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Operator: Hello, everyone. Thank you for joining us, and welcome to RJET Q1 2026 Earnings Call. [Operator Instructions] I will now hand the conference over to Keely Mitchell. Please go ahead. Keely Mitchell: Thank you, Cara, and thank you, everyone, for joining our earnings call. On with me today are David Grizzle, Chairman and Chief Executive Officer; Matt Koscal, President and Chief Commercial Officer; and Joe Allman, Senior Vice President and Chief Financial Officer. In the Investor Relations section of our website, you will find the earnings press release and slide presentation to accompany today's discussion. This call is being recorded and will be available for replay on our Investor Relations website. Today's discussion will include forward-looking statements regarding Republic Airways future performance, strategic initiatives, and market outlook. These statements reflect our current expectations and beliefs based on information available to us today, but they are subject to various risks and uncertainties that could cause actual results to differ materially from our projections. The aviation industry operates in a dynamic environment with inherent risks, including regulatory changes, economic fluctuations, weather-related disruptions, and evolving market conditions that can significantly impact our operations and financial performance. Additionally, our business is subject to the operational and financial health of our major airline partners, labor market conditions, aircraft availability, and other factors beyond Republic's direct control. For a comprehensive understanding of the specific risks and uncertainties that may affect our business and financial results, I encourage all participants to review the detailed disclosures in our filings with the Securities and Exchange Commission, including our Form 10-K on file with the SEC. These documents provide important context and detailed information that supplement today's discussion and are or will be available on both the SEC's website and in the Investor Relations section of Republic's website at rjet.com. Throughout this webcast, we will also present and discuss non-GAAP financial measures. Reconciliations of our non-GAAP financial measures to their most directly comparable U.S. GAAP financial measures, to the extent available and without unreasonable effort, appear in today's earnings press release and accompanying presentation, which are available on our Investor Relations website. And now I will turn the call over to David. David Grizzle: Thank you, Keely, and good evening. Before we get into our prepared remarks, I'd like to update everyone on the anticipated leadership changes. The Board promoted Matt to the position of CEO effective June 15. Additionally, effective at the same time, the Board promoted both Joe Allman, our CFO; and Paul Kinstedt, our Chief Operating Officer, to the position of Executive Vice President, and I will continue in my role as Chairman. This completes our succession plan for Republic following its merger with Mesa and return to the public markets. We are blessed to have such a seasoned leadership team. I've had a chance to work very closely with these talented executives during the last year. I have tremendous respect for them and Republic is well positioned for the future. Our people and our culture are the backbone of our success, and we have an outstanding team. The first quarter of 2026 marked a couple of significant milestones for our company. First, this is our first fiscal quarterly reporting period following the merger with Mesa last November. And as a reminder, our quarterly results from Q1 2025 do not include any Mesa results. We reported Q1 2026 adjusted net income per diluted share of $0.73. Revenues were $527 million, and adjusted pretax income was $47 million, or an 8.9% pretax margin. These strong financial results demonstrate the resiliency of our business model to weather the storm. The first quarter is generally our lowest quarter of block hour production due to seasonality. This year, our operations were impacted by severe winter weather in January and February. Winter Storms Fern and Hernando had a direct impact on our operations in the Northeast and Mid-Atlantic regions. As an example, during 1 day of Fern, we were unable to operate 87% of the airline because of weather, which in turn created large crew positioning disruptions. I want to thank our frontline crew members and operations center associates that worked tirelessly through these multi-day disruptions and still delivered an exceptional product to all of our passengers and partners. While our full-up completion factor was 3 points lower, or 94%, versus the prior year Q1 result of 97%, our controllable completion rate remained exceptional, and we were still able to achieve 80 days, a perfect -- that is to say, 100% controllable completion factor performance in the quarter. I am continually impressed by the professionalism and dedication of our team as they serve our partners and passengers. The second significant milestone is the conclusion of our fleet transition efforts at United. We took delivery of the last 3 new E175 aircraft to conclude our fleet transition by swapping 38 new E175s for the 38 E170s at United. We started this fleet transition program back in November 2022, and we now have all of the new aircraft in position and in service with United. 31 of the 38 E170s removed from service have been redeployed to another partner, either in revenue service or under long-term leases. The last 7 E170s removed from United are currently unallocated, meaning not assigned to any of our partners, and will be used for ad hoc charters and other support. As a reminder, substantially all our revenues are generated from capacity purchase agreements with our 3 airline partners, American, Delta, and United. Our business model also protects us from fuel price increases as our partners are responsible for fuel, ground handling, and managing the passenger ticket pricing and demand management. We are responsible for providing safe, reliable, and cost-efficient operations. Now I'd like to turn the call over to Matt to provide an update on our strategic focus and the ongoing integration efforts related to the merger. Matt? Matthew Koscal: Thank you, David, and good evening, everyone. I want to begin by expressing how deeply humbled and grateful I am for the opportunity to lead our more than 8,400 dedicated Republic associates. It is a tremendous privilege to serve alongside such an exceptional team that shares a steadfast commitment to our culture of excellence, a culture that has defined who we are and enabled our continued success. As we look ahead to our next chapter of growth, I am fully committed to building upon this strong foundation and further strengthening it together. I would also like to sincerely thank our Board of Directors and David for their trust and confidence in me and our executive leadership team as we carry Republic forward. Turning our direction to the demand environment. Despite the uncertainty that persists in the broader market and its effects on oil prices and ultimately jet fuel costs, the demand signals from our partners are cautiously optimistic and focused on smart capacity deployments. As such, the demand for large multi-class regional aircraft remains strong, particularly in the high-value hubs we service, and we don't expect that to change. Historically, our aircraft have actually seen increases in utilization even during uncertain economic conditions. Our aircraft provide our partners the flexibility to deploy a lower seat density aircraft to right-size or match expected passenger demand and still capture business, premium, and basic economy fares. Earlier this month, an FAA order capped daily flights at Chicago O'Hare at 2,700 beginning in June. This presented another example of our agility and how we work closely with our partners. While we expect to see some adjustments to our O'Hare schedule in June, we don't expect any material long-term impacts to our flying, as many of those hours will be redeployed in other areas of our partners' networks. We remain in constant communication with our partners to ensure we are ready to shift flying where they desire and protect the expected block hour production and schedules. Before I move to discuss the status of the integration, I think it's important to acknowledge that while the Northeast bore the brunt of winter weather this year, it was helpful for us to have some new geographic diversity in our network. The addition of Houston to our network as a result of the Mesa merger helped offset some of the lost flying days we had in the Northeast, and we look forward to expanding positively on this trend as we increase utilization at Mesa over the next couple of years. Now let me turn my attention to our integration efforts. We've made substantial progress during the quarter on integration. We remain focused on executing our 4 clear workstreams: consolidation of the back-office functions, IT systems integration, fleet harmonization, and regulatory operating certificate harmonization. Regarding the first 2 workstreams -- consolidation of corporate functions and the integration of our IT systems -- we have made great progress on both fronts in the quarter. We are slightly ahead of plan on the back-office integration, and we expect that work to be substantially complete by Q4 of this year. On the IT front, we continue to make investments across legacy Mesa to further enhance both hardware and software capabilities, and we believe these investments are already providing tangible benefits across the airline. This workstream is a multiyear process that doesn't fully wrap up until we complete the operating certificate harmonization process in 2028. Lastly, we were pleased to receive approval from the FAA to recognize our Carmel training campus as an approved Mesa training facility. This puts us 1 step closer to being able to train all of our crews at our state-of-the-art training campus in Carmel, Indiana. On the fleet side, we are in the early stages of moving the Mesa fleet onto our standard maintenance cycle with full harmonization of our E175 programs. Completion of this process will allow us to drive maximum utilization, compliance consistency, and improved maintenance and inventory management across the combined fleet. In Q1, we achieved our first milestone on reduced heavy maintenance turnaround times, which is an early example of how legacy Republic can leverage planning and supply chain resources to unlock future value across the Mesa operation. This early improvement gives us increased confidence that we will achieve our target of completing the fleet harmonization work in late 2027. The fourth workstream, the process of bringing 2 operations into a single harmonized airline with the FAA, coupled with associated technology and systems alignment, is expected to continue into 2028. The process will involve the filing and approval by the FAA of 5 revision cycles. The first revision cycle addresses the alignment of our safety systems and processes, and we anticipate submission of this in early May. The overall goal of the harmonization process is to create a unified airline from an FAA perspective, with aligned manuals, maintenance programs, training, and operational oversight. Lastly, let me speak to our progress with our labor unions. In December, we reached a joint collective bargaining agreement or JCBA, with the 2 flight attendant labor unions, and the teams have spent considerable time on preparing for implementation of the JCBA throughout the first quarter. I want to acknowledge all the work and support that both the IBT and AFA provided to deliver an agreement. We appreciate the focus and energy those teams demonstrated in achieving the joint collective bargaining agreement. With respect to the pilots of IBT at Republic and ELPA at Mesa, we continue to have productive dialog and negotiations. I would like to thank everyone for their continued hard work in this area, and we look forward to providing you updates on our progress in the future. On the staffing side of the house, we entered this year with slightly elevated staffing levels to ensure that we could deliver an excellent operation to our partners while we work through Mesa's integration. We are well positioned to meet the needs of our partners, both now and in the future, and we are reaffirming our block hour guidance that we will produce more than 865,000 block hours this year. 2026 continues to be a transformational year. Our investments in training infrastructure, technology, and our future aircraft delivery positions with Embraer put us in a position to serve our partners' needs well into the future. To recap, we are on track with our integration targets and remain focused on continuing to deliver an exceptional operation for all of our partners. Once the aircraft maintenance harmonization process concludes, we expect to see an improvement in aircraft availability for schedule as heavy maintenance normalizes. We remain committed to successful execution of these initiatives and look forward to sharing updates with you as we progress throughout the year. We believe the end state will support greater operational efficiency, which will drive stronger margins and shareholder returns. Now I'd like to turn the call over to Joe to walk us through Q1 financial results. Joe? Joe Allman: Thanks, Matt, and good evening, everyone. Total revenue for the quarter was up 34% to $527.4 million due to a 30% increase in block hour production. This was our first full quarter of Mesa's operations. We incurred $9.5 million of merger and integration related costs during the quarter. These are the costs associated with the integration and harmonization efforts that Matt just covered. We will continue to separately report these costs, and as the integration and harmonization activities begin to subside, we also expect the associated costs to subside. Our adjusted pretax income was $47.1 million, up 15% over Q1 2025. And adjusted EBITDAR for the quarter was $100.1 million, up 14% over the prior year period. The improved Q1 2026 financial performance is attributable to the growth in operations from the Mesa transaction, as well as the growth of Republic's fleet following the fleet transition David highlighted earlier. Focusing on cash flows and our balance sheet, we generated $58 million in cash from operations this quarter. Our cash outlay from investments in aircraft, property and equipment, including predelivery deposits, increased to $95 million, driven by the acquisition of the 3 E175 aircraft. We received proceeds from new debt of $64 million and made scheduled principal repayments of $49 million during the quarter. Our adjusted net leverage was flat from year-end 2025 at 2.7x. We expect our net leverage to continue to improve over the balance of 2026 as we remain focused on our initiatives to reduce net leverage below 2.2x by year-end 2026 and with a longer-term target of below 1.5x. We believe it is prudent to continue to strengthen our balance sheet and reduce debt as this will best position our airline for the future. We recently reached an agreement with Embraer to reschedule our aircraft delivery positions. Originally, our next delivery was expected in February of 2027. With the adjustments from Embraer, we now expect our first delivery in April of 2028. This revised delivery skyline timing allows us the opportunity to match deliveries to expected demand from our airline partners. We appreciate the longstanding partnership and relationship with the team at Embraer. Turning our focus to guidance. We issued full year 2026 guidance 8 weeks ago on March 4. At that time, the conflict in the Middle East was 3 or 4 days old. Since that time, we have seen an escalation of hostility and more volatility and uncertainty. Meanwhile, our discussions with our airline partners have been very positive and indicate a strong demand for our products. Therefore, we are reaffirming the guidance we previously issued. We expect revenues in excess of $2 billion and adjusted EBITDAR in excess of $380 million on block hour production of at least 865,000 hours. Capex is anticipated to be $170 million, which is mainly driven by aircraft and engine CapEx, the completion of our campus and training center construction projects, and other general maintenance CapEx. We expect to repay $165 million of principal and receive proceeds of new debt of approximately $75 million. Despite the uncertainties that exist in the broader market, we remain confident in our ability to achieve these targets. Lastly, we are focused on ensuring an efficient integration and harmonization of the Mesa operation and continuing to deliver on our brand promise of industry-leading operational performance and outstanding customer service to our airline partners and their passengers we carry. We are well positioned for the future, and now I'll turn the call over to David. David Grizzle: Thank you, Joe. I'm very proud of the whole Republic team as they've been able to maintain our impeccable operating performance and deliver strong financial performance despite the challenges that come with winter weather. In addition to improving weather, which will allow us to fulfill our flight segments as scheduled, the demand signals from our partners for the remainder of the year remain quite strong. We believe that the headwinds faced this quarter will continue to subside and the company will be in a position to achieve positive momentum and significant growth throughout the rest of 2026. We appreciate the support of our associates, our partners, and our shareholders, and we look forward to continuing to deliver our commitments and promises to all our stakeholders. Thank you again for joining us today and for your interest in Republic. Cara, we are ready to open the line for questions. Operator: [Operator Instructions] Your first question comes from the line of Savi Syth with Raymond James. Savanthi Syth: I know it wasn't controllable factors, but I was curious with these severe weather impacts that you've had this quarter. Was there a notable impact on earnings that maybe is not normal that we should consider as we think about the earnings power here? Matthew Koscal: Savi, it's Matt. Thanks for the question. Thanks for joining the call. You're spot on. The impact was significant over what we saw last year, about 3 -- a little over 3 full points. That's not typical for us in a quarter. We didn't break out the impact. But in a more typical seasonal environment, we would expect the business to perform more robustly. Savanthi Syth: Understood. And maybe on the -- United has shown some creative thinking with the CRJ-550 a few years back and now the CRJ-450. Just wondering if there's an opportunity to do something like that with the E170s or even the E145s that you've operated in the past. Matthew Koscal: Great question. So as you look at it, I think we have a history of being a solution provider for our partners, right? And that has evolved throughout the years. We are positioned incredibly well. We're sitting here today with a strong plan for 2026 going into 2027. It's fully focused on a successful and flawless Mesa integration. Today, as you heard on our prepared remarks, the team is just performing exceptionally well in that regard. We're ahead of schedule on each of our workstreams, and we could not be more proud of their efforts there. As we continue to deliver on that and we strengthen our balance sheet, we believe that positions us incredibly well to continue to have flexibility to respond to our partners' needs, and we'll continue to have those conversations with them and be ready to respond to their needs as they evolve. Operator: Your next question comes from the line of Duane Pfennigwerth with Evercore ISI. Duane Pfennigwerth: Just wondering longer term, I appreciate the commentary on the deferrals, but how are you thinking about putting the order book to work? And would you think about those in terms of growth? Or do you expect them to be primarily for fleet replacement by your customers? Matthew Koscal: Duane, thanks for the question. And if you look at our past deployment, I think it's been a combination of both, right? We've found opportunities to deploy certain aircraft in a purely growth positioning. And then we've also found ways to do fleet replacements and then redeployment of other aircraft to other partners, just as we've done in this completion of the E175 order at United. The beauty of the order book that we've had as we've had it for several years now is we've got ultimate flexibility. We've got a great relationship with Embraer, and we continue to be in dialog with our partners to find the best deployment of those assets as opposed to just a deployment in the original order slots. And that's what we think that this deferral allows us to do, is it allows us to find that ultimate best solution with our codeshare partners on a future deployment for them. Duane Pfennigwerth: And then just for my follow-up, the presentation is very clear with the expected debt paydown over the balance of the year. But I wonder, as you look out longer term, do you see opportunities to refinance a portion of that debt as well, now that you have probably a different and improved credit profile? Joe Allman: Duane, this is Joe speaking. It's a great question. Look, our focus right now is on just continuing to strengthen the balance sheet. We have a lot of unencumbered assets, though, as you referenced -- as we referenced in the presentation. 70% of the fleet today is free of financing. Now some of those aircraft come from our partners, but we have a number of E175s and E170s that are debt-free at this stage. So we believe that flexibility as we move forward will put us in the best position to find unique and strategic ways to work with our airline partners and find the solutions that Matt referenced in his response just a second ago. Operator: Your next call comes from the line of Michael Linenberg with Deutsche Bank. Michael Linenberg: Congrats, Matt, on your promotion. Question here just on the guidance for the year. When you look at what you have for block hours and what you have for EBITDAR, I mean, it looks like despite all the intensity and complexity of the March quarter with the weather, it looks like that you're actually running well ahead of plan. And so the question is, are you ahead of plan? Do you feel like you're ahead of track? Are there things that we need to consider in this year where maybe you take a temporary hit to block hours or maybe there's some seasonality piece, even though I know historically you don't see as much seasonality with the regional carriers? Something for us that maybe I'm not looking at because it does seem like you're well ahead given what was a challenging quarter for everybody. Matthew Koscal: Michael, this is Matt. Thank you very much. Appreciate the congratulations. And it is a great observation, a great question. And look, in any other environment that we're sitting here talking to you today after the quarter that we put together and what we're seeing in our block hour demand going into Q2, Q3, we would be taking up our guidance. Considering the macro uncertainty today, we just think it's prudent to get a little bit further into the year and see how things develop and go from there. But we had an incredibly strong quarter, you're right, a lot of challenges, and we'll provide you updates as we get further into the year. Michael Linenberg: And then just my second question, as we think about the improvement in your leverage, it does look like that the CapEx should come down because of the deferrals or the next airplane coming in the spring of 2028. I realize you're still on the hook for predelivery deposits. How can we think about CapEx, though, as it trends where we are today over the next, I don't know, 3 to 4 quarters? It does seem like it's going to slope down, and maybe it actually hits a bottom sometime in early '27 before starting to pick back up again. Joe Allman: Thanks, Mike. This is Joe speaking. You're correct. We should see CapEx subside as we move throughout the year. The first quarter was our heaviest quarter, predominantly related to the aircraft deliveries. We'll come up on the conclusion of the construction in our Carmel training campus. And just general maintenance CapEx -- and I should say the CapEx associated with the investment that we're making at Mesa. And those opportunities will come and continue to present themselves as we progress throughout the year. But you're right, it's a downward slope from the first quarter. Operator: Your next question comes from the line of Savi Syth with Raymond James. Savanthi Syth: I was curious, I think a couple of months ago, when you talked, you were expecting normal levels of attrition versus an abnormal year last year. And I was wondering what you've seen, especially as some of the mainline airlines are cutting capacity here. And just related to that, just what your plan is for the LIFT Academy in terms of how much of your needs that pipeline will deliver? Matthew Koscal: Savi, thanks. This is Matt. I'll answer the second part first. LIFT Academy is positioned to satisfy about 20%, 25% of our hiring needs in a normal hiring year. So nothing changes in the throughput that we're planning to put through LIFT this year. It's been a great program, and the candidates that come through that perform exceptionally well and are incredibly loyal to the airline and their career path. As we look at the attrition trends, very much a status quo to the update we provided to you just a few weeks ago. Attrition remained through the quarter at normalized trends, going back to a pre-COVID standard, healthy level of attrition, going to the [ career ] carriers that we would like to see, healthy captains attriting on to our codeshare partners and the like. We would expect to see, and we're seeing just a little bit of the beginning of a slowdown in the attrition, just a seasonal slowdown as we go into the summer months. So right on plan. Our attrition curve and our hiring curve have been right on plan for us. Operator: We've reached the end of the Q&A session. I will now turn the call back to David Grizzle, Chairman and Chief Executive Officer, for closing remarks. David Grizzle: Thank you, Cara. Thank you all for joining us this afternoon. As you've heard, we are very pleased with how our people are working to execute our plan and achieving results of which we are very proud. We are grateful to all of you for your continuing support. Have a great evening. Thank you very much. Operator: That concludes today's call. Thank you, everyone, for attending. You may now disconnect.
Operator: Good afternoon, and welcome to the Moelis & Company First Quarter 2026 Earnings Conference Call. To begin, I'll turn the call over to Mr. Matt Tsukroff. Matthew Tsukroff: Good afternoon, and thank you for joining us for Moelis & Company's First Quarter 2026 Financial Results Conference Call. On the phone today are Navid Mahmoodzadegan, CEO and Co-Founder; and Chris Callesano, Chief Financial Officer. Before we begin, I would like to note that the remarks made on this call may contain certain forward-looking statements that are subject to various risks and uncertainties, including those identified from time to time in the Risk Factors section of Moelis & Company's filings with the SEC. Actual results could differ materially from those currently anticipated. Firm undertakes no obligation to update any forward-looking statements. Our comments today include references to certain adjusted financial measures. We believe these measures, when presented together with comparable GAAP measures, are useful to investors to compare our results across several periods to better understand our operating results. The reconciliation of these adjusted financial measures with developing GAAP financial information and other information required by Reg G is provided in the firm's earnings release, which can be found on our Investor Relations website at investors.moelis.com. I will now turn the call over to Navid. Navid Mahmoodzadegan: Thank you, Matt. It's great to be with you all this afternoon. We have had an active start to the year with record first quarter revenues of $320 million, record first quarter levels of announced transaction activity, strong momentum in senior hiring and continued execution of our strategic growth priorities. Since our last earnings call, we advised that a number of notable M&A transactions, including Clear Channel Outdoors $6.2 billion sale to Mubadala Capital and TWG Global, Tri Pointe Homes $4.5 billion sale to Sumitomo Forestry and Kennedy Wilson's $9.5 billion take private. Beyond M&A, we advised TowerBrook on its $1.2 billion continuation vehicle for EisnerAmper, and most recently, we acted as an active book runner on X-energy's $1.2 billion IPO. We entered 2026 with high levels of new business origination and a constructive outlook. While the war in the Middle East, disruptions in private credit and the impact of AI on certain sectors, have created some near-term headwinds in parts of the transactional environment, the same forces create new opportunities for our firm. We remain confident about the trajectory of our business, supported by our pipeline near all-time highs and the fundamental drivers of transaction activity firmly in place. Let me briefly take you through an overview of what we're seeing in each of our major product areas. In M&A, corporates continue to seek scale to strengthen their strategic positioning especially amid rapid technological disruption. This dynamic is most pronounced in large-cap transactions, which continue to drive M&A volumes and is further supported by a more accommodative U.S. regulatory backdrop. Dislocation in various parts of the public equity markets is also driving take-private transactions, an area where our Board and special committee advisory practice is strong. In addition, our business continues to benefit from financial sponsors need to monetize an extensive backlog of investments. While the market is not yet seeing a broad-based increase in sponsor exit activity, our M&A revenues from sponsors grew double digits during the quarter. In private capital advisory, the market for GP-led secondaries continues to hit record levels, driven by sustained demand for liquidity solutions, increased adoption of continuation vehicles and a growing base of institutional investors seeking exposure to seasoned assets with more predictable return profiles. Our thesis for PCA is playing out as expected with the team executing a number of live mandates and rapidly building a significant pipeline. With the recent addition of a Managing Director focused on private credit secondaries and another joining later this year, we will have 7 senior bankers dedicated to GP-led secondaries further strengthening our position in this important market for our sponsor clients. Turning to capital markets. Demand for growth capital from high-quality issuers is driving activity in our business, particularly in late-stage growth and pre-IPO issuance for AI, digital infrastructure and aerospace and defense oriented business models, just to name a few. IPO issuance is also strong with our team involved in a number of transactions coming to market in the near-term. In addition, technology disruption is creating a more dynamic financing environment and accelerating opportunities for hybrid and structured solutions. We are further investing to meet the opportunities we see in capital markets. We've recently hired 2 managing directors in the space, including a Managing Director focused on securitization will help develop this important growth opportunity for the firm. And a Managing Director that complements our already strong private credit and debt capital markets capabilities. In capital structure advisory, liability management continues to be the most active segment of the market. increased lender selectivity is widening the gap between companies that can readily refinance and those requiring more complex solutions, which we expect will lead to more traditional restructurings over time. Our CSA pipeline is meaningfully above last year's levels and ongoing technological disruption and volatility in commodity prices are creating new opportunities. Additionally, our growing creditor coverage is diversifying our CSA business, contributing to a larger share of revenue and positioning us well with the creditor community. Turning to talent. We have hired 8 MDs year-to-date, 2 who have already joined and 6 who will join us over the course of the year. In addition, the PCA and Capital Markets hires previously mentioned, we've also invested across industries where we see attractive long-term opportunities. This includes recent Managing Director hires in key sectors, including energy and health care IT. In Europe, we've hired 2 managing directors to enhance our expertise in chemicals and deepen our sponsor coverage capabilities. We recently relocated to a new and expanded office in London to support our talent, our clients and our continued growth in the region. In general, we remain intensely focused on attracting the best and brightest talent and are excited about our high level of engagement and dialogue with world-class candidates. With respect to capital return during the quarter, we repurchased 1.9 million shares including 895,000 shares in the open market while preserving the strength of our balance sheet with substantial cash and no debt. Finally, we are actively testing and deploying AI tools across our business with broad adoption from our teams. We see AI as a clear productivity lever supporting our bankers and providing the best possible advice to clients and driving greater efficiencies throughout our organization. With a strong pipeline, including high levels of announced transaction activity and the most comprehensive capabilities at any point in our history, we are well positioned to support our clients and deliver long-term value for our shareholders. With that, I'll pass the call to Chris to review our financial results in more detail. Christopher Callesano: Thanks, Navid. Good afternoon, everyone. As Navid mentioned, we reported record first quarter revenues of $320 million, an increase of 4% versus the prior year period. Our revenue growth was driven by year-over-year increases in M&A and private capital advisory, partially offset by decline in capital structure advisory capital markets. Our business mix for the first quarter was approximately 2/3 M&A and 1/3 non-M&A. Turning to expenses. Our first quarter adjusted compensation expense ratio was 65.8%, down from 69% in the first quarter of 2025 and in line with our full year 2025 adjusted compensation ratio. As the year progresses, our compensation ratio will depend on the trajectory of revenues and the pace and magnitude of hiring throughout the year. Adjusted noncompensation expenses were $67 million for the first quarter, resulting in a 21% noncompensation expense ratio. Main drivers of the expense growth were higher deal-related costs and increased communication and technology expenses. As previously communicated, we currently anticipate our full year 2026 noncompensation expenses grow at a similar rate to 2025 due to our ongoing investments in technology, including AI, increased deal-related travel expenses and growth in headcount. Our adjusted pretax margin was 15% for the first quarter of 2026 as compared to 14% in the prior year period. Regarding taxes, our underlying corporate tax rate was 29.3% for the quarter before the discrete tax benefit related to the vesting of equity. Turning to capital allocation. We continue to maintain a strong balance sheet ending the quarter with $354 million of cash and no debt, allowing us to continue investing in the business while also returning meaningful capital to shareholders. Board declared a regular quarterly dividend of $0.65 per share and as Navid said, we repurchased 1.9 million shares during the quarter at an average price of $61.40 per share, including 1 million shares to settle employee tax obligations and 895,000 shares repurchased in the open market. Through the combination of net settlement and open market repurchases, we have offset more than half of our annual equity incentive compensation issuance. Including the dividend declared today, we have returned approximately $171 million of capital to shareholders with respect to the first quarter. With that, we are happy to take your questions. Operator: [Operator Instructions] Your first question comes from the line of Devin Ryan with Citizens Bank. Devin Ryan: I want to start with a question, kind of big picture just on the software sector. Obviously, you guys have made some investments there and have scaled nicely. Clearly, kind of one area that's getting caught up in some of this AI dislocation. But curious kind of what you're seeing kind of play out there relative to maybe what people were expecting heading into the year? And I know it's not just one category. There's a lot of kind of subsectors to it. But kind of where do you see activity there evolving do we see forced consolidation later this year? Are there take private to public companies? Maybe that's a catalyst. Just would love to get some sense of how you see this mapping out and then how important that is for kind of the broader M&A recovery, just given that it is a kind of important subsector? Navid Mahmoodzadegan: Sure. Thanks for the question, Devin. So you're right, we have a great, great team in technology at the firm and within our technology group, software is a really important set of subsectors within that group. So the events of this quarter, essentially what you've seen is a repricing of software stocks in the public markets due to fears over what AI is going to do to a lot of these historically very sticky business models. That's caused a revaluation in the public markets, that clearly leads over into the private markets, both in terms of the private M&A market and lenders' desire to finance these types of companies. And so it's definitely harder in the near-term to navigate traditional software M&A at the same rate as you've seen over the last few years. I think if you take a step back, I think we're likely to see because right now, the market is putting sort of a broad brush on all of these SaaS business models. And I think what's likely to happen, if you sort of simplistically put all of these companies into 3 buckets, I think, in 1 bucket and time will tell. This will play out over a period of time. There will be companies that -- where the AI threat is misperceived these companies will adapt and use AI to their advantage and prosper and grow through some of this disruption. And I think those companies, you'll see active again in the M&A marketplace either as consolidators or as candidates for sale to other strategic or private equity firms. On the other end, I do think there's a category of company that the business models are going to be significantly disrupted. And if those companies carry a lot of leverage, either because they're subject of a historical LBO, we're owned by a sponsor, et cetera. I do think you're going to likely see liability management and other actions to deal with those capital structures, which are not sustainable going forward given the disruption from AI. And I think there's a category in the middle of companies where it's just going to take some time to figure out what AI means for those businesses and those companies will need time and the owners of those companies will need time to adapt to kind of the changing landscape. And I think for those companies, things like bespoke capital hybrid solutions, things that delever the capital structures and give the owners of those businesses more time or continuation vehicles. You'll notice that in each of these different buckets, we have great product expertise to service those companies to leverage the deep relationships our technology team has with companies and with sponsors and with their deep expertise and knowledge in these spaces. And so I think we're really well positioned as the market evolves and makes sense of AI disruption to these different categories of software companies I think we're really well positioned to be able to provide great service to our clients to help them navigate that. Devin Ryan: That's terrific color. And then just as my follow-up, I heard the comments on sponsor engagement in the prepared remarks, but just curious kind of what you think bring sponsors back. I mean, this is supposed to be the year of the mid-market sponsor exit first few months, obviously, not very conducive. But do you still see that as likely if kind of the macro conditions settle down? Or what do you think needs to change to just unlock that reacceleration in sponsor activity? Navid Mahmoodzadegan: Look, I can tell you, Devin, there is significant desire and need for these sponsors to transact with these portfolio companies. So the demand is there. It's really a question of lining up that demand with market conditions that enable these transactions to happen. So geopolitical uncertainty, a widening out of spreads in certain sectors because some of the dynamics that are playing out in private credit. Those things in the near-term aren't conducive to a full-scale reopening of the full breadth of the middle market M&A business, which is where a lot of the sponsor activity is. I think it's coming. I think as we kind of hopefully get through the geopolitical uncertainty as some of the headlines around private credit subside. I do think sponsors are going to take advantage of the need to transact with these portfolio companies. So you're right, it hasn't happened quite yet. And our sponsor business is growing through that, so I'm really proud of that. But I do think it's going to take a little bit more time to see that full breadth of the market that we all anticipate will appear at some point, hopefully soon. Operator: Your next question comes from the line of Alex Bond with KBW. Alexander Bond: I want to start on the restructuring side. You noted in the release that the revenues declined there year-over-year in the quarter. A, can you just help us think about the magnitude of the decline there in the quarter? And then also if you could help put some context around the results here. The commentary from some of your peers has continued to be relatively upbeat and you noted the pipeline here is up meaningfully year-over-year. So maybe if you could just speak to the drivers behind the year-over-year decline and maybe it's just timing. But any other color there would be helpful. And then additionally, any color around the pipeline would also be helpful. Navid Mahmoodzadegan: Yes. Look, we're not going to get into specific details of the quarter. But look, it's really just timing. The transactions -- the revenues in the quarter are a function of which transactions closed in the quarter. And so there's always going to be a little bit of variability depending upon the quarter and the business segment. But as I said, we -- our team is doing a great job. They're working on a number of really important and significant mandates, got a lot of momentum. Their pipelines are up in a really positive way. And I do think some of the same volatility that we've been talking about in terms of raw material prices, input prices given the geopolitical uncertainty, tech disruption, AI disruption, some of those same themes that are potentially causing some near-term headwinds on the M&A side are creating opportunities for liability management and other things that our CSA teams get involved with. So I feel really good about the trajectory of that business and feel really great about our team. Alexander Bond: Okay. Great. And then maybe just on the PCA side, you noted the stronger year-over-year revenues there, which makes sense given the build-out of the platform. But maybe if you could just help us think about the contribution here in the quarter, maybe how that progressed sequentially. And then also, any updated thoughts around where you sit in the competitive landscape and progress in terms of market share gains to date, that would be helpful as well. Navid Mahmoodzadegan: Yes. Look, we're building that team aggressively, as I mentioned. We'll have here soon 7 managing director -- senior folks managing directors, building that business for us. We love the team. They're doing a great job getting great reviews from clients who they're going to see, and they're getting hired on and building up their pipeline pretty significantly. So it's still early days. We're starting to see kind of the fruits of that early start-up phase in that business. But I think I said in the prepared remarks, our thesis is spot on. The client -- the sponsor clients that we have these deep relationships with want us to be in that business. They want to support us and hire us. They want us to be involved with their portfolio companies. And now that we've been able to put in place a world-class team in a really important product, both on the traditional GP-led secondary side and with private credit secondaries, both of those are growth areas and I suspect there'll be growth areas for a while, and we've got a great team there that's out there winning mandates and executing mandates. So I feel really good about that. Operator: Your next question comes from Ryan Kenny with Morgan Stanley. Ryan Kenny: So just to follow up on that last question on private capital advisory. So it sounds like it's starting to contribute to revenues, which is great to hear. Is it accretive yet to pretax income, so revenues less expenses? And is that something that can happen this year? Navid Mahmoodzadegan: I don't know. Chris, do you want to take that, Chris? I don't know. Christopher Callesano: Yes. I mean it's hard to tell during the quarter, right? But I would say this year, I think there's sure it could be accretive. Like Navid said, it's certainly growing. It's part of our non-M&A, right? You mentioned that 2/3 of our business is M&A, 1/3 is non-M&A. That's split between capital market, CSA and now with PCA, that's a growing component of it. Ryan Kenny: And then as a follow-up on private credit. So it came up a couple of times as one of the near-term headwinds. I'm wondering, are you seeing anything under the hood there? Or is this just headline specific with perceived risk impacting activity? Christopher Callesano: Yes. I don't think there's systemic risk in the private credit market and a lot of the headlines you're seeing around direct lending. Direct lending is a small part of the overall private credit complex. And most of the issues right now are around direct lending into software and concentration around some of those portfolios. I do think when things like the sort of revaluation of software companies happens, lenders, direct lenders, folks in the private credit industry tend to get a little more selective and tend to ask themselves the question of, right, what's next? Are the risks that I haven't seen in other parts of the marketplace. Now put that aside, there's all sorts of other parts of the marketplace, many, many sectors that are really insulated from some of this technology disruption and/or our beneficiaries of the technology disruption. And so the direct lenders are actively lending -- continue to actively lend into all of those different bases and sectors at a very rapid pace. But I do think it does cause folks to say, are there other spaces where I didn't see risk that -- and we're at mispriced risk essentially. And so -- and causes them to be a little bit more cautious lending in some of those areas. And so those are -- that's a flavor for some of the headwinds that I was talking. Operator: Your next question comes from the line of Ken Worthington with JPMorgan Chase. Kenneth Worthington: As we think about the business environment for M&A and the puts and takes that you highlighted at the beginning of the call, how does the U.S. compare with Europe and with Asia as we think about the outlook for M&A activity for the next few quarters? Navid Mahmoodzadegan: So I think the U.S. is still ahead of Europe. If you look at the announcements this quarter in Europe, there's a little bit of a pop I think that's really due to a few larger cap transactions, but the volumes just aren't there in Europe yet. So Europe is still behind the U.S. in terms of momentum in the M&A market. I think that will change over time. And certainly, we're super committed to our build in Europe. It's a critically important part of the world. If you're going to have a world-class investment bank on a global basis, you have to be strong in Europe, and we're committed to that region. But the pace of the M&A market, the dynamism of the M&A market is still not what we're seeing in the United States. Asia, there is pockets of activity in Asia, a little less on the cross-border side that we're seeing, but there's still activity there, and we have a presence there, and that's obviously critically important as well. Kenneth Worthington: Okay. And maybe just following up on Europe. Why is Europe maybe not coming together like we're seeing in the U.S. M&A market? Is it a financing issue? Is it a sentiment issue? Is it just like a sector mix issue? What would you sort of put your finger on as to why we're not seeing the same level of engagement? Navid Mahmoodzadegan: I think that's a longer philosophical question that you one could take a lot of time answering, but let me give you my views. I think, look, part of it is I think a different relationship between government and enterprise in some of those markets. I think there's a different and more difficult regulatory environment in some of those markets. I think there's a different approach to entrepreneurialism in Europe in some of those markets that you see in the United States. And I think there is a different pace to capital formation in parts of Europe, and you see in the United States. So I think you could talk about it for a long time, but I think some of the pillars of why you see a healthy growing dynamic M&A markets in the United States. Europe is just a little bit behind the United States in some of those areas. Operator: Your next question comes from the line of James Yaro with Goldman Sachs. James Yaro: I just want to touch a little bit more on the restructuring backdrop in 2026. Could you just comment a little bit on your view as to whether that could improve to a lesser or greater extent as a result of issues within private credit. And maybe if that's true, then the cadence over which that could occur? And then just maybe if you could also comment on the mix of M&A versus non-M&A revenue? Navid Mahmoodzadegan: Yes. On that last point, Chris. Christopher Callesano: Yes. I mean the mix was 2/3 M&A, 1/3 non-M&A, split between CSA and capital markets. Generally, we don't give a breakdown, but I would say they're in the same ZIP code depending on the quarter. And then again, now we have PCA in that area, and that's growing nicely. Navid Mahmoodzadegan: Look, on the outlook for restructuring generally. But there's still significant maturity walls as you kind of look out to the '28 to '29 to '30 timeframe. I think something like $2 trillion of maturities that are set to hit the leverage loan in the high-yield market during those time periods. So those maturity walls have to be dealt with -- some of that are prior maturity walls got kicked out to '28, '29 and '30 and some of those companies may or may not be able to continue to refinance and down the road I do think some of the tech disruption and the AI disruption we talked about, some of the factors that come out of some of the geopolitical events in terms of raw material prices and fuel prices that are impacting some sectors. All of those things create stress with companies that have levered balance sheets. And all of those are areas that were structuring teams are actively involved in conversations with clients. So I do think we're in for continued liability management opportunities. And we think over time, liability management will turn into more traditional restructuring as well. Default rates are still sort of low, but we do think there's plenty of activity for a number of years on the restructuring side. James Yaro: Okay. That's super helpful. I just wanted to touch again on the private equity backdrop. You made the comment that sponsor M&A is growing double digits. I assume that's a year-on-year comment, but correct me if I'm wrong. And then I just wanted to touch on what's driving your business to outperform the broader market on the sponsor side. Is it that you're taking market share? Or are there specific types of sponsors that are particularly strong that you're seeing, whether it's in terms of geography, the size of deals that they're transacting in or something else? Navid Mahmoodzadegan: Yes. That -- just to clarify, that is a year-over-year growth number. And look, just like if we don't do well in 1 space in a quarter, I don't want -- you shouldn't make too big a deal but I don't want to make too big of a deal that the other way when we do well in the space relative to the market either. So look, I think, generally, sponsors has always been very much part of the DNA and fabric of our firm. We cover corporates actively. We cover sponsors actively. We have dedicated sponsor coverage teams. And really, even before sponsors were in vogue, we were doing that from the early days of the firm. So I think we are -- our teams do a great job and are very focused on covering those entities like we cover corporates. We think that's a very symbiotic thing to do to understand all the players in a particular ecosystem or the corporate and sponsor and so I think really, it's just -- we do a good job of covering them, and it's really an important thing we focus on. So again, I don't want to overstate the market. The market is still not fully open in terms of -- again, back to the demand the desire for activity. The level of actual activity is not meeting the demand yet. And I think once that happens, we're going to be particularly well positioned to reap the benefit of it. Operator: Your next question comes from the line of Brennan Hawken with BMO Capital. Brennan Hawken: Excellent. So Navid, you spoke to expanding relationships in the creditor community in the capital structure advisory in the restructuring business which I thought was kind of interesting. Could you drill down on that a little bit, like which parts of the credit community have you been focused on? Is that shift or expansion in relationships sort of centered around an opportunity set that you believe is likely to become more robust. And I don't think you touched on this before when you were talking about the fact that 1Q started off a little slower, but you had recently taken up your outlook for the year. Do you still expect that business to be flat to up here as we progress through '26? Navid Mahmoodzadegan: Sure. Thanks for the question. So yes, look, we -- a couple of years ago, we hired a couple of senior professionals to really focus in on the creditor side of the business. Really, over the last number of years, the creditor side of the business has really evolved. I think post financial crisis and then for a number of years thereafter, a lot of the action in the creditor community really revolved around hedge funds and I think over time, that's really shifted more to CLOs. And in order to make sure that we had best-in-class coverage of CLOs and the other constituents in the credit marketplace. We had to be more intentional about covering those players actively and really making decisions as we were going after corporate opportunities in the restructuring world, making a decision are really going to focus on a company side situation or we're going to focus on a creditor-side situation because a healthy balance, I think, between those 2 businesses is important to have the biggest TSA business you can have. And I think having a group of people who are really intentional about building relationships to make sure we were well positioned, especially, I think this is really, again, part of the secret sauce of how we go to market. Our CSA business, like all of our sectors, all of our product businesses are deeply collaborative with our sector teams. And so especially where we had a good relationship with the company, knowledge in a sector to make sure we were lining up with the right creditors, if we were chasing a creditor assignment and being really intentional about that, it's been really, really important and it's opened up a lot of opportunities for us. So that's -- that's what I was referring to in the comments. And I think the investment in that side of the business being more intentional there has really paid off. Brennan Hawken: And no change to the outlook, right, just to confirm? Navid Mahmoodzadegan: Yes, I think I mentioned in the prepared remarks that our pipelines are up meaningfully and we'll see how the year plays out, but we do expect growth in our CSA business. Brennan Hawken: Great. Great. The next 1 is a little more ticky-tacky. So probably more for Chris accounting-oriented. Comp expense of $210 million. How close is that to a floor for you guys on comp. And if that layer above the floor is a little thinner than normal, is that a statement of optimism around the ability to accrue against more robust revenues as the year progresses? Christopher Callesano: I mean I'd say a couple of things. Our Q1 comp ratio is down, right, over 300 basis points from this time last year. Q1 had equity comp in there and it's higher, right, due to the acceleration of retirement eligible equity awards. So I think you're aware of that. However, those awards are fully considered in our 65.8% full year estimated comp accrual. So I think right now, we're just -- we are projecting that 65.8% for our best estimate for the year. And as always, we plan to evaluate and adjust the comp as the year to develops, considering revenues, investment in the business and the competitive landscape. Operator: Your next question comes from the line of Brendan O'Brien with Wolfe Research. Brendan O'Brien: I guess to start. Just from what we can see in the public data, it seems like you have been having a lot more success with strategic clients in terms of share than what you have historically. I just want to get a sense as to whether this is a concerted effort on your part to focus more of your efforts on strategic clients, just given some of the softer activity among sponsors and whether you view this as being more sustainable share gains that you could hold on to as sponsor activity begins to recover? Navid Mahmoodzadegan: Yes. Thanks for that observation and for the question. I agree with you. I think our platform and our bankers and the quality of the hiring we've been doing laterally. I think all of that has contributed to a more active transactional activity around strategics to go and pair with our always historical strength with sponsors. And so that's very intentional. And I do think from my perspective, our best sector bankers know a lot of companies and transact with a lot of companies. They also understand sponsor space. They also understand our product capabilities and work collaboratively with our product folks and those are the kinds of people we're hiring. Those are the kinds of people we're developing through our internal development pipeline. And I think really what you're seeing is, yes, intentionality to make sure we're covering corporates the right way. And to think big in terms of larger opportunities, we definitely have a concerted effort at the firm to make sure we're thinking about the largest transactions and are pursuing the largest opportunities but it's also, I think, a testament to our hiring and our talent development and the maturation of our plan. Brendan O'Brien: That's helpful color. And then -- for my follow-up, I just wanted to touch or drill down a bit more on the comp ratio. I understand there's a lot of uncertainty on the back half of the year at this point, but just struggling to reconcile the record 1Q pipeline commentary and just the overall optimism on activity trends across the business with the flat comp accruals. So I guess it would just be helpful to understand -- and for the remainder of the year in the 1Q accrual and how we could think about comp leverage if activity continues on this positive trend? Navid Mahmoodzadegan: So I think on the last call, as we were looking into 2026, even though we had made, I think, meaningful progress over the last couple of years to bring our comp ratio down. I think I was pretty clear that we don't intend to be finished there. And our goal is to continue to work the comp ratio down as the investments that we've made over the last number of years in our people started to show up in terms of increased revenue as the market improved and as our business continues to grow, that's still exactly the plan. And I'm hopeful and optimistic that we'll see that as we roll through the next few quarters and have a great year this year. The first quarter was up. It wasn't up a lot. You can see what percentage it was up. And I do think as we roll forward in fact, if we see the kind of growth numbers that I hope we see and I anticipate we'll see, we will revisit comp ratio in subsequent quarters. Christopher Callesano: Yes, I agree. I think it's just a little too early. Just like last year, we started out at 69% and as the year progressed and saw our revenues come in and our investments, we were able to lower it over 300 basis points. So we're hopeful -- I'm not sure that it would be the same pace as we did last year, but we're still hopeful to make increases in improvement on our comp ratio this year. Operator: Your next question comes from the line of Mike Brown with UBS. Michael Brown: I wanted to ask you about the pipeline here. So your pipeline that I guess, all-time highs. Public backlog does seem to support a good second quarter here, but it does seem like there's a lot of market uncertainty could certainly elongate some of the deal closings for the industry, maybe impact the pace of new deals. So as you think about the next quarter or 2, can you just maybe give us a view on how you think those could shape up relative to the prior year? Any color there would just be helpful just given kind of a lot of the pockets of softness in the market currently? Navid Mahmoodzadegan: Sure. Look, we feel really good about the overall level of our pipeline, as we mentioned in the prepared remarks, and we have a I think the highest at this point in a year, the first quarter in terms of our announced pipeline deals that have been announced that are waiting to close. So I think those are both really good data points as we kind of think about the rest of the year. But you're correct that at the end of the day, we have to transact against that pipeline. Our teams are working extremely hard to service clients and give great advice and try to get transactions done, but some of that is out of our control. And as I pointed to in the remarks as well, some of the factors in the marketplace coming out of the geopolitical environment, AI disruption, do create some near-term headwinds that we're working through, but they also create some opportunities in other parts of our business. So a long way of saying we'll see how the year plays out, but we're optimistic the business is in a really good spot. And our teams are working exceptionally hard to make this a growth year. Michael Brown: Okay. Great. And I wanted to ask maybe another question on the comp ratio come at it maybe a little bit of a different way. And again, with the theme of kind of wide range of outcomes here. So if we have a better environment here and continues to accelerate and you see revenue growth pick up from here. What would kind of be the level that could actually push that comp ratio down 100 basis points from that 65.8% level? And then conversely, if revs were to be more flattish for the year, could you hold the comp ratio flat to last year? Just trying to think through as you're investing and then maybe the push and pull on some of your fixed comp costs. Christopher Callesano: Yes. I don't think we're going to get into any sort of algorithm or percentages. I would say, yes, if the environment improves and we ultimately have revenues of what we would expect. We will have an improvement in comp ratio. I'm not going to give you the percentage because, again, we don't know what kind of investments we're making -- we're making all sorts of estimates based on revenues, investments and the competitive landscape at the end of the year. And yes, I think -- sorry, what was your second part of the question? Michael Brown: Just how to think about the comp ratio of revenue was to be more flattish year-over-year? Christopher Callesano: Yes. I mean, right now, we're not expecting that. But sure, if it was flat versus last year, we had an increase in heads, there's a possibility that you would have to adjust that. We don't expect that at this time. Operator: Your next question comes from the line of Nathan Stein with Deutsche Bank. Nathan Stein: I wanted to follow up on Devin's question earlier in the call. So you said in your prepared remarks, large strategic transactions have been driving M&A volumes. That's consistent with what we've seen in the data and also the trend last year. I was hoping you could talk about what's going to get that core middle market strategic deals to really pick up speed here? Navid Mahmoodzadegan: Look, I think -- look, some stability. Look, as I mentioned earlier, I do think if you're a sponsor and you own a company, you waited to monetize it because you're holding out for a price. If -- and you see war break out in the Middle East and that reduces the likelihood after waiting this long to monetize that asset that you're going to actually hit the mark, you're waiting for a little bit, right? If you see credit spreads gap out a little bit because there's disruption in the private credit industry, you're waiting a little bit to see that play out. High-quality assets have been trading. There is activity in the marketplace, but there's also a bunch of -- a whole suite of companies portfolio sitting inside private equity firms people have been waiting to do something, and they have a price in mind of what they want for the asset. And they're waiting for the optimal moment to go ahead and monetize that asset if they haven't done a CV or if they haven't done a refinancing or something like that. And I think it just takes some time. But these assets do have to move. There's no doubt in my mind that these assets have to move, and they will come to market. And it will just take time for that middle market to open up, but it's coming. Operator: Your next question comes from the line of Daniel Cocchiara with Bank of America. Daniel Cocchiara: Sticking with comp and just hiring, I was wondering if you could talk to us about the competitive dynamics you're seeing on this front and whether or not you're seeing any added pressure maybe from like the bulge brackets and their ability to retain talent. Navid Mahmoodzadegan: Sure. It's -- look, it's competitive. There's no doubt hiring great people, what I call difference makers, it's super competitive. It's rare that you're talking to somebody who is great in a space where they're not talking to another firm as well. So we have to compete against bulge bracket firms. We have to compete against other independent firms, and we have to compete against people doing other things and staying at the firms they're at. So look, what we're looking for, again, are people who want to be part of a collaborative environment will fit in great and be accretive to our culture. and who are difference makers. And finding and cultivating those relationships takes time. And it's definitely hand-to-hand combat to get those people here on terms that make sense for us and for them. But again, hired 8 people this quarter. We're excited about all those hires. It's my #1 focus as CEO of the company is not just to make sure our bankers that are here continue to think Moelis & Company is the best place to work with the best culture, but also to recruit other super talented people from all over the world to join us. And we're -- I think we do a great job. Our teams do a great job of identifying those people. And as a senior management team, we spend a lot of time developing those relationships and trying to get those people to yes. Operator: Your next question comes from the line of Devin Ryan with Citizens Bank. Devin Ryan: Just had a quick follow-up on non-compensation expense. Obviously, you heard the guidance and pretty consistent with what you guys had said previously. It was a little bit higher than we had modeled. I think we were a little bit low and kind of building through the year. And I think the guidance implies kind of more of a steadier pace. But in the other expense line, obviously, that jumped up pretty meaningfully. I know there could be some kind of lumpy deal costs and things like that. So I'm just curious what drove that kind of step up and how much of that is kind of core versus like transitory or just one-off items? Christopher Callesano: Yes. I mean -- so I would say that other expenses, this line includes costs that don't warrant their own separate category. So there are things like client conferences are in there, certain deal-related capital markets underwriting expenses, but we have other things like insurance, education, business taxes and just a number of other items. The individual -- like you pointed out, individual non-comp line items fluctuate quarter-to-quarter. But in aggregate, they generally balance each other out. And we still anticipate full year non-comp expenses to grow at a similar rate to 2025. Operator: I'll now turn the call back over to Navid Mahmoodzadegan for closing remarks. Navid Mahmoodzadegan: Thank you all for joining today. Really appreciate it, and we look forward to speaking to you all soon. Thanks so much. Operator: Ladies and gentlemen, that concludes today's call. Thank you all for joining. You may now disconnect.
