the middle of our increased range of 2.75% to 4.25% for the year. If we pick up more in the year for the year, it will go hacker. And if pickup is lower than last year, it will go lower. Recall that last year, with everything that happened, we lost pace advantage as the year progressed. And finished down for the year in room revenue. For Q2, total room revenue pace as of the end of March was ahead of last year by $7.5 million. April pickup for April looks like it will be down year-over-year, but much of that likely reflects pace being so far ahead when we entered the month. We expect April RevPAR and total RevPAR to grow in the 3% to 5% range versus last year. May appears to be our weakest month in the quarter weighed down by the year's most difficult monthly convention comparison in San Diego, along with softer convention calendars in both Boston and San Francisco compared to last year. Finally, I thought I'd provide a few thoughts about this year's World Cup. We've always thought of it as a large collection of college football bowl games. Like the college bowl games, we believe demand for World Cup games will vary dramatically depending on the teams involved and the impact from each game will vary, not only by the Albertan attendance of the games, but also by everything else that is already going on in the specific market. Most of the 48 teams have based themselves in locations across the U.S., including many markets without games. For example, we have a team at benign in Portland, even though there are no games important. I'm sure you've seen the media reports about a propping large blocks of rooms in many markets. Our understanding is that these blocks are intended mostly for fans who can choose to purchase hotel rooms through FFO. Obviously, bands are not choosing to purchase or tells for FIFA in a major way and will likely book the rooms individually through normal hotel booking channels. When teams and ticket holders moving around the country many on extended trips that include non-World Cup destinations and Visa -- and Visa waiver documents required. We expected and continue to expect. Most of the demand to book very short term, certainly within the 60-day window, which we're in now. And consistent with that, we are seeing some of that demand book on and around game days in our markets. We also booked some group demand from teams, sponsors and FIFA. We're currently contracted for about $1.9 million of room revenue. Over half of this group business is booked in our Boston hotels. We don't have an estimate for the total impact of the World Cup on our overall performance, but we do think it will be positive with most of the benefit coming in terms of higher average rates and increased non-room revenues. Occupancy will be aided by the World Cup. However, it comes at what is already a very busy time of year with high occupancies in June and July the norm in our World Cup markets. We also remain concerned about the impact of the conflict in the Middle East on airline ticket pricing, airline capacity jet fuel availability and especially inbound international travel. As a result, our forecast for the World Cup and Q2 remain conservative. For the full year, similar to the second quarter, we remain appropriately more cautious for all the same reasons. We have reflected a significant Q1 in our hotel performance assumptions. But we've left Q2 and the rest of the year unchanged from our prior outlook. As we said last quarter, we're going to take it 1 month at a time, given the volatile and uncertain environment. But we've got a very strong first quarter done and in the books. So we've increased our current outlook for RevPAR and total RevPAR growth for the year by 75 basis points for each, with our RevPAR growth outlook range now at 2.75% to 2% to 4.75% and our total RevPAR growth outlook range now at 3% to 5%. For 2026, we expect to continue delivering operating efficiencies and keeping property expense growth well controlled as our outlook indicates. The Q1 $10 million hotel EBITDA beat has been fully passed along into our hotel EBITDA outlook at the year's midpoint. As a result, we're now forecasting same-property EBITDA growth of 5.2% to 8.6% at the midpoint of almost 7%, a healthy increase for the year and a material step-up from our prior outlook. To wrap up with a terrific first quarter behind us, we remain very excited about the 2026 setup for Pebblebrook. Now we just need the rest of the year to cooperate and provide a more stable environment. And with that, we'd now be happy to take your questions. So Donna, could you please proceed with the Q&A. Operator: [Operator Instructions]. Today's first question is coming from Cooper Clark of Wolf Fargo. Cooper Clark: Appreciate some of the conservatism baked into the 2Q reports you guide as you bounce the calendar event with an uncertain macro. I was just hoping you could remind us about the historical impact of higher oil prices on travel demand for your portfolio and maybe certain assets either on the drive two or flat to markets where you see a greater impact? And then curious when you may expect to see some of the negative impact from higher oil prices as it relates to room night demand if we do see higher oil prices for longer. Jon Bortz: Sure. Thanks, Cooper. So historically, for our portfolio, out prices -- significant increases in gas prices cannot have an impact. And that's A big part of that it has to do with the fact that our resorts in particular, are all in dry markets. And of course, many of our markets also have other forms of transportation access like trains on the East Coast, in particular, in the trains on the West Coast. But it's really airline ticket prices where there's a clear connection between demand ultimately and people's ability to fly. Now, again, it has more of an impact on middle income and lower and less of an impact on the upper end. So it's hard to forecast exactly what the impact is going to be. They're certainly according to the airline, he's been a lot of business booked and have ticket prices going up. We've seen -- so far, we've seen increases anywhere from 0% to 2% to -- we've seen much bigger increases for international travel, particularly international travel originating from Europe and Asia. So start to tell how much of an impact that will have on international inbound. That is what we not worry about. But the resorts are also drive to and -- so if people do trade down from flying to driving, which is something we've seen to some extent in the past that domestically located resorts tend to benefit a little bit more and the ones available by airline flights tend to be impacted a little bit more. Cooper Clark: Great. And then just switching over to the expense side. Curious if you could take us through some of the building blocks on the expense guidance for the full year and where you're expecting to see growth come in for wages and benefits, insurance and utilities. Raymond Martz: Sure, Cooper. Yes. So our full year outlook implies on expense growth at 2.4% to 3.8% range. And so on the labor side, which is the largest cost that's low single digits. We're in the 3% to 5% range depending on the market. But because of -- in terms of wage increases, but in many cases, we're having FTEs actually in line or decline year-over-year despite the increase in occupancy. So we're finding a lot of efficiencies there, which we continue to pursue. We talked about this quarter. in areas like insurance as well as, for example, property insurance. It's a very favorable property insurance market for owners this year given a lack of storms last year. that impacted the U.S. as well as a lot of capacity on that side from insurance. So it's likely to be in pushing down premiums pretty significantly this year. So our renewal isn't until June 1. So at our July call, we'll have an update there, but we would expect property insurance costs to be declining on a year-over-year basis. relative to last year. And outside of that, we're doing what we can on energy initiatives [indiscernible] given what's going on right now with Middle East, we expect a little more pressure there. But overall, we feel really good about our expense growth that we provided. And the fact that we've been able to find new ways to do things accretively and limit this expense growth versus what others are experiencing in the industry. Operator: Our next question is coming from Smedes Rose of Citi. Bennett Rose: I was just interested to hear a little bit more about your decision to rebrand what was, I think, the Mondrian to Veloria and join the Hilton system. Could you just maybe talk about how you weighed what I assume would be maybe higher costs to be in the Health system versus the system you were in and sort of how you -- some of the things that help you make that decision? Jon Bortz: Sure. So [indiscernible] jump in. But I think strategically, as we've seen sort of the L.A. market and the West L.A. market and the sunset trip submarket sort of evolved over time, there's been a lot of luxury product that's been added into that market. And what we found over time is Mondrian well and Icon, particularly when it was created and really over up to maybe 5 years ago. I think was sort of the dominant player in the market. And as other luxury products come in, I think what we found is the system, the core [indiscernible] system was just not delivering to the property at the level that one of the domestic major brands could deliver it. And so given the positioning of Curio, we felt like tucking under the luxury in terms of their brands with sort of the right positioning for the property -- it is a luxury product. I'd say the service levels are more lifestyle than maybe you would consider being luxury. And so we really thought it was a much better positioning with a much more value brand and a more entrepreneurial and life spot-oriented operator who is really comfortable with the major collection brands like Curio. And then as it relates to cost that the cost of the Interia program are actually less expensive in the cost of the Kerio arrangement or maybe better said, the combined cost between the operator and the franchise in total is lower than the cost of where we were with port anime as both the brand and the operator. So a little different than some of our other properties is the way the cost play down. Raymond Martz: And [indiscernible] gone through a number of transitions in the past with switching brands going from one brand to another or going to independent every vice versa. And [indiscernible] in a fantastic to work with. The transition has been very smooth so far. I hope has been really additive in the process. And look, with Davidson, we have demote properties advance for us. So we have a very differ with their team. So they've done a very good job for us and look forward to in July when we have a full quarter under our belt here to report on the results that we're producing. I realize, of course, of course, quarter they're usually bumpy when you are up 1 system to another, but we like the direction we've had so far since April 1. Jon Bortz: And maybe one other thing to add is the Hilton distribution in that market is little to none. So we felt like it was really good positioning with Hilton. Bennett Rose: Okay. That's interesting. And then I wanted to ask you, just coming into the year, you had provided some guidance around what you thought LaPlaya could you just -- how did the first quarter ago? And is that property still kind of on track as what you had initially expected? Jon Bortz: Yes. The first quarter for LaPlaya went well. we're on track to be in that $28 million to $30 million range compared to $24 million last year. And I'd say also as well as the first quarter when it's not stabilized yet as we went into the quarter with softer group than we would normally have given all the disruption we have in construction last year these group into that environment. So, so far, so good. We've also sold I think we've already sold 45 or so additional memberships there at the low that well over $100,000 a piece. Those are bound refundable and that continues to grow the revenue at the property as well. Operator: Our next question is coming from Gregory Miller of Truth Securities. Gregory Miller: I'd like to start off with a question on 2027, and I promise to not ask you too much on a guidance perspective. But hopefully, 1 of the more straightforward questions on relates to the Super Bowl change moving from the San Francisco be area down to Los Angeles. And I'm curious, just your general perspective so far, do you consider an LA Super Bowl exposure, superior or inferior to your San Francisco exposure as we think about the implications to 1Q next year? Jon Bortz: Sure. Good question, Greg. I think the Super Bowl and L.A. will be obviously an extremely major benefit to the market, particularly in February. And -- but L.A. is a much larger market in San Francisco or even the combined nature of San Francisco and San Jose. And so -- when we look at where the pricing is already is and where it's likely to be for Super Bowl, likely to be at the same levels as San Francisco. It will still be super as the name implies, but it won't quite have the same benefit that we had discoveries come. Greg it's breaking up a little bit. Greg. Okay. Greg, you're breaking up. So it's -- sorry, Greg. I can't make how your question. I apologize. Operator: Certainly. Our next question is coming from Aryeh Klein of BMO Capital Markets. Aryeh Klein: I was hoping maybe you can unpack a little bit more about the World Cup and how it's setting up for you. I understand that you're not incorporating [indiscernible], but is there any risk that if the world set at sizzle, it ultimately -- it could ultimately emerged as a headwind if it's also disrupted to other travel into those markets. Jon Bortz: It's possible it could be a headwind. I think that's highly unlikely. And I don't think there will be a headwind for our portfolio because we didn't hold rooms of the market for any of the PPA blocks that we had. And we haven't -- we certainly have deterred other business coming into the market. And I think, again, unlike I don't know, maybe Super Bowl or an inauguration or some monstrous event. Some of these events are that large that they're deterring normal business coming into the market. And the gains are all over the place, and they're generally not back to back in the market. There's gas. So I don't really think that's going to be the case. The other thing we've seen is, I mean, the [indiscernible] business is booked in it. They're markets like L.A., where we have a huge number of concerts in July -- in June and July, sort of mixed in through World Cup, which we think will be big demand generators in that market as well. So I tend to think -- I have a hard time sitting [indiscernible] turning how to be headwind or certainly not for us and not for the industry. Aryeh Klein: Got it. That's helpful. And then maybe just would be great to get your updated views on San Francisco. Obviously, a really strong start to the year, some special events certainly help there. But I think EBITDA in 2025 was still quite a bit below 2019. I think it was 62%. Just curious how you think about that recovery moving forward and some of the tailwinds that you see as sustainable there? Jon Bortz: Yes. I mean, I mean San Francisco is crazy right now in terms of the boom recovery that's going on in that market and impacting all segments, whether it's business transient, business group, in-house group. Lease are coming back into the market that have stayed away during the pandemic and even many of the [indiscernible] pandemic years, it's really just starting to recover in the last year. and the convention calendar will continue to get better over the course of the next 3 to 5 years. So the city is on a roll, it's got good governmental policies. It's got good leadership in place. You see it in the other real estate categories the very strong, in fact, record office leasing going on in the market. The return to office that has been mandated. AI obviously being headquartered there, robotics, so many robotics companies are moving into the market. Robotics is being headquartered in San Francisco and the Bay Area. And so we certainly can see -- I mean, I'll give you an example this year, I think we're probably looking at RevPAR growth, again, aided by Super Bowl, I think, by about 4 points for the year. But we think RevPAR growth is certainly going to be between 12% and 15% for the year, unless some major macro event has an impact. And at that level of growth mean we expect to see the bottom line up 40% or more over last year. And you're right about being in the 60s, I think 62% or 65% 62%. If that's -- if you take that 62 and say we're going to be up we're going to be down still 40% compared to '19 levels. And -- but we think that with everything going on in San Francisco, and we're just starting to get pricing power back in the market as occupancies have been recovering, which are, by the way, still well below where we were in -- we think there's no doubt you can see double-digit RevPAR growth over the next 3 to 5 years in that market, assuming a reasonable macro environment. So we're pretty high on the market right now. And it looks a lot like it did back in the 2010 to '15, '16 period of time when it really exploded. Raymond Martz: The part of reference for 20 our services goals occupancies will -- should be somewhere in the 74%, 76% range. We'll see where we end at but that was at 87% in 2019. And that's how to say we're going to get back and the season at the same occupancy level, but it shows that San Francisco is truly a multiyear growth story, and we're just in the early innings of that. Jon Bortz: And pricing is so well now. from '19. So -- and that's just nominal pricing that's not in place and adjusted pricing. So I think there's huge opportunity in that market, and let's not forget, there isn't going to be any supply in that market for at least the next 5 years and arguably probably 5 to 10 years. Operator: Our next question is coming from Gregory Miller of Truist. Gregory Miller: Can you hear me better this time? Okay. Hopefully, they get to my questions. Appreciate it. I'm not sure if already asked about AI and bookings, but I thought I'd give a shot. I'm curious where you're at today in terms of your independent hotels showing up on the -- are you seeing any meaningful traction either from mature travelers that find your hotels that might not have heard of your hotels otherwise or from bookings impact itself. Raymond Martz: Sure. Greg, we've been very active in this area, which we think we're encouraged by where it could go in terms of the level of the planes deal with AI agents going directly to the hotels and looking to book direct search directly versus going through either some of the OTAs or the traditional brands. So we've been very active on that. All of our hotels are on a system which we've audited out and where it gets the maximum visibility through the agents. So there's in pages out there that all of our independent tells we've added that are now readable through that. So we've done a portfolio-wide partnership that our Corporate Vice President of Revenue Management is overseeing. So we're all working on that and monitoring those results. So we're on that side, we're excited and [indiscernible] will reach changing around some of our websites. And what created on the independent side, we have a lot more flexibility around doing that. And in addition to that, we're also looking at other tools and productivity at the property level. We just came to an agreement with Canary AI, which is a multimodule tools with panels calls and reservations and in those guest requests. So we're really excited about that. So again, with independent hotels, we could do a lot of those flexibility and [indiscernible], I cannot this technology is over. We're excited about where it's going and more reports to make more progress. Operator: Our next question is coming from Rich Hightower of Barclays. Richard Hightower: Obviously covered a lot of ground this morning, but I wanted to dig in a little bit more to the idea that I appreciate the level of caution that's sort of embedded in the guidance for the rest of the year. But you talked about booking window visibility maybe narrowing a little bit. And so I would assume that, that applies the 2Q outlook as well. And so my question is how much of the 2Q as we sit here at the end of April is really baked at this point? How confident are you in that particular part of the outlook? And how does that inform sort of the rest of the year as well? Jon Bortz: Yes, Rich, I think as it relates to Q2, I think we feel fine about our Q2 outlook with April just about done and some reasonable visibility into May. But we're -- again, we continue to be cautious because of how looks like trends can change. And particularly with the complex continuing on. And I think that also in fall out that we're definitely going to see how much it impacts travel, that's on down and so I think we're -- we learned a lesson last year, but we went into the year so positive. We had great pace. A lot of stuff happened last year that had, I don't know, you could call it self-inflicted, I guess, certainly came from governmental policies for the most part. And government-driven geopolitical issues. And so that sort of really the entire year over the course of the year. And so we're just going to maintain this approach of we're going to take it on for the time. If there's no fallout from the conflict, and there's no other major geopolitical events and policies that impact travel and the economy like happened last year, the numbers are going to be a lot higher than our help. And so that's the way we've approached the year. We just think with -- there's not a political statement, but it's a factual at with this administration. There's just a lot of stuff that keeps coming out are being created that positive disruption. And last year, a lot of that disruption impacted travel. So we're going to remain cautious. We built cautiousness in and we'll take a bit of time. Richard Hightower: Okay. That makes sense. And maybe just to dig in on L.A., specifically for a second, and I appreciate you guys have tried to maybe strip out all of the one-timers that impacted the first quarter and even into next year to some extent. But if we think about the underlying economy in L.A., it's obviously still recovering from the depths of COVID, like a lot of places on the West Coast, but maybe not as far along as the Bay Area might be. So what are you seeing in terms of the industry drivers, the types of companies that are booking business travel, the type of leisure demand. Is it more local? Is it some outside the region? Just what's really going on, on the ground in L.A. as we think about the health and growth in that market going forward. Jon Bortz: Yes. So I think there's a couple of major drivers in that market, obviously, the entertainment industry at the broadest level. So you're talking about TVs, movies, commercials. You're talking about tick top. You're talking about Instagram, you're talking about the music industry. I think these many dramas that are being created that are renting studios now in the market even appropriate periods of time. I think there's this transformation going on in the industry. And so I think what we've seen so far this year is we've seen improvement of demand coming from the entertainment sector, both TV and film and commercials and other. And then we've seen an increase in the bus industry coming through. And one of the things that happens in L.A. And we're not just talking about concerts that actually happened in L.A. But a lot of the music or come to L.A. to use the facilities, the studio facilities, the entertainment event facilities to practice for 2 or 3 weeks before they go out on the road on tour. And as we see more and more verse touring, more and more venues being created for music around the country, that industry is on a very strong growth path, which is helping the market. The fashion industry is another demand generator. That's improving at this point in time. We're definitely seeing demand from the fashion side. And then you see a lot of this internet venture capital, startup programs businesses that are being created in L.A. is somewhere near the level of VC capital coming into L.A. that's coming into San Francisco. But it's probably in the top 5 in the country. We're pretty close to that. So we are seeing industries being created. You're also a little further south of L.A. just down in El Segundo. You have the defense industry that's seeing a resurgence in the space industry as well related to it. So all of that is good right now for the industry. You need to change the politics and the policies in the market, similar to what happened in San Francisco. I think to really get more business confidence and more businesses being willing to grow or relocate into the market instead of relocating out of the market. But I'd like to think that the next election cycle will be more positive. And we certainly have been involved with and have seen a lot of business groups who've gone to the point that business has got to in San Francisco and said we've had it. And so you combine that with all these other spaces along with the sports industry which is booming in L.A. with book, you've had SoFi created. You've had where the clippers play and new events center being created the old ones get renovated. So there's definitely strong availability and growth on the sporting side as well. And obviously, you see that with is them tracking the Super Bowl back again to next year. SP-2 Very helpful. Operator: Our next question is coming from Duane Pfennigwerth of Evercore ISI. Duane Pfennigwerth: And great to hear Rich on the call. Maybe just to take it there. You talked a bit about the fundamental recovery in L.A. and San Francisco, but can you speak to the dialogue you're having about asset sales. And just -- you've probably addressed this before, but what was your optimal footprint in those markets look like versus where your exposure is today? Jon Bortz: Yes. I mean I think we're going to continue to be opportunistic as it relates to the disposition of assets within the portfolio it shouldn't surprise anyone to see additional sales occur in major cities in the U.S. That's, frankly, where all of our sales have been in the last 7 years. And I think Tom can probably speak a little more to where the investor sentiment is for those markets as well as sort of in general. Thomas C. Fisher: Yes, Duanne. I think in general, we've been talking about investor conviction in the muted transaction market over the last 2 years. The primary reason for that was growth or more importantly, the lack of growth. which made it hard for investors to underwrite. It seems like we're pivoting, and we're transitioning from that, especially given Q1 performance. And when you see markets that have bottomed like San Francisco, and you see the growth in 2025 and the continued growth in 2026, you see the growth in MA in some of these markets. What we've always said is capital files performance. There's also a number of high-profile kind of higher-end upper-upscale luxury properties in the market and in the final stage of marketing, and we'll be taking bids here over the course of the next 30 days. which I think will give a lot more clarity in terms of investor sentiment, investor depth, investor conviction and ultimately, investor pricing. So I think certainly by the second quarter call, we'll have a lot more visibility in terms of the market, as the market kind of recovered and are we continuing that momentum. So I think the setup for a functioning transaction market is there. That is still very available and is still very aggressive. But it all remains subject to the conflict in the Middle East, which could pause transactions momentum if it's not resolved in the short term. Operator: our next question is coming from Michael Bellisario of Baird. Michael Bellisario: Thanks, just on the auto room spending on I focus there. Maybe help us understand, what do you see throughout the quarter? What did you see in April? Has demand surprised to the upside? Any differentiation between group and transient out of route spend? And then sort of what is that telling you about the broader health of the traveler and broader consumer spending trends? Jon Bortz: Sure. So we haven't really seen any change in the Alger spending this year or in April. It remains healthy. It's interesting you read -- if you look at the consumer surveys and consumer confidence is at its almost in history, maybe or very close to it, yet what we find is when groups and leisure are on property, they spend, they want to have a great experience. enjoying the facilities and eating there and spending money on activities or treating themselves with spas. Or other unique activities it continues. And I think a big part of that continues to be not only the strength of the upper end consumer. But look, the wealth effect it has to be having an effect, right? The stock market at all-time highs or very bear. And I think that, ultimately, that's planned through and the comfort people have in spending. So, so far, so good. Mike, we haven't seen any change, and we find that very encouraging. Michael Bellisario: Got it. That's helpful. And then just one follow-up. Just sort of in terms of revenue management. And any change in what you are telling your operators to focus on? And is there still an imperative to build occupancy first? Jon Bortz: Yes, that's -- I appreciate the question because we are increasingly focusing on taking pricing opportunity where it exists. We've been doing that more so in the resorts were we've seen this sort of robust leisure growth occur and also with events and the better holiday calendar we're seeing more compression as we expected around those better holiday periods. So we are pushing price more. We're not doing it to the detriment of occupancy at this point. We're trying to do both because we think the opportunity continues to be there for both as we're nowhere near the level of occupancies that we would prefer to operate at on a stabilized basis. But we are taking price where the opportunity exists, and that opportunity seems to have increased over the course of the last 4 months. Operator: Our next question is coming from Chris Darling of Green Street. Chris Darling: What's the latest you can share as it relates potential redevelopment of Paradise Point, I think you have all the requisite permanent approvals, if I'm correct. So wondering if that's a project that you might consider kicking off sooner than later. Jon Bortz: Yes. So we'd love to, but we're enjoying -- we have the California Coastal approvals for the plan. Now we have a process to go through with the city in terms of getting permit approvals for the actual instruction. And that's taking anywhere from 6 to 9 months at this point in time. So there's also some additional work we have to do as part of the California coastal approval that relates to some studies on geological displacement as we do the construction. So it's all part of the process. But it continues to be lengthy and certainly longer than we'd like. So I don't really see the project kicking off this year. at this point in time. And -- but it's still on the calendar as we move forward. Operator: At this time, I would like to turn the floor back over to Mr. Bortz for closing comments. Jon Bortz: Thank you all for participating. We know you're really busy. We're here in the hard earnings season. And we look forward to seeing you in some various conferences, and we look forward to seeing you at NAREIT next and we'll be prepared to give you an update at that time. Thanks again. We look forward to talking with you. Operator: Ladies and gentlemen, this concludes today's event. You may disconnect your lines and walk up the webcast at this time, and enjoy the rest of your day.