Operator: Thank you for standing by, and welcome to MediaAlpha, Inc. First Quarter 2026 Earnings Call. I'd like to remind everyone that this call is being recorded. [Operator Instructions] I would now like to turn the call over to Investor Relations. You may begin. Alex Liloia: Thanks, Angela. Good afternoon, and thank you for joining us. With me are Co-Founder and CEO, Steve Yi; and CFO, Pat Thompson. On today's call, we'll make forward-looking statements relating to our business and outlook for future financial results, including our financial guidance for the second quarter of 2026. These forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially. Please refer to our SEC filings, including our annual report on Form 10-K and quarterly reports on Form 10-Q for a fuller explanation of those risks and uncertainties. All the forward-looking statements we make on this call reflect our assumptions and beliefs as of today, and we disclaim any obligation to update such statements, except as required by law. Today's discussion will include non-GAAP financial measures, which are not a substitute for GAAP results. Reconciliations of these non-GAAP financial measures to the corresponding GAAP measures can be found in our press release and shareholder letter issued today, which are available on the Investor Relations section of our website. I'll now turn the call over to Steve. Steven Yi: Thanks, Alex. Hi, everyone. Thank you for joining us. We're off to a strong start in 2026, delivering record results across all of our key financial metrics. First quarter transaction value came in above the midpoint of our guidance range, reflecting continued strength in auto insurance carrier spend and further broadening of carrier participation on our platform. These dynamics drove a favorable mix shift to our open marketplace, pushing both revenue and adjusted EBITDA above the high end of our guidance. Within P&C, we've seen a number of carriers that were previously punching under the weight in our marketplace take meaningful steps over the last several quarters to increase their spend. As anticipated, this is resulting in a mix shift towards our higher-margin open marketplace, where our estimated 3x scale advantage and unmatched proprietary data fuel highly differentiated predictive AI optimizations that drive better outcomes for our partners. Moving forward, I'm encouraged by the productive conversations we're having with a growing number of leading carriers about further leveraging our trusted infrastructure and AI targeting capabilities to maximize the return on ad spend and gain market share. The underlying auto insurance industry remains healthy. Carriers are strongly profitable and are competing more aggressively by lowering their rates and increasing their advertising spend as they prioritize policy growth. While underwriting margins have begun to decline from record levels, they remain robust by historical standards. We believe these conditions support further growth in our P&C vertical, which continues to benefit from the secular shift in carrier distribution spend from agent commissions and off-line advertising to a direct-to-consumer model supported by online performance marketing. While not yet material to our results, our strong first quarter P&C traffic growth suggests that consumers who are starting their insurance shopping experience on LLMs are driving incremental referrals to our marketplace. During the quarter, we were pleased to see a significant strategic shift by a leading LLM to place greater emphasis on advertising monetization to support the consumer product. We view this as a favorable development that could meaningfully accelerate LLM referral traffic and revenue growth for us and our partners. We remain confident that carriers will stay central to the quoting and binding experience regardless of how the consumer shopping experience evolves, reinforcing our highly defensible position as the core infrastructure layer connecting carriers with insurance shoppers. As a trusted partner to carriers and a leader in AI-powered insurance distribution, we recently launched autoinsurance.net, a ChatGPT-powered shopping experience that simplifies the consumer journey while keeping carriers in full control of their brand, compliance standards and quoting processes. This is an early proof-of-concept product, and we're excited about what comes next as we continue to build out this capability to better support our partners. On the health insurance side, our under 65 business continues to represent a diminishing portion of our overall mix, which is in alignment with our plans. We continue to believe that Medicare Advantage is the long-term growth opportunity for this vertical. Importantly, we remain focused on utilizing our significant free cash flow to maximize shareholder value. We are executing aggressively on our outstanding share repurchase authorization and have returned over $25 million of capital to shareholders already this year. As we look ahead, we're energized by the opportunities in front of us. Carrier and agent participation in our marketplace continues to expand and the innovations we're bringing to market are opening new doors for consumers to discover and connect with both carriers and agents. Overall, we believe we're well positioned to deliver both sustained profitable growth and long-term shareholder value. Before turning the call over to Pat, I'm proud to share that MediaAlpha has earned a Great Place to Work certification for the 10th consecutive year with 95% of our team members affirming that our company is indeed a great place to work. This recognition reflects the strength of our culture and our exceptional team, which underpins everything that we do. Patrick Thompson: Great. Thank you, Steve. I'll start by walking through the key drivers of our Q1 results and then cover our Q2 outlook. As Steve mentioned, transaction value came in above the midpoint of our guidance range. Revenue was $310 million, above the high end of our guidance range, reflecting a favorable open marketplace mix shift driven by broader carrier participation in our marketplace. Adjusted EBITDA for the quarter was $31.4 million, up 7% year-over-year. Our efficient operating model and disciplined expense management allowed us to convert 64% of contribution to adjusted EBITDA. Excluding under 65 Health, our core business performance was very strong with year-over-year revenue and adjusted EBITDA each growing 28%. Turning to the balance sheet. We completed the refinancing of our credit facilities during the quarter. As detailed in the Form 8-K we filed with the SEC, we put in place a new $150 million senior secured term loan and a $60 million revolving credit facility, both maturing in March of 2031. The refinancing replaces our prior arrangements, extends our debt maturity profile meaningfully and provides enhanced financial flexibility. We drew modestly on the revolver in connection with closing, and we ended the quarter with $26.1 million in cash and $45 million undrawn on the revolver. On capital allocation, since the beginning of the year, we have repurchased approximately 2.6 million shares for $25 million, representing approximately 4% of the company. We remain committed and on track to complete the vast majority of the remaining $60 million of our $100 million authorization in 2026. Turning to Q2. We will be changing how we present guidance. We will be guiding to contribution and we will no longer report transaction values as we think contribution is a more relevant metric for investors evaluating the company's performance relative to our publicly traded peers. For Q2, we expect revenue of $290 million to $310 million, up approximately 19% year-over-year at the midpoint. Contribution of $45.5 million to $48.5 million, up approximately 18% year-over-year at the midpoint. Adjusted EBITDA of $28 million to $30.5 million, up approximately 19% year-over-year at the midpoint, including an approximately $2 million year-over-year decline in contribution from under 65 Health. Excluding under 65 Health, we expect contribution to increase by 25% and adjusted EBITDA to increase by 31% year-over-year. For Q2, we expect the health vertical to be approximately 1% of total revenue, as we made a strategic decision to limit under 65 Health open marketplace participation to carriers only, simplifying our operations. Looking at the remainder of 2026, we are entering a more normalized growth environment in P&C. Accordingly, we expect growth rates to moderate in the back half of 2026 as we lap increasingly strong prior year comparisons. For the year, we expect to generate $90 million to $100 million in free cash flow. Overall, we remain confident in the strength of our position and the long-term opportunity ahead. With that, operator, we are ready to take the first question. Operator: [Operator Instructions] And your first question comes from the line of Tommy McJoynt with KBW. Thomas Mcjoynt-Griffith: Steve, could you go into a bit more detail and specifics about the LLM comments that you made? You seem to suggest a strategy shift in LLM that's monetizing advertising leads. Could you add some more details and specifics around that? Steven Yi: Yes. So what I was referring to was OpenAI's announcement that ChatGPT was going to increase, I guess, reliance on advertising monetization. And I think the number that they threw out was that by 2030, they wanted to generate about $100 billion in ad revenue by then, which is about 4x the previous forecast for ad revenue that they had released, I think, earlier this year. And so, for us, that was a really clear sign that OpenAI and ChatGPT, at least with the consumer-facing product, we're going to monetize primarily using an advertising model. I mean, certainly, I think with Gemini being owned by Google, you can expect Gemini to do something similar. And so, what we really was saying was that with the adoption of this advertising model as opposed to a closed commerce model as some people had expected, I think that means a good thing for our overall industry because what I have full confidence in is our supply partners to be able to adapt to this new upstream traffic acquisition source and really be able to tap into the incremental demand and shopping behavior that the LLMs are going to generate. And we think ultimately, over the next 2 to 3 years, this is going to be a significant tailwind to our business, both on the publisher side and for us as a whole. Thomas Mcjoynt-Griffith: And then switching gears, we often talk about the carriers being stratified into those leading players that were first to reengage in advertising spend and then more carriers catching up. Have you seen any of the leading carriers start to pull back on advertising spend as they seem to maybe notice that the underwriting cycle is nearing its peak? Steven Yi: No. No, we haven't. I think what we're seeing is really accelerating growth from the non-leading carriers more than any pullback from the leading carriers. I think they were obviously the first ones to come back and really lean into growth mode by acquiring customers. And really the spending came back very quickly within our marketplace from a couple of the leading carriers. I think they're maintaining the levels of spend, we continue to see growth there. But really, what you're seeing, and you're seeing that coming out in our numbers with the higher growth rate that we're seeing from our open marketplace is really just the growth that we're seeing from a lot of the other top 15, top 20 carriers as they continue to -- or they increasingly start to lean into growth marketing. And so, we're obviously very encouraged by that. It's really the broadening of the demand that we have been expecting for the last couple of years. It represents both, I think, really the strong cyclical tailwinds that you're seeing, as carriers start to lower rates and really pour money into advertising to grow their policy counts. And then in addition to that, really the cyclical tailwind really fueling the secular shift that we're starting to see again from an increasing number of carriers as they pivot from being primarily reliant on agent-based distribution to really building a strong direct-to-consumer channel as well, which effectively means that a lot of the distribution costs that a lot of these agent-based carriers were incurring really is starting to shift from agent commissions into advertising dollars, which is a net positive for our industry and clearly a net positive for us. Operator: Your next question comes from the line of Cory Carpenter with JPMorgan. Cory Carpenter: I just wanted to ask, last quarter, you talked about an expectation for carriers to enter the year kind of with a more prudent start and then kind of save some, if you will, for later in the year should the opportunity present itself. Maybe could you just give an update on kind of that? And has any of the macro uncertainty that we've seen unfold over the last couple of months changed kind of your expectations for how you expect spend to trend through the year? Steven Yi: Yes, sure. I think that what I said in the last comment, I think, really holds for this one, which is that they may have started the year a little bit conservatively. Certainly, the big ones have continued to grow organically, but it's really the body of the demand for carriers who are, again, top 15, top 20 carriers, but weren't big spenders in the past within our marketplace. And we've been really pleasantly surprised to see the level of growth that we're seeing from them. Now the -- I'll say a couple of things there, right, which is, we still think that, that broadening of demand has a ways to go because all of those outside of the top carriers that you're referring to are still only allocating, let's say, 2% to 3% of their overall advertising budget to our marketplace. If you look at benchmarks and really where we expect them to be, it's really somewhere between 10% to 20%. So they have somewhere between 5 to 10x to go in terms of the level of spend that they could support with us, right, once they eventually get to a point where the industry leaders are. And so, even though we're seeing really strong demand, robust growth in our open marketplace by the broadening of demand, we think that there's still a ways to go there. To answer the last part of your question, are we seeing any slowdown with some of the macro effects? I'm guessing that you're referring to the war and rising gas prices and then fears of increasing inflation. I mean, certainly, those things could have an impact on loss ratios. We're not seeing the carriers really taking any action right now based on any fears of inflation. I think it's going to cut both ways because gas prices going up means that people are going to drive less, that's going to reduce frequency. But certainly, higher gas prices or higher oil prices is likely to result in inflation of car prices, which could have a negative effect on severity. Operator: Your next question comes from the line of Mike Zaremski with BMO Capital. Michael Zaremski: Just a couple of numbers questions. On the -- I heard loud and clear about reiterating the free cash flow. Did you mention why the cash flow didn't come through this quarter? And then just another numbers question. Did you specify the new terms on the debt so we can calculate the potential savings? Patrick Thompson: Sorry, on mute. Mike, on the cash flow side, the -- a couple of things happened in Q1. So first off, we had an $11.5 million payment to the FTC. That was our second and final payment to the FTC. So that was obviously a use of cash. And Q1 is a quarter where we have a couple of kind of annual payments that go out the door. So we've got annual bonuses to employees, which is kind of -- it's a mid-, high single-digit million number, and we've got annual payments that go out the door on our tax receivable agreement. And I would say that Q1 had those kind of 3 one-timers or once annual items. The rest of the year should not have those. And so, the adjusted EBITDA to free cash flow conversion should be very strong for the balance of the year. And moving to the debt side of the house. The refinance had essentially very minimal changes to the overall interest profile of the debt. Probably the most meaningful change to cash flow is that the amortization is going to be slightly lower. We have $7.5 million annually of amortization, kind of paid 1/4 of that every quarter. So there's a little bit less paydown that occurs naturally on the debt. But I would say otherwise, the economics of the debt are largely unchanged from the prior agreement to this one. Michael Zaremski: Got it. And probably for Steve, on the removing transaction value, I'd say investors did find that helpful. Are you saying you feel like it's proprietary and some of your competitors don't disclose it, so you'd rather not disclose it? Patrick Thompson: Yes. And Mike, this is Pat. I'll take that one. I would say that for us, transaction value was something we originally disclosed at the time of the IPO to show our scale, and it's something we've shown since to show our scale. And as Steve said in his scripted remarks, we estimate from a transaction value standpoint, we're close to 3x the size of our nearest competitor. And so, we think we've kind of probably pretty clearly proven that point and investors understand it. And as we think about the most important metrics for understanding the business, those really are revenue contribution and adjusted EBITDA. And those are the exact metrics that all of our public peers show. And so, we're just in a spot where we thought from a simplicity standpoint and a conformity standpoint that it made sense to focus on the same things that everybody else does. Operator: That concludes our question-and-answer session and as well as today's call. Thank you all for joining. You may now disconnect.
Operator: Good afternoon, and welcome to Everspin Technologies First Quarter 2026 Financial Results Conference Call. [Operator Instructions] As a reminder, this conference call is being recorded. I would now like to turn the conference over to Amy Grant, Investor Relations for Everspin. You may begin. Amy Grant: Thank you, operator, and good afternoon, everyone. Everspin released results for the first quarter 2026 ended March 31, 2026, this afternoon after market close. I'm Amy Grant, Investor Relations for Everspin. And with me on today's call are Sanjeev Aggarwal, President and Chief Executive Officer; and Bill Cooper, Chief Financial Officer. Before we begin the call, I would like to remind you that today's discussion may contain forward-looking statements regarding future events, including, but not limited to, the company's expectations for Everspin's future business, financial performance and goals, customer and industry adoption of MRAM technology, successfully bringing to market and manufacturing products in Everspin's design pipeline and executing on its business plan. These forward-looking statements are based on estimates, judgments, current trends and market conditions and involve risks and uncertainties that may cause actual results to differ materially from those contained in the forward-looking statements. We would encourage you to review the company's SEC filings, including the annual report on Form 10-K and other SEC filings made from time to time in which the company may discuss risk factors associated with investing in Everspin. All forward-looking statements are made as of the date of this call, and except as required by law, the company undertakes no obligation to update or alter any forward-looking statement made on this call, whether as a result of new information, future events or otherwise. The financial results discussed today reflect the company's preliminary estimates are based on the information available as of the date hereof and are subject to further review by Everspin and its external auditors. The company's actual results may differ materially from these estimates as a result of the completion of financial closing procedures, final adjustments and other developments arising between now and the time that the financial results for the period are finalized. Additionally, the company's press release and statements made during this conference call will include discussions of certain measures and financial information in GAAP and non-GAAP terms. Included in the company's press release are definitions and reconciliations of GAAP net income to non-GAAP net income, which provide additional details. A copy of the press release is posted on the Investor Relations section of Everspin's website at www.everspin.com. And now I'd like to turn the call over to Everspin's President and CEO, Sanjeev Aggarwal. Sanjeev, please go ahead. Sanjeev Aggarwal: Thank you, Amy, and thanks, everyone, for joining us on the call today. Before I discuss our first quarter results, I would like to share some exciting news. Today, after market close, we announced a new 2.5-year $40 million agreement with the U.S. prime contractor. Under the agreement, Everspin will be a subcontractor on an existing prime contract and will provide Toggle MRAM process technology capabilities and engineering services for U.S. defense industrial-based customers. In addition, Everspin will provide engineering and foundry services for U.S. Department of War or DoW products through its recently announced Foundry Services Agreement with Microchip. This agreement builds on our long history of supporting military and aerospace applications where performance, reliability, longevity and domestic production are critical. Now turning to our first quarter results. We are pleased to report results at the high end of our guidance range with revenue of $14.9 million and non-GAAP EPS of $0.11 per diluted share. Our performance this quarter was driven by strength in Industrial Automation, Transportation and Data Center applications. Industrial Automation growth was driven by a recovery in customer demand, including Japan, as inventory levels have been worked down. In the Transportation segment, growth was driven by the transition of design wins to production at several customers, including 2 rail applications. One such customer is a railroad operator in Asia, who is utilizing our MRAM technology for critical railway signal applications such as train axle counters. Axle counters and by extension, their components must operate in harsh, vibratory conditions, which MRAM can withstand better than other memory technologies. Modern axle counters use MRAM for storing large amounts of diagnostic and maintenance data, allowing for real-time monitoring such as wheel detection and predictive maintenance. Additionally, MRAM enables more robust data storage, contributing to the high safety integrity levels, SIL4, required for axle counter systems, ensuring accurate detection and reducing false alarms. Another customer is a leading embedded computing company in Asia who chose Everspin's MRAM solutions for rail transit systems because they reliably preserve critical data during power loss and support unlimited erase and write cycles. In Data Center, growth continues to be driven by our ongoing work with IBM on the FCM4 and FCM5 modules and the Redundant Array of Independent Disks or RAID, reference design at the top 5 hyperscale operators. With respect to below-the-line items, we recognized $2.1 million in other income in the first quarter and $12.8 million to date from the $14.6 million contract we have with the DoD contractor to develop a sustainment plan for our MRAM manufacturing facilities to provide continuous onshore MRAM capabilities to their aerospace and defense customers. We expect this business to begin to wind down over the coming quarters with estimated completion in the first half of 2027. Turning to some of our product development efforts. During the quarter, we formally introduced our UNISYST MRAM family at Embedded World in early March. This product family represents a new generation of unified memory solutions designed to fundamentally change how embedded systems store and access code and data. UNISYST delivers high-bandwidth read and write speeds in a nonvolatile memory device, enabling fast boot, rapid updates and predictable performance without the trade-offs of traditional flash-based designs. UNISYST will extend our MRAM road map to higher densities while giving customers a practical way to start with PERSYST today and migrate to a code and data MRAM architecture as soon as it is available. Everspin will initially offer the UNISYST family in densities ranging from 128 megabits to 2 gigabits using a standard xSPI interface operating up to Octal SPI at 200 megahertz. Target use cases include AI at the edge, military and aerospace, automotive, industrial and casino gaming. Engineering samples of UNISYST are expected to be available in the fourth quarter of 2026. As a reminder, the UNISYST family of products will serve the high-density stand-alone NOR Flash market, which will expand our addressable market by approximately $3 billion. Our goal is to capture 5% to 10% of this market in the early years and then grow further. With respect to the high reliability parts that we announced last quarter, customers have our PERSYST 64-megabit xSPI STT-MRAM devices in hand and are engaged in design activity. Additionally, we remain on track to qualify our 128-megabit and 256-megabit high reliability parts and continue to expect them to be available in high volume in the second half of this year. Customers have engineering samples of these parts on hand as they evaluate them in their designs. Building on our existing relationship with Microchip, we recently announced a strategic manufacturing agreement with the company to expand our onshore production capacity and strengthen our long-term supply chain resiliency by creating a second domestic source of supply for our customers. Under the 10-year agreement, we will establish an MRAM line at Microchip's fab in Oregon to manufacture MRAM and TMR sensor products currently produced at our line in Chandler. We expect to ship the first products from the new line in the second half of 2027. I will now turn it over to our CFO, Bill Cooper, who will walk you through our first quarter financials and second quarter 2026 guidance. Bill? William Cooper: Thank you, Sanjeev. Our results reflect the consistency of our execution. During the first quarter, we delivered revenue of $14.9 million, up 14% year-over-year and toward the high end of our guidance range of $14 million to $15 million, driven by higher product sales. MRAM product sales, which include both Toggle and STT-MRAM revenue, were $14.1 million, an increase of 28% over the first quarter of the prior year and up 5% sequentially. Licensing, royalty, patent and other revenue decreased to $0.8 million from $2.1 million in Q1 '25 due to fewer currently active projects. Our GAAP gross margin increased to 52.7% from 51.4% in the first quarter of 2025 due to higher capacity utilization. GAAP operating expenses were $10.6 million, up from $8.7 million in the first quarter of 2025 due primarily to litigation costs as well as higher compensation costs for new and existing employees and professional fees. Other income of $2.1 million was related to the strategic award we won in mid-2024 to upgrade manufacturing equipment in our existing manufacturing facility located in Chandler, Arizona. We recorded fourth (sic) [ first ] quarter non-GAAP net income of $2.6 million or $0.11 per diluted share based on 23.1 million weighted average diluted shares outstanding. This was at the high end of our guidance range of non-GAAP net income of $0.07 to $0.12 per share and compares to non-GAAP net income of $0.4 million or $0.02 per share in the first quarter of 2025. Our reported non-GAAP results exclude the impact of stock-based compensation as well as litigation expenses. Our balance sheet remains strong and debt-free. We ended the quarter with cash and cash equivalents of $40.5 million, down $4 million from the $44.5 million at the end of the prior quarter. Cash flow generated from operations decreased to $0.5 million for the first quarter from $2.6 million in the fourth quarter due to the litigation costs I mentioned earlier as well as increased working capital needs. We believe our cash and cash equivalents are sufficient to meet our anticipated capital requirements to execute upon our Foundry Services Agreement with Microchip and continue to invest in product development to support our future road map and enable the company to drive growth. Turning to guidance. Excluding any impact from the new subcontractor agreement that Sanjeev mentioned, we expect Q2 total revenue to be in the range of $15.5 million to $16.5 million and GAAP results per fully diluted share to be between a net loss of $0.12 to a loss of $0.07. On a non-GAAP basis, we anticipate results to be between breakeven and net income of $0.03 per fully diluted share. These non-GAAP figures exclude the impact of patent litigation costs in addition to stock-based compensation expense. In summary, we are pleased with our solid performance this quarter and remain committed to maintaining financial discipline while focusing on scaling our business and converting additional design wins to revenue. Operator, you may now open the line for questions. Operator: [Operator Instructions] Our first question comes from the line of Neil Young with Needham & Company. Neil Young: So the $40 million contract that you just announced, could you give us like a shape on how you're thinking that revenue layers in? Or anything you can share on the milestone payments such as how achievable you think the milestones are? What are the biggest risks to the milestones? And then lastly, will that revenue live in the licensing royalty patent bucket? And then I have a follow-up. William Cooper: Yes, Neil, this is Bill. Thanks for the question. Yes, so we really aren't giving any guidance related to that particular subcontract agreement just yet. But of course, we do expect to have a significant positive impact over the next 2.5 years to the financials. In terms of meeting and achieving the milestones, yes, that was negotiated with the group involved, and we're very confident in our ability to deliver on the milestones. Neil Young: Okay. And then could you maybe speak to what drove the gross margin strength in the quarter? As the STT portfolio continues to evolve, are you maybe starting to see higher ASPs come through here? And then also, should we sort of expect to see this gross margin -- the gross margin hold in this range or revert back to similar levels of 4Q '25? William Cooper: Yes, good question. I think a couple of things, right? So the first is strong quarter on the margins. Again, as we've sort of always noted, we do target 50% plus in terms of gross margin. I think as we sort of see that lift in the top line and that volume increase, right, you kind of get into that beneficial arena of higher capacity utilization and obviously, right, the guys are always looking at ways to reduce costs and improve our yields. So all those things factor in. Operator: Our next question comes from the line of Richard Shannon with Craig-Hallum Capital Group. Richard Shannon: I'm going to follow up on this $40 million contract here. I guess a few questions here for me. I want to follow up from your response, Bill here about why you don't have any revenue thoughts here you can give today, is that because you're not allowed to or because you don't know what the shape and structure and timing looks like? And then also, I want to get a sense of what kind of margin profile we should expect over the life of the contract with this. William Cooper: Thanks. Yes, good questions. So I'll try and elaborate a little bit further. The contract itself, right, the ink on that is just drying. And obviously, it's going to have a significant impact on the financials. And so we're looking at all of the various impacts of that. And as we run through Q2 and get the results and get the kickoff of the contract and all the various pieces, right, we'll give you guys better guidance as we go into the end of this Q2 results. And then in terms of margin, yes, I would expect that, that is also going to have a bit of a beneficial impact to margin as well. And -- but again, that's sort of -- I have to be a little careful there. We're going to, again, reiterate, we do target the 50% plus margin for gross margins. And again, we have to sort through all the pillars of that significant contract. Richard Shannon: Okay. I want to ask a follow-up about this contract in the context of other activities you have or may have going on in the future here. So you've referenced today and in the past here this -- I think it's a $14.6 million contract for -- I forget the word you used here, continuity plan or something. And I think there's an RFQ out there from the U.S. government about maybe establishing 300-millimeter capacity here. And then you've obviously recently, as you announced, I can't remember last month or whatever, adding some more capacity at Microchip. To what degree do all of these things interrelate here? Can you kind of tie these things together or if they're not tied together, tell us? I'd just love to get kind of some context here, please. Sanjeev Aggarwal: Richard, this is Sanjeev. Good question. And I think maybe I can help and then maybe there's a follow-on to further clarify. But the bottom line is the RFI for the 300-millimeter MRAM line is independent of the 3 other items you mentioned, namely the $14.6 million contract that we got in 2024, the Microchip Foundry Services Agreement and the new contract that we just talked about today. So as far as the $14.6 million contract that we got in 2024, that is the one where we basically got some support from the U.S. government to improve the supply chain for MRAM or Toggle MRAM for the U.S. government. And that revenue, as you know, is actually being recognized below the line. So that was not above the line. There's a lot of CapEx and supply chain robustness involved in that discussion. The Microchip Foundry Services Agreement was simply between Everspin and Microchip, where we basically went out to increase our capacity. So that was independent of these 2 contracts in that sense. So we went out to increase our capacity given the high demand that we've been seeing over the last couple of quarters. Now this new agreement that we just signed is basically we are going to provide a technology information, a recipe, a compendium, if you will, for mil and aerospace Toggle MRAM to this contractor, to this U.S. prime contractor, okay? And in addition, they would have a right to second source the Everspin Toggle MRAM for mil/aero applications again in case Everspin decides to exit the business. Obviously, we have no intention of doing that, but we do give them the rights and all the technology and all the recipes, et cetera, associated with it in case we do exit, right? And then also under this agreement, they actually get access to this Microchip fab that we are bringing up to qualify their existing products on that line. So there's NRE associated with getting that activity done. And then finally, there is a new product that the U.S. government is actually planning to tape out. So the R&D for that product and the production support for that product would also be part of this contract that we just talked about. Hopefully, that helps. Richard Shannon: That does help a lot. I appreciate that. If you don't mind, I'm going to throw one more question before jumping back into the queue, and that's really about the guidance here. So I mean, it sounds like we should expect most of the sequential growth in dollar terms here to come from products here. How do we think about it between the kind of the STT that's mostly going to IBM versus other products here within that? And then any idea -- or can you just give us a sense of what kind of litigation spend you're expecting in the second quarter? William Cooper: Yes. So on the first point, what I would say is definitely seeing very strong product sales. We're up year-on-year 28%. I think most of that growth from Q1 to Q2 is going to be in that product sales category. Again, we are seeing, I would say, just good solid product sales across all the various categories. And then on your second question, we do show the $1.6 million that we had to expend in Q1 on litigation costs. And what I would say is, unfortunately, litigation is expensive, and I think we're kind of expecting it to continue in that range for at least the next couple of quarters. But again, we'll see how that ultimately pans out. Operator: Ladies and gentlemen, I'm showing no further questions in the queue. We did have a question -- a follow-up question that come through. One moment. William Cooper: Okay. Operator: We have a follow-up question from the line of Richard Shannon with Craig-Hallum. Richard Shannon: Well, I guess I didn't have to jump out of line. But let's hear, maybe a couple more from me guys here. I noticed you've had a couple of quarters of some above-trend CapEx numbers in the fourth quarter and now the first here. And while I could certainly expect some of that coming from maybe your Microchip agreement or not, I'm not sure. But how do we look at that going forward here? William Cooper: Yes, we did. We had a, I'll call it, a unique period of capital spend. And that, again, was related to some of the improvements that we saw in the Chandler facility primarily across a couple of different contracts. So that flurry of activity, I think, will start to settle down until we get into the real heart of this Foundry Services Agreement. Richard Shannon: This Foundry Services Agreement, is that referring to Microchip specifically? William Cooper: That's right. That's right. That's right. Richard Shannon: When do we start to see that pick up? And any idea how to think about that sum total over -- I don't even know what period of time to expect to be there. I assume it's at least a couple of years, but what do we think about there? William Cooper: Yes. So there will be some significant capital spend over the next 2 years. Again, it's going to be spread out over time a little bit, probably some later this year as well as early next year. And then in terms of the overall CapEx, not so significant that we can't manage it. I think, again, it's going to be in the range of kind of what our historical spend has been annually. Yes. Richard Shannon: Okay. Fair enough. My last question, I will jump out of line. If I took the notes here, and I seem to recall them being consistent with what I've heard in the past regarding the UNISYST product line here, you talked about this being a $3 billion TAM. And Sanjeev, if I caught your comments right, you're expecting kind of a 5% to 10% share early on here. 5% share, that number is $150 million in a year, and you're talking about -- last quarter, you talked about getting to a goal of $100 million within 3 to 5 years. So I look at that 5% to 10% share early on, "early on" seems to be a little bit longer time frame than what would fit in here. So are we either thinking it's going to take a while to get that kind of share? Or is there some meaningful upside in terms of timing to hit that $100 million total corporate level goal? Sanjeev Aggarwal: Yes, that's a good question for clarification, Richard. So I think we have talked about this in the past. I don't think that UNISYST is going to strongly contribute to the $100 million target that we have in the next 3 to 5 years. And the reason being that it takes about 18 to 24 months for the qualification of these products at our customers. So let's say, we have the product available samples in Q4 of '26, production, let's say, Q1 or Q2 of '27, and you basically have another 18 months before it's going to ramp to production. So I don't think it's going to contribute significantly, but it will contribute some. Richard Shannon: Okay. So early on would be after that qualification period that you said takes up to 2 years then, so -- okay. Sanjeev Aggarwal: That is correct. Yes, that's right. Richard Shannon: That makes sense. Sanjeev Aggarwal: Yes. Operator: I will now turn the call back over to Sanjeev for closing remarks. Sanjeev Aggarwal: I just want to say thank you, everyone, for joining the call today, and we look forward to talking to you at the end of Q2. Thanks a lot for your time. Bye now. Operator: Ladies and gentlemen, that concludes today's conference call. Thank you for your participation. You may now disconnect.
Delaney Gembis: Good afternoon, and welcome to Aware's First Quarter FY '26 Conference Call. Joining us today are the company's CEO and President, A.J. Amlani; and CFO, David Traverse. [Operator Instructions] Before we begin today's call, I would like to remind everyone that the presentation today contains forward-looking statements that are based on current expectations of Aware's management and involve inherent risks and uncertainties that could cause actual results to differ materially from those described. Listeners should please take note of the safe harbor paragraph that is included at the end of today's press release. This paragraph emphasizes the major uncertainties and risks inherent in forward-looking statements that management will be making today. Aware wishes to caution you that there are factors that could cause actual results to differ materially from the results indicated by such statements. These risks and uncertainties are also outlined in the company's SEC filings, including its annual report on Form 10-K and quarterly reports on Form 10-Q. Any forward-looking statements should be considered in light of these factors. You are cautioned not to place undue reliance upon any forward-looking statements, which speak only as of the date made. Although it may voluntarily do so from time to time, Aware undertakes no commitment to update or revise the forward-looking statements, whether as a result of new information, future events or otherwise, except as required by applicable securities laws. Additionally, this call contains certain non-GAAP financial measures as that term is defined by the SEC and Regulation G. Non-GAAP financial measures should not be considered in isolation from or as a substitute for financial information presented in compliance with GAAP. Accordingly, Aware has provided a reconciliation of these non-GAAP financial measures to the most directly comparable GAAP measures in the company's earnings release issued today. I would like to remind everyone that this presentation will be recorded and made available for replay via a link available in the Investor Relations section of the company's website. Now I would like to turn the call over to Aware's CEO and President, A.J. Amlani. A.J.? Ajay Amlani: Thank you, Delaney, and good afternoon, everyone. First, let me start with our performance this quarter. Revenue for the first quarter was $3.4 million, which was below our expectations. Transparently, we underestimated the pace at which the market was shifting and the degree to which our existing product infrastructure and architecture needed to evolve to meet it. The rapid advancement of AI has simultaneously raised the stakes and expanded the threat surface for biometric systems, making liveness detection and identity assurance more critical than ever, while making the job of protecting against spoofing and deep fakes more demanding. We did not move fast enough to get ahead of that reality, and this quarter's results reflect that. As part of our ongoing transformation, we took deliberate steps during the quarter to further align the business with our platform-first strategy. This included removing approximately $4 million in expenses and simplifying our go-to-market operating model. These actions represent a meaningful reset of our cost structure and are designed to support a more focused, efficient organization aligned with our highest return opportunities. Stepping back, this quarter marks the next phase of our transformation. 2025 was about building the foundation, strengthening our technology, expanding certifications and deepening our understanding of customer requirements. We are now in step 2, focusing the company around a single scalable platform strategy. At the center of that strategy is the awareness platform. We are moving away from a fragmented portfolio of components and SDKs and toward a unified biometric orchestration platform designed to serve both federal government and enterprise customers at scale. We believe biometric orchestration represents a critical layer in modern identity infrastructure, enabling organizations to integrate, manage and scale biometric systems and workflows across their environments with increased efficiency and simplicity. More importantly, this is not just a product decision and is grounded in market demand and data. In our recently published market research, the state of biometric security in the age of AI fraud and a founding 98% of organizations already using biometrics said they're interested in investing in orchestration capabilities. Additionally, nearly 90% report concern over AI attacks targeting biometric systems, further illustrating why they need visibility into orchestrating biometric workflows. The report is available on our website, and I'd encourage you to read it. Taken together, this feedback reinforces that we are aligned with where the market is headed, allowing us to build with a clear understanding of the opportunity in front of us. We also believe Aware is uniquely positioned to lead in this category. Our decades of experience, our deep scientific foundation and our strong intellectual property portfolio, particularly in liveness detection, represent a durable competitive advantage. It is the critical capability that will determine winners and losers in this space, and it is where we have historically been strong and intend to lead. As part of this shift, we are prioritizing investment in the awareness platform and aligning our resources accordingly. This includes downshifting investment in certain legacy product areas, including portions of our law enforcement-focused offerings while continuing to fully support our existing customers and deliver on our commitments. At the same time, we are increasing our focus on the federal government, where our foundational capabilities have long proven and where we continue to see demand for modernization and biometric interoperability. In parallel, we have gained important insight from enterprise customers whose requirements are increasingly centered around cloud-based multi-tenant architectures. This feedback has directly shaped the design of the awareness platform, which is built to support scalable enterprise-grade deployments. The platform continues to evolve, and we are actively engaging with customers to refine capabilities and ensure a strong product market fit. We are encouraged by the feedback we are seeing and believe this positions us as we plan for a broader platform rollout later this year. Step 3, which we expect to begin in the coming quarters and accelerate into the fall is about scaling, bringing expanded platform capabilities to market, including continued advancements in liveness and providing single integration access to top-performing systems so that customers can test and evaluate performance as well as quickly deploy biometrics anywhere across their business. As we move through this transition, we expect near-term variability to continue. Our focus is not on optimizing for quarter-to-quarter results, but on building a more durable, modern and scalable business that can deliver steady, long-term growth and broader adoption of the platform. While this business did not meet our expectations this quarter, we are confident that the actions that we have taken position us more effectively for the future. A key example of continued progress is our performance in independent real-world government evaluations. During the quarter, we delivered strong results in the DHS remote identity validation rally Track 3, where our Intelligent Liveness solution demonstrated the ability to stop sophisticated attack ors while maintaining a high-quality user experience. We view results like these as more than technical milestones. They are a direct reflection of our commitment to building high assurance, production-ready technology that can operate at scale with speed and accuracy in the most demanding environments. These validations are critical prerequisites for winning large government and enterprise deployments, and they reinforce our confidence in the platform as we are continuing to build. With that, I will turn the call over to David to review our financial results in more detail. Over to you, David. David Traverse: Thank you, A.J. Let's review our financial results for the first quarter of 2026, which ended on March 31, 2026. Revenue for the quarter was $3.4 million compared to $3.6 million in the prior year period. This decrease reflects lower perpetual software license revenue and was partially offset by higher maintenance and services and other revenue. Operating expenses for the quarter increased to $7 million compared to $5.5 million in the prior year quarter. The higher expenses included onetime severance costs of $700,000 as well as higher compensation costs related to hires we made in 2025. As A.J. noted earlier, we have reduced operating expenses by $4 million on an annualized basis starting in the second quarter of 2026. And we continue to make adjustments to our operating expenses as we continue to focus on our strategic objectives. Net loss for the quarter was $3.5 million or $0.16 per diluted share compared to $1.6 million or $0.08 per diluted share in the prior year period. Adjusted EBITDA loss was $3.2 million compared to $1.5 million in the prior year period. We ended the quarter with approximately $19.6 million in cash, cash equivalents and marketable securities, and we have no debt. Our balance sheet remains strong and provides flexibility as we execute on our strategic plan. We expect the savings of the actions taken this quarter to be more visible as we align our expenses with our strategic priorities. Given the nature of our business and the transition underway, we expect quarterly variability to continue. And as a result, we continue to believe performance is best evaluated over multiple quarters. With that, I'll hand it back to A.J. for closing remarks. A.J? Ajay Amlani: Thanks, David. We have been transparent with you today about where we fell short. We underestimated both the fit and capability demands of the current market and the speed at which AI is reshaping what customers need for biometric infrastructure. That is on us, and the restructuring actions we have taken this quarter reflect genuine accountability, not a reaction to 1 quarter, but a deliberate reset towards our opportunity to lead us as a biometric orchestration platform player. We are intentionally moving away from products that will not be relevant in our new paradigm and concentrating our resources on the areas where we have a proven durable advantage. Chief among those is our liveness capability to help combat AI-powered spoofing and deep fake threats and our proven track record serving the federal government. The awareness platform is how we bring this to market at scale, giving customers a single integration point to access, evaluate and deploy best-in-class biometric capabilities across their environments. The early feedback reinforces that this is the right direction, and we remain focused on executing the rollout with discipline. We are building toward consistent long-term growth from a sharper, more defensible position. We believe the path forward is clear, and we are committed to it. That concludes our prepared remarks. We will now open the call for questions. Delaney, please provide the instructions. Delaney Gembis: Thank you, A.J. At this time, there are no questions. That completes our Q1 FY '26 broadcast. As a reminder, this presentation is recorded and made available for replay via a link available in the Investor Relations section of the company's website. Thank you, and you may now disconnect.
Operator: Welcome, and thank you for joining the SBA First Quarter 2026 Results. [Operator Instructions] With that, I'll turn the call over to Louis Friend, Vice President of Finance and Capital Markets. Please go ahead. Louis Friend: Good evening and thank you for joining us for SBA's First Quarter 2026 Earnings Conference Call. Here with me today are Brendan Cavanagh, our President and Chief Executive Officer; and Marc Montagner, our Chief Financial Officer. Some of the information we will discuss on this call is forward-looking, including, but not limited to, any guidance for 2026 and beyond. In today's press release and in our SEC filings, we detail material risks that may cause our future results to differ from our expectations. Our statements are as of today, April 29, and we have no obligation to update any forward-looking statements we may make. In addition, our comments will include non-GAAP financial measures and other key operating metrics. The reconciliation of and other information regarding these items can be found in our supplemental financial data package, which is located on the landing page of our Investor Relations website. With that, I will now turn it over to Marc to comment on the first quarter results and 2026 outlook. Marc Montagner: Thank you, Louis. Given the solid start of the year, we are increasing our full year outlook for all key metrics, including site leasing revenue, our cash flow, adjusted EBITDA, AFFO and AFFO per share as compared to our initial 2026 guidance. The primary drivers of these increases include outperformance during our first quarter, high straight-line revenue and favorable foreign currency rates. In the first quarter, we continue to operate efficiently, controlling direct costs and achieving company-wide tower cash flow margins of approximately 80%. In the U.S. we added approximately $10 million of quarterly new lease and amendment billings year-over-year. The bulk of the activity continues to come from new colocations as carrier both densify and expanded network footprint. With respect to churn, our prior outlook for both Sprint and EchoStar-related churn for the year remains unchanged. With regard to EchoStar, we continue to litigate the matter in federal court and believe strongly in our contractual rights. Internationally, we continue to see healthy demand for our infrastructure and we added approximately $4 million of quarterly new lease and amendment billings year-over-year. International churn continues to be elevated due to carrier consolidation, bankruptcy, restructurings and wireless operator's network rationalizations. We believe 2026 will be the peak year for international churn and expect improvement in our churn rate over the next several years. Moving to our balance sheet. In January, we paid off $750 million of ABS debt with our revolving credit facility, and our outlook assumes that we will use our free cash flow to pay down the current outstanding amount on our credit facility over time. Consistent with our prior outlook, we continue to assume that a $1.2 billion November ABS maturity will be refinanced in November at 5.25%. We also continue to be committed to becoming an investment-grade issuer and anticipate making our inaugural investment-grade bond issuance at some point in 2026, dependent market conditions. We ended the quarter with approximately $13 billion of total debt. Our current leverage of 6.6x net debt to adjusted EBITDA remains near historical lows and within our target range of 6 to 7x. During the first quarter, we declared and paid cash dividend of $135.2 million or $1.25 per share. And today, we announced that our Board of Directors declared our first quarter dividend of $1.25 per share, payable on June 17, 2026, to shareholders of record as of the close of business on May 22, 2026. This dividend represents an increase of approximately 13% over the dividend paid in the first quarter of 2025 and an annualized rate of approximately 41% of the midpoint of our full year AFFO guidance. I will now turn the call over to Brendan. Brendan Cavanagh: Thanks, Marc. The first quarter was another quarter of solid financial and operational results, leading both in industry AFFO per share and year-over-year growth in our dividend. Our customers around the globe remained busy deploying cutting-edge technology, expanding the footprint and deepening existing capacity to meet strong customer demand. In the U.S., our customers continue to invest in their networks, expanding 5G coverage with new spectrum, including C-band, technology upgrades such as massive MIMO antennas and growth in fixed wireless access, which continues to add strain to carrier networks. The majority of leasing activity in the quarter came from new leases as carriers focus on coverage gaps and capacity needs. Our backlogs also continued to steadily increase during the quarter, and we expect to see steady activity levels throughout the remainder of 2026. Looking farther out, we expect the drivers of organic growth to include the upper C-band auction expected in mid-2027. 6G network architecture moving towards a more balanced uplink, downlink mix and new spectrum bands currently being studied for future auction. All of these items will require new hardware at the tower sites. Today, we are starting to see the early signs of 6G with higher capacity radios and denser and more intelligent antenna configurations to send and receive growing volumes of data. Beyond towers, we continue to make progress and are very excited about the opportunities to leverage our existing portfolio to play a more meaningful role in mobile edge computing as edge workloads move closer to the end user. Macro tower compounds offer a cost-effective solution for edge compute needs, benefiting from strategically located sites with existing power, backhaul infrastructure and zoning protections. We are excited about the potential of this incremental revenue driver. Internationally, we had a solid quarter as well. We've made tremendous progress integrating the Millicom assets and are seeing healthy colocation demand for these sites, exceeding our initial lease-up projections. We are also just starting to ramp up the number of new tower builds, building just over 60 towers in Central America in the first quarter, with expectations to do much more over the coming quarters and years. Between building towers and buying the land underneath, we intend to put capital to work in Central America at risk-adjusted returns that are expected to be well above our cost of capital. We expect that our leading position in Central America will enhance our overall international portfolio, reducing relative FX exposure, diversifying our customer base and extending lease terms, all with the overarching goal of improving the durability of cash flow over the long term. Turning to capital allocation. Our dividend as a percentage of AFFO remains relatively low. This means the continuation of our shareholder-friendly remuneration policy while also preserving the flexibility to opportunistically invest in new assets in our existing markets. While we did not repurchase meaningful shares in the first quarter as we prioritize paying down our revolving credit facility with excess free cash flow, we expect share buybacks to remain an important part of our capital allocation strategy in 2026. In the first quarter, leverage remained within our recently revised target levels even with the removal of all EchoStar revenue as of January 1, and we are well positioned to be an investment-grade issuer during this year. We expect that this shift to IG will reduce our relative overall cost of debt over time while providing access to the deepest and most liquid market in the world, improving our already solid balance sheet. SBA is a truly remarkable company. We have solid financials, high-quality assets, an established track record, the best people in the industry and perhaps most importantly, a drive and culture that continually pushes us forward to maximize outcomes for all of our stakeholders. The future potential for this company remains very exciting. Before opening it up for questions, I'd like to thank our team members and customers for their trust in SBA. The company's ability to achieve our vision to be our customers' first choice provider and the industry leader in quality infrastructure solutions is only possible because of the incredible team members we have with SBA. With that, operator, we are now ready for questions. Operator: [Operator Instructions] Let's go to our first caller. Ric Prentiss: It's Ric Prentiss, Raymond James. Can you hear me? Operator: Yes, we can. Ric Prentiss: I want to ask a couple of philosophical questions. When you -- can you help us understand what are the advantages and disadvantages of being a public company versus a private company as you look at competing for assets and tenants and capital? Just kind of help us lay it out long-term view, short-term view leverage levels. Help us understand kind of how you think about public versus private. Brendan Cavanagh: Well, I mean, Ric, I think for us, it's not really about public versus private. We focus on quality of assets that we have and providing the best service possible to our customers and the best -- meet their needs where they have them. And I think whether we're a public company or a private company, that will continue to be the case. There's, of course, differences in public and private companies in the way that they're capitalized and things that they have to talk about publicly, but otherwise, the business is the same. Ric Prentiss: Okay. The other philosophical question is you guys sold the Canadian tower portfolio. As you review that Canadian sale, how do you stack up the priorities or criteria or the factors of price versus ability to close versus financing? When we look at Canada, how do you kind of think of going through the potential list of buyers and what's important? Brendan Cavanagh: Well, Ric, I mean the approach with Canada was specific to Canada. We had come to the conclusion after being there for many, many years that our ability to get to a scale that would position us in the best place possible to continue to grow that business and meet customer needs there was not going to be achievable. And so we decided to explore monetizing those assets as a better -- potential outcome for our shareholders. And based on that process that we ran, we were able to achieve a price that we felt was attractive and appropriate and so we sold the assets. And that's really no different than the way we've approached all of our markets. We've talked for the last couple of years about portfolio review that we're doing, trying to make sure that we're positioned in the best place possible in each of the markets where we operate in terms of our relative scale as well as our relative positioning to the leading carriers in those markets. And the Canada situation was no different than any other. Ric Prentiss: Okay. And then one operational question. Obviously, not meaningful stock buyback this quarter, but you said you want -- still plans to do some in '26. How should we think about leverage level, buyback, M&A opportunities and how you're kind of balancing those use of your flexibility? Brendan Cavanagh: Yes. So our leverage target, we revised late last year to 6 to 7 turns of net debt to adjusted EBITDA, and we're obviously operating right in the middle of that range. And so we start with the leverage first. We make sure that we kind of maintain leverage in that target range and then prioritize what we think provides us the best opportunity at a given point in time among buybacks. Obviously, dividends are paid out and growing on a pretty steady basis and then new asset investments, mostly new tower builds and acquisitions. And that's not really that different than the way we've approached things historically. I think from quarter-to-quarter, different opportunities come up and we spend time on those opportunities. And depending on what we're looking at, that may cause us to slow down on buybacks or possibly increase them because we don't have enough other options to invest that capital, but it's our goal to stay levered at the same level that we've targeted. And as a result, that provides us a lot of excess cash flow to invest every year. And we look at all the options available and compare them to each other at a given time. But ultimately, I expect we're going to spend money on all of those categories over time just as we've done in the past. Operator: Let's move on to our next caller. Please go ahead. State your name, organization, then question. Michael Rollins: Mike Rollins from Citi. Two topics, if I could, please. The first on the leasing environment. The release referred to, I believe it was a larger backlog in domestic leasing. Just curious if you could talk about the significance of that change in backlog versus maybe other historical first quarters and put that into perspective in terms of the type of leasing growth that you're expecting to deliver this year or in future years? And the second question, maybe just taking a step back, as you talked at some conferences, the subject of your value versus private markets has come up. I'm curious, as you talk with investors about it, what you learned about how investors are valuing you in the public market? And what are the ways that SBA is trying to respond to questions about whether it's the business or the financial outlook in a way to improve that visibility and transparency for your future financial opportunities? Brendan Cavanagh: Yes. So first, the leasing environment. Our backlog did increase from December 31 levels to March 31 levels. So that was a good sign. And I'm talking about U.S. backlog specifically. I think that's what you're questioning. And that increase, I would categorize as moderate. It wasn't extreme necessarily, but it definitely was an increase where we have more applications coming in than new business that we are executing. So it's actually replenishing faster and at a higher rate than it's being used. So that's a good sign in terms of the rest of the year and how the year should shape up in terms of leasing activity. I think from a historical standpoint, it's not necessarily an extreme outlier. And I would expect that this year's leasing activity in the U.S. will be relatively steady based on where we sit today. Obviously, things can change throughout the course of the year. But at this moment in time, based on our interactions with our customers and the way that the backlogs have grown, I would expect to see fairly steady activity levels. In terms of how we position SBA, it's a little bit of a cryptic question, Mike. But I think our focus is on trying to be as clear as we can with our public investors about all of the tremendous attributes of our business and sharing that information clearly in terms of the quality of our assets, the quality of our growth prospects and the quality of the cash flow that we produce on a very steady, consistent basis than we have, frankly, for decades. And so the more that I think we can share that message and evangelize it and then ultimately demonstrate our ability to execute, I think we'll be just fine. I can't speak to how every individual party might look at valuing this company if they're outside of the public shareholder base at this point. Operator: All right. Let's move on to our next caller, Batya Levi UBS. Batya Levi: Great. Just a follow-up on the domestic activity. With the backlog -- the moderate increase in the backlog that you're seeing, is that across the board or specific to a company? I think one of your tenants had been slowing down significantly. Do you see some uptick in their activity to maybe offset some of the slowdown you were expecting in the second half? And a question on the mobile edge compute that you think could provide a new incremental revenue opportunity. What kind of investment do you think it would require to refit your sites? And when do you think that will start to flow into the P&L both from an expense and a revenue perspective? Brendan Cavanagh: Okay. So on the domestic activity, and I don't like to necessarily share specifically what each customer of ours is doing, I will say that it was not necessarily completely even among our biggest customers in terms of backlog increases. We obviously have 1 customer where we've signed a recent agreement. And so we're starting to see an increase in activity associated with that. So that definitely has influenced it. But overall, that ebbs and flows generally over time anyway. That's what we've always seen historically. So in a given quarter, 1 quarter does not necessarily tell the story. So I would expect that we'll see all 3 of the primary customers we have in the U.S. be active at various points during the year. On the edge compute side, we are kind of excited about the potential opportunity there. It's definitely emerged as something that I think there's going to be a lot of interest in specifically for AI inference and low-latency environments that are going to be critical as AI just continues to infiltrate all of the applications that end users will eventually be using over these wireless networks. We are, ourselves, engaged actively with multiple companies exploring how we might deploy some of these edge data centers at our tower sites. And we're in the early stages of that, Batya. I would say we have some that we've already done, a very small number. And so some of that is almost trial in nature. We expect some of those to come online shortly. So we've incurred some dollars as it relates to that. I think I need to just punt a little bit on the timing for impact to the financials in any material way, but that's something that I'm sure we will be coming back to you with in future quarters because it's definitely starting to gain traction, and I think it will be a contributor down the road. Operator: [Operator Instructions] Let's move on to our next caller from Brendan Lynch from Barclays. Brendan Lynch: Just a follow-up on the edge sites. Brendan, can you hear me? Brendan Cavanagh: Yes. Brendan Lynch: Just to follow up on the edge sites. Brendan, can you give any concrete examples of how AI being deployed at a tower site is advantageous relative to in a traditional data center? Just -- I asked this because it's largely been theoretical over the past several years. So maybe it sounds like there's some momentum and things are changing there. So any additional color you can give would be helpful. Brendan Cavanagh: Yes. I mean it's hard to give you exact. I mean, really, what we're talking about and what we're seeing is some of these applications that have a much greater amount of uplink versus downlink, which affects, by the way, the general architecture of the wireless network itself is requiring in order to be effective an even lower level of latency to make those solutions as effective as possible. And as a result, the closer that you can move the compute power to the edge of the network and closer, frankly, to the user, we're finding that folks think that that's going to make a real difference to the success of some of these applications. And as a result, there's a push to move that out. I also think there's a practical issue in that, in some ways, it may be easier to have this more distributed compute sort of network through these micro data centers versus just having the bigger facilities that are more centralized in terms of just power usage and other resources that are necessary to make these things effective that to some degree, when you distribute it out on a further basis, that's actually easier to achieve in some cases. So we'll see, Brendan, but I think as long as latency is a real issue, then edge compute is going to become more and more important. Brendan Lynch: Okay. Great. That's helpful. And then maybe just another question on the land purchase in Guatemala. Can you just kind of walk through some of those details and what the cap rate was that you paid? Brendan Cavanagh: Yes. So that -- we actually talked about that, I think, on the last call because we closed on that early in the year. We were able to buy out land under most of the towers in Guatemala that we acquired as part of the Millicom acquisition. I believe the multiple we paid was in the 7-ish range. I'm looking for confirmation. I think it was about 7 turns was about what we paid for that. So pretty attractive and accretive in terms of valuation, but also helpful to us in terms of our relative positioning from a risk standpoint on all those properties and that we can control that land a lot better than, obviously, we could have before. Operator: Our next caller is Nick Del Deo from MoffettNathanson. Nicholas Del Deo: So Brendan, you noted in your prepared remarks that the demand you're seeing for the Millicom towers has exceeded your expectations. I guess based on your conversation with those customers, is it your sense that this is like an initial burst that's happening, the sites have become available that may subside? Or does it strike you something that's more sustainable? Brendan Cavanagh: Yes. I think there's definitely an initial interest because these sites were obviously in carrier-controlled hands before. And so now that they're kind of opened up more directly for colocation business than they probably were before, that's caused some inbound interest that I think is what you would normally expect when assets like this become available. But I do think that there is an opportunity to sustain the growth for an extended period of time because for one thing, there's a lot of sites. Two, we're just at the very beginning stages of having conversations with those other customers, and it's primarily 1 customer in many of these markets about the site. So based on the pent-up demand that we see and what they've expressed to us, I think we're going to see very attractive lease-up for an extended period of time. Nicholas Del Deo: Okay. Okay. Great. And then maybe one about the U.S. market. One of your peers has commented that the big carriers might be more interested in working with the larger public tower companies to undertake more new construction opportunities. I was wondering if you've observed anything similar. Brendan Cavanagh: Yes. I think there is some of that. I mean, definitely, the dialogue that we've had with the MNOs as of late has been much more constructive towards new build opportunities here in the U.S. than it has been in the past. I mean, really, if you kind of go back in history, and this isn't just SBA, but the other big tower companies as well, were primary suppliers of new builds for many, many years. And then that obviously changed dramatically. You had a lot of smaller new companies coming up and the financial terms that were being offered were not really something we found attractive, and I imagine most of our peers -- our bigger peers did not as well. And so that's why you saw the level of what we're doing dry up. But in this current environment, as we sign some of these master agreements, and we have broader reaching relationships that get established as well as the cost of capital increasing and the stability of the end provider that the carriers are dealing with, it's becoming more and more important to them that they're with somebody that they know that they can rely on to be there for the long term. And I think as a result, you're going to see more opportunity for companies like us to do more new tower builds here in the U.S. Operator: Moving on to our next caller, David Barden from New Street Research. David Barden: So I guess, Brendan, I just have to ask, like, do you -- the story that -- there were a couple of questions already about this, which is that there are multiple PE firms circling, wanting to buy SBA, take it private. TMT Finance reported that they would do with a $250 a share. And I'd question whether you and Jeff, who is still the Chairman would really want to sell. So could you kind of walk us through what would it take for this to actually happen? That would be kind of question number one. And then -- well, that's it. That's my question. Brendan Cavanagh: All right. Yes. I mean, listen, of course, I've seen, of course, these articles that have been out there for the last few weeks, and you won't be surprised to hear me say that as a matter of policy, which is our policy, we don't comment on speculation or rumors that get put out there in the press. I mean what I can say just more generally is that I've been with SBA for over 28 years. And during that entire time, we have always focused on evaluating all options and all possible routes we can take around various different things in order to act in the best interest of our shareholders. And we do that still today, and I expect we will do that in the future. And so of course, we will always evaluate any opportunity that presents itself to us. But beyond that, I mean, I can't really comment on what somebody decides to put in an article without any real basis. David Barden: Would it be fair, Brendan, to say that if there was ever a moment in the last, say, 3, 4, 5 years while this constant evaluation has been happening, where you bought back stock, that you would never sell the company for a number that's less than the number that you bought that stock at? Brendan Cavanagh: Well, I mean, I can't -- David, I can't really tell you what we would do or what we would not do in some hypothetical case. What we would do is always make a decision that we thought was best for the shareholders, whatever that was at that moment in time, and that's the decision we would make. Operator: [Operator Instructions] All right. And that looks like that's all the questions we have for today. Brendan Cavanagh: Okay. All right. Well, thank you, Marilyn, and thank you, everybody, for dialing in, and we look forward to reporting our second quarter results to you next quarter. Thanks. Operator: Thank you to our speakers and to everyone in the audience for joining us today. The call has concluded. You may now disconnect.
Operator: Ladies and gentlemen, thank you for standing by. Welcome to the Woodward, Inc. Second Quarter Fiscal Year 2026 Earnings Call. At this time I would like to inform you that this call is being recorded for rebroadcast. [Operator Instructions] Joining us today from the company are Chip Blankenship, Chairman and Chief Executive Officer; Bill Lacy, Chief Financial Officer; and Dan Provaznik, Director of Investor Relations. I would now like to turn the call over to Dan Provaznik. Daniel Provaznik: Thank you, operator. We'd like to welcome all of you to Woodward's Second Quarter Fiscal Year 2026 Earnings Call. In today's call, Chip will comment on our strategies and related markets, Bill will then discuss our financial results as outlined in our earnings release. At the end of our presentation, we will take questions. For those who have not seen today's earnings release, you can find it on our website at woodward.com. We have included some presentation materials to go along with today's call that are also accessible on our website, and a webcast of this call will be available on our website for 1 year. All references to years in this call are references to the company's fiscal year, unless otherwise stated. I would like to highlight our cautionary statement as shown on Slide 2 of the presentation materials. As always, elements of this presentation are forward looking, including our guidance and are based on our current outlook and assumptions for the global economy and our businesses more specifically. These elements can and do frequently change. Our forward-looking statements are subject to a number of risks and uncertainties surrounding those elements, including the risks we identify in our filings with the SEC. These statements are made as of today, and we do not intend to update them except as required by law. In addition, we are providing certain non-U.S. GAAP financial measures. We direct your attention to the reconciliations of non-U.S. GAAP financial measures, which are included in today's slide presentation and our earnings release. We believe this additional financial information will help in understanding our results. Now I'll turn the call over to Chip. Charles Blankenship: Thank you, Dan, and good afternoon to all who are joining our Second Quarter 2026 Earnings Call. I'm pleased to report that Woodward delivered an exceptionally strong second quarter. Our team continues to execute with focus and discipline to meet ongoing robust demand across both our Aerospace and Industrial segments. Before we get into the results, I want to take a moment to acknowledge the complex global environment we're operating in. I'd like to thank our Woodward security professionals, our leaders and members in the region for their vigilance in keeping our team members operating in the Middle East, safe. I also greatly appreciate our customers in the region for their collaboration on safety and coordination as we adjust projects that are underway there. While the safety of our team is our first priority, we're also closely monitoring broader geopolitical developments and how those might impact defense spending or airline traffic. If those impacts do occur, we expect them to be felt in fiscal 2027. Let me turn to a few financial highlights for the quarter. The second quarter marked a significant milestone for Woodward as we surpassed $1 billion in quarterly sales for the first time in our history. Sales increased 23% year-over-year reaching all-time highs in both Aerospace and Industrial. We also delivered margin expansion, including record quarterly adjusted earnings per share, up 34% from the prior year. These results reflect the strength of our end markets, the benefits of our strategic focus and the steady progress we're making in our operations. Our members' tremendous efforts and dedication to continuous improvement, not only enabled us to deliver another quarter of outperformance, but also positioned us well for the second half of the year. While we are monitoring uncertainties in the geopolitical environment, we're raising our full year sales and earnings guidance based on our second quarter results and confidence in the remainder of 2026. Turning to our markets. Here's a breakdown of what's driving the robust demand in Aerospace and Industrial and what it means to Woodward. In Aerospace, commercial aircraft build rate increases are coupled with overlapping maintenance cycles of legacy and current generation fleets. In Industrial, we see power generation demand expressed in both power gen and oil and gas end markets. These market drivers create durable growth opportunities for Woodward. Our challenge in this environment is to continue to expand our capacity and that of our supply chain in ways that are well managed and resilient. We are doing the right work to achieve these outcomes. At times, however, we've seen demand outstrip our activities like dual sourcing projects or our additional test and procurement, installation and calibration, which are 2 real examples of what constrained output for us last quarter. In Aerospace, we saw expected growth in both commercial and defense OEM along with continued strength in commercial services. Legacy services activity remains solid, and we're seeing steady increases in volume for our control systems on LEAP and GTF engines. Shop inputs remained steady and we haven't seen any decreases as a result of airlines recently announced capacity and utilization reductions. In Industrial, momentum continued across all our major markets, including oil and gas, transportation and power generation. Our ability to deliver on this robust demand reflects strong execution across the company. Moreover, our team is managing order growth, while simultaneously undertaking numerous critical projects to optimize our portfolio, strengthen our competitiveness and position Woodward for long-term growth. We remain focused on our value drivers: growth; operational excellence; and innovation. Our profitable growth pillar contains both organic and inorganic lines of effort along with selective divestitures and investments in capability, efficiency and capacity. These projects are changing the game in how we operate. They're also allowing us to focus on areas with the greatest potential to strengthen value creation. Our recent announcements reflect purposeful portfolio management decisions that our team has been working to activate over the last 1 to 2 years. In March, we closed the acquisition of Valve Research & Manufacturing, adding the premier designer and manufacturer of solenoids to the Woodward portfolio of control systems. These are critical enabling technologies for current and future aircraft with next-generation single-aisle platforms clearly in our sites. We also see opportunities related to Industrial Gas Turbine control systems, integration is progressing well as we welcome our new team members in Southeastern Florida. We also announced the sale of our Niles-based pilot controls product line to Ontic, a mutually beneficial transaction that will enable us to refocus resources. In addition, we communicated the relocation of servo valve production lines from our facility in Santa Clarita to Rockford. Rockford is our world-class servo technology design and manufacturing center where we intend to achieve the necessary quality and delivery improvements required for our customers and shareholders. In Industrial, our actions to wind down the China On-Highway product line remain on track and last-time buy volumes are reflected in our second quarter results. All of these actions streamline and strengthen our portfolio and sharpen our focus on our most attractive near- and long-term growth opportunities. These decisions allow us to serve customers better on our current book of business. And by trimming product lines that don't have a path for us to be best-in-class and by moving work to where we can be more effective and efficient, we can focus on partnering with our customers to tackle their biggest challenges with their next generation of products. Our 2 biggest construction projects, Spartanburg and Glatten are both on track. Our new facility in Spartanburg, which will be the location for Airbus A350 spoiler actuation systems is on schedule. Walls are erected and floors are being poured as we speak. We are on target to be operational in 2027 and begin deliveries the following year. Our Glatten expansion to deliver more diesel fuel injectors for data center backup power is almost complete. We have moved over 100 machines within the new hall and legacy areas to perfect flow. Our teams have demonstrated the major achievement of small batch flow and customers will see substantial capacity increases with reduced lead times. This will translate into cost productivity and better inventory turns. While I've been vocal with many analysts and investors that Woodward has the facilities and capacity to support the ongoing power generation demand and data center accelerator to that demand growth, multiple customers have recently shared potential increases to their forecasts. We are working with our customers to evaluate the opportunities and capacity options. Shifting to growth in Aero MRO, the volume on LEAP and GTF is growing quickly. We continue to increase capacity at our Rockford and Prestwick sites with Kaizen activities focused on flow and turn time. We have added test and capacity at Rockford, and we are progressing with the expansion plans for Prestwick. As we've indicated in prior earnings calls, we have a strategy to perform repair and overhaul service in-house as well as through license providers that will deliver to OEM standards. This approach allows us to optimize our capital and internal resources and support our airline customers in the way they prefer to contract for maintenance and repair. It is a well-respected open maintenance model that we have refined to suit Woodward's strategy on LEAP controls components. Last week, we announced new partnerships at MRO Americas, including new licensed repair service facility agreements with Lufthansa Technik and Air France KLM as well as a new distribution agreement with AAR. We are thrilled to be partnering with industry leaders in MRO and material support. These partnerships expand our global service network, increase capacity and give airlines flexibility in how they contract for service. Moving to our operational excellence pillar. Investments in automation continue as we execute projects as simple as increasing the closed door machining time as a total percent of the job and as complex as full assembly and test automation with vision systems and integrated inspection. We're also introducing repeat automation projects to additional sites, leveraging the automation lab in our Rock Cut facility. This lab was recently recognized by the Manufacturing Leadership Council as leading the way in manufacturing excellence. I see firsthand the results of continuous improvement nearly every day. I was recently visiting the industrial SOGAV value stream in our Fort Collins site and was impressed with an automated cell that allows one operator to manage 3 machines and turn a production bottleneck and staffing challenge into a high-speed machining cell that can outrun our current demand forecast. We need both capacity and productivity to achieve our goals in the long term. To us, it's equally exciting to create value for customers and for shareholders. As indicated by the list of projects I described above, our team is managing a high level of activity across the company, while at the same time, improving delivery to our customers and our financial results. We continue to invest in our people and our talent pipeline to make sure we have the engineering, manufacturing, business support and leadership needed to enable our growth trajectory. For example, we recently launched a rotational program to develop the next generation of Woodward leaders with the first cohort starting in June, yet another step to build a high-performing organization designed for the future. Turning to innovation. Innovation has always been and will continue to be a major competitive differentiator for Woodward. As I said last quarter, we're turning from pure technology development to more technology demonstration activities with our Aerospace customers. We have entered into collaborative agreements with many of our current customers to work together on trade studies and demonstration programs. This is an exciting time to be an innovator with a track record of industrialization. We will speak more about this trend at Investor Day late this calendar year, but you will see Aerospace R&D expenses beginning to tick up this year and more so in the years that follow as future aircraft timelines firm up. In Industrial, one focus is on a new actuation platform to provide precise fuel and error control on reciprocating engines that will deliver more customer value and is designed for a more efficient automated production system. It is more compact in size and produces a broader torque range than prior models, which allows us to simplify the product portfolio and use this platform in many applications. The product will enter service in 2027. Our priorities remain clear as we head into the second half of the year, meet OEM demand growth, deliver world-class service across our installed base, including legacy Aerospace, LEAP, GTF and Industrial Gas Turbine Systems and demonstrate customer value on key technologies to position Woodward for increased content on next-generation single-aisle aircraft. We are entering the second half of the year from a position of strength, and we'll continue to invest with discipline and focus to deliver long-term shareholder value. With that, I'll turn it over to Bill to take you through the financials in more detail. Over to you, Bill. William Lacey: Thank you, Chip, and good evening, everyone. As Chip mentioned, Q2 was a strong quarter. Quarterly net sales exceeded $1 billion for the first time in Woodward's history coming in at $1.1 billion in the second quarter of 2026, an increase of 23%. The significant growth reflects strong demand and increased output in both Aerospace and Industrial. We achieved earnings per share in the second quarter of 2026 of $2.19 compared to $1.78. Adjusted earnings per share were $2.27 compared to $1.69. We generated $38 million of free cash flow in the second quarter. At the segment level, Aerospace segment sales for the second quarter of 2026, were $703 million, an increase of 25%. The strong growth was primarily driven by Commercial Aerospace. Commercial Services increased 36%, reflecting higher repair volume to support the continued high utilization of legacy aircraft as well as increased LEAP and GTF activity. In addition, spare LRU sales growth was strong in the quarter, with volume consistent with the previous 2 quarters. Commercial OEM sales were up 30% and we believe destocking is largely behind us as their output is now more aligned with current airframers build rate. Defense OEM sales grew 9%, primarily due to increased JDAM pricing that took effect in the fourth quarter of 2025, and Defense Services grew 8%. Second quarter Aerospace segment earnings were $158 million or 22.5% of segment sales compared to $125 million or 22.2% of segment sales. While the strength in Commercial Services, higher commercial OEM volumes and solid price realization drove meaningful margin expansion, this was largely offset by planned strategic investments to support future growth and inflationary pressures. This reduced the Aerospace flow-through in the quarter, resulting in a net margin increase of 30 basis points. These strategic investments included enhancements to our manufacturing capabilities to deliver the content on current platforms, incremental R&D tied to early-stage efforts to compete for the next single-aisle aircraft platform and an enterprise-wide ERP upgrade. While these initiatives are impacting margins, they are critical to positioning the company for sustained long-term growth, and we expect these investments to continue. The flow-through in the full year 2026 Aerospace guide is expected to be at a targeted rate of approximately 30% to 35%. Turning to Industrial. Industrial segment sales for the second quarter were $387 million, an increase of 20%. Core Industrial sales, which exclude the impact of China On-Highway, increased 19% in the quarter, driven by higher volume, price and favorable foreign currency impacts. Marine Transportation sales were strong, increasing 34%, reflecting higher shipyard output and services activity. Oil and gas sales grew 18%, driven by higher volume, primarily related to greater midstream and downstream gas investment. Power Generation sales increased 7%. Excluding the impact of the prior year combustion business divestiture, Power Generation sales grew in the high teens on a percentage basis. This was driven by increasing data center demand for both base and backup power generation. Outside of our core Industrial business, China On-Highway sales were $29 million in the quarter. We expect approximately $30 million of sales in the third quarter and minimal sales in the fourth quarter. Industrial segment earnings for the second quarter of 2026 were $66 million or 17% of segment sales compared to $46 million or 14.3% of segment sales. Within our core Industrial business, margins were approximately flat at 14.7% of Core industrial sales, as strong price realization and higher sales volume were partially offset by inflation. In addition, margins were negatively impacted in the quarter due to a reserve for a product performance claim. Excluding the reserve, Core Industrial margins would have been in line with Q1. The China On-Highway business added an additional 230 basis points of margin growth in the quarter. Nonsegment expenses were $45 million for the second quarter of 2026 compared to $27 million. Adjusted nonsegment expenses in the second quarter of 2026 were $38 million compared to $34 million. At the consolidated Woodward level, net cash provided by operating activities for the first half of 2026 was $205 million compared to $112 million, largely driven by higher earnings. Capital expenditures totaled $97 million for the first half of 2026. We continue to expect a meaningful increase in capital expenditures over the next 2 quarters consistent with our guidance for the full year. As Chip mentioned, construction of the Spartanburg facility to support future A350 production is progressing as planned. We remain on track to finish the building over the next few quarters and are beginning to purchase production equipment with the site expected to become operational in 2027. In addition, we continue to make strategic investments to support growth related to current platforms, including automation, preparing for increased LEAP and GTF service activity, our ERP upgrade and product line moves. We generated $109 million of free cash flow in the first half of 2026 compared to $60 million, driven primarily by higher earnings, partially offset by higher capital expenditures. As of March 31, 2026, debt leverage was 1.4x EBITDA. We continue to allocate capital according to our priorities, supporting organic growth, selectively pursuing strategic M&A opportunities and returning capital to shareholders through dividends and share repurchases. Regarding strategic M&A, we recently completed the acquisition of Valve Research & Manufacturing. Consistent with our strategy of pursuing targeted, high return opportunities that enhance our capabilities and improve our position to compete for the next single-aisle aircraft. In addition, in line with our portfolio optimization efforts, we recently announced the divestiture of our pilot controls product line, which we expect to close by the end of the year. We are building a stronger, more focused Woodward as we invest in high-growth opportunities and expand in the right areas to position Woodward to create additional value for shareholders. In the first half of 2026, we returned over $355 million to stockholders through share repurchases and $36 million in dividends. Our strong balance sheet provides flexibility to move decisively as compelling opportunities emerge. Lastly, our fiscal 2026 guidance still assumes the return of between $650 million and $700 million through dividends and share repurchases. Turning to our 2026 guidance. Based on our strong second quarter performance and confidence in the second half outlook, we are raising our 2026 sales and earnings guidance. For 2026, we now expect the following: Aerospace sales growth between 21% and 24% with margins increasing to be between 23% and 23.5%; Industrial sales growth between 18% and 20%, with margins increasing to be between 18% and 18.5%. We now expect total Woodward sales growth between 20% and 23%, and adjusted EPS between $9.15 and $9.45. Free cash flow is still expected to be between $300 million and $350 million, and capital expenditures are still expected to be approximately $290 million. We expect to continue to maintain higher levels of inventory than previously anticipated as we prioritize to meet customer demand, while we strive for better alignment for the end-to-end supply chain. We have a number of inventory initiatives underway, which should drive improved free cash flow generation in 2027. We now expect our average diluted shares outstanding to be approximately 61.5 million Adjusted effective tax rate guidance is unchanged. This concludes our prepared remarks on the business and results for the second quarter of fiscal year 2026. Operator, we are now ready to open the call to questions. Operator: [Operator Instructions] And our first question comes from the line of Scott Mikus with Melius Research. Scott Mikus: On a sequential basis, your commercial aftermarket sales were up 12%. In the opening remarks, I think it was mentioned that the LRU volumes were roughly consistent with the prior 2 quarters. Since the quarter has ended, have you seen a drop-off in orders for spare LRUs. And are you concerned that if there is a broader slowdown in the aftermarket the amount of LRUs in the field could result in destocking pressures in the back half of this year or early in '27? William Lacey: Yes, Scott. Let me jump on the front part of that. And then Chip, maybe the second part. But as we head into third quarter, and as we've mentioned, these orders for these spare LRUs are rather short cycle, so we don't have a ton of visibility. But we're comfortable that sequentially, Q3 spare LRUs are in line with what we've seen in the first 2 quarters. And again, from a financial forecasting standpoint, tough to say what Q4 looks like currently. But Chip, I don't know if you want to... Charles Blankenship: Yes, we've certainly seen some airline signaling that they're removing a little bit of capacity. They're parking some planes. But none of the parking activity exceeds any of the forecasts that were already in play. And we haven't seen any drop-off in inputs to our shop for -- from LRUs for repair. And we haven't seen any slowdown in the order rate for spare LRUs. And so there's always assumptions in the forecast, but we haven't seen any indications in our direct connections with customers to indicate that we're going to see a slowdown inside our fiscal year. That being said though, we are obviously monitoring the situation at the higher level, geopolitical and macroeconomic. And as far as what that means for FY '27, we'll all have to ride a little further along to see where that goes. Scott Mikus: Okay. And then a lot of energy infrastructure in the Middle East has been damaged in the ongoing conflict and it will need to be rebuilt. Just curious how you're thinking about that opportunity for your Industrial business are you receiving RFPs from your customers to support that reconstruction, fully understanding that, that probably won't hit the P&L for next year, though? Charles Blankenship: I think we're a little bit further down in the supply chain to be seeing initial outreach on that for anything except service activity. So we have some ongoing projects, and a number of them are back up and running as far as service for our customers, be it on the valve type equipment or on the control -- electronic control systems for gas turbines and power plants. So that activity is ongoing. Some of the things that need to be rebuilt as the customers and operators reach out to EPC type companies that will flow down to us and we haven't seen anything along those lines yet. But there'll probably be some opportunity. Operator: And our next question comes from the line of Sheila Kahyaoglu with Jefferies. Sheila Kahyaoglu: We could focus on margins for both Aerospace and Industrial. So first on Aerospace, just first half margins just under 23% with fiscal Q2 at 22.5%, yet you raised the full year to 23.5% at the high end. Can you just talk about what drives that second half margin expansion? What are the puts and takes? Charles Blankenship: Yes, I'll just let Bill start there, and I'll jump in at the end. William Lacey: Yes. So Sheila, we do continue to see good growth in -- on the services side of the business. And obviously, that helps our margin rates, while we continue to see the volume growth, which creates leverage. And then as we've been talking about Sheila, we've been investing and working hard on our lean activity and that work is paying off as we see the shipments increase. So those are some of the key things we continue to have good pricing in Aero and are managing our inflation well. So our -- so we're seeing that positive flow through to our bottom line as well. Sheila Kahyaoglu: Okay. And then maybe on Industrial core margins, they stepped down almost 300 bps. William Lacey: Yes. Sorry, Sheila, good you asked that. Sorry, in Q2, we did have a reserve that we put up and that impacted Q2 margins for Core Industrial. If you back that out, the margin rates are on the bottom line with what we saw in Q1, and we expect the second half to be more aligned to that -- what we saw in Q1. And operationally, what we saw in Q2, we expect that to continue in the second half. Sheila Kahyaoglu: Yes. Maybe just -- sorry, can you expand on what that product reserve was? What drove that? How big was it? Charles Blankenship: Yes. So it's simply a matter of a long-standing product development program with the results that we see a little bit differently than our customer sees it. And that's about all we'll able to share at this time, it's a matter that's being undertaken to the legal process. So we're not going to comment much more on it. Operator: And our next question comes from the line of Noah Poponak with Goldman Sachs. Noah Poponak: Chip, everyone is trying to figure out what's going to happen with Aerospace aftermarket. I guess as you described not really seeing much yet. I'd be curious to just hear given your experience in the market over a long time, like why do you think you haven't seen anything yet? Why do you think the airlines are not responding that much yet? And when you talk about the possibility of there eventually being a response and seeing that in your fiscal '27? If it were to happen, what would make it happen? What's the threshold? Is it a higher fuel price? Is it the duration of fuel price, just what are your customers telling you? And then is there any way to frame or think about Woodward relative to the market because you have so much more content on newer products versus older product, if capacity is trimmed or things are retired out of the back end of the fleet, is it safe to assume you see much less of that than the average player in the space? Charles Blankenship: Okay, Noah, I may ask you for a repeat of the second half of the questioning, but I'll jump on the first half. I think you used the word duration, and I think that's the main question that is unanswered at this time in terms of what happens to fuel prices. My experience in situations like this is the reason things haven't happened very quickly from a negative standpoint is that there's still a strong traffic demand out there. And then the airlines that have decided to try to pass along price to the airline customer that has not resulted in destruction of demand. And so I think everyone is kind of a little bit walking on egg shells, trying to see how much of this cost impact that airlines are seeing from oil prices can be passed on from passengers about reducing load factors on flights. They've taken some very smart decisions to take out some lower load factor mid-day, mid-week city payers, I think, and put some higher fuel-burning aircraft to the site. So all those are sort of prudent actions to take a look and see what's going to happen next from a traffic standpoint. Demand is still strong. So I think people are continuing as they were with their maintenance programs. And if the duration and the price of fuel continues to climb, then load factor breakeven points between city payers is going to cause more planes to be parked and maybe there'll be some destruction of demand if prices go up too much. So none of those if statements that I said have happened yet. So I think it's business as usual, a little bit on the maintenance side. Some of our peers are -- may seem like they're being a little more cautious with their quarterly results announcements. But if I remind everybody, we're halfway through our year. So we've got a little bit more in the rearview mirror already accomplished on the books. We've got a little less in front of us to ride on this duration question than our peers do. So hopefully, that sorts that out. Second question, I think you asked was about what's specific for Woodward having higher content on the current generation of narrow-body, the higher technology fleet with better fuel consumption performance. I think from our standpoint, legacy narrow-body repair business continues to grow much to my -- a little bit of a surprise, and we didn't forecast it growing quite as much year-over-year or quarter-to-quarter as it did in Q2. So things are still looking good on legacy utilization front. But if we come to an oil shock that's even more and longer duration than we see right now. If the newer technology fleet gets utilized much more than the older technology fleet for Woodward, it happens to be good math. It's not good for the whole industry. We don't wish that on the industry. But if that does happen, we have a little bit of a hedge there because we have a faster growing, higher content position on that fleet. Noah Poponak: Okay. That is super helpful. I appreciate all that. And then just a follow-up on the Aerospace margin. Would it be possible to quantify the incremental investments you made in the quarter, just so we can all sort of keep tracking the underlying trend you've been experiencing there? And then on the pricing front, you guys have been providing kind of total company and then directional within the aftermarket pricing any update you could provide on what happened there in the quarter? William Lacey: On the first piece, Noah, I -- what I'll say is we're focused on making sure that we've got the systems, the processes, in place for us to continue to execute on our key imperatives. We are going to be diligent and thoughtful about how we increase that investment, not getting too ahead of the volume growth, but not being so far back that we can't execute on it. And so as you can see, there's still margin expansion that we're looking for in the results based off of our guide. And so I think we're being responsible and reasonable with how we are increasing the spend as it relates to those strategic projects. Charles Blankenship: Yes. And I'll just jump in and say that Bill had alluded to this in some of his remarks, but we have increased our R&D spend a little bit in Aerospace. Much of that is aimed at the preparation, the technology demonstration projects. We're working with our customers. We've invested in manufacturing engineering to accelerate our automation journey, which also feeds how we will industrialize for the next single-aisle aircraft components that we win. And as well, we've been building that plant in South Carolina and we are starting to staff up there some of our very key positions like plant leader and value stream leaders and some advanced manufacturing engineers. And so some of these our longer-term investments, some of the automation investments will provide returns sooner. But some of the staffing up that we're doing and the R&D expenses are really aimed towards the next generation. William Lacey: And then Noah, I think you had a question on price, if that's right. And the price in the quarter was around 6.5%, 7% and that's roughly what we projected to be for the total year. Aero being a little bit stronger on the price side than Industrial. Operator: And our next question comes from the line of Gavin Parsons with UBS. Gavin Parsons: What drove the Aero revenue guidance raise kind of between the subsegments? And then within aftermarket, how much of that is kind of the spares provisioning drop in versus repair and overhaul work? Charles Blankenship: Without getting quantitative about it, I'd say that the commercial services is really the largest piece of the increased revenue gain. We had forecast the OEM to be growing substantially and maybe hedge it back a little bit in terms of how we were thinking about it based on what the aircraft and engine OEMs would actually come through with orders for and sort of meter us to. But it's been a little bit more on the demand side from the OEM. So it's driven a little bit of the gain and the forecast guide, but Commercial Services kind of looking in the rearview mirror and thinking that, that will sustain at least through 3Q, as Bill said, with the higher LRU orders. But the repair is strong across the board in commercial services, wide-body, legacy narrow-body, regional and the LEAP, GTF, all contributing to revenue and earnings growth. William Lacey: And Gavin, just to expand on that again. Obviously, the raise and guide was partly recognized in the strong Q2 performance, but also second half performance. Commercial OEM, defense OEM on the Industrial side, most of that OEM, and we see, especially in the fourth quarter, OEM being growing nicely, and that's a big part of the raise for the second half. And obviously, that will -- that has a different kind of flow-through pattern than the services that we saw in the second quarter and in the first quarter. Gavin Parsons: Okay. That's very helpful. And then, Chip, you pointed out that airlines are maybe sidelining some of the least fuel-efficient aircraft. I think over the long run, you guys have talked about flight hours as being the key metric driving your aftermarket growth. But if it's those older, less fuel-efficient aircraft being sidelined, is the risk going forward more about accelerated permanent retirements, delayed shop visits or maybe cut shop visit scope? Charles Blankenship: Just to clarify, are you talking about for the legacy fleet or in general? Gavin Parsons: In general, is the risk more about shop visits or retirements and less about flight hours? Charles Blankenship: Yes. I think for the legacy retirement -- for the legacy fleet, certainly, the risk is about retirement and part out and not getting another shop visit on our LRU, whether it's a V2500 fuel control or CFM56-5 HMU. And so that risk though, is like the end-of-life risk for the oldest part of that fleet. They still pick a number of 40% of airplanes with engines and LRUs that only seen one shop visit and are quite capable assets. The airlines are going to continue to fly. So flight hours is still going to correlate with how that equipment comes off and comes in for shop visits with us. And -- but the sort of end of life for the oldest A320s from our -- CEOs -- from our standpoint, that's going to happen based on a combination of traffic demand, price of fuel and OEM delivery rates, and we'll monitor that closely. Operator: And our next question comes from the line of Pete Skibitski with Alembic Global. Peter Skibitski: Great quarter. Yes. I just want to circle back to Sheila's question on Industrial margin. I just want to think about the right way to think about it going forward. If we exclude the provision in the second quarter, it sounds like you're maybe a tad over 17% on Core Industrial margin in the first half. And with the new guide, you get a little bit of a boost in the third quarter from China On-Highway, but then nothing in the fourth quarter, but it seems like you'd still be exiting around 18% or so in the fourth quarter. So it just seems like a lot of nice momentum in core industrial margin year-over-year. And so is the right way to think about it, the 18%, 18.5% is a reasonable range to think about for 2027 or maybe 17.5% in the low end? Or is there any logic wrong there? William Lacey: Yes. We're -- just I'm real happy about 2026, Pete, and where that is. And I think how you laid it out is right. We continue to work hard on all our margin and productivity margin expansion and operational excellence initiatives. And we'll be talking to you real soon about how that all comes to play. But I think if Randy was here, he says he's not -- he would say he's not planning on giving up any ground, but we'll see how it all comes out in the mix as we start talking about '27. Peter Skibitski: Okay. Fair enough. Just one follow-up. On the pilot controls product line sale, is it fair to conclude that this product line has less aftermarket than the engine portion of aerospace. And so I'm just wondering if the divestiture is sort of margin accretive for you in Aerospace? And how much revenue is involved in that product line? Charles Blankenship: Well, I don't think we'll share the revenue specifics there, but it's not super significant. It is accretive to carve that out for us. That's one of the criteria we would use to examine a divestiture opportunity. A while back in our strategic review process, we just identified this as an area where we would have to put a lot more resources into this to become a leader in the industry in this area. Where we are a leader is in some of the enabling technology components and subsystems that go into pilot controls like throttle quadrants. So some of the precise motor controls and motors themselves as well as sensors and the LVDTs and hall effect sensors and things like that, things that we can bring to the party, and we will remain a supplier of those components to the company that we sold the main business line too. So we'll retrench into the places where we're the most competitive and have the most value add for customers and pass that along. Now it does have a good amount of service business to it, which made it kind of an attractive product line to sell for the buyer. So -- but still, from our standpoint, it was -- it's accretive to let it go. Peter Skibitski: Okay. So Niles will remain open. There are more production there than the pilot controls, that's right? Charles Blankenship: Yes. This was a relatively small value stream in the Niles facility. Operator: And our next question comes from the line of David Strauss with Wells Fargo. David Strauss: Chip, I think if I caught it correctly in your prepared remarks, you talked about additional step up in interest from your IGT customers and the potential that you might be looking at some sort of capacity expansion to be able to handle that interest. Did I get that right? And maybe if you could expand on that? Charles Blankenship: Yes, not just our IGT customers. So gas turbine, reciprocating engines, diesel-powered, natural gas-powered backup prime power applications. So it's like across the board, multiple OEMs in each of those categories over the last really a month or so have come to us and said, we want some capacity studies for these kinds of forecast between now and 2030 plus. And so we've been sort of digesting those requests. And it's not one customer. It's not one technology, but it's largely driven by data center caused power generation demand. And so we're looking to respond to these customers. But the reason I wanted to lay that out and what may seem like an early way in this earnings call is that as I've been meeting with investors and analysts, I've really kind of been firm that based on everything I see from our customers, we have the footprint, and we have the ability through Kaizen and other continuous improvement, elimination of waste, lead time reductions, things like that, we could make our way to solve for the capacity that's needed. But this new later breaking information says that maybe we need to consider capacity increases. David Strauss: Okay. I guess we'll check back in on that later, where you come out. If I missed it, I apologize. Did you talk about where LEAP, GTF aftermarket revenue volumes, however you quantify, are relative to legacy at this point and where -- if the crossover point has changed? Charles Blankenship: Yes. So I didn't mention it in the prepared remarks, but thanks for the question because it's one that we talk about quite a bit. What's really interesting to me and our team is that as we grow LEAP in a substantial way, the legacy narrow-body fleet continues to provide inputs to our shop, and we're like, okay, it's kind of growing at a good clip still for the legacy fuel control units, especially. I'm not changing the forecast right now. We said sort of end of '26, sometime in '27. We still think that's a reasonable assumption. The things that could change -- pull that in, the fuel price shock that we talked about could reduce the rate of input for the legacy. And that would be like a not so interesting way to have the crossover be pulled in. We like it to go further to the right. The other thing I would say, just to give a little bit more color to what we're talking about is that right now, this quarter and even last quarter, the total amount of service revenue is about the same for LEAP, GTF compared to the legacy narrow-body, if you include the spare LRU items. So from a repair standpoint is the crossover that we keep talking about looking for is a few quarters out in the future. But I just wanted to share that we're already kind of in the very similar numbers from LEAP, GTF compared to V2500 and CFM-5, if you include all the different kinds of service products that we offer. David Strauss: That's great. You predicted my next question or follow-up question. Operator: And our next question comes from the line of Ken Herbert with RBC Capital Markets. Kenneth Herbert: I just wanted to maybe follow up on the free cash flow guide. It didn't change with the sales and EBIT increases. Is that just reflecting as you continue to talk about higher working capital spend or working capital as a percent of sales? Is that the right way to think about it? Or is there anything else impacting on the free cash flow side? William Lacey: No, Ken, I think that is the right way to think about it. Simply stated. Kenneth Herbert: Okay. Okay. That's helpful. And I wanted to follow up on the announcements with LHT and Air France KLM. How quickly will those scale as sort of third-party MRO providers? And should we expect maybe a movement of -- a block movement of spare parts or inventory at some point in the next few quarters as they ramp or maybe as part of these agreements? Charles Blankenship: Yes. So the rate-limiting step for any of our licensed service providers is going to be getting test stands in procured, installed and calibrated. So that's 9 to 12-plus months away depending on where each of the folks are in the procurement cycle of that. So it's definitely not a 2026 kind of thing, and we'll give some color to how we expect the standing up of these partner providers to affect our Service business is along with our Investor Day information late in the calendar year. Operator: And our next question comes from the line of Christopher Glynn with Oppenheimer. Christopher Glynn: So I was curious if you've -- curious, have you guys evolved any like different angles on visibility to the China LRU markets? Charles Blankenship: As far as new angles, I would just like the easy answer is no on that. But what I would say is that we're starting to see just like more across the board as expected, based on airplane deliveries, customers ordering spare LRUs to provision for their fleet uninterrupted operations and the maintenance cycles that are coming. So I think we can kind of take the China moniker off the table for now, and they're ordering kind of like you'd expect them to order based on how many planes they have. Christopher Glynn: Okay. So maybe a little bit of a tempest in the teapot discussion for the past couple of quarters, sounds like. And then curious on the L'Orange model, don't recall like really discussing if they have much military in there. I suspect they do. I don't think your guided missile destroyer program was L'Orange, but rather your Power Gen business. But I just wanted to check in on that the military business pipeline overall for industrial and as it resides or doesn't within L'Orange? Charles Blankenship: Yes. So I would consider L'Orange to be 99-point something commercial as far as I know, I don't want to say 100% here, but it's just -- it's not something we think about or consider for what our diesel fuel system business contributes to. As far as the destroyer DDG class that are powered by gas turbines, both for propulsion as well as for onboard Power Gen, that's really the business that we participate in. It's the electronic control systems for controlling the power from the gas turbine as well as controlling the propulsion systems. Operator: And our next question comes from the line of Louis Raffetto with Wolfe Research. Louis Raffetto: Maybe, Bill, just on the China On-Highway. I know you said $30 million of sales in 3Q. Should we expect to see similar levels of profitability that we saw in the last 2 quarters? William Lacey: For Q3, that's correct. Obviously, there is going to be a restructuring charge that flows through. So operationally, Louis, correct, but I do want to make sure I highlight that there is going to be a restructuring cost that comes off. That will be separate as we go through the quarter. Louis Raffetto: Okay. Great. And then, Chip, maybe just to come back to what you just mentioned about the LRUs. So obviously, as we get to your fiscal fourth quarter, you're going to be coming up on a tough comp. But what I'm trying to understand, based on what you just said is are the LRU sales that you saw this quarter? Are they not China? And it's -- you're kind of saying don't think of this as a separate bucket anymore and everything is kind of one big bucket nowadays? Or is there still sort of a China bucket out there that we need to be mindful of? Charles Blankenship: I'm saying the former, which is there's really not a China bucket anymore. That was when we had our first step-up in LRU -- unforecasted LRU sales within a quarter, that was due to a little bit of a surprise order stream starting from China. That lasted a couple of quarters. And then as I kind of was alluding to, the rest of the orders inside the quarter are more spread out to European and U.S. and Latin America and in every other airline that's ordering aircraft and provisioning to support their fleet. So I would put the China bucket behind us for now and kind of how we see the rest of the year shaping up. We -- as Bill said, we have -- we largely have the LRU orders in hand for 3Q. We have good visibility to 3Q, and it is a good mix of customers. So less risk of being a nonrepeat kind of thing. But our visibility into 4Q is what we would normally see at this point, not fully clear in terms of who's going to order and how much it's going to be. But we have enough confidence in all the different levers of our OE and Service businesses in both segments to say we're confident in what we've put up for our guide. Operator: And our final question comes from the line of Gautam Khanna with TD Cowen. Gautam Khanna: I was curious, just, could you quantify what the guidance revision was for just China OH relative to the prior outlook? William Lacey: What the guidance revision was for... Charles Blankenship: We really didn't take that. William Lacey: Yes. Yes, Gautam. Not much. I mean I think the guide, the upper end to the lower end considered what we're seeing in there for China OH. So I think at the beginning of the year, we said it was going to be around $60 million, and where we've ended up with what we've had and the last time buy, it will probably be somewhere around $90 million in total. So that was sort of within the range of our guide. And so we -- so anyway, that's how we handled it. Gautam Khanna: Okay. And in terms of profit variance, when you had the $60 million, what was the expected profit? And then if it's $90 million what's the new expected profit? William Lacey: Yes. So we talked a bit about at certain levels, it starts to go beyond breakeven and then it flows through quickly through that point. We are at that point, and so that's what sort of generated. I think in the comments, we said it was worth about 230 basis points this quarter to the overall industrial earnings increase. Gautam Khanna: Okay. I was just curious what the revision is related to that. We can take it offline. Charles Blankenship: Yes, I would just emphasize, Gautam, that the China OH wasn't really driving the revision to guidance. It's more the success we've had in the first half with commercial Aero services and continued strong OE in both segments. Gautam Khanna: Yes. No, I got you. That's clear too. The -- to Pete's earlier question on industrial underlying margins kind of over time, how far along are you guys in that process of kind of looking at which SKUs to stock, which ones to retire kind of the operational turnaround within the Industrial business. How far along are you in that journey? And do you have any ballpark sense for where margins ultimately can get to in that segment? Charles Blankenship: Yes. So far, I've always answered that question saying we're in the early innings. But I feel, honestly, like we're in the middle innings in the industrial portfolio rationalization, turnaround, I use the word turnaround. I've not really use that, but I think it's an apt description. That team is just really pulled together and made some difficult decisions. You see the China On-Highway exit that we're doing, that was a difficult call. Some of the product lines we've exited were difficult calls around small engine and other things like that. But what we're doing now and what you can see now is that we are more -- introducing a more standard disciplined product management approach to the business. And so I talked about this actuator in my prepared remarks that is going to enter into service in 2027 that's now in the test phase, and we're industrializing that's going to replace a pretty complicated portfolio of actuation for reciprocating engines. So it's not like we looked at the portfolio and said, we don't want to be in that business anymore. We said there's a better way to serve customers here that's going to be more efficient in our factory. It's going to be more resilient in the supply chain and then we're going to -- and the customers are going to get more value from a broader torque range and lower form factor. And so that's the kind of work that's going on in Industrial right now. So that's why I think it's the middle innings because we've kind of evolved from -- these are the things we want to stop and these are the things we want to keep doing. And now we're just refining the approach within the places we want to compete. William Lacey: And Chip, if I can add to that, Gautam, as you're talking about where can it go? As Chip has spoken about previously is we're focused heavily on recouping our service franchise there. And we've got to see -- we have a plan. We got to see what's the art of the possible is and how we can get there. But I think that will -- if we're in the middle innings, we've got half game to call on the productivity, the other piece of margin expansion will be how we can grow that service franchise. And I think we can talk more about that when we get to Investor Day and what's the art of the possible for industrial margin rates. Operator: And Mr. Blankenship , there are no further questions at this time. I will now turn the conference back to you. Charles Blankenship: Thank you. I'd just like to thank everybody for joining our 2Q call and look forward to talking to you again soon. Operator: And ladies and gentlemen, that concludes our conference call today. A rebroadcast will be available at the company's website, www.woodward.com for 1 year. We thank you for your participation in today's conference call. You may now disconnect.
Operator: Ladies and gentlemen, thank you for standing by. Welcome to the McGrath RentCorp First Quarter 2026 Earnings Call. [Operator Instructions] This conference is being recorded today, Wednesday, April 29, 2026. Before we begin, note that the matters the company management will be discussing today that are not statements of historical fact are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, including statements relating to the company's expectations, strategies, prospects, backlog or targets. These forward-looking statements are not guarantees of future performance and involve significant risks and uncertainties that could cause our actual results to differ materially from those projected. Important factors that could cause actual results to differ materially from the company's expectations are disclosed under the Risk Factors in the company's Form 10-K and other SEC filings. Forward-looking statements are made only as of the date hereof, except as otherwise required by law, we assume no obligation to update any forward-looking statements. In addition to the press release issued today, the company also filed with the SEC the earnings release on Form 8-K and its Form 10-Q for the quarter ended March 31, 2026. Speaking today will be Phil Hawkins, Chief Executive Officer; and Keith Pratt, Chief Financial Officer. I will now turn the call over to Mr. Hawkins. Go ahead, sir. Philip Hawkins: Thank you, Stephanie. Good afternoon, everyone, and thank you for joining us today from McGrath RentCorp's First Quarter 2026 Earnings Call. I'm pleased to report on our performance over the past quarter and to provide an update on our outlook for this year. I will also address current economic conditions and the possible effects of the Middle East conflict on the business. First, our quarterly results. Total company revenues increased 2% and adjusted EBITDA decreased 1% compared to the prior year first quarter. This performance was driven by continued progress from our modular strategic growth initiatives and strength in TRS with too. We delivered rental revenue growth in each of our businesses despite some challenging market conditions. Higher equipment preparation expenses and lower sales at Enviroplex were headwinds to profitability for the quarter. Yet we still managed to deliver adjusted EBITDA essentially flat with last year. At Mobile Modular, rental revenues grew 4%. Our commercial market segments were the primary drivers of our growth. These included government, manufacturing, health care and data center projects. Education demand levels remained steady. As we prepared existing units to meet demand, our operating expenses increased. These higher costs supported increased shipments in the first quarter and beyond. Architecture Billings Index, or ABI, and other macro indicators of construction-related demand remains subdued. Despite this, our quote and booking levels were higher than a year ago with our geographic expansion efforts and additional sales coverage contributing to these positive trends. Our services expansion initiatives, Mobile Modular Plus and site-related services saw solid increases in the quarter, helping to offset lower utilization. Modular equipment sales were lower in the quarter, any fluctuations. Turning to our portable storage business. rental revenues increased slightly with steady demand, while higher costs compressed profitability for the quarter. At TRS, rental revenues continued their recent growth trajectory and were up 13%. Demand continued to be strong across the broad spectrum of our equipment, and we benefited from project supporting build-out of new data centers. Overall, I'm pleased with our start to the year. Turning to the broader macro environment. Recent developments in the Middle East had no material impact in the first quarter. This could change as the year progresses and may increase uncertainty or result in customers delaying projects. Additionally, higher energy prices for an extended period may start to impact operating costs. As always, we remain vigilant and we'll be ready to make adjustments as needed. So remains well positioned, improved first quarter rental revenues across all divisions despite some challenging market demand conditions. Our strong balance sheet gives us the flexibility to fund organic growth opportunities, support a steadily increasing dividend and retain capacity for strategic M&A and share repurchases. We continue to demonstrate this in the first quarter. Capital spending increased to fund organic growth in new modular geographic markets and we increased investment in TRS to support strong market demand. We also worked on a small modular acquisition, which we closed in early April. In addition, we completed share repurchases during the quarter. I'm confident we have the right team and discipline in place to drive shareholder value in the years ahead. I would like to thank our team for your engagement in delivering these results. and our customers and shareholders for your trust in our company. With that, I will turn the call over to Keith, who will take you through the financial details of our quarter and our outlook for the full year. Keith E. Pratt: Thank you, Phil, and good afternoon, everyone. As Phil highlighted, first quarter results demonstrated steady progress with rental revenue growth in each of our divisions. Looking at the overall corporate results for the first quarter. Total revenues increased 2% to $199 million, and adjusted EBITDA decreased 1% to $74 million. Reviewing Mobile Modular's operating performance as compared to the first quarter of 2025, total revenues for Mobile Modular increased 2% to $134 million. and adjusted EBITDA decreased 1% to $47 million. The business saw a 4% higher rental revenues, driven by growth from our commercial customer base and 4% higher rental-related services revenues due to higher site-related services projects. The growth in rental operations was partly offset by 7% lower sales revenues. Inventory center costs increased by $3.2 million as we prepared equipment to support higher shipment levels. This expense compressed rental margins to 56%, down from 60% a year ago. Sales revenues decreased $1.6 million to $20.9 million as a result of lower new and used sales projects during the quarter. Average fleet utilization was 70% compared to 74.6% a year ago, consistent with the challenging demand environment. First quarter monthly revenue per unit on rent increased 7% to $889. For new shipments over the last 12 months, the average monthly revenue per unit increased 1% to $1,208. There is still a positive pricing tailwind opportunity as our fleet churns. We continue to make progress with our modular services offerings. Mobile Modular Plus revenues increased to $10.3 million from $8.6 million a year earlier, and site-related services increased to $5.3 million, up from $4.1 million. Turning to the review of portable storage in the first quarter. Total revenues for portable storage increased 3% to $22 million, and adjusted EBITDA was $7 million, a decrease of 17% compared to the prior year. Rental revenues for the quarter increased 1% to $16.3 million and rental margins were 80%, down from 84% a year earlier. Adjusted EBITDA was lower as a result of several cost and margin pressures in the quarter, inventory center costs increased as we prepared equipment to support higher shipment levels. Rental-related services margins for deliveries and pickups were pressured in a very competitive environment. SG&A expense increased in part because we invested in sales coverage to support longer-term utilization improvement across the current branch network. Average utilization for the quarter was 58.6% compared to 60.2% a year ago. Turning now to the review of TRS-RenTelco. TRS had a strong quarter. with total revenues up 11% to $39 million and adjusted EBITDA up 16% to $21 million. Rental revenues increased 13% to $29 million as the industry continued to experience improved demand conditions and the business benefited from project supporting data center build-outs. Rental margins improved to 45% from 40% a year ago. Average utilization for the quarter was 66.1%, up from 61.6% a year ago, and was the highest first quarter level since 2021. Sales revenues increased 1% to $8 million and gross margins were 55% compared to 47% a year ago. Lastly, on Enviroplex compared to a very strong first quarter in 2025, Enviroplex total sales revenue decreased 51% to $3.7 million, and adjusted EBITDA declined to a loss of $1.1 million from a profit of $0.4 million. The remainder of my comments will be on a total company basis. First quarter selling and administrative expenses increased $2.6 million to $53.5 million primarily due to higher salaries and benefit costs. Interest expense was $6.5 million, a decrease of $1.7 million as a result of lower average debt levels and lower interest rates during the quarter. The first quarter provision for income taxes was based on an effective tax rate of 26.7% compared to 24.6% a year earlier. Turning to our year-to-date cash flow highlights. Net cash provided by operating activities was $42 million. compared to $54 million in the prior year. Rental equipment purchases were $45 million compared to $12 million in the prior year. as we increased investment in modular geographic expansion opportunities and to support higher demand at TRS. In addition to investments in new fleet, healthy cash generation allowed us to pay $12 million in shareholder dividends and to complete $12 million of share repurchases. At quarter end, we had net borrowings of $546 million, and the ratio of funded debt to the last 12 months actual adjusted EBITDA was $1.51 to $1 million. For the full year, our outlook remains unchanged, and we expect total revenue between $945 million and $995 million, adjusted EBITDA between $360 million and $378 million, and gross rental equipment capital expenditures between $180 million and $200 million. We are encouraged by the progress made during the first quarter, and we are fully focused on solid execution for the remainder of 2026. That concludes our prepared remarks. Stephanie, you may now open the lines for questions. Operator: [Operator Instructions] We'll take our first question from Manav Patnaik with Barclays. John Ronan Kennedy: This is Ronan Kennedy on for Manav. Can I just ask some follow-ups to start on demand trends in end markets. I think you called out strength across government, manufacturing, health care, data centers, which of these are the largest contributors? And how are the trends in terms of the momentum in each? And then for the education end market, I think you had indicated demand is steady. Has that changed at all in something visibility? Keith E. Pratt: Thanks, Ron. I appreciate that. I think those modular products customer segment areas that we called out, government, manufacturing, health care, data center, the majority of that work would fall into what you would call the mega project category. So I wouldn't call out 1 of those buckets over another, other than that we're seeing that large project demand in several of those verticals, a piece of that being data centers. On the education side of the business, we spend a lot of time internally drilling into our performance by market. And there's a lot of headlines out there about decreasing student populations. I think the important thing to remember there is there's still increasing demand for modernization work due to aging school infrastructure. And so when we look at Q1 adjusting out the abnormal demand we saw last year related to the Southern California wildfires. Our first quarter education bookings were roughly flat year-over-year, but kind of that steady demand level with those kind of 2 offsetting macro factors contributing to that. John Ronan Kennedy: Got it. And another on kind of macro commentary and potentially early signals. I think you indicated that the Middle East situation had no impact in Q1, but could increase uncertainty or delay projects. Have you seen any early signs of customer caution or changes in quoting, booking behavior since the quarter end? And then I think you also flagged a risk of higher energy prices impacting costs. where would that show up? Would that be in the equipment prep, delivery logistics or broader operating expenses? Keith E. Pratt: Maybe I'll just start by saying we're actively monitor and manage these types of geopolitical events and the impact they have, both on our cost structure and our supply chain. We haven't seen any material impact, as I mentioned, in the first quarter or here in the early months of April. I think the place that you'd probably see that occur first if this is extended, would be in the fuel cost area or fuel exposure and even there, the majority of those costs were able to pass through the customers and we manage those pricing increases with real time through our pricing optimization tools. We haven't seen any further delays or customer questions at this point. I think it's still too early to see that, and we'll keep monitoring to understand that there's any longer-term downward pressure on demand. Philip Hawkins: I think Ron and the other thing to keep an eye on is just more broadly higher energy costs can be a driver for just broad-based inflation and ultimately, that cost and other things. It's just way too early to get any read, if that's going to be an issue and to what extent. And as Phil said, we'll be vigilant. We'll look to make adjustments if we need to. So very early days, but no impact at this point. John Ronan Kennedy: Got it. And then on the bookings strength macro indicators going back to demand, I think ABI and macro indicators remain subdued, but internal booking activity is improving. Can you kind of talk about how that reconciles internal strength versus weaker indicators? And then I think looking levels were higher, yet utilization declined revenue growth remained modest. Can you reconcile those dynamics as well? And if we should anticipate change in conversion, timing from bookings to shipments to revenue, et cetera. Philip Hawkins: Yes, I think I'll start with the booking question. There was a lot doubles and modulars are encouraging. There are several factors that helped us in the quarter. We talked about our sales -- growth of our sales teams. We have more sales reps in more markets. We closed several of the data center and other large industrial project opportunities that we've referenced and we continue to see growth in government opportunities. So on the booking side. And as you know, close orders and then there's some period of time it can be months before those project sites are ready, and we're actually delivering. And so I think what you're seeing is the normal lead times and sales cycles between closing and delivering and billing projects. Keith, anything else you'd like to highlight there? Keith E. Pratt: Yes, I think that answers it. I think the utilization comment as well just to reconcile that. I think Ronan, what we're seeing is good leading indicators in terms of the bookings and the activity levels, and we're actually shipping more, but offsetting that, we're still getting returns that are higher than the ships, and that's why you're seeing the utilization metrics under pressure as it has been for multiple quarters now in this overall softer macro environment, softer with fewer of the sort of local construction projects. So again, positive with new business. but not enough to offset the returns that occur in the normal course for projects that started in previous periods. Operator: We'll take our next question from Scott Schneeberger with Oppenheimer. Scott Schneeberger: Real nice quarter. You beat us top to bottom, and I love that you grew all the segments in rental revenue that was impressive in the quarter. It's -- and I guess, first, it would normally be a later question, but intriguing because of how infrequently you all make buybacks, but you did share repurchases in the quarter. I think it's been many, many years since the last time you did that. I guess, Keith, first question for you, care to elaborate on that? And is that something that we should expect to persist. Keith E. Pratt: Yes. I'd say share repurchases are something we review on a regular basis. It's part of our capital allocation framework. As you know, we look at our capital requirements for organic investment, and that has been our primary use of capital over the years. We also, in recent years, are more active in M&A. So we have an active pipeline. We're constantly reviewing opportunities in that pipeline that have potential -- what potential size and timing they could have and all the normal things you would expect in terms of looking at dividend plans and other items. So you're right, we haven't done any repurchasing since the COVID era back in 2020, when we look at where we are today and especially with leverage being a little bit lower, the business being extremely healthy and then some attractive opportunities in terms of where the equity markets we're trading in March. We felt it was a good time to be active. We'll continue to monitor opportunities in the market, and we have a very large authorization with over 1.8 million shares available and authorized for repurchase under the current plan. So this is a good tool in our capital allocation tool kit and 1 that we're absolutely willing to use under the right circumstances. Scott Schneeberger: I appreciate that. In -- I want to ask, following up on Ronan's questions in modular and add portable storage to this question. What kind of trends are you seeing in April? You start to get a bit more of a seasonal uptick, and we're now largely through the month, you maintain the guidance for the total company, Dana will talk about TRS in a second. But -- how is the seasonal uptick occurring? Are you seeing what you want to see to anticipate a good year. I know you've guarded a little bit on the Middle East conflict but -- and what that could be, but not seeing it yet. So that aside, is it developing and shaping as you would have expected? Philip Hawkins: I'll take that one. I think everything we've seen so far through the month of April our activity levels is consistent with what we experienced in Q1. So solid bookings in Mobile Modular, still kind of flattish up portable storage and continued strength of TRS. So that's what we're seeing that helps us feel good about the guide for the rest of the year. Scott Schneeberger: Appreciate that. The -- and real nice to see in modular the new shipments at plus 1, that's a good sign for the upcoming year. I want to ask about cadence of sales in modular -- it was a little lighter in the quarter on a year-over-year basis, and that was due to a comp year-over-year comp. How should we think about the cadence over the course of this year? And how impactful can sales be, I guess, case for you to the model on a quarterly basis and then pulling up and thinking about it on an annual basis. Keith E. Pratt: Sure. It's actually 1 of the tougher parts of the business to give an answer against sales, we feel very good about our capabilities in the area as you know, we've described this as an initiative area. It's very complementary to a lot of our customer engagement on larger rental opportunities. So we feel good about it as a sort of plank of our activities and as an initiative area. The sales side of the business is not immune from some of those macro factors that impact rentals. We've seen examples where projects are planned and get delayed or there are issues in the field with permitting. So we often run into situations where we have a good visibility on future projects. but being really confident about which month or even which quarter we're going to see the revenue, that can be a lot more tricky. guidance range for the year, and you see that breadth of the range on revenue, that in part reflects a lot of possibilities on the sales side. It could be a flat year to last year or even down a bit. It could also be a very positive year and up from last year. Really, at this point, it's a pretty wide spectrum of possibilities. And then when you look at it by quarter, I would say it's more typically more significant in the second half of the year. than the first half. And you can look from the outside, just as we look at the insights, look at past patterns as to how the sales have been recognized by quarter, but it is 1 of the trickier areas but it's part of the business that we're focused on. We have a good team. We see good long-term opportunity. Scott Schneeberger: Great. And then last from me over to for the year. And it's a continuation of a lot of momentum. The question is how much more momentum should we anticipate -- or should we anticipate this level of sustained momentum going forward? And how long? Because you guys kind of are a data center story now. I know you don't share exact numbers of how much -- and it's actually hard to record for you, how much is data center related. But I know you're getting a lot in TRS. Does that mean that you have a long tail to this model, given the long tail we would expect of activity at data centers. Philip Hawkins: I'll take that one. Let me understand that everybody is looking more closely at TRS as they contribute to our performance in a more meaningful way. And we don't have a crystal ball on these things. But our team has been through many technology cycles, and they know how to manage them well. I think our view of demand, even though we had shorter rental terms in this space is pretty solid for the rest of the year. and thus, it still feels like early to mid-innings on the whole data center play. And so we feel good about the TRS demand through the end of this year. Operator: We'll take our next question from Daniel Moore with CJS Securities. Dan Moore: I apologize if you had this in the slides, and I missed it, but of the 4% growth in Mobile Modular, can you just talk about kind of price versus volume and your outlook for growth for the next several quarters? Keith E. Pratt: Sure. One way to look at that, Dan, is if you look at the 4% growth in rental revenues, you can also see in our -- both in the commentary today and in our Investor Relations pack, so the average unit on rent in the fleet, we're getting 7% more revenue per unit, and I referred to that in my prepared remarks. and you can see it in the supporting materials. So how do you get from a 4% rental revenue growth if you've had a 7% lift in the revenue per unit. And the answer is we had roughly 3% fewer units on rent. and that's how you sort of bridge those numbers. Those trends are fairly consistent with what we've seen in recent quarters. and I think they're positive. And certainly, the opportunity here is when we get to the point where units on rent are not declining, and they're flat. And at some point, we hope increasing, there will be even more horsepower in those dynamics. Dan Moore: And from a margin perspective, sticking with profit, 13% growth was impressive. Just talk about the drivers and the sustainability of continuing to sort of expand margins year-on-year for at least there embedded in your guidance for the remainder of this year? Keith E. Pratt: Yes. I think the thing that we always work through over the course of the year are the expenses we incur to get units ready to ship from the modular fleet. So again, we mentioned just for Q1, we keep a very close eye on the gross margin on rental revenues at modules. That was compressed, but it was compressed, I think, for the right reason, which is we're busy getting equipment ready to go out on ramp. Some of those units went out in the first quarter. Others will go out in the months ahead. That's normal in the business. those expenses tend to be heavier, typically the first couple of quarters, even the first 3 quarters of the year depending on the ebb and flow of shipment activity. If we look at it on a full year basis, margins, I would say, should be stable compared to last year. And the expense investment moderates, we get us some opportunity to expand slightly. But I characterize things that's fairly stable given that we're making the right investments in the fleet, and we're supporting higher levels of. Dan Moore: Appreciate it. And shifting to portable storage. Obviously, a lot of work has been done in penetrating newer geographies generated 1% growth in a flat to down market. I think you said April flattish. Are you seeing green shoots that would -- could indicate a return to growth in the next few quarters? And just talk about your confidence in the ability to continue to outpace the market. Philip Hawkins: Yes, I look at that flattish activity levels, slight increase on revenue is positive given the macro conditions and nonresidential construction and the higher commercial construction exposure that, that business has. I don't think that we've seen significant green shoots that cause us to feel like that market is improving significantly, and we're holding our own in the current environment, last couple of ABI prints are closer to 50%, but still below. And so we pay close attention to that. We use our geographic expansion, services offerings, all those things drive capture more than our fair share of the projects that are out there, but I wouldn't point to significant green shoots in the near term. Keith E. Pratt: I would just add. And again, you could listen to this again in the prepared remarks. But just to acknowledge when we're in that flattish and relatively stable demand environment, it's certainly a positive compared to seeing reduced revenue and reduced shipments. On the other hand, when things are flat, it does create challenges in absorbing some of the normal expense increases in the cost structure that every business has to find and so we have a lot of work to do, and we're fully aware of it, trying to get the cost, manage them closely, manage them efficiently and during this flattish period, it does mean earning EBITDA flat adjusted EBITDA is going to fix some work. So we're focused on it, and it's an important part of the journey this year to do as well as we can. Certainly, if the demand environment edges in our favor at any point, that's going to really help a lot. Dan Moore: Understood. Last for me. Enviroplex sales obviously can be lumpy. Just are you seeing any kind of slowing in demand? Or was the decline in Q1 sales just a little bit more episodic. Keith E. Pratt: Yes. Dan, I'll go back to some comments I made back in February and just say in Biriplexin 2026, I think performance in terms of revenue and adjusted EBITDA is likely to look a lot closer to 2024 when compared with the very, very strong 2025 that we have. So again, I would go back, look at 2024. And by the way, by historical standards, 2024 was actually a very good year. It was 2025 that was exceptional. So in a sense, it's created some very tough comps for us. It's not uncommon to start the year in that business. relatively modest amounts of revenue being recognized and not uncommon to have a loss in that part of the business in the early part of the year. If you look historically, that happens on a fairly regular basis. So again, the results we had this year in Q1, they're fine, but compared to the very strong Q1 of last year and full year of last year, it looks a bit more challenged. But it's a good business. We have a great team there, great engagement with customers. It's a good part of the picture. Operator: We'll take our next question from Steven Ramsey with Thompson Research Group. Steven Ramsey: I wanted to start with the bookings and modular good story and good elaboration in the Q&A, I wanted to hear about cross-selling in the bookings that you're seeing more recently, cross-selling of modular Plus, SRS and even storage, if there's -- how you would describe the cross-selling within bookings currently. Keith E. Pratt: Yes. I think that's 1 of the things that we talk about that's leading to those price movements that Keith Tom spoke about earlier is the addition, further penetration of those services and there's really a couple of things going on there. One, we -- our sales team continues to be more effective at adding those services in, educating the customers on what we have to offer there. but also continuing to add services that we -- that our customers find value in. And so we look at both of those things as long-term flywheels that have lots of room to run. And you can see in the investor deck, we've got really solid growth rates in both modular Plus which are the services that building and then site-related services, the other things we can do for our customer around the site during the project. Our sales teams also work closely together between the modular and the portable storage side. We're always looking for opportunities to leverage as many products as possible on the job side. So I don't think there's anything new or different numbers there, but further penetration and addition of services is an ongoing trend. Steven Ramsey: And then I wanted to think about this bookings growth amidst units coming back off of rent kind of a multiyear headwind of units coming off of rent. Do you think we crossed the river on that in 2026? Or do you see a pathway that maybe that shapes up in '27. Keith E. Pratt: Yes, it's a tough one. We're watching it very closely. I think if you look at the change in units on rent, the decline was a little less in Q1 than maybe the last few quarters. I think the short answer is we're not 100% sure when that crossover will come. What we can work on is the front end, which is work with customers, win projects, continue to try and drive success in the market. the returns, as you can appreciate, we don't control when a customer finishes up a project and it's time to return things. But at some point, logically, if demand is as healthy as it was a few years ago, you would think those 2 things start to balance it between shipment and returns. Hard to tell if we'll see it by the end of this year. We'd certainly like it to be the case. but we're not making strong assumptions that there's a big shift there in the near term. Steven Ramsey: Fair enough. Okay. And I wanted to think about TRS demand rising utilization rising, yet the fleet size still in that 22,000 unit range the past 5 quarters. Do you feel like -- or does the CapEx guide embed an increase in units in the TRS fleet for 2026. Keith E. Pratt: Yes. All good observations. I mean the first thing I would acknowledge is we've got an outstanding team in that business. They actually did a wonderful job when they went through a part of the cycle where demand was decreasing, and they very heartfully reduce the size of the equipment pool. They successfully sold used equipment at very strong margins. really did a wonderful job in difficult business conditions. The nice thing is the business conditions have not shifted, we had a very good year last year. We followed that with a very good start to this year. As was discussed earlier on the call, we're getting some benefit from data center-related work. So where we stand today is the -- that team is doing an excellent job running the business. Utilization, as I mentioned, was the best first quarter utilization since 2021 and we're more than happy now to add capital. We actually ended the quarter and you can see these details in the 10-Q, but we ended the quarter with utilization at TRS above 68%. So when we're at that kind of a level, that's very high fo that business on any kind of historical more capital to work. And if the healthy demand continues, that's what we're going to be doing. And you're correct in saying that once we increased the gross CapEx guide for this year, is, in fact, we saw the probability that this good opportunity at TRS would continue, and we would want to deploy more capital into that business. Philip Hawkins: Ramsey, I'd also just add to that. I'd pay more attention, like Keith was saying, to the actual dollars of CapEx and fleet size -- units in that business is the high variability in cost per unit. So if demand is growing and the more expensive equipment, you're not going to see it in the units, but you'll see it in the size of the inventory and the CapEx numbers that I think you're seeing that. Steven Ramsey: Okay. And then last 1 for me, TRS serving data centers. I guess first quick 1 there. Is more rental happening for this activity than your customers owning this equipment? And then secondly, is the margin profile serving data centers is it comparable or superior to the segment results. Philip Hawkins: I'll start with the work that we're doing in data centers is the same work that we're doing on smaller scale for the other customers that we work with every day. So there's nothing you need happening in the data center environment, just that there's a whole lot more of it happening all at 1 time. So it's a -- it's a volume play versus there's not anything really strange and unique happening in that. We're just able to provide that to more customers and they need more equipment at once. So no changes in the rent versus buy model there that we can see. It's just there's more rental needs than they were before because of the size of these facilities. The thing I would say on margin, and Keith, you can add your comments here. I think we're still in the early days where there's getting the equipment, getting the data center up and running, high priority, things are happening fast. And so there may be less focus on price and more focus on speed of delivery and getting things up and running. I think that goes through a natural cycle. And so there may be some moves that we'll see there. In the early days, we tend to -- maybe get a little better rates early on, but there will be a natural shift there that we would see in a normal technology cycle. Keith, anything you want to cover there? Keith E. Pratt: Yes, I think you've hit the important point, Phil. Again, I don't know that there's a big difference in the rent versus own decision. I mean people usually ramp it project-based work and making sure they have access to good quality equipment that's reliable, well calibrated things like that. I think from a margin point of view, on a transaction basis, there's really not a lot of difference. We're pretty consistent in how we look at that across the business. and the opportunity, and you see some of that in the numbers for the quarter is as the business is achieving, number one, a larger volume of business, there's some benefit to scale. and then the very effective management of the equipment pool where we're getting more utilization of the equipment that we own. Those factors on a total division basis are very helpful in terms of progressing with margins over time. Operator: [Operator Instructions] We'll take our next question from Marc Riddick with Sidoti. Marc Riddick: And certainly, a lot has been covered already. I did want to touch a little bit on where you're seeing progress thus far in some of the growth opportunities and initiatives that you've undertaken. Maybe you could talk a little bit about sort of where you are as far as the geographic footprint as well as sales efforts and sort of how we might sort of see that evolve through the year. Philip Hawkins: Yes, I'll take that one, Mark. I think Keith talked a little bit about the sales dynamic a little earlier and we talked about Mold Modular Plus site-related services. So maybe that geographic expansion is a good place to spend a little more time -- this is really 1 of our high priority strategic growth drivers. And I'm really pleased with the progress we've made in this area. We did a nice job adding to the team last year. We're getting some good traction with customers in the markets that we've entered. We don't typically share specific market information for competitive reasons. But let me give you a couple of flavors of the way that we go about this work. it could be adding a new sales rep or doing an acquisition in a state that we didn't have a sales presence, maybe didn't even have rental fleet coded for that market before. So that's 1 option, or it could be adding a sales presence in an adjacent metro market that broadens our sales coverage and brings additional opportunities to deploy existing fleet from 1 of our larger facilities. And so we've used both of those methods successfully -- since we started this initiative coming out of early 2025 to increase our sales footprint and serve our customers in more parts of the country, and we're happy with the progress so far. Marc Riddick: Excellent. And then I did want to touch on -- I think in your prepared remarks, you made commentary around rental-related services, competitive pressures and margin challenges that I guess maybe more focusing on the competitive landscape, I guess, maybe if you could touch a little bit about what you're seeing there that might be a little different or what we should be looking at as similar as on the rental related services side? Keith E. Pratt: Yes. Thanks, Mark. It's a good topic. And again, the comments were just around the portable storage business. And so I sort of begin by saying always in this business -- it's very difficult to make much money on the delivery of units and the pickup of units. It's just a part of the business that's not really significant from a profit generation point of view. And in some instances, we've seen in the past, it's an area where it is lost. And so as the market is much more competitive in recent year or recent quarters, we've seen some of the smaller players much more willing to sharpen their pencil and what they charge for a delivery or pickup. As you know, we try to preserve very disciplined pricing on the monthly rental charge. And even on the deliveries pick up, we don't really pressure there, but the industry environment is very competitive. And I would say it's harder to cover your costs now than it was 2 or 3 years ago. That's the reality. And if you look specifically at our numbers in the first quarter. I would say there were a few, I'd kind of call it elements of noise in the numbers that worked a little bit against us. So we'll be working hard to do as well as we can in that area, but it is an area where everybody struggles with making any money. And for us, getting to breakeven would be great. But that's the journey from where we are currently, given the market conditions. Marc Riddick: Okay. Great. And then last 1 for me. I did want to circle back on the share repurchase activity, and that certainly was kind of jumped out a little bit. Can you talk a little bit -- you talked about already as far as the thought process behind -- can you talk a little bit about the timing that we saw there? Was that sort of throughout the quarter, ending of the quarter in the quarter? Is there sort of a pacing there that we should be aware of? Philip Hawkins: March. So there's some additional information in the 10-Q, but we were active in the month of March. And as I mentioned earlier, we review this capital allocation opportunity on a routine basis. And when we look at all the other capital allocation decisions we're making, this is 1 that we want to consider carefully, and we're very well positioned in terms of our debt capacity and our availability to act and we have a large authorization. We still have a remaining authorization in excess of 1.8 million shares. So that's an area we active in March. We may act again on an ongoing basis, but we don't telegraph our intentions ahead of time. But we'll give you the activity in that area. Operator: [Operator Instructions] There appear to be no other questions. This concludes the Q&A portion of today's call. I'd like to now turn the floor over to Mr. Hawkins for closing remarks. Philip Hawkins: I'd like to thank everyone for joining us on the call today and for your continuing interest in our company. We look forward to speaking with you again in late July to review our second quarter results. Operator: Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.