Operator: Good afternoon. Welcome to the Penske Automotive Group First Quarter 2026 Earnings Conference Call. Today's call is being recorded and will be available for replay approximately 1 hour after completion through May 6, 2026 on the company's website under the Investors tab at www.penskeautomotive.com. I will now introduce Anthony Pordon, the company's Executive Vice President of Investor Relations and Corporate Development. Sir, please go ahead. Anthony Pordon: Thank you, Krista. Good afternoon, everyone, and thank you for joining us today. A press release detailing Penske Automotive Group's first quarter 2026 financial results was issued this morning and is posted on our website along with the presentation designed to assist you in understanding the company's results. As always, I'm available by e-mail or phone for any follow-up questions you may have. Joining me for today's call is Roger Penske, our Chair and CEO; Shelley Hulgrave, our EVP and Chief Financial Officer; Rich Shearing from North American operations; Randall Seymore, of International Operations, and Tony Facione, our Vice President and Corporate Controller. We may make forward-looking statements on today's call about our earnings potential, outlook and other future events, and we also may discuss certain non-GAAP financial measures such as EBITDA and adjusted EBITDA. We've also prominently presented and reconciled any non-GAAP measures to the most directly comparable GAAP measures in this morning's press release and investor presentation, again, both of which are available on our website. Our future results may vary from our expectations because of risks and uncertainties outlined in today's press release under forward-looking statements. I direct you to our SEC filings, including our Form 10-K and previously filed Form 10-Qs for additional discussion and factors that could cause future results to differ materially from expectations. At this time, I'll turn the call over to Roger Penske. Roger Penske: Thank you, Tony. Good afternoon, everyone, and thank you for joining us today. We're pleased to report a solid and productive first quarter. During the first quarter, PAG delivered over 123,000 new and used vehicles and nearly 3,600 new and used commercial trucks and that generated approximately $7.9 billion in revenue. We earned $324 million in earnings before taxes and $235 million in net income and generated earnings per share of $3.56. The first quarter results include a $60 million gain on the sale of a dealership partially offset by $13 million in certain disposals and other charges as we continue to optimize our dealership portfolio. Excluding these items, adjusted earnings before taxes, was $276 million. Net income was $201 million and earnings per share was $3.05. This was a difficult comparison for the prior year period and challenging market conditions impacted year-over-year performance. We also continue to grow our footprint. In February, we acquired 2 high-performing and strategic Lexus dealerships in Orlando metropolitan area of Central Florida, one of the fastest-growing regions in the U.S. These acquisitions complement the 2 Lexus and 2 Toyota dealerships we acquired in November 2025. Combined, these 6 dealerships are expected to generate $2 billion in estimated annualized revenue. We also repurchased 170,000 shares of common stock for $26 million. We increased the dividend to $1.40, which yields approximately 3.4%, the highest yield in our peer group. Looking at the details for the quarter. Same-store retail automotive new units declined 5% and used increased 1%. Units retail were impacted by weather-related challenges and a difficult comparison to March 2025 when tariffs caused pull-ahead sales and lower BEV sales in the U.S. associated with the elimination of the BEV tax credit. Gross profit per unit, new unit retail was $4,783, up $94 sequentially. Gross profit per used unit was $2,076, up $306 sequentially. Our service and parts revenue and gross profit was a Q1 record. Same-store revenue increased 4.6 and related gross profit increased 5.7%. Service and parts gross margin was up 60 basis points. In the Retail Commercial Truck segment, Q1 unit sales declined 953 units driven by reduced order intake during Q3 and Q4 2025, following the implementation of tariffs and weakness in the freight market. However, we are encouraged today with the trends we are seeing across the commercial truck market. In recent months, we've seen an increase in new truck orders and expect the timing of these deliveries to take place in the second half of 2026. PTS equity income increased 24%. Growth in the full-service leasing revenue, improved fleet utilization lower operating and interest expenses resulting from continued fleet reductions, including maintenance and our depreciation were partially offset by continued challenges in the rental and lower gain on sale of trucks. At this time, I'll turn the call over to Rich Shearing. Richard Shearing: Thank you, Roger, and good afternoon, everyone. In U.S. Retail automotive same-store new and used unit sales were affected by 2 major winter storms, liberation day tariff announcement and pull forward of retail sales in March of last year and lower BEV sales from easing emissions regulations and the elimination of the BEV tax credit at the end of September 2025. During the quarter, 25% of new units sold were at MSRP compared to 29% in Q1 last year. Same-store service and parts revenue increased 3.2% and gross profit increased 3.4%. Customer pay was up 4%, warranty was up 5% and collision repair declined 4%. Our U.S. automotive technician count is up 3% when compared to the end of March of last year, and our Bay utilization is 84%. Turning to Premier Truck Group. During Q1, Premier Truck Retail 3,583 new and used trucks, generated $695 million in revenue and $128 million in gross profit. On a sequential basis compared to Q4 2025, new unit gross increased $111 and used unit gross increased $4,624. New unit sales were down 26% and were in line with the overall North American Class 8 market. The recessionary freight environment and market uncertainty associated with tariffs and the status of emissions regulations impacted new truck orders during the last half of 2025. However, as Roger mentioned, in recent months, we have seen an increase in new truck orders. In fact, Class 8 orders increased 91% and the industry backlog grew 33% to 175,000 units in the first quarter when compared to March of last year. We expect this increase in order activity to result in higher new unit sales in the second half of this year. Service and parts revenue increased 5% as average daily activity continues to grow and service backlog is beginning to increase. Service and parts gross profit represented 73% of segment gross profit during Q1. Turning to Penske Transportation Solutions. We are also encouraged by the stronger financial performance of Penske Transportation Solutions. During Q1, operating revenue declined 4% to $2.5 billion. Lease revenue increased 2%, rental revenue declined 17% and logistics revenue declined 3%. PTS sold 9,319 units in Q1, ending the quarter with a fleet size of 387,500 units compared to 435,000 at the end of December 2024. Gain on sale declined by $26 million in Q1 '26 compared to Q1 2025. As PTS continues to rightsize its fleet, higher fleet utilization, lower operating costs for maintenance, depreciation and interest expense contributed to an increase in earnings. Overall, our equity income from PTS increased 24% to $41 million. I would now like to turn the call over to Randall Seymore to discuss our international operations. Randall Seymore: Thanks, Rich. Good afternoon, everyone. During Q1, international revenue was $3.3 billion, which is up 6%. International new units were up 2% and used increased 3%. Same-store service and parts revenue increased 7% as our strategies to increase customer pay drove a 10% increase, which was more than offset the 3% decline in warranty. In the U.K. market, Q1 automotive registrations increased 6% to 615,000 driven by private and retail demand and an increase in Chinese OEM sales. While we were encouraged by Q1, the U.K. automotive environment remains challenging as inflation, higher taxes, consumer affordability and the government mandate towards electrification impacts the overall market. During Q1, our U.K. same-store new units delivered were flat from lower sales of several German luxury brands and the elimination of the [indiscernible] programs for these luxury brands. Same-store used units increased 3% and gross profit per unit increased $500 sequentially when compared to Q4 2025. Turning to Australia. Our EBT increased 15% compared to Q1 last year. In automotive, our 3 Porsche dealerships in Melbourne continue to gain market traction through implementing our Porsche 1 ecosystem process. This process has driven higher customer satisfaction with all 3 dealerships in the top 5, including the top position nationally. Although we had a decline in new unit sales associated with the transition of the McCann to an all-electric vehicle, we had a strong mix of higher-end vehicles and our focus on pre-owned and after sales continues to drive the business. In the Australian Commercial Vehicle and Power Systems business, we are diversified with revenue and gross profit split approximately 2/3 off-highway and 1/3 on-highway. The off-highway business continues to grow. The current order book has exceeded our full year business plan with strength in in Energy Solutions, mining and defense sectors. We have over AUD 600 million in secured orders so far for 2026. The engines and support we provide will be critical as this segment evolves. We continue to see the potential for our Energy Solutions business to generate at least AUD 1 billion in revenue by 2030. Over the last several years, our focus has been to increase units in operation to grow the recurring service, parts and remanufacturing aspects of our business, and this focus is starting to pay off. One of the major mining customers operates 125-megawatt power station with 20 Bergen engines that we installed 4 years ago. As part of the major maintenance interval, we have begun to remanufacture 300 cylinder heads which will generate approximately 15,000 hours of work for our business. I would now like to turn the call over to Shelley Hulgrave to review our cash flow, balance sheet and capital allocation. Michelle Hulgrave: Thank you, Randall. Good afternoon, everyone. We remain committed to a strong balance sheet and a flexible and disciplined approach to capital allocation while driving our diversification strategy, implementing efficiencies and striving to lower costs. SG&A expenses increased by 1.5%, which is lower than the rate of inflation, while gross profit declined 1.7%. SG&A as a percentage of gross profit for Q1 2026 was 74.3%. Adjusted SG&A to gross profit was 73.3%. Q1 SG&A to growth was impacted by employee benefit costs up $4 million, payroll taxes and other U.K. social programs of $3.5 million, rent and real estate taxes up $7 million and lower automotive units and the impact from lower sales of new and used commercial vehicles at Premier Truck Group. During Q1, we generated $215 million in cash flow from operations and EBITDA of $397 million. During Q1 2026, we invested $63 million in capital expenditures. This is down from $85 million in Q1 2025. We completed acquisitions of 2 Lexus dealerships representing $450 million in estimated annualized revenue. We increased the cash dividend to $1.40 per share, representing the 21st consecutive quarterly increase. On a forward basis, our current dividend yield is approximately 3.4% with a payout ratio of 39% over the last 12 months and we repurchased 170,000 shares of common stock for $26 million. As of March 31, 2026, [ $221 million ] remained available for repurchases under our securities repurchase program. Since the beginning of 2023, we have returned approximately $1.6 billion to shareholders through dividends and share repurchases. At the end of March, non-vehicle long-term debt was $2.6 billion and leverage was only 1.8x, despite completing several large acquisitions over the last 6 months. Floor plan was $4.1 billion, and we have $425 million in vehicle equity. For the quarter, total interest expense increased $2 million. Floor plan interest decreased $4 million due to our cash management and lower interest rates, while other interest expense increased $6 million, primarily from higher borrowings for acquisitions. We estimate a 25 basis point change in interest rates would impact interest expense by approximately $15 million. Our effective tax rate was 27.4% in Q1 2026. The prior year results have been recast for the acquisition of Penske Motor Group using common control as disclosed last quarter. As a reminder, PMG was a partnership prior to our acquisition and was not subject to income tax. Q1 2025 does not reflect federal or state income taxes had PMG been included in our taxable group. Therefore, period-over-period comparisons of net income and earnings per share may not be directly comparable due to the change in tax status of PMG. The impact to the effective tax rate would have been approximately 100 basis points and the impact to earnings per share would have been $0.05. Total inventory was $4.9 billion, up $77 million from December 2025. New vehicle inventory is at a 44-day supply, including 46 days for premium and 29 days for volume foreign. Used vehicle inventories at a 39-day supply with the U.S. at 33 days and the U.K. at 42 days. At the end of March, we had $84 million in cash and liquidity of $1.2 billion. At this time, I will turn the call back to Roger for some final remarks. Roger Penske: Thank you, Shelley. As mentioned, we added 2 Lexus dealerships to PAG during the first quarter. And today, I'd like to welcome our new teams at Lexus Orlando and Lexus Winter Park to our organization. As I said earlier, we had a solid first quarter, and I continue to remain optimistic about our business. New and used retail on motive process remained strong and service and parts continue to grow. Our diversification remains our key strength of our business model, the recovery commercial truck market is underway. We expect to increase new truck orders to benefit the second half of the year and our retail truck dealerships and PTS investment should benefit. Again, today, thanks for joining our call. We'll take questions. Operator: [Operator Instructions] Your first question comes from Michael Ward with Citigroup. Michael Ward: I hope you all are doing well. Weather had a -- had a significant impact on the industry in January and February in the U.S. Can you quantify at all how much you were affected? And were you able to get any of that back? Richard Shearing: Mike, this is Rich here. Good question. I mean as I mentioned in my prepared remarks, 2 significant storms, both -- one in January, one in February, impacted -- the first storm in January, I think, was almost 2,400 miles in its length. So it impacted our businesses from Texas all the way to the Northeast. And so we had either delayed openings, multiple day closures as we had to deal with the cleanup. So February wasn't as bad, but did impact pretty significantly the Northeast. Now the good news is, obviously, the competitors around us in those markets also suffered the same same challenges. So we don't think consumers were running to their dealerships to buy cars while were struggling. But certainly, from a fixed growth standpoint, there was lost business there because that's time you just can't get back. So we had the added expense of the snow removal and then we attribute the fixed gross loss to about $4 million to $5 million. And then in total, overall, about a $6 million impact to our earnings in Q1 related to the weather. Michael Ward: Okay. So you called out -- I don't know if you were calling out or just the cost on the SG&A side of about $15 million. It sounds like some of those will be recurring, I guess, the rent and the health in the U.K. Are those onetime in nature? Are they not recurring? What were you kind of alluding to with that? Michelle Hulgrave: Mike. Yes, a little bit of both. Certainly, rent increases we see year-over-year health benefit plans. We certainly hope those costs go down, but that doesn't seem to be the trend. I wanted to highlight the fact that the U.K. social programs, this is the last quarter before we anniversary those. So it's a bit uncomparable compared to Q1 of 2025. But like I said, we'll see that anniversary here in Q2. Michael Ward: Okay. And that's about 30 to 40 bps, sorry? Michelle Hulgrave: Yes. We estimate without those that our SG&A to growth would be in that 71% to 72% range that we had talked about. So still comfortable in that low 70s range. Michael Ward: Okay. And just lastly, it looks like you've been doing some portfolio rebalancing. Usually, you don't see much movement in the retail automotive revenue mix, but you see a couple of good changes year-over-year. And I'm just wondering if that's a trend we can look to more. Are those going to our focused brands continue to focus on the luxury, the volume form, that's the strategy, correct? Roger Penske: Well, let me say this, that we actually sat with our Board probably 18 months ago to determine what was going to be our strategy on brands, locations not only domestically but internationally. And we felt that we would look at our low performers, and then we looked at what were the expectations of the manufacturers from a CapEx perspective. And then what could we grow that business? And we determined there were probably a number of locations that we would need to sell in order to get a return that we would want on top of that, because of our commitment to go forward with Penske Motor Group, and we had to commit to sell 2 Lexus stores, one in Norwich and one in Madison, Wisconsin, which we completed. Obviously, that gave us the opportunity to buy the Orlando stores and the PMG stores. Along with that, we took out a number of other smaller locations, some larger, some in the U.K. and that generate about 300 -- I'd say, [ $25 million to $350 million ] worth of free cash flow back on these stores, which we sold, which obviously, we used some of that money to pay to buy these other key stores that we're going forward with. So we'll continue to prune the portfolio. We're still in the acquisition business. I think we made the decision in the U.K. to reduce our number of [indiscernible] select stores from 14 to 6, which is paying off. We are taking those locations and adding the Chinese brands in the same showroom. So overall, I think the strategy has worked and we've kept our leverage, as Shelley said, from around 1.5 to 1.8, am I right? Michelle Hulgrave: That's right. Roger Penske: So I think it's been a good movement and will continue. And I think I see our peers doing the same thing because today, the cost of doing business is so high and some of the smaller locations with all the controls you need and the high cost of the best people we just can't see the numbers, give us the returns we want. So all of us are obviously looking for locations, at least where we can add on in key markets. Anthony Pordon: So Mike, this is Tony. Just Page 9 of our earnings presentation is a key chart in the deck that lays out what total revenue is, right? And you can see there, in particular premium, 72% volume, volume non-U.S. is 22%. And then when you look at the Toyota Lexus number, it has jumped up to 18% of our overall business from an automotive standpoint. So very, very key with the acquisitions and the OEM presence that we have. Michael Ward: Proactive plan looks like you're just pulling it off. Operator: Your next question comes from the line of Rajat Gupta with JPMorgan. Rajat Gupta: I just wanted to follow up on PTL. Pretty nice earnings growth in the quarter, obviously despite the lower gain on sale. Obviously, a lot of those improvements are coming from just lower maintenance, debt, fleet costs, et cetera. I'm curious how we should think about the trajectory of PTL earnings for the remainder of the year? Any kind of guardrails you can give us for the full year? Roger Penske: I think number one, we've come from roughly 430,000 units defleeted to 387,000 at the end of the quarter. So that's obviously reduced a significant interest cost in our depreciation has been impacted positively with that. But the good news is that our fleet utilization on the rental side which were before we were down to 71%. It's now moved up to 76%. And I think we've seen that the operating side of our business has been excellent during the quarter and really in Q4 also because our gain on sale obviously has been down $26 million in the quarter. So we were able to pick that back up through utilization through lease revenue and some of our logistics businesses, which provided an overall pickup in our profit -- their profit from $120 million to $142 million. We've got lower operating expenses, obviously, as I mentioned, maintenance, depreciation, et cetera. So it's operations. I think you think about interest, depreciation and gain on sale is down but still higher than it was a year ago, but we're seeing rental utilization up about 500 basis points. Rajat Gupta: Got it. Got it. So I mean, just like a lot of these trends are sustainable like from -- or at least from like a cost and earnings perspective through the remainder of the year on a year-over-year basis? Anthony Pordon: Rajat, could you repeat that, please? Rajat Gupta: I was trying to say that a lot of these trends seem sustainable for the remainder of the year directly from the cost side when you look at the year-over-year trend? Roger Penske: You're talking about PTS? Rajat Gupta: Yes. Roger Penske: Okay. Look, certainly, we are continuing. We probably have another 3,000 or 4,000 units that we'll take out easily during this year from a fleet perspective, we will continue to grow. And also, we're seeing the revenue coming back on rental, we can take some of our off-lease equipment and replace at that point. So I think the older trucks are out now, which we're providing much higher maintenance. So we're seeing that maintenance and entire maintenance much, much better. And I think that the customer acceptance -- this is a key one for you. We're starting to see people signing up for long-term leases. We say there was a pause over the last 90 to 120 days with emissions, with costs, et cetera. and we weren't getting the traction in the month or the quarter, Q1, we saw our lease signings going up, which bodes well for us for the future because these leases are 3, 4, 5 years of economic escalators. Rajat Gupta: Got it. Got it. And just a follow-up on the parts and service business, more on the international side, pretty strong numbers overall. But it looks like if you look at it excluding the FX benefit, growth was probably flat to slightly up. I'm curious if sort of -- if that's correct? And what kind of initiatives are in place to maybe accelerate that growth going forward? Randall Seymore: Rajat, it's Randall. We could take the FX out, that's correct. In the U.K., we were slightly up. But as an example, Italy, we were up 11%; Germany, up 20%, and it's really on the back of customer pay focus because warranty is actually down. And remember, internationally, we don't get the markup on parts like we do here in the U.S. So you only get 10% margin, we're on warranty on the parts, whereas customer pay it's the same. So it's the mix and the focus on customer pay that's driving it with the higher margin business. Rajat Gupta: Got it. What portion of international in the U.K. versus non-U.K. in your numbers there? Roger Penske: Italy was up 11%. Germany was up 20%. Rajat Gupta: I mean like just mix of services, just mix of your business in terms of contribution in U.K. and non-U.K? Anthony Pordon: Rajat, I'll get that back to you off-line after the call. Operator: Your next question comes from the line of Jeff Lick with Stephens. Jeffrey Lick: Question for Rich. Rich, we get into this part of the year kind of April through the rest of the year, lapping against last year. Last year at this time, luxury started to lag the broader auto sector with the exception of April and -- I mean, of August and September with the EVs. Just kind of curious how you're seeing things now as the year plays out because you guys are a bit unique and that you have easier compares. Just kind of curious how you're thinking about the rest of the year on the new luxury and then maybe also talk about as we lap the EV compare with anything to think about there? Richard Shearing: Yes. So I'll touch on the last comment you made relative to EVs. So if you look Q1 this year versus Q1 of 2025, our EV sales were down 61% this year compared to last year. And certainly, in our West Coast in California, there's still a certain level of demand for the BEV. And so the consumer out there. We haven't completely replaced that with hybrids or ICE. So that was a tough compare year-over-year. We thought that the Iran conflict would drive some near-term or short-term demand in BEVs that we just haven't seen materialize. So that escalation in fuel prices hasn't overcome the consumers' concerns about battery electric vehicles, either from a range or infrastructure charging perspective. And so I don't see really a material change occurring in the balance of this year. I think it's kind of stabilized post the tax credit going away in that 4% to 5% of the overall retail sales market. So then coming back to the luxury, you mentioned or someone did earlier that the tough compare, certainly in March, we were at $17.6 million [indiscernible]. April, is it at $17 million. And so we've got some tough comps year-over-year. You look at the premium luxury market, certainly, the sales are a little bit down in those brands. If I look at Audi in Q1 was down about 30% overall as they're launching some new models that need to come into the marketplace. BMW about 15%. And Porsche with the Macan going away, we knew that this year, next year until they relaunch that model will be a little more challenging. So we're down about 18% with them and Mercedes, about the same as BMW down about 15% overall. The good news, I would say, is that the OEMs have now adjusted to the -- what the tariff impact is going to be on their business. Certainly, I think they were holding back money on incentives and programs certainly in the latter half of last year. I'd say they're back in the market. I wouldn't say the incentives are great, but they're good. And the products they're producing are still very desirable. We tend these annual dealer meetings and every single one of them has a bevy of new products that are going to be launching in the market this year that I think are going to be highly desirable. So I think from a model mix and brand mix with our 72% premium luxury, we're still in a good position there. Jeffrey Lick: And anything to call out with service and parts with respect to warranty that you're lapping stop sales, especially on the luxury side? Randall Seymore: So our fixed gross overall was up about 3.5%. We talked about the impact from the storms. An encouraging nugget in there is our customer pay ROs. We talked about that in the last couple of calls, we've been really focused on that segment, too. The recalls, they continue to happen. So if you look at Toyota, they increased the Tundra recall on engines to the 23 and 24 model year units. BMW has got a starter recall that was recently announced, and then Audi on their 3-liter engine has piston replacements, which is about a 30-hour job, and then we're doing a proactive software campaign, too, on the Q5 product. So look, I know the OEMs would prefer not to have these recalls, but they continue to have quality leakage into the marketplace. Operator: Your next question comes from the line of John Babcock with Barclays. John Babcock: Just a quick one on the truck market. I know you're expecting an increase in truck orders, particularly in the second half. Just curious on the sustainability [indiscernible]. I mean I'm sure there's probably a portion of the truck demand is probably driven by expectations for higher prices with some of the regulatory changes. So I'm just kind of curious if you think this is something that you think is long-term sustainable truck demand? Or is this something that you temporarily driven by some of the short-term factors like regulations. Randall Seymore: I certainly think there is some short-term influence on the truck orders similar to what we saw with lack of truck orders in Q3, Q4 last year, John. I think once there was some finality on what the EPA 27 guidelines were going to look like and customers could understand what the rule set was going to be that's what drove the order intake here in the first part of this year, as Roger quoted, up 91% on Class 8. I also think we had a near-term bump in particular for Premier Truck Group with tariff announcements in February. And so there was a grace period that was granted to customers that if they placed orders by the end of -- or sorry, by the beginning of March, they could avoid that tariff price increase, which was between $1,000 and $1,500 depending on heavy-duty or medium-duty and then there's some things structurally that I think have been going on that we've talked about for the last 18 months with the administration, right? The Department of Transportation and FMCSA have really been cracking down on illegal carriers and non-domiciled CDL holders, and that has had an effect of tightening capacity. You see that in the spot rates up 30% to 40%. And year-over-year, and that's driving higher utilization of, say, the legal operators on the road, and we're seeing that manifest itself in our parts and service revenue up just over 4% in that business. And that's the first first time in 6 quarters that we've seen a growth in our fixed gross profit there. And then when you look at the freight rates increasing, we're seeing that drive near-term used truck demand as well. So our volume sales are trending upward there, and our gross profit, as you saw in the quarter, was up almost $4,000. So -- and I think if you look -- if you follow any of the public, J.B. Hunt, Covenant Transport, that they've reported, they would reiterate that they feel that the changes are structural and not temporary in nature. John Babcock: Thanks for all that color. Now just on the M&A side of things, you've increased exposure to Texas -- Toyota and Lexus recently. But on a go-forward basis, should we think about expanding brands? Are there certain geographies you want to tack on to? Also, how are you balancing that with leverage? And what's your comfort level of leverage right now? Roger Penske: Well, I think our leverage gives us all sorts of opportunity, point number one. Point number two, we're sitting with 70-plus percent premium luxury and 21% or 22% volume foreign. And we're focusing obviously on the mix of our business in those particular areas probably more critically and looking for opportunities. I think our goal obviously is to maintain, as Shelley said, our dividend, our buyback and our CapEx. We think by eliminating some of the stores that we have, have allowed us to reduce our CapEx whole fleet by $100 million this year, and that's going to give us the opportunity to continue to focus. I would say, internationally, we've also done some pruning of our businesses there. I think at the end of the day, we're focusing on investments in Australia, in the defense area and the power system and power generation. So a good thing is we have such a diversification. And then obviously, the returns that we're getting from Premier Truck Group, their Freightliner business, they are market share leaders and we'd be looking for other locations in the U.S. and Canada to represent them because those have been turned out to be quite good. And I think what's key is we'll look right now, like the stores we did in Orlando, the right brand, certainly the right location and profitability. So I think we have the luxury of not being in a hurry when you put $2 billion of revenue on, now we've got to continue to integrate those into our company, which I think we're doing well. And we'll again look for ones with a brand, look at Titan and Lexus right now. the lowest day of supply of the industry. We're talking 120 days when you think about it, some of the Lexus stores under 10, and they could continue to keep the product tight and that, to me, is going to be critical, and they're saying, that's where they're going to operate in the future. And we're getting some of that already also. When you look at Land Rover, you look at Porsche and our business is down, not because we're down it's because of supply of the vehicles we want, and that's being impacted by tariffs, et cetera. So we're going to be cautious and there will be people that are confused down because on these businesses, some of the smaller operators if they're contiguous to our circles, we're going to pounce all over those if we can. That's a long answer, I'm sorry. John Babcock: Yes. no thanks. That's perfect. Appreciate it. Operator: Your next question comes from the line of Mike Albanese with StoneX. Unknown Analyst: Could you guys just comment on what you saw in Q1 regarding Chinese models and taking share in international markets? And then a house view on how you think about the implications to premium luxury? And I mean, do you think about leaning into building exposure with these models or just kind of continue to take it slow and monitor. Roger Penske: Let's let -- Randall is the expert on -- in fact just came back from the auto show in China. So he's most current that we have on the phone. But that's again what we're doing, what we're seeing in the U.K. and Europe. Randall Seymore: Yes, Mike. So obviously, the Chinese brands are gaining share in Europe. In fact, the markets that were in the U.K., Italy and Germany, they've more than double. In fact, if you look at Australia last year, the Chinese brands were 15% and year-to-date this year, through the first quarter, they're up to 23%. So we are -- we've put our toe in the water in the U.K. and in Germany starting really effectively at the beginning of the year, we started late last year, but this is our first full quarter. We've got 11 locations between the U.K. and Germany right now, 4 different brands. And I would say, first of all, our strategy has been to put these brands into existing facilities. So in the U.K., we have our Sytner Select, which is our big box used car retail. So we're able to put the brand there with a, call it, a minimal CI spend and we're in business. So we don't have additional fixed expense, we can sweat the asset a little bit more. But frankly, first blush so far has been positive. We're going to take a walk before run approach in the big box used car retail, we get about 400 guests per week. So these Chinese OEMs are eager to partner with us more. So that's one of the reasons I went to the auto show is really to understand the difference between these brands. You can't just throw an umbrella, say, Chinese brands, just like any Western brands that each of them have their pros and cons. So look, we're going to expand where it makes sense, but we're going to be, let's say, eyes wide open, cautious as we do it. Unknown Analyst: Great. And then probably just follow up to that, it probably matters brand by brand as you alluded to. But could you just comment on what you're seeing in terms of unit profitability on these vehicles? Randall Seymore: Yes. It's -- look, it differs slightly, I would say, in the U.K., Geely and Cherry have both been good to deal with. One concern like with any brand, got to make sure they don't have over inventory that they're not going to over dealer the market because then it's just a race to the bottom. And the other channels as you think about you open a brand-new store stand-alone, you don't have any fixed operations. So instead of running at 75% fixed absorption at 0, right, at the beginning. Now over time, that will increase. But that's to get a return on that investment. So -- and then in Germany, we have BYD and MG, and we just started those. So I would say it's too early to tell. Roger Penske: I'd say when you look at the margins in the big boxes, we're probably getting a couple of thousand pounds more on the Chinese brands that are with our used vehicles we're selling in the same store. So right now, it could be Christmas. We don't know what's going to happen as we go forward. Richard Shearing: But look at the product's good -- we're not seeing any consumer pushback. The mix has been about 50% retail, 50% fleet. Obviously, they're going to put some in fleet to seed the market and get some volume up and awareness in the marketplace. But I think their approach has been sensible overall. Again, as a dealer, you just caution not to -- that they don't saturate the market. Unknown Analyst: Okay. And then just my last question on this front. Is there anything we should be thinking about in terms of implications on after sales with these brands? I mean, is it the same process, getting them in the service lines and the same general RO that you would get on premium luxury. Yes, go ahead. Randall Seymore: Look, it's a good question, more from the standpoint of, hey, are they prepared and hence, are we prepared that we've got all the right safety stock from a parts standpoint that when the customer does come in, that we can handle them officially. So that's 1 big message I had with these OEMs as I met with them, and they seem to understand that we haven't had any challenges yet. But it's been so minimal, Mike, relative to the number of customers we've had come in. I can't say dollar period. But one thing is these cars have a 7-year warranty on it. So we think the customer is going to be stickier rather than having a 3- or 4-year warranty, they'll keep coming back. Roger Penske: We don't know what the used car bias going to be. That's -- and then also is the captive finance companies, which lead the brands around the world that has the best captive finance the ones that we see are best for us. So right now, they're using banks and other things in order to support it, then they will buy down the rate to be competitive in the market. So those are all things. And we don't have units in operation. That's why Randall decide if we're going to do it, we're going to put it in places where we already have revenue and we have a parts and service just in different cargoes on the left on the more ... Randall Seymore: Those select locations where we have full fixed operations in each of them. So it's -- again, we're just -- we're utilizing our assets better. Roger Penske: We're trying in a different market to what's going on in Germany versus what's happened in the U.K., you might talk a little bit about Australia. Richard Shearing: Yes, from a Chinese standpoint? Roger Penske: Yes. Richard Shearing: Yes. Well, look, we don't have any Chinese brands there now. But like I said, it's up to 23% and that's 1 market where the Australia is pinched a little bit more with lack of fuel. They've only got 2 refineries there, so they're dependent on imports. So their fuel price went up more than most countries. And they've seen significant increase in BEV sales along with the Chinese sales. So think about it, they went from 15% to 23% in just 1 quarter. And those customers now are getting the taste of the quality of those brands. So it's it's a disruptor for sure. Operator: Your next question comes from the line of Daniela Haigian with Morgan Stanley. Daniela Haigian: So switching gears a little bit to a more thematic question. The trend of energy and auto is converging on a global scale is getting a lot of interest from investors. Could you speak a little bit about your Australian, New Zealand segment? And any opportunity there? Randall Seymore: Well, thanks, Danielle. It's Randall again. So first of all, let's say, the energy business is vital across the world, but particularly in Australia, the data center business is exploding. And we have a 75% market share in data center backup power for the power range of 1,250 kilowatt and higher, which the majority of them are. So that's just our business pipeline there is extremely strong. We're very tight with numerous customers and that's good news. The bad news with that is you sell the engine and it sits there, right? You go, you do maintenance on it once a month, but it doesn't run. So you don't have that after sales annuity. So where we're focused is to continue to grow our prime power strategy and units in operation. So as an example, 4 years ago, we built a power station with our Bergen engines in the Northwest of Australia, which for our biggest mining customer, 175-megawatt stations, 15 engines, 20 cylinders per engine. These are massive engines, 18 liters per cylinder. These are and these run 7,000 to 8,000 hours a year. And so we're in the cycle right now after they got this commissioned, where the 16,000-hour maintenance interval, you have to take the heads off and remanufacture them. We have all that capability and expertise to remanufacture these heads in country as part of Penske Australia. So after those 15 engines or 300 cylinder heads, that's about 15,000 hours worth of work. So our strategy is to do more -- get more units in operation than our prime power, and we've got that whole vertical strategy and approach and solution for those customers in the market. So it's a key strategy without a doubt for us. Operator: Your next question comes from the line of Alex Perry with Bank of America. Alexander Perry: Congrats on the strong quarter. I wanted to ask about the outlook in the U.K. sort of ex the Chinese brand sort of the core outlook in the U.K. And then just 1 piece on the Chinese brands. Are you expecting -- I know you said earlier you're going to take a measured approach there, but will you continue to add doors there. So just wanted to get your thoughts on the U.K. sort of outside of what's going on with the Chinese brands. Roger Penske: Yes. I think we're going to be measured is the right word, but it was interesting, again, meeting with all these OEMs and understanding the strengths and what some of their strategies are, how that aligns with our strategies. I think we'll continue to evaluate 2 things. Number one, which brands make sense, most sense to continue to partner with. And number two, where we have available facility infrastructure, again, with the strategy of saying we already have it, let's put it there. And because, again, with the lack of units in operation, you don't have that after sales. So the cost to get in is minimal. And then look, we're going to, as usual, be good partners with these brands and want to grow and help them understand the market better. But they're going to limit us based on [indiscernible]. Randall Seymore: Yes. Roger Penske: Now we start to see what the discounting is because we don't want to handle [indiscernible]. Randall Seymore: Correct. Correct. Alexander Perry: Yes, that makes a lot of sense. And then just on inventory levels across the network more broadly. Can you just talk about how you feel about inventory levels? It sounds like there are certain brands [indiscernible] Lexus where you're light any where you think you're over in inventory? And then -- and the brands that you're like, how much do you think that, that sort of restricting the sales velocity and any line of sight into those improving? Richard Shearing: Yes, Alex, Rich here. So I'll speak to the U.S. and then Randall can cover internationally. Just as a top side from an overall perspective, new, we ended the quarter 43 days and unused 33 days and the new compared to 52 days a year ago. So we're down from a day to supply standpoint, 9 days. You've got to look at both the day supply and the model mix within the inventory that you have by brand. And so even though we would say that Toyota Lexus is great from a days supply standpoint, we would prefer to have maybe more wrap forwards in that inventory and less [indiscernible] as an example. So you've got to look at it from both perspectives. But certainly, they are the healthiest in maintaining that supply versus demand balance. We talked last year, we saw Honda maybe overproduced a little bit and our days supply crept up there. They had a plant closure earlier this year that has got them back more in line. And then we still got to balance the BEV mix in there. We've seen that come back up after the the tax credit went away at the end of September, and we had that sell-through. We were down 12 days supply on bev. We're up to 78 days supply now. And so that's higher than certainly our overall new car averages and certainly higher than we would want it to be. And then I think from a use perspective, we would prefer to have more used right now. There is demand in the used car market. but we've been disciplined again on our sourcing of used cars. We could go out and buy more used cars, but it would have the counter effect of lowering our grosses on the other side of the ledger. So we've stayed within our wheelhouse of 0- to 4-year-old used cars, not going upmarket in the 8-plus year range for used cars. So that's -- that's a little bit of color on the U.S. So Randall? Randall Seymore: Yes. Look, it's very similar in the U.K., our new car supply is 40 days and giving you an idea the lowest day supplies land over at 35 days and the highest is Audi at 45 days. So the band is pretty small with all the brands in between. And then our used car supply is 42 days, similar to the U.S. is difficult now, but I would say -- our team in the U.K. has done a fantastic job with acquisition of used in proper appraisal. The available growth we have in our used cars right now is as best it's been in months. So anyway, we feel we're in very good shape. Operator: Your next question comes from the line of David Whiston with Morningstar. David Whiston: On service [indiscernible] utilization, you talked about it being, I think, 84%. So I was just curious what prevents that from being -- not being 100%? Is it purely labor shortages or other variables? Richard Shearing: Yes. There's -- it's a combination of tax because that is a measure of tech ratio to base. And so our tech count is up 3%. Our guys would tell you, you don't want and we're probably never going to have 100% [indiscernible] utilization because in order to achieve that, you need that, to Randall's comments earlier, have every part you need at the time you need it and invariably, that's never the case. And so you -- you're in a process of having a car torn down, waiting on a part that's tying up a bay or you -- in the case of battery electric vehicles, you've got a flat Bay and you've you need a bay next to it to reinstall the battery. So we feel pretty good at 84%. We probably can tick that up a few percentage points more. But with the flexibility we need for the type of work we do, growing north of 90% would be a challenge. Roger Penske: Yes, I think, Rich, also these bigger jobs or we're taking engines out of [indiscernible] and things like that, you will see the second [indiscernible] year [indiscernible] in order to be able to do the work. It's flexible. But we are -- to put it in perspective, we're adding -- we're going to 100 bays at Longo Toyota, in California. We're building a full dealership with 100 bays and Hutto Texas outside of Austin, and we're adding another 30 bays to Central Florida Chadwell get us to almost 100%. So our commitment because the units in operation for this brand, make this a real opportunity, talk about where growth will be. And depending on its warranty, look, we like to warranty work, but the customer comes back because you've got a car that's not in for warranty every day. So I think that's key and as for Toyota, in many cases, leads the market. And there's no question that our biggest push when we talk about investment is some of the showroom CapEx that's required because in many cases, that means we got to tariff our billing. We just did this in San Diego at Lexus, we spent by almost a year, new furniture, et cetera, et cetera. I think it's done great, but we have to go further than that. This is some of the questions that we have today. what is the store making, what's the expectation of the OEM. And we're pushing back to them in a good way, trying to explain to them, we needed to spend more in parts of service let's make the showroom smaller, let's put more cars outside and work on more inside. I know it's opposite of what the thinking is. But we have Bill Brown Ford, #1 Ford dealer in the country, we could put 3 cars in the showroom and they sold 600 cars this month. And what are we doing, we're expanding the service. So there is no question in the back end. And that's why we like Rich's business in premium truck, what are you 120%, 130% fixed coverage? Richard Shearing: That's Premier Truck, yes, we're 127%. Roger Penske: 127%. So how many trucks you have in the showroom? Richard Shearing: Zero, [indiscernible]. Roger Penske: [indiscernible] based, David. Operator: That does conclude our question-and-answer session. And I would now like to turn the conference back over to Mr. Penske for closing comments. Roger Penske: Thanks for joining us. We'll see you next quarter. Thank you. Operator: Ladies and gentlemen, that does conclude today's call. Thank you all for joining, and you may now disconnect.