Operator: Thank you for standing by. My name is Rebecca, and I will be your conference operator today. At this time, I would like to welcome everyone to The Cheesecake Factory, Inc. First Quarter 2026 Earnings Conference Call. [Operator Instructions] I will now turn the call over to Etienne Marcus, Vice President of Finance and Investor Relations. Please go ahead. Etienne Marcus: Good afternoon, and welcome to our first quarter fiscal 2026 earnings call. On the call with me today are David Overton, our Chairman and Chief Executive Officer; David Gordon, our President; and Matt Clark, our Executive Vice President and Chief Financial Officer. Before we begin, let me quickly remind you that during this call, items will be discussed that are not based on historical facts and are considered forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Actual results could be materially different from those stated or implied in forward-looking statements as a result of the factors detailed in today's press release, which is available on our website at investors.thecheesecakefactory.com and in our filings with the Securities and Exchange Commission. All forward-looking statements made on this call speak only as of today's date, and the company undertakes no duty to update any forward-looking statements. In addition, during this conference call, we will be presenting results on an adjusted basis, which exclude acquisition-related items, impairment of assets and lease termination expense and other items. Explanations of our use of non-GAAP financial measures and reconciliations to the most directly comparable GAAP measures appear in our press release on our website as previously described. David Overton will begin today's call with some opening remarks, and David Gordon will provide an operational update. Matt will then review our first quarter financial results and provide commentary on our financial outlook before opening the call up to questions. With that, I'll turn the call over to David Overton. David Overton: Thank you, Etienne. We delivered strong results in the first quarter, exceeding expectations across revenue, margins and adjusted diluted earnings per share. This performance reflects disciplined execution across our restaurants and continued demand for our differentiated high-quality concepts. First quarter comparable sales at The Cheesecake Factory restaurants increased 1.6%, outperforming the industry and reflecting the strong affinity for our namesake concept. Culinary innovation continues to be a core strength of our business. Our recent menu additions, including new bites and expanded bowl options have been well received by guests and highlight the broad appeal of our menu and the value we deliver to our guests. Importantly, these offerings keep the concept fresh and competitively positioned without relying on discounting. To this point, Cheesecake Factory average weekly sales reached a new all-time high during the quarter, bringing our industry-leading annualized unit volumes to nearly $12.8 million. Strong sales and exceptional execution drove further improvement in The Cheesecake Factory's restaurant-level profit margins, and we delivered double-digit growth in adjusted diluted earnings per share year-over-year. Turning to development. During the first quarter, we opened 3 restaurants, including a North Italia, a Henry and a Flower Child. In addition, 1 Cheesecake Factory restaurant opened in the first quarter in Mexico under a licensing agreement, the only international opening we expect this year. Subsequent to quarter end, we opened in North Italia, marking our 50th location for the concept. With these openings, we remain on track to meet our objective of opening as many as 26 new restaurants this year. In summary, we delivered a strong quarter. And as we look ahead, we will remain focused on delivering exceptional food, service and hospitality, the hallmarks of our success while continuing to execute our long-term growth strategy. Before I turn the call over, I am pleased to share we were once again recognized by Fortune as one of the 100 Best Companies to work for, marking our 13th consecutive year on the list. This recognition based on direct feedback from our staff reflects the strength of our culture and the engagement of our people. We believe this continues to be an important advantage in attracting and retaining talent in a highly competitive labor environment. With that, I will now hand the call to David Gordon to provide an operational update. David Gordon: Thank you, David. Our performance this quarter reflects the strength of our operations teams and their ability to execute at a high level in our restaurants while leveraging sales growth to drive flow-through and profitability. Operators delivered improvements in labor productivity, food cost management and other controllable expenses while maintaining strong retention across both hourly staff and management teams and delivering strong guest satisfaction scores. As David mentioned, our recent menu additions at The Cheesecake Factory restaurants have been well received, which we believe has contributed to the sequential improvements in traffic and check mix. This has allowed us to moderate menu pricing without impacting restaurant level margins. Moving on to Cheesecake Rewards. The recent launch of our new mobile app has exceeded expectations with top-tier download rankings, including #3 overall and #1 in food and drink during the rollout week. And early guest feedback has been overwhelmingly positive, particularly around the app's ease of use for making reservations and browsing the menu to place orders, reordering favorites and accessing rewards all within the app. We are also seeing solid early traction with increasing adoption of the app for digital ordering, reflecting strong early engagement with the platform. At the same time, we continue to refine the program toward more targeted behavior-based personalized offers with an increased focus on life cycle management. So far this year, we've seen higher engagement, improved incrementality and greater offer efficiency. I'll now turn to additional concept performance details. The Cheesecake Factory's first quarter comparable sales outperformed the Black Box Casual Dining Index by 40 basis points and resulted in annualized AUVs of $12.8 million for the quarter. This performance was supported by an off-premise mix of 22%, in line with the prior quarter and prior year. Restaurant-level profit margins increased 10 basis points year-over-year to 17.5%. North Italia's first quarter annualized AUVs totaled $7.4 million with comparable sales declining 2%. Our focus remains on returning to positive sales growth, and we remain confident in the concept's competitive positioning and long-term opportunity. At the same time, we're seeing encouraging trends, including improved retention across both managers and hourly staff as well as strong early results at new restaurant openings with average weekly sales at recent openings meaningfully above the system average. In addition, we recently implemented at North Italia, the guest feedback platform used at The Cheesecake Factory, which we believe will provide valuable insights into execution and support ongoing improvement. Our new menu currently being rolled out introduces a dedicated lunch section featuring lighter options, including refreshed salads and additional protein offerings aligned with current guest preferences and thoughtfully priced. We believe this will increase awareness of our lunch offering and strengthen our value proposition in the lunch daypart. Restaurant level profit margin for the adjusted mature North Italia locations was 14.8% for the quarter versus 16.6% for the prior year. The decline primarily reflects sales deleverage along with higher building expenses, including repairs and maintenance and utilities. Flower Child delivered another standout quarter, meaningfully outpacing the fast casual segment, underscoring the strong affinity for the concept as it continues to take market share. First quarter comparable sales increased 10% for a 2-year comparable sales increase of 15%. This strong performance translated into annualized AUVs of $4.9 million, a new quarterly high for the concept. Restaurant-level profit margin for the adjusted mature. Flower Child locations was 19.6% in the first quarter, up 100 basis points from the prior year. This performance reflects the concept's highly differentiated positioning with a made-from-scratch menu that is both health-focused and craveable, delivering compelling value across a broad range of offerings, all within thoughtfully designed restaurants to provide a more elevated experiential dining experience. Combined with consistent strong execution by our restaurant teams, these strengths continue to drive momentum and strong sales trends. We remain focused on building strong teams to support the concept's continued growth, and we're increasingly confident in the opportunity ahead. And lastly, we expanded our FRC portfolio with the opening of a Henry in Phoenix, which opened to strong demand. Average weekly sales have exceeded $280,000 in the first 4 weeks for an annualized AUV of over $14 million. And with that, let me turn the call over to Matt for our financial review. Matthew Clark: Thank you, David. Let me first provide a high-level recap of our first quarter results versus our expectations I outlined last quarter. Total revenues were $978.8 million, meaningfully above the high end of the range we provided. Adjusted net income margin was 5.2% and adjusted diluted earnings per share was $1.05, both finishing above our expectations. And we returned $32.6 million to our shareholders in the form of dividends and stock repurchases. Now turning to some more specific details around the quarter. First quarter total sales at The Cheesecake Factory restaurants were $690.5 million, up 3% from the prior year. Total sales for North Italia were $89.5 million, up 7% from the prior year period. Other FRC sales totaled $104.5 million, up 20% from the prior year, and sales per operating week were $145,200. Flower Child sales totaled $52.6 million, up 21% from the prior year, and sales per operating week were $94,500. And external bakery sales were $13.9 million. Now moving to year-over-year expense variance commentary. Specifically, cost of sales decreased 10 basis points, primarily driven by favorable dairy costs, partially offset by higher beef and seafood costs. Labor as a percent of sales declined 20 basis points, primarily driven by labor productivity gains, partially offset by higher group medical. Other operating expenses increased 40 basis points, primarily driven by higher utility and bakery overhead costs. G&A remained relatively flat as a percent of sales and depreciation increased 10 basis points from the prior year. Preopening costs for the quarter, including some expenses related to early second quarter openings totaled $5.5 million compared to $8.1 million in the prior year period. We opened 3 restaurants during the first quarter versus 8 restaurants in the first quarter of 2025. And in the first quarter, we recorded a pretax net expense of $2 million, primarily related to impairment of assets and lease termination expenses and FRC acquisition-related items. First quarter GAAP diluted net income per share was $1.02. Adjusted diluted net income per share was $1.05. Now turning to our balance sheet and capital allocation. The company ended the quarter with total available liquidity of $601.6 million, including a cash balance of $235.1 million and $366.5 million available on our revolving credit facility. Total principal amount of debt outstanding was $644 million, including $69 million in principal amount of 0.375% convertible senior notes due 2026 and $575 million in principal amount of 2% convertible senior notes due 2030. CapEx totaled approximately $43 million during the first quarter for new unit development and maintenance. During the quarter, we completed approximately $18.4 million in share repurchases and returned $14.2 million to shareholders via our dividend. Now let me turn to our outlook. While we will not be providing specific comparable sales and earnings guidance, we will provide our updated thoughts on our underlying assumptions for Q2 and full year 2026. Our assumptions factor in everything we know as of today, including net restaurant counts, quarter-to-date trends, our expectations for the weeks ahead, anticipated impacts associated with holiday shifts and the recent softness in industry sales trends and the current consumer environment. Specifically for Q2, we anticipate total revenues to be between $990 million and $1 billion. Next, at this time, we expect effective commodity inflation of low to mid-single digits for Q2 as our broad market basket remains stable. We are modeling net total labor inflation of low to mid-single digits when factoring in the latest trends in wage rates and minimum wage increases as well as other components of labor. Other operating expenses are estimated to be approximately 20 basis points higher than prior year, reflecting higher marketing spend to support the launch of our rewards app. G&A is estimated to be approximately $63 million to $64 million. Depreciation is estimated to be approximately $28 million to $29. We are estimating preopening expenses to be approximately $7 million. Based on these assumptions, we would anticipate adjusted net income margin to be about 5.5% at the midpoint of the sales range provided. For modeling purposes, we are assuming a tax rate of approximately 13% and weighted average shares outstanding of approximately 48.5 million. Turning to fiscal 2026. Based on similar assumptions and no material operating or consumer disruptions, we anticipate total revenues for fiscal 2026 to be approximately $3.91 billion at the midpoint of our sensitivity modeling. For sensitivity purposes, we are using a range of plus or minus 1%. We currently estimate total inflation across our commodity basket, labor and other operating expenses to be in the low to mid-single-digit range and fairly consistent across the quarters. We are estimating G&A to be about 6.5% of sales, partially driven by our sales growth outlook impacted by the timing of restaurant openings and closures as well as periodic true-ups related to stock-based compensation. Depreciation is expected to be about $115 million for the year. And given our unit growth expectations, we are estimating preopening expenses to be approximately $35 million to $36 million. Based on these assumptions, we would expect full year net income margin to be approximately 5% of the sales estimate provided. For modeling purposes, we are assuming a tax rate of approximately 11% and weighted average shares outstanding relatively flat to 2025. With regard to development, we plan to continue accelerating unit growth this year. At this time, we expect to open as many as 26 new restaurants in 2026, with roughly 3/4 of those openings planned for the second half of the year. This includes as many as 6 Cheesecake Factories, 6 to 7 North Italias, 6 to 7 Flower Childs and 7 FRC restaurants. And we would anticipate approximately $210 million in cash CapEx to support unit development as well as required maintenance on our restaurants. Note, this CapEx range includes some new restaurant construction expenses, which may be classified as operating lease assets instead of additions to property and equipment in the statement of cash flows. In closing, our first quarter results reflect a healthy business, solid top line momentum, disciplined cost management and strong operational execution. Our financial position continues to provide the flexibility to support new unit growth while investing in the business and returning capital to shareholders. With a diversified portfolio of high-quality concepts, experienced operators and a strong balance sheet, we believe we are well positioned as we move through the year. Looking ahead, we remain focused on consistent execution, comparable sales growth, margin expansion and long-term shareholder value creation. With that said, we'll take your questions. Operator: [Operator Instructions] Your first question comes from the line of Andy Barish with Jefferies. Andrew Barish: Can you just kind of go through -- I know the Cheesecake business has been very consistent on the top line. Just anything quarter-to-date? I know it's been noisy with Easter and spring break shifts. But just anything you're seeing in your guests, any check management that you'd be willing to comment on would be helpful. Matthew Clark: Sure, Andrew. This is Matt. I mean, as you know, we're not going to give a specific number. But I think if you interpolate the revenue guidance for the second quarter, we're expecting to have consistent trends continue for the Cheesecake Factory. And I think we feel cautiously optimistic about the rollout of the app and the incrementality that we have potential to drive there. We rolled out incremental more new menu items in the first quarter, and we saw progressively improving incident rate trends on those. So generally, I would say we have a bullish outlook on our business at this time. Operator: Your next question comes from the line of Jeff Farmer with Gordon Haskett. Jeffrey Farmer: Matt, you mentioned that the Q1 revenue performance exceeded obviously, the guidance. But what was the primary driver of that outperformance relative to your guidance? Matthew Clark: Yes, Jeff, this is Matt. It was a couple of factors. I mean, obviously, Cheesecake Factory comps came in above the range that we had provided there. And I think they were very stable throughout the quarter. So I think that was a positive. And then certainly, Flower Child, that 10% was above our expectations that we had thought more in the mid-single digits. And each of those probably contributed about 50% of the beat. Jeffrey Farmer: Okay. And then one more. As it relates to intra-quarter same-store sales trends, when the conflict in Iran really kicked off in early March and gas prices jumped, did you see any impact on same-store sales for any of the businesses? Matthew Clark: We were pretty steady throughout the quarter. Honestly, we were looking at that as well and parsing it. And throughout the portfolio, we continue to be, I think, steady. There's a little bit of spring break movement, but even that was probably more muted than we thought. And so it was very balanced throughout the quarter, and we didn't see any trade down either. So I would say both the guest traffic and the mix were both steady throughout. Operator: Your next question comes from the line of Jim Salera with Stephens. James Salera: Maybe a 2-part question. One, just some housekeeping. Are you able to provide the breakout of Cheesecake Factory comps, the traffic, the pricing and then the mix components? And then as we look at the strong results in the quarter, I know historically, you've talked about kind of GDP and jobs numbers as having a big influence on guest traffic and engagement with the brand. I don't think we've had necessarily very good jobs numbers this year that haven't been horrible, but I think kind of continuing to slow growth in 2025. But then we see your results accelerating. And so I was hoping maybe you could just kind of bridge what's happening at your restaurants that's maybe leading you to outperform relative to kind of the macro backdrop as a whole. Matthew Clark: Sure, Jim, this is Matt. I'll start here on the specifics of the Cheesecake Factory. Pricing was at 3.3%. As we have noted previously, that's coming down. It will be 3% in the subsequent quarters, just given the timing of what was rolling off in the quarter, it was at 3.3%. And then the mix was a negative 0.3%. So we saw a pretty material stabilization there, really benefiting particularly from the bites being add-ons and not substitutions. And so we feel really positive about that. And the traffic was a negative 1.4%, which was a material improvement over the Q4 results. And just also note for everybody for the record, the total weather impact for the company was about 1.7% of sales. Of course, there was weather in the prior year. So the net really was about 70, 75 basis points, if you think about that. So pretty close to getting back to that flat traffic for Cheesecake Factory really on a like-for-like basis. So really positive movement there. And I think, Jim, there's a lot of factors at play regarding sort of the economy. Certainly, if you believe in or subscribe to the K economy component of it, many of our concepts in our portfolio benefit from higher income cohorts. And so I think that there's a piece of that. I think the flexibility of the menu, particularly at Cheesecake Factory and Flower Child will benefit us with a tail here and the whole GLP-1 thing. right? Like you can get anything you want to eat. And at Cheesecake Factory, you can get steamed salmon with broccoli, if that's what you want and heavy up on the proteins and certainly have Flower child as well. So I think the menu, ultimately, we believe in sort of the 3 primary tentpoles of restaurant touring, and that's the menu and the hospitality and the service. And so I think we're excelling in those. So probably taking some share for those reasons. I do think even though the jobs haven't been great, to your point, sort of breaking into the economist here, the news cycle around the layoffs is not also as bad as it sounds. I mean the big news, but it's been steady. The job market has been steady. discretionary income is up slightly, and it's up a bit more than we're taking price. So from a wallet perspective, I think there's that. I think also lastly, what we've ascribed to here, and I just read about this today in the journal where people's wallets are going is for experiences, not for just goods and we're experiential dining. And so it's not so much transactional. So I think for all of those reasons. David Gordon: Jim, this is David Gordon. I'll just add one more piece, and that would be the continued retention we see in the restaurants at the hourly staff and management level quarter after quarter after quarter, has allowed the operations teams to execute as well as they ever have. And we continue to see that type of execution. We see it in the results of our Net Promoter Scores continuing to be positive. And that just has a flywheel effect of guests wanting to come back and having those type of experiences that Matt just mentioned. So that can never be overlooked. Operator: Your next question comes from the line of Jeff Bernstein with Barclays. Pratik Patel: This is Pratik on for Jeff. Just a quick housekeeping question. Can we also have the components of the comp for North Italia, please? And then I have a real question. Matthew Clark: Yes. This is Matt. I'm happy to provide that for the components. So mix was positive 1% for the quarter. Price was about 3% that came down a little bit, and then traffic was negative 6%. Pratik Patel: I appreciate it. And then my bigger picture question was, I appreciate that your brands skewed to relatively higher income consumers. But with elevated gas prices, inflation north of 3%, the ongoing stock market volatility, it just seems like everyone is frustrated these days to some degree. So I was just wondering if you're seeing any trade down from fine dining and other higher-end casual dining customers into your brands. Do you currently think you're capitalizing on that? Or is there an opportunity to capitalize that on that frustration? And secondly, in terms of whatever read you have on your own customers, do you see any check management in terms of alcohol appetizers or add-ons? David Gordon: Sure. This is David Gordon. A couple of things. I think that the incident rates and the add-ons have remained incredibly consistent. As Matt touched on earlier, some of the early check management that maybe people were anticipating with the bites, really, we didn't see. We saw people attaching bites along with the rest of their meal at Cheesecake Factory. As far as the high-end consumer and white table cloth, I would say actually, if you look at Flower Child, I think maybe Flower Child is taking market share from QSR or maybe from some of the folks in fast casual that have had to take much more price to protect margins over time. And Flower Child has not had to do that and has an elevated experience. And so along with that elevated experience and the quality of the food and the menu innovation and the ongoing LTOs, I think we are taking market share maybe from that consumer that feels pinched, whether that's your typical fast casual or QSR. I think that's benefited Flower Child. Operator: Your next question comes from the line of [ Samantha Cheng ] with Goldman Sachs. Unknown Analyst: This is Samantha on for Christine Cho. Congrats on the strong results. With the new Cheesecake mobile app launched earlier this month, I know you mentioned that really guest feedback has been positive so far. Could you touch on any additional early observations that you have from the app rollout regarding member engagement and frequency? And how do you expect personalized marketing to evolve following this launch? David Gordon: Sure, Samantha. This is David again. We still haven't discussed any actual numbers around the rewards program. And I would anticipate -- you should anticipate we won't be doing that either when it comes to the amount of downloads or members that have joined since they've downloaded the app. What I will say is that we are very pleased with the amount of downloads that we've seen thus far. We're also very pleased with the amount of sign-ins that we've seen after downloading because downloading is one thing, but then engaging with the app is something else. And we're happy with the amount of folks that have enabled locations and allowed notifications because those are ways that we can engage with them on a one-on-one personalized relationship, get the best ROI out of them, try and drive the incrementality that we've talked about historically and continue to gather data to make sure that the marketing spend is getting us the best ROI in the long run. So we're super happy with the launch early on. I think as I stated in the opening prepared remarks around the amount of engagement in the App Store and the Google Play Store right in the beginning was very, very high, and that's very promising to see and continues week after week to be significant. Matthew Clark: Samantha, this is Matt. Just one thing qualitatively. I've been really pleased with the number of new guests that we're getting for the sign-up. So clearly, we're opening the funnel to attract incremental traffic, and it's not just about engaging with our current rewards members, but making sure we're actually growing the total base. Operator: Your next question comes from the line of John Ivankoe with JPMorgan. Unknown Analyst: This is [ Chris ] on for John. My first question is on Flower Child. So the 10% comp is really strong against the category that came in roughly at flat in the same quarter. And most of the discussion around unit growth, you said has been dependent on your management pipeline, whether let's say general manager and your executive chef. I was wondering where are you on that, especially as the category is growing really fast compared to other segments in the restaurant? David Gordon: Chris, this is David. Great question. And we have said that in the past that we still believe that being able to grow at the pace we want is going to require the right type of general manager and executive chef. We still believe that. We're pleased to see continued retention benefits at Flower Child because that's a key component of career growth and enabling people to be able to grow their careers within the concept to reach that general manager and executive chef level. And we feel confident in our current growth trajectory that we have the pipeline in place to meet those expectations. And that team is very, very focused. If we decided we wanted to ramp up just a little bit from where we are today, they remain focused in the most important areas to enable the growth in that talent level to have the general managers and executive chefs in place in time for that growth. Unknown Analyst: And second one is on North Italia. Looking at numbers, it looks like new unit volumes came down a little bit in the first quarter. I was just wondering how new units are opening up and if you could give a little bit more detail. David Gordon: Sure. We've opened up 2 new restaurants here recently. Actually, we just finished our first full week at our new Brea location in Southern California, the busiest opening week in the history of North Italia for any individual location. So very, very well received in an existing market. And then in the new market in Northern California, roughly about a month ago, that would have been our busiest opening if we hadn't just opened Embrea. So new markets have been very, very well received. We'll continue down the path this year of about 50% new to existing markets, and we're pleased with the early results. Operator: Your next question comes from the line of Jim Sanderson with Northcoast Research. James Sanderson: Congratulations on a great quarter. I wondered if you could talk a little bit more about store margin at North Italia. That was a bit lower than expected and what the unlocks or remedies are to get that back up to the double-digit teens. Matthew Clark: Sure, Jim. This is Matt. I think a couple of things. There's certainly a little bit of pressure there from the comp and some deleverage on more of the fixed cost piece. I think it's also about making sure that we're investing the right amounts in labor as well as having, as David talked about on the prepared remarks, the right menu offerings at thoughtful prices. There's also a little bit of the mix of mature. So right, every year, the different sort of group comes into the mature margin set, and this happened to have a couple of higher margin or higher cost market in that. So more on a comp basis, it didn't move quite as much. So that's a little bit of it's optics. I think the most important thing, though, is to continue to focus, as David said, on positive comp store sales, right? That's really the primary attribute to recapturing the margin piece. Overall, we feel very confident that the mature margins should be in that 16% to 18% range on an ongoing basis that we've talked about. And we're obviously very close to striking distance on that. So it's not a big movement from our range, and some of it is just the moving pieces that happened to be in Q1, but certainly a lot of focus on recovering that. James Sanderson: And just a follow-up to that. How would leaning into lunch impact the store margin just in general? Matthew Clark: It's really about aggregate traffic. I think from a lunch perspective, the incrementality and recapturing that traffic there. The flow-through, obviously, we have the teams there, right? There's a staffing level that's already set. And so you're able to recapture margins at a higher rate than what the average is. And I think that's the key, right? That's why, ultimately, we believe that's the biggest lever on the margin side of things is to bring in more people when we have capacity. James Sanderson: All right. And just last question for me. Just stepping back, how should we look at the ability for you to consistently expand consolidated store margin over time? I think it's pretty much flattish with prior years the trend that we're seeing right now on an annualized basis. So the formula to get back to modest expansion. Matthew Clark: Sure. Our full year guidance still calls for about 25 basis points of 4-wall margin expansion in totality. Certainly, every quarter is going to have a little bit of ups and downs depending on, as we noted, group medical or one of the things that we saw in the first quarter was that produce prices were higher just because of weather conditions, right? But our outlook for the year remains unchanged because a lot of that just is timing that was already anticipated by us and built into our expectations for the quarter. So we feel very confident that 25 basis points a year is still attainable across the portfolio, and that's our plan for this year. That would put us north of the 16% kind of range, and that is inclusive of the growth of adding 26 new restaurants. So I would say that's still our target and still very viable, and that's our plan so far. Speaker 0 Your next question comes from the line of Jon Tower with Citi. Karen Holthouse: This is Karen Holthouse on for Jon Tower this evening. Yes, Anecdotally, it seems that there's more social content coming out. It's, I think, showing up in at least within our team, we've talked about it our feeds more often than I think just content that's more engaging. Could you maybe comment on anything you're doing differently on your end, how you're measuring engagement in that channel and how meaningful that you think that could be as a part of a go-forward marketing strategy? David Gordon: Sure, Karen. This is David. We have a pretty strong social presence across Instagram. We just -- I'd say in the past 6 months, dipped our toe in the water on TikTok here and there, using influencers, paid and nonpaid. I'd say for Cheesecake Factory, one of the most beneficial aspects of the concept is all the PR that we get on a regular basis, whether that's through -- not through paid media, right, but just through culture and showing up on late-night TV, et cetera. But we have many different tactics across all social media platforms that we're using on a regular basis and try and take a real multichannel approach, and we'll continue to do that. Karen Holthouse: And then a quick second one. I think Cheesecake Factory is probably one of the really like primarily U.S.-based brands that has a pretty big brand recognition. As you move around the world, kind of this is the concept there is theory, just the Big Bang theory is a reason it's popular. Are you building anything explicit in your second quarter or annual outlook for a potential benefit around the World Cup and the associated tourism? Matthew Clark: Karen, this is Matt. No, I think that would be a nice upside. I do think you're right. We do have great worldwide recognition, and we do hear that. And you're also right about the big bang theory, which is kind of funny but true. But I think that the World Cup could be a benefit. I think we'll -- if that happens, then we'll all be pleasantly surprised to the upside. Operator: Your next question comes from [ Kelly Merrill ] with Morgan Stanley. Unknown Analyst: This is Kelly on for Brian. Just wanted to ask, do you have any plans to iterate on bowls and bites just as smaller portions become more popular among consumers? And can you remind us, is that menu going to be refreshed a few times a year like the core menu? David Gordon: Certainly, menu innovation is going to remain core to everything that we do. I think you can expect in our next menu change that we'll be refreshing some new bowls and bites, and there'll be some new opportunities for guests to enjoy some new flavor profiles and some new interesting innovative menu items, whether that's on the bowls and bites menu or on the main menu and in bowls and bites. So our plan is to continue to make sure we have as much variety on the menu as possible. That's across every type of cuisine and every type of price point that we can offer for guests to give them the most value in any way they choose to use Cheesecake Factory. Operator: Your last question comes from Sara Senatore with Bank of America. Sara Senatore: I just -- I guess I wanted -- one last question on North Italia, I apologize if you touched on this earlier. But I guess, AUVs are down a little bit year-over-year, perhaps more than the same-store sales. I think one of the things that you -- or maybe 2 things you've talked about in the past are cannibalization on the one hand and on the other hand, awareness. So maybe a longer ramp and awareness is low, but also last year, you had perhaps more of a cannibalation impact because of where you were building those restaurants. I guess, as I look out this year, is cannibalization still a factor for North Italia? And also, I guess, conversely, are you opening in more new markets? And is that part of why the AUV might come down? So just some insights into the development strategy. David Gordon: Sure. That's a great question. Thanks, Sara. I think the mix for this year is about 50-50 new and existing markets. We did call out cannibalization last year, and we still have some of that lingering in some of those markets as well. As far as the new markets, as I said earlier, we opened in Northern California, very strong opening there. But we would expect what traditionally does happen in North is that there's a much longer not expecting that we're going to open up at the volumes of the last 2, but that we will open up a little shy of what our targets are and grow into those over time. And that's our own internal expectation. If we exceed that expectation, we're pleasantly surprised and that creates a little bit of cannibalization in the short term, we're okay with that as well. Operator: Ladies and gentlemen, that concludes today's call. Thank you all for joining. You may now disconnect.
Operator: Greetings. Welcome to TPG RE Finance Trust First Quarter 2026 Earnings Conference Call. [Operator Instructions] Please note, this conference is being recorded. I will now turn the conference over to Dan Kasell. Thank you. You may begin. Daniel Kasell: Good morning, and welcome to TPG RE Finance Trust Earnings Call for the first quarter of 2026. Today's speakers are Doug Bouquard, Chief Executive Officer; Brandon Fox, Interim Chief Financial Officer; and Ryan Roberto, Head of Portfolio Management and Capital Markets. Doug, Brandon and Ryan will provide commentary regarding the company, its performance and the general economy, and we'll answer questions from call participants. Yesterday afternoon, we filed our Form 10-Q, issued a press release and shared an earnings supplemental, all of which are available on the company's website in the Investor Relations section. This morning's call and webcast is being recorded. Information regarding the replay of this call is available in our earnings release and on the TRTX website. Recordings are the property of TRTX and any unauthorized broadcast or reproduction in any form is strictly prohibited. This morning's call will include forward-looking statements, which are uncertain and outside of the company's control. Actual results may differ materially. For a comprehensive discussion of risks that could affect results, please see the Risk Factors section of the company's latest Form 10-K. The company does not undertake any duty to update our forward-looking statements or projections unless required by law. We will refer during today's call to certain non-GAAP financial measures, which are reconciled to GAAP amounts in our earnings release and our earnings supplemental, both of which are available in the Investor Relations section of our website. Now I'll turn the call over to Doug. Doug Bouquard: Good morning, and thank you for joining the call. The broader economic backdrop during the first quarter of the year continued to provide an encouraging environment for investment activity within the real estate sector. While concern over private credit and broader geopolitical tensions have permeated the market, real estate credit has been relatively stable. As we survey market opportunities, we are closely monitoring capital flows in both real estate and credit, which will allow us to identify real-time trends that will drive the investment landscape. These insights are further augmented by the depth and breadth of TPG's global alternative investment platform. While real estate values have reset and our lending pipeline is robust, the recent steepening of the yield curve has put modest pressure on new acquisition activity. That being said, many of the key themes we've previously described continue to remain in place, including heavy refinance volume driven by broken capital structures and reset values, which have been further exacerbated by sustained elevated interest rates and supported by a consistent supply of back leverage for bank balance sheets. Building on the momentum of 2025, a year where TRTX closed $1.9 billion of new investments and achieved 25% year-over-year growth in earning assets. We are pleased to report a strong start to 2026. For the first quarter, our performance reflects our disciplined approach to risk management as we maintain stable risk ratings and 100% performing loan portfolio at quarter end. We saw no negative credit migration in the quarter with risk ratings unchanged at 3.0 and CECL reserves essentially flat quarter-over-quarter. In April, TRTX received the full payment of 575 Fifth Avenue, which was our largest office exposure and the material partial repayment on another office loan. And as a result, our office exposure is now less than 5% of our current balance sheet. As a natural consequence, the vintage of our balance sheet continues to compare favorably to our competitive set with 67% of our balance sheet comprised of 2023 and new loan originations. This is a direct result of the proactive risk management we've been consistent with over the past few years, combined with our strategic and measured approach to making new investments. As I look at our origination and repayment pace for this year, I expect we will finish 2026 with a substantial majority of the balance sheet comprised of 2023 and newer loan origination dates, which will provide shareholders with a new vintage portfolio and attractive credit profile. Of note, we've been able to achieve this balance sheet transformation while generating steady earnings and remaining underlevered relative to our peers. From an investment perspective, thus far this year, we've closed $324 million of loans and have another $535 million of executed term sheets, the majority of which are multifamily and industrial collateral, sectors we continue to target given their strong downside protection and solid long-term fundamentals. Since the start of Q4 2025, we originated 12 loans with total commitments of $1.25 billion, with more than 90% of these from repeat borrowers, underscoring the deep relationships we've cultivated within the real estate ecosystem, further amplified by the breadth of TPG's integrated real estate debt and equity investment platform. Furthermore, within the $535 million of executed term sheets that we have this quarter, the majority of those new investments are collateralized by multifamily and industrial exposure and are sponsored by high-quality borrowers across the U.S. From a liability perspective, we continue to expand our lender relationships and optimize the durability of our capital structure. Building on the 2 Series CLOs issued in 2025, which provide ample reinvestment capacity at an attractive cost of funds, we ended Q1 2026 with $173 million of liquidity, 78% non-mark-to-market financing and a debt-to-equity ratio of 3.1x. This positioning affords TRTX flexibility to pursue accretive investment opportunities while maintaining balance sheet discipline. Our company is in an advantageous position from a capital allocation standpoint. Given our strong liquidity position, we are able to both increase net earning assets while also repurchasing shares that we believe are undervalued. Since the year began through April 27, we repurchased over 1 million shares of common stock for a total consideration of $8.7 million at an average price of $8.07 per share. While we are proud of the foundation laid in 2025 and the strong start in Q1 2026, we remain focused on building on the success throughout the year. Our objective remains to continue to grow net assets and the earnings power of our company. With the insights and reach of TPG's real estate investment platform, a stable balance sheet and an attractive opportunity set, we are confident in our ability to deliver continued strong performance. Despite the strength of our balance sheet and our growing earnings power, our stock trades at a valuation that we believe significantly undervalues our position relative to competitors and offers compelling value on an outright basis as well. Simply put, our balance sheet looks remarkably different from our peers with a newer vintage loan portfolio that provides steady earnings and credit stability. Relative to our peers, we continue to distinguish ourselves, particularly when you look at a number of important metrics, including loan vintage as a percentage of the portfolio, multifamily and industrial exposure, office exposure, unfunded loan commitments, REO as a percentage of assets and total debt-to-equity ratio. The offensive posture we've embraced rooted in the strategic approach we laid out years ago positions us well to sustain our momentum. Our performance in 2025 set a high bar, and we entered the remainder of 2026 with the capital, the team and the drive to continue creating value for our shareholders. With that, I will turn the call over to Brandon to discuss our financial results in more detail. Brandon Fox: Thank you, Doug, and good morning. For the first quarter of 2026, TRTX reported GAAP net income of $15.2 million. Distributable earnings for the quarter was $19.5 million or $0.25 per common share, a 1.04x coverage ratio of our first quarter common stock dividend of $0.24 per share. During the quarter, we repurchased 557,000 shares (sic) [ 556,592 ] of common stock at a weighted average price of $8.06 per share for a total consideration of $4.5 million, which increased book value by $0.02 per share. As of March 31, book value per share was $11.06. During the first quarter, we originated 2 loans with total commitments of $148.4 million at a weighted average credit spread of 2.73% and received loan repayments of $123.6 million, including 2 full loan repayments of $92.7 million where the underlying collateral was 40% multifamily, 35% hotel and 25% industrial. Subsequent to quarter end, we originated a hotel loan with a total loan commitment and unpaid principal balance of $175.4 million at a weighted average credit spread of 3.0% and received 2 office loan repayments totaling $262.3 million, reducing our office loan exposure on a pro forma basis to less than 5%. Quarter-over-quarter, net assets remained flat at $4.1 billion. Year-over-year, our net assets have grown 26% or $868.0 million. At quarter end, our loan portfolio was 100% performing. During the quarter, we did not have any credit migration in our loan portfolio. Our weighted average risk rating for the loan portfolio is unchanged at 3.0. Our CECL reserve decreased slightly quarter-over-quarter to 179 basis points compared to 180 basis points at December 31, 2025. We ended the quarter with near-term liquidity of $172.8 million, consisting of $77 million of cash on hand available for investment, net of $15 million held to satisfy liquidity covenants, undrawn capacity under secured financing arrangements of $39.7 million and CRE CLO reinvestment proceeds of $41.2 million. Additionally, we held unencumbered loan investments with unpaid principal balance of $106.8 million that are eligible to be pledged under our existing financing arrangements. The company's liability structure is 78% non-mark-to-market across 10 financing sources and carries a weighted average cost of funds of 1.80%. Total leverage increased slightly quarter-over-quarter to 3.1x from 3.02x. At quarter end, we had $1.5 billion of financing capacity available to support loan investment activity, and we're in compliance with all of our financial covenants. With that, we welcome your questions. Operator? Operator: [Operator Instructions] Our first question is from John Nickodemus with BTIG. John Nickodemus: Doug and Brandon, you both provided some great color about sort of what you're seeing for originations looking ahead. Doug, I know you mentioned the $535 million of executed term sheets. With the portfolio kind of flat quarter-over-quarter, but obviously up year-over-year. I'd love to hear just some more thoughts on how we could see portfolio growth trending throughout 2026, particularly with those term sheets in mind, but also the large repayment that's already come in, in the second quarter. Doug Bouquard: Yes, sure. So look, I think that from a quarter-to-quarter perspective, obviously, we had a pretty substantial Q4 and then Q1, I think probably a touch of seasonality mix in there, resulted in perhaps a lighter number relative to Q4. But I really think the sort of big story is the trend, right? I mean the trend is growth the trend remains that we have -- even having $535 million of term sheets executed at this point, that also doesn't reflect the pipeline that we have beyond that. So when we think about earnings growth and our ability to really grow the company, our -- the stability of our balance sheet, the durability of our liability structure puts us in a great place. And when you combine that with the sourcing and resources of TPG's broader platform, we feel really excited about our ability to kind of continue on our path. John Nickodemus: Great. Really appreciate that, Doug. And then just one more for me. I believe on the last call, you mentioned that we should see some further progress on the REO portfolio this year. There's nothing huge, 5 assets, but I was just curious if there are any assets like 1 or 2 in particular of those 5 that we could expect to see come off sooner rather than later in 2026. Ryan Roberto: This is Ryan. I'll take that one. Thanks for the question. As we demonstrated last year, we sold 2 office assets. And I think our plan this year kind of remains the same as Doug iterated last quarter, which is our plan is to sell some assets this year as well. The majority of our REO is focused on multifamily, which there is some seasonality to leasing and some other things that we're kind of nearing the corner on. So we'll look to kind of update everyone with some progress there. But again, it remains the plan to sell some REO this year. Operator: [Operator Instructions] Our next question comes from Chris Muller with Citizens Capital Markets. Christopher Muller: Congrats on a really solid quarter here. So looking at the subsequent origination at $175 million, that's, I guess, above what your portfolio average is at about $80 million, but you guys do have other loans in that size range. So I guess the question is, are you guys starting to push into that larger loan space? Or is this more of a one-off deal? Doug Bouquard: Yes. So look, I think from a loan size perspective, we've kind of generally averaged somewhere in the sort of $85 million to $90 million range historically. So I think that really -- when I think about going forward, it will just be a mix. We're still looking at loans that are $30 million, $40 million, $50 million, $60 million. But if we see a really compelling high-quality asset or portfolio that is between $100 million and $200 million, we're also happy to pursue that. So I'd say in short, it basically has been a mix in the past and will continue to, frankly, remain a mix of, again, that sort of $30 million to $60 million range combined with some that again, just sort of warrant larger exposure based on borrower quality, asset quality and sort of how it fits into our portfolio. Christopher Muller: Got it. And it looks like multifamily and industrial have been the bulk of the recent activity, I guess, aside from that 2Q origination. How is competition for these assets these days? And are there other asset types that you guys find attractive right now? Doug Bouquard: Sure. Yes. So I think first on the competitive front, I think multifamily and industrial does have some competition. But that being said, I think we have a pretty tremendous sourcing edge at TPG. And also I think where we've probably been able to find some incremental value recently has been in the industrial space. I think that is a marginally less trafficked part of the market that I think people have a little bit less understanding of. We benefit from a fully integrated debt and equity platform that's both an owner of industrial and also a lender on industrial. So we feel like we have a particular edge there. So I would say that multifamily, I'd say it's sort of been pretty steady in terms of the competitive dynamic there. I think industrial is a little bit spottier, and that's where we found probably on the margin a little bit more value. Outside of multifamily and industrial, I think a lot of what we've done in the past, we will continue to do so, which is right now with the funding of this recent hotel well, that gets our pro forma hotel exposure to about 9%. We've generally kind of tended to keep that sort of below 10% to 15% as a target. So we will look at other sectors. We're very selective. But I think at the core of where we're focusing our energy is finding assets that have substantial downside protection in particularly 2 asset classes that we do feel like have strong long-term fundamentals. Christopher Muller: Got it. And if I could just squeeze a quick housekeeping one in probably for Brandon. Do you have the earnings contribution from the REO assets, handy? Brandon Fox: Thanks, Chris, for the question. We do have the incremental distributable earnings contribution for the REO assets. On a quarterly basis, it is positive. I would say that you can probably expect, depending on seasonality to Ryan's point, between, call it, $0.02 and $0.03 per quarter as a good run rate. Operator: [Operator Instructions] Doug Bouquard: I just want to thank everyone for joining the call this morning, and we look forward to updating you on our further progress. Thank you very much. Operator: Thank you. This will conclude today's conference. You may disconnect at this time, and thank you for your participation.