Operator: Good afternoon, ladies and gentlemen. Thank you for standing by and welcome to the Central Pacific Financial Corp. First Quarter 2026 Earnings Conference Call. During today's presentation, all parties will be in a listen-only mode. Following the presentation, the conference will be open for questions. This call is being recorded and will be available for replay shortly after its completion on the company's website at cpb.bank. I would now like to turn the call over to Jayrald Rabago, Senior Strategic Financial Officer. Please go ahead. Jayrald Rabago: Thank you, and thank you all for joining us today as we review Central Pacific Financial Corp.'s financial results for the first quarter of 2026. Joining me this morning are Arnold D. Martines, Chairman, President, and Chief Executive Officer; David S. Morimoto, Vice Chairman and Chief Operating Officer; Ralph M. Mesick, Senior Executive Vice President and Chief Risk Officer; and Dayna Matsumoto, Executive Vice President and Chief Financial Officer. We have prepared a supplemental slide presentation with additional details on our earnings release. The presentation is available in our Investor Relations section of our website at ir.cpb.bank. During today's call, management may make forward-looking statements. These statements are based on current expectations and assumptions and are subject to risks and uncertainties that could cause actual results to differ materially. For a complete discussion of these risks related to our forward-looking statements, please refer to slide two of our presentation. With that, I will now turn the call over to our Chairman, President, and CEO, Arnold D. Martines. Arnold D. Martines: Thank you, and aloha to everyone joining us today. The first quarter represented a strong start to 2026 with solid earnings performance and continued execution across our franchise. We delivered growth in both loans and core deposits, maintained strong credit quality, and continued to operate from a position of capital strength. This momentum reflects the strength of our relationship-focused banking model and our continued commitment to serving the people, businesses, and communities of Hawaii. Our results also demonstrate the durability and organic earnings power of the franchise. With return on equity above 13% and robust capital levels, we remain focused on disciplined, sustainable growth and thoughtful capital allocation. From a shareholder perspective, we remain committed to deploying capital in ways that enhance long-term value. This includes supporting organic growth, maintaining a strong balance sheet, returning capital through dividends and share repurchases, and preserving flexibility to respond to market opportunities. We were also pleased that CPB was named the Hawaii U.S. Small Business Administration Lender of the Year for 2025. This marks the seventeenth time CPB has received this recognition and reflects our long-standing commitment to Hawaii's small business community. Turning to the broader environment, Hawaii's economy remained resilient during the first quarter. Visitor arrivals and spending increased, and the state's unemployment rate remained exceptionally low at 2.3%. While oil prices have decreased due to the conflict in the Middle East, the direct impact on Hawaii's economy has been limited to date, and we continue to monitor conditions closely. At the same time, Hawaii continues to benefit from ongoing construction activity, military spending, and a resilient local economy. Recent storm activity and flooding, including impacts from the Kona Low, caused isolated but significant damage in parts of the state. We remain committed to supporting affected customers and communities as they recover and rebuild. Against this backdrop, our strategy remains consistent: support local businesses through prudent lending, grow and deepen core deposit relationships, invest thoughtfully in our franchise, and manage risk with discipline through the cycle. With that, I will turn the call over to Dayna. Dayna Matsumoto: Thanks, Arnold. For the first quarter, net income was $20.7 million and earnings per diluted share was $0.78. Return on average assets was 1.12%, and return on average equity was 13.9%. Compared to the year-ago quarter, our EPS increased by 20%, reflecting revenue growth and expense discipline as we continue to successfully execute on our strategy. Net interest income totaled $61.4 million and net interest margin remained healthy at 3.53%. Compared to the prior quarter, results reflected typical seasonal factors and balance sheet timing, including lower day count and lower average loan balances. The decline in our loan yields was partially offset by the improvement in our deposit costs. For the second quarter, we are projecting NIM of 3.50% to 3.55%. Our guidance for full-year net interest income remains at a 4% to 6% increase over the prior year. Across a range of potential rate environments, our balance sheet positioning and funding mix continue to provide meaningful resilience. Total other operating income was $11.6 million and declined from the prior quarter by $2.6 million. In the prior quarter, we had one-time BOLI death benefit income of $1.4 million. Current quarter BOLI income was further impacted by equity market volatility. Additionally, Q1 seasonality typically results in lower levels of fee income in the mortgage banking and wealth areas. We continue to expect our full-year other operating income to increase modestly over normalized prior year. Total other operating expense was $43.7 million and declined by $2 million from the prior quarter. The decline was primarily driven by higher incentive accruals in the prior quarter and lower deferred compensation expense this quarter. We expect our expenses to increase over the year, but our full-year expense growth is still expected to be modest at 2.5% to 3.5% from 2025 normalized. In the first quarter, we paid a cash dividend of 29¢ per share and repurchased approximately 321 thousand shares for a total of $10.5 million. With our strong earnings and capital position, our board declared a second quarter cash dividend of 29¢ per share. We had $44.5 million remaining available under our share repurchase program as of March 31, and we plan to continue to utilize it as part of our capital allocation strategy. I will now turn the call over to David. David S. Morimoto: Thank you, Dayna. During the first quarter, our total loan portfolio grew by $31 million, bringing total loans to $5.3 billion at quarter end. The majority of the loan growth came near the end of the first quarter; therefore, we will see the benefit in our net interest income in subsequent quarters. Loan growth this quarter was driven by commercial real estate, where we continue to see good risk-reward opportunities both in Hawaii and the Mainland. We had a roughly equal amount of loan production volume in Hawaii and the Mainland this quarter, while loan runoff was greater in the Hawaii portfolio, as it represents over 80% of overall balances. Average loan portfolio yield in the first quarter was 4.93%, compared to 4.99% in the prior quarter. The yield decline was primarily due to the impact of the fourth quarter Fed rate cut on repricing and new loan yield. Total deposits increased $90 million during the quarter, ending at $6.7 billion. Core deposits represent over 90% of total deposits, with continued growth in noninterest-bearing and relationship-based accounts. At the same time, total deposit costs decreased by 4 basis points quarter over quarter to 0.90%. Looking ahead, our loan pipeline remains solid across Hawaii and select Mainland CRE markets, and currently we see stronger opportunities in commercial loans relative to retail lending. We will continue to execute our deposit strategy, focusing on new customer acquisition and deepening existing relationships. As a result, we are maintaining our full-year 2026 guidance of loan and deposit growth in the low single-digit percentage range. With that, I will turn the call over to Ralph. Ralph M. Mesick: Thank you, David. We continue to operate within risk appetite, and the credit profile of the bank is unchanged at quarter end. We maintain an approach of seeking to achieve optimal returns, balance, and diversification, emphasizing underwriting discipline, relationship lending, and risk-based pricing. Our credit metrics stayed near cycle lows during the first quarter. Nonperforming assets totaled $14.5 million, or 19 basis points of total assets. Net charge-offs were 18 basis points. Past due trends were stable. Criticized loans were less than 200 basis points of total loans and within an expected range. Changes in criticized loans reflect relationship-specific dynamics rather than any broad-based credit trend. Provision expense for the quarter was $2.4 million. We added $2.7 million to the allowance, while the reserve for unfunded commitments declined by $300 thousand. We identified no material matters impacting our customers from the recent Kona Low flooding. At quarter end, our total risk-based capital ratio was 14.7%. At this level, we retain ample flexibility to manage through adverse conditions. With that, let me turn the call back over to Arnold. Arnold D. Martines: Thank you, Ralph. To summarize, the first quarter was a strong start to the year. We delivered solid earnings, maintained strong credit quality, grew both loans and core deposits, and continued to operate from a position of capital strength. I want to thank our employees for their continued commitment, care, and dedication to our customers and communities. We will now open the call for questions. Operator: Thank you. We will now begin the question-and-answer session. If you would like to ask a question, please press star then one on your telephone keypad. If you would like to withdraw your question, simply press star then one again. Your first question comes from the line of Evan Krotowski from Raymond James. Your line is open. Analyst: Good morning. I am on for David Pipkin Feaster. I just wanted to start on loans. What have you been hearing from borrowers in your market, and how has demand been holding up given the uncertainty we are seeing in the market today? And then going forward, I think you mentioned seeing more opportunity or maybe focusing more on the commercial side. What kinds of credits are you targeting there as well? David S. Morimoto: Hey, Evan. It is David Morimoto. What we are seeing and hearing from our customers has not changed much from prior quarters. We continue to see opportunities, but as we mentioned, they are currently more focused in the commercial area than in the retail area, and that is industry-wide. A lot of the retail loan categories are subdued right now as a result of the interest rate environment, but hopefully that will change going forward. Right now, we are seeing good risk-reward loan opportunities. They tend to be primarily focused in commercial mortgage and, to a lesser extent, in commercial and industrial. Analyst: Is that more on the Mainland or in Hawaii, or is it balanced wherever you see the opportunity? David S. Morimoto: Currently, it is relatively balanced. I will say that quarter to quarter, there is always a lot of variability in deals—when things ultimately end up closing. You might think it is going to close in the second quarter and it slips to the subsequent quarter. But currently, what we are seeing in the pipeline is relatively balanced. We are always targeting to grow both Hawaii and the Mainland every quarter, but as we saw this quarter, it varies based on a lot of different factors. Analyst: That is helpful. Pivoting to the margin, you were able to achieve further funding cost leverage during the quarter, which is no easy feat seeing as deposit costs are at 90 bps. Do you think you have hit a floor on funding costs from here? If so, what are the main drivers for the margin going forward with the Fed seemingly on hold? Dayna Matsumoto: Hi, Evan. With the Fed on hold, we expect our deposit cost will level out somewhat. We do have some downward repricing opportunity on our CD portfolio. We have about $480 million, or slightly less than 50% of our CD portfolio, maturing in the second quarter with a weighted average rate of 2.8% coming off, while our new CD rates on a blended basis are approximately 2.5%. Thinking about the NIM going forward, we will improve our earning asset mix as we plan to optimize our excess liquidity by growing loans and some securities. We also expect to continue to get a positive lift from back book repricing, although that lift has moderated somewhat. On the funding side, we do expect some modest continued decline in our CD cost. All in all, our NIM is expected to remain relatively close to where it is today. With the Fed on hold and our position being fairly neutral to slightly asset sensitive, we think it could be modestly positive to us, but not a big overall impact. Bottom line, we feel really good about our strong NIM being in the mid-3% range, and that gives us some flexibility to be more competitive in the market to drive growth and revenue. Analyst: If I can ask one more: you were active on the buyback this quarter and still maintain a good amount of excess capital. How are you thinking about capital priorities today, and do you see any opportunities for balance sheet optimization with that excess capital? Dayna Matsumoto: Our capital priorities remain the same. We continue to deploy our capital in a very thoughtful and deliberate manner. As we have said before, our top priority is to use capital for loan growth and to support our clients. We plan to continue our quarterly cash dividend, and any excess capital beyond what we can use to organically grow the business we will consider for share repurchases. You will likely see that we return a similar amount of capital as we did this past quarter through both dividends and share repurchases. Operator: Your next question comes from the line of Matthew Clark from Piper Sandler. Your line is open. Matthew Clark: Good morning, everyone. A couple more questions around the margin. Dayna, do you have the spot rate on deposit costs for March? Dayna Matsumoto: For March month-to-date, deposit cost was 90 basis points, and the spot rate at the end of March was about the same. Matthew Clark: And on the asset side, on average how much do you have in fixed loan repricing or runoff per quarter, and the same on the securities side in terms of cash flows? Dayna Matsumoto: We typically have around $200 million to $250 million of loan runoff each quarter. Our weighted average new loan yield in the first quarter was 6%, compared to our average loan portfolio yield in the quarter of 4.9%, so we continue to see positive repricing there. On the securities portfolio, cash flows are about $30 million per quarter at a weighted average rate of about 2.8%, and our new security purchase yields have been around 5%, so we continue to get a very nice lift there. Matthew Clark: Given those dynamics—some basis points on CD repricing and a few basis points on loans and securities—why guide the margin to 3.50% to 3.55% instead of closer to, say, 3.60%? Dayna Matsumoto: There are a lot of factors and variables that go into the NIM. In addition to the moderation of the back book repricing I mentioned, on the competitive front we do see some pressure on spreads and new loan yields due to the competitive nature of the market. Those are some of the factors we are considering. Our NIM path will largely depend on loan growth, market dynamics, and the shape of the yield curve going forward. Arnold D. Martines: I will add that we have a healthy NIM level, and we want to be thoughtful about balancing further improvement with being selective and competitive in the local market. We remain very committed to maintaining a very healthy NIM overall. Matthew Clark: Do you still anticipate a few construction projects funding this quarter, and how should we think about the related reserves you put against them? David S. Morimoto: There is one large residential condominium project that is expected to close in the second quarter. That will be a paydown on the construction side, but it will largely be offset by takeout mortgages on the residential mortgage side for the homeowners. Matthew Clark: On the uptick in criticized loans in the slide deck, what drove that and what is the plan for resolution? Ralph M. Mesick: The increase in criticized loans was related primarily to one commercial relationship. There is no systemic deterioration. This is a longtime customer with a viable business and a fairly strong balance sheet. They experienced some operating losses that resulted in a drawdown in liquidity. The plan is to retain and support this customer. We do not see any loss content in that credit. Operator: Your next question comes from the line of Kelly Motta from KBW. Your line is open. Kelly Motta: Good morning, and thanks for taking my questions. Circling back to the margin, you mentioned greater competition on loan pricing. Where is the blended rate of new originations now relative to a quarter ago? Dayna Matsumoto: In the first quarter, our weighted average new loan yield was 6%. In the fourth quarter, it was 6.8%, so we do see a little bit of moderation there. Kelly Motta: Appreciate the color on capital return. I know it is early, but given residential mortgage is a decent part of the portfolio, is it fair to say the proposed capital rules would be beneficial to you, and have you done any preliminary sensitivity around the impact to your regulatory capital ratios? Dayna Matsumoto: That is correct. It will be beneficial to us. We are still evaluating the proposal, but it is positive and will have a favorable impact on our capital ratios, particularly from the residential mortgage risk-weighting changes. Our early estimate is an improvement of around 50 to 100 basis points in our CET1 ratio. We will continue to monitor developments on the proposal, and we do not expect it to change our capital strategy. Kelly Motta: Two modeling items: on the tax rate, it jumped from Q4, but you had the BOLI death benefit then. Is 22% to 23% a good go-forward effective tax rate? Dayna Matsumoto: The increase in our effective tax rate this quarter was due to less tax-exempt BOLI income, and in Q4 we had some tax credit benefits. On a normalized basis, we expect the ETR to be in the range of about 22% to 23%. It could trend lower to the extent that we bring on additional tax credits or have more tax-exempt income. Kelly Motta: Lastly, you noted liquidity was higher in Q1. How do you manage liquidity levels, and should we expect some of that to be redeployed into the growth you are seeing? Dayna Matsumoto: At 03/31, our cash and liquidity position was very healthy. We had some inflows of deposits and have some excess cash, maybe in the range of about $100 million to $150 million, that could be deployed as opportunities present themselves. Our average earning asset growth may not be too significant as we shift some of that excess cash to loans or securities. Going forward, it will be a function of good loan risk-reward opportunities and our continued focus on growing core deposits. Arnold D. Martines: Thanks for your questions, Kelly. Operator: Again, if you would like to ask a question or have additional follow-up questions, press star then the number one on your telephone keypad now. We will pause for just a few seconds. As there are no further questions, I will now turn the call back over to Jayrald Rabago for closing remarks. Jayrald Rabago: Thank you, everyone, for joining us today and for your continued interest in Central Pacific Financial Corp. We look forward to updating you again next quarter. Operator: This concludes today's conference call. Thank you for your participation. You may now disconnect.
Operator: I'd like to remind everyone that today's call and webcast are being recorded. Please note that they are the property of Apollo Commercial Real Estate Finance, Inc. and that any unauthorized broadcast in any form is strictly prohibited. Information about the audio replay of this call is available in our earnings press release. I'd also like to call your attention to the customary safe harbor disclosure in our press release regarding forward-looking statements. Today's conference call and webcast may include forward-looking statements and projections, and we ask that you refer to our most recent filings with the SEC for important factors that could cause actual results to differ materially from these statements and projections. In addition, we will be discussing certain non-GAAP measures on this call, which management believes are relevant to assessing the company's financial performance. These measures are reconciled to the GAAP figures in our earnings presentation, which is available in the Stockholders section of our website. We do not undertake any obligation to update our forward-looking statements or projections unless required by law. To obtain copies of our latest SEC filings, please visit our website at www.apollocref.com or call us at (212) 515-3200. At this time, I'd like to turn the call over to the company's Chief Executive Officer, Stuart Rothstein. Stuart Rothstein: Thank you, operator. Good morning, and thank you for joining us on the Apollo Commercial Real Estate Finance, Inc. First Quarter 2026 Earnings Call. I am joined today by Anastasia Mironova, our Chief Financial Officer; and Scott Weiner, Chief Investment Officer. This call comes at a pivotal moment for ARI. As previously announced, we completed the sale of the company's $9 billion loan portfolio to Athene on April 24. Following repayment of ARI's financing facilities, other indebtedness and transaction expenses, ARI's total assets now consist of approximately $1.3 billion of cash, along with 4 REO assets representing approximately $900 million in gross value. The sale delivered ARI stockholders a compelling premium to where the stock has traded in recent years, and we believe this outcome demonstrates our unwavering commitment to maximizing stockholder value. As previously indicated, ARI's management team, Board of Directors and other senior investment professionals at Apollo are in process of evaluating a range of commercial real estate-related strategies for ARI with the goal to deliver attractive, go-forward returns for stockholders. We have spent a significant amount of time since the announcement at the end of January, exploring different strategies and speaking with bankers and other industry experts. We anticipate having an update on the strategy exploration in the coming months. Shifting now to a brief update on the 4 remaining REO assets. As a reminder, 2 assets, the Brook, a multifamily asset in Brooklyn and the Mayflower Hotel in Washington, D.C. represent approximately 80% of the REO net equity value. At the Brook, the market rate residential component is approximately 80% leased and affordable units are approximately 70% leased, with 95% of units selected. Both components are expected to reach stabilization by this summer. We continue to monitor the market and think through the appropriate exit strategy, either pre- or post-stabilization while continuing efforts to add value to the Western parcel. With respect to the 2 hotels, the Mayflower had a strong first quarter, with net cash flow well ahead of budget, driven by margin improvements and higher occupancy. We see opportunity for continued improvement in year-over-year performance and subject to market conditions, we expect more clarity on exit strategy in the second half of the year. Turning to the Courtland Grand. First quarter performance was below budget due to broader market softness, though we expect business interruption insurance from the offline units and the benefit from the upcoming soccer World Cup over the summer to bring full year performance in line with our expectations. We are in active dialogue with several potential buyers regarding alternative uses as we think through potential exit strategies. Lastly, for the 2 remaining former hospital assets, which combined represent approximately $24 million of book value, we are actively engaged in rezoning efforts and in dialogue with local operating partners to determine optimal exit scenarios. Before I turn the call over to Anastasia, in anticipation of a question, I just want to provide an update on dividend policy going forward. Consistent with past practice, declaration of any dividends will remain subject to the approval of the Board of Directors, and we will announce the second quarter dividend a few weeks prior to the end of the quarter as per the customary schedule. As we disclosed at the time of the original announcement of the loan sale, ARI intends to continue paying a quarterly dividend as we assess strategic opportunities. We also previously indicated a target dividend resulting in approximately an 8% annualized dividend yield on book value per share of common stock. The goal and target remain intact. It is worth noting that given the cash balance held at ARI and the desire to invest that cash conservatively while evaluating strategic options, any dividends declared for future quarters likely will contain a significant return of capital component. With that, I will turn the call over to Anastasia to work through our first -- to walk through our first quarter financial results. Anastasia Mironova: Thank you, Stuart. Good morning, everyone. For the first quarter of 2026, ARI reported net income available to common stockholders of $23 million or $0.16 per diluted share of common stock. Distributable earnings for the quarter were $31 million or $0.22 per diluted share. Net interest income for Q1 2026 was $36 million compared to $39 million in Q1 2025. Interest income from commercial mortgage loans increased modestly to $150 million from $144 million due primarily to loan portfolio growth of about $1.2 billion on amortized cost basis compared to March 31, 2025, outweighing the impact of lower average index rates. Interest expense increased to $114 million from $105 million, reflecting higher average secured debt balances associated with portfolio fundings compared to last year. Throughout the quarter, we opportunistically repurchased approximately 2.9 million shares of common stock at a weighted average purchase price of $10.52 per share. Following the quarter end, we repurchased an additional 3.9 million shares at a weighted average price of $10.72, bringing total repurchases year-to-date to approximately 6.8 million shares. This activity resulted in $0.07 of book value per share accretion year-to-date with $0.03 in Q1 and $0.04 in Q2 to date. In April, our Board of Directors has authorized a new share repurchase program, and we now have up to a total of $150 million available for the repurchase of common stock. Common equity book value per share was $12.01 at March 31 compared to $12.14 at the end of Q4 2025, with $0.10 of the decrease attributable to the impact of vesting and delivery of restricted stock units, the trend typically observed during the first quarter of the year. Pro forma book value per share at the closing of the portfolio sale without giving effect to real estate owned quarter-to-date activity and certain quarterly accruals is $12.15, reflecting reversal of general CECL allowance in excess of discounts and closing costs for the portfolio sale as well as accretion from the share repurchases, as referenced earlier. Turning now to the portfolio sales. I want to highlight a few key points from the transaction. In addition to repaying our secured borrowing facilities, we have fully repaid the outstanding balance of our Term Loan B and deposited funds to satisfy and discharge our senior secured notes, which will be redeemed at par on or about June 15. As Stuart indicated, our balance sheet is now predominantly represented with cash and net equity in our real estate owned assets. The only commercial mortgage loan currently remaining on our balance sheet is the loan secured by a hotel property in Chicago, which remains on nonaccrual status. The loan has an amortized cost basis of $42 million and an upcoming maturity in May, at which point we expect it to be repaid through the sale of the underlying property, the purchase agreement for which was executed during Q1 with hard money deposits received by the sponsor. With that, I will open the call for questions. Operator? Operator: [Operator Instructions] Our first question comes from Jade Rahmani with KBW. Jade Rahmani: Could you comment on the rationale to be buying back stock at this point in advance of the strategic review? It's reasonable to expect that capital could be needed to consummate an acquisition or some transaction. And so I'm just curious about your thoughts on that. Stuart Rothstein: Yes. I think from our perspective, Jade, look, we obviously, in light of the sale and what's left in the portfolio, have significant confidence in where the book value per share is today. And as we think about using some amount of capital to buy back stock, I would say the amount that we're using to buy back stock is not material as we think about having any impact on our options to do something strategically with the remaining capital in the vehicle. Jade Rahmani: And then regarding the strategic review, just wondering if you could comment on asset classes or give any broad commentary as to how your thinking is evolving. I noticed that Blackstone is planning to IPO a data center REIT and wondering if that type of construction could be similar to something you might explore. Stuart Rothstein: I'm not going to give any specific comments on asset types. I guess what I would say is a few clarifying comments. While the agreement we announced several months ago indicated we had until the end of this year to decide the strategic path we were headed in, I think it's safe to say I don't envision a scenario where we are sitting here until the end of the year and making a grand announcement. I think there will be meaningful progress made in the next few months and significant clarity provided the next time we are speaking to all of you, if not sooner. The other thing I would say is, as we think about strategic alternatives, our view fundamentally is we have created $12 a share of value in the ARI box. And anything we would think about doing strategically needs to be done with us having full confidence that what we are considering/pursuing will create more than the current book value per share for shareholders. Operator: Our next question comes from Rick Shane with JPMorgan. Richard Shane: Look, it sounds like we'll have additional clarity within the next 3 months. And for now, you guys are sitting on a lot of cash. You talked about sort of doing something in the near term to invest that cash. How should we think about that? Is this -- are you -- how much flexibility do you have? Does it have to be, for example, CMBS given the mandate of the company? Can you invest in agency mortgage-backed securities and mitigate credit risk, but take on some duration risk? Is this just going to be a treasury portfolio? How do we think about the asset class and potentially the leverage that you would take given some of the facets of those different asset classes or loan types? Anastasia Mironova: Rick, this is Anastasia. So maybe to start with the first part of your question, CMBS, agency securities, all of these are typically good REIT assets, CRE CLOs, maybe not good REIT assets, but there are structures which could allow us to invest in those if we wanted to. And other than that, we have a number -- more than a handful at this point of high-yielding deposit accounts, which are providing us a pretty attractive yield. So that's an option as well. Richard Shane: And is the REIT test based upon the average over the quarter? Or is it actually based simply on 6/30. So can you -- do you have flexibility intra-quarter and then can be in compliance at the very end of the quarter to meet your obligations? Anastasia Mironova: Technically, the asset test is as of the quarter end. There is also an income test, which is on an annual basis. Richard Shane: Got it. Okay. And what about leverage on any of those different classes? Anastasia Mironova: No leverage as we envision to date. Stuart Rothstein: I mean, to be simple, like it's not about return, Rick. It's about making sure the cash is there if we go down any of the strategic paths we're considering. We don't want to put any of the capital at risk today for market movements that sometimes occur. Operator: [Operator Instructions] Our next question comes from Jade Rahmani with KBW. Jade Rahmani: Just wanted to ask about the REO resolution paths and how that interacts with the strategic review because let's just say the strategic review did not come up with a definitive strategy in which you were confident that new company would trade above $12 a share and you decide to return the money. Would you look to bulk sale the REO portfolio or put that in a liquidating trust? Just wanted to get some color you might provide on that. Stuart Rothstein: Yes, nothing set in stone today, Jade, but I think more likely the latter, which would be we'd want to give ourselves the time to make sure we maximize the value of each of the four REO assets, and that is probably more likely some form of liquidating trust as opposed to just a bulk sale, which might have some sort of discount attached to it. Jade Rahmani: And then if I could ask a follow-up just broadly about the macro picture with the 10-year today now at 4.4% and the mortgage REITs down 3% to 5% today, including ARI, which had an unsurprising quarter, in fact, a positive quarter. So what are your thoughts about the interest rate outlook and how that might complicate either the strategic review or equity return calculations in real estate? Stuart Rothstein: Well, first of all, I think you just validated your own initial question on share repurchase for ARI, given what's going on in the market today. Look, I think it's something -- historically, we've not been -- spent a ton of time trying to predict interest rate markets and try to think about value through cycles vis-a-vis interest rates. But I do think, given the uncertainty in the market today, when we've created effectively a capital box that is mostly cash right now, I would say it just has implications as higher rates, inflation, potential impacts on employment, all factor into thinking about future strategies versus the value of what we've created for people and at some point, deciding we're better served to let others decide what they want to do with their capital in the future. Operator: Thank you. I would now like to turn the call back over to Stuart Rothstein for any closing remarks. Stuart Rothstein: Thank you, operator. And as always, myself, Anastasia, Hilary are around if people have follow-up questions after the call. Thank you. Operator: Thank you. This concludes the conference. Thank you for your participation. You may now disconnect.
Operator: Good morning, and welcome to Dana Incorporated's First Quarter 2026 Financial Webcast and Conference Call. My name is Regina, and I will be your conference facilitator. Please be advised that our meeting today, both the speakers' remarks and Q&A session will be recorded for replay purposes. [Operator Instructions]. At this time, I would like to begin the presentation by turning the call over to Dana's Senior Director of Investor Relations and Corporate Communications, Craig Barber. Please go ahead, Mr. Barber. Craig Barber: Thank you, and good morning. Welcome to Dana Incorporated's earnings call for the first quarter of 2026. Today's presentation includes forward-looking statements about our expectations for Dana's future performance. Actual results could differ from what we discuss here today. For more details about the factors that may affect future results, please refer to our safe harbor statement found in our public filings and our reports with the SEC. I encourage you to visit our investor website where you'll find this morning's press release and presentation. As stated, today's call is being recorded, and the supporting materials are the property of Dana Incorporated. They may not be recorded, copied or rebroadcast without our written consent. With us this morning is Bruce McDonald, Dana's Chairman and Chief Executive Officer; Byron Foster, Senior Vice President and President of our Light Vehicle Systems Group and our incoming CEO; and Timothy Kraus, Senior Vice President and Chief Financial Officer. Bruce, I'll now turn the call over to you to you. R. McDonald: Okay. Thank you, Craig, and good morning, everyone, and thanks for your interest in Dana. Just maybe before we get into the slide deck, I'd just like to kind of reflect on the fact it's my last call as CEO, and I'm transitioning into the Chairman's role here now. If you look at the first quarter results, Tim, Byron and the entire Dana team, I think, have delivered another terrific quarter with the first time since I've been back, we're showing revenue growth and extremely strong year-over-year improvement in our margins. I'd also reflect on the fact that these are the first of our 30 conference calls we're going to have when we talk about our Dana 2030 plan. And I think we're off to a terrific start. And with the -- that's the $10 billion revenue bogey that we put out there and with our margins getting into the 14% to 15% range. You'll see in our deck, we've talked about winning the RAM Dakota Program. And with that award, we now have just over 60% of our growth through 2030 secured. So I think that's a great start. Anyway, I'll turn it over to Byron, and he'll take you through the highlights of the quarter. Byron Foster: Okay. Thanks, Bruce, and thanks, everyone, for joining the call this morning. As Bruce said, the team is off to a strong start to the year, and I'm excited to share a few highlights that I'll take you through on Page 4. Starting with the financial results. EBITDA margin came in at 9.2% which, as Bruce alluded to, is a great year-over-year improvement of 400 basis points. So really seeing the margin expansion come through on a year-over-year basis. In terms of share repurchases, we repurchased 4.4 million shares in the quarter, returning $125 million to our shareholders, and that keeps us on track to our target of $300 million for the year here. If you look at the program to date since we launched back in Q2 of last year, that takes us up to $775 million of value return to our shareholders and keeps us on track to our target of $2 billion through 2030. In terms of cost reductions, you'll see, as Tim takes us through the walk that the team delivered $35 million of cost reductions in the quarter, which is right on track to our target of $65 million for 2026 and a program total of $325 million. So the team remains highly focused on making sure that we remain a lean and efficient operation here. If you look at new business growth, and Bruce mentioned it in his opening comments, we were able to deliver a significant new business award in the quarter, which I'll take you through here in a couple of pages. So delivering against our commitment of profitable growth for the company. And this is right in line with what we laid out relative to our Dana 2030 strategy around profitable growth and margin expansion for the company. If you go to Page 5 in the deck, I want to take the opportunity again to thank all those that were able to spend time with us at our Capital Markets Day about a month ago. And as a quick reminder, our plan is about profitable growth in our Traditional business, our Aftermarket business as well as Applied Technologies, and it's about margin expansion through manufacturing excellence and structural cost reductions. You can see the financial targets that we've laid out and we remain committed to top line of $10 billion, which is 33% above our guide here -- the midpoint of our '26 guide, margins in the mid-double-digit 14% to 15% range, which is a 400 basis point improvement over the midpoint of this year's guide and then 6% free cash flow margins. So as we go through our journey of the Dana 2030 strategy, you will continue to hear various proof points from us as we're in front of you, giving you updates on the progress of the business. And this quarter, we'd like to give you an update on the first pillar around Traditional growth -- growth of our Traditional product lines, if you will. So if you go to Page 6, you can see the new award that -- we're proud to announce that we'll be participating on the RAM Dakota program with Stellantis, where our content will be front and rear axles. And it's really a testament to the continued performance of the team relative to world-class quality and delivery performance as well as competitiveness. It's also a great story because it leverages installed capacity that we have in place supporting the Toledo assembly complex and really leverages our core products on the ICE front. You can see that it's $250 million of annual sales, and that it will launch in early 2028. So if you flip to Page 7, just to give you a visual now of where the backlog stands. When we were last in front of you, our 3-year net new sales backlog was $750 million, which takes it up to $950 million. And that's because as the program ramps, some of that $250 million that I referenced on the previous page will fall in the 2029 time horizon. So really proud that the team continues to deliver on incremental growth in our backlog and has secured a significant new award with one of our key customers. So on Page 8, just in summary, again, what new Dana is all about. It's really about focusing on our core Light Vehicle and Commercial Vehicle markets, remaining a lean, efficient organization and ensuring that the work we've done to take cost out that, that cost remains out and that we remain efficient. It's about double-digit margin performance, and you're going to see that starting here in 2026, and you'll see that those margins increase over our 5-year planning horizon. And it's about delivering strong shareholder returns through profitable growth, margin expansion and maintaining a best-in-sector balance sheet. So great start to the year, great quarter. And with that, I'll turn it over to Tim to take us through the numbers in more detail. Timothy Kraus: Thank you, Byron. As we begin the discussion of the first quarter with the change in sales and adjusted EBITDA, you can join me on Page 10 of the deck. Starting with sales. First quarter 2026 sales were $1.868 billion, up from $1.781 billion last year. As expected, lower end market demand drove a $33 million headwind from volume and mix. Despite that backdrop, we continue to execute well across the organization, as Byron mentioned. Performance actions added $2 million due to pricing and recoveries. Tariffs contributed $48 million, primarily due to the recovery timing. Currency added $64 million, largely driven by the euro strength, while commodities provided an additional $6 million top line benefit in the quarter. Altogether, those items brought us to the $1.86 billion of sales for the first quarter of 2026. Turning to adjusted EBITDA. We started at $93 million in the first quarter of last year, a 5.2% margin and delivered a significant step-up despite slightly softer demand. Volume and mix contributed $27 million in incremental profit, reflecting favorable mix and improved profitability on new programs. Performance actions added $15 million driven by stronger operating efficiency and continued tight cost controls across all aspects of the business. Cost savings were a major driver, contributing $35 million as our cost actions continue to deliver exactly as planned and remain on pace for our full year and full program target of $325 million. Tariffs were a modest $2 million headwind to EBITDA this quarter, while currency contributed $5 million. Lastly, commodities were a $2 million headwind on a year-over-year basis. Bringing it all together, adjusted EBITDA was $171 million, representing a 9.2% margin, a 400 basis point improvement over 2025's first quarter. This was a very strong quarter from a margin and execution standpoint, demonstrating the durability of our business post divestiture and our ability to drive meaningful profitable improvement even in a softer demand environment. Next, I will turn to Slide 11 for a look at adjusted free cash flow for the quarter. First, you will note that 2025 comparisons include both continuing and discontinuing operations to be consistent with the structure of our Off-Highway transaction. In 2026, it will just be continuing operations contributing to adjusted free cash flow. On that note, adjusted free cash flow from continuing operations improved by $78 million, driven by strong operations following the completion of the sale of our Off-Highway business. Onetime costs declined by $20 million on a year-over-year basis, reflecting completion of several of our cost reduction programs and lower restructuring spend as we move past the intensive phase of our transformational initiatives. Net interest expense increased by $6 million, driven primarily by the timing of interest payments related to the debt repayment activity after the closing of the Off-Highway sale. Taxes were $6 million year-over-year headwind, reflecting timing of tax payments. Working capital was a use of $224 million, largely due to higher accounts receivable and the timing impact related to certain VAT recoveries and customer paid tooling. Finally, net capital spending was modestly lower by $3 million. Putting all these items together, adjusted free cash flow for the first quarter was a use of $195 million with higher operating profitability and lower onetime costs, partially offset by the loss of EBITDA from discontinued operations and normal first quarter working capital dynamics. Please turn with me now to Slide 12 for an update on our full year guidance for continuing operations. Our guidance ranges remain unchanged from our February call, but we now expect to be at the upper end of our ranges for sales and see a commensurate adjusted EBITDA increase. Our 2026 outlook reflects continued operational execution, accretive new business and the ongoing benefit of our cost reduction initiatives. Starting with sales, we expect 2026 revenue to be approximately $7.5 billion at the midpoint of our range. Increased backlog and the benefit of higher-margin new business are expected to largely offset a modestly softer market environment and changes in product mix. Beneficial sales mix, potential second half commercial vehicle improvement, higher tariff recoveries and currency translation will likely push us higher in our range for sales. Adjusted EBITDA is expected to be around $800 million, an increase of roughly $200 million compared with 2025. This improvement is driven by the full year run rate of our cost-saving programs, continued operating efficiency improvements and the incremental margin from new business that carries higher profitability. At the midpoint of the range, this represents an adjusted EBITDA margin of roughly 10% to 11%, an expansion of approximately 250 basis points on a year-over-year basis. Diluted adjusted EPS guidance for 2026 is expected to be about $2.50 at the midpoint. For this calculation, we're using a share count of 109 million and are not including future share repurchases in this calculation. Adjustments for EPS are similar to those in nature that we make for adjusted EBITDA. Adjusted free cash flow is expected to be around $300 million, in line with our 2025 performance. Free cash flow stability reflects disciplined working capital management, improved earnings and a normalization of capital spending as major investments over the past several years begin to taper. Our 2026 outlook demonstrates continued profit improvement driven by new business, operational efficiencies and the structural benefits of our cost actions over the past year or so. Please turn with me now to Slide 13 for the drivers of the sales and profit change for our full year guidance. Beginning with sales, volume mix remains unchanged, and we expect to reduce revenue by approximately $95 million as lower demand in Traditional markets as well as ongoing softness in Electrical Light Vehicle program's impacts our battery cooling business. We are seeing the beginnings of higher demand for North American Class 8 trucks that may benefit sales later in the year. Performance is expected to be modestly lower, reducing sales by about $30 million, reflecting more normalized pricing environment as we lap last year's commercial actions. Tariffs are expected to improve sales by roughly $50 million, largely due to the timing of recoveries. Foreign currency translation adds approximately $60 million, driven primarily by the strengthening of the euro compared to the U.S. dollar. Commodities are projected to add about $15 million in sales due to continued effectiveness of our recovery mechanisms with our customers, which recover about 75% of the average commodity pricing changes. As we experienced in the first quarter, foreign currencies have remained strong against the dollar so far this year. If that trend continues, we will likely see a benefit to sales from currency translation above what is shown here. Altogether, these drivers result in 2026 sales of approximately $7.5 billion, in line with prior year levels. Turning to adjusted EBITDA, starting from the $610 million in 2025, representing an 8.1% margin. Volume and mix is expected to add approximately $20 million in EBITDA. Favorable mix within our businesses will drive higher profit on slightly lower sales. Performance is expected to increase EBITDA by roughly $100 million, largely from pricing improvements and continued operating efficiency. And please note, we still expect to eliminate about $40 million of post-divestiture stranded costs, which is included within this $100 million number. Cost savings in addition to the stranded cost reduction remain a meaningful contributor, adding $65 million in profit in the year. Tariffs are expected to be a $10 million tailwind due to timing on recoveries. Commodity costs is expected to represent a $15 million headwind driven by timing differences in recoveries and expected material cost changes. All combined, adjusted EBITDA for 2026 is expected to be approximately $800 million at the midpoint of our range or approximately 10.6% margin, representing an improvement of roughly 250 basis points over 2025. Next, I will turn to Slide 14 for details of adjusted free cash flow outlook for 2026. Our adjusted free cash flow also remains unchanged. As I discussed during the first quarter review, full year 2025 included cash flow from discontinued operations that will not continue in 2026. Even without the contribution from discontinued operations, we expect full year 2026 adjusted free cash flow to be about $300 million at the midpoint of the guidance range. Onetime costs will be about $30 million lower than last year or about $40 million due to fewer strategic actions. Net interest will be about $70 million in 2026, about $95 million lower than last year due to our aggressive debt reduction actions completed in January. Taxes will be about $100 million, about $75 million lower than 2025 due to lower taxable income and the jurisdictional distribution of profits. Working capital will be a source of $25 million in 2026, a $40 million improvement over last year. And net capital spending is expected to be about $325 million this year, which is about $70 million higher than last year as we invest in efficiency improvements in our operations and support our new business backlog. Please note that we expect to utilize a portion of the proceeds of our Off-Highway transaction to buy out some facility leases. A portion of that buyout will flow through capital spending, but we are excluding it here as we have excluded the proceeds from our Off-Highway sale as well. These transactions will likely occur in the second quarter. Please turn with me now to Slide 15 for an updated look at our sales growth and 2030 targets. As both Byron and Bruce mentioned, we look -- this slide will likely look familiar. We really walked through this framework at our Capital Markets Day back in March. What you're seeing here is the same underlying road map to the $10 billion in sales by 2030, but we've updated today to reflect the recently secured new business win Byron mentioned. As a result, we've improved both the timing and quality of our backlog. Approximately $200 million that we had previously shown as future sales growth has moved from the additional backlog column into the 2028 backlog category, increasing our near-term visibility of our sales growth. In addition, $50 million has moved from nonsecured backlog into the secured backlog, further strengthening the outlook for our business. Importantly, this does not change the overall road map we laid out in March. We still see $2.5 billion of organic sales growth through 2030, supporting a roughly 6% compounded annual growth rate, driven by now larger secured backlog, commercial vehicle market recovery, share gains and continued growth in Aftermarket and our pursuit of Applied Technologies. The update here reinforces execution, converting opportunities into profitable sales and gives us even greater confidence in delivering the growth trajectory we outlined in March. Please turn to Slide 16 for a brief reminder of our Dana 2030 strategy. I will end my remarks by reminding everyone of the key elements of our Dana 2030 strategy, which we laid out at our Capital Markets Day last month. The strategy is centered around above-market growth supported by new business wins, delivering 6% growth -- compounded annual growth in sales, 17% compounded annual growth in adjusted EBITDA and 11% compounded annual growth in free cash flow through 2030. Underpinning that growth is a fundamental improvement in our operations, driven by structural cost reductions, manufacturing excellence and a disciplined focus on the right mix of Traditional products, Aftermarket and Applied Technologies, all aimed at achieving top quartile margins. At the same time, we're focused on accelerating free cash flow generation with free cash flow expected to grow from roughly $300 million today to $600 million by 2030 and deploying that cash in ways that consistently increase shareholder value. Importantly, the targets remain unchanged, approximately $10 billion of revenue by 2030, 14% to 15% adjusted EBITDA margins and around 6% free cash flow margin, which we believe position Dana for sustained value creation and multiple expansion over the long term. We are off to a great start to achieve them and intend to continue to execute strongly throughout this year and the years to come. Thank you, and I will now turn the call back over to Regina for any questions. Operator: [Operator Instructions] Our first question comes from the line of Tom Narayan with RBC Capital Markets. Gautam Narayan: Tim, I wanted to get back to that Slide 15 that you were talking about, the one that we saw at the Capital Markets Day. Just trying to understand like how do we think about those green buckets, the $1 billion worth, Traditional, Aftermarket, Applied Technology. I know Aftermarket, you said there's market share gains in there. I mean, what -- like is the Traditional product, is that kind of the easier to get and then it kind of gets harder to get as we go down that chain Aftermarket and then Applied Technology is the hardest to get? Like just trying to -- and also the cadence of what you could get sooner rather than later as we get to 2030. Just trying to understand as we get trying to get proof points and converting those greens to blues? Timothy Kraus: Yes. Tom, thanks for the question. It's a good one. So yes, I think the way to think about this, the $400 million in Traditional products, that's probably -- think about it as, hey, it's our current products. We're gaining share. We're able to sell those. I mean, to some respect, when you think about the Dakota program, we're using an existing plant. It's our core technology that's able to be applied at a very good incremental margin. That's obviously sitting in backlog. But you can think about that with our Traditional products. That also does include Traditional products that is some EV as well because we have obviously a very good portfolio of EV products that we can sell that need minimal amounts of application engineering, off-the-shelf products that we can continue to sell to the OEMs. If you think through Aftermarket, we continue to work on growing our Aftermarket share. As we mentioned at the -- or as Brian mentioned at the Capital Markets Day, we have 30% or 35% market share when you think about our gasket business in Europe, and we have less than 5% in North America. We do believe and are making really good strides to deliver increases in our Aftermarket business, especially around sealing. And I think as we move through the next couple of quarters, we'll be able to share some more there, which will probably give you some more comfort around how we're going to fill that up. But we have very, very strong conviction in our ability to deliver that $200 million over the next 3 or 4 years. The last is Applied Technologies. So that's clearly the one where we're taking current -- our current technologies and developing products for new markets. Now if you think about that, some of those are in defense, where we're taking largely off-the-shelf commercial vehicle, even some light vehicle products and adapting them for use from a defense. Same would be true in powersports. So I think while that one probably has maybe a little bit longer tail, we are making, again, very strong inroads. We're receiving a lot of really inbound interest in a lot of these products from various customers, and we'll be able to share that too. And Byron, you've got a comment there? Byron Foster: I was just going to add on the powersports side, as an example, we've gotten over $200 million of RFQ opportunities in front of us. We're having workshops with the key players in that space. And they're really looking for kind of the automotive quality off-the-shelf product that we can bring to improve the performance of their vehicles. And so to Tim's point, we're expecting that those opportunities will begin to convert for us and launch kind of in the '28 time frame. And we look forward to kind of giving you some more proof points as those become reality for us. But we feel really good about the progress so far. Timothy Kraus: Yes. And look, we're going to -- what we just laid out here with the Dakota pickup truck win, we'll keep updating the schedule and moving those buckets from green to blue and showing you as we fill it up. Gautam Narayan: Got it. If I could just do a quick follow-up on the '26 guidance. I guess IHS numbers came down after you guys gave this guidance at the end of Q4. And now you're raising your guidance effectively. So just curious like -- so I mean, obviously, your revised guidance incorporates the weaker Light Vehicle production. Is that right? Timothy Kraus: Yes. I mean, obviously, we have to look at our specific programs when we think through that. But we have -- we're confident in where we're at today, and we do think there's opportunity, especially in the commercial vehicle side in the back half of the year. I mean we did see some softness in Commercial Vehicle in the first quarter, especially in Brazil, but we do -- we are watching that closely as we move through the year. But largely, we do see upside on the top line from CV. And as I mentioned, also from currency when you look at our first quarter, I think we printed $65 million in currency up. And so there's probably upside in currency as well from a top line perspective. Operator: Our next question will come from the line of Emmanuel Rosner with Wolfe Research. Emmanuel Rosner: Curious if you could give us some sense of cadence for the earnings improvement throughout the year going from the 9.2% margin this quarter to like the 10.6% at midpoint for the full year. I think the biggest driver seems to be continued cost performance and cost savings, but just curious if there's any specific cadence or seasonality to that? Timothy Kraus: Yes. As usual, Emmanuel, typically second and third are our stronger quarters and then tails off a little bit in the fourth quarter, just given the production schedule. I would think that's probably how we can see it here. We're probably a little more weighted to third quarter just given the timing on some of the performance improvements. But generally, you can think about it the way we generally do, but probably more weighted in the third than the second. But we should see an improvement in margin as we march through the 2 middle quarters of the year. Emmanuel Rosner: Okay. And then on the Light Vehicle sales, so I guess, another -- or I guess, performance yet, another quarter of sort of like negative volume mix at the top line, but obviously, pretty solid sort of like at the bottom line. I think you flagged against sort of product mix. Can you just remind us what exactly is going on in there as well as for the full year? Timothy Kraus: Yes. So there's a couple of things in there. We've -- some of it is pricing around EV. So we've been very successful in getting pricing on EV products despite -- because of the lower volumes. So you're seeing lower volumes, but better pricing and better profitability coming through that. And then as we start to turn over some of these programs, we tend to have better profitability on them. So we're seeing refreshed and new programs coming through on that, which is essentially giving us despite a little bit softer on the volume, a much better conversion on the profitability. Brian, I don't know if you have anything else to add? Brian Pour: Yes, no. You hit it. Operator: Our next question will come from the line of James Picariello with BNP Paribas. James Picariello: Just a clarification question first, and I don't know if I only get one question or a follow-on. But operating cash flow is cited in the press release at $156 million use of cash for the quarter. And then if we just bridge that against the adjusted free cash flow, right, that would imply $39 million in CapEx, but the slide deck refers to $61 million in CapEx. So apologies if I missed the clarification on that, but... Timothy Kraus: Yes, it's just some of the adjustments. And we'll -- when we file the Q, we'll give you the full breakdown, but some of it has to do with how we're classifying some of the -- we still have some onetime costs coming through from the transaction. But we can help you clean that up when we give you the [ walks ]. James Picariello: Okay. And then just any order of magnitude on the operating lease buyouts that I think you said have a second quarter time frame? Timothy Kraus: Yes. There'll certainly be -- I mean, we're still in negotiations on some of these, but it certainly is -- it's tens and tens of millions of dollars as we go through. But I don't want to get too far ahead given we're in the midst of negotiating some of this stuff. But it's a sizable number. And it's some of the plants that we've -- when we were a bit constrained around capital that we ended up leasing. But from our view, it's -- these are facilities we should own because they're core facilities. And again, we're using the proceeds from the off-highway sale, which was our intention to pay for this. R. McDonald: Yes. It's probably also just worth noting, this is like a onetime catch-up. We've gone through and said, "Hey, our core manufacturing facilities, we should own, not lease," and there's a handful that we lease, and this is a onetime adjustment using our cash to clean it up. Operator: Our next question will come from the line of Joe Spak with UBS. Joseph Spak: I wanted to talk a little bit about how you're thinking about the incremental margins on the backlog because you've mentioned in the past, you're getting some higher-margin categories here. And then even on this Dakota win, you clearly called out utilizing existing capacity, minimal capital investment. So it seems like could come on pretty strongly. And I just wondered if you could elaborate on that? Byron Foster: Yes, for sure. I mean I think the Dakota win is a great example where we've got a pretty substantial footprint today supplying the Wrangler and Gladiator. And so this program will drop basically right into that footprint for both the final assembly as well as our component plant. So our ability to leverage all the fixed cost that's in place for those plants should deliver very strong contribution margin on the incremental sales here. Timothy Kraus: Yes. But Joe, don't forget our customer also knows that as well. So keep that in mind. The customer knows where we're going to assemble and what we have. So -- but we would agree the new programs -- and don't forget, as we move through the product life cycle, they tend to get less profitable over time given some of the givebacks and whatnot. So that's part of it as well. But I agree, they should come on at good margins for us. Joseph Spak: Okay. And then just one quick one on the guidance. I know -- I'm just curious about the Commercial Vehicle market view actually, which is still flat even though I think there's views out there that, that could be up now this year. So I just want to be sure, you're saying you're trending to the high end even with a flattish commercial vehicle environment and then a decent growth there... Timothy Kraus: No, Joe, that includes some thought around the Commercial Vehicle market. Don't forget, it's North American Class 8. And -- but at the same time, we have a pretty sizable medium-duty business and medium-duty business is still flat, it's soft, it's actually a little down. So our mix is a little bit different. And then it's mostly line haul, which we have -- again, we don't have as large a representation as the overall market. So those are why we're still seeing -- we're being a little bit more cautious. But certainly, we're starting to see those back half. So -- and then, of course, our South American business was weak in the first quarter, and we got to keep an eye on that as well. Operator: Our next question will come from the line of Colin Langan with Wells Fargo. Colin Langan: Just unusual question, I guess, but why not delay the earnings call until you have sort of more full financials? Usually, it's sort of unusual that we don't have like it's actually less information than the Q4 release. What is the thought process there? It just seems unusual to me, I guess, maybe as a former accounts... Timothy Kraus: Colin, I think we would agree. We would like to be here with our usual cadence of filing the Q this afternoon. We just continue to work through all the aspects of the transaction and tariffs and the like. And so we already had this scheduled, and so we wanted to make sure we got the information out on sales and EBITDA on our normal schedule. So agree. I think you see us in the second quarter, we'll be back to our normal cadence. Colin Langan: Got it. Okay. And then if I look at Slide 13 with the full year guidance, everything is identical to Q4, yet we've had S&Ps lowered, raw material has been all over the place, FX moved all over the place. Is really everything not changed? Or is just you're trying to signal that nothing has materially changed from what you had last? Timothy Kraus: Yes. I think what we're saying is, hey, we're still inside of our range. We're probably trending to the upper end of the range, driven by potentially some upside in CV and then a bit higher tariff and currency will -- if you just look, we're at $60 million. I think we [ printed $65 million ] in the quarter. So you just trend that, we would -- currency alone would drive us to the upper end. We did -- like when you think about the business itself, those are the drivers taking us to the higher end of the range. So we're still in the range of what we gave. And so we didn't go and kind of mix through the buckets. But we feel like there -- we'll likely be at the upper end of the range. Colin Langan: Okay. You mentioned tariffs in there. So Commercial Vehicle is better, currency is better. And then what is the tariff change? Timothy Kraus: Maybe tariff wise, just some of the timing and the recoveries around tariff, maybe a little bit higher than what we have here. Operator: Our next question will come from the line of James Mulholland with Deutsche Bank. James Mulholland: Just as a quick follow-up on the Commercial Vehicle market. You've talked about some recovery in North America and South America. But conversely, has there been any discussion or concerns about the higher energy prices could impact any recovery we might be seeing in Europe's production? Have orders seen any improvement? It sounds like the truckers earlier today and last week came out, they sounded pretty positive. But any color that you could give there would be great. And then I have a follow-up. Timothy Kraus: Yes. No, I mean our European CV business is relatively modest. So we don't see it being overly impacted or any softness there overly impacting our overall results or our view of the way the year will come. James Mulholland: Okay. And then I guess just looking at your walk for the rest of the year, as you think about, I guess, call it, $125 million of performance and cost savings, excluding the stranded cost, do either segments have more room to run there? Or are the savings going to be generally proportional. And then from a cadence standpoint, should we think about it as relatively steady or really back half weighted? Timothy Kraus: So on the performance, it generally sized to the size of the business. So you can -- it will follow generally that split. And I'm sorry, your second piece of that question? James Mulholland: It was just on the cadence. I know I think you mentioned what Emmanuel asked earlier that there could be some -- a little bit more in the third quarter. So should we think of it as more back half weighted just in general? Timothy Kraus: Yes. I mean, yes, but I think in general, we're in the middle 2 quarters will be better. I mean our fourth quarter, just given production schedules and the holidays, it generally is a softer quarter. But I think if you think about our middle 2 quarters being generally our best 2 performing quarters, that's probably more weighted to the third than the second given what our historical performance has been in those. But I don't know that I'd say it's absolutely back half, but because of the way fourth quarter generally runs. Operator: Our final question comes from the line of Dan Levy with Barclays. Dan Levy: Maybe we could just double-click on the commodity exposure, which you maintained a headwind of $15 million on the EBITDA line. And so I know that you have indexing in place and you're more exposed on steel, which hasn't moved as much. But maybe you could just talk about broadly what you've been seeing on the inflationary side, your exposure to things like aluminum or freight or other oil-based exposures that -- is there any risk that on the inflationary or raw mat side that, that could be something that deteriorates? Timothy Kraus: I mean I think we're obviously watching it closely. We're continuing to see what happens. Obviously, oil impacts a lot because it goes into -- even if it's only transportation, everything that we buy. I think from us, if anything, it's a timing issue based on when the costs come through and when we get the recoveries because we're on a lag for most of these indexed programs. But we're watching it. I don't -- right now, we don't see it as a big potential issue for us. We'll continue to work through it. I think if you look through over the last few years, the recovery mechanisms we have in our contracts with our customers have worked very, very well. And we continue to have those dialogues with our customers to make sure we're in front of it. Dan Levy: And for some of the inputs like the oil or transport or freight where you're probably not indexed, I assume the mechanism is such that this would just be part of normal course commercial discussions with your customers and you have confidence that you would get fully reimbursed on the inflation over time? Byron Foster: Yes, that's right. That's exactly how it will work. And we've been through this cycle before. So we'd be in front of our customers working through recovery mechanisms for those items. Dan Levy: Okay. Just as a follow-up, you talked about earlier the volume mix benefit really reflect some of the EV pricing. We're seeing a number of the automakers put out in these large impairment numbers, which reflect payments to suppliers. Maybe you could just unpack, are the benefits you're seeing within volume mix on EV pricing, are these onetime benefits? Or is this a structural repricing of the contract such that you don't see any reversal in subsequent years beyond this year? Timothy Kraus: It's generally the latter. For ongoing programs, we're getting pricing that comes through over the course of the program. Byron Foster: Okay. With that, we're going to close the call. I want to thank you again for attending our call. Thanks for the questions and continued interest in Dana and the Dana 2030 plan. I do want to take the opportunity to thank Bruce for his leadership as our CEO -- Chairman and CEO, and we look forward to continuing to partner and work closely together with Bruce in his role as Chairman going forward. And I also want to take the opportunity to thank our customers and the Dana team for delivering a great quarter and a great start to the year. Have a great rest of the day, and we'll talk to you soon. Operator: This concludes today's call. Thank you all for joining. You may now disconnect.