Operator: Welcome to Impinj's 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 Mr. Andy Cobb, Vice President, Corporate Finance and Investor Relations. Please go ahead. Andy Cobb: Thank you, Nick. Good afternoon, and thank you all for joining us to discuss Impinj's first quarter 2026 results. On today's call, Chris Diorio, Impinj's Co-Founder and CEO, will provide a brief overview of our market opportunity and performance. Cary Baker, Impinj's CFO, will follow with a detailed review of our first quarter financial results and second quarter outlook. We will then open the call for questions. You can find management's prepared remarks plus trended financial data on the company's Investor Relations website. We will make statements in this call about financial performance and future expectations that are based on our outlook as of today. Any such statements are forward-looking under the Private Securities Litigation Reform Act of 1995, whereas we believe we have a reasonable basis for making these forward-looking statements, our actual results could differ materially because any such statements are subject to risks and uncertainties. We describe these risks and uncertainties in the annual and quarterly reports we file with the SEC. We do not undertake and expressly disclaim any obligation to update or alter our forward-looking statements, except as required by law. On today's call, all financial metrics, except for revenue or where we explicitly state otherwise, are non-GAAP. All balance sheet and cash flow metrics, except for free cash flow are GAAP. Please refer to our earnings release for a reconciliation of non-GAAP financial metrics to the most comparable GAAP metrics. Before turning to our results and outlook, note that we will participate in the 2026 Evercore TMT Global Conference on June 2 in San Francisco. We look forward to connecting with many of you this quarter. I will now turn the call over to Chris. Chris Diorio: Thank you, Andy, and thank you all for joining the call. Our first quarter results were solid with revenue and adjusted EBITDA exceeding the top end of our guide range. Endpoint IC bookings hit an all-time record, driven by the custom ASIC ramp at our second large North American supply chain and logistics end user, our market-leading share position, retailer rebuys and customers booking beyond our standard lead times amid lengthening competitor lead times. Looking further out, we're approaching second half 2026 prudently, hedging against multiple possible macro scenarios. Starting with endpoint ICs, the RAIN Alliance has now released the 2025 industry volumes and our market share grew 1,700 basis points over 2024. That share gain is a springboard for strong second quarter demand. We believe we can meet that demand in the multiple scenarios we are modeling. Looking forward, we are focused on using Gen2X and enterprise solutions to spur preference for our endpoint ICs and grow our share further. First quarter inlay partner inventory declined sequentially as expected. So we entered the second quarter with healthy channel inventory and clear air to execute our strategy. Turning to our opportunities. In supply chain and logistics, we shipped meaningful volumes of the custom ASIC in the first quarter and expect those volumes to more than double in the second with the end user on track to fully convert to that ASIC before year-end. That ASIC opens the door for us to migrate upstream to our customers' customers, delivering ICs and solutions software that improve item visibility and traceability at a double-digit number of accounts. In retail apparel, we expect endpoint IC demand to increase in the second quarter. Multiple new end users are speaking openly about RAIN adoption, including a large European brand with whom we are closely engaged. And we are proving the benefits of Gen2X in retail, for example, by using it to dramatically improve item readability at a large Asia-based lifestyle brand and unlock a significant share shift opportunity. In general merchandise, we're focused on cosmetics, personal care and health with the goal of unlocking significant incremental endpoint IC opportunities and again, demonstrating the benefits of Gen2X. Food volumes are growing modestly as expected with the bakery rollout on track to double the number of deployed stores this year. Also in food, we and our partners beat the self-checkout readability targets set by the European grocer to progress to a store pilot. Although still early, full store grocery self-checkout enabled by our endpoint ICs and software is a massive opportunity. Overall, we are making strong progress advancing supply chain and logistics, general merchandise and food to fill in behind retail apparel, which is now in mainstream adoption. On the development front, we're growing our software and solutions teams to help solve end-to-end enterprise systems problems. We upgraded the processor and memory in our flagship reader to better support machine learning at the edge, helping us address those enterprise systems problems. And because the solutions almost invariably need Gen2X, we drive preference for our endpoint ICs at the same time. We also continue advancing Gen2X, for example, with a forthcoming update to our reader ICs and readers that improve M800 tag read range by up to 25%. In closing, we have an enviable market position, endless opportunities in front of us, good product supply and a strong wind at our backs. As we continue driving our bold vision, I remain confident in our market position and energized by the opportunities ahead. But faced with today's unpredictable macro, we're approaching the second half prudently even as we pursue market share, solutions successes and growth. As always, before I turn the call over to Cary for our financial review and second quarter outlook, I'd like to again thank every member of the Impinj team for your tireless effort. I feel honored by my incredible good fortune to work with you. Cary? Cary Baker: Thank you, Chris, and good afternoon, everyone. First quarter revenue was $74.3 million, down 20% sequentially from $92.8 million in fourth quarter 2025 and flat year-over-year from $74.3 million in first quarter 2025. First quarter endpoint IC revenue was $63.2 million, down 16% sequentially from $75.2 million in fourth quarter 2025 and up 3% year-over-year from $61.2 million in first quarter 2025. Endpoint IC revenue exceeded our expectations, driven by turns orders. Looking forward, we expect second quarter endpoint IC product revenue to increase sequentially on the favorable side of normal seasonality. First quarter systems revenue was $11 million, down 37% sequentially from $17.7 million in fourth quarter 2025 and down 15% year-over-year from $13.1 million in first quarter 2025. Systems revenue fell short of our expectations due primarily to the timing of Lighthouse enterprise CapEx spend. Looking forward, we expect second quarter systems revenue to increase sequentially. First quarter gross margin was 52.4% compared with 54.5% in fourth quarter 2025, and 52.7% in first quarter 2025. The sequential decline was driven primarily by higher indirect costs, annual endpoint IC price declines and revenue mix. The year-over-year decline was driven primarily by higher indirect costs and revenue mix, partially offset by the continued M800 ramp. Looking forward, we expect second quarter product gross margin to increase sequentially. Total first quarter operating expense was $35.5 million compared with $34.2 million in fourth quarter 2025 and $32.6 million in first quarter 2025. Operating expense was below our expectations, driven primarily by good fiscal discipline and timing of spend. Research and development expense was $20.4 million. Sales and marketing expense was $7.3 million. General and administrative expense was $7.8 million. Looking to second quarter, we expect similar operating expense to first quarter. First quarter adjusted EBITDA was $3.4 million compared with $16.4 million in fourth quarter 2025 and $6.5 million in first quarter 2025. First quarter adjusted EBITDA margin was 4.5%. First quarter GAAP net loss was $25.3 million. First quarter non-GAAP net income was $4.4 million or $0.14 per share on a fully diluted basis. Turning to the balance sheet. We ended the first quarter with cash, cash equivalents and investments of $235.2 million compared with $279.1 million in fourth quarter 2025 and $232.5 million in first quarter 2025. Inventory totaled $86.3 million, up $1.3 million from the prior quarter. First quarter capital expenditures totaled $1.7 million. Free cash flow was $2.2 million. Before turning to our guidance, I want to highlight a few items specific to our results and outlook. First, in March, we opportunistically repurchased $40.2 million aggregate principal of our 1.125% convertible notes due May 2027 using cash on hand. This repurchase highlights our commitment to minimize dilution, in this case, by roughly 400,000 shares as we manage our convertible debt. Second, our indirect cost of goods sold increased in the first quarter, driven by a short-term endpoint IC production issue that reduced our back-end capacity utilization. That issue is fixed and behind us. Third, as Chris highlighted, our inlay partners exited first quarter with healthy endpoint IC channel inventory. In second quarter, we anticipate strong sequential endpoint IC product revenue growth, driven primarily by underlying demand and to a lesser extent, by no channel inventory burn down. Turning to our outlook. We expect second quarter revenue between $103 million and $106 million compared with revenue of $97.9 million in second quarter 2025, a year-over-year increase of 7% at the midpoint. We expect adjusted EBITDA between $27.8 million and $29.3 million. On the bottom line, we expect non-GAAP net income between $24.6 million and $26.1 million, reflecting non-GAAP fully diluted earnings per share between $0.77 and $0.82. In closing, I want to thank the Impinj team, our customers, our suppliers and you, our investors, for your ongoing support. I will now turn the call to the operator to open the question-and-answer session. Nick? Operator: [Operator Instructions] And the first question will come from Timothy Arcuri with UBS. Natalia Winkler: This is Natalia Winkler for Timothy here. So first one was on the record bookings. Congratulations on that. Just wanted to understand if that kind of offers you guys incrementally more visibility into September quarter. And I think specifically, you're calling out having a little bit more of a conservative stance in the second half. So how should we kind of think about the visibility that you guys have? Cary Baker: Yes. Natalia, this is Cary. Thanks for the question. I'll take it first. There are a variety of factors that drove our strong Q1 bookings. First, our ecosystem is aggressively ramping, the custom ASIC to support our North American supply chain and logistics customer. And second, we're beginning to see retail rebuys after a prolonged period of destocking. Within those 2 trends, we did see inlay partner request times move from the lower end of our standard to the higher end of our standard lead times. And then finally, to a lesser extent, we saw some customers book beyond our standard lead times, likely in response to lengthening lead times from our competitor. At this point, we believe that the orders match the demand. And in fact, our 2Q bookings are off to a good start, and they're right within our standard lead times. Natalia Winkler: And I guess a follow-up, Cary, probably to you as well on the gross margin. It sounds like in March quarter, there were a few factors affecting -- there's the onetime back-end capacity issue and mix. And then I think usually, you go through the annual kind of pricing negotiations in this quarter as well. Can you kind of help us maybe decipher how these factors are -- how they have transpired in the first quarter and how we should think about them in the second quarter? Cary Baker: Yes. I'll start first with the annual price negotiations. Those were largely complete entering the first quarter. There were a little bit -- a couple of laggards, but mostly complete entering the quarter. We didn't exactly size it other than to say it was within our normal expectations. Maybe a little bit on the aggressive side as we were driving pricing to support the food ramp that we expect to begin this year. On the capacity utilization issue, we had an issue with one of our production tools that drove that capacity underutilization. As I mentioned, that issue is now behind us, and we expect to have full production in Q2. If I were to size it, I would say that the underutilization charge was roughly 100 basis point impact to Q1. And we expect in the second quarter on a product basis, our gross margin to increase sequentially. Of course, in second quarter, recall, we had the $17 million license revenue. So that will drive an outsized gross margin increase. But if I strip that out and look at just the product, we expect a sequential increase in product gross margin. Operator: The next question will come from James Ricchiuti with Needham & Company. James Ricchiuti: Cary, just a follow-up to that, is the improvement that you're anticipating in Q2 product gross margin, is that mainly that 100 basis points? Or are there some other factors that will drive additional improvement to product gross margins in Q2? Cary Baker: Yes. The 100 basis points is obviously sizable. So yes, that's driving a lot of it. But in addition, the M800 continues to ramp. That drives gross margin accretion. We're getting our lots of revenue scale back in Q2, which will drive leverage against our fixed operating costs. And we also expect higher systems revenue in the second quarter. All of those factors will contribute to the sequential increase in product gross margin. James Ricchiuti: And the 3 factors that you cited beyond the production issue, would you say that the total combined would be a bigger tailwind than just recapturing that 100 basis points? Cary Baker: Probably not, Jim. I think the 100 basis points will be the largest even when comparing the rest as a collective. James Ricchiuti: Okay. And just a quick follow-up just on OpEx. I'm wondering if -- how we might be thinking about OpEx in the second half, just given some of the puts and takes around demand and also some of the conservatism that you talked about just in light of the macro. Cary Baker: Yes. We expect our OpEx to follow normal seasonal patterns. So we'll see similar OpEx in the second quarter and then the back half steps up. That is a combination of us continuing to invest in our business, primarily in the engineering line and offset by the seasonal pressure -- upward pressure on OpEx that we see in the first half of the year. Operator: The next question will come from Troy Jensen with Cantor Fitzgerald. Troy Jensen: Congrats on just another great quarter and great results here. So Chris, I guess for you, I thought coming into the quarter, retail might have been at risk a little bit given the high gas prices, but you seem more bullish than ever on retail. So can you just talk a little bit? Is this -- obviously, it seems like it's expanding SKUs and new customers, but any more detail would be great. Chris Diorio: Yes. So Troy, we do see some retail strength. We see retail rebuys, especially helped by the tariff clarity and essentially the tariff whipsaws are gone and there's more certainty in the markets associated with tariffs. We see new program growth at many accounts, Abercrombie & Fitch, Aritzia, Fabletics, Old Navy, just many others. And so when you combine those factors together, we feel good about the retail situation in the market. And on top of that retail growth, we feel good about what's falling in behind, which is supply chain and logistics, retail general merchandise and food. So I think those factors are contributing to our -- some of the strength we saw in the first quarter and the very strong bookings we saw in the first quarter leading into the second quarter. Obviously, macro uncertainties are staring us in the face behind that. And so we're being prudent and cautious as we look forward. But we feel good about 2026, absent that macro uncertainty and there's a big if associated with it. But if consumer demand holds up through that macro, we feel good about 2026 overall. Troy Jensen: Yes. Clearly. All right. Maybe one quick follow-up too. Can we just dive into a little bit on the NXP royalty, just the longevity of that. Do you guys feel like their new chip has no longer violates your guys' IP? And if so, how long would it take them to try to like design out? And if designing out, is that an opportunity for you guys to get more share here? But any insight would be great. Chris Diorio: So yes, Troy, there's a limited amount of information that we have right now because NXP's new IC is, of course, new. I'll just say that we don't know yet if they have designed out or not designed out our intellectual property. We do know, of course, that the older ICs, which are still in market, use our intellectual property because there were court rulings and juries decided that they did use our intellectual property. So NXP needs to either sunset those existing ICs or redesign them as well. We don't know the time frame for them doing so. We obviously got the payment this year. I can't speak to next year, but we're guardedly optimistic that we'll get another payment next year, and then we'll see what happens after that. Obviously, time will tell. And as we learn more and are able to report things out, we will. Cary Baker: And Troy, just to be clear, the payment that we received this year was $17 million, up from $16 million last year. Operator: The next question will come from Blayne Curtis with Jefferies. Ezra Weener: Ezra Weener on for Blayne. Just wanted to follow up on the European grocery opportunity. I know the current food opportunity, bakery moving into protein. This seems like it would be a little bit more all-encompassing. Can you talk about kind of the sizing of that opportunity and the time line? And then I have a follow-up after. Chris Diorio: So yes, Ezra. So it is a very large opportunity. It is really for us, the first meaningful opportunity that is a full store, every item tagging and consumer self-checkout opportunity. To date, the testing has been all lab testing. European grocers set certain readability targets for them to make an internal decision to transition to a live store pilot. And not only did we and our partners meet those readability targets, but we exceeded them, and we're waiting for the decision for them to go forward with a store pilot. So we're excited about that opportunity. We continue to be -- we have a very close relationship with that grocer and looking forward to being able to continue to report positive results there. But to answer your question, very large, all items. They do control a lot of their own supply. So they're one of the grocers that would be an -- that are an ideal candidate for tagging all items because they can get the tags on because they have significant control over their own supply chain. Ezra Weener: Got it. And then a follow-up question. You talked about with the ASIC opportunity moving upstream at a double-digit number of accounts. Can you talk a little bit about that process and what that looks like? Chris Diorio: Yes. So our second large North American supply chain and logistics end user has done an amazing -- just an amazing job driving operational efficiencies across their organization using RAIN RFID. The custom IC is a further step down that path for them and also for us. Both, they and we see opportunities for them to use their prowess and their learnings, basically what they've done, what they've learned to help their customers in the same way. It's not just about package shipping. It's about driving operational efficiencies at their customers and leveraging their learnings to improve their customers' operations. So it's a big opportunity for them. It's also a big opportunity for us. And I guess the way I think you really should think about it is that end user that we've been working with for these many years is actually a partner for us. It is a replication partner that is now starting to pull us into other accounts. And they're a fantastic partner for us. Operator: The next question will come from Christopher Rolland with Susquehanna. Christopher Rolland: My question is also on the competitive landscape and your competitors' new offering. They kind of described their situation in RFID as having channel issues in 2025 with their partners, but coming in 2026, clean in terms of that perspective and then great prospects for their new product with greater capabilities. I guess, would you describe their situation as similar to your own? And then if you could talk about the competitive prospects for their new product and where you think market share might move between you and them moving forward on these new capabilities? Chris Diorio: Okay. Chris, that's quite a question. I think I could talk for maybe an hour on that one, but I'll do my best here. First, starting with our competitor's IC. I'm going to start in a slightly different spot. You probably noticed as have others that the RAIN Alliance endpoint IC numbers in 2025 were down. Part of that reason, of course, was due to retailer destocking and the impact of tariffs and other whipsaws that happened in the market. But we believe another part of it was due to excess channel inventory of our competitor ICs. So competitor ICs in the channel that needed to get burned down. So we believe that to be the case. I think your comments that there was some -- you didn't use the word burn down, but that there was some improvement in our overall channel position would tend to buoy our belief that that's what happened and was part of the reason for the decline. As we look forward, we had record first quarter endpoint IC bookings. Some of that strength undoubtedly spilled over to our competitor as well. The market is strong. We're doing well. We had strong bookings. They probably did too. As we look forward, they've got a new IC. It's early in the market. We haven't seen it out there much at all. Our competition for it is our existing M800, which is performing very well in the market. We also continue to improve that M800 with time and Gen2X. And Gen2X is kind of unique in that it doesn't just improve the endpoint IC, it improves the reader as well. On the last earnings call, I talked about improvements to reader sensitivity that extended a reader's hearing range by more than 40%. On this call, I talked about changes that improve a tag's ability to be powered and extend its range by up to 25%. And we've got further improvements in Gen2X in the wings. I truly -- and Gen2X is really optimized for enterprise solutions. So I truly believe that our product portfolio, our solutions emphasis, what we're doing in Enterprise Solutions and Gen2X will allow us to solve enterprise problems in a way that mix and match components just can't. So look for us to continue to drive into the market, focus on enterprise solutions and drive successes for us as a company. Christopher Rolland: Fantastic. And maybe coupled with that success, where are you planning to invest or reinvest? Do you just see many more inorganic or organic opportunities? Or do you think there could be some inorganic opportunities here to -- whether they're bolt-ons or adjacencies, something else to do in this market? Chris Diorio: Yes. So I'll take that one also. So invest, we continue investing in our existing product lines and expect us to continue doing so. We've got a lot of improvements and changes and overall positive things we can make. Equally importantly, perhaps more important is the effort we're putting into enterprise solutions, making our products and the enterprise benefit from those products be seamless for the enterprise and driving partner replication of those solutions so we can expand the pace or both expand adoption and increase the pace of adoption. So in response to the last question, I talked about our second large North American supply chain and logistics end user as a partner. And we truly see them as a partner because with their prowess and know-how and our technology underpinning, I believe we can drive solutions out into the market broadly. In terms of other opportunities for us, inorganic opportunities, obviously, we keep our eyes open. And if an opportunity arises, we'll be looking. Operator: The next question will come from Guy Hardwick with Barclays. Guy Drummond Hardwick: Just a quick fairly easy one for you, Chris. I mean you said you feel good about 2026. If I ask you to order, rank in order the factors which make you feel good about '26. What would you start with? And what are the other ones? Chris Diorio: Well, I'm going to have to think about that one for a second, Guy. So I'm excited about a lot of things. Number one, I'd start with our opportunities around enterprise solutions. Us bringing ML to bear at the edge on the reader to confine read zones, to identify items that are transitioning, whether it's to a dock door, store exit, front store, back store, any of these transitions. ML is providing us some very significant benefits, and I believe will transform the industry and our ability to drive those solutions in the market and provide enterprise benefits, so that would be number one. Number two, after that would be Gen2X and what we're doing in Gen2X to enable those ML solutions, again, to spur enterprise adoption. We're going to see those -- that adoption happening in the areas that I mentioned already, supply chain and logistics. And I'll put that one first because that's where -- we believe we can first and best apply our ML techniques in Gen2X. And obviously, there's a lot of transitions and readability needs to be incredibly high for those use cases. You don't want to miss any package. So supply chain and logistics and us falling in behind our key end user there and helping them and us and their customers in the market. So I probably put that one number one. And then, of course, we have general merchandise and food, which are the other 2 that I mentioned. We are waiting on some of the key end users to choose what categories they'll be going forward with in the latter part of 2026 across general merchandise. We mentioned some categories, of course, health, cosmetics, beauty, and then there's obviously food there, food ramp and proteins and bakery. So all of those are out there. We're being a little bit prudent in terms of us picking and choosing simply because we're going to wait to see what the customer announces. But we do expect a growth in general merchandise and food this year, and we'll be pushing on both of them. So that's how I order them. I order them in basically the order in which I spoke to them rather than calling 1, 2 and 3, but that's how I'd see things. Secular growth in retail, of course, supply chain and logistics, enterprise solutions, huge opportunity and then food and general merchandise coming up behind. Guy Drummond Hardwick: And just as a follow-up, just after 5 consecutive months of double-digit declines in U.S. apparel imports, just wondering how you feel about the status of apparel inventories amongst your largest customers here in the U.S.? Chris Diorio: We see apparel inventories picking up, both because they're incredibly lean right now. And you can listen to some of the retailers are actively talking about growing some inventories. So we see inventories picking up. And it's also the tariff side. Tariff certainty has contributed to increased orders. Operator: The next question will come from Scott Searle with ROTH Capital. Scott Searle: Great job on the quarter and the outlook. Chris, you've referenced a couple of times concern from a macro standpoint. I wonder if you could flesh that out a little bit. Are you seeing any of that in terms of order patterns from your customer base? And then as we look into the second half of this year, and you kind of answered this indirectly in a couple of earlier questions. But should we be expecting normal seasonality, all things equal? And what are you baking in, in terms of your expectations for a large general merchandise customer moving into the next phase of development and food? Given yesterday's comments from Avery Dennison, it sounds like they're expecting those to move pretty aggressively in the second half. I'm wondering if you could kind of gauge the range of outcomes of what you guys are building into your baseline expectations. Chris Diorio: Okay. I'm going to try and take those questions. There's a lot of questions in there, and I'm going to try and take them, but I'm going to tag team with Cary, and you'll catch me on the parts that I miss. So to start with, no, we are not seeing anything currently from the macro perspective. However, we look at the clouds on the horizon, and we want to be prudent. Our hope and expectation is that consumer demand will hold. And if it does, as I said, we expect 2026 to be a good year. But I can't predict the future and the things that are going on right now are way out of our control. And so that's where our prudence comes in. So we're just being careful, and we're modeling a bunch of different scenarios. But as of right now, do we see anything, any pullbacks or any impact right now? Nothing of consequence. Second, in the categories, let me speak to food a little bit because, yes, Avery Dennison did make those comments the other day and -- or yesterday. And we obviously know of those -- or know of that account and specifically the accounts that they're talking about and are in there and trying to drive the use case in those accounts. Our preference here is to wait for the enterprise end user to make a statement in terms of what they're going to do. And that's just a preference, just as the way they are. And I'm not saying anything negative there, just we're going to wait and see until they make an announcement and then we'll speak a bit more about it. So don't view our reticence to speak a lot as anything negative on the opportunity there. It is a real opportunity, and we're excited about it. We only guide one quarter at a time. Customer hasn't made an announcement yet. So when they make an announcement, we'll speak more about it. And that also covers the general merchandise categories. I alluded to some of the general merchandise categories, as I spoke just a minute ago about. We see significant opportunities in those categories, health, beauty, cosmetics, personal care, and we're putting effort into those categories to make them go. When the customer makes an announcement, we'll be as excited as you are. Or maybe the other -- we'll be more excited than you are. I'll put it that way. So what did I miss? Cary, what did I miss? Cary Baker: You did great. Scott Searle: No, that was perfect, Chris. And I'll hopefully make this the follow-up quick. But in terms of the European food opportunity, given the magnitude of the items there, you have to push down across the entire supply chain and vendor supply chain. Is that something that requires DPP? And maybe just some quick updated thoughts on that and timing? Chris Diorio: The first answer -- the answer to the first question is it is not -- it doesn't really require DPP. DPP is rolling out. The category that impacts us in terms of the DPP rollout is textiles, and this is a grocery opportunity. The other stuff is batteries and tires and stuff, which is kind of not really relevant. The difference between this grocer and many others is that they control the significant majority of their own supply chain. So if they want to get tagging, they can do it themselves. Of course, they sell some categories as well, but they're in a very good position in order to drive the tagging when they say go. So that's why we see a significant opportunity there. In terms of the DPP overall, the delegated act for textiles will come into force in 2027. There'll be a grace period currently estimated to be about 18 months. We'll have to wait and see how that goes. To my best estimate, I'd say DPP will be meaningful near the end of this decade. We are participating in many of those DPP efforts. RAIN RFID is now approved as a data carrier for DPP. We are doing some work on the endpoint IC side on the beta side on our ICs to support DPP. And so expect us to be a key part of it, but at a measured pace because the actual implementation is still several years away. Operator: This concludes our question-and-answer session. I would like to turn the conference back over to Chris Diorio, Co-Founder and CEO, for any closing remarks. Chris Diorio: Thank you, Nick, and I'd like to thank you all for joining the call today. Thank you very much for your ongoing support. Bye-bye. Operator: The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
Operator: Good day, and welcome to the Essex Property Trust First Quarter 2026 Earnings Call. As a reminder, today's conference call is being recorded. Statements made on this conference call regarding expected operating results and other future events are forward-looking statements that involve risks and uncertainties. Forward-looking statements are made based on current expectations, assumptions and beliefs as well as information available to the company at this time. A number of factors could cause actual results to differ materially from those anticipated. Further information about these risks can be found on the company's filings with SEC. It is now my pleasure to introduce your host, Ms. Angela Kleiman, President and Chief Executive Officer for Essex Property Trust. Thank you. Ms. Kleiman, you may begin. Angela Kleiman: Good morning, and welcome to Essex's first quarter earnings call. Today, I will cover our first quarter performance, discuss regional trends and conclude with an update on the transaction market. Barb Pak will follow with prepared remarks, and Rylan Burns is here for Q&A. Starting with the macro environment. U.S. economic conditions year-to-date have generally unfolded in line with our outlook with national labor trends remaining soft. Additionally, heightened geopolitical tensions and inflationary pressure in recent months have contributed to increased near-term uncertainty. Against this backdrop, we delivered a solid first quarter with core FFO per share exceeding the high end of our guidance range and same property revenues trending ahead of plan. Two key factors contributed to these results. First, we successfully deployed an occupancy-focused strategy to maximize revenues, generating a 20 basis point year-over-year occupancy gain. Second is the strength in Northern California combined with the durability of our supply-constrained West Coast markets. There is a direct correlation between housing supply and the cost of housing for consumers. It is no surprise that markets with some of the highest rental rates are typically markets with significant legislative burden on housing providers, which deters building activities, leading to a chronic housing shortage. Looking forward, permitting activities remain at a historical low in California. And as such, we expect new housing deliveries to remain low at around 0.5% of existing stock for the next several years. On the demand side, we are seeing early indicators of improvement in 3 areas: first, job postings from the top 20 technology companies have remained steady despite the layoff headlines. Second, elevated levels of venture capital investments in the Bay Area are funding a new wave of startup companies. And third, continued office expansion announcements in our markets. In summary, the low level of housing supply throughout our markets provides resilience across a wide range of economic conditions while improving demand indicators position the portfolio for sector-leading long-term rent growth. Moving on to property operating highlights. We achieved same-store blended rent growth of 1.4% for the quarter, which is generally in line with our expectations as we execute an occupancy-focused strategy ahead of the peak leasing season. From a regional perspective, Northern California was our best market, performing ahead of plan for the quarter, with blended rent growth of 3.2% led by San Francisco and San Mateo, followed by Santa Clara County. During the quarter, while occupancy increased by 50 basis points sequentially, we were also able to increase rents, demonstrating the strength of this market. Attractive affordability, favorable demand drivers and limited supply support our expectations for solid growth to continue in this region. As for Seattle, this region performed in line with our expectations for a slow start to the year, with blended rent growth of negative 80 basis points. This was primarily driven by a soft demand environment combined with the absorption of supply delivered last year. Encouragingly, during the quarter, we achieved sequential improvements each month in net effective new lease rent growth and occupancy while reducing concessions. With additional office expansions recently announced in the region, we maintain our conviction with the long-term outlook for this market. On to Southern California, which is closely linked to broader national employment trends. This region also performed on plan with blended rent growth of approximately 1%, led by Orange County and Ventura. In Los Angeles, incremental improvements continues at a modest pace. Heading into peak leasing season, we have shifted our operating strategy to driving rent growth across most markets, and our portfolio is well positioned with April financial occupancy at 96.4% and blended lease rate growth north of 3%. Turning to transaction activities. With minimal forward-looking supply deliveries and favorable fundamentals, interest in multifamily assets on the West Coast remains healthy, especially in the Bay Area, as evidenced by the 50 basis points cap rate compression since 2024. Essex has been the largest investor in this market in the past 2 years as we allocated approximately $1.7 billion of capital ahead of the cap rate compression, generating substantial value for our shareholders. Overall, cap rates across our markets remain consistently in the mid-4% range. However, with our stock trading close to a 6% implied cap rate over the past several months, which is a significant discount to private market valuation, we shifted gears and repurchased approximately $62 million of stock, thereby continuing our strong capital allocation track record of maximizing accretion for our shareholders. With that, I'll turn the call over to Barb. Barb Pak: Thanks, Angela. Today, I will discuss our first quarter results and full year guidance and conclude with comments on the balance sheet. We are pleased to report a solid first quarter with core FFO per share exceeding the midpoint of our guidance range by $0.11. There are 3 key drivers of the outperformance. First, same-property revenues, which grew 2.9% on a year-over-year basis, was 50 basis points ahead of plan and accounted for $0.04 of the beat. Higher occupancy and other income were the key components of better revenue growth during the quarter. Second, same-property operating expense growth was flat on a year-over-year basis, which was lower than expected and accounted for another $0.04. However, this benefit is timing related and expected to reverse in the second half of the year. Third, non-same-property and co-investment NOI make up the remaining $0.03 of outperformance. As for our full year outlook, we are reaffirming our same-property growth and core FFO per share guidance ranges. While we have started off the year in a solid position with revenue growth trending ahead of plan, we'd like to get further visibility into peak leasing season before adjusting our forecast due to the current macro uncertainty. As it relates to the remainder of our FFO forecast, there are 2 key factors that are different from our original guidance. First, we expect to receive approximately $90 million in early structured finance redemption proceeds, which are expected to occur in the second quarter. We are pleased to see this early redemption activity despite it causing a $0.07 headwind to our second half forecast as it demonstrates the continued strength of the West Coast markets. The second factor is share buybacks. We took advantage of the significant discount in our stock price and repurchased approximately $62 million at an average price of $243.76, which equates to an attractive FFO yield of 6.5%. As such, the near-term earnings headwinds from the structured finance redemptions is largely offset by the benefits from the buybacks, and our full year forecast is unchanged at this time. Concluding with the balance sheet. We recently repaid $450 million in unsecured bonds that mature, resulting in limited remaining maturities for the balance of the year. With net debt to EBITDA of 5.5x, over $1 billion in available liquidity and ample sources of available capital, the balance sheet remains in a strong position. I will now turn the call back to the operator for questions. Operator: [Operator Instructions] Our first question is from Nick Yulico with Scotiabank. Nicholas Yulico: In terms of the blended rate growth, I know, Angela, you gave the April stats there. I think you said north of 3%. Can you just remind us how to think about how that's going to trend this year to get to your 2.5% guidance for the year? Angela Kleiman: Nick, thanks for your question. We're on plan as it relates to our guidance. And so if you look at first quarter coming in at 1.4% and April is already north of 3%, it's -- we don't anticipate challenges to hitting that 2.5% for the year. And we -- at this point, we're still anticipating that first half and second half are pretty similar to each other. And so things are on plan. Nicholas Yulico: Okay. Great. And then second question, I guess, Barb, on you talked about the FFO guidance the $90 million. I just want to be clear, the $90 million of additional or early redemptions, is that like a pull forward for redemptions you assumed in the back half of the year? Or is it just an additional level of capital coming back altogether? And how should we think about -- is there any potential for that FFO headwind to get even worse throughout the year if this kind of repeats again? Barb Pak: Nick, that's a good question. So the $90 million is effectively maturities that were set to mature in '27 and '28. And so it's been pulled forward into 2026. And because of that, we don't have any redemptions in '27 and '28 now. So the headwind is effectively behind us at this point. Operator: Our next question is from Jana Galan of Bank of America. Jana Galan: Sorry, just a quick question on the change in methodology for the net effective rate growth. I guess, like, one, what drove the decision to change it? And then two, when comparing with the prior disclosure, it appears like it's higher in 2Q, 3Q and then lower in 4Q and 1Q. Would that be correct? Angela Kleiman: Jana, you are right on point on the cadence when it comes to the lease rates. So effectively, we made this change, and we actually signaled this change last year when we reported or detailed like-for-like lease terms, but we also reported all lease terms because with feedback from investors that it was easier for everyone to look at how we report the same way as our peers. So just really to be in line with our peers. So there's no change to our business and certainly no change to how we approach our business. And as far as the cadence, all leases means there will be a little bit more variability and with the highs in the second and third quarter and lower lows around the first and the fourth quarter. Jana Galan: And I appreciate the color on, kind of, the April operating stats. I'm wondering if you could share where renewals are being sent out for the summer? Angela Kleiman: Yes. Yes. We are actually in a good position. We continue to be with renewals sending out around 5%. And of course, that can get negotiated. But so far, our renewals have been pretty darn sticky, which is a good indication of the fundamentals of our markets. Operator: Our next question is from Eric Wolfe with Citi. Nicholas Joseph: It's Nick Joseph here with Eric. California is off to a strong start, but obviously, there have been some recent layoff announcements from some of the larger tech companies. Are you seeing any changes in that market or all the forward indicators holding strong? Angela Kleiman: Yes, Nick, that's a good question. Job -- the demand side is something we do watch closely and BLS visibility is not as great nowadays. But what we are seeing is the layoff announcements, if you look through to the WARN notices, it shows that the majority of the layoffs are not in our markets. These are -- these layoffs apply to global locations. And a couple of areas that we track that I'm happy to share with you that gives you a better forward-looking indication. One is that when we look at the top 20 tech job openings, they remain steady and it's actually improved a little bit in the past couple of months. But we don't expect that to accelerate. Having said that, things are just fine on the ground. We also look at both new and continued unemployment claims, which remains at a low level. Now this tells us that people that are displaced in our markets, they're able to find another job quickly. But most importantly, is our Northern California performance, which is -- that market has the highest concentration of tech companies, and it's our best-performing region. Operator: Our next question is from Steve Sakwa from Evercore. Steve Sakwa: Maybe just going back to the -- I guess, the repayment. Is there any chance that you could backfill that with, I guess, new investments? I don't know exactly kind of what the market looks like to make some of these new investments and kind of where your head is in terms of making new investments. Rylan Burns: Steve, Rylan here. As we've communicated, we remain actively involved in many conversations related to new investments on the structured finance side. We were not anticipating going into this year that we'd get that $90 million back. But as Barb alluded to, this business has kind of been level set at a lower rate. So we're continuing those conversations. We're tracking a few deals that we think could present really attractive risk-adjusted returns. So we remain committed to the business, and we'll continue to look for opportunities when the opportunities present themselves. Steve Sakwa: Okay. And maybe just going back to the expense. Can you provide just maybe a little bit more color? I mean, I realize it was pretty flat in the first quarter, and it sounds like a lot of that was timing. Can you maybe just provide a little more detail on kind of where the surprises came in the first quarter and what, I guess, is likely to reverse itself in the back half of the year? Barb Pak: Yes, Steve, this is Barb. On the expense side, it really came down to lower controllable expense spend in the first quarter as we delayed several projects from the first quarter into the second and third quarters. And so that's really what drove it. For the full year, our controllable expense spend is expected to be around 2%. So it's still very low in anemic, and we do still think it's going to hit at this point. It was just a delay in our spend. Operator: Our next question is from Brad Heffern with RBC. Brad Heffern: Barb, last quarter, you said that you were assuming no redemption proceeds for a couple of the 2026 maturities. I was wondering if you have any update there or if that's still the case? Barb Pak: Yes. So good memory. That is the case. We did have one of our investments did mature at the end of March, and the sponsor did contribute some additional equity, and we did grant a small extension on that investment. And there is still a lot of moving parts with that investment and not everything is finalized. And while we could have continued to accrue from an FFO perspective and it would have benefited our FFO, given some of the uncertainty related to this investment, we decided not to continue to accrue. There is value there, and there will be upside to our FFO, but it really is depending on the timing of when we can settle a few of these open items. And right now, it looks like it's probably an early '27 event, but more to follow as we go forward. The other large investment that we had stopped accruing on in the fourth quarter, we're in ongoing discussions with the sponsor. That one doesn't mature for a couple more months. So more to follow on that one. No difference in how we budgeted that one as of yet. Brad Heffern: Okay. Got it. And then just a follow-on to the change in the spread methodology. Do you have the number handy for what 1Q would have been under the old methodology just so that we can kind of compare to what we had in our models? Angela Kleiman: Sure. Happy to. Angela here. So on a like-for-like Q1 blended would have been 2%, so a little bit higher than on all lease. And the components are new lease will be negative 1.2% and renewal will be the same, 3.9%. Operator: Our next question is from Jamie Feldman with Wells Fargo. James Feldman: So I appreciate the color on blends in 1Q across the regions and even in April. Can you talk about new versus renewal in April? And then also for 1Q, can you talk about new versus renewal across the regions? Angela Kleiman: Sure, happy to. So in April, I'll start with April, new versus renewal, let's see. New is -- where to go. Hold on, James, I have it somewhere. Here you go. New is about negative 90 basis points and renewal is about 5%. So that takes April to 3.1%. And on a regional basis, Northern California, once again, the shiny star with the blend at north of 5% and followed by Seattle with a blend north of 2% and Southern California around 1.5%. So that gets you to that 3.1%. So it's generally playing out as we had anticipated. And I know I had guided to, for the full year, renewal around 3% to 4% and new around 0% to 1%. And all the markets are pretty much coming in, in line with the exception of Northern California outperforming. James Feldman: Okay. And there's been a lot of kind of political tax headlines across some of the West Coast markets. I mean any thoughts or any feedback from tenants if there's any implications to demand? Or it sounds like you're feeling pretty good about the job market and job postings, but any color or conversations with your peers about how people are thinking about the political environment? Angela Kleiman: Yes, that's a good question, and it's so hard to predict, and it's just too early to know how this will play out. There's the wealth tax that is probably what you're referring to, but at the same time, there's also what we're seeing is a lot of opposition to it, and there's actually a counterbalance measure to advocate responsible expense management rather than imposing more taxes. So I think this will -- we just need a little more time to see how this plays out. But we've not seen any impact to our business, and we've not heard from others about having a direct impact to Essex or multifamily directly. Operator: Our next question is from Austin Wurschmidt with KeyBanc Capital Markets. Austin Wurschmidt: Could you guys speak to affordability within Northern California? And just given kind of the optimism that you highlighted around job trends and supply conditions, I guess, what the runway looks like for you to continue to push on blended lease rate growth within that region? Rylan Burns: Austin, this is Rylan here. I mean this has been a key component of our fundamental thesis on Northern California for the past several years. You've seen significant steady increases in household income growth over the past decade continued through COVID. So as it stands today, our current rent-to-median income ratios in Northern California stand at around 21.5% compared to a 20-year average of almost 26% and a historical peak over the past 20 years, closer to 32%. So there is significant rent upside on those metrics alone to get back to a point that's more in balance or closer to those historical peaks. So again, it's not the primary driver, but it is a fundamental thesis that we feel very attractive as it relates to Northern California. Wages continue to increase in these markets. And yes, again, I think the consumer is feeling very healthy in Northern California in particular. Austin Wurschmidt: That's helpful. And then just switching maybe to Southern California. I mean, last quarter, I think you indicated maybe it was L.A. specifically that conditions were stabilizing and maybe we're seeing sort of some early signs of rent growth improving. What's sort of the latest thoughts and outlook for that region as well? Angela Kleiman: Yes, Austin, good question. L.A. is progressing at a glacial pace. It continues to be our most challenging. So for example, if we excluded L.A. portfolio, our April new lease rates actually would be 180 basis points higher. It will flip to 90 basis points positive. Having said that, we didn't anticipate things to move quickly. We expect the progress to be slow and choppy, which has been the case. And so we don't get too caught up by short-term numbers because you'll see puts and takes. For example, if you look at economic occupancy compared sequentially from fourth quarter to first quarter, it's a slight decline. But if you look at blended, it actually went up by 70 basis points. So you're going to see that dynamic to continue to play out. But the net-net is that this market is stable. We are -- we've seen the trough, and there's now -- it's trending better, but just slow. Operator: Our next question is from John Kim with BMO Capital Markets. John Kim: We're halfway or half an hour into this call, and I don't think you've mentioned AI. So I'm wondering if you feel like you're getting a direct benefit or you a direct beneficiary of AI job growth? Or is it more indirect for you or more moderate given most of your assets are in Santa Clara and San Mateo County. I was just wondering if you could just comment on if you're seeing a lot of tenants in your market employed by AI companies. Angela Kleiman: Sure thing, John. I do believe that we are getting a direct benefit from AI, especially as you get closer to San Francisco. But more importantly, what we don't have clarity on is all the start-ups that's happening because of AI, and that is throughout our markets. And if you look at the strength of our market, while downtown is doing strong or doing well, it also is still in recovery because it recovered later than the Peninsula. And so we certainly anticipate that benefit of AI to continue. And more importantly, we are also seeing a lot of these large AI companies expand to the Peninsula as well. So over the long term, I think all of our markets will continue to benefit, particularly in the suburban markets. John Kim: Okay. And then I wanted to ask Jana's question maybe a little bit different way. But looking at your lease growth under the old definition, you had a peak in the second quarter and a deceleration of 70 basis points in the third quarter. Under your new definition, that drop-off is steeper. It's 130 basis points. So do you see that a similar dynamic occurring this year? Or do you think this -- the seasonal trends will be different and that drop-off would be more moderate? Angela Kleiman: Yes, John, that's a good question. Big picture from -- when you look at all lease perspective, it's going to be -- you're going to have more variability. Now I don't know the exact magnitude at this point because we are just starting to enter into our peak leasing season. But it wouldn't surprise me that, that drop becomes more significant because keep in mind, all leases means you're going to have different terms, so it's going to just have a lot more noise in it. Operator: Our next question is from Alexander Goldfarb with Piper Sandler. Alexander Goldfarb: So 2 questions. The first is on Seattle. We sort of hear different things like East Side, super strong, Seattle CBD softer. Certainly, on the office side, we hear that and on the apartment side, it sounds like the same, but yet there's a lot of job growth out there, especially on the East Side. So can you just provide a little bit more color on how the market breaks out? Seattle CBD would certainly seem culturally to be a little bit more exciting than maybe sort of the 95 Bellevue. But can you just provide more color of how the residents are looking at the broader market and how you guys are thinking about where you want to either own more assets, divest assets, et cetera? Angela Kleiman: Alex, yes, it's a good question. With Seattle, it's a combination of 2 things. It's demand and supply because Seattle historically generates more supply than California. So it's the impact of those 2 playing out that then drives the rent growth. So East Side has performed better than CBD, although not by a huge margin from what we're seeing. But over the long term, East Side has historically outperformed mostly because it has a strong employer base, but lower supply. And we do expect that to continue. And as far as generally speaking, this is a market that has greater highs and lows because of supply, combination of supply. And so with first quarter, demand was soft, and we anticipated that. So we -- the performance was pretty much in line with our expectation. Alexander Goldfarb: Okay. And then the second question is, and obviously, looking at public information, but Camden has their portfolio out there for sale. You guys obviously look at everything. Are you -- the interest that you hear that they're receiving, is it what you expected? Or are you surprised by maybe the number of people who are coming to look at the portfolio? I'm just trying to get a sense of the appetite for California real estate, Southern Cal real estate, if it's in line from an institutional perspective, if it's more then you're like, wow, there are a lot more people coming or wow, I would have thought more people would have come. Just trying to get a sense for the investment appetite as people look at California versus other parts of the country. Rylan Burns: Alex, Rylan here. As you mentioned, we do look at everything in our markets. We're also subject to nondisclosure agreements. So I can't elaborate on details on any one deal specifically. But what I would say is I feel like there has been a significant uptick in terms of capital interest on the West Coast, partly driven by performance issues you're seeing throughout the rest of the country and the relative strength and the forward-looking fundamentals, particularly as it relates to supply as well as some of the demand drivers that Angela mentioned. So I think there's been an increase in capital interest on assets in the West Coast. You've seen this in terms of the cap rate compression we've seen in Northern California. And as we look at the fundamentals over the next several years, I wouldn't be surprised if that continues. So very healthy demand for assets on the West Coast. Operator: Our next question is from Adam Kramer with Morgan Stanley. Adam Kramer: I just wanted to ask about renewal growth trends. And I recognize sort of the methodological change here that might be sort of impacting this comparison I'm about to make. But I guess just bear with me. So if I look at Q4 2024 versus Q1 2025, it looks like about a 10 basis point decel in renewal growth. If I look at what you guys just reported yesterday, it looks like it was about an 80 basis point decel this year. So just wondering, I guess, number one, if sort of the methodological changes played any impact here on just sort of what's happening with renewal growth, maybe there's sort of an operational or strategic change in terms of how you guys are thinking about renewal growth. I just sort of wanted to focus on that piece here today, just sort of that Q-over-Q decel that you reported last night. Angela Kleiman: Yes. Adam, good question. And as far as our pricing methodology or operating strategy, it hasn't changed. The reporting change to all leases is really a reflection of what -- just to make things easier for comparative purposes for our peers versus our peers. But ultimately, we continue to focus on maximizing revenues, and we don't manage to a specific metric. So what you're seeing on renewal is really an output, not an input. And ultimately, we can manufacture a high lease rate by reducing occupancy, but you wouldn't want to do that. And just back to the basics, we're running a business here, and the goal is to try to maximize revenues. So I wouldn't get too caught up on the renewal rates. At a minimum, I would point you to look at the blends. The blends have improved, continue to improve sequentially. And ultimately, that is what really hits the bottom line, the combination of your blended and your occupancy. Adam Kramer: That's helpful. And then just maybe switching gears to capital allocation. I don't think we've touched on that yet. I recognize there was some buyback activity in the quarter and subsequent to quarter end. I don't think you did much, if any, of buybacks last year, so a little bit of a shift there. Stock has moved a little bit versus sort of the average share price that you bought back at. So just wondering sort of as you sit here today with where the stock is, how do you sort of think about stack ranking capital allocation opportunities? And where does the buyback fit into that? Angela Kleiman: Adam, it's Angela here again. I do want to point to last year, the environment was different in that cap rate compression has not really take hold, and we were very opportunistic in our capital allocation strategy. And by buying assets before cap rate compression, we were actually able to generate a lot of accretion. And also, the pricing level was different back then. I'm very pleased with our finance team executing at that $243 pricing on average, that's a terrific execution. So what you'll see us do is we're going to be thoughtful and opportunistic. And at every point in -- when you look at the investment spectrum, we're going to pick our spots. And so that means that there's not an exact price today because the relative value will change based on what's available to us in the future. Operator: Our next question is from Haendel St. Juste of Mizuho Securities. Haendel St. Juste: I wanted to go back to Seattle. Your tone there seems to be more constructive relative to L.A. where it sounds like things will be more challenged for a bit longer. So is your view on Seattle, I guess, the more constructive, more hopeful view tied to that reduction in supply you're referring to? Perhaps are there other KPIs you're watching more closely? I'm curious what those are and what they're telling you? And when do you think we can expect Seattle to track a bit more closely to San Francisco, which historically has shared a lot of the same demand drivers? Angela Kleiman: Yes. Haendel, yes, I think you picked up on my tone being more constructive on Seattle for a couple of reasons. One, you mentioned on the supply, I think that it certainly has a direct impact. And first quarter, we did expect that legacy absorption for last year is going to have some overhang. And so it's good that we are mostly behind that. But more importantly, as we look at where leases are, while Q1 overall lease rate was negative, the rates actually flipped positive in March and has continued in April. And we know we are aware that because this is our most seasonal market, it could flip quickly. And so the fundamentals are quite sound in this market. And so we do view that it already has started to trend toward what -- at the midpoint of our expectations. Haendel St. Juste: Maybe unfair to ask, but I'll try anyway. Would it be your expectation that Seattle would perform more closely to San Fran next year, narrow the gap? Angela Kleiman: That's a good question. I have a -- I'm not sure on the exact timing. We are seeing office announcements and expansions into Seattle, and you would expect that Seattle does follow the Northern California market. It's hard to predict the actual timing because once they expand, they're going to have to hire, and we don't know how long that's going to take. I will tell you that at this point, just even on the renewal side, Seattle is starting to catch up to the Bay Area market, which is a good sign. So it tells us that it's going to get there. I just don't have enough data to be able to tell you when. Haendel St. Juste: Fair enough. Fair enough. Second question is on concessions. Maybe some color on where they stand today across the portfolio, how that compares to a year ago last quarter, some context. Angela Kleiman: Sure. Happy to. So concessions, this -- it's not a whole lot different. So first quarter concession for the portfolio was about 6 days. And last year, first quarter was about 4 days. So it's not a huge variation. I think the largest area is really L.A. continues to be lumpy. And so L.A. concessions this year is a little bit higher than last year, although that's not anything that we're surprised by. San Diego is a little higher because of supply that I talked about, which you would expect. And then the rest of it generally performing in line. Operator: Our next question is from Julien Blouin with Goldman Sachs. Julien Blouin: And sorry if I missed this. But on the new reporting last year, was April the highest blend month? I'm just trying to get a sense on that north of 3% for April. Would you expect it to be even higher as we move into May and June? Angela Kleiman: Yes. Typically, you would expect blends to continue to improve as we head into our peak leasing season. And so on average, you would say we would anticipate blends to peak, say, around June through July, somewhere in that time period. The question here is really the trajectory of that increase. And I do want to say that while we're performing well here, we are still in a soft demand environment generally across the U.S. and with geopolitical uncertainty. So how much that blend is going to increase will have some of that impact. And one of the reasons why we didn't raise our same-store revenues. We're very comfortable with where we're at. And in fact, our same-store, if it performed consistent with what we had anticipated when we released our guidance, just based on the first quarter results, same-store revenues will be about 15 basis higher. Having said that, when we set our guidance last year in early February, we weren't in a war with a new country. So things are moving around, and there's a lot of noise out there in the broader economy. Operator: Our next question is from Wes Golladay with Baird. Wesley Golladay: Can you comment on what's going on in Alameda? It looks like it's having a little bit of an acceleration. Just curious if this is more of a concession burn off or a pickup in demand. Angela Kleiman: Wes, it's a combination of a couple of things. One is that we do have concession burn off. We had talked about supply abating and starting to benefit this year. So concession in the first quarter of last year was almost 2 weeks, and now it's half a week, which is terrific. And we're seeing both rental rates and financial occupancy improve. We're also seeing that there's, of course, the spillover effect that helps with San Francisco performing well. And so there's some demand driver as well. So both of those components are helping Oakland, which is playing out what we had expected. Wesley Golladay: Okay. And then maybe just one on the financial modeling. Do you have a timing expectation for the preferred investments being redeemed for the second half? Barb Pak: They're expected to be redeemed in the second quarter. I think if you model mid-Q2 redemption, that will get you close on the guidance. Operator: Our next question is from Michael Goldsmith with UBS. Ami Probandt: This is Ami on with Michael. We were just wondering, what are you seeing in terms of residents moving in from outside of your MSAs? Has there been any change in either domestic or international immigration? Barb Pak: Ami, this is Barb. Yes, on the immigration front, what we're seeing is domestic immigration within the Bay Area has continued to improve, and it is above pre-COVID levels. And I think that's a function of the demand for tech jobs and tech workers. In terms of international immigration on the legal side, we haven't seen any material change on H-1B visas or anything like that. We know that the H-1B visas for 2027, they've already hit the cap. And so those will all get filled. So overall, it's been a slight benefit on the immigration side to our markets, specifically in the Bay Area and no material change from what we said in the past. Ami Probandt: Great. And just a follow-up on some of the questions about the structured finance opportunities. How has competition trended for these deals? And for the deals that you guys look at and underwrite, how far off are you from getting these deals and being the selected bidder? Rylan Burns: Ami, a good question. As we've said for the past couple of years, there was a significant amount of capital raised in the past several years to invest in this structure. So there has been more competition. We have seen yields compress. And it's somewhat opaque in terms of like where on specific deals we might miss out. But we're just trying to be diligent and stick to our process. So we still feel it's a relationship business. If you start to see developments pick up, that will create some more opportunities for us. We have a long history in this business. We're viewed as a good partner on the preferred side. So we're going to continue to see opportunities, but we're just trying to stay disciplined as it relates to our underwriting process and not chase the market as some covenants get weaker and/or yields compress. We're going to stay disciplined to our return requirements. Angela Kleiman: Yes, Ami, it's Angela here. Ultimately, there's been a lot of volatility to our earnings because of the preferred book overhang and the size of the preferred book. I, for one -- and poor Barb here has had to deal with the direct impact, and we are quite relieved that this is the last year of that volatility. And so going forward, what we have been is much more selective and in an effort to maintain a size that's going to be accretive to the portfolio and our business but not create so much noise that it becomes a distraction to our business. Operator: Our next question is from John Pawlowski with Green Street. John Pawlowski: On the capital allocation front, assuming your cost of capital stays in a similar ZIP code as it is today, what kind of -- what rough range of disposition volume could we expect this year and then the most likely use of those funds? Rylan Burns: John, Rylan here. As Angela mentioned, our capital allocation strategy doesn't change. We're really trying to maximize FFO and NAV per share accretion and improve the growth profile of the company. We have several assets that are currently on the market. So we will probably do several dispositions this year, and those proceeds will be allocated to whatever is the highest risk-adjusted return at the time of that. So we have the ability, as we talked about the health of the transaction market, which I think you're aware of, we have the ability to ramp that up and down as we see fit. And again, the strategy has not changed, and we'll continue to do as we have for many, many years. John Pawlowski: Okay. But today, given the health of the private market pricing, is it fair to assume that currently the best use of the funds is share repurchases on your guys' math? Angela Kleiman: I don't think so, John. Once again, it depends on what the opportunity is available at the time. And so I would point back to the transactions that we completed, over 60% of it was off market. And so we certainly have an incredible network and extensive relationships and a reputation that gives us an advantage. And the stock price is going to change every day. And so to pinpoint, what we're going to do based on today's stock price is probably not something you want us to do. Rylan Burns: John, I would add on that when I look at our menu of investment opportunities today, we've got several development land sites that we're quite excited about. We think these are going to be very attractive risk-adjusted returns as well as our redevelopment opportunities, particularly ADUs. This is a business that we've been ramping up where we're getting 10% return on cost. The per unit costs are a fraction of in-place value. So those are 2 areas that we're going to continue to invest in because the returns, in many cases, exceed the highest risk-adjusted returns. John Pawlowski: Okay. Last one for me. Barb, can you talk a little bit about the insurance market, the property insurance market? I think you're expecting maybe a 5% decline on your insurance and other expenses this year. Curious if the market is healing faster and more dramatically than you thought or if that's still a fair bogey. Barb Pak: Yes, John, we actually went to the insurance market and did our renewal for property in December. And so we did see a healthy reduction in our property insurance. And so I do think that market has held up from what we're hearing even today. I know we're, I think, 4 months past or 5 months past the renewal. It sounds like on the commercial side, that is the case. I think if you're talking residential, it's a much more challenging market, but we have seen the reinsurers come back in and the insurance premiums have come down from where they were over the last couple of years. Operator: Our next question is from Omotayo Okusanya of Deutsche Bank. Our next question is from Alex Kim from Zelman & Associates. Alex Kim: I wanted to circle back quickly to Los Angeles and the extent to which the eviction processing time line impacts the pace of improvement. Have those eviction processing time lines improved at all in the first quarter? And when do you anticipate that the supply reduction in 2026 shows up in meaningful pricing power improvement? Angela Kleiman: Yes, that's a great question on L.A. So delinquency processing or the court processing time has improved over time. It's -- as far as just from fourth quarter to first quarter, it's pretty sticky. It's around 4 months, but this is a huge improvement from -- it wasn't too long ago when it was 6 months and thereafter. And -- so what we would want to see is for that to improve, say, closer to 3 months, that's closer to our long-term average. And that will definitely help on the delinquency front. As far as pricing power is concerned, we would want that economic occupancy to be at about 95% or better. We are very close right now. We were above 94% in the fourth quarter, and we're still above 94% in the first quarter, although it's a little bit lower than the fourth quarter. But pricing power is -- will be available to us once we hit 95%, and we're feeling good that we're close to it. Alex Kim: Got it. So just taking a bit longer than occupancy returns. That's all for me. Angela Kleiman: Yes, it's taken longer. But then again, we didn't expect this to happen quickly. We had thought it was going to take multiple years. Operator: Our last question is from Rich Anderson with Cantor Fitzgerald. Richard Anderson: Angela, when I was -- I was just reading the transcript from last quarter and you were talking about Los Angeles and you described it as just so close to the magic 95% economic occupancy where things perhaps get a little bit better for you. I know you described SoCal in general is in line, perhaps L.A. in line with your expectations, but deep in your heart, were you expecting more this quarter from L.A. that you didn't get? I'm just curious, and I have a follow-up to that. Angela Kleiman: Rich, always happy to hold out for you. Deep in my heart, I always hope for better numbers. And I think anybody who works with me knows that we push pretty darn harder. Having said that, the expectations are such. And sometimes things do better. Northern California expected -- exceed expectations and sometimes they meet expectations. And with L.A., I think we have always said that it was going to take a little bit longer and occupancy, once again, it's so close. But even though we didn't see significant occupancy improvement from quarter-to-quarter, which we didn't expect, 70 basis points improvement in blends, that's not bad. I'll take it. Richard Anderson: Okay. And then on the Camden process, I don't think you're a buyer, but is there anything about it that's informing you strategically around the area, whether it's L.A., Orange County, San Diego and Inland Empire that they're looking to sell that you're sort of tapping the reception that they're getting, which sounds like it's been pretty substantial. Does it inform you about what you might do as a corollary to the process they're undertaking, whether it's as a buyer or a seller or anything? Angela Kleiman: Yes, Rich, that's a good question. As far as Southern California is concerned, it's part of our stable or it's a stable part of our portfolio. We have about 40% in SoCal and a little bit more in NorCal, maybe 45%-ish. And that allocation makes sense to us. We're in Southern California because it mirrors the U.S. and with more professional services and lower supply as a whole. And so other companies are going to make capital allocations differently than us. And I will say that Camden is a good company. It's run by smart people, but dynamics are different, right? Because having a handful of portfolios in a huge region, it's very tough to be efficient versus for us, 70% of our portfolio -- of our properties are within 3 to 5 miles for each other. We can run it incredibly efficiently. And so it's just very different reasons why people make portfolio allocation decisions. Operator: This now concludes our question-and-answer session. Ladies and gentlemen, thank you for your participation. This does conclude today's teleconference. Please disconnect your lines, and have a wonderful day.