Operator: Ladies and gentlemen, thank you for standing by. My name is Abby, and I'll be your conference operator today. At this time, I would like to welcome everyone to the First Commonwealth Financial Corporation First Quarter 2026 Earnings Release Conference Call. [Operator Instructions] And I would now like to turn the conference over to Ryan Thomas, Vice President of Finance and Investor Relations. You may begin. Ryan Thomas: Thanks, Abby, and good afternoon, everyone. Thank you for joining us today to discuss First Commonwealth Financial Corporation's first quarter financial results. Participating on today's call will be Mike Price, President and CEO; Jim Reske, Chief Financial Officer; Brian Sohocki, Chief Credit Officer; and Mike McCuen, Chief Lending Officer. As a reminder, a copy of yesterday's earnings release can be accessed by logging on to fcbanking.com and selecting the Investor Relations link at the top of the page. We have also included a slide presentation on our Investor Relations website with supplemental information that will be referenced during today's call. Before we begin, I need to caution listeners that this call will contain forward-looking statements. Please refer to our forward-looking statements disclaimer on Page 3 of the slide presentation for a description of risks and uncertainties that could cause actual results to differ materially from those reflected in the forward-looking statements. Today's call will also include non-GAAP financial measures. Non-GAAP financial measures should be viewed in addition to and not as an alternative for our reported results prepared in accordance with GAAP. A reconciliation of these measures can be found in the appendix of today's slide presentation. With that, I will turn the call over to Mike. Thomas Michael Price: Thank you, Ryan. Good afternoon, everyone. Several headlines for the first quarter of 2026 follow. Net income of $37.5 million resulted in $0.37 of earnings per share as compared to our consensus earnings estimate of $0.40. Net interest income was down from $4.2 million for the quarter to $109.3 million as we sold $210 million of Eastern PA commercial loans and loan balances fell another $74.2 million due to heightened payoffs. Our commercial loan repayments swelled to $630 million in the first quarter, up some $150 million over the first quarter of 2025. In the first quarter, we had 18 successful CRE projects. They were refinanced or sold, representing a payoff of approximately $240 million in loan outstandings. The net interest margin or NIM fell as expected to 3.92%. Among other items, positive replacement yields on new fixed rate loans in the first quarter were 54 basis points higher and coupled with $150 million of swaps rolling off in the second quarter, this should provide the impetus for further NIM expansion. Deposits grew 6.3% end-to-end annualized in the first quarter, and our money market promotions have resulted in new consumer checking accounts. Heretofore, we have been reticent to aggressively drop rates. But given the elevated loan payoffs and a markedly lower loan-to-deposit ratio, we are well positioned to test lower deposit rates in the next several quarters. Noninterest expenses were up $1.2 million to $75.5 million in the quarter as salaries and incentives increased alongside $500,000 of prepayment fees for the repurchase of long-term debt. Our efficiency ratio climbed to 55.4%, and we intend to slow down our expense growth rate. The provision for loan losses increased $3.7 million to $10.7 million on a linked-quarter basis as we had $9.6 million in specific reserves for 3 larger credits, one of which was from Eastern Pennsylvania. Our nonperforming loans or NPLs to loans remained stubbornly high at 0.98% in the first quarter, specifically 3 previously discussed relationships totaling $20.5 million moved to nonperforming status during the quarter with $9.6 million of associated specific reserves. These downgrades offset otherwise positive asset resolution during the quarter. And please recall that of our $92.3 million in NPLs, $28.1 million or 30.4% is guaranteed by the SBA. The balance sheet and liquidity continued to strengthen in the first quarter as we paid off virtually all borrowings, lowered our loan-to-deposit ratio to 91% and grew tangible book value per share by 4.3% while at the same time repurchasing our stock. Other notable first quarter items include our Center Bank acquisition has exceeded financial expectations and helped lead Cincinnati to company-leading loan and deposit growth in the second quarter. Residential mortgage had a strong first quarter with both loan volumes and gain on sale income. The Small Business and Business Banking segment volumes were brisk as we have added new bankers and enhanced credit processes. Also, our retail bank had the highest Net Promoter and customer satisfaction scores since we began tracking. As we think about the ensuing quarters in future, it will be important that we focus on the basics, namely live our mission, grow the bank, get better. As we grow the bank, we must do so steadily and ensure our credit costs converge and surpass peers. Getting better will necessitate new approaches and technologies to both make it easier for customers to do business with First Commonwealth while simplifying internal processes. Given our adoption of fintech over the years and our current AI usage, we have important tools to continue to evolve our company. Simultaneously, we must become more efficient as we scale the bank. Our first strategic initiative, live our mission to improve the financial lives of our neighbors and businesses remains the cornerstone of our brand and is what sets us apart as a community bank. With that, I'll turn it over to Jim Reske, our CFO. James Reske: Thanks, Mike. Mike has already provided an overview of financial results, so I'll drill down a bit on spread income and the margin. Spread income was down from last quarter by $4.2 million, but approximately $2.6 million of this decline can be attributed to having fewer days in the quarter. The remainder stems from the lower level of earning assets and the impact of last quarter's Fed rate cuts on the variable rate loan portfolio. The Fed cuts resulted in a 9 basis point contraction in the yield on earning assets, somewhat offset by a 5 basis point decrease in the cost of funds. The decline in earning assets is largely the result of the disposition of $210 million in loans that were moved to held for sale at the end of the fourth quarter. This quarter's net interest margin or NIM of 3.92% is in line with our previous guidance. While it is down from last quarter's 3.98%, the NIM in the fourth quarter benefited from about 3 basis points from several unique items that we talked about last quarter, including the recognition of accrued interest from the payoff of several loans that had previously replaced on nonaccrual status. Looking ahead, the NIM should benefit from fewer-than-expected rate cuts to keep the variable rate loans from repricing downward while continuing to allow the fixed rate loans and securities to reprice upward. And the expiration of $150 million of macro swaps on May 1 this Friday is even more valuable in a higher rate environment as it will allow those loans to flow to higher rates than expected. Based on our new one cut base case, we are revising our previous NIM guidance upwards slightly, about 3 to 5 basis points higher each quarter than before, drifting upwards to the low 4% range by the fourth quarter of this year. First quarter noninterest expense or NIE, increased by $1.2 million from last quarter, but first quarter NIE included about $1.3 million in expense for finalizing incentive payments related to prior year volumes and performance similar to the first quarter last year, along with the $500,000 FHLB prepayment penalty that Mike mentioned. We expect NIE per quarter to hover in the $74 million to $76 million range this year. Fee income is a little changed from last quarter. First quarter fee income included approximately $435,000 from the payoff of several loans that had been included in the held-for-sale portfolio at year-end, where they paid off at par, the difference between par and the mark was recognized as fee income. Wealth, mortgage and SBA are all up significantly from the same quarter a year ago. Fee income should range from $24 million to $25 million per quarter this year. We repurchased approximately $22.7 million in stock last quarter at a weighted average price of $17.67. We have $25 million remaining in repurchase authorization, not the $18.4 million figure that was in the earnings release. We announced a $0.02 increase in the dividend yesterday, marking the 11th straight year of dividend increases. Combined with the dividend, we returned nearly 100% of internal capital generation to our shareholders last quarter, and yet tangible book value per share grew from $11.22 to $11.34. We intend to continue share repurchase activity in the second quarter. Our CET1 ratio improved from 12.1% to 12.5%. Our TCE ratio was unchanged at 9.7% And with that, we'll take any questions you may have. Operator: [Operator Instructions] And our first question comes from the line of Daniel Tamayo with Raymond James. Charles Driscoll: Maybe starting just on the increase in the charge-offs. I appreciate the comments on the loans that were paid down or sold in the second quarter early on. Maybe just a clarification on that. First of all, were there any charge-offs associated with those credits that were sold or paid off? And then, Jim, I was just wondering if you had any thoughts on provision or net charge-offs for the rest of the year. Thomas Michael Price: Brian Sohocki? Brian Sohocki: Yes. Daniel, I can jump in. The charge-offs from the portfolio, we recorded $2.8 million during the fourth quarter when we moved them to held for sale. And then there was approximately $400,000 that had paid off at par that were reversed and run through the income statement in the first quarter. As you look at the other charge-off activity, my comment would be that we remained above our long-term target, but we did improve sequentially. And the level continues to be driven by a limited number of isolated credits. We're not seeing any indicators of systematic stress across the portfolio. Overall, the performance has been remaining consistent outside of those isolated numbers. And I think your last part of the question was just related to the activity in the press release post quarter end. There was 2 names that were in nonperforming at the end of the first quarter. One, we ultimately exited via a loan sale and incurred just a charge-off outside of our reserved amount of just under $150,000. The second was an exit full payoff at par. Daniel Tamayo: Okay. Very helpful. And I appreciate that detail on the second quarter. So I think what you're saying is you're -- and correct me if I'm wrong, you're expecting -- I guess you said they were a little bit above your long-term target in the first quarter. So that should drift down towards that range kind of as the year plays out. Is there like a ramp down, you think still from here? Or we're moving pretty quickly back into that range? Brian Sohocki: Yes. We'll continue to work through the resolution. Specifically, as you saw in the release, the one item which was moved to NPL during the first quarter is a second quarter charge-off. So more of a slow ramp down to the historical level as we resolve those credits that moved into NPL. Daniel Tamayo: Okay. Great. That's helpful. And then, Jim, maybe or Mike or anyone on the loan growth. Just curious what paydown activity looked like in the first quarter, kind of how you're forecasting that to trend down for the rest of the year and how that offsets against origination activity? Thomas Michael Price: Yes. Just in the -- we compared the first quarter to the first quarter of last year, and we had $10 million more of production, well over $900 million in the first quarter of 2026. Our payoff activity was heightened. It went from about $480 million to about $630 million. It was up $150 million. And so we felt that, and we felt that on top of the loan sale and last year, we grew modestly. We grew about $90 million, $95 million in the first quarter. It was about 4.5%, maybe 4.4%. To notwithstanding those payoffs, our activity was steady. It was good. It was -- HELOC key loan was a bright spot, I would say, small business, business banking and still trying to get the commercial real estate construction portfolio to overtake the payoffs and some of the originations there. So we just -- we feel the year sets up pretty well, notwithstanding $150 million more of payoffs from a year ago. And I would say that in the ensuing quarters since the first quarter of last year, the payoffs went up every single quarter. We feel with rates maybe cresting here, perhaps that -- and moving up that, that activity has slowed somewhat here in the last 30 days or so or maybe it's coming at a natural end because we don't have that many big names left to pay off. So that's the calculus, and we do feel good about the level of activity and that we can hit the guidance that we've given historically of mid-single loan growth. Operator: And our next question comes from the line of Charlie Driscoll with KBW. Charles Driscoll: This is Charlie on for Kelly Motta. Just one clarifying question on the margin. I appreciate the comments on the 3 to 5 bps of expansion from here. But just drilling down on that exit margin, do you expect to kind of exit the year near 4% or a bit above that level? If you could kind of help us with how you're thinking about some of the pieces here or what could cause you to kind of exceed that exit rate, reach the high end or low end of that guide? James Reske: Yes. Thanks for the question and the opportunity to clarify. We think the fourth quarter should be over 4%. But I'm really glad you asked because there's variability and the big variability, especially if you look over the last few years has been deposit behavior. I think we're in a really good spot now. The loan-to-deposit ratio now 90.9%, so down to -- we really have some room here to bring down our deposits just because the balance sheet is so liquid. give us just more freedom to be a little more aggressive on deposit rates and bring that down. So that's kind of -- that's the big variable factor in our NIM forecast. But yes, all else being equal, we expect to end the year a little over 4%. Thomas Michael Price: Yes. I would just add that in bringing down the cost, we will balance that with -- we hang promos and we have nice -- we've gathered a lot of deposits, core deposits as well as interest-bearing. And it's been a terrific way to gain new checking accounts. And the team has done a nice job. So it's more of a balance than you think, so that we'll pick our spots as we decrease rates, probably perhaps a little bit more on CDs. And by the way, we're going to test this and we're going to move the steering wheel, but we're just going to be cautious because household growth, the granularity of our depository is tied to -- when we get a customer, we're going to have to lend to them. It's just a good thing when we get a new consumer customer. And our depository is about 50-50 consumer, which makes it very granular. And we sail through events like Silicon Valley 3 years ago. And you can see our string of -- we grew deposits pretty steadily over the last 3 years or so. Charles Driscoll: Great. I appreciate the commentary there. I guess kind of on that deposit gathering activity, you saw a nice quarter here. But do you expect that to keep up with the mid-single-digit loan growth you guys are getting? Just kind of trying to get the right side of the balance sheet here, seeing up. Thomas Michael Price: Yes. Long term, yes. Maybe shorter term, we're going to test some things and just -- we'll test some things. We have a good team. Charles Driscoll: Great. And then last one for me, just on expenses. Wondering if this is a good core run rate to build off of in 2026. Maybe you could provide some color on what sort of investments you're making and where you're exercising more discipline on the expense front. James Reske: No, I think the guidance we gave, we talked about NIE covering the $74 million to $76 million range. I wish I could actually give you a tighter range, but I know it's a $2 million range, but those just vary a little bit quarter-to-quarter. We're just committed to keeping expenses under control. Mark, I don't know if there's anything you want to add. Thomas Michael Price: No, we've been good stewards of expenses over the years, and we like efficiency ratios that are less than 55%. And we just need to keep -- we've been pretty good at operating leverage through the years. And we just -- as we scale the bank, we have to stay true to that culture of -- and at the same time, we're getting stretched on expenses and talent. We have to find the right mix and really have lots of good discussions just like other management teams. Operator: And our next question comes from the line of Karl Shepherd with RBC. Karl Shepard: Can you guys hear me? Thomas Michael Price: Yes. Karl Shepard: Okay. Great. Jim, just one quick one on the NIM guidance. I think you said you moved from 2 cuts to 1 cut. Is that later in the year? Or is it earlier and might have a little bit of impact? James Reske: I think it's a little later in the year, like, late summer. I can verify that. It's an interesting dynamic I kind of -- again, I'm glad you asked because if there is one cut, it kind of -- if the rate environment is down a little bit, it gives us an opportunity to be -- to take deposit costs down even further. Generally, we say we're asset-sensitive balance sheet, but if the activity is on the deposit side, if it's a falling rate environment, it gives us a little more opportunity on the deposit side than it cost us in the downdraft in the variable rate loan portfolio. So when we look ahead on one cut versus -- this is the question you asked, I'm just kind of thinking about as you asked the question, one cut versus 0 cuts, the delta isn't all that big. The one cut in our base case forecast is, as I said, late summer, not September actually. So I hope that helps a little bit. We mentioned in my prepared remarks is that the base case last a budget for us was based on a purchased vendor that most banks use, and that was 4 cuts for the year, it's quite dramatically different now. Karl Shepard: Okay. That's helpful. And then I wanted to pick up a little bit on the credit discussion. I know the provision will kind of be an output of what's sitting there at 6/30. But if I put all your comments together and the specific reserves for the credits that were resolved after quarter end, it seems like there's room for the provision maybe to drift back down a little bit. I think you're kind of signaling with no stress in the portfolio, a stable reserve. Is that a fair way for us to think about this? Thomas Michael Price: I think so, yes. Operator: And our next question comes from the line of Manuel Navas with Piper Sandler. Manuel Navas: Can you speak a little bit more on the buyback pace? And is it impacted at all with any potential shifts in loan growth? I mean, I know you reiterated the guide, but if loan growth comes in at different parts of the range, would you buy back more? Is that part of the calculus? James Reske: Great question, Manuel. It's not really driven. It's not leveraged by the loan growth. We have plenty of capital to capitalize the loan growth. In other words, I don't think that if we grew [indiscernible] we'd be pushing the capital ratios into any kind of place where we'd be concerned. It's really more driven by just a dollar amount of capital generation. We're kind of operating under the Fed guidance that says you allow to buy back -- return to shareholders between the dividend and then the buyback up to the dollar amount of capital generation in any given quarter, but not beyond that. And that's kind of what we've been operating at. There are -- if you -- there are peers that do go beyond that, but that requires a full loan application with the Fed, we just haven't done that. So that's what we're doing. So last quarter, there's a chart in the supplement that we published on the Investor Relations portion of our website, the PowerPoint that shows we returned about 95%, close to 100%. I think we came within $1.7 million so no, it's not so much loan growth. It's a fair question because we always say the primary use of capital is organic loan growth and capitalizing as we go. So that's -- I guess you're coming from, but that's really driven by just the dollar amount of capital generation the cap. Manuel Navas: Okay. Shifting over to loan growth for a moment. Any shift to the mix or just because the production is pretty solid, you're going to keep the same mix. And one specific, could you comment a little bit on the equipment finance growth? Are we approaching a cap? Or does that still have a year or so left to run? That was kind of the nice positive area of growth for the quarter. Thomas Michael Price: Yes, the mix is probably 1% more commercial, probably 61-39 now commercial consumer mix. So that's changed. And obviously, to move it 1% or so even in 2 quarters, takes a lot more production on one side than the other. So we are becoming more commercial. We actually talked about that this morning. And because we love the consumer households and the deposits and the granularity of that, and we just want to have good balance there. And then -- so great question. And then on the equipment finance side, I think there's room to run there for another year or so. And knock on wood, it's really met our credit projections and that portfolio mature here, begin to mature here in the next year or so, and we'll see how those credit costs come through and how that matures. But I -- we feel good about that business. The other thing the team has been very nimble and creative is we had a goal to kind of -- once we got that up and running to really switch that to an in-market true leasing business, and they're already pivoting there in a meaningful way that will result in a good portion of that business being in-market leases to our commercial clients. And so it's just a talented team, and we are we're just delighted with how that has unfolded. So hopeful that that's helpful, Manuel. Operator: And our next question comes from the line of Matthew Breese with Stephens. Matthew Breese: A few questions. First one is towards the back of your presentation, it looks like you have $35 million in maturing office next quarter. You have $17 million in the third quarter and $13 million in the fourth quarter. Given we're not totally out of the woods on office yet. Just curious, have you looked at the maturities and any sort of credit worries as we come upon those dates? Thomas Michael Price: Yes. We've looked at it going out about through the end of next year, actually. Brian, do you want to comment on that? Brian Sohocki: Yes, I'll just jump in. And I guess we continue to actively manage the portfolio. We have seen exposures continue to trend lower. And my comment on the maturities is part of that is also managed purposely through shortening maturities and extending into a certain period in order to facilitate an exit or a refinance or a sale of a property. One of our biggest successes in 2025 was just that where we had a large reduction in the second half of the year through an asset sale as a result of that. So we evaluate maturity by maturity throughout the whole portfolio and focus over the next 24 months and are actively pursuing exit that makes sense for the portfolio. Thomas Michael Price: Is that helpful? Matthew Breese: Yes. Okay. Jim, it looks like the cash position is up a little bit, maybe excess $100 million, $150 million, kind of the near-term deployment for that? James Reske: Well, a couple of things. The cash position is up in part because of that the execution of the sale of the loans that are held for sale. So we see that cash we pay down and Mike mentioned this, we pay down some FHLB borrowing, bought some securities and still have -- with the loan book shrinking a little bit in the first quarter, we had an excess cash position. So we can foresee the pattern of some of our depositors, some of our large deposits that are in the public funds category. A lot of those come out in the second quarter, so we make sure we have cash around for that. So we don't invest that money and find ourselves having to borrow money because we have those outflows. So knowing that those are coming, we're holding some cash for that and holding the cash for excess loan growth. But to the extent it doesn't materialize, we de would be buying more securities. We're buying now expand the securities portfolio a little bit. That's kind of actually one of the issues at the moment. Matthew Breese: Okay. And then I did want to touch on some of the categories outside of equipment finance. So traditional C&I ex equipment has been down for 3 quarters. It looks like commercial real estate has been down for 2 quarters, and we talked about prepays and payoffs and things like that. But for the larger segments, C&I commercial real estate, when do you start to -- when do you think we'll start to see some net growth there? Is that a 2Q event? Thomas Michael Price: Yes, it will be definitely this year. We've added some business bankers. We're seeing -- and that's really more on the small end, more granular end. The payoffs are happening on a little larger credits. And so that's kind of a tough swap because you got to do 4 loans for every one that's paying off. I like that long term, but the team -- we've added a lot of business bankers over the last few years. They seem very productive. We actually, in the C&I segment, on the smaller end, small business and business banking actually grew that in the first quarter, $30 million or $40 million and really haven't done that on that bottom $600 million, $700 million, $800 million in that space. So that's good news, and we feel good about that. And that's obviously granular and comes with more depository. But we still have had some payment headwinds, no doubt. We do think we can grow there. We will grow it. Matthew Breese: Last one is just between Ohio and Pennsylvania, there's just a ton of activity between chip manufacturing, AI data centers, and power plant build-out stuff. I was hoping for your comments around all that. And then how much of it can you say has had or potentially could have an impact on the pipeline or loan growth to date? Thomas Michael Price: It might already be having an impact. I mean we have really probably our deepest pipeline after Cincinnati had a great first quarter, our deepest pipeline is probably in our $4.5 billion community PA market, particularly on the small business up through the business banking segment. And I think that I was with a contractor for dinner on Monday night and who's doing a lot of power generation, gas-powered, one in Homer City, it's having a real impact. And it's good to see. But I also think that, I mean, Ohio has really grown in the last few years and helped really led out in growth. So I expect that to continue. That's everything together. And Community PA always generated a lot of deposits. And now it looks like they're setting up for a good year on HELOC key loan and small business and business banking. So that's -- it's -- we like the business. It's fun, and we feel like we make a difference but it looks good. Operator: And our next question comes from the line of Daniel Cardenas with Brean Capital. Daniel Cardenas: Just a couple of questions. Have you noticed any change in customer sentiment just given the current economic environment right now? Thomas Michael Price: It might be too early to tell. I did notice that our interchange income on debit card was off a couple of hundred thousand dollars. James Reske: With the holidays in the fourth quarter, too. Thomas Michael Price: Yes. But -- and activity and swipes even, but I -- that's probably the first quarter, too. But yes, we've been and I think we've shared this with you, Dan and others. We've been watching our consumer books like a hawk. Our HELOC key loan, our mortgage and our indirect auto, and we're just -- we're seeing some pretty solid performance. So it kind of belies gas that I just filled up was in Pennsylvania is high at $4.47 a gallon. So we're just -- we're watching that closely. Brian Sohocki: Yes. I just -- I'd confirm that, Mike. And I mean that was one of the positives in the first quarter as consumer delinquency trends improved and was somewhat of an offset, helped our overall total delinquency level for the period. But we're monitoring everything that's touching energy and potential inflation impacts as we go through the quarter. Thomas Michael Price: And Dan, I would add, we have probably -- it's not like we have 15,000 or 20,000 customers. We have -- plus indirect auto, we have 300,000 customers of the bank. So we have a lot of clients. So it's a pretty good sample set -- sample size. Daniel Cardenas: All right. And then just jumping quickly back to credit. Within your level of nonperformers, is there any geographic concentration in any one particular market where perhaps some of these credits are housed in versus others? Brian Sohocki: No, nothing from a geographic standpoint as you look through it, it's been isolated credit events that have driven the overall dollar amount of NPLs. The one point I'd add is Mike made a comment in his opening statement. It's just important to distinguish between the guaranteed and unguaranteed exposure within the SBA portfolio. Those are all very granular. But from a concentration standpoint, as you asked, there are $28 million of guaranteed NPLs in that portfolio. Daniel Cardenas: All right. And then just one quick modeling question on the tax rate. Is a 20% tax rate kind of a good run rate for you guys? James Reske: Yes, very close. I think we are at 20.6%. Yes, 20.26% for the first quarter. Operator: And we have no additional questions at this time. So I will now turn the conference back over to Mr. Mike Price for closing remarks. Thomas Michael Price: Thank you for your interest in our company. I did want to mention, lastly and importantly, after 37 years at our company, Norm Montgomery, our Chief Information Officer, is retiring, and we will miss him. And we have hired Ryan Gorney to replace Norm and have a talented team at our company and excited for Norm and his retirement, and welcome to Ryan Gorney. Operator: And ladies and gentlemen, this concludes today's call, and we thank you for your participation. You may now disconnect.