Operator: Good morning, and welcome to the BrightSpire Capital First Quarter 2026 Earnings Conference Call. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the conference over to David Palame, General Counsel. Please go ahead. David Palamé: Good morning, and welcome to BrightSpire Capital's first quarter 2026 earnings conference call. We will refer to BrightSpire Capital as BrightSpire, BRSP or the company throughout this call. Speaking on the call today are the company's Chief Executive Officer, Mike Mazzei; President and Chief Operating Officer, Andy Witt; and Chief Financial Officer, Frank Saracino. Before I hand the call over, please note that on this call, certain information presented contains forward-looking statements. These statements, which are based on management's current expectations, are subject to risks, uncertainties and assumptions. Potential risks and uncertainties could cause the company's business and financial results to differ materially. For a discussion of risks that could affect results, please see the Risk Factors section of our most recent 10-K and other risk factors and forward-looking statements in the company's current and periodic reports filed with the SEC from time to time. All information discussed on this call is as of today, April 29, 2026, and the company does not intend and undertakes no duty to update for future events or circumstances. In addition, certain financial information presented on this call represents non-GAAP financial measures. The company's earnings release and supplemental presentation, which was released yesterday afternoon and is available on the company's website, presents reconciliations to the appropriate GAAP measures and an explanation of why the company believes such non-GAAP financial measures are useful to investors. Before I turn the call over to Mike, I will provide a brief recap on our results. The company reported first quarter GAAP net income attributable to common stockholders of $4.8 million or $0.03 per share, distributable earnings of $15.6 million or $0.12 per share and adjusted distributable earnings of $18.2 million or $0.14 per share. Current liquidity stands at $206 million, of which $58 million is unrestricted cash. The company also reported GAAP net book value of $7.05 per share and undepreciated book value of $8.24 per share as of March 31, 2026. Finally, during this call, management may refer to distributable earnings as DE. With that, I would now like to turn the call over to Mike. Michael Mazzei: Thanks, David, and welcome to our first quarter 2026 earnings call. I will keep my prepared remarks brief. And as always, Andy will walk through the quarter's loan originations and portfolio activity. Since reinitiating new loan production, we have closed 37 loans totaling $1.1 billion with an additional 9 loans in execution for $283 million for a combined total of just over $1.4 billion. While the process has been gradual, we have steadily increased our loan book each quarter, and it now stands at $2.7 billion. Our strategy remains focused on middle market lending with an average loan size of approximately $27 million. We have been focused on increasing diversification and avoiding loan size and investment concentrations that we deem too large for our equity capital base. This, in turn, will also allow us to maintain slightly lower cash balances. Thus far, the overwhelming majority of new loans have been multifamily, contributing to a more favorable property type exposure. During the quarter, our portfolio also benefited from payoffs and resolutions of office loans. We expect a further reduction in our office loan exposure to occur this next quarter. As an aside, we also closed loans on hotel and industrial properties during the first quarter. However, overall, we expect multifamily loans to continue to comprise the majority of our activity in the medium term, with bridge loan demand being driven by valuation resets and increasing levels of sales transactions. This reflects lenders incentivizing borrowers with greater frequency to sell or refinance 2021 and 2022 vintage bridge or construction loans. It is worth noting that in particular, the Sunbelt markets are seeing very high demand for multifamily bridge lending as that region works to absorb vacancies and rent concessions over the next 12 to 18 months. As we look ahead, our priorities remain straightforward, and those are to redeploy capital from the watchlist and REO resolutions into new loans, to grow the loan book to $3.5 billion by year-end and to execute a fifth CLO in the second half of the year. This plan positions us to cover the dividend by year-end. Achieving that goal will provide greater financial clarity, while the continued reduction in REO should remove credit uncertainties that may be overhanging the stock. Taken together, we are confident these actions will position BrightSpire to drive long-term shareholder value. With that, I will turn the call over to our President, Andy Witt. Andrew? Andrew Witt: Thank you, Mike. Starting with our originations activity, it has been a busy start to the year despite the geopolitical issues in the Middle East. Equity markets have largely taken the events in stride. And with the exception of a couple of weeks when decision-making slowed, the commercial real estate credit markets have been similarly resilient. In the first quarter and subsequently, we closed on 8 loans totaling $311 million in commitments. Currently, we have 9 additional loans in execution, totaling an incremental $283 million in commitments. In total, this year, we have closed or in execution on 17 loans for total commitments of $594 million, 14 of which were multifamily. Transaction volume picked up in the first quarter. We saw over $29 billion at the top end of the funnel, which represents an increase of over 50% versus the same period last year. It is worth noting that we are focused on the middle market opportunity, mostly between $20 million and $70 million, highlighting the breadth of transaction volume we're seeing at the top end of the funnel. Repayments during the quarter consisted of $169 million across 6 positions, including 2 risk rank 5 loans. Three of the repayments were office loans, further reducing our office exposure to just over 20% of the loan portfolio. We expect to continue reducing office exposure, both nominally and as a percentage of our loan portfolio throughout the remainder of 2026. Currently, the property underlying the Phoenix office loan, our largest office loan is being marketed for sale. Our loan book at quarter end was approximately $2.7 billion across 100 loans, a modest increase quarter-over-quarter. Our average loan balance is $27 million and our risk ranking is 3.1, consistent with the previous quarter. Given the recent momentum, we expect to cross $3 billion in loans by approximately halfway through the year. Further, we anticipate our loan book will continue to grow in the back half of the year, targeting at least $3.5 billion loan portfolio by year-end. As it relates to portfolio management, during the first quarter and subsequently, exposure to watch list loans continues to move in the right direction. During the first quarter, we resolved 3 loans, including 1 property we took ownership of through foreclosure, bringing watch list exposure down to $166 million or 6% of the loan portfolio. We also downgraded and simultaneously resolved one multifamily mezzanine loan for $32 million. As of today, we have 4 loans on our watch list for an aggregate value of $134 million. Multifamily properties underlying 2 of the remaining 4 watch list loans are under purchase and sale agreements, both of which are expected to close during the second quarter. Following the sale of these 2 properties, our watch list will consist of 2 positions, a Dallas office loan and an Austin multifamily loan with an aggregate gross book value of $67 million. The reduction in watch list exposure, both completed and underway in combination with new loan originations are foundational to our loan portfolio growth plan. While we continue to make progress on the portfolio, we recognize there are headwinds still ahead, particularly in overbuilt Sunbelt markets that are both challenged from a market fundamentals and policy perspective, particularly as it relates to immigration, which is pronounced in border states such as Texas and Arizona. As a result, these markets are experiencing rental rate and concession challenges. As Mike mentioned, it is in these same markets where we are seeing lenders lean on borrowers to sell underlying assets, resulting in a wave of sales, particularly in Texas. As for the REO portion of the portfolio, there are 6 positions totaling $336 million of gross carrying value. Two of the 4 multifamily properties are currently in the market for sale following the completion of value-add business plans we've executed over the past 12 months. The remaining 2 multifamily properties are currently undergoing value-add business plans, and we expect to be in a position to take them to market in late 2026 or early 2027. The final 2 REO properties consist of the San Jose Hotel and the Santa Clara multifamily predevelopment property. We continue to make progress on the San Jose hotel property, driving operational performance while making physical improvements and upgrades to the property. The loan represents 43% of our current REO exposure with a carrying value of $143 million. Lastly, as it relates to our Santa Clara multifamily predevelopment property, market conditions continue to evolve favorably as the Bay Area is achieving some of the strongest rental rate growth in the country, fueled by the AI boom. We anticipate taking this property to market later this year or very early in 2027. In closing, we made significant progress during the quarter and subsequently in all phases of the business. And results were consistent with the expectations we set for the quarter. Looking ahead, our focus remains on growing the portfolio and increasing earnings over the course of the year. With that, I will turn the call over to Frank Saracino, our Chief Financial Officer. Frank Saracino: Thank you, Andy, and good morning, everyone. For the first quarter, we generated adjusted DE of $18.2 million or $0.14 per share. First quarter DE was $15.6 million or $0.12 per share. DE includes a specific reserve of approximately $2.6 million. Additionally, we reported total company GAAP net income of $4.8 million or $0.03 per share. Quarter-over-quarter, total company GAAP net book value decreased to $7.05 per share from $7.30 in the fourth quarter. Undepreciated book value decreased to $8.24 per share from $8.44. The change is mainly attributable to equity granted as part of our stock compensation program and consistent with past practice. Additionally, the first vesting of our performance stock unit awards also contributed to this decrease. Going forward, PSU vesting will be an annual first quarter occurrence. Looking at reserves. During the first quarter, we recorded a specific CECL reserve of approximately $2.6 million. As Andy mentioned earlier, we downgraded and simultaneously resolved one mezzanine loan and as a result, charged off the associated reserves. Our general CECL provision decreased slightly to $87 million or 306 basis points on total loan commitments versus $88 million or 315 basis points reported in the fourth quarter. Our debt-to-assets ratio is 68%, and our debt-to-equity ratio is 2.4x. Lastly, our liquidity as of today stands at approximately $206 million. This includes $58 million of cash, $120 million available under our credit facility and approximately $28 million of approved but undrawn borrowings available on our warehouse lines. This concludes our prepared remarks. And with that, let's open it up for questions. Operator. Operator: [Operator Instructions] Our first question today is from Timothy D'Agostino with B. Riley Securities. Timothy D'Agostino: I guess for me, it'd be interesting to hear how the investment landscape and the market is in the second quarter compared to the first quarter. Obviously, 10-year treasury was heightened kind of in May. And it'd just be good to hear the opportunity out there. Is your pipeline growing in the second quarter? Michael Mazzei: Thank you. It's Mike. Thank you for the question. As Andy alluded to in his opening remarks, we did see a little bit of a pause given what was going on in private credit, given what's going on geopolitically, but that was pretty brief. It got pretty much right back on track after about 2 or 3 weeks. Overall, the market is doing pretty well. You're seeing spreads remain tight. We did not see a gap out in spreads that we saw in pricing in certain sectors in private credit. Real estate spreads continue to stay resilient. We kind of hit a wall on how tight we've gone. Everything is getting done pretty much for multifamily around the mid-200s, plus or minus 10 basis points. We are seeing some good response in the capital markets. We're seeing CRE CLO transactions with price talk on the AAAs at 135. I think that's 10 tighter than where we printed in January before the Iran affair started. So market is pretty much on track. Pipeline looks good. As Andy mentioned, subsequent to quarter end. We've got a lot of stuff in execution, over $300 million in loans in execution now for closing. So we're expecting to hit the $3 billion mark midyear. And right now, things are pretty calm. Pipeline looks good. The flow looks good. We also mentioned that we're seeing a lot of lenders leaning on incentivizing maybe I should say, borrowers to get to the market either vis-a-vis short sales, foreclosures or that's happening tremendously in Texas. Right now, we're seeing a lot of activity there, a lot of price resets. And in that, we're seeing opportunities for new loans. Timothy D'Agostino: Okay. Great. And then I guess just as a second question, you had mentioned on the call that the San Francisco area is performing better from the AI boom. And is that true across multifamily, office and industrial? I guess it'd just be interesting to get a little bit more color on per asset class in that area because I have heard that before that San Francisco is doing better with the AI boom. Michael Mazzei: Yes. I would say San Francisco and the Bay Area, even there was a commentary by Green Street, I think, last night that even Oakland is starting to see some positive tailwinds. So on the resi side, absolutely. If you look at rent increases around the country, I think San Francisco is leading the way even above New York City with positive rent growth. And we also see the same thing in office. You're seeing a lot of activity in AI where start-up companies are starting off with a small amount of square footage year one and they get a second round of financing if they get traction on their strategy and they're coming back for 20,000, 25,000 square feet. So I think you're seeing office leasing in San Francisco doing better than it was pre-2019. We also think that the same effect is going to be in the lodging sector. That sector has been dormant for quite a while. San Francisco was kind of like on a no-fly list for a few years now. But given what's going on with the new mayor of San Francisco, who's done a miraculous job in turning that city around and what's going on AI, I think generally, people are more bullish on San Francisco, yes. Timothy D'Agostino: And then sorry, if I could just ask a follow-up question there. Is there any tailwinds being drawn to the San Jose hotel from that or not as much? Michael Mazzei: Not as much right now. We're still very largely dependent upon group business. We're still going through our CapEx program and upgrading the hotel. We had some very serious events occur with the Super Bowl and March Madness NCAAs. The hotel handled those very well. We did very well with those. We have FIFA coming as well as another event in July, the CrossFit National Championship. So that should also be a tailwind for us. But we're not yet seeing that transient business traveler yet. We're seeing a lot better resorts in hotels because of the amount of money that the baby boomers have in terms of discretionary income. But we need a pickup in transient overnight stays to really get us to the NOI level that we want. But as we said, we intend to hold that asset through the balance of the year and market it at the end of this year or beginning of next year. Operator: The next question is from Chris Muller with Citizens. Christopher Muller: So it's great to see the expected REO sales and also the 5-rated loan repayment and expected underlying property sales there. And it looks like that's going to clean up the rest of the 5-rated loans. So I guess, first off, am I reading into that correctly? And then will there be any realized losses associated with those subsequent activity that will hit second quarter earnings? Michael Mazzei: Well, on the properties that we have up for sale now in REO, those bids are coming in now. And so the answer is we'll find out. We think we're pretty close to the pin. But as Andy alluded to, there's a lot of supply coming in those markets. And one thing that I want to highlight is as we get -- as we wind down and we're getting -- making magnificent headway on the watch list. There are still areas of the country, particularly in the Southwest, as Andy mentioned on his prepared remarks, that are experiencing a lot of softness. The Dallas-Fort Worth market seems to be tightening. It seems to be coming out of a trough. We could see a potential tightening of rent concessions over the next 6 months. However, you move to markets like Arizona and Vegas and particularly Arizona, we're seeing very few asset sales. So we have an asset in Mesa that we're selling right now in the REO. The bids are due next week, but there have been very, very few. I think maybe 5% of asset sales relative to the peak of asset transactions in like 2022. I think asset sales in Arizona are kind of like the 2009 levels. So that market has been more slow to recover. We've got a lot of vacancy and a lot of absorption that needs to be dealt with, and that's probably going to take another 12 to 18 months. So we have eyes. We've made some new loans in Arizona at reset basis that we really like. But with regard to our portfolio, we have some exposure in Arizona, and we're watching it very closely. That market has been chronically difficult with rent concessions, vacancies. As Andy mentioned, we're seeing kind of a reversal of the immigration that we've had over the past few years. That's going backwards now. A lot of the in-migration to the state because of the work from home during COVID has pretty much completely unwound, but there's a lot of supply that's still hitting the market this year. So all eyes and ears on Arizona, and we'll know more about our REO sales this week. As I said, we're expecting bids this week and next week. Christopher Muller: Got it. And it looks like the remaining 4 rated loans are in Dallas and Austin. Anything you can share on the potential path of those? Michael Mazzei: On the multifamily one, that will be pretty straightforward. We'll time the market on that. There's liquidity there. It's all a matter of pricing. On the Dallas office, we have some activity going on with existing tenants that we think will be positive. We're waiting for the outcome there. That property is holding its own. We're also -- there are 2 buildings on the property. The smaller building is up for sale. If we get a bid on that, that will help reduce the loan amount. But it's a nice building, good location. It's been holding its own. The occupancy is about 70%. If we get some of this leasing done and re-leasing done, there's a pretty good chance that we may ask that owner to put that building on the market. Operator: The next question is from John Nickodemus with BTIG. John Nickodemus: I know in the prepared remarks, you mentioned that you had originated an industrial and a hotel loan during the quarter. Are those areas that you're looking to incrementally add to at all? Or are these more just one-off opportunities given that those are your only loans in the portfolio in either of those sectors? Michael Mazzei: Andy, would you like to take a swing at that? Andrew Witt: Sure, Mike. So we did do a couple of loans away from multifamily. We're certainly looking to do more. We like the industrial sector. We're going to be selective in the hotel space, and there are other asset classes that we're looking at. However, I would say, going forward, look for us to be predominantly investing in multifamily. Michael Mazzei: We've looked at some industrial. The issue there is it's all about back leverage as well. We're seeing opportunities where there is a lot of binary lease-up risk that really doesn't lend itself for -- well for CLO or for back leverage. Really -- that's really more of a private credit fund type of investment. So we're seeing a lot of that. We're looking in industrial for more granular rent rolls while there is lease-up needed and the reason why they're coming to a nonbank is for that reason, we're looking for the ones that have a little less binary risk than some of the deals that we've been seeing. In hotel, listen, RevPAR for the year 2025 was down a little bit in the U.S. The shiny spots were resorts. As I said earlier, there's a vast amount of wealth in a certain demographic that's looking to spend money on wellness and experiences and things like that. So the resorts are doing better. It's really the more full-service economy side of the hotel sector that has been struggling a little bit. So we're very selective there. The hotel loan we did is a very unique transaction. And it wasn't just the asset and the metrics on the loan, the capital structure in the transaction was also very appealing to us. So that was almost a very unique set of circumstances that transcended the fact that it was just a hotel loan. So it's very -- we're seeing opportunities in those sectors still, as Andy said, very selective. John Nickodemus: Great. Other one for me, just regarding dividend coverage. I believe last quarter, you mentioned you were looking for full coverage by midyear and then positive coverage by year-end. Now it kind of sounds like it's more full coverage by year-end. Just curious if there's anything that's changed there on your path back to dividend coverage. Michael Mazzei: Yes. It's just the timing of asset resolutions and putting out money that you could see over a longer period, 6-month period, you get there. But just over the short term, things happen, things get delayed. For instance, we delayed on the Arizona sale. We delayed taking indications on pricing by about 2 weeks. So things like that. are occurring where it ebbs and flows. We're still hovering very close to the dividend, just shy by $0.02 this quarter, but we are very confident that we'll get there by year-end. And when you look at the pipeline and look how much progress we've made, I think we're pretty comfortable that midyear, we'll get to the [ $300 million ]. And it looks like really based on the payoff projections that we're looking at, it looks like the $3.5 million (sic) [ $3.5 billion ] is really a stone throw away. So I think we're pretty optimistic about getting there by year-end. I'm sorry, but during the course of the year, we get the ebbs and flows of things that get delayed and it causes a little bit of a blip. But we're confident we'll get there by year-end. Operator: The next question is from Jason Weaver with JonesTrading. Jason Weaver: First, I appreciate your comments on the pricing environment out there. But when I look at it, it looks like the originations out of 1Q were quite a bit tighter inside of the existing book at 2.59%. So with your stated ROE target of around 12% on new originations, what's the all-in financing spread you're underwriting to these loans? And at what point does spread compression force you to either widen the credit screen or reduce origination pace rather than compress ROE? Matthew Heslin: Yes. This is Matt Heslin. I'll take that one. So as spreads have marched in on the whole loans, we've seen similar on the back leverage side. So we've generally tried to maintain about 100 basis point spread between our loans and our financing source. That's been pretty consistent to date. And as Mike mentioned, we priced our CLO in the early part of the first quarter this year, and we've seen spreads despite the noise, continue to march in there as well, which is great news, right? A lot of demand for that paper. So we've been able to maintain our ROEs despite the tightening. Jason Weaver: Got it. [indiscernible] helped out with that. Michael Mazzei: And Jason, overall, listen, the banks, and I'm sure some of the line lenders are listening to the call, I don't want to speak on their behalf. But the banks are flushed with capital, a lot of because of the changes in Basel III that were anticipated. This has been a sector that may be one of the best performing sectors at the banks because we know that we don't see any losses on any bank lines for any of our competitors or funds in the back leverage warehouse sector and the risk-based capital treatment for these assets is favorable versus making whole loans. So the banks very much have an appetite for warehouse lending. So they have been slowly playing ball with spreads tightening. Jason Weaver: That's good color. I appreciate it. And then on that same subject almost with the pricing environment as it is right here versus where the stock is trading at a discount to undepreciated book value. Talk to me about the trade-off of repurchase versus deployment into new originations and how you're looking at that today? Michael Mazzei: Well, listen, the buybacks are something we've done. You've seen us do it in the course of 2025. We did a couple to several times. We'll look to do it again. When we did it before, the price was more in the mid-5s. When we looked at the yield on -- the dividend yield on the stock at that level versus where we could put out money, there was a crossover there where it looked very attractive versus making new loans. And so we did that. But as long as the stock is trading where it is now and hopefully higher into the 6s, making loans is what we do, and that's what we want to preserve the capital. We do realize that there is a halo effect, positive halo effect in buying back stock that typically is not long-lived. We're not buying back enough stock to really affect the overall book value. We can drive it by a few cents a quarter, but not really material enough as much as we see the effect of making new loans and what that will do to the stock price. So the bias is make new loans. And at this level, we think making new loans at the levels we discussed is more attractive to us with our capital. Operator: The next question is from Gaurav Mehta with Alliance Global Partners. Gaurav Mehta: I wanted to ask you on your -- the $3 billion and $3.5 billion expectations for midyear and end of the year and some of your commentary around Sunbelt in the Bay Area. So as you look to deploy that capital, do you have any regional preference as to where you're seeing demand and where you want to put that new capital in? Matthew Heslin: Sure. This is Matt Heslin. I'll start on this, and Mike can jump in. I mean I think we're generally looking at all those places. Basis is obviously very important, as Mike said, despite the headwinds in some of the Sunbelt markets, we are still lending there at reset basis. So acquisition, new capital coming in, debt yields that work on a going-in basis are obviously very attractive. And then, yes, we're also looking and have done stuff and we'll continue to do stuff in the Bay Area. So we're seeing great rent growth there. So even some older vintage properties are getting the benefit of that. Mike, anything you want to add? Michael Mazzei: I think if you also look at -- thank you for the question. I think also if you look at and something that we've been studying recently, when you look at the transaction volume that's occurred in 2020, '21 and '22, when interest rates were close to 0, and we had, in some cases, double-digit rent growth in these markets and an influx of immigration where people were living somewhere, and we're sure a lot of that was in workforce housing. You had -- the number of transactions that have occurred were higher than anywhere else in history in some of these markets. We are expecting -- I mean, you see what we're doing with our watch list, with our REO. We are expecting other lenders, and we're seeing this in deals we quote where existing lenders are behind the scenes, encouraging borrowers to get out to the market and reset values. There is a disgorgement that's going to have to happen. And while we think real estate is in very late innings, certainly relative to private credit with CECL reserves that we've taken across the board with our brethren in the market, we still see that the transactions need to occur. You may have taken a CECL against the loan, but now that loan has to go out into the market and get restructured and recapitalize. So we still think there's going to be a big opportunity on the back end of the 2020 to 2022 cycle, we're going to see a lot of transactions coming out in '26, '27 and '28. The issue with some markets are they're lagging. And as I highlighted, some of the states in the Southwest are still very much lagging. Texas is doing better. We're seeing a lot of activity in Texas. We do think that there's going to be a dam that breaks in Arizona and Nevada. And there'll be a lot of opportunity to lend there at reset basis. Operator: This concludes our question-and-answer session. I would like to turn the conference back over to Michael Mazzei for any closing remarks. Michael Mazzei: Thank you. Thank you, as always, for joining us today. And if we're not scheduled to have a one-on-one with you, please call on us, and we'll be glad to do that. If not, we'll see you all on the second quarter earnings call in July. Thank you. Operator: The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
Operator: Good afternoon, and welcome to the Ethan Allen Fiscal 2026 Third Quarter Analyst Conference Call. [Operator Instructions] Please note that this conference is being recorded. It is now my pleasure to introduce your host, Matt McNulty, Senior Vice President, Chief Financial Officer and Treasurer. Thank you. You may begin. Matthew McNulty: Thank you, operator. Good afternoon, and thank you for joining us today to discuss Ethan Allen's fiscal 2026 Third Quarter Results. With me today is Farooq Kathwari, our Chairman, President and CEO. Mr. Kathwari will open and close our prepared remarks, while I will speak to our financial performance midway through. After our prepared remarks, we will then open up the call for your questions. Before we begin, I'd like to remind the audience that this call is being webcast live under the News and Events tab within our Investor Relations website. A replay and transcript of today's call will also be made available on our Investor Relations website. There, you will find a copy of today's press release, which contains reconciliations of non-GAAP financial measures referred to on this call and in the press release. Our comments today may include forward-looking statements that are subject to risks and uncertainties that could cause actual results to differ materially. The most significant risk factors that could affect our future results are described in our most recent quarterly report on Form 10-Q. Please refer to our SEC filings for a complete review of those risks. The company assumes no obligation to update or revise any forward-looking matters discussed during this call. With that, I am pleased to now turn the call over to Mr. Kathwari. M. Kathwari: Thanks, Matt, and thank you all for participating in our third quarter financial results call. As we reported, despite many challenges, we performed reasonably well. We were mainly impacted by a reduction of business from our State Department contract, primarily due to government shutdown, lower international sales and to some extent, sluggish demand for home furnishings. Our written sales in North America were flat compared to last year, while our wholesale orders declined 7.6% from reduced, as I mentioned, governments -- U.S. government sales and slowdown in our international business. Tariffs also impacted our earnings, especially the unexpected tariffs on our Mexico manufacturing products. The increased tariffs during the quarter of about $4 million were mainly -- were the main reason of our reduced earnings. Matt will now provide more information. And after Matt, I will review our initiatives. Matt? Matthew McNulty: Thank you, Mr. Kathwari. Our third quarter financial performance was highlighted by strong operating cash flow and a robust balance sheet despite operating in a challenging macroeconomic environment. Our consolidated net sales of $136 million benefited from a higher average ticket price, increased clearance sales and fewer returns. These increases were offset by lower contract sales, a decline in delivered unit volume and inclement weather. Retail segment written orders were flat versus last year, while our Wholesale segment declined 7.6% due to macroeconomic challenges, reduced government activity and a slowdown in our international business. Demand levels were choppy and the pace of written orders declined slightly throughout the quarter. Our retail written trends were strongest in July despite adverse weather, which slowed traffic late in the month and continued into February. There was a pullback in demand during March following the Iran conflict, but we are excited for the introduction of several new products this spring and believe they will complement the current home furnishings Ethan Allen has to offer. We ended the quarter with wholesale backlog of $42 million, down 23% from a year ago. Lower U.S. State Department and international business, combined with improved customer lead times helped reduce our wholesale backlog. Our consolidated gross margin of 59.4% was impacted by incremental tariffs, delivering out orders with increased promotional activity and higher clearance sales, partially offset by a change in sales mix, lower inbound freight, reduced headcount and a higher average ticket. Our adjusted operating income was $6.8 million with an operating margin of 5%. Lower operating margin was driven by higher tariffs, incremental digital and technology spend, fewer U.S. government sales and delivering out orders with higher promotions. Disciplined spending, cost control initiatives and lower headcount helped to drive SG&A expenses down 3% and offset additional investments we are making in our business. At quarter end, we had 3,105 total associates, a decrease of 6% from a year ago, with decreases noted in both wholesale and retail. Adjusted diluted EPS was $0.24. Our effective tax rate was 24.2%, which varies from the 21% federal statutory rate, primarily due to state taxes. As noted earlier, our business has been impacted by the current tariff environment, which remains dynamic and uncertain. Since the beginning of 2025, the U.S. government has announced several different measures regarding tariffs. More recently, in February, the U.S. Supreme Court invalidated certain IEEPA tariffs introduced last year. Shortly thereafter, a new 10% global import tariff under Section 122 was made effective and last until mid-July of this year. Our current exposure is concentrated on the 25% tariff that took effect in October 2025 under Section 232, which is on upholstered wood products produced and exported out of our Mexican manufacturing facilities. Our remaining exposure is under the aforementioned Section 122 tariff, which applies a 10% tariff on furniture manufactured and exported out of our Honduras facility as well as on imported wood furniture from Indonesia, select fabrics from Asia and imported home accents. In total, we estimate our current tariff exposure to be in the range of $15 million to $20 million annually. In the past month, the U.S. Customs and Border Protection Agency released guidance regarding IEEPA tariff refunds, including last week's April 20 launch of software that will process IEEPA refund claims at scale. We are currently working through recoverability of previously paid IEEPA tariffs and expect refunds to take up to 80 days to receive. Now turning to our liquidity. We remain debt-free with substantial liquidity to support long-term growth. We maintain a robust balance sheet and ended the quarter with $181 million in total cash and investments. During the just completed third quarter, we generated $15 million in operating cash flow, up from $10 million a year ago due to improved working capital. Through the first 9 months of fiscal 2026, we have generated $22 million in free cash flow. In February, we paid a regular quarterly dividend of $10 million or $0.39 per share. Also, as just announced in our earnings release, our Board declared a regular quarterly cash dividend of $0.39, which will be paid this May. We continue to view our dividend as an attractive use of cash and a positive return to shareholders. As I conclude my prepared remarks, we are pleased that our business model helped deliver another quarter of profitable growth. Our efforts to identify ways to leverage operating expenses are constant. We seek to properly balance investing in future growth while managing ongoing costs. Ethan Allen's vertical integration and focus on one brand are core differentiators that will help us navigate through these current industry headwinds. With that, I will now turn the call back over to Mr. Kathwari. M. Kathwari: Yes. Thanks, Matt. As I mentioned, we have continued to take steps to strengthen our unique vertically integrated structure, including strengthening our product offerings. During the last 6 months, focus has been to introduce new relevant product programs, strengthening our retail network. We have continued to reposition our retail network in North America, design centers numbering 172 locations with smaller footprint with major introduction of technology to help our talented interior design associates. continued strengthening our North American manufacturing, which produces about 75% of our furniture, almost all made custom on receipt of orders. Continued strengthening our North American national and retail logistics, which enables us to deliver our products with what we call white glove delivery at one delivered price to our clients in North America. And importantly, combining personal service of our interior designers and our manufacturing associates with technology has been a game changer. This has helped us provide great services while reducing costs. And with this brief overview, happy to open for any comments and questions. Operator: [Operator Instructions] And our first question comes from Taylor Zick with KeyBanc Capital Markets. Taylor Zick: Well, I just wanted to first ask kind of about the retail written orders. You gave some good color here, trends slowed a little bit in February and then you saw a pullback in March, I assume, related to the geopolitical situation. Any sense of how retail written orders are trending here so far in April? I assume there's some Liberation Day noise in there as well, but maybe if you can kind of touch on that? M. Kathwari: Yes, it's a good -- it's an important question. First is that in this quarter, despite all these challenges we have had in the economy, our retail, retail -- I mean, our written retail held up. In fact, our retail division basically where written orders were about the same as last year, which tremendously important. As Matt also mentioned, the decline was mostly due to the international issues and the State Department issues. So our business has held up. And now in April, it's actually -- it's been positive. There has been positive news so that we will continue the progress that we saw despite all these challenges last quarter. We maintained our retail. And I think in April, so far, it has been positive. Taylor Zick: Great. And then maybe if I can ask maybe on the tariff side, and maybe I can wrap two questions in one here. You also gave some great color on the tariffs and where you're exposed. You called out, I think, $15 million to $20 million of exposure on an annual basis. Can you kind of just talk a little bit about how you plan to mitigate some of those tariff expenses? And then related to that, maybe if you can touch on the gross margin as well because we also have rising diesel costs and increasing foam prices as well. So if you don't mind touching on. M. Kathwari: I'll say a few words, and Matt can also join. Our tariffs are -- the impact of tariffs are on our products coming, of course, from imported products, which is mostly Asia. And then recently, last year, there were tariffs imposed in our North American operations, both in Mexico and in Honduras. And interestingly, Mexico has been close to what 25%? Taylor Zick: Correct. M. Kathwari: 25% and Honduras is 10% -- so they were -- and that really is interestingly, especially in Mexico. The advantage we have, of course, in Mexico to some degree to some degree has mitigated because we operate and own the manufacturing operations. And according to Mexican law, we can ship the products from Mexico to the United States at a relatively small margin. I think it was about 5% or so, 5%. So 5% if that was not the case, we had to buy all those products, nobody would be able to operate 5%. Even with the 5% margin that we have, we still were impacted substantially with the impact of Mexico, to some degree, Honduras. And then, of course, our products that come from Asia there, the margin -- I mean, the tariffs have gone very, very high. But now in the last 6 months, tariffs have been reduced from Indonesia, from India and other places, even in China. So I think that we do hope that there is some resolution to what is taking place with the United States and Mexico. It's nothing to do with business. There's a lot of politics that has resulted in those high tariffs. Matthew McNulty: Yes. That's a great answer. And I'd just like to add a little bit more on to that for you, Taylor. The -- your first part of your question was what steps have we taken? And I think in my prepared remarks, I said the tariff situation is dynamic and ongoing, meaning that the rules and the regulations continue to change. The Section 122 of the 10% global tariff rate was a 150-day set tariff rate, which is set to expire in July. So the rules may again change in July. But we got to play with what the rules are as of today. So we took certain steps and we continue to take certain steps to mitigate the tariffs. Those include partner sharing or sharing of costs with vendors, sourcing diversification, identifying alternative sources for products if possible. Third is absorb some of the costs. We know we can't pass along all of them or have our vendors absorb all of them. So we do absorb some ourselves. And last is price increase. We mentioned on the previous call last quarter that we took about an average 5% price increase in October and November of 2025. So those have helped mitigate some of that incremental tariff exposure that I quantified of $15 million to $20 million. M. Kathwari: Yes. But those tariffs really impacted our operating margins. I mean, when you take a look at our operating margins coming down, it's mostly because of those tariffs. Our retail business in the United States held up. All right. Next, any other questions? Taylor Zick: No, I think we covered it here. I'll pass it along. Operator: [Operator Instructions] Your next question comes from Cristina Fernandez with Telsey Advisory Group. Cristina Fernandez: I had a couple of questions. The first one is on the State Department contract and just the whole wholesale contract side of the business. It's been a pressure point now for at least a year. What is your outlook from here on that part of the business? Do you think it's near reaching stabilization? Or should we expect weakness for the rest of 2026? M. Kathwari: Cristina, a number of factors. First is that we have had a fairly long-term contract with the state department. And recently, just in the last few months, the contract has been up for renewal. So we had to bid, and I'm sure others have bid on it, too. So the bidding has taken place and the state department is right now reviewing all those bids, and we do expect to hear from the state department. And depending on what happens, we do have an opportunity, which we have done to increase some of our prices based on these issues of tariffs. But I think in the next few -- I think hopefully, in the next couple of months, we will know about the new contract. Right now, we do have the current contract where we are getting business, not at the level we did last year, but the business is coming in under the current contract. Cristina Fernandez: Then the second question I had was on the impact of promotions you mentioned during the quarter. Is that mostly related to the increased promotional activity back in the second quarter and those deliveries being made now? Or did you offer incremental promotions to consumers during this current quarter versus a year ago? M. Kathwari: So there are two factors. First is we decided to increase our marketing spend, both in our -- especially in our digital mediums. And so we increased that. And that's -- when you look at our advertising, a lot of it was done because of the fact we increased it. Now which is the right thing to do because our digital mediums are tremendously important. So that is what you look at it as not because of the -- not only because of the existing promotions, but we expanded in a very strong manner in our digital mediums. And that has helped us and will continue to help us. And we do have the flexibility as we go forward in determining how much we spend. But last quarter, we spend more relative to the sales. That's why our percentage of marketing was higher. Cristina Fernandez: And then the last question I had was on the real estate plans on the press release, you noted a couple of new locations planned for this year. Do you still see opportunity, I guess, mostly in the U.S. to enter newer markets that you're not in? Or are most of these store openings relocations or updates to existing stores? M. Kathwari: It's both. We -- in the last couple of years, we have -- 3 years, we have spent a great deal of effort, resources to reposition our existing network. At that existing network, the repositioning has involved, first, investing in the -- our existing design centers to make sure they project well and also reducing the size. We have been able to overall reduce the size of our design centers by at least 25% to 30% because of the technology that we are able today to utilize in helping our designers work with clients. So that's tremendously important. The second is we do have a number of locations that we actually currently are working on about 5 new locations in the United States. And we also have opened up one or two locations in Canada. So we'll continue to open up new locations, but also relocate the current ones. And as I said, we have had a major, major impact of taking our current locations, repositioning them in both in size and also in the new products. So one of the factors we've got to keep in mind is that our -- and that affected to some degree, our margins is the fact that bringing in lots of new products meant we had to sell what we have. That had somewhat of an impact on our margins because those products we had to sell, and we're still selling them. All right, Cristina, any other questions or comments? Operator: Sir, there appears to be no additional questions at this time. So I'll hand the floor back over to Mr. Kathwari for closing remarks. M. Kathwari: Well, thank you very much. And as I said, on one hand, we are going through challenging times, but the good news is we have continued to position ourselves well. We have -- every week, I focus on five important things. First is talent. We are blessed with very, very strong talent in our vertically integrated enterprise from our manufacturing, to our logistics, to our merchandising, to marketing, logistics. The second thing is, as we look at after talent is technology. Technology has played a tremendously important role in everything we do today. Third is marketing. Marketing is important at national level, at the retail level. And fourth is our whole focus on making sure that we provide great service. And fifth and tremendously important is social responsibility. Those five things are critical and I think has helped us maintain a strong presence in all our operations. Thank you very much for participating and look forward to our continued -- making sure we continue to focus on our business and to grow our business. Operator: Thank you. This concludes today's conference. You may disconnect your lines at this time. Thank you all for your participation.
Operator: Good day, and thank you for standing by. Welcome to the Silicon Motion Technology Corporation's First Quarter 2026 Earnings Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. This conference call contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934 as amended. Such forward-looking statements include, without limitation, statements regarding trends in the semiconductor industry and our future results of operations, financial condition and business prospects. Although such statements are based on our own information and information from other sources we believe to be reliable, you should not place undue reliance on them. These statements involve risks and uncertainties, and actual market trends and our results may differ materially from those expressed or implied in these forward-looking statements for a variety of reasons. Potential risks and uncertainties include, but are not limited to, continued competitive pressure in the semiconductor industry and the effect of such pressure on prices, unpredictable changes in technology and consumer demand for multimedia consumer electronics, the state of and any change in our relationship with our major customers and changes in political, economic, legal and social conditions in Taiwan. For additional discussion of these risks and uncertainties and other factors, please see the documents we file from time to time with the Securities and Exchange Commission. We assume no obligation to update any forward-looking statements, which apply only as of the date of this conference call. And with that, I'll now hand you over to Mr. Tom Sepenzis, Senior Director of IR and Strategy. Please go ahead. Thomas Andrew Sepenzis: Good morning, everyone, and welcome to Silicon Motion's First Quarter 2026 Financial Results Conference Call and Webcast. Joining me today is Wallace Kou, our President and CEO; and Jason Tsai, our CFO. Wallace will first provide a review of our key business developments, and then Jason will discuss our first quarter results and outlook. Following our prepared remarks, we will conclude with a Q&A session. Before we begin, I would like to remind you of our safe harbor policy, which was read at the start of this call. For a comprehensive overview of the risks involved in investing in our securities, please refer to our filings with the U.S. Securities and Exchange Commission. For more details on our financial results, please refer to our press release, which was filed on Form 6-K after the close of the market yesterday. This webcast will be available for replay in the Investor Relations section of our website for a limited time. To enhance investors' understanding of our ongoing economic performance, we will discuss non-GAAP information during this call. We use non-GAAP financial measures internally to evaluate and manage our operations. We have, therefore, chosen to provide this information to enable you to perform comparisons of our operating results in a manner consistent with how we analyze our own operating results. The reconciliation of the GAAP to non-GAAP financial data can be found in our earnings release issued yesterday. We ask that you review it in conjunction with this call. With that, I will turn the call over to Wallace. Chia-Chang Kou: Thank you, Tom. Hello, and thank you for joining our call today. I'm pleased to report another quarter of better-than-expected results, highlighted by record revenue of $342.1 million. Growth and operating margin both exceeded our guidance as stronger-than-anticipated revenue drove improved overall profitability. We saw strong performance across embedded eMMC and UFS as well as our Ferri and boot drive solutions, driving solid growth this quarter, following an exceptional start and given our current pipeline of win across all our markets, I'm confident that we will deliver meaningful growth throughout what should be a record revenue year for Silicon Motion. Now let me first address the current market environment. The memory and storage market continue to create significant challenges across the market in which we operate. NAND prices continue to rise sharply with a sequential increase of about 55% to 60% in the first quarter of 2026. AI adoption has driven significant demand across all memory and storage technologies, including HBM, DRAM, NAND and HDD. Growing demand from hyperscalers and cloud service providers for AI infrastructure deployment, combined with the low NAND bit growth and insufficient DRAM capacity have led to significant scarcity, negatively impacting many markets include smartphone and PC, particularly in the low end. Despite these challenges, we executed well in the first quarter with our backlog design win and new opportunity ramping throughout the year, we are confident in our ability to deliver solid growth. We have spent many years developing deep relationship with the NAND flash makers, which have allowed us to gain share as NAND makers outsource more of their controller requirement. These strong relationships have also allowed us to secure NAND in the difficult environment as we ramp our Ferri and enterprise boot drive business and help our module maker and AI smart storage system customers secure NAND, making us an even more valuable and strategic partner. While we expect the NAND shortage will remain challenging throughout 2026 and '27, we have never been better positioned. We have and will continue to benefit from the fundamental shift by the NAND maker towards higher-end and high-capacity enterprise and data center solutions, driving a greater reliance on Silicon Motion to serve the consumer market and opening a new opportunity in automotive and lower density storage solution. As a company, we are at the start of the wholesale transformation as we scale our new cloud AI opportunity with our enterprise MonTitan controller and boot drive storage products, which will drive meaningful growth to both our top and bottom line going forward. We are also benefiting from our edge AI opportunity, including smartphones, PC, automotive, IoT and other applications where we are seeing a rapid shift toward next-generation storage capabilities. Silicon Motion is playing a pivotal role with an expanding pipeline of products spanning edge AI and cloud AI platform in 2026 and beyond. Given our current backlog and design win pipeline, we expect sequential growth across our product portfolio in 2026 as we capitalize on our investment, gain share in existing markets and benefit from our diversification strategy, starting with another strong sequential quarter of growth of 15% to 20% in June. I will now discuss our embedded eMMC and UFS business, which include controllers for smartphone and other IoT and connected devices. AI is fundamentally reshaping how memory and storage makers are allocating capital. Memory and storage makers are increasingly redirecting internal resources towards DRAM, HBM and other high-performance memory technologies for AI workload and stepping back from edge market, including phone and other smart devices. For the first quarter, our mobile business was up between 30% to 35% sequentially and over 140% year-over-year, significantly outperforming the industry as share gain further fuel strong growth for our business. The mobile market is undergoing a rapid shift as NAND manufacturers accelerate the outsourcing of controller to third party, especially Silicon Motion. Some NAND makers are also finding increasingly attractive to monetize wafer rather than investing in development of complete eMMC and UFS solutions for smartphone. Module makers have stepped in to fill this gap, and they rely heavily on Silicon Motion controller and firmware. Our relationship with the NAND supplier and our ability to assist our module maker customers in securing NAND put us in the best position to benefit from the rapidly shifting landscape in the mobile market. Looking ahead, the smartphone market is likely to stay pressured due to ongoing NAND and DRAM supply constraints. Chinese handset OEMs are expected to face greater headwind than Apple, given Apple's purchasing scale and Samsung given its captive memory supply. At the start of the year, we projected global smartphone unit volume will decline by 5% to 10% in 2026. However, recent estimates suggest the decline could be more than 10% year-over-year with a greater weakness concentrated in China. Importantly, much of this unit pressure is occurring at the low end of the smartphone market, where we have limited exposure. Elevated memory and storage costs make it increasingly difficult to produce low-cost smartphone, a dynamic we expect to persist through at least the end of '26 to '27. Our eMMC business remains stronger than expected, driven by multiple markets, including automotive, smart TV, AI glasses, smart watches, next-generation set-top box that demand higher capacity storage and many others. The market for eMMC are large and growing at over 900 million units sold every year. With major flash makers essentially gone from this segment, competition is decreasing and our revenue contribution from this market is growing. Based on our current backlog, customer forecast and continuing share gains, we expect another very strong year of growth in our embedded eMMC and UFS business with share gains dramatically outpacing the macro pressure on smartphone unit sales. Moving on to our SSD business, which includes edge SSD and enterprise controllers. In the first quarter, our overall SSD controller business revenue declined approximately 10% sequentially, in line with the seasonal trend, but was up approximately 45% year-over-year as we benefited from the early impact of PCIe 5 on our mix and the early ramp of our MonTitan controllers. For our edge SSD business, our client SSD controllers are utilized in a variety of products, including PC, gaming console and PC workstation. The PC market has been a challenging area so far this year given supply constraints and high prices associated with both NAND and DRAM. PC manufacturers are lowering specification for new computers and passing on higher NAND cost to consumers, which we expect will contribute to overall unit decline in the PC market in 2026, especially at the low end. Fortunately, for Silicon Motion, our products span the market from value line to the high end, and we continue to gain share across the range of devices as the NAND market makers exit the consumer segment. 2026 will be a defining year for our client SSD business. PCIe 5 began to displace older technologies. Our 8-channel PCIe 5 controller leads the market in performance and ramp steadily throughout 2025. While we expect a DRAM supply constraint could limit growth of this high-end controller in 2026, it is still highly sought for this unmatched power and performance. In December, we launched our 4-channel DRAMless PCIe 5 controller and at a mass market, and we expect this to become the volume leading PCIe 5 chip in our portfolio this year. This controller bring PCIe 5 performance to a broader audience at a more accessible price point and remove a significant component hurdle for our customers at the time when DRAM availability is constrained and the costs are elevated. We have our NAND flash maker customer for each of our PCIe 5 controller well as nearly all the module makers and expected to drive higher ASP and improve margin in our client SSD business throughout 2026 as PCIe 5 grow as a percentage of our sales mix. Entering this year, we estimate that the PC market will experience unit decline of 5% to 10% in 2026, given the tightening NAND and DRAM supply and increased prices. Current expectations are a bit lower with anticipate unit decline now in the 10% plus range. Despite this, we expect to grow our edge SSD business through a combination of increased market share and higher ASP as our PCIe 5 controller continue to ramp and as NAND flash maker retrieve from edge market in favor enterprise and cloud AI. For our MonTitan enterprise controller business, our cloud AI opportunity in the data center and AI infrastructure are growing rapidly, and we are in the early innings. NAND is a central part of enterprise and AI infrastructure deployment spanning warm storage, compute storage and increasingly near CPU and near GPU storage applications. The need for speed, lower latency, greater power efficiency is driving a technological shift in the data center, and MonTitan is squarely in the middle of the transition. MonTitan when paired with the TLC NAND power high-performance CMX, KVCache and compute SSD using near CPU and near GPU environment. When paired with the QLC NAND, MonTitan enable high-capacity, high-performance enterprise and AI data storage. During the December quarter, end user qualification of TLC-based and high-performance compute SSD powered by MonTitan began with multiple customers. This qualification have been progressing well, and the end customers are now expected to begin volume commercial ramp in the current quarter, one quarter earlier than expected. Currently, we see greater demand for TLC-based CMX compute and KVCache SSD controller than for QLC given a slower rollout of 2 terabit NAND than initially expected. While we anticipate more initial revenue contribution to come from TLC configurate MonTitan solution, we believe QLC configure solution will begin contributing more meaningful later this year and long term. High capacity storage SSD leveraging QLC NAND will represent the largest addressable market for MonTitan, and we expect to begin ramping multiple customers as broader availability of the next-generation 2-terabit QLC NAND die become available from nearly all NAND makers and as supply returned to more normal levels. Our QLC solution offer meaningful advantage over HDD for AI inference workload, faster assets, higher speed, lower power consumption and improving cost to jatterory. I'm excited to announce that our MonTitan customer plan to begin ramping of 3 Tier 1 Asian CSP and 2 U.S. Tier 1 CSP later this year with both TLC compute and QLC1ory SSD solutions. In the third quarter, we expect to tape-out our first 4-nanometer controller, a PCIe 6 MonTitan controller targeting hyperscaler and CSPs. It has been developed in close collaboration with multiple partners and customers, and we expect it to drive the next phase of MonTitan growth beginning in the 2027, '28 time frame. Importantly, we have already secured design wins with multiple Tier 1 customers with volume expected to ramp meaningfully in 2028. Given the traction we are seeing and the progression of end user qualification for both TLC and QLC implementation of MonTitan, we are increasingly confident that the business will grow rapidly throughout this year and at our target run rate of 5% to 10% of our now expanded 2026 revenue expectation with further growth anticipated in 2027 and beyond as our entry into the enterprise market scales meaningfully over time. And finally, I would like to provide an update on our Ferri and the boot drive storage business. Our Ferri and boot drive storage business delivered exceptional performance in the March quarter as we began scaling several new projects in Ferri for automotive as well as in our emerging enterprise boot drive business. So this business are growing rapidly this year. Sourcing NAND is becoming more critical to our long-term success. Our unparalleled relationship with the NAND maker has become a key differentiation and has enabled us to secure NAND from 3 different makers, which will ensure we will remain a resilient supplier of Ferri solution and boot drive for our customers despite the increasing supply constraints. NAND supply allocation for 2026 were largely finalized by all flash makers by mid last year. Our ability to secure NAND has given us a meaningful competitive advantage as we are one of few suppliers globally able to consistently source NAND to support our customers' accelerating requirements. Ultra storage is rapidly becoming one of our most exciting growth opportunity as we are actively engaged with multiple customers to build solutions that operate across a variety of platforms. This includes leading DPU, Ethernet and NVLink switches and other opportunity across different AI infrastructure architecture. In the fourth quarter of 2025, we began volume boot drive shipment to a leading AI GPU manufacturer for their current DPU product. In the first quarter, we worked with that customer to qualify next-generation DPU design as well as Ethernet and NVLink switches of their new GPU CPU platform to be launched in the second half of this year. As our customers transition to the next-generation GPU CPU platform, our opportunity is increasing rapidly with a much broader footprint beyond the DPU boot drive and with the density that increased 2 to 4x from the previous generation. We anticipate strong revenue contribution and growth with this customer this year and throughout 2027. In addition to this customer, we have recently won a design with a leading telecommunication infrastructure provider and will be ramping initial scale with them later this year. We are also sampling with a leading search engine company for its TPU architecture as well. And we will continue to develop a new boot storage device built around our leading controller to drive future growth. Our Ferri business is experiencing strong demand from automotive and industrial customers as the NAND maker continue to shift away from lower density solution to focus on higher ASP, higher-density enterprise solution. Our more than 10 years of developing automotive-grade a solution provides significant differentiation by offering reliable supply, proven technology, dedicated technical support and qualification expertise tailored to the automotive market. As a result of this investment, demand from global automotive OEMs and their subsystem supplier continue to accelerate across the U.S., Europe, China and Japan. We are gaining meaningful share, creating a strong pipeline of near-term revenue and long-term sustainable growth opportunities. In conclusion, the first quarter was exceptional, delivering our highest quarterly revenue at Silicon Motion as we continue to drive meaningful share growth across our markets. Despite ongoing supply constraints and price increases associated with the NAND and DRAM, we continue to expect that we will deliver sequential growth throughout 2026 as we reap the benefit from the investments we have made over the past few years. This growth was across all our major business propelled by our growing cloud AI opportunity with our enterprise AI product, including MonTitan and our emerging boot drive storage business that are just beginning to ramp. We are in the strongest position in our company history with a deeper product portfolio, growing foothold in edge and cloud AI with multiple opportunity growing in tandem in the legacy and new markets. The successes we have made through the partnership with all the NAND makers over the past many years have given us an unparalleled advantage as we leverage these relationships to gain access to NAND supply. This relationship as a strategic differentiation for our company, and I am extremely confident in our ability to deliver broad-based sustainable growth as we scale both established and emerging opportunities across the business in 2026 and beyond. Now let me turn the call to Jason to go over our financial performance and outlook. Jason Tsai: Thank you, Wallace, and good morning, everyone, for joining us today. I will discuss additional details of our first quarter results and then provide our outlook. Please note that my comments today will focus primarily on our non-GAAP results unless otherwise specifically noted. The reconciliation of our GAAP to non-GAAP data is included in the earnings release issued yesterday. This was an outstanding start to the year for Silicon Motion as our investments over the past several years are bearing fruit. We're gaining share across our entire portfolio in a difficult macro environment and rapidly expanding into new opportunities in edge and cloud AI applications, which should drive -- which should continue to drive significant top and bottom line outperformance. In the March quarter, sales increased 23% sequentially and 105% year-on-year to $342.1 million, coming in well above the high end of our guided range, delivering our second consecutive quarter of record revenue. Outperformance in the quarter came primarily from our embedded eMMC and UFS controllers and strong growth in our Ferri and boot drive storage business. Gross margin was 47.2%, above our guided range of 46% to 47% as we capitalized on new product introductions. Operating expenses increased sequentially to $99.2 million, given increased investments in our emerging MonTitan AI and enterprise SSD controller and boot drive storage solutions. Operating margin was 18.2%, above our guided range, driven by higher-than-expected revenue and gross margin during the March quarter. Earnings per ADS was $1.58. Total stock compensation, which we exclude from non-GAAP results, was $8.4 million in 1Q '26. We had $210.9 million cash, cash equivalents and restricted cash at the end of the first quarter compared to $277.1 million at the end of the fourth quarter of 2025. Cash decreased in the first quarter due to a combination of dividend payment of $16.9 million and an increase in inventory to support our expected strong business ramp. Our team is executing exceptionally well in this challenging NAND and DRAM pricing and supply environment. We continue to invest in advanced geometry products for both our established markets and our emerging enterprise markets, including MonTitan SSD and enterprise boot drive storage solutions. These investments will continue throughout 2026 as we support the growing demand for our enterprise portfolio. For the second quarter of '26, we now expect revenue to grow 15% to 20% sequentially to $393 million to $411 million. We see strength across nearly all our product segments with an emphasis on continuing market share gains and new cloud AI opportunities with our MonTitan and boot drive business as they ramp. Gross margins are expected to increase sequentially to 48.5% to 49.5% in the June quarter, given the product mix assisted by greater contribution from MonTitan and our PCIe 5 controllers. Operating margin is expected to be in the range of 21% to 22%, and our effective tax rate is expected to be 19%. Stock-based compensation and dispute-related expenses is expected to be in the range of $3.6 million to $4.6 million. 2026 is on track to deliver record revenue for Silicon Motion with strength across all of our major product lines. We expect sequential top line growth for the remainder of the year with further improvements in profitability. We still anticipate additional development costs, which will drive higher operating expenses in the second and third quarters of this year, which will be more than offset by higher revenue and gross margin performance. We anticipate our full year 2026 operating margin to improve as compared to '25 despite our higher investments this year. We are navigating the current memory and storage supply constraints and high pricing environment with remarkable success, driven by our relentless strategy of relationship building with NAND flash makers over the past 20-plus years. We are also beginning to reap the benefits of our multiyear investments in eSSDs for enterprise and AI with MonTitan and our growing boot drive storage business beginning to ramp in volume. Our leading position in merchant controller, combined with unmatched NAND maker partnerships will drive higher share across eMMC and UFS, client SSDs, enterprise, automotive, boot drives and the high-performance, high-capacity enterprise and data center storage markets. We expect this will lead to significant revenue growth for Silicon Motion in 2026 and the years to come. I look forward to sharing more detail on our progress when we report next quarter. This concludes our prepared remarks. I'd like to open up for questions now. Operator? Operator: [Operator Instructions] We will now take our first question from the line of Neil Young of Needham & Company. Neil Young: So it obviously sounds like everything is supposed to grow quarter-on-quarter throughout the year. But maybe specifically looking to 2Q, could you sort of rank the segments on what you think should grow the most and what you think should grow the least? Jason Tsai: We anticipate growth, as I said, across all of our business segments. I think, obviously, we've had some very strong growth in eMMC and UFS early on in the year. If you take a look at our automotive, Ferri and our boot drives, we're just in the early stages of that ramping. So we do anticipate stronger growth from those products. And then certainly, the rest of the other products continue to grow as well throughout the -- for the quarter. Neil Young: Okay. And then I have a follow-up. So within the eMMC and UFS business, it sounds like it's diversifying a little bit away from handsets. Could you maybe update us on the mix of handset revenue in the business versus sort of the broad markets that you talk about? Chia-Chang Kou: So for our eMMC and UFS controller business, UFS majority is in handset. I think eMMC majority is in the smart devices such as smart glasses -- and IoT device, smart TV, new set-top box and smart door lock and many others is going to the automotive. So I think the -- although the smartphone unit shipment will decline, but our overall eMMC UFS controller shipment will continue to grow throughout the year. Jason Tsai: Neil, we also anticipate MonTitan to begin to ramp more meaningfully in the second quarter -- starting in the second quarter as well. So that will be another growth vector for our second quarter. Operator: We will now take our next question from the line of Mehdi Hosseini of Susquehanna Financial Group. Unknown Analyst: So this is Amy filling in for Mehdi. The first one is with the new SM8008 product launch in March, can you give a bit more color on the boot drive revenue trajectory? I know the contribution of revenue is small this year. So how should we frame the ramp from here? And what does a more meaningful contribution year look like? And I have a follow-up. Jason Tsai: So we don't break out those segments specifically. But as I said before, we do anticipate boot drives and Ferri to be more meaningful contributors of revenue in the second quarter as well as throughout 2026. SM8008 is a boot drive controller that was introduced, and that will be part of the portfolio of solutions that we have in this category of products, but we have other solutions here as well that have been ramping. Chia-Chang Kou: So I mean, let me add some comments. For SM8000A, our PCIe Gen5 high-end boot drive controller, primarily selling the controller and the firmware to the customer who make a boot drive solution. So for this year, most of our boot drive solution were not based on 8000A controller. This is only ship specific to certain customer, major customer, that will start to ship by late this year. Unknown Analyst: Got it. Really helpful. And my next question is regarding the revenue diversification. Do you remain on target to have 20% of your total revenue from a mix of MonTitan boot drive and auto? Chia-Chang Kou: Yes. We definitely will reach the goal. I think we quarter-by-quarter figure. We didn't give a full year guidance, but wait for our next quarter results and the guidance for Q3. Operator: We will now take our next question from Suji Desilva of ROTH Capital. Sujeeva De Silva: Wallace, Jason, Tom, congratulations on the progress here. Perhaps you can give us some fundamental color here. Maybe understanding how the second half versus first half half-over-half revenue would be this year perhaps versus typical years? And is 50% gross margin potentially in the near future? Or any puts and takes there would be helpful. Chia-Chang Kou: I think, first of all, 50% gross margin is definitely achievable. We're confident for this year. The second is we cannot give you the -- we just say quarter-by-quarter sequentially. So we'll continue to grow quarter-by-quarter, but we cannot give you a percentage regarding first half, second half. Sujeeva De Silva: Okay. Jason, can you remind us what the typical year is? Or do you have that data? Jason Tsai: Yes. I mean, typically, we're about 45, 55, somewhere in that ballpark. Sujeeva De Silva: Great. And then my other question is around MonTitan. Can you give us an update on how many customers are ramping today that are going to ramp start near term and how many you have or pipeline? Any update on MonTitan number of customers would be helpful. Chia-Chang Kou: So MonTitan, we are ramping today in production with 2 customers, but we are going to have 5 additional major customers from CSP by late this year, 3 from Asia, 2 from U.S. Operator: We will now take our next question from Gokul Hariharan of JPMorgan. Gokul Hariharan: Great results. So Wallace, I just wanted to dig in a little bit on your comment about having more interest on the MonTitan solution from TLC NAND and KVCache, especially for the CMX piece of the equation. Could you talk a little bit about what has changed there, given I think previously, I think you were a lot more optimistic about the QLC NAND solution, and that was kind of like the key selling point for MonTitan given Silicon Motion's experience in managing QLC NAND. And in addition to that, can you also talk a little bit about how is the adoption that you're seeing from a lot of these customers on the CMX solution or the previously called ICMS solution -- is that largely the 5 customers or at least the 2 non-Asia customers that you're seeing ramping up along the CSPs? Is that related to the CMX solution? Chia-Chang Kou: Okay. You have a very long and good questions. Let me try to answer one by one. First of all, because the NAND price increased dramatically and because the NAND supply shortage and the most of the majority output and taken away by the CSP customer. Now because the NAND price increased dramatically, so the customer who originally designed with the QLC with 128 terabyte, even higher capacity, they have certain drawback because the price increased almost 5 to 10x compared with a year ago. It is very, very unlikely. So we see more demand, either the QLC capacity reduced or they're shifting more for compute storage. As everybody know, compute storage, we say is the compute SSD, which is next to CPU and the new compute SSD, which is called by NVIDIA CMX content memory storage is for KVCache for AI inference is also use TLC because latency is very, very important. So we see more and more customers moving to TLC with a smaller capacity like 4 and 16 terabyte. And this is really a benefit for Silicon Motion because we ship more controller. But for QLC, we also still have 2 customers continue and ramping later this year, and they are able -- we can help -- we help them to secure NAND supply because the QLC 2 terabit today only have 3 NAND maker can provide the production. I think wait for 1 more year, we see all the NAND maker can produce QLC availability will be better. We will see more demand for high-capacity QLC and supply will become more normal. So that situation we see. Regarding the CSP customer, because MonTitan are one of the unique technology called performance shaping, which is very, very good for AI inference because when AI inference go to KVCache, you need to have managed multiple token and our MonTitan have the architecture can handle 4 tokens simultaneously. That's why the many, many leading customers and CSP like the great architecture. That's why we see demand is very, very high from U.S. to Asia. Gokul Hariharan: Got it. That's very clear. Just on the client SSD controller side, I do notice that the strength is still very robust even in a reasonably challenging PC market. Do you sense any pull-forward demand from some of these customers? Because this is something that we hear from some of the other vendors that even though end demand has been not that great, there's been some pull forward demand, customers trying to stock up inventory ahead of cost hikes and price increases. Is that something that you're seeing among your customers? And secondly, when you talk about NAND makers exiting this market, does it change the threshold in terms of what kind of market share you could eventually have of client SSD? I think previously, you've talked about maybe 50% or 40%, 50%. Is that threshold increasing given the industry trends we are seeing? Chia-Chang Kou: Okay. I think you asked a very good question. As everybody knows, the NAND supply is shortage and the NAND maker allocate less SSD to PC OEM customers. But this trend benefit for Silicon Motion because, first of all, we get a more outsourcing project from NAND maker for PC OEM. Second, and because the module maker, they step up to fill the gap because we own almost majority module maker to design our controller for PC OEM. And that's why although we see the PC unit shipment might decline 10% or more, but we will continue to gain market share, and we see the client SSD business continue to grow. When the PCIe 5 moving from high end to mainstream and PC OEM and shipping more PCIe 5, we benefit much more because ASP is higher and also we dominate for PCIe 5 more than 50%. So we see a market share gain continually when PC OEMs start to ramp the 4-channel DRAMless PCIe 5 controller. Operator: We will now take our next question from the line of Sebastien Naji of William Blair. Sebastien Cyrus Naji: On the strong results and guidance. My first question is on the share gain momentum that you're seeing, particularly in the mobile and PC markets. How do you think about the trajectory of those share gains? In other words, have you seen maybe more meaningful share gains been front-loaded here Q4, Q1, Q2 of this year? Or is there significantly more runway for you to keep taking share as we move into the second half and even into 2027? Chia-Chang Kou: Our goal is to continue gaining market share. When NAND maker, now they have limited R&D resources, and they probably will outsource more projects to Silicon Motion. So we try to reserve all the R&D, and we're very busy to catch all this outsourcing opportunity. And we see we continue to gain the embedded eMMC and UFS controller business as well as client SSD for PC OEM because retail for client SSD almost gone. It's very, very low. We see the PC OEM, but we have a much broader customer to provide the SSD solution to PC OEM, not just NAND maker. There'll be more module maker coming too. Sebastien Cyrus Naji: Great. Great. Okay. That's nice to hear. And then my follow-up is just on the boot drive opportunity. Can you just remind us what the competitive landscape looks like? Who else might be in a position to provide these types of boot drive controllers? And then relatedly, how should we think about your share in that market? Should it be higher than in some of your other subsegments? Or should it be pretty similar? Any pointers there? Chia-Chang Kou: So for our first engagement for the DPU BlueField 3, there will be 3 makers provide the solution. Two other NAND makers also use the Silicon Motion controller, but different controller, different NAND. And we also -- with our additional different controller to support. But I think through the engagement, I believe the customer will like to focus on the new generation DPU and also provide much more deeper NVLink and Ethernet, the C69 switches project to us because for the new generation boot drive, security becomes very critical. I believe today, we are probably only one to have a specific security in our firmware and hardware in our controller. And we have a unique firmware with -- to manage the NAND into a pseudo LC mode, provide specific function for the end customer. So that's why we believe we probably have a majority of the new generation boot drive in this particular customer. Operator: We will now take our next question from Tiffany Yeh of Morgan Stanley. Hsin Yeh: On the great results. And my first question would be, could you share with us your latest view on the TAM for the MonTitan or the overall eSSD market and also your targeted market share in the overall market? And I have a follow-up. Chia-Chang Kou: We see MonTitan now get tremendous attention and a very, very broad design win. We're very happy in our progress. We see we'll continue to gain market share. We see MonTitan, even for PCIe Gen 5 and associate product, we will grow to at least 5% to 10%, aligned with our expanded 2026 revenue and '27. Our PCIe Gen 6 MonTitan even stronger even before we tape-out, we have multiple design wins from Tier 1 customers, including 2 NAND maker and several CSP customers. So this is bringing a very, very broad and long-term commitment and for development. We see the -- our PCIe Gen 6 MonTitan also have a very, very unique technology with 160x LDPC and support both TLC and QLC for next-generation QLC. So we have a very, very broad customer waiting for the product, and we'll continue ramping PCIe Gen 5 and waiting for PCIe Gen 6 for design win pipeline. Hsin Yeh: All right. Very clear. And my second question would be, as we see elevated material costs and also the OSAT costs, would you consider conduct price hike on your product to pass through all these costs to your customers? Jason Tsai: I think we've developed a very good relationship with our back-end packaging and testing as well as our suppliers. Look, I think our goal here is to maintain our gross margins in this 40% to 50% range, and we're comfortable through our existing relationships with our suppliers as well as our relationships with our customers that we can maintain that pricing. We're not going to go into specifics about pricing changes with customers, but we're confident that we can maintain our margin... Chia-Chang Kou: Let me add a comment. At the moment, our concern is not in the price increase regarding manufacturing side. Our main concern is the Ton material for the BGA substrate because it's very, very tight and supply is very limited. We have to fight with all the U.S. Tier 1 customer. But our operation worked very hard with both the Japan customer directly and work with all the Taiwan manufacturers. And so we try to overcome the challenging and manage supply to make sure we can meet the customer demand. Operator: Do you have any follow-up question, Tiffany? We will proceed with our next question from the line of Craig Ellis of B. Riley Securities. Craig Ellis: Congratulations on the great performance, guys. I wanted to ask an intermediate to longer-term question. Wallace, congratulations on what appears to be really significant MonTitan customer diversification through this year, and you've got a boot drive position that seems to be broadening out significantly in next-generation drives through the year and auto with Ferri is expanding nicely as well. So the question is this, as we look at reports seeing that that memory-related order pipeline is happening deep into 2027. And as you exit this year with a much broader customer and program footprint, how do you feel about supply availability next year? And are you seeing from your customers extended order visibility? And if so, where is that happening? Chia-Chang Kou: I think for this year, NAND supply is a little challenging to us. It's not because the NAND maker won't provide NAND supply to Silicon Motion because we provide the PO were late last year because the NAND maker and DRAM maker, they almost finished allocation before August time frame. And this is why we -- but through our strategic relationship and deep partnership and presentation with the NAND maker, we're able to secure the full supply for 2026. Now for next year, we will start to provide our demand to our NAND partner in advance. So we are pretty sure and we are able to secure all the NAND we need for '27 growth. And I believe 2027 DRAM and NAND supply will be more severe than 2026. But the DRAM will get easier from late 2027 to '28 because all the new mega fab start to ramp from second half 2027. And I think Micron, the second fab in Boise will ramp from second half 2028. But I think the NAND will start to see release probably from early '28 or second half '28, but still in shortage. But we will try to maintain the position, make sure we secure all the NAND in advance, meet our customer demand and meet the growth demand. Jason Tsai: And also keep in mind, Craig, we have -- we're sourcing from 3 different flash makers. So we've got a really good range of suppliers to work with. Craig Ellis: That's really helpful color, guys. And then for the second question, I think just thinking near term about how some of the hydraulics play out in the second half of the year with product-related investments. It sounds like there'll be some asset costs for PCIe Gen 6, but you're also looking for much higher revenue and higher gross margins. So can you talk a little bit more the gives and takes that we should be thinking about in the middle of the back half of the year? Jason Tsai: Yes. I think from an OpEx standpoint, we will have our OpEx obviously higher this quarter, and then that will probably tick up a little bit in the third quarter as well as some of these tape-out costs come in. And then our expectation for timing is that fourth quarter, those we should have a lot less development costs, so that will come down. Overall, we expect to see margins continue to improve, operating margins continue to improve throughout this year. Chia-Chang Kou: Let me add some comment. Silicon Motion procure NAND is not like a normal customer. We are a strategic partner for NAND maker because we are a mutual business, and we engage their project to many, many large-scale customers, too. So they treat us as a partner, not just a normal buyer for NAND. Operator: We have reached the end of the question-and-answer session. Thank you all very much for your questions. I'll now turn back to Mr. Wallace Kou for his closing comments. Chia-Chang Kou: Thank you, everyone, for joining us today and for your continuing interest in Silicon Motion. We will be attending several investor conferences over the next few months. The schedule of this event will be posted on our Investor Relationship section of our corporate website, and we look forward to speaking with you at this event. Thank you. Operator: Thank you for your participation in today's conference. This does conclude the program. You may now disconnect your lines.
Operator: Hello, everyone. Thank you for joining us, and welcome to the Extreme Networks Q3 Fiscal Year '26 Financial Results. [Operator Instructions] I will now hand the call over to Stan Kovler, Senior Vice President, Finance and Corporate Development. Please go ahead. Stan Kovler: Thank you. Good morning, everyone, and welcome to Extreme Networks's Third Quarter Fiscal Year 2026 Earnings Conference Call. I'm Stan Kovler, Senior Vice President of Finance and Corporate Development. And with me today are Extreme Networks President and CEO, Ed Meyercord; and Executive Vice President and CFO, Kevin Rhodes. We just distributed a press release and filed an 8-K detailing Extreme Networks' financial results for the third quarter of 2026 and a copy of our press release, which includes our GAAP to non-GAAP reconciliations, and our earnings presentation is available in the IR section at extremenetworks.com. Today's call and Q&A may include certain forward-looking statements based on current expectations about Extreme's future financial and operational results, growth expectations, new product introductions, supply chain dynamics and management strategies. All financial disclosures made on this call will be on a non-GAAP basis, unless stated otherwise. We caution you not to put undue reliance on these forward-looking statements as they involve risks and uncertainties that can cause actual results to differ from those anticipated by these statements. These risks are described in our risk factors in our 10-K and 10-Q filings. Any forward-looking statements made on this call reflect our analysis as of today, and we have no plans to update them, except as required by law. Following our prepared remarks, we will take questions. And now I will turn the call over to Extreme's President and CEO, Ed Meyercord. Kevin Rhodes: Ed, you may be on mute. Operator: [Operator Instructions] Please stand by. Ladies and gentlemen, we are currently experiencing technical difficulties. Please stand by as we resolve the issue. Edward Meyercord: Am I unmuted? Kevin Rhodes: There you go, you're good, Ed. Edward Meyercord: Okay. Sorry about that. Thank you all for joining us this morning, and thank you, Stan. The third quarter marks our fifth consecutive quarter of double-digit revenue growth. Our results reinforce our momentum as the fastest-growing enterprise networking player, outpacing market leaders. Our performance reflects strong sales execution and differentiated technology, including our enterprise fabric and AI-powered platform, which are driving share gains across key markets. We've also resolved memory supply needs for both the near and long term, which will allow us to meet customer demand and stabilize gross margins. And in the quarter, we returned $50 million to shareholders through share repurchases. Revenue in the quarter beat the high end of our guidance at $317 million, an improvement of 11% year-over-year. Product revenue increased 12% year-over-year, representing 8 quarters of growth. Cloud subscription momentum lifted SaaS ARR to $236 million, an increase of 29% year-over-year. This performance underscores the strength of our Platform ONE strategy and the durability of our recurring revenue model. Extreme has secured our forward-looking supply to support demand through fiscal '27 and beyond through a combination of multi-sourcing, alternative component qualification, engineering redesign, component inventory investments and strategic supplier partnerships. Moving forward, this gives us greater fulfillment certainty and margin visibility. Enterprise networking demand remains strong as high-quality secure networks are mission-critical to scaling operations and achieving business objectives. This demand supports targeted price increases to offset supply costs while maintaining a price advantage relative to Cisco. The combination of disciplined pricing actions and cost management allowed us to improve gross margins to 62.3%, up quarter-over-quarter, exceeding guidance. A recent independent study found that enterprise customers can experience more than 30% total cost of ownership savings with Extreme compared to leading competitors. Additionally, our new partner program delivers 20% higher profitability versus our largest competitor. This, combined with Cisco's end-of-life refresh cycle and HPE Juniper integration complexity is creating a significant opportunity for Extreme to take share. This is reflected in double-digit growth, where 44 customers spent over $1 million with Extreme this quarter. Our products and solutions stand out in the market. Our fabric continues to be a significant differentiator. Customers highlight its simplicity and automation, which translate into reduced deployment time, improved reliability and lower operational complexity. It also strengthens security by shrinking the attack surface and containing threats with built-in segmentation that limits lateral movement. The feedback we hear most often is, "It's so easy," and our favorite customer quote is, "What took us 6 hours with Cisco, took only 6 minutes with Extreme." We're the only vendor that offers this fabric. We're gaining traction and adoption across verticals with Extreme Platform ONE. Its agentic core and ability to provide customers with full network visibility is a significant competitive advantage. Customers are using Platform ONE to streamline operations, accelerate root cause analysis and automate routine tasks, resulting in faster issue resolution, reduced downtime and more efficient use of IT resources across increasingly complex environments. Wi-Fi 7 continues to be a key driver of wireless network refresh opportunities. This is driven by the advanced design of our access points, which maximizes throughput, minimizes latency and efficiently utilizes spectrum in dense environments. Our APs are built to handle the increasing demand of complex enterprise applications, AI-driven workloads and real-time traffic, delivering consistent high-performance connectivity even in the most challenging conditions. And finally, no one matches Extreme's cloud choice, public, private or on-prem with no trade-offs in performance or control. Our platform's built-in compliance and flexibility let customers meet strict data security and regulatory requirements without compromise, driving strong public sector interest. The strength of our portfolio is showing up clearly in our results and customer wins. For example, Extreme played a role in 2 marquee events this quarter. During the recent Artemis II lunar spaceflight launch from Kennedy Space Center, our networking solutions supported mission-critical systems at the launch control operations. We're very proud to be a part of this historic and critical mission. We also supported Lucas Oil Stadium during the NCAA Men's Final Four, where our team rapidly modernized connectivity, removing legacy access points and deploying temporary infrastructure to make the stadium game ready. Now we're upgrading and modernizing the stadium to Wi-Fi 7 for the upcoming Indianapolis Colts season. In addition, we had several new Extreme platform ONE wins in the quarter with customers, including Asiana Airlines, which is merging with Korean Air; Atlantic Food Distributors; Bridgeport Public Schools; City of Prescott, Arizona; Johnstone Supply; Nissha Medical Technologies; and the University of Buckingham. These customers are turning our AI-powered automation to reduce manual tasks, streamline operations and minimize network complexity, ultimately enabling faster execution and lower costs. We're seeing strong momentum with our MSP program, with more than 70 active partners. MSP billings grew 26% quarter-over-quarter and continued a solid upward trajectory. MSPs value Platform ONE for its ability to manage multiple customer networks, licenses and incidents and our unique consumption billing and portable licensing model make it easy for them to scale their businesses. We exited the quarter with over $200 million in annualized EBITDA, healthy net cash and a full year guidance that reflects continued growth. And we have resolved supply chain concerns, which could translate into increased market opportunity. The setup for Q4 means we're set to grow double digits for fiscal '26, and we're confident in our ability to outpace the market and continue to gain share in fiscal '27. Now let me turn the call over to Kevin to discuss financial results and guidance. Kevin Rhodes: Thanks, Ed. We're really pleased with the third quarter performance. It was another strong quarter across several key areas: revenue growth, SaaS ARR growth, deal volume, gross margin improvement, earnings per share and solidifying our supply chain for at least the next fiscal year. Let me walk you through what drove the strong results this quarter. Total revenue of $317 million, grew 11% year-over-year and exceeded the high end of our guidance range. We achieved 5 sequential quarters of growth, a double-digit growth year-over-year and 8 quarters of sequential product revenue growth. The growth in revenue is being driven by larger deals over $1 million, higher overall volumes of deals and improved average selling prices due in part to selective price increases. We achieved strong bookings across all regions, which reflects strong execution as well. On the bottom line, we continue to achieve strong operating leverage. Earnings per share of $0.26 exceeded the high end of our guidance range and grew 24% year-over-year, up from $0.21 in the prior year quarter. A few highlights to consider. We saw a meaningful acceleration in our SaaS ARR to $236 million, which was up 29% year-over-year due to strong Platform ONE attach to new product sales and upsells within our existing customer base. We have several new AI and product features that are being announced at our upcoming Connect conference next week, which we expect to continue to drive Platform ONE adoption. Subscription and support recurring revenue of $114 million in the quarter grew 13% year-over-year and remained consistent at 36% of revenue. SaaS deferred revenue climbed to $342 million, a 19% year-over-year increase. This strong and growing base of deferred revenue signifies the shift to a more favorable mix of predictable, high-margin recurring revenue. Wi-Fi 7 grew meaningfully in its contribution to wireless product revenue, representing 37% of total wireless unit shipments in the quarter, up from 27% last quarter. In terms of bookings dollars, nearly half of wireless bookings came from Wi-Fi 7 this quarter. This favorable mix shift continues to drive higher selling prices and gross margin. Geographically, we had very strong performance in EMEA and APAC, and we're confident in building on our success in those regions due to our favorable competitive positioning and differentiated solutions. Performance in Americas was also solid, especially considering the elevated revenue benchmark set in the prior year, and our bookings growth during the third quarter provides confidence in our outlook. Across verticals, we saw particular strength -- booking strength that is in education, health care, manufacturing and sports and entertainment during the quarter. Several other factors drove revenue growth during the third quarter. The first factor was our momentum in winning larger and more strategic customer engagements, demonstrated by 44 customers spending over $1 million with Extreme, higher than any point in the last 2 years. Second, we had recent competitive wins and strong funnel conversion. We're seeing improved win rates with our differentiated campus fabric, Platform ONE's ability to offer full network visibility and AI-powered automation and network refresh opportunities with Wi-Fi 7. And finally, we successfully implemented another round of price increases in March, following our mid-single-digit November price increases. The rising cost of memory and other components caused us to selectively raise price. This as well as disciplined discounting helped improve gross margins during the quarter. Overall, gross margins of 62.3% was up 30 basis points from the last quarter. Product gross margin grew 70 basis points from the second quarter as well. We've secured our supply chain, including our memory supply through fiscal 2027 and beyond, putting us in a strong position to meet our longer-term demand due to a combination of multi-sourcing, alternative component qualification, engineering redesign, component inventory investments and strategic supplier partnerships. Turning to operating profit. Our operating margin in the third quarter was 15.2%, up from 14.1% in the prior quarter and 15% last year. This was driven by improved gross margins and disciplined cost management. In fact, we achieved our highest EBITDA on a dollar and margin basis in the last 10 quarters at $53.4 million of EBITDA and a 16.9% EBITDA margin. Our strong operating results reaffirm our confidence in driving operating leverage to reach our long-term profit target of 22% to 24%. On the capital allocation side, we executed a $50 million accelerated share repurchase during the quarter, retiring over 3 million shares post settlement at an average price of $14.58 per share. We plan to return cash to shareholders through continued buybacks with $137.5 million of our current $200 million authorization still remaining. Now let me turn to our fourth quarter guidance. We expect our revenue to be in the range of $330 million to $335 million. We expect gross margins to be in a range of 61.8% to 62.2%. Operating margin is expected to be in a range of 15.2% to 16.1% and earnings per share is expected to be in the range of $0.28 to $0.30. Our fully diluted share count is expected to be around 132 million shares. For the full fiscal year 2026, we expect guidance as follows: revenue to be in the range of $1.275 billion to $1.280 billion. The midpoint of this range suggests 12% year-over-year growth. Given our results and visibility we have for gross margins, we now expect gross margins for the full fiscal year to be in the range of 61.8% to 61.9% and operating margin to be in a range of 14.7% to 14.9%. Earnings per share for fiscal 2026 is expected to be in a range of $1.02 to $1.04 per share. And with that, I'll now turn the call over to the operator to begin the question-and-answer session. Operator: [Operator Instructions] Your first question comes from the line of Ryan Koontz with Needham & Co. Ryan Koontz: Terrific results to see here this morning. If I could start with SaaS there. Nice to see that inflect higher and start to accelerate. What's your visibility look like for that continuing that momentum? And do we expect some solid seasonality in your Q4? Maybe you can unpack that for us a bit. Edward Meyercord: Kevin, do you want to take that one? Kevin Rhodes: Sure. I'm happy to, Ryan. So I mean, we actually were pretty pleased with what we saw both from a bookings perspective on Platform ONE. We do have a little bit of a tougher comp in Q4, like you mentioned. We still believe that we can range, I'd say, our growth in SaaS ARR to be in that kind of 20% to 30% range. Naturally, this quarter, it's higher on that range, but that's roughly the range that we're expecting on the long term. Edward Meyercord: And I'll just add to that. Yes, I'll add to that, Kevin, that we have -- in terms of growth, we've been exceeding our internal expectations for Platform ONE. We have a very steep ramp in our plan. And so, it's doubling from Q2 to Q3 and then further into doubling again in Q4, and we're on track. And so I would say it's really that momentum of Platform ONE adoption that has been the driver. Ryan Koontz: That's terrific. It sounds right in line with your plan. So maybe on the competitive front, you mentioned some wins and some strong bookings internationally. Who are you seeing the most success with against in these competitive bids? And what gives you confidence here going forward on your continued share gains here because you guys are clearly taking share. Edward Meyercord: Yes, it's interesting, Ryan, in all of the examples that we put in our press releases, it really reflects wins against virtually all of our competitors. And when we say that, obviously, #1 is Cisco, #2 -- and it really just goes by market share, #2 being HPE Juniper and then we actually included a win from Huawei, which is interesting because we don't see them in the U.S. in many markets. So I would say that it's -- our competition is primarily versus Cisco and HPE. And we're winning with our fabric. We're winning with Platform ONE. We're winning with our success and making it very easy for customers to deliver a high-quality experience in complicated networking environments. We talk about complex wireless. And we also talk about cloud choice and flexibility. And then there's also commercial terms. There's -- today, the competitive environment is such that Cisco continues to grow and expand outside the networking market. And I would say, simply focus on other things. That opens the door for us. The new comp plan for partners require them to jump through hoops and sell things that they normally don't sell. That opens the door for us. And then HPE Juniper, the complexity of that deal and the challenges that they'll have with integration filters out into the field and into the channel. And so here, again, with Extreme, with a very clean vision, a clean portfolio and hardware and solutions that are very easy for customers to use and simplify operations in something that's inherently complex is getting us more at bats and our conversion rates are going up and our win rates are going up. Operator: Our next question comes from the line of Dave Kang with B. Riley. Dave Kang: Question on the gross margin came in better than expected. Were there several large professional installation projects in fiscal third quarter? And what should we expect for fiscal fourth quarter as far as the installation projects are concerned? Because I think that was the reason that kind of pressured gross margin last quarter, right? Kevin Rhodes: Yes. Dave, we... Edward Meyercord: Yes. I'll take it, Kevin, and then you can jump in. We had a couple of professional projects pushed to Q4 and Q1. And so the level of professional services in the quarter was a little higher than normal, but not as significant as we had expected. But obviously, there's a lot of variables impacting gross margin. And we saw some benefit from the pricing moves we took earlier in Q2. And then we're very aggressively managing the cost on the cost of goods side. I think our teams are doing a great job there of being very disciplined and aggressive and attacking the cost structure. Kevin, do you want to add anything? Kevin Rhodes: I think that's right, Ed. I think across the board, we just saw a little bit more improvement than we had expected. But overall, part of it is execution, part of it is the price increases and part of it is just a slight delay in some of the professional services, mix of all 3. Dave Kang: And then more importantly, on product margins, are they still trending up and -- going forward? Kevin Rhodes: Product margins, I mean, yes, I would say from -- first of all, we had 70 basis points increase quarter-over-quarter from a product margin perspective, Dave. I would say from a product margin perspective going forward, we're still absorbing some of the costs that we had, higher memory costs, and we're trying to balance that with the price increases that we had, including those in March. We're still trying to see if we can get those price increases in March through. But I would say, generally speaking, we feel confident in our ability to stabilize product margins around that 57% plus range. Dave Kang: Got it. And then on the memory situation, I think the last time we talked, I thought you were targeting close to 3 years. Are we there yet? Or where are we in that regard? Kevin Rhodes: Go ahead, Ed. Edward Meyercord: Yes, I was going to say I don't -- we would not target to have on hand 3 years of supply of memory. But at this stage, what we're messaging is that we no longer believe we have an issue with supply of memory. And that's near term with committed supply through fiscal '27 and into '28. And then there are new sources of supply coming into the market when -- we believe in the first quarter of calendar '28. So from our perspective, we mentioned the fact that we have -- we've established direct connections with suppliers of memory and taken a multi-sourcing approach. We've been able to qualify alternative components that were designed for other industrial sectors, which has given us another source of supply. We've been able to redesign our products to reduce the number of chips required, which is another factor. And then we've been able to make investments with our strategic partners and our ecosystem of partners, they have helped us find and locate supply, which has been very important. And so it's through a combination of a variety of initiatives that we've been able to solve for this, and we're confident in saying that we have no near-term nor do we believe a long-term issue with memory and currently any of our components going forward. Operator: Our next question comes from the line of David Vogt with UBS. David Vogt: So maybe, Kevin, I might have missed it and maybe if you can touch on this again regarding kind of the supply chain dynamics and all the initiatives that you undertook in the quarter, can you remind us again sort of how we should think about the implementation of price increases in the supply chain and how it flows through? Historically, you've had, what, like 90-day quoting windows. Like what do those quoting windows look like today for customers? And when do you start to think you're going to start to see the benefits of -- obviously, I'm sure you saw some of the price increase benefits from December, but you mentioned March as well. So how do we think about that flowing through into the upcoming quarters from a gross margin perspective? Kevin Rhodes: Sure, Dave. And first of all, I would describe the price increases, even if you do like a 10% price increase, the industry standard is discounting at 75%. So really, you're looking at somewhere between 2% to 3% net price increase, right, as you can imagine. And so with these price increases kind of coming through on a net basis at 2% to 3%, both between November and March, some of that is to obviously offset the cost themselves and some of it is to maintain the margins that we've had in the past going forward. It's a little early to tell what's going to happen with the March increases. And quite frankly, a lot of competitors also put price increases in March. So the fact that typical quotes are open for 30, 60 days makes it a little difficult to know what's going to happen with March over the time frame. We feel good about stabilizing our gross margins and being able to start to grow gross margins I would say, into the '27 period. And so I think from our perspective, we are feeling confident about the 62% number and then growing from there throughout the next year. David Vogt: Perfect. And maybe one follow-up too. I know, obviously, you talked about big wins in EMEA and other markets. Can you maybe just touch on the U.S. market? I would have imagined -- I know there was a little bit of a tough comp in the Americas, but I would have imagined given the share gains that you probably are taking from some of the integration challenged companies that we would have seen stronger growth in the Americas. Anything to call out there in the Americas vis-a-vis what's going on in APAC and EMEA? Edward Meyercord: Yes, David, I think it's a little misleading because the -- what we're showing as revenue is based on shipments and the timing of shipments doesn't always line up with -- I think what you're getting at is the demand and our success in the marketplace. If we were to flip the page and actually look at bookings, and I know we don't report bookings data, but bookings growth in the Americas was up significantly, and I would say significantly higher than total revenue growth for the company. So I think the revenue stats here are going to be a little misleading because we had an excellent quarter in the Americas as far as bookings. But in terms of the shipments and the timing of shipments channel, that's what's going on. So I would say that geographically, the strongest geo was the Americas this quarter, even though it wouldn't appear so if you're looking at that revenue number. Operator: Our next question comes from the line of Tomer Zilberman with Bank of America. Tomer Zilberman: Maybe following along the gross margin question line here. Outside of the price increases, you also mentioned some other things like requalifying alternative parts. I think previously, historically, you mentioned qualifying in automotive-grade DDR4, if I recall, and I think also qualifying in some Chinese vendors. One, is this more about just securing supply versus improving the gross margin level? And two, these other alternative things you're doing, I think you also talked about redesigning some of your products. When is that flowing through? Did that already impact results this quarter? Or is that something that we should expect to benefit in 2027? Edward Meyercord: Thanks for the question, Tomer. I think it's a combination of both. It's both demand as well as gross margin. I would say we're securing memory at prices that are below market with the initiatives that we have underway. As I mentioned on the last call, our size is an advantage in terms of what we're chasing. I want to shout out to our teams because we have very creative teams that have excellent relationships with our vendors. I also want to shout out Broadcom. We have a strategic relationship with Broadcom. They have gone out of their way to support us in making important introductions out into the industry for us to solve this problem. And so they have been a key partner for us in solving for this. And it is a combination of a variety of things. Historically, we would -- Extreme would not buy memory direct. We would -- our ODMs, our manufacturers would acquire memory from distribution in Asia, and then they would, in turn, buy from suppliers. And what's changed is, we've established direct connections now with multiple vendors of memory. And as you mentioned, we've been very creative working with Broadcom to qualify memory chips that were designed for other industrial sectors that we could use and Broadcom has qualified those. So now those are going into production, and we've been able to pick them up for a very good price. And so I would say that the efforts that have been undertaken at the company, and it's been multifaceted has opened the door for us for new supply from different vendors, from different markets. And we've been able to secure not only the supply for the long term -- near term and long term, but we've also been able to get them at very attractive prices. And I would say that we were -- I'm pleasantly surprised with the success that we've had given where we were 2 quarters ago and kind of what the outlook was at that time. At this point in time, as I said, we put this behind us, and we believe it could turn into a competitive advantage. What we hear from manufacturers is that we are in a very strong position relative to competitors. Tomer Zilberman: So maybe a follow-up question just to the end of what you were saying there. Are you hearing from your customers that any of your wins are coming specifically from that? One, from -- you have a level of supply that maybe some of your peers don't and customers are going to you because you can ship faster? And could it also be that you just have less cost pass-throughs versus your peers, and that's also a differentiator for your customers? Edward Meyercord: Tomer, I think that as far as the demand side of the ledger, we haven't really seen a competitive win based on supply yet. But given what's going on in the market and given the persistent shortage out in the industry, we think it could come into play. I think that's the way to think about it. We do know that there is some activity that -- of customers wanting to make sure that they can secure supply for important projects, some of that going on. Kevin mentioned the price increase. intra-quarter, we saw some people moving orders earlier in the quarter to take advantage of the price increases. But generally, it's been business as usual. And as we look into Q4, we have a really healthy funnel, and we're off to a really good start. So we feel really confident about how we're guiding. Operator: Our next question comes from the line of Mike Genovese with Rosenblatt Securities. Michael Genovese: I guess the upside in Extreme ONE orders and the RPOs kind of answered this question in a way. But is there any more detail you can give us, Kevin, on cloud and services attach rates and how those have changed since you've launched Extreme ONE? Kevin Rhodes: Well, yes, Mike, I mean, I would say -- I mean, Ed nailed it earlier where we said our plan this year, we're running ahead of our plan. So we launched in July, obviously, Q2 being the first full quarter. And now in Q3, we've doubled what we expected from Q2, and we're expecting to double again from a bookings perspective in Q4. That's going to start to play out and continue to accelerate subscription and support revenue over time. This is what we've talked about, right, for about a year now with launching Platform ONE as a platform that gives a higher attach rate, a higher ASP and obviously better renewals in the future. From an attach rate perspective, I would just tell you, the agentic AI is the interesting part where we're getting higher attach rates, both on the wireless as well as the wired side. And that's where you're continuing to see strong bookings there. And like I said, we saw really strong bookings in the third quarter related to Platform ONE. Michael Genovese: Great. And then my second question, it just seems looking at the data that you've been gaining share from Cisco for a while. But I'm wondering, has there been any inflection that you can point to on the HPE Juniper side where kind of have the share gains there started? What's the confidence that they're going to accelerate? Kind of what's going on, on that side? Edward Meyercord: Yes. Mike, the answer is we're seeing opportunities both with end-user customers. And then we're seeing a lot of opportunities in the channel. A lot of channel partners, maybe they were Juniper partners, and now it's the HPE show and they're disillusioned and they're looking for alternatives. There's a lot of activity in the channel right now where we're engaged with new partners that are larger partners as we move upmarket and a lot of those partner opportunities are coming from the disruption of Juniper and HPE. Those opportunities as it translates into end-user business, I don't think we've seen that materialize yet. We have examples, but in a meaningful way, but we're expecting that to gain momentum as we go forward. Michael Genovese: Congratulations on the bullish quarter and outlook. Operator: Our next question comes from the line of Christian Schwab with Craig-Hallum. Our next question comes from the line of Eric Martinuzzi with Lake Street Capital Markets. Eric Martinuzzi: I wanted to revisit the Investor Day comments you had regarding long-term growth rates. At that time, this was -- you guys were talking about a 10% plus growth rate between FY '25 and FY '29. Given the good numbers that you've seen here, certainly top line, both since the December quarter and the March quarter, is there any change to that outlook as far as a double-digit growth rate? Edward Meyercord: Eric, there's not. When you look at our guide into Q4, that implied growth in Q4 is, call it, a 7% to 9% range. But keep in mind, last year in Q4, we grew 20%. If you average that out, you've got a mid-teens growth rate that we're running at. And so I think that assumption holds and it has not changed. Eric Martinuzzi: Okay. And then from a macro perspective and probably more for your EMEA market, but the war with Iran has been going on for a couple of months now. You obviously put up good numbers here in the March quarter. But anything on the margin, good or bad, tied to pipeline in EMEA with the war? Edward Meyercord: Yes. I think during the quarter, there were a couple of shipments that were impacted where we couldn't ship into the region. And -- but at this point, a lot of those projects have resumed. We talked about our massive project in Ras Al Khaimah, which is just north of Dubai, right near the Strait of Hormuz is. It's a Wynn Casino and Resort. It's the first casino in the Middle East. It's the first phase is a $10 billion project, and it's a massive project for us. They're back and working. And it's hard to believe it's business as usual there. The shipping lanes and our ability to transport product into the region is open. So at this point, I'd say we're -- it's somewhat business as usual. We have seen -- because of the incident, and we have seen some delays in some of the projects, but it feels like projects are getting back and that they will recover from prior delays. The other comment on that, Eric, is that for us, it's a smaller -- a much smaller piece of our business. The Middle East is tied to EMEA for us, and we had a strong quarter in EMEA. And we've been taking share in the Meta market, and that continues. We have excellent customer references there. So we expect that market to continue to grow at a healthy growth. Operator: [Operator Instructions] Our next question comes from the line of Christian Schwab with Craig-Hallum. There are no further questions at this time. I will now turn the call back to Ed Meyercord, President and CEO, for closing remarks. Edward Meyercord: Okay. Thank you, Melissa, and thank you, everybody, for joining us. I also want to shout out, we have employees, customers and partners that tune into these calls, and thank you for the hard work and support on delivering an excellent quarter. Also mentioning to stay tuned, we have some big announcements coming out next week. We have our user conference, Extreme Connect, which is going to be in Orlando. We will be talking about some new technology solutions and the evolution of our portfolio and some exciting new developments on that front. So we appreciate your support, and I hope you have a great day. Operator: This concludes today's call. Thank you for attending. You may now disconnect.
Operator: Thank you for standing by. My name is Kate, and I will be your conference operator today. At this time, I would like to welcome everyone to the O-I Glass First Quarter 2026 Earnings Conference Call. [Operator Instructions] I would now like to turn the call over to Chris Manuel. Please go ahead. Christopher Manuel: Thank you, Kate, and welcome, everyone, to the O-I Glass First Quarter 2026 Earnings Conference Call. With me today are Gordon Hardie, our CEO; and John Haudrich, our CFO. After prepared remarks, we will open the line for Q&A. Our presentation materials are available on the company's website. Please review the safe harbor statements and the disclosures regarding our use of non-GAAP financial measures included in those materials. With that, I'll turn the call over to Gordon, who will begin on Slide 3. Gordon Hardie: Good morning, everyone, and thank you for joining us. Today, we will review our first quarter results, what we are seeing across the business and our outlook for the year. Before I begin, I want to thank all our O-I colleagues across the world for their focus, execution and commitment to supporting our customers in a tough environment. The year got off to a challenging start. While the top line held steady, demand was sluggish early in the quarter before improving through March. We also experienced elevated commercial pressures in Europe and several onetime external events that increased our costs. As a result, first quarter adjusted earnings of $0.05 per share came in below our original expectations. Fit to Win continues to deliver and the disciplines are now embedded across the organization. We are seeing the benefits of a stronger cost position reflected in new business wins across key categories that should support higher volumes starting in the second half of the year. Operationally, it was a story of two hemispheres. In the Americas, earnings were stable despite several external disruptions. In Europe, results fell short of expectations amid elevated competitive pressure. Europe is also earlier in the Fit to Win journey than the Americas, and we expect performance to improve in the coming quarters as we execute the restructuring actions we have announced. Looking to the full year, we expect strong year-over-year improvement in the Americas. Yet we have an updated -- we have updated our 2026 guidance to reflect a more challenging European market, compounded by elevated energy inflation and broader macro dynamics. John will walk you through the updated outlook in more detail in a few moments. Even with the near-term uncertainty, our strategy and priorities are unchanged. With continued Fit to Win execution and new business wins, we are confident we can strengthen results as the year progresses and expect to build momentum into '27 and beyond. We remain laser-focused on our investments -- Investor Day objectives, and we believe many of today's headwinds are temporary. Let's now turn to Slide 4 to discuss our top line performance and volume trends. As you can see, net sales have remained steady over the past several quarters, even amid ongoing volatility and uncertainty. That said, we got off to a slow start this year with first quarter shipments down about 8% versus the prior year. This comparison was also tougher as last year likely benefited from customer prebuys ahead of a new U.S. tariff regime. By category, alcoholic end users were the softest, while NAB and food performed better. In fact, food is now emerging as our second largest category behind beer. Regionally, shipments declined in North America and Mexico amid ongoing customer inventory adjustments in spirits, while South America delivered mid- to high single-digit growth. In Europe, demand was softest in wine, particularly in the South and an extended negotiation period, while other markets were more balanced. Importantly, volume trends improved sequentially through the quarter, with March volumes down only 2%. Given that trend, we continue to expect full year sales volumes to be about flat with the prior year. After a slow first quarter, we anticipate shipments to be stable in the second quarter and to deliver low to mid-single-digit growth in the second half, supported by easier comparisons and new business wins. As we implement our new go-to-market approach, we are encouraged by the early progress. We've landed new business across about 15 accounts spanning all categories that should contribute 1.5% of new sales volume starting in the second half of the year. Together, these wins should help set us up for a profitable, sustainable growth in the 1% to 2% range beginning in 2027. While the quarter was challenging, the trend improved as we exited Q1. The team executed well in difficult circumstances. With steadier demand and new business wins, we believe the fundamentals position us well for a stronger second half. Turning now to Slide 5. Fit to Win remains a core value driver for O-I. The program continues to take cost out and optimize our footprint and value chain. Strengthening our cost position improves competitiveness and enables long-term profitable growth as demonstrated by new business wins. We are now at the halfway point towards delivering $750 million of cumulative benefits through 2027, and we remain ahead of schedule. In the first quarter, the team delivered gross Fit to Win benefits of about $50 million, in line with our expectations. Net benefits were $35 million after headwinds from external disruptions in the Americas and temporary transition costs as we complete the closure of three plants in Europe. Let me highlight our progress across the phases of the initiatives. Phase A, focused on SG&A streamlining and initial network optimization, generated $32 million of net benefits in the quarter despite transition costs in Europe. We expect the organizational actions and planned capacity closures to be largely completed by mid-2026. Phase B focused on end-to-end value chain transformation, was slightly up after absorbing costs associated with disruption in the Americas. Core work streams continue as planned. We launched the third wave of total organization effectiveness, and we are accelerating procurement and energy initiatives to drive incremental savings. We are also pursuing incremental opportunities to offset cost headwinds we observed in the first quarter. Fit to Win is working. We continue to target at least $275 million of benefits in 2026. With that, I'll turn it over to John to walk you through the financials, starting on Slide 6. John Haudrich: Thanks, Gordon, and good morning, everyone. First quarter net sales were $1.54 billion, essentially flat with the prior year. Favorable FX largely offset slightly lower average selling prices and a high single-digit decline in volumes, while shipments improved meaningfully as the quarter progressed. Adjusted earnings were $0.05 per share, down from $0.40 per share in the prior year, primarily due to commercial headwinds, including unfavorable net price and lower volumes. Operating costs were comparable to the prior year as Fit to Win compensated for unanticipated disruptions. Earnings also reflected an unusually high effective tax rate on low pretax earnings. As earnings improve, we expect a full year tax rate of approximately 35% to 40% with the potential to move lower in 2027 and beyond. Looking ahead, the full O-I team is focused on strengthening performance as the year progresses. Let's turn to Slide 7 to discuss operating results. Segment operating profit was $142 million, down from $209 million last year, primarily due to the commercial pressures we discussed. As noted, the Americas was stable, while Europe was down considerably. In the Americas, we performed well despite several external disruptions. The segment's top line was stable as favorable FX and mix, largely offset slightly lower selling prices and a 9% decline in shipments. Demand trends also improved as the quarter progressed with March shipments down only modestly versus the prior year. Americas segment operating profit was $142 million, essentially flat year-over-year, benefiting from higher net price, while lower sales volume and higher operating costs were headwinds. Costs included $10 million of disruption-related expense driven by extreme weather, civil unrest in Mexico and a natural gas pipeline failure in Peru, partially offset by Fit to Win. In Europe, the results were well below our expectations, and they are the primary driver of the year-over-year decline in segment earnings. Europe segment operating profit shortfall was driven by a combination of softer demand and an increasingly competitive market backdrop, which pressured price amid low capacity utilization, most notably in wine in Southern Europe. As a result, net sales declined slightly with favorable FX partially offsetting lower price and volumes. Shipments were down 7% year-over-year, although trends improved as we moved through the quarter and March shipments were up slightly versus the prior year. As you'd expect in that environment, profitability compressed meaningfully. Europe segment operating profit was breakeven in the first quarter, down roughly $68 million from a year ago. The biggest factor was a $76 million reduction in net price, reflecting both elevated price competition and the reset of favorable energy contracts that expired last year. Lower shipments were an additional headwind. These pressures were partially offset by Fit to Win benefit costs even after absorbing $5 million of higher-than-expected temporary plant closure expenses. Looking ahead, we anticipate performance to increasingly converge across the regions as Europe builds the same resiliency and execution capability demonstrated in the Americas while continuing our transformation journey. Turning to Slide 8. I'll close with an update on our outlook for the remainder of 2026. As discussed, it has been a challenging start to the year, and we have updated our full year guidance to adjusted earnings of $1 to $1.50 per share. The chart also reflects our revised EBITDA and free cash flow expectations. To frame the outlook, it's important to separate what we are seeing in our core glass markets and what we are absorbing from broader macro environment, especially energy. Starting with the core glass business, demand trends are stabilizing as the year progresses and Fit to Win is continuing to deliver meaningful results. In the Americas, our outlook remains positive, and we expect results to be up year-over-year. In Europe, we have risk-adjusted our outlook by up to $25 million given elevated competitive pressures, net of additional cost actions and restructuring should support improved performance in the second half. The biggest swing factor in our updated guidance is macro-driven energy inflation stemming from conflicts in the Middle East, which could total $75 million to $100 million. Higher energy prices flow through natural gas, electricity, logistics and certain raw materials. Importantly, our proactive energy management practice significantly limit further exposure, particularly in Europe, where approximately 75% to 80% of gas requirements are protected at prices favorable to current market levels and higher protection in the colder winter months. We will continue to monitor macro developments, including customer demand and whether broader inflation could further influence commercial dynamics. As we have essentially risk-adjusted our outlook for energy inflation, the appendix includes additional earnings sensitivities to changes in European natural gas market prices. While our 2026 outlook is conservatively set given macro uncertainty, our strategy and priorities remain unchanged, and we continue to drive towards the 2027 objectives we outlined at last year's Investor Day. We expect Fit to Win to deliver significant value next year, and we believe many of the pressures we are seeing in 2026 are temporary. More than half of our business operates under contractual price adjustment formulas that reflect changes in inflation on a lagging basis, providing an important structural mechanism as cost conditions evolve over time. Likewise, as capacity utilization increases, particularly in Europe, we believe our competitive position should continue to strengthen. Overall, we remain focused on the levers within our control, anchored by Fit to Win, and we are determined to deliver the best possible performance this year while building momentum into 2027. With that, I'll turn it back to Gordon for closing remarks on Slide 9. Gordon Hardie: Thanks, John. Let me close with a few key takeaways. We are not satisfied with our first quarter results, and we are moving quickly to improve performance. At the same time, our strategy is unchanged, and our long-term value creation plan remains firmly on track. While near-term noise may continue to drive volatility, we see several clear indicators that O-I's underlying fundamentals are moving decisively in the right direction. Here are six reasons we believe O-I is a compelling long-term investment. Fit to Win is delivering and continues to enable future profitable growth by improving operational discipline and cost competitiveness across the business. Core glass demand is stabilizing and recent trends are increasingly encouraging. March volumes point to a clear turning point in demand, providing early evidence that our actions are beginning to translate into profitable growth in the second half and beyond. Improving competitiveness across the footprint is already converting commercial opportunities. We have 15 confirmed incremental volume wins in hand, yielding approximately 1.5% annualized growth. These ramp up over '26 and into '27, giving us a clear line of sight to profitable, sustainable growth. The Americas, where we are furthest along in executing our transformation, are performing very well. Our capacity and demand are tightly aligned and across much of the region, we are effectively sold out. As such, we are actively evaluating opportunities to bring dormant capacity back online. Further, cost parity between aluminum and glass is spurring increased customer interest. In Europe, Fit to Win execution is accelerating. While the region trails the Americas by roughly 6 to 9 months, our capacity rationalization and restructuring actions are underway. Our competitive position continues to strengthen, especially as capacity utilization improves. While we conservatively risk-adjusted our 2026 outlook to reflect Europe's operating environment and the energy backdrop, we remain committed to our 2027 Investor Day targets. We believe these headwinds are temporary and manageable. Taken together, O-I today is a more disciplined, better balanced and better positioned for durable growth than at any point in recent years. Thank you for your time today and your continued support. With that, we'd be happy to take your questions. Operator: [Operator Instructions] Your first question comes from the line of George Staphos with Bank of America Securities. George Staphos: Gordon and John, what has your line management relayed to you about 2Q volumes and Fit to Win performance so far? And what have you relayed in turn to the Board? And why are you and the Board both confident that the turn is happening in 2Q, both in terms of volumes and accelerating in Fit to Win? Relatedly, the phase B on Fit to Win seems to be really not having much contribution so far this year versus target. The second question, I know you gave us some sensitivity, but if you could help us out, if energy rises from here and the consideration of your hedges, is there a way you could give us some back-of-the-envelope EBITDA effects? And do we need to start worrying about any of your secured debt covenants at this juncture or not? And where would we need to? John Haudrich: George, this is John. I'll take the second part of that point first. So as far as the sensitivity to the earnings situation, we assumed in these numbers given that we're 75% to 80% covered this year, we're assuming a range of EUR 45 to EUR 55 per megawatt hour being the relevant range. And so to the degree that energy is below that, for every EUR 5 drop on average, we get back about $0.05 per share. So that's about $12 million or so of EBITDA. To the degree that it goes above $0.55, we're protected, that's more like $0.02 to $0.03, so maybe $5 million or so of risk. We use a combination of different tools and factors and things to manage our energy positions. So we're pretty confident that, that number that we have between $40 million and $60 million of pure energy exposure to the elevated environment and the conflict is about right. And ideally, we can perform better on the downside. And then on the secured question, we got -- we're very, very low on our secured ratio right now, very favorable net position. We're not anywhere near at risk. And I'll tell you, we've got significant liquidity, $1.5 billion of liquidity. We manage our cash very conservatively in the organization. So from a balance sheet standpoint and managing the liquidity, we're in great shape. Gordon Hardie: George, Gordon here. So with regard to Fit to Win, I think we're very well placed to deliver the $275 million and maybe beyond this year. The way we set up the timing of it, we're in line. Quarter 1 delivered to expectation. We did have a number of external events through the tough winter, particularly in North America and some extra costs in Europe on the closure and reconfiguration of the network that were once-off in nature. And so you will see the Fit to Win momentum build. Behind those numbers is very detailed plans, very detailed accountability, weekly tracking. So we feel we're in good shape on Fit to Win. And as ever, we're always looking at new opportunities that are identified and ways to strip waste and inefficiencies out. So we'll be obviously pushing for a higher number, but we're confident in that $275 million number. George Staphos: And what are you seeing so far in 2Q on volume? What have you committed to the Board? Gordon Hardie: Q1 volumes of about 8% in the Americas, and let me break that down and about 7% in Europe. It's clear -- let me start with the Americas because it is a kind of a story of two hemispheres. Let me start in Brazil, where the business is performing very strongly for us with beer volumes up mid-single digits, NAB up mid-single digits and food and spirits up low teens. So we're outperforming the market in all categories in Brazil. And the team there has done an excellent job in executing Fit to Win to become much more competitive and has already entered what I would consider the profitable growth horizon of our strategy. And an interesting fact, Brazil is now more profitable in 2026 than when it had too fewer major competitors a number of years ago. And we expect Brazil to have another very strong volume and financial year. If I move Northwest to Andean, again, performing very strongly for us, outperforming the market in all categories, delivering mid-single-digit growth. And we're expecting a very strong second half and full year in that business. We're also executing incredibly well our Fit to Win program in Andean, and I would consider that market well advanced in the profitable growth horizon. In Americas North, our teams are executing well and addressing very effectively kind of long-run structural issues in that business and getting good results thereof. And so while volumes were down 8%, let me break that down. About 3% of that 8% was wine volume we -- that was not viable and was a barrier to us getting a much leaner network in place. And along the lines of our EP EBIT, we've taken that out of the business. There was about 3% of spirits customers destocking in the face of high distributor volumes. We know that is a temporary piece. And there was about 2% in what I would call missed beer volume due to those external disruptions and we had a furnace repair. We expect another very strong financial year in North America. And indeed, the first quarter EBIT in North America was the strongest in over 8 years. If I look at America Central, we're on track for another strong year despite the macro challenges of tariff impact on beer and spirits exports. We're executing very effectively there, and we're driving cost and waste out and becoming much more competitive on the domestic market in beer, in food and in spirits to offset in part volumes lost in exports. But we expect a strong run home. So in essence, the Americas are performing strongly. We see the volumes coming through. We see the wins coming through with customers. And I'd reinforce that the Americas is about 6 to 9 months ahead of Europe in terms of executing on Fit to Win. In Europe, overall demand was sluggish in the first quarter, particularly across spirits, wine and beer. However, food and NAB held up really well. That said, there are pockets of growth for us. So we had a strong volume rebound in spirits in the U.K., up mid-single digits and wine up about 11% delivering a strong overall year-on-year volume growth in the first quarter in the U.K. North Central Europe, which encompasses the Nordics, Germany and Poland for us, performed strongly with very good growth in food, up above mid-single digits and NAB the same. And we've picked up significant new pieces of business in North Central Europe, where I would say our Fit to Win program is most advanced in Europe, and we can see that competitiveness turning into profitable volume growth opportunities. So they're the two kind of best-performing regions for us, where the issues in volume were in Southwest Europe and Southeast Europe. And that is largely driven by wine, where demand continues to be soft, down in the region overall of about 5%, where there's significant overcapacity and quite significant kind of price pressure in the first quarter. So the bright spot for us in Southeast Europe is food, up about 10% and spirits up about 2% and RTD is actually growing quite nicely for us. But the main issue in Southwest Europe and Southeast Europe is wine and some spirits in France as cognac continues to be impacted by lower export volumes. So Europe, we believe the tide is turning. And when we look at our forecast for quarter 2, we expect to be up low single digits and then low to mid-single digits for the back half of the year. And overall, in Europe, I think we're having the highest rate of new business wins since pre-COVID. And so that's very encouraging. One other marker that we keep an eye on is how many of our customers are returning. And we're having customers come back to us that we haven't done business with in a number of years. So when you put that all together and we look now at our new go-to-market approach and how effectively that's being implemented, we're confident we'll finish the year close to flat with sequential kind of volume growth now in each quarter. So I hope that gives you a flavor, George. Operator: Your next question comes from the line of Mike Roxland with Truist Securities. Michael Roxland: Gordon, I just wanted to follow up with you on the new business wins across 15 accounts, and you said spanning all categories. Is that mostly Europe? Because you just said a lot of the commentary in terms of your response to George's question, it sounded like there's a lot of new business wins in Europe. So can you just comment about those new accounts, the breakdown between, let's say, Europe versus the Americas and what end markets you're really seeing that growth come from? Gordon Hardie: Yes. So overall, that growth, if you were to annualize it, would make up about 1.5%, so overall. And right now, that's split about 70%, 75% Americas, 25%, 30% Europe, with Europe kind of building momentum. We're seeing that in beer. We're seeing it in spirits. We're seeing it particularly in food and NAB. And in North America, for the first time, we're starting to make inroads into RTDs. And as you know, due to a regulation change last year, it's given us the opportunity to enter the RTD market, which is a market that certainly in Anglo-Saxon markets is growing in double digits. So we -- the way we've set up our business is -- and our sales forces and go-to-market is a category and sales combo. And so we see opportunities in each of the categories, and we're executing those, I think, quite effectively. We expect that momentum of new business wins to continue as we translate cost reduction into competitiveness. And if I take people back to I Day, the overall strategy is for us to get our cost base way down, and we're doing that. We still have quite a way to go to be the lowest cost producer, but we're making tremendous progress and then sharing some of that productivity with key strategic customers in exchange for profitable growth. And you're seeing that come clearly through in Brazil, a business that was really in a tough place 2 years ago and is now outperforming in all categories and a tremendous uplift in profitability over the last 2 years. We're seeing the same in the Andean, we're seeing despite a tough macro environment in Mexico, seeing the same dynamic, winning more business, getting costs down, winning more business, improving the financial results. And particularly pleasing to us is North America, which for years, for O-I has been a tough market. We're addressing finally some structural issues in that business in that market and turning that into profitable growth with a number of really strong wins for us in North America. So we believe we're executing this strategy. What happened in Europe in the first quarter, we're mid- to end of the network restructure. And I think the overcapacity in the Southwest and Southeast was an issue. And then the energy cost is a bit of a hit, but it's not a knockout for us. And we see a clear path to getting back to the kind of margins that, that business can deliver. Michael Roxland: That's great color, Gordon. And then just one quick follow-up. Just you mentioned remain focused on 2027 targets, including EBITDA of $1.5 billion plus. Your 2026 guide is down about $100 million at the midpoint. So obviously, that's a setback. Can you help us bridge how -- roughly how you intend to get to the 2027 guide right now? And what levers do you have at your disposal to make up the shortfall? I know maybe not specifically going to provide guidance on 2027, but just maybe walk us through some of the larger buckets that will help you get there given the fact that 2026 is down $100 million. Gordon Hardie: Yes. So here's how we look at that. we are absolutely laser-focused on our 2027 Investor Day targets, of which one is $1.45 billion, okay? There's no question that this is a setback this year, but we're absolutely clear that we have a viable path to that $1.45 billion. And let me give you probably two, three -- three points. We've already laid out that we have $150 million of Fit to Win to come in 2027. And a significant part of our business is in -- has what we call PAFs, price adjustment formulas that are lagged formulas that will allow us to catch up on some of the inflation this year in next year. And we're also, as I said, starting to deliver and move in, in more and more of the markets into the profitable growth phase of our strategy, which also should help us bridge that gap. We've tended to outperform on Fit to Win. So there's also the opportunity to do better than that $150 million, and we're ruthlessly focused on stripping waste and inefficiency out of the business and out of the chain. So when we put all that together, yes, is it a bit of a steeper climb, but absolutely achievable. And in every difficulty, there's an opportunity. And I think the opportunity for us here is to even get more focus and to move even at a faster pace to get to where we need to go. Operator: Your next question comes from the line of Anthony Pettinari with Citi Investment Research. Anthony Pettinari: Gordon, John, it seems like you have these -- you've seen these periods in the past where you have oversupply in Southern Europe with maybe smaller producers in Italy and France. And I'm just wondering if you could talk a little bit more about the competitive dynamics that you're seeing today and maybe how those situations have sort of resolved themselves in the past. Are people -- I guess the basis of the question is you were breakeven in Europe in 1Q. I assume smaller producers are doing much worse. And I'm just curious how sustainable that's been historically? And then I guess, related question, is it fair to say you're giving up a little bit of share in Southern Europe and maintaining or maybe even growing in Northern Europe? John Haudrich: I'll touch base on that one, Anthony, just to talk about the competitive situation and kind of maybe do a compare and contrast. So for example, if you go over to the Americas, where that's a lot of the restructuring has occurred already. We've taken out significant capacity. We went from the low 90s to the upper 90s as far as capacity utilization in that set of markets. And now you can see that on the bottom line. I mean, the performance of the Americas through Fit to Win and a good capacity balance in the marketplace. Our results are over the last 1.5 years, 2 years are up about 60% there. So you can see when there is the balance of these activities, it drives performance. If you compare that to Europe, that probably going into the year -- and I think we brought this up during the last call is that we were -- the market was probably more in the low 90s, right? But there is significant amount of announced capacity closures underway. We're -- as we said, we're going to complete the work that we're doing by midyear. We believe from what we can see is even net of new capacity additions, you're getting into a very similar spot that you see in the Americas. So a much more supply-demand balance. And as a result, it gives us confidence that as we go forward, what we saw in the Americas, we could replicate over in Europe. And truth, yes, it's a more fragmented base in Europe than it is in the Americas. But if you look at the whole, the capacity utilization road map seems to be improving. Gordon Hardie: Yes. Just in addition to that, Anthony, as we laid out at I Day, our cost base was too high. We've made significant progress on that further along in the Americas, as I said. But we also see tremendous further opportunity to get our cost base way down, and that is a key focus for us so that we can compete and deliver our commitments in any environment. So a bit to go there, but that is fundamental to our strategy. And then we're -- it's not really up to us to comment how anybody else is doing. But we're crystal clear on what we need to do. We're crystal clear on the point on the cost curve where we need to be at to grow profitably, and we are absolutely determined to get there and have a clear line of sight on how to do it. Operator: Your next question comes from the line of Joshua Spector with UBS. Gaurav Sharma: This is Gaurav Sharma sitting in for Josh today. I'm just wondering what the optimal utilization target for the European network is in a normal demand environment? And then if there's any additional facilities where you're considering idling versus permanent closures if the market just generally remain soft this year? John Haudrich: Yes. So clearly, from an overall market utilization standpoint, as I mentioned just before, you see the Americas in the kind of an upper 90 utilization across the whole marketplace would be our estimate. But when we talk about our own plants, when we're running them, something in the 90s, low 90s is a great place to be for a glass plant. And so if you're running maybe in the 80s or mid-80s or so, being able to get your utilization up into the 90s is a really good performance trend. That's part of what we -- when we get to win with the total organizational effectiveness program is really about driving the productivity up and utilization levels within our own network. So that's where we're trying to drive that. And ultimately, that gives you scale and allows you to continue to network optimize within your system. When it comes to the overall -- how do you manage kind of a softer environment, it is obviously -- you got to make a read on what you think that you need over the long term, right? And that has driven our own decisions around capacity rationalization over the last year or more. But you also have to say that you have to have some spare capabilities to be able to meet market growth and things like that. So if we go back 1.5 years ago, we were probably -- we had about 13%, 14% excess capacity in our overall network. And that's why we announced the larger restructuring, long-term restructuring activities. In the first quarter, that was down to low single digits or so. So -- and then we're going to continue, obviously, to complete where we are over in Europe over the next few months or so here. So the idea is that we want -- we always want to have a couple of percent of spare capacity to be able to take advantage of what Gordon was saying, which is as we grow our business, we want to be able to do that. But one of the things we did comment is we -- over in the Americas, for example, we are bringing back a previously shutdown furnace to be able to meet the needs. So you've got the ability to flex a little bit on both sides. Gaurav Sharma: Got it. That was very helpful. And then just a quick follow-up to that. You mentioned an extended price negotiation window in the release. I think you spoke about that at conference already. I was just wondering if this is done now or if there are negotiations still ongoing on that end. Gordon Hardie: Yes. For us, it's done usually, the season kicks off kind of late October, early November and a big chunk of it is usually completed before year-end. Some of it kind of runs on into the end of January. And I think the dynamic this year in Europe or last season in Europe was that there were deals done or agreements kind of brought to near conclusion that opened up again in January and February because of -- particularly in Southern Europe and Southwestern Europe, because of the spare capacity and a number of players feeling they needed to keep their capacity full. And so there was a bit of toing and froing. And that extended down to sort of, I would say, mid-February last week in February, which was an unusually long window. But that is done for sure, yes. Now there's always volume that's not contracted in the open market and -- but we're largely done in our business. John Haudrich: One thing I would add to that, and you saw that the volumes in Europe were down 7% in the first quarter. And as we indicated that was concentrated in when those negotiation windows extend like that, people tend to sit on the sideline on their orders, right, because they're waiting for the final deal. So one of the reasons we had a softer first quarter is because of this extended window and a lull in order activity. And so that's starting to normalize after that window was completed at the end of February. Gordon Hardie: Yes. And also, Easter was later this year, which had an impact in Europe. Operator: Your next question comes from the line of Arun Viswanathan with RBC Capital Markets. Arun Viswanathan: I guess I just want to go back to the volume side. So I would agree that you do have a steep climb for next year given the $100 million shortfall this year. And when we started this journey, a lot of the comments was nonmarket dependent and volumes, I guess, you could still achieve your guidance with weak volumes. But it seems like volumes have been a bigger headwind than initially thought. So when you think about the 1% to 2% that you could be adding through new business wins, do you expect that to offset continued volume declines? And should we just kind of assume maybe low single-digit volume declines from here for the market? Is there a path to actually reporting absolute 1% to 2% volume growth on a consistent basis? Or maybe you can just comment on some of those ideas. Gordon Hardie: Yes. Thanks, Arun. So yes, I think it's fair to say over the last 15 months, probably volumes have been below what we thought they might have been. We were expecting them to come to flat a bit sooner. I think what's got in the way of that is the level of inventory in the total system in spirits, for example, and markets like the U.S. and China continuing to be soft. And then you have the continued decline in wine across both the Americas and Europe. And that probably has continued longer than we initially thought. So where we are is we really feel we've bottomed out. And so when we're talking about being close to flat year-end and then kicking into 1%, 1.5% next year, that is net, right? That's a net position. So -- and these new business wins, they're not small fragmented customers. They're largely of sizable customers with sizable volumes. John Haudrich: I would just add, Arun, two points. One is if you look at some of our volume numbers, as Gordon had mentioned earlier, we intentionally did walk away from some low profit business. So you have to kind of consider that in there. And if you go back to our original strategy, we said, hey, we intended to be focusing on the cost and maintaining a stable top line while we're really focusing on cost. But now we're pivoting to that point where we believe, especially like we see in the Americas here and ultimately in Europe, that the competitiveness is improving, which allows us the baseline to create the profitable growth. And so we're at that inflection point where it wasn't necessarily the primary focus of our strategy over the last 18 months. It's increasingly going forward because of the cost positions that we're establishing. Gordon Hardie: Yes. And Arun, I refer back to my earlier comments. We're in markets like Brazil, where we really nail the Fit to Win and translating that into being much more competitive. Our volumes are up mid-single digits in beer, NAB and food and spirits, and we're outperforming the market in all those categories. Likewise, in the Andean and increasingly in North America right now, we can sell all the beer that we can produce. And we have pockets in, as I said, in North Central Europe, where we've -- in that particular region, we've had a 7% uplift year-to-date. So the whole -- the entire strategy of getting more competitive and then translating that working with key customers into more profitable growth. There's numerous clear examples of that across the business. And we're absolutely focused on executing that strategy with more rigor. Arun, one other point I'd make, we continue to see the cost gap between cans and glass narrowing. And we've absolutely seen an upturn in interest from beer customers to accessing more glass. And again, that was one of the premises we had that as you close that gap, you would curtail the shift from glass to cans and actually reverse it. And we're seeing that happen. And certainly, the interest in beer for glass, even in mainstream glass is a much different dynamic to last year. Arun Viswanathan: Okay. Great. I appreciate that. I guess what I'm observing is that the market appears to be declining a little bit faster than maybe what the capacity rationalization is. And maybe that -- and so you have to take downtime and you have to make these decisions to exit businesses that maybe were unforeseen a year or 2 ago when you initially put together Fit to Win and that's maybe causing the shortfall. Do you envision a time period in the future where we won't have these supply-demand imbalances and oversupply situations? Because I think just even 2 years ago, Europe was considered balanced and North America was a little oversupplied and then you have to kind of shut some capacity in North America and now because of the volume declines in Europe, wine and spirits and so on, that new capacity additions in that region is oversupplied. So is there ever a period where you envision again the capacity rationalization kind of being in line with demand growth or maybe demand growth kind of reaccelerating so we wouldn't have these issues of oversupply? I know it's kind of a longer-term question, but it seems to be the main issue here. Gordon Hardie: Yes. Look, I think we all live in a very dynamic world now with a lot of volatility. And I think over a cycle of a decade, there's also -- there'll be periods of where it's perfectly matched up and there will be periods where it's not. And then you've got to make a decision, is that a short-term mismatch? Or is it a fundamental match that's out of position where you can't make an economic return on that asset? And that's always a dynamic question in any business, I would say. We feel good about where we are in terms of our capacity, particularly in the Americas. And as John said, there's even opportunities to bring some capacity back up to fill demand for profitable volume. And where we are in Europe, we should have all of the announced capacity curtailments completed and clear of that by the half year. And I think that puts us in good stead. I can't speak for the rest of the market, but our S&Ds or supply and demand should be well in balance. And then it's about executing productivity, quality and service levels to the customer. So as you said, it's a longer-term question, but it really depends on volatility and dynamics over an extended period, yes. John Haudrich: The one thing I would add, Arun, specifically to our own plan, as you know, we did increase our Fit to Win target in the face of some additional commercial pressures, and we believe that protects our position to our targets. But that also did include a little bit of scaling up of some of the restructuring from what we originally had to be able to be nimble to that. So as we stand here right now, we believe that the Fit to Win actions are sufficient to be able to address through our horizon here, our next year's target, understanding the other extra $100 million we're dealing with this year, it is more of a temporary phenomenon with a good ability for recovery through PAFs and things like that in the future. Gordon Hardie: I think one additional kind of thought on that, Arun, is portfolio momentum is also a part of how you maximize the value of your capacity. And as opportunities arise in the market to shed unprofitable volume like we did in wine in North America in the first quarter and bring in more profitable volume -- higher margin volume, more premium volume, that's also a way of sweating your capacity much, much harder. And I think we're getting much better at that and making those calls and starting that sort of mix shift that we outlined in Investor Day as well as part of our strategy. Operator: I'll now turn the call back over to Chris Manuel for closing remarks. Christopher Manuel: Thanks, Kate. That concludes our earnings call. Please note, our second quarter call is currently scheduled for Wednesday, July 29. And remember, make it a memorable moment by choosing safe, sustainable glass. Thank you. Operator: Ladies and gentlemen, that concludes today's call. Thank you all for joining. You may now disconnect.