Operator: Welcome, everyone. Thank you for standing by for the Alphabet First Quarter 2026 Earnings Conference Call. [Operator Instructions] I would now like to hand the conference over to your speaker today, Jim Friedland, Head of Investor Relations. Please go ahead. James Friedland: Thank you. Good afternoon, everyone, and welcome to Alphabet's First Quarter 2026 Earnings Conference Call. With us today are Sundar Pichai, Philipp Schindler and Anat Ashkenazi. Now I'll quickly cover the safe harbor. Some of the statements that we make today regarding our business, operations and financial performance may be considered forward-looking. Such statements are based on current expectations and assumptions that are subject to a number of risks and uncertainties. Actual results could differ materially. Please refer to our forms 10-K and 10-Q, including the risk factors. We undertake no obligation to update any forward-looking statement. During this call, we will present both GAAP and non-GAAP financial measures. A reconciliation of non-GAAP to GAAP measures is included in today's earnings press release, which is distributed and available to the public through our Investor Relations website located at abc.xyz/investor. Our comments will be on year-over-year comparisons unless we state otherwise. And now I'll turn the call over to Sundar. Sundar Pichai: Thanks, Jim. Hi, everyone, and thanks for joining us today. it was a terrific quarter for Alphabet. Our momentum was on full display at Cloud next last week and the month of May brings even more with I/O, Brandcast and GML. I hope you will tune in see our progress. It's clear that our AI investments and full stack approach are driving performance across our business. In Search & Other revenue grew 19%. People love our AI experiences like AI Mode and AI overviews and they're coming back to search more. Cloud accelerated again this quarter due to strong demand for our AI products and infrastructure. Revenue grew 63%, exceeding $20 billion for the first time and our backlog nearly doubled quarter-on-quarter to over $460 billion. Gemini Enterprise is seeing tremendous momentum with 40% growth quarter-over-quarter in paid monthly active users. In subscriptions, this was our strongest quarter ever for our consumer AI plans, primarily driven by adoption to Gemini app. Overall, the number of paid subscriptions has now reached 350 million with YouTube and Google One being the key drivers. And our AI models have great momentum. First-party models now process more than 16 billion tokens per minute via direct API used by our customers, up from 10 billion last quarter. Today, I'll share our progress across the AI full stack then Search and Cloud, followed by YouTube and Other Bets. Starting with our AI infrastructure. It's the foundation of our full stack approach to AI, driving customer growth and product adoption. Our custom TPUs, Axion CPUs and the latest NVDIA GPUs continue to form the industry's widest variety of compute options. NVDIA GPUs are a core part of our AI accelerator portfolio and will be among the first to offer NVDIA Vera Rubin NVL72 in addition to the Blackwell and Hopper-based instances already available. At Cloud Next, we introduced our 8 generation TPUs, individually specialized for training and serving and able to take on the most demanding agentic workloads. TPU 8t provides high-performance model training with 3x the processing par of Ironwood and 2x the performance. TPU 8i delivers cost-effective low latency inference with 80% better performance per dollar than the prior generation. This exceptional infrastructure powers world-class AI research that includes models and tooling, which continued to progress really well. Gemini 3.1 Pro continues to push the frontier in reasoning, multimodal understanding and cost. We have quickly expanded the Gemini 3.1 Series of models to offer more choices for developers, including our cost-efficient flash models. 3.1 Flash Live, our latest audio model has improved precision and reasoning, making voice interactions more natural and intuitive. It's now powering conversational features in search in the Gemini app. Speech to text is now available in 70 languages. And with 3.1 Pro, our deep research agent got a big upgrade, including MCP support and native visualizations. Our generative media models are incredibly popular. Lyria 3 has generated over 150 million songs since launching on the Gemini app. Nano Banana 2 reached 1 billion images in nearly half the time of Nano Banana 1. And Veo 3.1 Lite is the most cost-efficient video model today. On top of this, we launched Gemma 4, our most intelligent open model. It's been downloaded over 50 million times in just a few weeks. In fact, our open models have now been downloaded over 500 million times. Looking ahead, we are focused on pushing the next frontiers of foundation models, including intelligence, agents and agentic coding. And we are using the latest technologies to transform how we work as a company. For example, with Antigravity, we are shifting to truly agentic workflows. Our engineers are now orchestrating fully autonomous digital task forces and building at a faster velocity, much more to come here. Next, we are bringing healthful AI into the hands of billions of people every day through our products and platforms. Earlier this year, we introduced Personal Intelligence, which helps people get more personalized and helpful responses. It's now in the Gemini app, AI mode and Gemini in Chrome. Early traction has been good, and this month, we integrated Nano Banana 2 to make personalized image creation possible in the Gemini app. Maps recently got its most significant upgrade in over a decade with Gemini. Users can now have a conversation with maps and get more personalized suggestions and intuitive directions and the Pixel 10A launched to positive reviews, providing the best of Google's AI features like Gemini Lite and AI-powered camera features. Turning to Search. AI continues to drive search usage and queries are at an all-time high. We continue to invest in improvements to AI overviews, which are driving overall search growth and we're also seeing strong growth in both users and usage of AI mode globally. Personal Intelligence expanded broadly in the U.S., and we are seeing people ask more personal questions and getting responses that are uniquely relevant to them. We also shipped agentic experiences like restaurant booking to new countries and new multimodal capabilities like search live globally. We are also continuing to improve efficiency and speed. Even as we have brought new AI features into our results page, we have reduced search latency by more than 35% over the past 5 years. And since upgrading AI overviews and AI mode to Gemini 3, we've reduced the cost of core AI responses by more than 30%, thanks to continued hardware and engineering breakthroughs. We are excited to share more about search at I/O. Now over to Google Cloud. Google Cloud is differentiated because we are the only provider to offer first-party solutions across the entire enterprise AI stack. Our growth in revenue, operating margin and backlog highlights this differentiation. Our enterprise AI solutions have become our primary growth driver for cloud for the first time. In Q1, revenue from products built on our GenAI models grew nearly 800% year-over-year. We are winning new customers faster with new customer acquisition doubling compared to the same period last year. We are seeing strong deal momentum, doubling the number of $100 million to $1 billion deals year-on-year and signing multiple billion dollar plus deals. And we are deepening relationships with existing customers outpaced their initial commitments by 45% accelerating over last quarter. At Cloud Next last week, we introduced hundreds of new capabilities across our vertically optimized AI stack that are designed to work together for our enterprise customers. We introduced a new Gemini enterprise agent platform that empowers users to build, orchestrate, govern and optimize agents with the controls that enterprise customers need. Along with new capabilities in Gemini enterprise app, like projects, canvas, long-running agents and skills, every employee can build agents. In Q1, Gemini Enterprise paid monthly active users grew 40% quarter-over-quarter. That includes major global brands like Bosch, Cityweft, Merck and Mars Inc. Our partner ecosystem plays an increasingly critical role in driving Gemini enterprise adoption. We saw 9x year-over-year growth both in seats sold with partners and in the number of partners adopting it for internal use. This momentum is leading to accelerating usage of our models. Over the past 12 months, 330 Google Cloud customers each processed over 1 trillion tokens. 35 reached the 10 trillion token milestone. To give agents business context from enterprise data to help them reason intelligently, we introduced a new agentic data cloud. It includes across cloud Lake house, knowledge catalog and deep research agents, which combine research and analytical skills. As an example, using our Data Cloud, American Express is enabling agentic e-commerce at scale by moving an enterprise data platform along with hundreds of production applications to BigQuery. Vodafone is proactively resolving outages, automating network planning and precisely targeting capacity. Enterprise data has become critical for agents to reason. Our strength with BigQuery and Gemini Enterprise has led Gemini-powered workflows in BigQuery to grow over 30x year-over-year. As cybersecurity threats from the use of AI models accelerate, our expertise in AI and cybersecurity is driving strong demand for our agentic defense offerings. In March, we closed the acquisition of Wiz, a leading cloud and security AI platform, which is an incredible fit for the moment we are in. We have seen tremendous interest from customers in our unique cybersecurity and AI products and services to protect their IT estate. The performance of Wiz so far has exceeded our expectations. Together with Google's Threat Intelligence, security operations and AI models, the business helping organizations [ deduct ], prevent and respond to threats. We introduced new Gemini-powered agents for threat detection, continuous red teaming and automated remediation to protect software code and cloud systems. Customers like Deloitte, Priceline and Shell are using our agentic defense to strengthen their security posture. All of this is powered by the AI infrastructure I mentioned earlier. Our TPUs continue our leadership in performance, cost and power efficiency for customers like Thinking Machines Lab, Hudson River Trading and Boston Dynamics. As TPU demand grows from AI labs, capital markets firms and high-performance computing applications will begin to deliver TPUs to a select group of customers in their own data centers in the hardware configuration to expand our addressable market opportunity. Turning to YouTube where our momentum continues. In the living room, U.S. viewers are watching over 200 million hours of YouTube content daily. And as of March, we have reached a new milestone with over 10 million channels now publishing shots each day. This level of daily activity is a testament to how people enjoy this content and how we made it easier for creators. And in Q1, our YouTube Music and Premium offering saw its largest quarterly increase in the total number of nontrial subscribers, both globally and in the U.S. since YouTube Premium launched in June 2018. I hope you'll tune into Brandcast on May 13. Moving to Other Bets. Waymo is on a great trajectory. It launched in Nashville a few weeks ago, that makes 6 new cities so far in 2026 and operations in 11 major U.S. cities in total. Waymo also surpassed 500,000 fully autonomous rights per week, doubling in less than a year. [indiscernible] continues to expand across the U.S. in partnership with Walmart and DoorDash and announced plans to operate in the Bay Area. In summary, a terrific start to the year with so many great opportunities ahead. We are not slowing down. Huge thanks to all of our employees and our partners. See you at I/O on May 19. Philipp, over to you. Philipp Schindler: Thanks, Sundar, and hello, everyone. As usual, I start with the performance of Google services and then cover the progress we're delivering across search, YouTube and partnerships. Google Services revenues were $90 billion for the quarter, up 16% year-on-year, primarily driven by the continued growth of Search, adding some further color to our results. Certain Other delivered 19% growth, primarily driven by retail and finance. YouTube advertising revenues grew 11%, driven by direct response followed by brand. Network advertising revenues were down 4% year-on-year. Starting with Search & Other revenues, which delivered $60 billion in revenue for the quarter. We are accelerating the deployment of Gemini across our entire ads infrastructure to help businesses reach more customers in more places than ever before. This is driving significant improvements across all areas of marketing and continues to fuel new performance breakthroughs across 3 areas critical for our customers' success, as quality advertiser tools and new AI user experiences. First, ads quality. AI is boosting our ability to deeply understand user intent for a given search query and to find the most relevant ad. Even when we don't have a direct user query, we're making significant strides in improving relevance. In Discover, new AI models and Classifiers are driving higher relevance by better aligning ads with unique user interest. In Maps, we're using Gemini to ensure promoted pins are deeply relevant to user surroundings, location of interest, history and intent. This work is improving ad's relevance by nearly 10%, leading to a significant increase in user engagement. We're pairing the strength and prediction-driven relevance with bottom of funnel precision. Over the past year, we've made over 20 improvements to certain shopping bid strategies. Smart bidding now uses Gemini to match user intent to an advertiser's product and services more accurately and further drive performance. This level of granularity was previously impossible to achieve at scale. Second, on advertiser tools, where Gemini helps advertisers drive more efficient and effective campaigns. People no longer search in fragments, they search conversationally and share more context. We launched AI MAX to help advertisers adapt to this new way of searching. And earlier this month, it moved out of beta with improved performance quality across targeting and creative capabilities. Take [ Hilton EMEA ]. They captured 1/3 more clicks for 1/5 of the spend, while simultaneously increasing the average booking value by 55%. And Etsy saw a 10% search volume uplift with 15% of those queries being net new to their business. We see significant opportunity as advertisers continue to make good progress on AI readiness and the adoption of AI tools. For instance, more than 30% of our customers [ search ] now uses AI-enabled campaigns, AI MAX or Performance Max. And these advertisers are seeing more conversion for the same spend. Third, how we monetize new AI user experiences in search. We aren't just bringing existing ad formats into AI experiences. We are reinventing ads for this new era. Direct offers in AI mode are resonating with users and continue to receive positive customer feedback. GAP, L'Oreal and Chewy are just some of the latest partners who have now signed up to test this Google Ads pilot. We're also exploring new formats for retailers. AI mode already services organic product recommendations based on the users query and we're now testing a new ad format that displace retailers who sell those recommended products. In addition, the retail industry is rapidly coalescing around the open-source universal commerce protocol, or UCP, we launched in January in partnership with the Ecosystem. Last week, we welcomed Amazon, Meta, Microsoft, Salesforce and Stripe as new members to the UCP tech Council. They joined founding members Shopify, Etsy, Target, Wayfair and Google to further accelerate the transition towards an agentic future. Partners like Sephora and Macy's have joined companies like Ulta Beauty, who are already rolling out UCP and can now redefine consumer journeys from discovery to checkout. Ulta Beauty just last week launched agentic e-commerce within AI mode and search and the Gemini app. Shoppers can now review product recommendations, compare options and complete streamlined checkout for eligible purchases directly within AI mode and Gemini. Turning to YouTube, which now has led streaming watch time in the U.S. for 3 consecutive years. We're in an unmatched position to connect brands with the audiences they care about in the moment they engage in. We are applying Gemini to drive better matching and discovery between brands and creators of all sizes. And Gemini now powers YouTube creator partnerships, a centralized platform integrated directly into YouTube Studio for creators and Google ads for advertisers. We've also made it easier to buy premium ad space in top-tier podcast shows by curating the most watched podcast into popular genres. For example, Super Group partnered with YouTube creator, Liza Koshy on a multi-format shorts and long-form CTV campaign, resulting in a 93% lift for their glowscreen product and a 55% overall brand lift. Looking at monetization across YouTube, momentum continues in shorts and the living room and demand gen continues to drive momentum in direct response, in particular, with smaller advertisers. Brand who is benefiting from growth in a living room where we continue to scale greater brand deals. YouTube subscriptions revenue continues to grow faster than ads, particularly YouTube Music and Premium. By the end of Q1, YouTube Premium Lite was fully launched in 23 countries, and we plan to launch in more than a dozen new countries in Q2. As always, I'll wrap with the progress we're seeing across partnerships. Retailers are increasingly looking to Google to support their AI transformation. This quarter, Kingfisher, Target and Wayfair closed significant multiyear cloud and ads deals. Combined with the implementation of UCP, these partnerships will help deliver personalized AI-driven agentic experiences from discovery to checkout. In closing, I'd like to thank Googlers everywhere for their contributions to our success. And as always, our customers and partners for their continued trust. Anat, over to. Anat Ashkenazi: Thank you, Philipp. My comments will focus on year-over-year comparisons for the first quarter, unless I state otherwise. I will start with the results at the Alphabet level and will then cover our segment results. I'll end with some commentary on our outlook for the second quarter and full year 2026. We had an outstanding first quarter, delivering our 11th consecutive quarter of double-digit revenue growth. Consolidated revenue reached $109.9 billion, up 22% or 19% in constant currency. Total cost of revenue was $41.3 billion, up 14%. Tech was $15.2 billion, up 11%. Other cost of revenues was $26 billion, up 15%, primarily driven by increases in depreciation, content acquisition costs largely for YouTube and compensation. Total operating expenses were up 24% to $28.9 billion. R&D expenses increased by 26% driven by compensation due to investment in AI talent as well as depreciation. Sales and marketing expenses were up 23%, driven primarily by marketing investments to support the Gemini app and search as well as compensation. G&A expenses increased 21%, primarily due to an increase in compensation costs related to legal and other matters. Operating income increased 30% to $39.7 billion and operating margin was 36.1%. Other income and expenses was $37.7 billion, representing a meaningful increase from the prior year, primarily due to unrealized gains in our nonmarketable equity securities portfolio. Net income increased 81% to $62.6 billion and earnings per share increased 82% to $5.11. We generated operating cash flow of $45.8 billion in the first quarter and $174.4 billion for the trailing 12 months. CapEx was $35.7 billion in the first quarter with the overwhelming majority of the spend in technical infrastructure to support the AI opportunities we see across the company. Approximately 60% of our investment in technical infrastructure this quarter was in servers, and 40% was in data centers and networking equipment. Free cash flow was $10.1 billion in the first quarter and $64.4 billion for the trailing 12 months. We ended the quarter with $126.8 billion in cash and marketable securities and $77.5 billion in long-term debt. And as we announced today, our Board of Directors declared a 5% increase in the quarterly dividend. Turning to segment results. Google Services revenues increased 16% to $89.6 billion reflecting strong growth in search and subscriptions. Google services revenues also benefited from a strong FX tailwind. Google Search & Other advertising revenues increased by 19% to $60.4 billion driven by growth in the retail and financial services verticals. YouTube advertising revenues increased 11% to $9.9 billion, driven by direct response advertising as well as brand. Network advertising revenues of $7 billion were down 4%. Subscription platforms and devices revenues increased 19% this quarter to $12.4 billion due to strong growth in both YouTube subscriptions, particularly in YouTube Music and Premium and Google One subscriptions, which benefited from increased demand for AI plans. Google Services operating income increased 24% to $40.6 billion and operating margin was 45.3%. The Google Cloud segment delivered outstanding results in the first quarter. Cloud revenues accelerate across all key areas and were up 63% to $20 billion. Revenue growth was driven by strong performance in GCP, which continued to grow at a rate that was much higher than cloud's overall revenue growth rate. The largest contributor to cloud's growth this quarter was AI solutions driven by strong demand for industry-leading models, including Gemini 3. In addition, we had strong growth in infrastructure due to continued deployment of TPUs and GPUs and core GCP continues to be a sizable contributor driven by demand for infrastructure and other services such as cybersecurity and data analytics. Workspace again delivered strong double-digit revenue growth, driven by an increase in the number of seats and the average revenue per seat. Cloud operating income was $6.6 billion, tripling year-over-year and operating margin increased from 17.8% in the first quarter of last year to 32.9%. And Google Cloud's backlog nearly doubled sequentially, reaching $462 billion at the end of the first quarter. The increase was driven by strong demand for enterprise AI offerings and the inclusion of TPU hardware sales that Sundar referenced earlier. The majority of the backlog is related to typical GCP contracts and we expect to recognize just over 50% of the backlog as revenue over the next 24 months. In Other Bets, revenues were $411 million, and operating loss was $2.1 billion. For the past few years, we have been working to prioritize our efforts and investments in the Other Bets. In Q1 of this year, Verily completed an external capital raise that resulted in its deconsolidation from Alphabet. GFiber announced plans to combine with Astound Broadband, which will result in its deconsolidation from Alphabet when the deal closes, which we expect to take place in Q4, and we continue to allocate significant resources to businesses where we see meaningful opportunities to create value, such as Waymo. Turning to our outlook. I would like to provide some commentary and factors that will impact our business performance in the second quarter and full year 2026. First, in terms of revenues, we're pleased with the overall momentum of the business. At current spot rates, we would expect to see an FX tailwind of approximately 1 percentage point to our consolidated revenue in Q2 compared to a 3 percentage point FX tailwinds in the first quarter. In Google Cloud, as Sundar mentioned, we will begin to deliver TPU hardware to a select group of customers in their own data centers. We expect to begin recognizing a small percent of the revenues from these agreements later this year with the vast majority of revenues to be realized in 2027. It is important to keep in mind that revenues from TPU hardware sales will fluctuate from quarter to quarter depending on when TPUs are shipped to customers. And finally, we're excited to welcome the Wiz team to Google Cloud with the closing of the acquisition in March and are very pleased with the performance to date. A couple of items to highlight related to the acquisition. First, Wiz will be reported in the Google Cloud segment. And second, we expect a low single-digit percentage point headwind to cloud's operating margin for the remainder of 2026 related to the acquisition. Moving to investment. We are updating our full year 2026 CapEx guidance range to $180 billion to $190 billion, up from our previous estimate of $175 billion to $185 billion to now include investment related to the acquisition of Intersect, which closed in March. We are seeing unprecedented internal and external demand for AI compute resources. The investments we are making in AI is delivering strong growth as evidenced by the record revenue and backlog growth in Google Cloud and strong performance in Google services. Looking ahead, the strong results reinforce our conviction to invest the capital required to continue to capture the AI opportunity. And as a result, we expect our 2027 CapEx to significantly increase compared to 2026. In terms of expenses, as we've discussed previously, the significant increase in our investment in technical infrastructure will continue to put pressure on the P&L in the form of higher depreciation expense and related data center operations costs such as energy. We also expect to continue hiring in key investment areas such as AI and cloud and are investing in marketing to support our AI products. To conclude, Q1 was an outstanding quarter for Alphabet, and our teams continue to execute with a high level of discipline and velocity, delivering amazing innovation. We look forward to sharing more in the coming weeks at I/O, Google Marketing Live and Brandcast. I want to take this opportunity to thank our employees for their contributions to our performance. Sundar, Philipp and I will now take your questions. Operator: [Operator Instructions] Your first question comes from Brian Nowak with Morgan Stanley. Brian Nowak: I have 2. The first one, Sundar, on a recent podcast, you talked about how you were acutely constrained [ by compute ], something you focused on almost every week to sort of make sure you're deploying capacity correctly. So Let me ask you this, as you sort of look at the Search business, what are the areas that you are most excited about applying next-generation compute toward to sort of generate an ROIC on that return in search in the next 12 months. And then the second one is on the sale of the TPUs to third parties. Just can you help us philosophically understand the strategy around pricing them, given the high ROIC of using TPUs to power multiyear Google Cloud workloads a little bit? Sundar Pichai: Thanks, Brian. I'll take the Search one first. Obviously, you've seen we are taking advantage of all our investments in building the Gemini models and both obviously applying it in Search in the Gemini app, driving innovations in AI overviews in AI mode and they're all contributing to the increased usage of the product. . I do think looking ahead across both these surfaces, there is a massive opportunity to go deeper in what we do for our users, I think, bringing agentic flows, workflows to consumers in a way that it's easy for them to do, including in the context of search, I see as a huge opportunity ahead obviously, we are in very, very early innings of all that. But our investments in our full stack of AI approach, I think, puts us in a good position to bring those experiences to search, and I'm pretty excited about it. On the second question around TPUs, obviously, I would -- we do think about it as what are we doing through Google Cloud to help our customers. And that's the framework with which we think about it. In that context, there are situations where it makes sense. For example, you take customers like capital markets where they are running highly performing AI workloads. They wanted TPUs in their data centers. So there are -- and those trends are true across a diverse set of industries and in certain cases, frontier AI Labs too. And so we are opportunistic about it. But I do think we step back and think about it overall as the opportunity for Google Cloud. A lot of it is providing infrastructure through cloud, at times it is direct sales of TPU hardwares to a select group of customers. But again, we do take ROIC approach. And some of it helps us get more economies of scale, scale in our overall compute environment as well. And so it helps us invest in the cutting edge, which we need to do the next generation as well. . Operator: Your next question comes from Doug Anmuth with JPMorgan. Douglas Anmuth: One for Anat and 1 for Philipp. Anat, you talked about 2027 CapEx that it will increase significantly. And I know you didn't quantify it, but how do you think about the current CapEx trajectory, the ability to service this massive backlog that you've built up in just the last quarter and what will no doubt increase going forward. And then, Philipp, can you just talk more about the drivers of search queries at an all-time high? And then how you're thinking about how much room there may be to increase coverage of search queries, just the ability to show ads against the higher percentage of queries than the 20% you've been at historically? Anat Ashkenazi: Thanks, Doug, for the question. Let me start with your first question on CapEx and how we think about CapEx increase going into 2027. As you've seen us over the past several years, increased CapEx every year, and we have done it very thoughtfully to meet the demand that we are seeing both from external customers as well as demands across the organization. And you're seeing the proof point, the ROIC on that in terms of just the growth rate we're seeing, whether it's growth rate within search or certainly the cloud business, and the opportunity we have within the cloud backlog. So as we're seeing that robust demand across the business, we are looking at what can we do to support that growing demand and the opportunity ahead of us and increasing CapEx to meet that demand. We'll provide more clarity in future earnings call about what that number will be, but that's the opportunity we're seeing ahead of us. It's quite meaningful and we want to make sure we capitalize that and we do it in a way that's responsible as we've done to date. Philipp Schindler: So the second part of your question, first of all, just [indiscernible] for a second. I mean we're very pleased with the performance of our ads business here. And as Anat shared, Google Services benefited from a strong FX tailwind-- that's important to keep in mind. The strength we saw in search was not due to a single driver, but was really the result of many parts of our business showing strength and working very well together. If I just keep that for a second the vertical perspective, retail finance, I talked about it in health, drove the greatest contribution, although all major verticals actually contributed, we make hundreds of changes every quarter to improve the user experience, the advertiser experience. And so that's really contributing to our performance here. And we've also been able to generate very strong ad performance while significantly involving the search results page here. The queries continue to grow. And as Sundar mentioned, they are an all-time high. We see AI overviews and AI Mode continue to drive greater search usage and growth in overall queries, including in commercial queries, you specifically asked about the 20% on the coverage side, as I said before, I think with the ability of AI to better understand inten t and a lot of other vectors around it. I think there is upside in that coverage number. And overall, understanding that we have at Gemini on intent has just significantly expanded our ability to deliver ads on longer, more complex searches that were previously really difficult to monetize. And Anat shared earlier, we are deploying our Gemini models now across our ads infrastructure, and it's really driving improvements across the big 3 areas that I highlighted in my prepared remarks. Operator: Our next question comes from Eric Sheridan with Goldman Sachs. Eric Sheridan: Maybe 2, if I could. The first one, just building on the answer so far. When you look at the backlog you disclosed today. Sundar, I would love to know if you can come back to your comments on AI infrastructure and your unique approach and how that positions you to either build capacity, scale, compute and do it in a way that is, as Anat said, sort of effective from a margin standpoint as well as a compute standpoint, just to understand where you sit competitively in your mind relative to others. That would be one. And then Philipp, to bring you into the conversation, you referenced UCP and there's been a lot of industry inertia around UCP very quickly. Talk to us a little bit about what for the services business as agenti commerce scales in the years ahead? Sundar Pichai: Thanks, Eric. Look, I do think part of -- I mean I do think we are genuinely differentiated. We're unique in the market because of our vertically optimized AI stack and the way we co-develop the components from our infrastructure and models to platforms and the tools to applications and agents. And the fact that we own frontier models, own the silicon really helps us stay ahead of the curve. And on top of it, I'll just to put an extra point on it, the deep investment in our security layers to keep everything safe. And I think we are the only provider in the market that offers all of these vertical stack. And so overall, again, to my earlier comments to Brian, I think about it all as Google Cloud. We can -- we have many different ways to serve our customers so we can meet them in a way, suited to their needs, I think better than other players here. And I do think looking ahead, our ability to invest in this moment and stay at the frontier I think, puts us in a strong position. And I think we are doing it based on tangible demand signals we are seeing. And it's not just on the revenue side, but I'm talking from an ROIC framework, and that's what is helping us navigate this moment responsibly. Philipp Schindler: To the second part of your question, look, I mean, we're in the early stages of the agentic era. Agnetic is more than just complete transactions. We all know this. We see agenetic experiences as additive, and it will really transform how we shop from discovery to decisions while helping obviously, brands differentiate themselves. We've been very intentional about creating an agentic experience that works for our users, our partners for the entire ecosystem. Our goal is really to remove the grunt work of shopping. So consumers can focus on the enjoyable parts. For decades, you could either shop fast or smart and I think with the agentic ecommerce, you no longer have to actually choose between speed and certainty here and the vision is to make commercial experiences across the board, assisted more personal, more fluid. And we're carefully designing space and agenetic workflows for users to really see valuable components of their shopping journey beyond just price, such as customer service, brand loyalty and more while removing the friction of the process that I just talked about. And this is exactly where the part of your question kicks in the Universal Commerce protocol, a new open standard for agentic commerce that works actually across the entire shopping journey, from the discovery to the buying and the post-purchase support that we just talked about. And it was really co-developed with the industry leaders, including I mentioned them Shopify, Etsy, Walmart and so on. And we received tremendous feedback so far from hundreds of top companies, payments partners, retailers really interested in integrating and it will help power a new checkout experience in AI mode in search and the Gemini app and allowing shoppers to actually check out from select merchants right as they're researching on Google and going through this journey. So we're very, very excited about it. Operator: Our next question comes from Ross Sandler with Barclays. Unknown Analyst: Yes. Just following up on the last question on agentic shopping. So it seems like we're at the point in time where this is actually going to start happening finally. So Philipp, just to elaborate a little bit, as you look at carrying the AdWords business from kind of the old way of doing things to this new agentic frictionless shopping way. How do you see the price and volume kind of growth trends for core AdWords evolving as you start implementing more agenetic workflows in search? Philipp Schindler: Look, our #1 focus is obviously on the user experience here. And I think the most important part then this is what I mentioned before, we are carefully designing the space in the agentic workflows for the users to actually see the valuable components within that shopping journey and a second, you have the space, you obviously have the ability for interesting app advertising models. I think it's also worthwhile noting that beyond just the traditional agents, there's a lot of additional ways we can actually use AI to improve the shopping experience. And you can think about it like our apparel try-On tools that is now available in U.S., you can think about Google Lens. So there's a lot more to do here. But I think the key part is actually what I said before. We focus on the user experience here and think -- I think all else will follow if we pay attention to the points I mentioned. Operator: Your next question comes from Michael Nathanson with MoffettNathanson. Michael Nathanson: One for Sundar, one for Philipp. Sundar if I can connect Brian's question, Eric's question, and go a little bit higher. I wanted to understand, how are you deciding how are you allocating which divisions and projects get excess capacity given that you're constrained, right? So how do you decide between all the internal projects you have and the external projects, right? So what types of screens are you running to decide who gets incremental capacity? And then to Philipp, I have noticed you said this on the Gemini app there's more and more images that come to you in the shopping journey. Can you talk about your thoughts about adding advertising on that app? And what's guiding your decision-making here on adding ads on Gemini? Sundar Pichai: Thanks, Michael. I think a great question on an ongoing basis. I'm looking forward to Gemini helping me more and more as I'm thinking that through. Look, I do think that the foundation where we start with it is what we need from a R&D standpoint to develop models at the frontier. So what do you need for training these models. And so effectively, the compute needed for GDM because it's a foundation for everything we do. And so that's a core principle at which we operate. And then obviously, with the ability to plan ahead, we are, we do long-range plans on our core areas, be it be it search, be it YouTube and so on as well as we see in Google Cloud. And obviously, in Google Cloud, we have -- we are providing enterprise AI solutions, which this quarter had an 800% year-on-year increase from the prior year. So we are seeing strong demand for Gemini enterprise our AI solutions there. We see strong demand for infrastructure in Google Cloud. And as I said earlier, in some cases, we are seeing demand for TPU hardware. -- hardware and other data centers as well. So we are modeling these out and working to allocate across these areas. Obviously, we are compute constrained in the near term. And as an example, our cloud revenue would have been higher if you were able to meet the demand. So we are working through that moment, and we are investing, but we have a robust long-range planning framework, and we see extraordinary opportunities ahead, and we are allocating with that framework in mind. Philipp Schindler: And to the second part of your question, as I said in my previous answer, we are obviously focused on the user first and creating a really great user experience with all of our products, especially on newer products. And specifically on monetization in the Gemini app, our focus right now is on AI Mode. But it's fair to say that we really believe a format that works well in AI Mode would transfer successfully to Gemini app. And so today, in the Gemini app, we're focused on the free tier and subscriptions and our AI plans were a sizable contributor to our Google One revenue growth. But let's also be clear, ads have always been a big part of scaling products to reach billions of people. And if done well, ads can be really valuable and really helpful commercial information. And at the right moment, we'll share any plans as we have said, but we're not rushing anything here. Operator: Your next question comes from Mark Shmulik with AllianceBernstein. Mark Shmulik: Philipp, one more on search performance, if I can. You talked a few times about kind of optimizing for the consumer experience. And I guess besides higher query volume, is it fair to conclude that consumers are using these AI tools [indiscernible] or otherwise, and it's shrinking their purchasing journeys, converting at higher rates? And if so, is there a way to dimensionalize how much of the strength in search is being driven by that behavioral change against perhaps some of the newer advertiser AI tools that you'd be launching and rolling out . Philipp Schindler: I think the way to think about it is really to think about the expansionary moment we see here for search. This is the key part. AI is fundamentally changing how the world searches for and how it access information, queries are at an all-time high, Sundar said this. Traditional search really started with [indiscernible], and now we have overviews in AI Mode and they have made search more intelligent than ever and they let you ask for more complex questions. And we have Lens or Circle to search live, And search Live, Search Live now available to all countries and languages that support AI Mode again, shows you the expansionary nature of it, and we have our AI-driven search campaigns, and we have now [ SMBs ] that can reach customers at a scale that it really wasn't possible even a few years ago, and you can add in Google Translate and so on. So I feel like you've factored all of this and we're in a pretty good place and are quite excited about where this is going. Operator: Your next question comes from Ron Josey with Citi. Ronald Josey: Maybe this one is for Anat. We continue with margins continue to expand here. I wanted to understand maybe if you could break down the cost drivers or really the drivers of margin expansion, particularly amongst cloud, there's a thesis out that AI revenues are lower margin in general, but we are seeing margins improve. So more insights on just the cloud business and what's driving that margin expansion. Obviously, demand may be pricing, but that would be helpful. Anat Ashkenazi: Sure. Let me help impact the margin expansion. Obviously, we're pleased to see that there are pushes and pulls across the business, including the wiz and Cloud specifically. And I would start with the top line, when we see this robust strong revenue growth, both in cloud and Google services, it does provide leverage all the way down to the bottom line within the income statement. And you know we've been working hard to ensure we have -- we're running a productive and efficient organization, and it's not just how we operate the business, but even in areas such as our technical infrastructure, where we are investing the significant CapEx investments in our data centers and servers. We are looking at how we drive scientific process innovation within that organization. And that is reflected both in cloud and Google services as we allocate cost based on consumption. In the past, I did talk about the depreciation associated with these investments that is hitting both Google Cloud and Google services. Google Cloud expanded margin quite significantly from a year ago, as you've seen in our numbers that we just previewed. And a lot of it is the top line growth that Google Cloud is providing or producing as well as an incredibly efficient way of running the business. I will give Thomas and a team a lot of credit for running a very productive organization and making sure that we are supporting our customers and providing the services and products that they want and benefit from continue to drive top line growth and doing this well within the middle of the income statement, all the way from a very efficient technical infrastructure thinking through how do we leverage AI across our business. As Sundar mentioned, the use of coding internally or how Gemini helps us there optimizing our real estate footprint. And we're going to continue to do this. This is not -- we're not going to stop here. We're going to continue to push for more efficiency, knowing that we're going to have the headwind associated with the depreciation coming with higher CapEx level. Operator: Our next question comes from Ken Gawrelski with Wells Fargo. Kenneth Gawrelski: Two for me, please. First, on the cloud and capacity, could you speak about how your verticalized capabilities enable you to navigate a complicated supply chain, especially when experiencing inflation and constraints. Are you factoring any supply chain price inflation into '26 and '27 CapEx commentary? And as part of that, maybe Anat, could you talk -- could you update us on the allocation of compute capacity internal versus external cloud? And then one more, please. When you think about search quality volume growth. We're clearly seeing expanding use cases. Historically, it's always been free to the consumer with and completely ad-supported do you see future use cases where certain consumer use cases are more effectively monetized via subscriptions? And maybe a different mix of the consumer "search" the new search opportunity? Sundar Pichai: All right, Ken. Maybe there are a few thoughts to it. Maybe I'll touch on it. And on overall compute. I think I spoke earlier on how we think about allocation of compute across our businesses. And I think, again, the long-range planning and the ROIC framework give us a good way to plan ahead. I do think we -- I mean, obviously, we are working through a complicated supply chain environment as you point out, and we are factoring that into any commentary we give. But I think the scale at which we are operating and our ability to work across all layers, both -- our supply chain partners see the strength of our diversified businesses and the demand we drive and our frontier technology and the investments all through the stack, I think they help us get into deeper partnerships all across the supply chain. And I think that's -- and I mentioned earlier, the economies of scale point as well. So all of that factors in a positive way there, I think. In terms of search, look, I think we -- we are proud that we build models at all, we are at the frontier across the period of Frontier. We do think about capability and the cost front here deeply so that we can serve users at scale. -- but at the same time, we can bring in the most powerful models for the most demanding queries. But the future, as you are right, that in a valuable as we serve more and more valuable use cases. There are going to be use cases where people will want to use the most powerful model. And there may be different ways to accomplish that. So we're going to put the user first and support them in the way they want to use the product, and we already provide various tiers of our subscription plans in which you can get access to more powerful models and that applies across your Google user experience and including in search, and you've seen the momentum we saw a very robust quarter in terms of our AI subscriptions growth, driven by interest in getting access to better Gemini models. And so I think that sets us up well to serve the breadth of use cases people would want in all places, including in search. Operator: And our last question comes from Justin Post with Bank of America. Justin Post: I expect a lot of interest in your TPU sales. So can you help us think about how you're thinking about the opportunity there? And then maybe how much break down the backlog growth a little bit between TPUs and cloud? And then second question, just thinking about the margins on these big generative AI cloud deals. How do you think about these $100 billion deals coming in and the margins associated with those? Can they be similar to your cloud business as it is? Sundar Pichai: Look, overall, I would say, look, we see tremendous interest and there's tremendous demand for both AI solutions as well as AI infrastructure, including massive interest in our GPU offerings as well as TPUs. And so we are proud that we can provide customers with a very diverse with the breadth of our offerings and let them -- they can meet them in terms of where their needs are. And maybe I'll pass it Anat to give some color on the backlog growth. Anat Ashkenazi: Yes. So the backlog, the TPU hardware agreements that Sundar referenced in his prepared remarks, are reflected in our cloud backlog of the $462 billion. Although the majority of the backlog is still GCP agreements. Now as you think about the total backlog, just over half of it will convert to revenue in the next 24 months. And the TPU hardware sales, more specifically, we expect a small percent of them to see coming through as revenue later this year and then the majority to be realized as revenue in 2027. Justin Post: And then anything on the big AI deal margins with the generative AI companies? Sundar Pichai: Look, I think nothing to comment on any specific contracts. But overall -- earlier, there was a lot of questions about how do we allocate and remember, in a constrained environment when we are choosing to allocate across all these opportunities, we are working off a robust ROIC framework. Operator: And that concludes our question-and-answer session for today. I'd like to turn the conference back over to Jim Friedland for any further remarks. James Friedland: Thanks, everyone, for joining us today. We look forward to speaking with you again on our second quarter 2026 call. Thank you, and have a good evening. Operator: Thank you, everyone. This concludes today's conference call. Thank you for participating. You may now disconnect.
Operator: Thank you, and welcome, everyone, to FormFactor's First Quarter 2026 Earnings Conference Call. On today's call are Chief Executive Officer, Mike Slessor; and Chief Financial Officer, Aric McKinnis. Before we begin, Stan Finkelstein, the company's Vice President of Investor Relations, will remind you of some important information. Stan Finkelstein: Thank you. Today's a company will be discussing GAAP P&L results and some important non-GAAP results intended to supplement your understanding of the company's financials. Reconciliations of GAAP to non-GAAP measures and other financial information are available in the press release issued today by the company and on the Investor Relations section of our website. Today's discussion contains forward-looking statements within the meaning of the federal securities laws. Examples of such forward-looking statements include us with respect to the projections of financial and business performance, future macroeconomic and geopolitical conditions; the benefits of acquisitions and subsequent integration, anticipated time line for and benefits from Farmers Branch, anticipated industry trends and volatility the impacts of regulatory changes, including tariffs, the anticipated volatility in demand for our products, our abilities to develop, produce and sell products and meet ongoing demand. Advancements of artificial intelligence impact on industry and demand and the assumptions upon which such statements are based. These statements are subject to known and unknown risks and uncertainties that could cause actual results to differ materially from those expressed during this call. Information on risk factors and uncertainties is contained in our most recent filings on Form 10-K with the SEC for the fiscal year ended December 27, 2025, and in our other SEC filings, which are available on the SEC's website at www.sec.gov. Forward-looking statements are made as of today, April 29, 2026, and we assume no obligation to update them. With that, we will turn now the call over to FormFactor's CEO, Mike Slessor. Mike Slessor: Thanks for joining us today. FormFactor's first quarter revenue grew sequentially to another all-time record. The gross margin and earnings per share significantly above the high end of our outlook range. In the current second quarter, we got to again set a revenue record and delivered sequential increases in both gross margin and earnings per share, extending the momentum that began in the second half of last year. These outstanding results exceed our target model on a quarterly run rate basis, and our current quarter outlook is expected to cap a string of results that validate the model on an annualized basis. . We're proud to have delivered on this commitment and at our upcoming Investor Day at the NASDAQ market site on May 11, members of FormFactor's executive leadership team will introduce our next target model. Along with the strategic priorities, long-term growth opportunities and operational initiatives that underpin it. We're also encouraged by how these financial results were achieved. We continue to benefit from our leadership position at the intersection of high-performance compute and advanced packaging, 2 powerful trends transforming the semiconductor industry. Our growth is fueled both by strength in familiar areas like probe cards for high bandwidth memory and accelerating contributions from newer foundry and logic opportunities like networking. The first quarter growth in probe cards for networking applications caused a leader in high-performance compute to become a 10% customer for the first time, and we're continuing to build our relationship with this leading customer in not only networking, but also probe cards for GPUs and systems for co-package optics. Operationally, these results represent a significant improvement from the execution challenges that previously limited our performance. While the pace of profitability improvement will moderate as we approach the limitations of our current footprint, later this year, we expect our Farmers branch site to come online, providing increased capacity with structurally lower costs will in turn create the foundation for future revenue growth and gross margin expansion. Aric will discuss our current operational performance and future plans later in the call. Turning now to segment and market level details. In DRAM probe cards, we delivered the expected sequential growth from the fourth quarter to reach another record with increased demand in HBM applications paired with sustained demand in DDR applications. As you've heard recently from our major DRAM customers, the environment continues to be supply constrained in DRAM overall. -- and we expect our customers to dynamically shift their wafer start mix between a variety of HBM and DDR designs to maximize their opportunity. Since probe cuts specific to each customer chip design, we expect our DRAM mix to correspondingly shift between HBM and DDR of these unusual end market condition resist. We're again forecasting record revenue in DRAM probe cards in the current quarter, driven by another step-up in HBM demand. Most of this incremental growth is coming from a second customer's increased adoption of FormFactor's differentiated Smart Matrix full wafer contactor technology. Smart Matrix provides a unique combination of high parallelism productivity and high-speed performance, enabling our customers to test hundreds of completed HBM deck simultaneously at the 10 gigabit plus I/O data rate of HBM 4. This capability is critical in advanced packaging processes like TSMC's Coos where stack die test insertions provide the final test for the HBM stack where it's combined with GPUs or custom ASICs. Our second quarter outlook shows the impact of FormFactor's competitive advantage and the resulting market share gains as P&IO speeds and overall stack bandwidth for HBM continue the relentless increase as the industry progresses from HBM3 to HBM4 and then on to HBM5. Shifting now to the foundry and logic probe card market. As expected, First quarter foundry and logic demand increased significantly over the fourth quarter driven primarily by growth in probe cards for networking applications. In the current quarter, we expect continued growth in foundry and logic probe revenue, driven primarily by incremental strength in data center CPU applications, building on top of continued strong demand in networking, as well as steady demand in PC and mobile. This data center CPU probe card demand is directly linked to the newly appreciated trend of increasing CPU compute intensity in AI inference use cases. This offers a powerful example of the value of FormFactor's diversification strategy as we strive to be a leading supplier to all major customers. In this case, we benefit from having put ourselves in a position to capitalize on unexpected demand for CPU probe cards from one of our long-term major customers. As we shared last quarter, we've continued to partner closely with this customer to support turnaround initiatives in the core business as well as in their effort to become a leading foundry. In addition, Intel recently awarded us the 2026 Epic Supplier Award, recognizing our world-class commitment to continuous improvement, collaboration and performance excellence. At the same time, as in HBM, we're successfully executing our strategy to be a top supplier to all the leading customers in the industry as we continue to build the foundation for market share gains at a large fabless XPU customer. Specifically, we've now been awarded a second design, building off our successful qualification and initial design win. In addition, our production qualification in leading-edge GPU applications at the world's largest foundry is nearing completion, with preparation now underway for second half volume shipments and production support. Finally, as an additional component of FormFactor's expanding high-performance compute exposure, we continue to grow our custom ASIC business, following a multimillion dollar design win in deepening engagement with several hyperscalers and their ASIC design partners. Turning to our Systems segment. In the first quarter, we experienced the expected seasonal reduction in demand. In systems, our focus continues to be two-pronged: one, executing on the growth opportunity in co-package optics; and two, helping customers solve the challenges of building scalable and commercially viable quantum computers. Staying with Quantum for the moment. In the first quarter, we announced the flat iron dilution refrigerator, a new benchtop millikelvin platform designed to simplify optical and electrical measurement and accelerate quantum device development, characterization and chip scale validation. In CPO, we're building on our decade-long R&D engagement with leading customers in their development silicon photonics and CPO and are now beginning to ramp our Triton production test system co-developed with Advantest and Tokyo Electron. This ramp is accelerating, and we now expect 2026 CPO revenues to come in at the high end of the $10 million to $20 million range we've previously communicated. This acceleration is driven by 2 factors: first, the growing volumes of CPO chips planned for later this year; and second, our leadership in the important test insertion on which ensures known good die on the photonic integrated circuit or pick wafer. Insertion 1 is proving to be a cost-effective and production-ready solution to ensure high yields of CPO modules built with advanced packaging processes like TSMC's coup. Because of cost and complexity challenges, other test insertions like insertion 2, after stacking the electrical dye on the PIC are proving to be difficult for customers to implement the production. Finally, we successfully integrated our [indiscernible] fourth quarter acquisition of Keystone Photonics, and our teams are collaborating to define and execute the world's leading silicon photonics and co-packaged optics probing road map. This includes electrooptical probe cards, which offer the promise of higher parallelism and higher throughput for our customers as we bring together our technology leadership in both electrical and optical oven. Before turning the call over to Eric, I want to thank the global FormFactor team. Achieving our target model is the result of their resilience in implanting multiyear investments in technology leadership talent, customer focus and operational execution. We're well positioned as test intensity and complexity continue to rise at the intersection of advanced packaging and high-performance compute and we're excited to share our vision for the future of FormFactor at our May 11 Investor Day. Aric? -- you're up. Aric McKinnis: Thank you, Mike, and good afternoon. Over the past 3 quarters, one of our top priorities has been to increase gross margins and deliver on our commitment to our target model of 47% non-GAAP gross margins at $850 million in annual revenues. We're proud to say that in Q1 '26, we achieved this target on a run rate basis, but we're even prouder of how we achieved it, driving what we believe are durable gross margin improvements. Through operational effectiveness and financial discipline. The actions we took included: first, deploying our workforce and existing manufacturing footprint more effectively, which included the restructuring actions announced in early Q1. Second, driving improvement in manufacturing yields in key process areas; third, innovating to reduce manufacturing spending and lastly, reducing cycle times in key manufacturing operations. Even as we executed on record demand, we remain focused on driving improvements in these critical areas. This is the type of discipline that we believe is fundamental to driving sustainable financial results. Thanks to the FormFactor team's focused execution, we generated additional operating leverage on sequentially higher demand levels. Driving even better progress than expected and a cumulative improvement of more than 1,000 basis points in gross margins over the last 3 quarters. At the midpoint of our Q2 guide, we expect to generate another 50 basis points of expansion. We believe the bulk of the improvements in gross margins are durable in nature. Driven by improved operational effectiveness as well as discrete changes in our cost structure. We expect these fundamental improvements will help us to profitably navigate the impact of inevitable shifts in product mix and volumes. Non-GAAP gross margins improved by 500 basis points from Q4 '25 and exceeded the midpoint of our first quarter outlook by 400 basis points. As expected, continued operational improvements and higher volumes drove an approximately 100 basis point improvement from Q4 '25 that we believe is durable in nature. The overperformance against Q1 expectations is about half related to timing items and half related to durable improvements. The timing items of about 200 basis points are primarily driven by changes in customer-driven priorities within the quarter. This element may be transitory as driven by timing. The remaining overperformance of 200 basis points was split about 50-50 between first, faster realization of cost savings from our first quarter restructuring action and second, unexpected relief from tariffs. As IEPA tariffs were discontinued and placed by lower Section 122 tariffs during the quarter. These improvements are likely durable in nature. We continue to drive the unit cost of our products down in part enabled by increasing output from our existing infrastructure. Our exposure to fast-growing markets that Mike drive is generating demand that requires more output. As reflected in our record quarterly revenue in Q4 '25, again in Q1 '26 and now in our outlook for Q2, we are manufacturing at levels that would not have been possible even 1 quarter earlier. Improvements in cycle times, yields and how we deploy our workforce in addition to reducing unit costs and improving gross margins are enabling us to get more out of each tool, process and sight by ensuring more good product out and better fungibility of our workforce. Our Farmers Branch site expansion is the next key priority. And the project is on track and expected to begin to come online later this year and to ramp over the course of 2027. Bringing up this capacity on time and on budget is a key focus over the as it will enable the next phase of growth and gross margin expansion beyond our current target model. The trajectory of gross margin improvement and attainment of our target model is now evident, but our journey is not over. While we are optimistic about our ability to continue to drive profitable growth and believe we will continue to drive incremental improvements throughout 2026. We recognize that sustaining the progress that we have made will require ongoing focus and discipline. Further, we expect future gains to be achieved at a more moderate pace as incremental improvements require both more effort and more time than the rapid progress to date. We are excited to share our longer-term view at our May 11 Investor Day. Q1 '26 revenues of $226.1 million came in $1.1 million above the midpoint of the Q1 '26 outlook range of $220 million to $230 million. GAAP gross margins for the first quarter were 38.4% and down 380 basis points from 42.2% in Q4. Cost of revenues included $23.9 million of GAAP to non-GAAP reconciling items, of which $21.5 million related to our Q1 '26 restructuring actions announced on January 5. Details of the GAAP to non-GAAP reconciling items are outlined in our press release issued today and in the reconciliation table available on the Investor Relations section of our website. On a non-GAAP basis, gross margins for the first quarter were 49%, 510 basis points higher than the 43.9% we achieved in Q4 and 250 basis points above the high end of our Q1 '26 outlook range. This increase in non-GAAP gross margins was driven primarily by improvement in the probe card segment, which were up 603 basis points to 50.5% and partially offset by the decrease in our Systems segment, which declined 350 basis points to 38% on seasonally softer demand and as we transition to production of our Triton system for co-packaged optics applications, as Mike described. Our GAAP operating expenses were $70.1 million for the first quarter, down slightly as a percent of revenue from the prior quarter and a decrease of 470 basis points from the same period in the prior year. Included in Q1 '26 operating expenses were $7.1 million of expense related to the preproduction ramp of Farmers Branch. Despite the incremental spending, the decrease as a percent of revenue demonstrates continued spending discipline across the P&L. -- even as we drive innovation through R&D and fund the Farmers branch expansion. GAAP net income for the first quarter was $20.4 million or $0.26 per fully diluted share. Down from GAAP net income of $23.2 million or $0.29 per fully diluted share in the previous quarter. The decrease was driven by restructuring-related costs, net of tax of $17.6 million incurred in Q1. First quarter non-GAAP net income was $44.5 million or $0.56 per fully diluted share, up from $36.6 million or $0.46 per fully diluted share in Q4. The GAAP effective tax rate for the first quarter was 2.1%, and the non-GAAP effective tax rate for the first quarter was 16.1%. Moving to the balance sheet and cash flows. We had free cash flows in the first quarter of $30.7 million compared to $34.7 million in Q4. The $4 million decrease in free cash flow was driven by greater capital expenditures and lower exposure from operations. The decrease in cash flows from operations which were down about $1 million from the prior quarter to $45 million in Q1 is driven primarily by higher working capital needs driven by our growth and $4.1 million in cash paid related to restructuring actions. At quarter end, cash and investments were up $28.1 million to $303 million. We continue to expect that cash CapEx for Farmers Branch will be between $140 million and $170 million in 2026. Preproduction ramp costs and G&A will be between $20 million and $25 million. Upon completion of the ramp to initial target capacity, we expect Farmers branch to be acetic to gross margins. Associated with our investment in Farmers Branch, we secured certain incentives, which we expect will partially offset these expenditures. Among others, incentives include about $24 million in cash grants designated to fund capital expenditures upon meeting certain criteria. During the first quarter, we did not repurchase any shares. At quarter end, authorization of $70.9 million remains available for future repurchases under the $75 million 2-year buyback program that was approved and announced in 2025. We are committed to our share repurchase program as a tool to offset dilution from stock-based compensation over the 2-year period of the program. In the short term, we have prioritized our deployment of cash to accelerate the ramp of our new manufacturing site in Farmers Branch. Turning to the second quarter non-GAAP outlook. We expect Q2 revenues of $240 million, plus or minus $5 million. This increase in revenues and the impact of continued gross margin improvement initiatives described earlier, are expected to result in a higher non-GAAP gross margin of 49.5% plus or minus 150 basis points. As a reminder, we continue to see an adverse impact to gross margins from tariffs despite recent reduction in an amount paid. We have assumed around 140 basis points of tariffs in our outlook for Q2. We have paid substantial EPA-based tariffs since they were put in place in 2025, and we expect some or all may be refundable in the future due to the Q1 '26 Supreme Court ruling. [indiscernible] We did not record a recovery of these amounts in Q1 and have not assumed recovery in our Q2 '26 outlook. We are actively monitoring developments in this rapidly evolving space. If the amounts we previously paid are deemed recoverable, we could receive a refund of $9 million to $11 million in tariffs previously recorded in cost of goods sold. At the midpoint of our outlook range, we expect Q2 non-GAAP operating expenses to be $65 million, plus or minus $2 million. Our Q2 non-GAAP effective tax rate is expected to be within the range of $15 to 19%. Non-GAAP earnings per fully diluted share for Q2 is expected to be $0.61 plus or minus $0.04. A reconciliation of our GAAP to non-GAAP Q2 outlook is available on the Investor Relations section of our website and in our press release issued today. As demonstrated by our Q2 results and our Q2 outlook, we have now achieved our current term model. We believe we have more room to run and driving operating leverage, underpinned by our initiatives to improve our structural costs, increase capacity and expand our leadership position in the fast-growing markets that Mike described. We look forward to sharing our new target financial model and key elements of our strategy at our planned Investor Day in a little under 2 weeks. With that, let's open the call for questions. Operator? Operator: [Operator Instructions] And our first question comes from the line of Brian Chin from Stifel. [Operator Instructions] Brian Chin: And congratulations on the really good results. First question. NVIDIA 10% come other than the nice ring that it has to it. Can you explain why you break this out separately versus rolling up under TSMC? And also how much roughly of this is networking related? And what does that suggest or what does this suggest for your market share of the SAM for new existing platforms? Mike Slessor: Brian, it's Mike. I'll take that one. With all customers, as we report them as -- when they cross the 10% threshold is required to it's based on who's placed the PO and who's paying the invoice. And so in this case, you see we have 2, 10% customers in this quarter. And as I described on the call, the second 10% customer is associated with networking. We're still making excellent progress on the GPU qualification. As I said, we're now reaching the final stages of that and expect essentially the $20 million in revenue we've described in the second half. We're now investing and preparing the capacity and local support for that. Those POs we would expect to come from the foundry, just different business models in different part of a fabless customers' business. Brian Chin: I'll leave CPO for the next question here. But 1 thing I wanted to ask you about, Mike, is that you've talked about the production ceiling that you're kind of working with until Farmers branch comes online, good sequential growth kind of in line with the midpoint of Q1 further growth ahead of our models for Q2, to ask this, but kind of curious how much of your near-term growth is being driven maybe by NIC or ASP relative to just units. Given the constraints you're operating on and maybe your ability to optimize within those constraints. . Mike Slessor: Yes. So it's a great question, Brian. And it ultimately comes down to ASP versus volume. And as Eric went through in his prepared remarks, he provided a pretty clear bridge that showed the gross margin improvement up to the 49% level is really based on cost reduction on COGS. Now it's split on things that we believe are durable and things that we think are temporary. But pricing in ASP is not a major factor in that. We've always run a business where customers will definitely compensate us for value. Typically, that's been performance of our products, cost of tests that we produce reductions in cost of tests that are produced. And in this case, there are some isolated incidents where customers are willing to pay expedite fees for a certain design because that offers the value in this capacity-constrained environment, but pricing really is not a driver of the gross margin improvement. It's COGS reduction and our operations team continuing to improve yields and cycle times and get more out of the existing footprint. How far that can run, we'll see. But so far, they've done a fantastic job. Operator: And our next question comes from the line of Matthew Prisco from Cantor. Matthew Prisco: So given the gross margin strength, I'd just like to dig in a little bit there. I know you listed out a few drivers, but can you perhaps just offer some more detail on how each of those drivers contributed to that 510 basis point increase quarter-over-quarter. And as we look forward over the last couple of quarters, combatted than expected. So how much more juice is there a squeeze with these current drivers ahead of that farmers branch ramp? . Unknown Executive: Yes. So as mentioned in the prepared remarks, the 510 basis points roughly 400 basis points were driven by a mix of durable and what I call transitory items. And if I break those down, the durable piece is really related to faster realization of savings from our restructuring action. So we thought the expenses were going to be a little bit higher and we ended up being able to do better than that as we executed on that restructuring action. Those changes are -- it was about 100 basis points in the quarter. And those changes are going to persist at those savings will persist as we move forward, our permanent in nature. The other 100 basis points of that 50% of the 400 basis points -- so the other 100 basis points is really related to tariffs. The new tariff construct that we're operating under just has lower weighted average tariff rates. And so that's resulting in a savings for us. We do continue to pay tariffs today. It still continues to be a headwind. But as long as the current framework is in place, we expect those savings to also be durable in nature. The piece that is transitory in nature really relates to timing items both on spend and also in terms of just prioritization of certain products that we were producing within the quarter. Those were decisions that were made in order and were not included in our original outlook. We think those things are temporary and will flip around as we move forward, primarily mix and cost timing items. And so we don't expect those to necessarily persist going forward. Now we do expect those to be replaced by durable improvements as we move forward into next quarter into Q2. So as you can see by our outlook, we are still expecting sequentially up -- that is because even though we have some of the improvement we saw in Q1, even though some of that goes away, it is replaced by other improvements, and those are primarily related to the full quarter impact of our restructuring actions and the savings associated with that. Also, volume is a factor as we move from $226 million to $240 million in revenues. Matthew Prisco: And then maybe on the foundry logic side, that business obviously coming in better than expected. Can you help give us the breakout of that business as it stands today, kind of between that networking smartphone [indiscernible] all different moving parts within it. And as you talked about kind of the genetic AI driving the PP demand as we think about your ability to service that demand given the constraints on supply, are you falling short of that today? Or is there some kind of work around where you can actually supply these incremental parts . Mike Slessor: Yes, it's Mike. I'll take that one. We don't break foundry and logic down other than qualitatively in some of these different drivers as we go sequentially forward. As we've done this quarter with the CPU demand that you talked about, -- the step-up in Q1 was expected, if you go back and parse our comments from the last call and right about where we thought it would be. Now part of that's the answer to your second question we are running at very, very high utilizations. And basically, if you look at the Q1 revenue results, we came in pretty close to the midpoint of the guidance, and that's a reflection of some of the constraints we have. The operations team, as you can tell from our outlook, we're stepping up again pretty significantly sequentially. -- has continued to squeeze, I think you call it squeeze more juice out of things. That's true on the revenue side as well. One of the reasons gross margins are improving is we're producing more out of the same fixed cost footprint by and large. There's a tremendous amount of leverage when we do that. Now we're working closely with customers on their demand visibility is still a challenge in this business with lead times right around mostly shorter in the quarter. But this is an area where we've got a more active dialogue going with customers to make sure we're planning for whatever we can produce. So we're meeting their needs and surprise demand like this, the CPU agent AI driving. Operator: And our next question comes from the line of Krish Sankar from TD Cowen. Hadi Orabi: Congrats on the great results. This is Eddie for Krish. I'd like to follow up on the same question regarding CPUs. Your main IDM customer remains 100% of revenues and for the past 2 quarters, the demand outlook for CPUs have meaningfully improved I wonder, do you expect later this year for that customer to return to more than 10%. And if we look at the revenues, they're still like 40%, 50% below their peak in 2022. I wonder how you think about the recovery profile from that customer going forward? Mike Slessor: Yes. And if you look, obviously, this issue of 10% customers that customer was not a 10% customer in Q4 nor was it in Q1. With some of the CPU demand, they'll be pretty close in Q2. I don't know whether they'll make the line, but they're going to be buttoning back up. Of course, the other thing that's going on is we're making the absolute revenue threshold to hit 10% larger as we grow the overall top line for FormFactor. . So will it return to the 2022 highs? I don't think so just based on some of the strength in CPUs, but as they continue to execute their turnaround plan as they continue to make progress in the foundry business, especially associated with their advanced packaging technology, given the strong relationship that we have with them, I referenced the award that they gave us earlier this year. We're certainly hopeful that we can return and even exceed the peaks of '22. Hadi Orabi: And a follow-up. I mean, it seems you have these meaningful demand drivers from -- whether it's from NVIDIA, from the IDM, but your revenues seem -- correct me if I'm wrong, are they capped near that $240 million level until you guys ramp your facility later this year. I'm just wondering how to think about September and December revenues. Should we expect like flattish from that $240 million? Or do you think there are some optimization techniques that can take us $10 million to $20 million more than that. . Unknown Executive: I'll take that question. As you can see from our Q1 results and our outlook, we've been able to now execute on $225 million in the Q1 quarter and then looking forward to next quarter to 240. I think if you were to back a quarter off of each of those a quarter before that, we probably couldn't have produced at those levels. We've been real-time driving efficiency improvements in terms of cycle times and yields in our sites. And I think that is very much real time, increasing our output out of our existing sites. It's very closely related to these efficiency improvements that we're making. And it remains to be seen how much more of that we can drive. I do believe that there is still room for improvement, and we're going to continue to strive to make those improvements as we move through the remainder of 2026. To the extent we're successful in that, that will -- we expect to be able to continue to incrementally increase our output over the coming quarters. Operator: And our next question comes from the line of Craig Ellis from B. Riley Securities. Craig Ellis: Yes. Congratulations on the really strong execution guys. -- both on the top line and gross margin. I wanted to start just by following up on the last question. So we've done a really good job over the last couple of quarters. Tuning the knobs with our operations to drive significantly greater capacity and we're doing that with better yields, and that's helping to give us much better gross margin. How much of what you're doing at current facilities is going to be leverageable into Farmers branch when you ramp that up late this year and next year? Unknown Executive: Our intent is to leverage all of that work, right? What -- it's really fundamentally improving how we run our manufacturing processes. And I think that moving a portion of our manufacturing and having the benefit of new tools we will only improve in those areas in terms of cycle times and yields with some of the additional capability we get from a new tool set. So we all intend to preserve the gains that we have made and in fact, build on them as we get access to newer equipment sets and a site that is more consolidated, if you will, that allow us greater fungibility of our resources. Hadi Orabi: And then the follow-up question is regarding the networking business. So interesting to see big green there. On the 10% customer list. My question is this, as we think about that customer and the revenues that it's now driving, how do we think about how this most recent quarter performed relative to the trend lines that you all have been seeing and what you expect from that customer? Is there a seasonal sign wave that goes along with that demand -- or how do we interpret where revenues could go from here, given what you've seen in the past and what your expectations would be? Mike Slessor: Yes. I'll address the seasonality part, Craig. There is going to be some seasonality in that business. You've seen it reflected in our HPM business, which obviously feeds into that customer's overall supply chain. First half heavy second half a little bit lighter, although some of the product releases are starting to blend together. So I would expect some seasonality. Having said that, if we look at the overall demand environment, it's pretty clear from an external perspective that the second half continues to be pretty strong, right? We've got, as I said, in response to the CPU question, more active conversations with our customers because they understand there's capacity constraints, not just for us, but for our competitors as well. And so I think there's other opportunities that we can take advantage of, even if there is some seasonality around the annual cadence of these high-performance compute product releases, if you will. Hadi Orabi: That's really helpful, Mike. And if I could sneak in one more. We're seeing more low-power DDR designing into certain AI systems going forward, it seemed like that could give legs to the kind of the legacy DRAM market that the company has served not making it as probe card intensive as HBM, but at least extending the life of different formats that might have had a different sign way. What does that mean for form? Is that right? Or is it not something that can benefit the business? Mike Slessor: It depends, right? The real details of how our customers -- and I referenced this earlier in the call, shift their wafer start mix between HBM and DDR, primarily DDR5, but some legacy DDR4, as you alluded to in the mix is going to be really a pretty dynamic situation. the Chairman of 1 of our largest customers a few weeks ago publicly said that they're now getting better margins out of the DDR business than they are on the HPM business. . And I think you're going to see all 3 major DRAM manufacturers optimize their mix around this in this overall bit capacity-constrained market. So there definitely is -- remembering that probe card demand is driven by new design releases and ramps of those specific designs. Each probe card is specific to a customer chip design there's a lot of devil in the details, but there is the potential for that to fill in some of the seasonality goals. Operator: [Operator Instructions] Our next question comes from the line of Christian Schwab from Craig Hallum. Christian Schwab: Congrats on a great quarter. I just have 1 quick question. Can you remind me -- I can't find any way now. What is the target revenue capacity that on a yearly basis that you're putting on in Farmers Market. Unknown Executive: Yes. farmers Brad. So just to remind you Yes, are Yes. Just a reminder on the time line. So we are initially starting production that site at the end of this year, and we intend to ramp over the course of 2027 to the initial target capacity approximate sizing of the initial target capacity is something equivalent, more or less equivalent to our existing California footprint. You can think of that as maybe 40% of our -- I'm sorry, a little bit more than that. Yes, roughly 60% of our existing probe cards business today. So a pretty substantial capacity, what I think is probably more relevant is our ability to bring that capacity online modularly over time. So we're going to we're going to target initial capacity and then make sure that we're monitoring the outside environment. We're going to talk a bit more about this in our Investor Day on May 11 and should be able to provide some more details around it. Operator: Our next question comes from the line of Dennis Paton from Needham & Company. Unknown Analyst: So just could you maybe give us an update on your data test partnership? Kind of what's the progress there? And what is the time frame to monetize on that partnership? . Unknown Executive: Yes. I think the partnership with Advantest, we've talked about it as being most prominent with CPO. The Triton system over the years we've codeveloped with them in Tokyo Electron. But I wouldn't characterize it too much differently than our partnerships with a variety of other suppliers in the industry. We work very closely every day with Advantest competitor Teradyne because fundamentally, we believe that the test ecosystem needs to be an open ecosystem. We trained our customers to rely on that for business continuity. We've all developed interface standards. So I think the CPO momentum that both of us and Advantest have talked about, I think as an example, where this codevelopment together with partners in ATE and probers and other instrumentation really produce a system that's useful for solving an important customer problem. So a great result of that partnership, we got partnerships similar to this all over the place. Unknown Analyst: Great. And then another question on Farmers Branch. So if I understood correctly, so you expect to replace basically most, if not all, of your California capacity with the capacity in Texas, right, which will be about 60% of it. And if that's correct, so when do you expect kind of revenue to start hitting the top line from Farmers Branch? What's going to be the first quarter that hits? And then when do you think you hit full capacity in that facility? . Unknown Executive: Yes. To clarify, it's not a replacement. We're expanding our available capacity. And as I mentioned in my response earlier, we intend for that ramp to happen over the course of 2027. So pretty fast ramp time line with the first initial capacity coming on here at the end of the year at the very end. So not much impact to this year. Operator: And our next question comes from the line of David Duley from Steelhead Securities. David Duley: I guess the first 1 is -- you mentioned your codeveloped tool and the Triton there for, I think, insertion number. You mentioned an insertion number. Will that be the vast majority of your TAM opportunity in CPO is top 1 particular step. I think there's like 4 insertion points and then a couple of like final testing. But -- so can you just kind of explain where you think most of your TAM and revenue would come from CPO as this insert you referring to or a different one? And then what is your total expectation for CPO revenue perhaps in 2027. Mike Slessor: Yes. So David, I'll try to parse that in different ways. We're in the very early innings of CPO, right? This is the initial production ramp. We are focused on insertion One for a couple of reasons. One, it represents the sort of the foundational optical probing technology that's going to be needed in any of the insertions. If you think about any of the insertions you have to be able to optically probe the device. It's just insertion on essentially is the exclusively focused on that. There's a little bit of electrical program there, but it's really the optical proping step. So we're going to be able to port that technology, if you will, across all the other insertions. I do expect, and I think most industry participants who are really in this game expect the spending between different insertions to move around as a function of yield, as a function of product mix from our customers. So we have active conversations on all of these different sections with various partners and with customers, we've just chosen the initial ramp to really focus on insertion 1, and that's turned out to be a good ben,right, as you can tell from us raising our outlook for 2027. the sort of revenue opportunity with CPO, I'm going to punt to Investor Day. We're going to spend time talking about why we're differentiated the different insertions and the longer-term opportunities I think it fits pretty well in the context of the next target model we're going to share for you. David Duley: Just as a follow-up on the insertion #1, that's where you're basically optically proven the PIC or the optical part, which is like super important, right? Because you're going to team that up with an electronic part later on. And once you package it together if the PIC doesn't -- if that part doesn't work, then a real key part breaks the co-packaged expensive part, so you don't feel like this is the most important step for you to address. Mike Slessor: Again, it goes back -- so I'm not going to -- I'm certainly not going to argue with you given where we focused our R&D resources and the momentum we're seeing. But imagine a scenario where you've got very, very high yields. Our customers have very, very high yields on the PIC wafer. Now I think you can infer that's probably not the case now. And for a while, as the new technology ramps, there's going to be a yield learning curve. But that's 1 of the reasons why we're continuing to pay attention to all the other insertions. And again, I can't overstress the idea that any insertion is going to require optical probing -- so if you get it right at insertion 1, you've got the toughest part of the problem solved for any of the other insertions. David Duley: Okay. Final thing for me is, could you just elaborate, I think you mentioned that most of your growth in HPM probe card revenue in Q2 is going to come from a new customer adopting a new application. Could you just elaborate a little bit more on what you said and what the opportunity is? . Mike Slessor: Yes. What I said was for Q2, we do expect HBM to grow to another record -- and really, this is -- comes from a second customer increasing their adoption of our Smart Matrix technology for the at-speed stack test. This has been one of the staples of our HBM differentiation. And we're now seeing some more significant adoption from the 2 other customers, others that are our primary driver customer. And we see this as central to our differentiation in the HBM space. . Operator: And our next question comes from the line of Elizabeth Sun from Citi. Unknown Analyst: Congrats on the results. So first on the follow-up on the HPM question earlier, you talked about the second customer increasing adoption in Q2. So I'm just wondering on the third HPM customer, are you seeing -- are you expecting to gain share as well going down the road? Mike Slessor: Elizabeth, in the long term, consistent with our strategy that we've articulated basically since I got here, we want to be a leading supplier to all customers in the industry. So that's an initiative. Now clearly, there's some prioritization and choices going on given not just the production volume, but how thinly or -- and the whole industry's R&D resources are stretched. So longer term, it's a question of time frame, right? Longer term, yes, we expect to be a leading supplier to all 3 DRAM manufacturers for these at speed DRAM test. And I think there's a nice sort of validation of that here in the second quarter. . The other thing I wanted to make sure I snuck in here was if you look at the growth in HBM, from the first half of 2025 to the first half of 2026, if you take the midpoint or guide we've grown our HBM probe card business by more than 50%. It's a great example of the increase in test intensity, test complexity now in the second quarter, a little bit more of a contribution from a second customer for this highly differentiated at speed test. Unknown Analyst: And on the CPO side, other than insertion one, are you still working -- are you also working with this similar group of partners? Or are you working with other like partners as well, like Teradyne or other probers testers providers? Mike Slessor: Yes. So to be clear, the bulk of our work is on insertion 1, as you might imagine, we're very focused on that because that's the foundational here and now opportunity that we must execute on. I'll go back to what I've said before on this call and in other settings, we leave in the open ecosystem. And so a partner like Teradyne wants to focus together with us and make sure that we've got a compelling solution for some of the other insertions. We'll certainly engage in that discussion. There's some details of resourcing and different relationships that need to be figured out as we do that. But the fundamental principle is we all need to operate in an open ecosystem to be as successful as we can and enable our customers to take on these significant technology challenges. Operator: This does conclude the question-and-answer session of today's program. I'd like to hand the program back to Mike Slessor for any further remarks. Mike Slessor: Thank you very much for joining us today. We're really excited to share the future of FormFactor now that we've achieved our target financial model, share with you the next target model. And really, the fundamental operating principles, development initiatives and growth areas that underpin that next target model for FormFactor. Hope to see you on May 11, either live in New York or we'll be webcasting the event as well. Until then, take care. . Operator: Thank you, ladies and gentlemen, for your participation in today's conference. This does conclude the program. You may now disconnect. Good day.
Operator: Good day, and welcome to the TTM Technologies Q1 2026 Earnings Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker, Mr. Sean Hannan, Vice President of Investor Relations. Please go ahead. Unknown Executive: Greetings, everyone. Welcome, and thank you for joining us today. I'm Sean Hannan, Vice President of Investor Relations for TTM. With me on the call are Edwin Roks, our President and Chief Executive Officer; and Dan Boehle, our Executive Vice President and Chief Financial Officer. Before we get started, I'd like to remind everybody that today's call contains forward-looking statements including statements related to TTM's future business outlook. Actual results could differ materially from these forward-looking statements due to 1 or more risks and uncertainties, including the risk factors we provide in our filings with the Securities and Exchange Commission, which we encourage you to review. These forward-looking statements represent management's expectations and assumptions based on currently available information. TTM does not undertake any obligation to publicly update or revise any of these forward-looking statements whether as a result of new information, future events or other circumstances, except as required by law. We will also discuss on this call certain non-GAAP financial measures such as adjusted EBITDA. A -- such measures should not be considered as a substitute for the measures prepared and presented in accordance with GAAP, and we direct you to the reconciliations between GAAP and non-GAAP measures included in the company's in release, which is available on the Investor Relations section of TTM's website at investors.ttm.com. We have also posted on the website and earnings presentation that we will refer to during our call. Here is Edwin. Edwin Roks: Thank you, Sean. Good afternoon, everyone and thank you for joining us for our first quarter 2026 conference call. At TTM Technologies, we are focused on designing and manufacturing complex products and solutions in 2 strategic directions. The first is advanced interconnect, which includes highly complex printed circuit boards, substrates and advanced packaging. The second strategic direction built on our advanced interconnect technology to design and manufacture sophisticated modules, subsystems and systems. Examples of this include our RF modules, thermal and power management systems etch and AI processing products as well as complex subsystems and fully integrated mission systems. We believe the future of electronics lies in speed to market, high reliability and efficient technology interim. The markets in redo business continue to demand highly complex technology solutions in an increasingly compact size and footprint. Our strategy is to stay at the cutting edge of advanced interconnect technologies through innovation and continue to move up the value chain into complex modules and subsystems that combine sensors, actuators RF and Photonics. We engaged early with our customers to ensure alignment on product development and speed to market while also enabling optimal management of their complex supply chains. From a demand standpoint, we are experiencing healthy multiyear tailwinds due to our participation in 2 key megatrends currently driving economic growth, artificial intelligence and defense. We previously stated that approximately 80% of our net sales are related to these 2 megatrends, and that this puts us in a unique position to benefit our investors. Our ability to seize these organic growth opportunities requires our continuous focus on technological innovation as well as expanding our capacity across our strategic footprint. We are further investing capital and resources to take full advantage of these opportunities today and in the future through our global footprint, which offers our customers manufacturing options across 24 sites located in China, Malaysia, Canada and the United States. We stand well positioned to support this growth across our end markets, and we are tracking well ahead of our previously communicated plan to grow revenues 15% to 20% per year for the next 3 years and to double our earnings from 2025 to 2027, which were closed that were reiterated on our February 4 earnings call. In our commercial segment, we are highly focused on supporting the demand wave of artificial intelligence in the data center and networking end markets where customer demand has materially accelerated. We are also focused on evolving opportunities in the use of automation and AI in our medical, industrial and instrumentation end markets, while we remain strategically positioned in automotive where our highly valuable solution designs are positioned to benefit from competitor consolidation and have additional transfer application into other markets. In our airspace and defense end markets, we continue to excel with our leading position in advanced interconnect products and we work to expand our product offerings in indicated and electronics, including modules, subsystems and full mission systems. Recently, we were proud to be a participant in the success of Artemis-I mission with our microelectronics, PCBs and assemblies for both the space large vehicle and the Orion crew capsule. As for this, current state of the defense budget as well as the geopolitical environment considering the conflict in Iran, our solutions are ever present in the categories of advanced radar systems, advanced gaming systems, missiles and decoys, electronic surveillance systems and satellite and ground-based communication systems. In the commercial aerospace market, we recently won an award from an innovative electric autonomous aerospace company for light passenger travel to provide the sense and the void radar system for their autonomous aircraft. I'll now begin with an overview of our business highlights from the quarter. Then we'll follow up with a summary on our Q1 fiscal 2026 financial performance and our Q2 and fiscal 2026 guidance. We will then open the call to your questions. We delivered an excellent first quarter of 2026, and I would like to thank our employees for delivering these results. We achieved sales of $846 million and non-GAAP EPS of $0.75 per diluted share, both above our guidance issued in early February and both all-time quarterly highs. Sales grew 30% year-on-year, reflecting continued demand trend in our data center and networking end markets driven by the requirements of AI while our medical, industrial and instrumentation and aerospace and defense end markets also experienced strong growth. The company adjusted EBITDA margin was 15.7% in the first quarter of 2026 compared to 15.3% in the prior year, largely reflecting positive mix impacts. Non-GAAP EPS of $0.75 per diluted share was a 50% improvement year-on-year. The aerospace and defense end market represented 40% of first quarter 2026 sales. Sales in the Aerospace and Defense market grew 11% year-on-year for the first quarter. The sales growth in defense market continues to be a result of positive tailwinds in defense budgets, our strong strategic program alignment and key bookings for ongoing programs. During the first quarter of 2026, we saw significant A&D bookings related to the Alteams Air Defense Radar, APS 153 maritime surveillance radar and a transportable radar safaris system for ballistic missile detection and tracking. In addition, we continue to see an increase in bookings for respective programs and we also have first booking that was confirmed to support Golden Done. A&D book-to-bill was [indiscernible] for the quarter, which led to a program backlog of $1.6 billion, similar to a level a year ago. We expect second quarter 2026 from this end market to represent [indiscernible] 36% of our total sales, while still delivering both year-on-year and sequential growth. Sales in the data center and networking end market represented 36% of our first quarter 2026 sales. This end market experienced 61% year-on-year growth in the first quarter above our growth expectation and reflecting continued demand strength from our data center and networking customers, building out the AI data centers. For the second quarter of 2026, we expect this end market to represent 42% of net sales. The medical industrial instrumentation end market represented 16% of the first quarter 2026 sales. This end market saw a year-on-year growth of 61% during the first quarter aided by healthy demand of AI-enabled robotics in medical, automated test equipment for AI applications in instrumentation. A notable example when in the quarter was for a major continuous glucose monitoring customer products with our involvement on both the current and next generation, which will feature a materially smaller footprint and more powerful performance. For the second quarter of 2026, we expect medical, industrial and instrumentation end markets to represent 14% of total sales, growing both sequentially and year-on-year. Automotive sales represented 8% of the first quarter of 2026 sales. We continue to be very selective in this market to focus on higher value-add products that carry margin profiles consistent with our financial goals as we also believe long-term business cycles should migrate back towards advanced capabilities. We are also supporting our Tier 1 automotive customers as they transition some of their more advanced capabilities towards products, in ancillary end markets. We expect the automotive end market to represent about 8% of our total sales in the second quarter of 2026. The overall book-to-bill ratio was 1.41% for the first quarter of with the commercial reporting segment at 1.65% and the A&D reporting segment at 1.10%. At the end of the first quarter of 2026, the 90 days backlog, which is subject to cancellations, was $787 million compared to $517 million a year ago. Now then Bailey will summarize our financial performance for the first quarter. Dan? Daniel Boehle: Thanks, Edwin, and good afternoon, everyone. I will review our financial results for the first quarter of 2026 that were included in the press release distributed today. Key financial highlights are also summarized in the earnings presentation posted on our website. For the first quarter, our net sales were $846 million compared to $649 million in the first quarter of 2025. The 30% year-over-year increase was due to continued strong growth in our data center networking, medical, industrial and instrumentation and aerospace and defense end markets, partially offset by a more modest than anticipated decline in our automotive end market. GAAP operating income for the first quarter of 2026 was $72.4 million compared to comp operating income for the first quarter of 2025 of $50.3 million. On a GAAP basis, net income in the first quarter of 2026 was $50 million or $0.47 per diluted share. This compares to GAAP net income for the first quarter of 2025 of $32.2 million or $0.31 per diluted share. The remainder of my comments will focus on our non-GAAP financial performance. Our non-GAAP performance excludes M&A-related costs, restructuring costs, certain noncash expense items such as amortization of intangibles, impairment of goodwill stock compensation, gains on the sale of property, unrealized gains or losses on foreign exchange and other unusual or infrequent items. We present non-op financial information to enable investors to see the company through the eyes of management and to facilitate comparison with expectations in prior periods. Gross margin in the first quarter of 2026 was 22.3%, an increase of 150 basis points from 20.8% in the first quarter of 2025. The year-on-year increase was due primarily to higher sales volume and favorable product mix, particularly in the data center networking and aerospace and defense end markets. Selling and marketing expense was [indiscernible] million in the first quarter or 2.8% of net sales versus $20.3 million or 3.1% of net sales a year ago. First quarter general and administrative expense was $49.3 million or 5.8% of net sales compared to $38.9 million or 6% of net sales in the same quarter a year ago. Our operating margin for the first quarter of 2026 was 12.8%, a 230 basis point improvement from 10.5% in the same quarter last year. The increase in the period was due both to the improved gross margin as well as operating leverage resulting from selling, general and administrative expense discipline. Interest expense was $10 million in the first quarter of 2026 compared to $10.9 million in the same quarter last year. Interest income was $2.5 million in the first quarter of 2026 compared to $3 million in the same quarter last year. Realized foreign exchange and other nonoperating income and expenses in the first quarter of 2026 totaled a net expense of $6.8 million as compared to net income of $1.5 million in the same quarter last year. The increased expense was driven by the weakening of the U.S. dollar, which resulted in a $7 million foreign exchange loss in the first quarter of 2026 as compared to a $0.9 million gain in the same quarter last year. Our effective tax rate was 14.5% in the first quarter of 2026, resulting in a tax expense of $13.6 million. This compares to an effective tax rate of 15% or a tax expense of $9.3 million in the same quarter last year. First quarter 2026 non-GAAP net income was $80.1 million or $0.75 per diluted share. This compares to first quarter 2025 non-GAAP net income of $52.4 million or $0.50 diluted share. Adjusted EBITDA for the first quarter of 2026 was $132.9 million or 15.7% of net sales compared with first quarter 2025 adjusted EBITDA of $99.5 million or 15.3% of net sales. Cash flow provided by operating activities was $21.7 million in the first quarter of 2026, despite the increased net working capital supporting our continued revenue growth. This compares to cash used in operating activities of $10.7 million in the same quarter last year. Free cash flow in the first quarter of 2026 was a net usage of $85 million as compared to a net usage of $74 million in the first quarter of last year both periods reflecting increased capital expenditures in support of organic growth opportunities. Now I'll return to our guidance for the second quarter of 2026 and a directional outlook for fiscal 2026. We project net sales for the second quarter of 2026 to be in the range of $930 million to $970 million and non-GAAP earnings to be in the range of $0.82 to $0.88 per diluted share. In addition, considering the current demand dynamics reflected in our first quarter results and second quarter guidance, we believe that the net sales growth trajectory in the first half of the year should continue in the second half. The second quarter 2026 non-GAAP diluted EPS forecast is based on a diluted share count of approximately 107.5 million shares, which includes the dilutive effect of outstanding stock options and other stock awards. We expect SG&A expense to be about 7.4% of net sales in the second quarter and R&D expenditures to be about 1% of net sales. We expect interest expense of approximately $10.6 million, interest income of approximately $2.5 million. and realized foreign exchange and other nonoperating expenses of approximately $6.9 million. We estimate our effective tax rate will be between 13% and 17%. Further, we expect to record depreciation of approximately $32.1 million, amortization of intangibles of approximately $9.2 million, stock-based compensation expense of approximately $11.5 million and noncash interest expense of approximately $0.5 million. Finally, I'd like to announce that we will be participating in the Barclays Leverage Finance Conference in Austin, Texas on May 19 and the B. Riley 2026 Investor Conference in Los Angeles, California on May 20. In addition, we will host an Investor Day on May 27 at the NASDAQ Exchange in New York City, as announced in our press release last week. That concludes our prepared remarks. Sherry, will turn it over to you for questions. Operator: [Operator Instructions] Our first question will come from the line of Steven Fox with Fox Advisors. Steven Fox: Great. I had 2 questions, if I could. First of all, I was wondering if you could maybe discuss the current interest you're seeing from your customers in bringing business into the UK facility as you ramp it? What kind of customers are looking at the facility and maybe how have the discussions progressed versus a year ago? And then I had a follow-up. Daniel Boehle: Yes, happy to answer your question. If you think about Once, I think we're making really, really good progress there. we are identifying, let's say, our anchor customers like we did in Penang. So that's going well. a core team is identified to see what we're going to do. As you remember, probably remember, it's about 750,000 square feet, and we have basically 3 modules. So we can use them for both our commercial business or our defense business, and we're very flexible with that. So we're identifying the customers right now. We have, of course, our supplier agreements in place. We have -- we are dealing with our equipment centers. So that's going well. And what I really like in that site as well is that we are going to build an R&D center, which is not only, let's say, providing capacity for our customers but also being very close with them on new R&D developers. Steven Fox: Great. That's helpful. And then as a quick follow-up, can you give us your latest thinking around the impact of higher oil prices on laminate costs and how that flows through your income statement in coming quarters? . Unknown Executive: Yes, Steve. So it's Sean Hannan here. So we did have some conversations within the company here and what we're observing within our supply chain and suppliers we are observing some pressure in the supply chain environment as is the rest of the industry and that can relate certainly to lead times and to pricing, but we don't think it's restricting our ability to reach our goals. In terms of a derivative specifically due to oil pricing, that's not something that we're currently observing through our questions. Operator: Out next question. And that will come from the line of Jim Rashidi with Needham & Co. . James Ricchiuti: Just wanted to focus on the growth you're seeing in the Davis Center networking portion of the business. Is there a way for you to give us a sense of how much of that is volume driven versus price? And when I say price, I guess there are 2 components to that, right? They are the higher ASPs for the more complex forwards and maybe just higher pricing in general. So I'm just wondering if you can maybe drill down a little bit more on that. . Unknown Executive: Yes, Jim, actually Happy to do that. And again, good to meet you again. First of all, I think if we -- before we get to the ASP and the volume aspects let's go back to the visibility first. I think our visibility is still, let's say, for normal order still within the quarter. As you know, we are doing some larger order for larger players here where we have a visibility of, let's say, a year. And we still have our strategic alliance with the stop customers. And these are, let's say, in the multiyear regime. That is, let's say, the whole point with respect to complexity. These boards are getting more and more complex. We spoke in the past about the number of layers. We can go to 80 layers. We had 100 players, even 140 layers, which is really the summer. And then, of course, we have these atomical panels as well where we distinct the power from the signals. So that's going very, very well. because of that complexity, our ASPs are going up, let's say, a factor of 4, maybe a factor VIII. But I hate to talk about ASP because it's basically the complexity. It's basically the complexity of what's going on -- then the volume aspect of it, yes, there is more volume. There are more panels. But also if you look at volume, if you want to create a more complex panel, you need more cycles in the facility to build that panel that's also a volume aspect. So if you -- let's say, bottom line, bottom line, if you look at ASP versus volume, yes, it's mostly ASP, but it still has a big effect on the facility because complex panels require more cycles in the facility. Hopefully, that answers your question. . James Ricchiuti: It does help. And maybe 1 quick follow-up. I'm wondering if you can give us an update on how the ramp is going in Penang. And Dan, maybe if you can give us some sense as to what kind of a headwind it might have represented in the quarter and how you see that unfolding in Q2 in the second half? Daniel Boehle: Yes, yes, one, absolutely. I'm very happy with the performance [indiscernible] yields, let's say, are improving a lot. If I look at these anchor customers, and I pick one of them, there we are seeing yields, let's say, in the past, we saw yields above 40% last quarter. Now we are seeing it closer to 70% and 80%. So that's going very well. In the past, I would say a year ago, we disclosed some of the breakeven numbers. I can tell you, we were getting very close to that number. So I will be very surprised, let's say, in Q4 and hopefully earlier, we are in a breakeven situation for Penang. So that's going well. We spoke about the headwinds of 160 basis points, bringing that back, so let's say, in half to 80 basis points headwind for the full year. we're still on track there. And again, we hope to do better. So again, we changed the team. I was at myself, by the way, a few weeks ago. It is going very smooth. It's a highly automated facility, so yes, I'm very positive, Jim, about that situation there. James Ricchiuti: And then just to clarify, when you say an anchor customer, is that an anchor customer in the data center networking area. Daniel Boehle: It is but in that facility, we also do a lot of medical industrial instrumentation business. But in this case, I was talking about one of the data center networking players, yes. Operator: Next question. And that will come from the line of William Stein with Truist Securities. . William Stein: Congrats on the great results and outlook. First, I want to ask something about data center networking, can you help us understand the your size in that market relative to the market overall because most of this market really has served out of Asia. I think there are many investors here in the U.S. who might not appreciate you may not be the biggest. And so it highlights the potential for significant growth, maybe almost you can take whatever you can build to. Can you maybe characterize that? And then the other question I had was about the exposure or concentration in that end market relative to the various GPU or TPU type customers and the other hyperscaler customers. Maybe talk about the dispersion of -- or the customer concentration. Daniel Boehle: Yes. Thank you, Will. These are really good questions. So first of all, your first question, if you look at the size of the market, that's always a big that's always a bit difficult to define, correct. It's -- the spend, let's say, in all these data centers, about 75% of it is still in hardware, which I really like. It's the energy component, and it's basically what we do is the interconnect. Yes, we are the nervous system, as you know, of all these interconnects putting all these chips together. The market overall is a bit difficult to define in that sense. But I can tell you, we play in the high end of that market. So everything what has to do with, let's say, more than 40 layers. And like I said in the previous question, [indiscernible] high complexity, very small pitch. That's where we play in. If I look at our competition, so thinking about Giant, thinking about boosting and micro and others, let's say, we are in that top 4. There is a lot of demand and we are in that top 4. Some of the, let's say, innovations, some of the innovations we did, let's say, I'm talking about emplozem, which is, for instance, the asymmetrical boards where power is on one side of the board and signal the other side of the Board, we basically transferred some of that IP to our competition to be able to make sure that we can supply a whole business. So the whole landscape is, let's say, 5, 6 layers where we are in the top 4. That's about the situation. Of course, we have a pretty unique situation here. We are a U.S. player that also means that we are very flexible with our location perspective what the customer wants. We can, if you want the process in China, we do that. We have 5 facilities in China. We have a facility in Malaysia, if you want, China plus 1 but if these customers want to be in the U.S., we have 16, 17 sites in the U.S. supporting this. So that's basically what's happening. Then related to your second question, regarding GPU, TPU XPU, whatever you want the PU. I can tell you we're agnostic. We're agnostic for that particular situation. Even if it goes to Quantum processing, QPUs, there is a lot of conventional processing required after quarter -- so there is always a need for these boards. These boards for whatever customers are very, very, very similar. And the complexity is fairly similar. So I'm so happy to say that we are very agnostic for that situation. Hopefully, that answers your question. Operator: Our next question. That will come from the line of Mike Crawford with B. Riley Securities. . Michael Crawford: Within your aerospace and trans vertical, how much was commercial? How much was space? And where what do you expect to see space in the future, especially as compute migrates to Leo Geodis linereven loom based space? Daniel Boehle: Yes, Mark, that's a very clear question. If you look at the aerospace and defense and by the way, you probably saw in the earnings that we did move our commercial space business from our commercial through the Aerospace and Defense group. And we did that for a reason because there is a lot of synergy between these businesses and it's much, much easier to put it in their own business. So that's what we did. If you look at, let's say, aerospace and defense, the breakdown is about 50% of the aerospace and defense business and that can be printed circuit boards can also be up to chain what we call the chain, let's say, all kinds of modules or subsystems or systems it's about 50% radar related. Then we have about, let's say, 25% communication, mostly communication related, some guidance systems, these type of things. Below the smaller fraction here below 10% is munitions. That's, by the way, that's where I expect a lot of upside in the coming periods. And then 5% only 5% -- currently, 5% of our business is space. And I agree with you, there is a lot of room to maneuver. There's a lot of potential, especially with our radiation heart designs and all the other things we do. So space is absolutely in the area of focus area, but currently, it's only 5% of our business. Michael Crawford: Okay. And then switching gears. CapEx was high at $107 million in Q1. Can you just provide any updated thoughts on where that might fall out this year and next, and that's assuming that you are not only ramping in China and Malaysia and Syracuse, but also clear. Edwin Roks: Yes, Mike, I'll take that question. So we -- you'll see in our 10-Q when it comes out, we disclosed the CapEx forecast for the year. It was originally about $250 million -- $240 million to $260 million. We're increasing that to $300 million to $320 million is the range that we're currently looking at. So we've accelerated some of the capital expenditures that we talked about for Asia as some of the lead times on equipment we're starting to get indications that those would -- would start stretching out. So we got our orders in early. We were starting to really get some of that equipment in a little bit quicker we've had to pay deposits for that. So that's why the cash expenditures have been up a little bit higher. But as you can see in our numbers, it's also generated fast revenue for us. So we've accelerated some of that $200 million to $300 million of CapEx that I said we were going to expand in Asia. Operator: Our next question and that will come from the line of Ruben Roy with Stifel. Unknown Analyst: This is Fed saying on for Ruben. Look yesterday, one of the major EMS guys reported. And then you made mention of challenges in 40-plus layer PCBs and sort of sourcing them. We've already talked about price leverage. It sounds like you have that headwind. Correct me if I'm wrong, I think I heard you say [indiscernible] on that. We're talking about volumes via the accelerated CapEx ramp, which sounds perhaps tied to the anchor customer. Maybe we look at perhaps the contract structures themselves and the length of contracts, the update into '27 we got earlier this year was healthy and great. And curious if you're seeing contract structures extend out as we're seeing with some of these other rack scale input and what that looks like in terms of securitizing supply with you being the supplier over a multiyear period, particularly as you're investing on an accelerated cadence into CapEx? Edwin Roks: Yes. That's a good question. Thank you very much for the question. Yes, if we look at contracts, it works a bit different here. I think it's it's all over these hyperscalers and data center and networking customers, it's about very tight relations. We have very, very tight relations. That basically means we have a lot of alignment on road maps or future. How do you think about, let's say, multilayers or you think about 0 stop, which is basically making sure there is no antenna function in these boards, you can imagine that everything becomes more and more complex. So you get a lot of antenna functionality in that thing which you don't want. So 0 sub is a new thing there. We spoke already about the empower the power and the signal is separated, there's a lot of, let's say, material science in our boards, which makes sure that signal integrity becomes at the highest part. I think that's the key thing for these customers. you need to be the technology leader. You cannot be a follower here. And then the other thing is, of course, you need to have the capacity and the flexibility. And that's what we provide, let's say, being in China, being in China Posninoucase, Malaysia and being in the U.S. and hopefully soon in Europe. So that's basically where we are, and that's basically tightened that relation with the customers. The other side is, let's say, the suppliers, they are the same thing. We have strategic alliances with all the critical components. And yes, of course, we have contracts in place. But if you have to rely on that contract, you're just too late. It's always a matter of, let's say, relation and making sure you're very relevant for that supplier, you're very relevant to your customers. So that will be my answer here. Daniel Boehle: By the way, just to add to Edwin's answer. So -- and also coming back to part of the question. So to clarify, within data center and networking, we don't have just an anchor customer. I think there was a reference to an anchor customer specific to a facility being Penang earlier in the conversation. But we have about [ 10 ] very major customers within that segment. Only 1 is a 10% enter right now, but we're playing with [ 10 ] substantial names. . Unknown Analyst: Okay. That's great. That was actually going to be a follow-up, particularly Daniel because of your CapEx commentary, I think last quarter, you -- as you mentioned, we're pointing to $250 million at the midpoint. And quarter, it sounds like $310 million, and you're still talking about FY '27 going up. So you're talking about an incremental [indiscernible] relative to at least what we signaled last quarter. if you can point to any sort of puts and takes on the pace at which you might recognize these ramps. I don't know if you're ready to make those types of disclosures. I understand if you're not. And if you're not the question on A&D you're pointing ammunition in the space, similar sort of question on contract structure, are these procurement-based contracts whereby margins are fixed? Or are these fixed firm price, whereby there's potential of margin accretion and I'll stop there. Edwin Roks: I guess I'll first address your capital expenditures. So I'm not going to go beyond what I just said about this year, as you mentioned, so our capital expenditures from this year is going up from -- yes, centered on $250 million to now centered on $310 million. So the range is from $300 million to $320 million. And so that's accelerated a little bit of what we had previously talked about over the next 2 years, and that's to continue to stay at pace with the demand that we are experiencing from our customers in the data center area. So I'll maybe pass it over you to answer the other question. Sorry, do you want to repeat that second 1 a comment earlier. Unknown Analyst: And as far as -- you're talking diminution in space, and it sounds like Edwin you're saying munitions might be the upside more near term space for a longer build upside. Edwin Roks: Yes, absolutely. By the way, we see strong demand in general, in our Aerospace and Defense business. And for the obvious reasons, of course. But on the munitions side, yes, if you read the newspapers, the there is the supply becomes more and more important. And we see that. We are long lead time items. So basically the primes are already coming to us, let's say, with respect to what can you do additionally on the munition side. So -- and that's -- for us, it's more of the same. We already do that. So that's a very, very good thing. So yes, that's the answer. Operator: Thank you. I'm showing no further questions in the queue at this time. I would now like to turn the call back over to Mr. Edwin Roks for any closing remarks. [indiscernible] Edwin Roks: Yes. Thank you, Sheri. Now I'd like to close by summarizing 3 key items. First, we are experiencing a high healthy growth. We delivered strong sales growth in Q1 of 30% year-on-year, resulting in an all-time high for quarterly revenue, driven by increases in our data center networking, medical, industrial and instrumentation and aerospace and defense end markets. Secondly, our adjusted EBITDA for the first quarter of 15.7% as reflected strong operating performance, leading to another all-time high record and quarterly non-GAAP EPS results of $0.75 per diluted share. And third, we continue to generate solid cash flows from operation, which enables us to invest in our projected continued growth while maintaining a healthy net leverage ratio of about 1. In closing, I would like to thank all the employees of TTM, our customers, our suppliers and our shareholders for your continued support. Thank you very much, and goodbye. Operator: This concludes today's program. Thank you all for participating. You may now disconnect.