Operator: Good morning, and welcome to the Navient First Quarter 2026 Earnings Conference Call. This call is being recorded. [Operator Instructions]. At this time, I will turn the call over to Jen Earyes, Head of Investor Relations. Jen Earyes: Hello, good morning, and welcome to Navient's earnings call for the first quarter of 2026. With me today are David Yowan, Navient's CEO; and Steve Hauber, Navient's CFO. After the prepared remarks, we will open up the call for questions. Today's discussion is accompanied by a presentation, which you can find on navient.com/investors. Before we begin, keep in mind our discussion will contain predictions, expectations, forward-looking statements and other information about our business that is based on management's current expectations as of the date of this presentation. Actual results in the future may be materially different from those discussed here. This could be due to a variety of factors. Listeners should refer to the discussion of those factors on the company's Form 10-K and other filings with the SEC. During this conference call, we will refer to non-GAAP financial measures, including core earnings, adjusted tangible equity ratio and various other non-GAAP financial measures that are derived from core earnings. Our GAAP results, description of our non-GAAP financial measures and a reconciliation of core earnings to GAAP results can be found in Navient's first quarter 2026 earnings release, which is posted on our website. Thank you. And now I will turn the call over to Dave. David L. Yowan: Thanks, Jen. Good morning, everyone. Thank you for joining the call and for your interest in Navient. This morning, we reported Q1 results that demonstrate continued momentum in our ability to deliver high-quality loan growth while maintaining expense discipline. Our reported results are in line with the full year outlook we provided in January, and that's a strong start towards achieving those targets. Overall, this quarter reinforces the strength of our platform, driving consistent growth, improving efficiency and delivering strong credit performance. Total originations grew over 60% year-over-year. Refinance loan originations grew 65% year-over-year, marking our 10th consecutive quarter of growth, driven by continued strength in demand generation and our ability to capture that demand. At the same time, we're seeing that volume growth come through more efficiently as we scale our loan production. Marketing and other operating costs continue to improve as a percentage of originations. Thirdly, credit quality strengthened with Q1 refi originations having an average FICO of 775. We're seeing continued strength in demand from borrowers with established credit and employment histories. Together, these outcomes demonstrate the effectiveness and scalability of our platform, enabling us to grow efficiently while delivering stronger credit performance. In-school lending had a solid quarter, originating $40 million of new loans with strong credit quality and margins. This performance and the peak season preparation we are doing increases our confidence in capturing the on-strategy opportunities in graduate lending contained in our outlook. Operating expense levels compared to the year ago period reflect the actions we've taken to eliminate costs and significantly reduce our expense base. With the Phase 1 strategic actions in our rearview mirror, the final expenses associated with our wind-down activities were incurred this quarter. We saw sequential improvement in credit performance across all of our private portfolios. Delinquency rates in private legacy improved from year-end, but continue to run above long-term historical trends. Steve will take you through these and other parts of our results in greater detail in a few minutes. We repurchased $23 million of shares during the quarter as we view the share price that prevailed for the quarter as an opportunity to repurchase shares at a greater discount to book value. We are mindful of a more volatile macro and geopolitical environment and are monitoring it closely. We have the flexibility to adjust quickly as and if conditions evolve. The successful completion of the strategic initiatives and the accompanying expense reduction targets that were announced in January 2024 are a natural time for me to step out of the CEO role. Ed Bramson will step into the CEO role in a few weeks' time. I'm proud of what's been achieved and grateful for the commitment of the many colleagues who accomplished it. The actions we have completed create the foundation for a more strategically focused, flexible and efficient organization to support future growth. Ed has been heavily involved in the development of our strategies and initiatives. I look forward to continuing to guide and support management as I remain on the Board. With that, I will turn it over to Steve, who will provide more detail on Q1 results. Stephen Hauber: Thank you, Dave, and thanks to everyone for joining today's call. As Dave highlighted, our results for the quarter were in line with our 2026 outlook and included strong contributions across the business. I'll provide additional detail on first quarter results, beginning on Slide 3. In the first quarter, we recognized core earnings per share of $0.20. We delivered these results while driving strong originations growth and maintaining strict expense discipline. Credit trends also improved with lower delinquency rates across our private and FFELP portfolios. Turning to Slide 4. Earnest continued its robust refinance loan origination growth in the first quarter. Refinance originations were $778 million, up 65% year-over-year and on pace with our 2026 target. We drove this growth through strong demand generation and engagement with rate check volume up 62% year-over-year. We are also seeing continued strength in credit with new loan average FICO increasing to 775, underscoring the quality of borrowers we are attracting. Slide 5 highlights our in-school lending growth. In-school originations were $40 million in the first quarter, consistent with our plan. We are well positioned for the upcoming peak season and the expected expansion of the in-school graduate addressable market, a customer segment that we know well. Slide 6 provides our Consumer Lending segment results. First quarter net income was $35 million, reflecting the mix shift toward more refi loans in the portfolio and the impact of rate changes from different index resets across the segment's assets and debt. That same mix shift also drove net growth in our private portfolio with outstanding balances increasing approximately $200 million quarter-over-quarter as refi and in-school originations outpaced portfolio paydowns. Consumer lending expenses in the first quarter were $39 million. This represents a $4 million increase compared to the prior year quarter, primarily reflecting marketing and other expenses associated with the growth of our lending businesses. Credit trends were favorable in the quarter with private charge-off rates declining from 2.26% in the fourth quarter to 1.91% in the first quarter. Delinquency rates also improved quarter-over-quarter with 31-plus day delinquency rates decreasing from 6.3% to 5.5% and 91-plus day delinquencies decreasing from 2.9% to 2.5%. We recorded a provision of $18 million in the first quarter, $11 million of which was related to new originations. While the improvement in year-to-date credit performance is encouraging, private legacy delinquency and charge-off rates continue to run above our longer-term historical levels. Federal Education Loan segment results are on Slide 7. First quarter net income was $22 million, slightly down from $24 million a year ago. Portfolio paydown reduced net interest income by $3 million, which is offset by a $3 million reduction in expenses. This offset highlights the impact of our cost reduction efforts, including the variable cost benefits from outsourcing servicing. Provision in the Federal segment in the first quarter was $9 million, and the net charge-off rate increased to 29 basis points. These largely reflect loans to borrowers affected by 2024 natural disasters that were written off in the first quarter. The bulk of the impact from this cohort is now behind us and delinquency rates improved significantly during the quarter. The 31-day plus delinquency rate improved from 17.5% to 15.2%, while the 91-day plus delinquency rate improved from 10.0% to 8.5%. The allowance for loan loss, excluding expected future recoveries on previously charged-off loans for our entire loan portfolio is $645 million, which is highlighted on Slide 8. Operating expense results are on Slide 9. First quarter total core operating expenses were $89 million, a 30% improvement compared to the first quarter of 2025. First quarter expenses were consistent with our plan for the quarter and the $350 million expense outlook for the year. Capital allocation and financing activity is highlighted on Slide 10. In the first quarter, we completed our first securitization of the year, $683 million in bonds backed by high-quality recently originated refinanced loans. We continue to see strong investor demand for our refi-backed notes, and we are achieving attractive pricing and a high effective cash advance rate. Additionally, last week, we priced our first in-school securitization of the year. The $550 million transaction was significantly oversubscribed, executed at favorable pricing and will release warehouse capacity in advance of our peak in-school lending season. The strong investor reception on both our refinance and in-school deals demonstrates investor confidence in the quality of the assets we are generating. The in-school transaction underscores the resilience of our funding programs to provide cost-effective financings in uncertain market conditions. Turning to our cash and capital positions. We have ample capacity to invest in attractive loan originations and distribute capital. In the first quarter, we repurchased 2.3 million shares at an average price of $9.91 as our shares remain significantly below tangible book value. In total, we returned $38 million to shareholders through share repurchases and dividends. Our adjusted tangible equity ratio remained above our long-term target at 8.9% and demonstrates our commitment to a strong and resilient balance sheet. In summary, our first quarter performance was a solid start to 2026 and keeps us on track with our outlook for the year. While we remain mindful of macro and geopolitical volatility, we are encouraged by the progress we're making and the momentum we are building as we execute on the opportunities ahead. As I wrap up, I want to thank the Navient team for their contributions this quarter and their continued dedication throughout our strategic transformation. Thank you for your time, and I'll now open the call for questions. Operator: [Operator Instructions]. We'll take our first question from Bill Ryan with Seaport Research Partners. William Ryan: First question just related to the credit numbers that you highlighted in the prepared remarks. You had very nice improvement in the private portfolio. I think it was down 80 basis points in delinquencies quarter-over-quarter, 90 basis points year-over-year. Yet you also kind of talked about it still kind of underperforming relative to past patterns. So are we now at a new base level at which we could expect to see normal seasonal credit trends develop? Or do you think there's additional room for at least some improvement from this point forward? And the second part of that related to it is, does the provision or the allowance level today capture sort of the underperformance that you're currently seeing? And I have one follow-up. Stephen Hauber: On the first question, right, we did see significant improvement in delinquencies across our portfolios. We are still above our historical levels as well as we do believe there -- we will see future improvement, so continued improvement along the lines of what we saw in the first quarter. So we are not at kind of the level that we expect to be -- we expect further improvement from this point forward. In terms of the reserve levels, reserve levels do reflect our -- that expectation that we have going forward. William Ryan: And just one follow-up on the loan originations. The origination mix right now is about 50-50 grad, undergrad. And just kind of thinking about it on the in-school side. And looking forward, obviously, July 1 opens up some new opportunities. Is that mix going to be doing kind of back of the envelope math, it seems like it might move to like 70-30 grad, undergrad starting in the third quarter. Is that the right way to think about it? And has there been any additional thoughts on the change in the funding for the incremental grad loans that are going to be put on the balance sheet? David L. Yowan: We're maintaining our outlook for the year in terms of total originations for in-school. We talk about peak season being in the third quarter. We're really in peak season, particularly with the changes to Grad PLUS -- we're in active discussions with financial aid offices who are trying to figure out, particularly at the graduate level, how they're going to fill the gap for their students between lending that used to come from the federal government and now will be supplied by private lenders. We're encouraged by those conversations. We continue to be confident in the products that we have that are well established with us and our ability to provide a customer experience that's tailored to graduate needs. The first quarter originations is really -- not a part of peak season, but I would point out in the first quarter that we originated or we disbursed almost 4x the amount of volume that we certified, which is $40 million. So we have a substantial footprint in that marketplace. I would expect that, in fact, the graduate percentage of our volume probably would be higher than it has been in prior years. But I think everybody, including competitors who we are actively running into in this space, as you might imagine, are all in a little bit of a learning and wait-and-see mode on what that -- what the actual volume and what that mix is going to look like. Operator: And we'll go next to Jeff Adelson with Morgan Stanley. Jeffrey Adelson: Maybe just to follow up on the last question. I guess just as we all sort of try to grapple with what the opportunity is here in the graduate market and who has the right to win here. Is there any sort of like early learnings or early market research you've done in terms of what you think your share of this new market could look like? I know I think you pointed in prior quarters to having 20% of the graduate market. Just kind of curious based on the work you've done and some of the efforts around marketing and product development that gives you some more confidence around what you'd be able to get there? David L. Yowan: Jeff, let me just give you a couple of examples of the experience we've had and not that it's unique to us. But one example I would give is there are more than a handful of graduate schools that provide degrees that we've traditionally funded. So professional degrees, for example, that have not relied on -- have only relied on Grad PLUS for funding. So there's a number of schools that don't even have preferred lending list coming into this. And so that allows somebody like us to get in on the ground floor with those kind of institutions, explain our product offering, explain the customer service that we have, show them the -- our ability to surprise and delight students with the ease of applying and the flexibility of our products. It's one example of a lot of work that we're doing to try to educate people about what we have to offer them. And I would say that early signs are there's certainly a keen interest coming in that's created because of the elimination of Grad PLUS, which we all knew. We're seeing that. We're seeing others compete alongside us, and we continue to be confident about what we bring to the table and look forward to reporting our results in the third quarter. Operator: And we'll take our next question from Caroline Latta with Bank of America. Caroline Latta: How should we think about the cadence of OpEx through the year? Should we expect it to be more front half loaded as you guys prep for Grad PLUS? Stephen Hauber: On OpEx throughout the quarters, I think the way to think about that during -- first of all, the first quarter, we -- as Dave mentioned, we incurred the final remaining expenses that we had as part of our transformation and completion of Phase 1. So first quarter does have about $5 million of wind-down costs that we would not expect to recur going forward. In terms of the rest of the quarters, third quarter would have some -- probably the highest operating expense quarter compared to the others given the origination activity that we expect for in-school that quarter. So feeling good about how that all fits together and our ability to hit the $350 million target that we set for the year. Caroline Latta: And then maybe just a similar question on originations. Should we expect Q2 originations to be similar to Q1 and then we'll see the bump in the back half? Stephen Hauber: I think that's a fair way to approach Q2 and Q1 being very similar. We would expect to see in-school tick up some in Q2 compared to Q1. But really, I think the meaningful difference gets to the Q3 where you see the majority of our in-school originations in that quarter. Operator: And we'll take our next question from Ryan Shelley with Bank of America. Ryan Shelley: First one here, I know it's still very early days, but can you give us any update or any learnings you've had on some of the trials you've had on the personal loan front? And I have one more, I'll follow up back with. David L. Yowan: So as we indicated, this year and certainly the beginning of the year is a testing and learning phase for us on personal lending. We did go live in the fourth quarter in our existing base in some tests that we're conducting. We went live in the first quarter with a sample of prospects. We're testing different product offerings, different ways to create demand, different ways to pull that demand through the conversion. We're testing our credit and fraud capabilities in this process as well. And I'd say at this point, we're pleased with the learnings that we have. It's too soon to give an update on any of the results, which are very immaterial at this point in time. But we're very pleased with the learnings that we're making in that product and following along the path that we laid out last November. Ryan Shelley: And then just one more quick one on funding throughout the year. So you have an unsecured maturity coming up here in June. Originations are projected to be up 50% year-over-year. So my question is just any color you can give us around funding where you think the most attractive cost of capital is at the moment would be much appreciated. Stephen Hauber: I had a little trouble hearing the question, but I think the question there related to how we're feeling about kind of both the unsecured -- we have an unsecured maturity coming up in June, which we certainly have the right liquidity and plan to address. And then for upcoming peak season and our lending, I'm feeling really good about our ability to fund those. We've had a lot of success in terms of our funding through our ABS securitizations and just have a clean path ahead here in terms of how we're feeling about funding for this year. Operator: [Operator Instructions]. We'll take a follow-up question from Bill Ryan with Seaport Research Partners. William Ryan: Thanks for taking my follow-up. I didn't think I'd cycle through this quickly, but I know there's quite a few competing calls this morning. I take a step back at a higher level, just kind of ask this question. So stock price is kind of around $9 a share. And if you start to look at it and you kind of value the FFELP portfolio, it looks like basically, you're paying the price today of what the FFELP portfolio value is worth on a present value basis in runoff. And the optionality is on the lending business where some people might say the optionality is actually on the FFELP portfolio, more value in the lending business. But either way, it looks like on an intrinsic value basis, the stock price is well below probably what the end of the day price should be. And just kind of throwing it out there, it seems like there's an opportunity or could be at some point for more of a strategic type maneuver. And I'm just kind of curious how you're thinking about that in terms of the stock price in relation to what the intrinsic value of the company might really be worth. David L. Yowan: We certainly agree that we don't think the stock price does reflect the intrinsic value of the company. Our share repurchases in the quarter and our share repurchases in the past year have been designed to help the rest of our shareholders capture that by buying back stock that we think is cheaper than that. Look, we're -- I'd say 2 things. One is we're very focused on the strategy and the plan that we have and executing against that. I'd also say that we're always interested in and looking at any ways that we can enhance the value of the firm. And so you can be assured that we're trying to think of all the things that we could do to get the share price a better reflection of the intrinsic value and the growth prospects of the company. Jen Earyes: Operator, are you on? Operator: Yes. At this time, there are no further questions in queue. I'd like to turn the call back over to Jen Earyes for closing remarks. Jen Earyes: Thanks, Erica. Before we conclude, I want to note that beginning next quarter, our earnings calls will take place after market close. And for the second quarter of 2026 earnings call, the date will be adjusted from our historical cadence. We'll share the specific date and time for the next call when we announce our earnings release schedule in July. Thank you for joining today's call. Please contact me as you have follow-up questions. This concludes today's call. Thank you. Operator: Thank you. This brings us to the end of today's meeting. We appreciate your time and participation. You may now disconnect.
Operator: Good day, and welcome to the Daqo New Energy First Quarter 2026 Results Conference Call. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the conference over to Jessie Zhao, Director of Investor Relations. Please go ahead. Jessie Zhao: Hello, everyone. I'm Jessie Zhao, the Investor Relations Director of Daqo New Energy. Thank you for joining our conference call today. Daqo New Energy just issued its financial results for the first quarter of 2026, which can be found on our website at www.dqsolar.com. Today, attending the conference call, we have our Deputy CEO, Ms. Anita Zhu; our CFO, Mr. Ming Yang; and myself. Our Chairman and CEO, Mr. Xiang Xu, is on the business stream now. So Ms. Anita Zhu will deliver our management remarks on behalf of Mr. Xiang Xu. Today's call will begin with an update from Ms. Zhu on market conditions and company operations, and then Mr. Yang will discuss the company's financial performance for the quarter. After that, we will open the floor to Q&A from the audience. Before we begin the formal remarks, I would like to remind you that certain statements on today's call, including expected future operational and financial performance and industry growth are forward-looking statements that are made under the safe harbor provisions of the U.S. Private Securities Litigation Reform Act of 1995. These statements involve inherent risks and uncertainties. A number of factors could cause actual results to differ materially from those contained in any forward-looking statement. Further information regarding this and other risks is included in the reports or documents we have filed with or furnished to the Securities and Exchange Commission. These statements only reflect our current and preliminary view as of today and may be subject to change. Our ability to achieve these projections is subject to risks and uncertainties. All information provided in today's call is as of today, and we undertake no duty to update such information, except as required under applicable law. Also during the call, we will occasionally reference monetary amounts in U.S. dollar terms. Please keep in mind that our functional currency is the Chinese RMB. We offer these translations into U.S. dollars solely for the convenience of the audience. Now I will turn the call to our Deputy CEO, Mr. Anita Zhu. Ms. Zhu, please go ahead. Anita Zhu: Thank you, Jessie. Hello, everyone. This is Anita. I'll now deliver our management remarks on behalf of our CEO, Mr. Xu. In the first quarter of 2026, market sentiment across the solar PV industry remained cautious amid seasonal softness and elevated inventory levels. It was further exacerbated by rising module prices driven by higher silver, aluminum, and glass costs, which led to a market slowdown in China. Geopolitical tensions in the Middle East also weighed on end market demand in the region. Against this backdrop, persistent industry overcapacity continued to exert downward pressure on polysilicon prices, resulting in quarterly operating and net losses. Notwithstanding these headwinds, we continue to maintain a robust and healthy balance sheet with 0 debt. As of March 31, 2026, we held a cash balance of USD 559.4 million, short-term investments of USD 288.3 million, bank notes receivable of $20.8 million, held-to-maturity investment of $50.3 million, and a fixed-term bank deposit balance of USD 1.1 billion. In total, these assets that can be converted into cash stood at USD 2 billion, providing us with ample liquidity. This solid financial position gives us the confidence and strategic flexibility to navigate the current market downturn. On the operational front, we continue to take proactive measures to navigate challenging market conditions and weak selling prices with nameplate capacity utilization rate operating at approximately 57%. Total production volume at our 2 polysilicon facilities was 43,402 metric tons for the quarter, exceeding our guidance range of 35,000 metric tons to 40,000 metric tons. With market prices for polysilicon experiencing a notable decline to be below production cost during the quarter, we adhered to the Chinese authorities' self-regulation guidelines by declining to engage in below-cost sales. We adopted a disciplined wait-and-see approach, pending further implementation of the national anti-involution policies we highlighted last quarter. As a result, our sales volume dropped to 4,482 metric tons, while average selling price increased 2.3% sequentially to USD 5.96 per kilogram. On the cost side, total production and cash costs increased marginally by 2% and 3% respectively on a sequential basis, primarily driven by exchange rate movements. However, despite higher silicon metal costs, manufacturing costs in RMB terms actually declined slightly on a sequential basis, reflecting our continued improvements in manufacturing efficiency. In light of the current market dynamics, we expect total polysilicon production volume in the second quarter of 2026 to be approximately 35,000 metric tons to 40,000 metric tons. For the full year of 2026, we expect production volume to remain in the range of 140,000 to 170,000 metric tons. With the solar market impacted by seasonality surrounding the Chinese New Year holidays and the absence of concrete updates on capacity rationalization policies, polysilicon transactions and shipment volumes remained low during the quarter. N-type polysilicon prices dropped from RMB 48 to RMB 55 per kilogram at the end of 2025 to RMB 35 to RMB 37 per kilogram by the end of the first quarter. However, polysilicon prices heading into the second quarter are showing signs of bottoming out with weekly declines gradually easing. While producers await clear guidelines from authorities to tack overcapacity, a weak demand outlook, industry inventory buildup and financial pressure forced several peers to adjust their production pricing strategies toward a more market-oriented approach. As a result, industry-level polysilicon monthly supply fell to approximately 93,000 metric tons during the quarter, representing an industry average utilization rate of just 39%. Looking ahead, we expect government authorities to strengthen the anti-involution policies necessary to address these industry-wide overcapacity issues. As an encouraging move on April 17, the Ministry of Industry and Information Technology, the National Development and Reform Commission, the State Administration for Market Regulation, the National Energy Administration and other key national departments jointly had a symposium on regulating market competition within the solar PV sector, reinforcing the urgent need to address irrational competition and curb destructive revolution. Additionally, all relevant authorities are now required to deploy concerted measures to strengthen industry governance and promote the high-quality development of the solar PV industry, including in respect of capacity regulation, standards guidelines [Technical Difficulty] Operator: Pardon me ladies and gentlemen, it appears we've lost connection to our speakers. Anita Zhu: Sorry. Apologies, my line got disconnected. So continuing with the April 17 symposium. All relevant authorities are now required to deploy concerted measures to strengthen industry governance and promote the high-quality development of the solar PV industry, including in respect of capacity regulations, standards guidance, innovation-driven development, price law enforcement, quality supervision, mergers and acquisitions, and intellectual property rights protection. More broadly, the solar PV industry continues to exhibit compelling long-term growth prospects. Growing vulnerabilities in global energy markets have sparked widespread concerns about national energy security, in which the solar PV and renewable energy sectors can play a crucial role. As one of the world's lowest cost producers of the highest quality N-type polysilicon backed by a robust balance sheet and 0 debt, we remain optimistic about the sector and are well positioned to capitalize on anticipated market recovery and long-term growth opportunities. We'll continue to strengthen our competitive edge through advancements in high-efficiency N-type technology and cost optimization via digital transformation and AI adoption. As the world accelerates the transition to clean energy, we are confident in our ability to play a leading role in shaping that future. So now I'll turn the call to our CFO, Mr. Ming Yang, who will discuss the company's financial performance for the quarter. Ming, please go ahead. Ming Yang: Thank you, Anita, and hello, everyone. This is Ming Yang, CFO of Daqo New Energy. We appreciate you joining our earnings conference call today. I will now go over the company's first quarter 2026 financial performance. Revenues were $26.7 million compared to $221.7 million in the fourth quarter of 2025 and $124 million in the first quarter of 2025. The decrease in revenue compared to the fourth quarter of 2025 was primarily due to a decrease in sales volume as the company reduced sales in light of the relatively low selling prices. Gross loss was $139.4 million compared to a gross profit of $15.4 million in the fourth quarter of 2025 and gross loss of $81.5 million in the first quarter of 2025. Gross margin was negative 521% compared to 7% in the fourth quarter of 2025 and negative 65.8% in the first quarter of 2025. The decrease in gross margin compared to the fourth quarter of 2025 was primarily due to an increase in provision for inventory impairment. Cost of revenue for the first quarter of 2026 includes $98.4 million of provisions for inventory impairment due to end of quarter market polysilicon pricing that is below production cost. Selling, general and administrative expenses were $12.2 million compared to $18.7 million in the fourth quarter of 2025 and $35 million in the first quarter of 2025. The sequential decrease of SG&A expenses was primarily due to lower sales volume in the first quarter of 2026. The year-over-year decrease was also due to the company recognizing $18.6 million in non-cash share-based compensation costs related to the company's share incentive plan in the first quarter of 2025. R&D expenses were $0.8 million compared to $0.7 million in the fourth quarter of 2025 and $0.5 million in the first quarter of 2025. R&D expenses can vary from period to period and reflect R&D activities that take place during the quarter. Loss from operations was $150.8 million compared to $20.9 million in the fourth quarter of 2025 and $114 million in the first quarter of 2025. Operating margin was negative 564% compared to negative 9.4% in the fourth quarter of 2025 and negative 92% in the first quarter of 2025. Net loss attributable to Daqo New Energy shareholders was $88.4 million compared to $7.3 million in the fourth quarter of 2025 and $71.8 million in the first quarter of 2025. Loss per basic ADS was $1.31 compared to $0.11 in the fourth quarter of 2025 and $1.07 in the first quarter of 2025. Adjusted net loss attributable to Daqo New Energy shareholders, excluding noncash share-based compensation costs, was $88.4 million compared to $7.3 million in the fourth quarter of 2025 and $53.2 million in the first quarter of 2025. Adjusted loss per basic ADS was $1.31 compared to $0.11 in the fourth quarter of 2025 and $0.80 in the first quarter of 2025. EBITDA was a negative $83 million compared to $52.5 million in the fourth quarter of 2025 and negative $48 million in the first quarter of 2025. EBITDA margin was negative 311% compared to 23.7% in the fourth quarter of 2025 and negative 39% in the first quarter of 2025. Now on the company's financial condition. As of March 31, 2026, the company had $559.4 million in cash, cash equivalents and restricted cash compared to $980 million as of December 31, 2025, and $792 million as of March 31, 2025. And as of March 31, 2026, short-term investments was $288 million compared to $114 million as of December 31, 2025, and $168 million as of March 31, 2025. As of March 31, 2026, the notes receivable balance was $20.8 million compared to $135.5 million as of December 31, 2025, and $62.7 million as of March 31, 2025. Note receivables represent bank notes with maturity within 6 months. And as of March 31, 2026, held-to-maturity investment was $50.3 million compared to 0 as of December 31, 2025, and 0 as of March 31, 2025. As of March 31, 2026, the balance of fixed term deposit within 1 year was $1 billion compared to $972 million as of December 31, 2025, and $1.1 billion as of March 31, 2025. Now the company's cash flow. For the 3 months ended March 31, 2026, net cash used in operating activities was $147.5 million compared to $38.9 million in the same period of 2025. And for 3 months ended March 31, 2026, net cash used in investing activities was $275.8 million compared to $211 million in the same period of 2025. Net cash used in investing activities in 2026 was primarily due to the purchase of short-term investments and fixed term deposits. And for the 3 months ended March 31, 2026, net cash used in financing activities was $7.8 million compared to 0 in the same period of 2025. Net cash used in financing activities in 2026 was primarily related to $7.8 million of share repurchases made by the company's subsidiary, Xinjiang Daqo, from its minority shareholders. That concludes our prepared remarks. We will now open the call to Q&A from the audience. Operator, please begin. Operator: Our first question comes from Philip Shen with ROTH Capital Partners. Philip Shen: First one is on the state administration for market regulation. Tier 1 manufacturers submitted formal correction proposals. Can you walk us through how these specific proposals are practically shifting or may practically shift competitive dynamics on the ground today? Ultimately, do these commitments accelerate or delay the necessary industry consolidation needed to stabilize ASPs? Anita Zhu: So you're kind of breaking up on our end. Can you repeat your question? Philip Shen: Yes, sure. So just wanted to understand what the submissions to the state administration for market regulation, those proposals, how could they practically improve the competitive dynamics to accelerate or delay the necessary industry consolidation needed to stabilize ASPs? Ming Yang: Anita, do you want to start first, and I can add to that? Or let me just start by -- our understanding is, I think that the government, especially at the most recent industry meeting with the Ministry of Industry Information Technology and NDRC and NEA and the Market Regulation Agency -- so basically, there is a consensus from the government that at the minimum, while maintaining some market competition, there's a need to enforce the price law. And now there is some details to be determined in terms of, for example, how to measure cost for all the different manufacturers. And our understanding is they're doing a new round of price determination. So this should come out, say, in the next 2 months or so. Our understanding is around midyear. So once that new cost determination is being done and then there will be a renewed guidance on where the minimum price would be. And then at the same time, we're still monitoring in terms of how the enforcement can be done. There may be some enforcement actions that's being discussed, but that hasn't taken place yet. So at least for us, right, so we're in observation mode in terms of whether enforcement happens. I mean, if there's no enforcement, then we maybe need to sell wherever the market is, right? I mean, at least right now, we're enforcing the price only in our sales efforts, right? But obviously, that's having a negative impact on our sales volume, right? So we're waiting for that to happen. But our expectation is that once the new cost determination comes out and manufacturers are now required to sell above production costs and then the market price should recover. So that's at least our -- yes. Philip Shen: In terms of enforcement actions, what could that look like and what kind of timing could that be? Do you think the probability of enforcement action is higher or lower or like greater than 50% or less than 50%? Ming Yang: Okay. Our understanding is rather than depending on the company's own reported cost, right, so the government is trying to have a cost model that is consistent across all the manufacturers in terms of like material cost, depreciation, labor and things like that, right? So once that is done, then we don't know if it's going to be one general price or there could be a different price for manufacturers. So that's to be determined. And then once that is done, then I think there will be enforcement or at least they will communicate how enforcement will be done. Previously, right, this would be in the form of a fairly significant penalty or in a worst-case scenario, you could revoke your manufacturing license or shut down your electricity. So there are many ways that the government could enforce, but we're yet to see that right now. Philip Shen: Got it. And then final question for me. So given all that and with -- the reality is you guys still need to operate and participate in the market. And so what do you think is a practical outlook for ASPs for Q2, Q3? And what do you think your utilization rate might be in those quarters? Ming Yang: Okay. I mean, for Q2, then it will be optimistic, right? I mean, cash price is kind of in the RMB 35 to RMB 37 range. I think some producers, if they have cash issues, they might sell a little bit discount to that. And then there are opportunities in the futures market, for example, where you might be able to sell a little bit higher, maybe in the RMB 38 to RMB 41 per range depending on the contract period. So we're looking at that as well. So let's say, if there is no price guidance and enforcement action, I think then the price range is maybe RMB 35 to RMB 40. Honestly, if price guidance does come out, it should be in the range of RMB 40 to RMB 45 or maybe even higher. And these are inclusive of VATs. Philip Shen: The utilization rate, do you have a sense for Q2 and Q3 yet? Ming Yang: For us or for the industry? Philip Shen: For you. Ming Yang: For us, it will be at roughly 50% to 55%. We're maintaining utilization for now because we're kind of at a fairly optimal operating condition in terms of both quality and cost, and production volume. And adjustments will generally -- our experience is will bring short-term volatility to both quality and cost. So at least in the short term we're maintaining the current production level. And obviously, either the new price guidance -- or enforcement, if it says below expectation, below what we would expect and price remain low, then we would make further adjustments in the second half. And this is subject to demand environment as well. Q1 was a really fairly negative demand environment overall, I would say. Operator: Our next question comes from Alan Lau with Jefferies. Alan Lau: In terms of the sales volume and the revenue in first quarter is a bit of a surprise. I would like to know if I do the math and back the ASP in the first quarter, it seems to be at around RMB 41 or RMB 42, ex VAT. So does it mean that the company didn't sell anything maybe after February? Ming Yang: I think that is the right way to look at this in terms of -- yes, we did sell volume in January at the high 40s, inclusive of VAT, right? I think actually our Q1 recognized ASP is higher than Q4, while if you look at market ASP is actually, on average, is much lower than Q4. And I think the big change is really around Chinese New Year, especially after Chinese New Year, where with the new policy from the state administration of market regulators was that the anti-evolution policy that was counted on previously to reduce capacity and enforce price was kind of disrupted, right? So that's when we start to see price to come down fairly quickly and significantly, right? So once price fell below production cost, and then we stopped selling to the market. The market generally in the first quarter was really -- I can characterize it by fairly high uncertainty, right? You have a number of things happening, the war in the Middle East, the high silver prices, right, that led to a lot of uncertainty for the downstream. Actually they were seeing fairly significant increase in their production costs, at the same time it was difficult for them to pass through all that increase while that's having a fairly negative impact to the Chinese end market as well. So these combined really led to a fairly low industry transaction volume for polysilicon in the first quarter. Alan Lau: I recall... Anita Zhu: Let me add... Ming Yang: Anita go ahead. Anita Zhu: No, I was just going to say, let me add a little bit more to that. So in terms of the industry-level inventory, it has accumulated to a relatively high level. So I would say in the first quarter has been above 500,000 metric tons, and it's now nearly 600,000 metric tons. So I would say Tier 1 manufacturers held roughly at least 3 months of stock. So that's why that led to a wait-and-see attitude from the downstream buyers. And for us, especially, we wanted to adhere to the Chinese authority self-regulation guidelines. So we were relatively reluctant to engage in below-cost sales. So we took this wait-and-see approach to see further implementation from the national policies level. Alan Lau: Understood. Sorry, how much did the Tier 1 producers are holding in terms of inventory? Is it 500,000? Anita Zhu: Like in total? Alan Lau: That total is 500,000. Anita Zhu: Yes, around that. Alan Lau: So how much is in Tier 1? Anita Zhu: Including the downstream as well. Alan Lau: Including wafer players, okay. Ming Yang: [Indiscernible] Alan Lau: So I recall actually in January and February, actually demand was quite good because downstream players are having a rush export to catch the VAT deadline. So I wonder why the company didn't sell more in January or February maybe, like because 4,000 tons seems to be just 10% of the production? Ming Yang: Okay. Let me add more color and then maybe Anita can feel free to add more. So I think what happened was there's fairly strong demand for the modules, especially for the European market. But what happened was these integrated manufacturers, especially we were selling mostly their existing inventory of modules. And then they were also producing, but primarily, I would call it, using their own inventory, right? They had some inventory of poly and materials. And I think the uncertainty in cost especially after Chinese New Year led them to really hold off or delay their procurement of polysilicon, I think especially uncertainty related to demand after April 1, right? And then with the war that made even a little bit worse. Yes. So I would say the market probably had reasonable amount of transactions in January, but really February and March was lower. Then you have this expectation of falling prices, especially for polysilicon because of the inventory issues. So that made it probably even worse or a little bit worse in terms of -- the customers, they buy when prices are rising, but they delay purchase when prices are falling. Alan Lau: Understood. So in terms of the price outlook, I think I just want to have a follow-up on Phil's question. So approximately, when you think there will be a guideline coming from the authority, like when do you think -- or like is it within a month or a quarter that price will start to rebound? Or like what is the time line there? And is there regular meetings with the authority to discuss the details on the enforcement? Or like what is the status now? Ming Yang: Our understanding should be around June. And then right now, they're redoing the cost model for all the different producers and then trying to make an alignment. So once that cost is done and then the next step would be an updated price guidance. Alan Lau: So to my understanding, that will be more like an enforcement of the price law, which means everyone should sell above their cost. But the previous acquisition incentives are -- is it basically rejected or it's still -- yes, or it's still aligned for, like what's the -- any updates on that? Ming Yang: There's no update to that as of now. There's no new guidance or development. They don't... Anita Zhu: I would say we're open to different kinds of proposals, but we're not 100% sure how that might unfold. But we're engaging in conversations now to discover or to test different sorts of solutions. So anything that would benefit the industry as a whole and for manufacturers as well, we're willing to try out or at least try to come to a solution with concerted efforts towards that. Ming Yang: I would say that the general policy of the government is positive and promoting mergers and acquisition to, call it, for more consolidation, right? But in terms of how that might lead to actual policies or action, that's still yet to be seen. Alan Lau: So I wonder if you are seeing any uptick of demand recently because demand, I think, was quite poor in the past couple of months. But wondering if you are seeing any recovery in demand. Xiang Xu: I would say on the module side and end market, certainly right now, Q2 is actually trending to look better than Q1. So we shall see. And then definitely, I think downstream inventory is coming down. So that's also a good sign. Alan Lau: Poly prices are also bottoming. So I would like to know if the company -- like because the sales was very low at first quarter, not sure if the strategy is the same in second quarter. If that's the case, then I would like to know if -- has the company considered maintaining an even lower utilization rate, like because the company was also running at like more than 50%. But I recall the company used to be running at 30%. So any consideration behind that, like running the utilization rate at a relatively high level? Xiang Xu: I would say that the general framework for the company is we're monitoring the developments of the price law, especially. So if the companies do prefer the price law or not are required to sell above production cost, and we're fairly confident on where we are in terms of industry positioning, right, and then we should regain market share. And it will be a function of demand as well. So if that's the case, then we might maintain the current utilization level. But let's say, if it turns out to be more negative in terms of -- especially if prices remain where it is right now, then we would consider a lower utilization rate. Operator: Our next question comes from Mengwen Wang with Goldman Sachs. Mengwen Wang: My question is about utilization as well. So my understanding now is that our current strategy is to maintain over 50% utilization and stop selling to external customers at below cost pricing. So this is based on the assumption of potential further regulation to drive poly price higher to RMB 40 per kilo and above. Is that correct? Ming Yang: That's generally the right thinking. So it's kind of a scenario, right? So the 2 major scenarios where if the government does what it says, right, enforce price law, right, penalties and all that and then have the manufacturer sell above cost, then we would maintain at the current utilization. On the other hand, if unfortunately, price laws have been forced for whatever reason, right, and the manufacturers continue to sell below cost, then we will lower our utilization. Mengwen Wang: So if we assume a scenario like no policy kicking and the pricing is likely to stay at the current level, then what's our sales strategy and production strategy in 2Q and in second half? Say -- is there any guidance on the utilization rate in this scenario? And on top of the utilization guidance, will we follow the rest of the industry to sell product at below cost pricing or we will continue to stop selling at the lower pricing level and continue to tie up the inventory and then wait for the sector turnaround? Ming Yang: Okay. So if we assume, right, the government, despite all the rhetoric, nothing happens, right? I think that's unlikely because -- I mean, there's a lot of pressure on my team right now as well. So by the way, let's assume that happens. And then obviously, we would lower our utilization and then start to sell at close to market pricing, right, whatever it takes to move volume. So I mean, then we would compete with our peers, right? And then obviously, we have a strong balance sheet. So I mean, we expect we would be one of the last provider if not the last provider, right. Then we would actually in say, 2 or 3 years, we will see fairly significant exit of the industry where then we have a market-based, call it, capacity consolidation, right? And then the company will do fairly well after that. So it's a trade-off. Mengwen Wang: Yes. That's clear. So I recall you just mentioned like you expect the policy will kick in, in June, and that's the month where we would expect a potential price hike. So if to reconcile your expectations, can we assume like we will keep utilization at 50% above to June and then start selling at close to market pricing if no policy kick in? Ming Yang: I think that's the right assumption, yes. So there is no policy, right? If price remain low, then we would be at a reduced utilization. And if the government does enforce price law, then we would maintain at least the current utilization. Mengwen Wang: So June is the month we are waiting for any policy to kick in, right? And if not, they will switch our strategy. Ming Yang: In terms of communication with government -- go ahead Mengwen. Mengwen Wang: No worries, it's fine. Ming Yang: Yes. I understand June is the time line of the new government policy. Mengwen Wang: My final question is about cash cost. Is there any guidance about our cash cost in second quarter and in the second half of 2026? Ming Yang: I think based on our current utilization production level and the current silicon metal costs and material costs, for example, we're expecting our cash cost to be in line with Q2 in terms of RMB terms and trending slightly lower over the next quarters. So a fairly steady cost structure. Operator: This concludes our question-and-answer session. I would like to turn the conference back over to Jessie Zhao for any closing remarks. Jessie Zhao: Thank you, everyone, again for participating in today's conference call. Should you have any further questions, please don't hesitate to contact us. Thank you, and have an awesome day. Goodbye. Operator: The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
Operator: Hello, and welcome to Oatly's First Quarter 2026 Earnings Conference Call. [Operator Instructions] Please note that today's call is being recorded, and I'll be standing by. It is now my pleasure to turn the meeting over to Blake Mueller. Please go ahead, sir. Unknown Attendee: Good morning, and thank you for joining us today. On today's call are our Chief Executive Officer, Jean-Christophe Flatin; our Global President and Chief Operating Officer, Daniel Ordoñez; and our Chief Financial Officer, Marie-Jose David. Please review the cautionary statement regarding forward looking statements and other disclaimers on Slide 3, which are integrated into this presentation and includes the Q&A that follows. Please refer to the documents we have filed with the SEC for a detailed discussion of the risks that could cause actual results to differ materially from those expressed or implied in any forward looking statements made today. Also, on today's call, management will refer to certain non IFRS financial measures, including adjusted EBITDA, constant currency revenue and free cash flow. Please refer to today's release for a reconciliation of non IFRS financial measures to the most comparable measures prepared in accordance with IFRS. In addition, Oatly has posted a supplemental presentation on its website for reference. I'd now like to turn the call over to Jean-Christophe. Jean-Christophe Flatin: Thank you, Blake, and good morning, everyone. Slide 5 are the key messages I want you to take away. First, we have delivered a solid performance in quarter 1, both on top line and bottom line. This continues to build our confidence in our journey to accelerate profitable growth. Second, we continue to see clear signs that our growth playbook is working. It's already driving real impact in Europe and International as well as increasingly so in North America. We are, therefore, focusing on executing against this playbook more broadly in order to continue to drive further incremental demand. And finally, we are reaffirming our 2026 guidance in a context where the impact of the conflict in the Middle East is already visible in our costs from March onwards and brings further uncertainty for the rest of the year. Turning to Slide 6. Here, you can see our solid quarter 1 scorecard on our most important KPIs. Our revenue grew by 15.6% and 8.1% in constant currency. Our gross margin reached 33.4%, which represents an improvement of 188 basis points as compared to last year, while our adjusted EBITDA reached positive $5 million, which represents 2.2% of our net sales and an improvement of $8.7 million versus last year. This combined improved performance on top line and bottom line confirms that we remain focused on driving growth and impact in a disciplined and profitable way. We believe that this is a winning recipe for our company. Finally, our free cash flow in the quarter was a negative $11.7 million, which is an $8.8 million improvement versus last year. Our business plan remains fully funded and bringing the company to structurally positive free cash flow is important to us. We fully intend to drive the business to that milestone, not just from improvements in the P&L, but also from putting on all available levers, including working capital. Slide 7 confirms our focus areas for 2026. As Daniel will outline, we are seeing very positive traction on our refreshed growth playbook, and we will be doubling down on its execution. While we do not have a detailed update for you today, in 2026, we plan on completing the strategic review of the Greater China segment. We continue to evaluate a range of options, including a potential carve out with the goal of accelerating growth and maximizing the value of the business. We will update the market on our progress as necessary. Finally, we are navigating the context of uncertainty and volatility created by the conflict in the Middle East with a clear objective to minimize as much as possible its impact on our performance. We are permanently adapting our end to end supply chain choices to ensure we could serve consumers and customers. When it comes to the global cost impact, they are so far mostly fuel prices related, either directly in logistics or indirectly like in packaging. We are mobilizing our culture of efficiency and frugality in order to mitigate those and continue to adapt with agility to this pretty unpredictable context. In this context, Slide 8 reaffirms our guidance. In 2026, we expect the continued rollout of our refreshed growth playbook to drive an acceleration in our profitable growth. Specifically, we expect to drive constant currency revenue growth of 3% to 5%. And with what we know today about our ability to mitigate the cost impact of the Middle East conflict, we expect to deliver adjusted EBITDA towards the low end of the range of $25 million to $35 million. With that, Daniel, over to you. Daniel Ordonez: Thank you, JC, and good morning, everyone. I will start my discussion on Slide 10. Over the past 2 years, we have methodically deployed this new playbook with the objective to attack barriers to consumption, drive relevance and increase availability. We are confident it is working, as we see continued positive results in Europe and increasingly so in North America, as we will discuss today. Staying true to what makes Oatly, this playbook change is founded on the strategic choice to be relevant to a much broader population, a decision not just to aim at growing consumption within our historical consumer base, the lactose intolerant and the environmentally conscious, but to also expand our target market to the upcoming younger generations to drive true incremental consumption growth. That means we're focusing on our strength within beverages. This is taste and health instead of trying to mimic dairy in all its forms. In this exciting space, the room for penetration growth is enormous, and it is precisely where our strengths and assets are rooted. As you heard us say, an alternative to dairy no more, but an experience canvas for the beverages market, working with customers to renovate their menus and shelves to be more relevant, more provocative and more on trend with today's consumer. Taste & Health defined a clear high ground for the new generations, in particular for this category, but we have also adapted how we communicate to them. They are digital natives, and we have migrated from analog heavy individual advertising to a more relevant, integrated and digital first approach, always blended with iconic culture making life events. So as we say we're doubling down on the playbook, let me show you some examples of what we mean by that and in which specific areas we do invest. On Slide 11, you see how we're doubling down on our taste leadership in beverages. Our iconic Barista product remains our top selling item and continues to grow very fast. And the flavored Baristas such as the caramel, vanilla and popcorn flavors keep showing healthy growing velocities, proven to be a hit with consumers. As anticipated last time, we have launched in the last few days additional flavors in selected markets such as churros or coconut, and we're expanding the matcha range with the addition of a strawberry flavor, which is the most popular combination in foodservice. This will enable customers to create an even wider range of drinks. I am particularly excited to say that our Cold Foam Barista has already reached the menu of many of our top customers. It can be added on top of any beverage, hot or cold. Plant based cold foam options weren't widely available in the market thus far. So this is a breakthrough product that delights consumers and elevates the experience for our foodservice customers. See, taste is a new platform for Oatly and for the category. This is not just random innovation. Slide 12 shows the foundation of our unique and differentiated model. We have over 60 beverage market developers around the world who spend over 1,500 hours a week with our out of home customers, deploying our lookbooks and designing recipes to make our customer menus more on trend and therefore, more relevant to their customers. We are doubling down. We continue to steadily increase coverage across this space, considering every different customer type and adapting our route to market accordingly. As you can see on this slide, I am particularly proud to see how we are sophisticating our service package to be relevant on and offline and deploying a tailored neighborhood attack approach with our already famous Oatly Week concept, like you see in the Barcelona example here. Finally, I am very excited to see how this is working in the U.S., having experienced it myself in the streets of Brooklyn and the Lower East Side in Manhattan or Venice and the Arts District in L.A. Slide 13 shows you selected examples of the types of outdoor communications we do, in this case, in the streets of Warsaw in Poland, so Oatly, but the new Oatly in its essence. Slide 14 shows you another example of the sort of culture creating experiences we do. In this case, a collaboration with AVAVAV, one of the most talked about indie fashion brands at the Fashion Week Milan some weeks ago. While guests and models could enjoy Oatly signature drinks live, the social media impact of this collaboration spread across Europe and North America at the very same time as a true global event. On Slide 15, you can see the latest and greatest of our social media presence, where most of our brand investment is being deployed, both with brand generated but also user generated content by our brand ambassadors. Finally, on Slide 16, we demonstrate how the new strategy is helping us to make shelves more exciting and relevant, occupying more space than before, but not only for Oatly, but also for the category as customers start sensing a new momentum. I am particularly excited to see the first in store executions of the new strategy in Canada. Our team there are doing a phenomenal job anticipating what we're capable of doing in North America. When we look at the growth trajectory on Slide 17, we see accelerating growth, which gives us additional confidence that the strategy is working. Europe and International keeps on strengthening with another quarter at 14.5% growth in constant currency. That's a stellar performance and a very healthy mix of growth in both the established and in the new markets. I am very pleased to say that at the back of strong performance across all channels, the North America segment has seen growth in the quarter of 12.3%, excluding the segment's largest foodservice customer, or 3.8% total net growth when you click through to Slide 18. So step by step, we're bringing this segment into its growth path following the European model footsteps. As we said, we expect it will take longer than in Europe because of the time lag in retail, but we are mildly optimistic that we're reaching a tipping point in this segment.Moving forward, we will continue to focus on the controllables and the deployment of the growth playbook. Slide 19 shows that we continue to consistently outperform our competition in the tracked channel data, more than ever before. We continue to expand our retail market share in every single European market that we measure, whether it is an established or an expansion market. And in the U.S., as we continue to lap last year's portfolio delistings, our drinks portfolio consolidated the growth trajectory we started in the fourth quarter at the back of sustained strong velocities and strong distribution gains in the core portfolio, showing record highest TDPs and ACV. Slide 20 shows that when we look at the European markets in aggregate, since the implementation of the new playbook last year, oats keeps gaining momentum, showing its decisive role in driving the overall category upwards despite most other crops that continue to lose traction. Slide 21 shows 2 important dynamics that prove the core objective of the new strategy, generate incremental consumption from new younger consumers. First, switching analysis in the core European market shows the ability of the new portfolio to drive incremental sales. Second, as we dig into the data, we see that consumers that are coming into the category via the new portfolio tend to be younger consumers, which we find very encouraging. As we move into Slide 22, many of you might be thinking how fast can we replicate this in the U.S. Well, first things first, controlling the controllables, we have progressively taken this segment into positive growth and profit. Out of home continues to grow steadily, 12.4% growth outside the largest customer and at the back of the identical model we've implemented in Europe, enamoring the new coffee and beverages space with Oatly's Magic. Having signed a partnership with Onyx, recently named one of the most notable coffee specialty brands in the world, is a concrete sign of what's happening in the U.S. Excluding that large customer, this channel represents over 25% of this segment, and we expect it to continue to grow by increasing coverage and by driving more customer diversification. In retail, our core beverages portfolio now represents over 95% of the channel's revenue. We continue to gain strong distribution points within this portfolio, taking the measured retail channel to 10.5% growth in the quarter and to the record highest market share, breaking the 30% for the first time. To this, we should add the 150% growth in clubs with opportunities to continue to expand velocities and regions. So the outlook is good. So while category softness in the measured retail channel continues, we expect that will start changing the moment we are able to list the new portfolio. And I'm happy to say that early customer conversations for the upcoming reviews seem promising. Now that we have discussed the past, I want to give you a preview of our future plans, as you see on Slide 23. And this is simply a confirmation of the last discussion. You should not expect any significant change, but a relentless consolidation of the new playbook execution. First, we will be decisively leveraging our fiber credentials by campaigning about the fiber content of our product. Many global health authorities estimate that people have a fiber deficiency of about 10 grams per day. As a company that is rooted in science, our visionary founders have historically advocated for the benefits of fiber in people's diets. So what you see here is just the first step, and you should expect to see more from us in the near future. Second, step by step, we are working to accelerate the introduction of the new portfolio in the U.S. retail during the upcoming range reviews. While we expect the new listings to start taking place at the back of this year, we also expect that the full rollout will move well into next year. On Slide 24, I will refer to the progress we're making in China. Consistent with previous discussions, the general context and the price pressure in the foodservice business continues. At the same time, I am pleased to report that the strong development of the retail channel accelerated, doubling in quarter 1 year on year and representing already close to 1/3 of the segment's revenue. Finally, as JC mentioned, we intend to complete the strategic review during this year. To finish this business update, I would like us to step back and pay attention to the trajectory of the key business metrics of the year since JC and I joined the business, taking quarter 1 as a reference to make the comparison like for like with today's results disclosure. Here, you can see how the growth evolution is yielding a direct positive effect in cost absorption and muscle building margin. This has allowed us to continue to reinvest in growth while steadily reducing SG&A, and in so doing, building a more resilient business able to better navigate one off effects like the volatile context we described during the introduction. Way further to go, but we're confident we're making significant decisive steps in the right direction. With that, I will now turn the call over to Marie-Jose, MJ? Marie-Jose David: Thank you, Daniel, and good morning, everyone. Slide 27 highlights our ability to execute globally with continued strength in the European and International segment and increasingly so in North America. As an illustration, this quarter marked our first period of positive volume growth in North America since Q4 2024, an encouraging signal our growth playbook is working. In Q1, we grew revenue 15.6% and 8.1% on a constant currency basis. Gross margin was 33.4%, which is an increase of 188 basis points compared to last year's Q1. This was a result of efficiencies across the organization, including facility optimization, volume absorption and ongoing productivity improvements, in addition to a strong mix in Europe and International. Adjusted EBITDA was a positive $5 million in the quarter, which is $8.7 million higher than last year's Q1. The significant increase in adjusted EBITDA was a result of strong top line growth and gross margin expansion. I will now provide more detail about our financial performance. Slide 28 shows the bridging items of our revenue growth. In the quarter, volume grew 5.6%, price/mix increased by 2.5%. Foreign exchange was a 7.5% tailwind compared to 4.8% last quarter. The increase in revenue comes from the execution of our growth playbook, which includes increased consumer relevance through new flavors and formats. Moving into Slide 29 and the year over year gross margin bridge, which shows the 188 basis points year over year improvement. This improvement is explained by 110 basis points from fixed cost absorption and supply chain efficiencies, 110 basis points from product and channel mix, 40 basis points from foreign exchange currency tailwinds, partially offset by a negative impact of inflation for 80 basis points. Slide 30 shows the Q1 year over year improvement in our adjusted EBITDA. The $8.7 million improvement was driven by a $14 million increase in gross profit, partially offset by a $5.3 million increase in SG&A and overhead. In SG&A, our ongoing cost savings actions in areas such as indirect procurement were more than offset by $7.2 million year over year FX headwinds as well as customer distribution costs, mostly linked to higher volumes sold. As a volume driven business, our cost structure scales with growth, and we remain focused on delivering profitable growth over time. Slide 31 shows segment level detail. Europe and International grew net sales by 14.5% in constant currency, which is another proof that the growth playbook is working. This helped drive a $16 million increase in the segment adjusted EBITDA versus first quarter of 2025. North America's revenue grew 3.8% in the quarter. The segment adjusted EBITDA decreased by $0.5 million to $0.7 million, driven by higher cost of goods sold, explained by an increase in freight and warehousing costs. Greater China constant currency revenue declined by 6.4% in the quarter. The decline was explained by strong competition in the out of home channel and partially offset by growth in retail. The segment reported negative $0.8 million in adjusted EBITDA. Despite these challenges, our team continues to work together to navigate the macroeconomic headwinds in the region while managing the ongoing strategic review. In the quarter, corporate declined by $4.5 million, mostly as a result of FX headwinds and timing of global branding and advertising expenses. These expenses were partially offset by the ongoing efforts to increase efficiency of spend. Turning to our cash flow on Slide 32. First, I want to remind everyone that our business plan remains fully funded, and we are focused on bringing the company to structurally positive free cash flow. For the quarter, free cash flow was a net outflow of $11.7 million, which is $8.8 million better than last year. It is worth highlighting that the free cash flow in the quarter includes annual bonus payments, which would not occur again this year, as well as $3.5 million payments linked to the exit from our production facility in Singapore, which will finish in first quarter of 2027. I continue to see good progress throughout the company on all levels of cash flow, and I believe we still have room for improvement. While we do not anticipate delivering positive free cash flow for the full year 2026, we do expect that the biggest drivers of our improvement will come from higher adjusted EBITDA and working capital improvements. We will continue to maintain discipline in our investment choices. Turning to our 2026 outlook on Slide 33. As Jean-Christophe mentioned at the top of the call, we are reaffirming our outlook for 2026. We expect constant currency revenue growth in the range of 3% to 5%. Based on recent FX rates and assuming no change for the rest of the year, we estimate FX to add approximately 100 to 200 basis points to full year net sales growth. On adjusted EBITDA, as we navigate the impact of the Middle East conflict, we now expect to deliver towards the low end of the range of $25 million to $35 million. As we stand today, we anticipate Q2 to be lower than our first quarter with visible negative impact from the Middle East conflict, combined with a strong brand investment season. As we move through the year, we expect performance to improve meaningfully in the back half. This is supported both by a normalization of near term volatility and by the continued rollout of our growth playbook, where investments in selling, branding and distribution, which are front half weighted, are building benefits over time. As a reminder, this is, of course, only based on what we know today. Importantly, we do not currently view any change in the underlying health of the business. The fundamentals remain strong, and we are continuing to execute against our growth playbook while remaining agile in our ability to adapt when necessary. Lastly, our guidance for CapEx remains unchanged, which we expect to be in the range of $20 million to $30 million for the full year. This concludes our prepared remarks. Operator, we are now prepared to take questions. Operator: [Operator Instructions] Our first question will come from John Baumgartner with Mizuho. John Baumgartner: Maybe first off for MJ. I'm wondering if you can touch a bit on Europe, the EBITDA delivery there in Q1, how much of that strength was driven by maybe beneficial timing shifts from reinvestment as opposed to delivery that's more structural and more sustainable in nature from operating leverage or product mix? Marie-Jose David: Yes. So thank you for your question, John. The way to look at Q1, to be clear, and I'm sure you'll recall prior conversations where we always explain our phasing between first half and second half. So if you look at how we invest, which was your question, we usually weight more on first half than second half. That's point number one. As we continue as well, if I go below just the branding investment, there is as well investment when it comes to the business and the way that we operate for our initiatives. So if you have to think about the full year, Q1 is weighted more when it comes to investment, branding, selling expenses, initiatives when it comes to SG&A will go more for the year. Did I answer your question, John? John Baumgartner: Yes. Perfect. And then, Daniel, a follow up. The prepared comments noted that the brand communications are emphasizing taste and health. And I'm curious how you think about the health component. If plant based no longer needs to be positioned as an alternative to cow's milk because the category can stand on its own, well, that overlaps now non plant beverages trying to differentiate by including the prebiotics and fiber that's already core to oats. So the trends seem to be coming to oats overall. It's obviously early days, but how expansive do you think these health efforts can be? Does it open additional opportunities in products like yogurt? Is it possible to leverage health organizations for product claims? Just how do you think about communicating or scaling the health benefits going forward? Daniel Ordonez: Very good. So I could notice 3 questions in one, John, and I would love to take a double click on MJ's answer as well to give you comfort about how we're building EBITDA in Europe. Listen, 3 things to unpack there. First, as far as Oatly is concerned, we don't see a shift in terms of communication focus. Taste & Health has been part of the brand's voice and vision from the very beginning, at least since the 2012 inception of the contemporary brand vision, right? That's absolutely number one. Number two, there is no either/or when it comes to the focus on target market, right? It is true, however, as we have said for many quarters to date that there was a bit of a limitation when it comes to lactose intolerant target audience and environmentally conscious, you would say, the epitome of the alternative to cow's milk target audience. When we look at the young generations, both Gen Z and Alpha, we see that they look at this with a much broader perspective. It's not that being an alternative to milk to cows is irrelevant. It's that they look at taste and health combined as the primary area of attraction to our appeal to consumption, right? And of course, with a double click on sustainability, if you want, or being an alternative to dairy. And then when it comes to health, we do see momentum. We discussed with you in these discussions before. There is a significant momentum growing in both sides of the Atlantic when it comes to fibers, prebiotics, gut health, and we really, really welcome that with open arms. So there is an incrementality on that. Definitely, yes. But there is also an incrementality when it comes to the whole combination of taste and health. Mind you, when you see the results that we have just posted, both in the U.S. and in Europe, you see the new consumers coming into the category. And that is not just taste, but it's both taste and health combined, John. So yes to that, but the incrementality will not only come from health, but from taste and health combined. Operator: Our next question will come from Max Gumport with BNP. Max Andrew Gumport: It's nice to see the continued momentum in Europe and the improved growth in North America. And along those lines, with the growth playbook clearly working and gaining traction, I was hoping to get an updated view of how you think about the long term top line growth for both your North America business and your Europe and International business. Daniel Ordonez: Thank you, Max. Is that -- you have a second question, you want to double click on that one? Max Andrew Gumport: I will have a second. Let me start with that one. Daniel Ordonez: Very good. Thank you. Just checking. Listen, let me unpack that to you. You saw first on Europe, we do see the momentum continues to build, right? So before going into the outlook, allow me 1 minute to focus on the now. We have just posted, as you saw, 2 consecutive quarters on the mid teens, and we're clearly generating new incremental demand. So the important thing here is that we see growth consolidating at Oatly. It's doubling the growth of oat milk and almost tripling the growth of plant based milk. And you see that is a platform that makes us look into the future with different parties. This combined is giving us a sustained growth momentum in plant based milk of mid single digits, which is strong compared to where we were a couple of years ago. So that sets you already for a trend. Going into the future, the first thing we look at is that very, very important data point, which the growth comes from younger generations of consumers entering the category. We now have abundant evidence that, that is the case. So then definitely looking into the future, we look at the 70% penetration headroom we have in front of us. And that's why we believe the opportunity is enormous. In terms of where we see the growth coming from, number one, a much stronger portfolio, which is fully focused on beverages. And in a way, I'm using this question from you to come back to something that John was asking before. We will remain for the foreseeable future focused on drinks because it's where we have our assets, where we have our strength, where we have our superiority and where we're winning. And there's a lot of opportunity. And the other thing to give you a lever for Europe, Max, is the new markets, what we call the expansion markets of the International markets, whether it's France or Poland or Mexico in this segment. You're talking about markets that are large, large in their potential and are building really critical mass. So the 2 of them combined, a new portfolio and channel expansion in the established markets and the expansion in the new markets, gives you a real, real sweet spot for us to think on a second revolution for plant based drinkers in Europe. If I now move the attention to North America in the now, I am very encouraged. We are very encouraged by how things are developing in the U.S. First, what we see happening in coffee and foodservice. We're spending a lot of time with the teams there, and I'm very encouraged to report the progress that you see. For us, why this is important is because it's the best marker for category momentum. This channel is where habits are created. And excluding the largest customer, this channel represents already over 25% of the segment's revenue and has been growing in double digits for some quarters now. So when we look ahead, we only see opportunities, Max. And finally, just to round up on the U.S., on North America, the category remains soft, but there is a very significant part in traditional retail only. And it is strengthening. If you have checked the latest scanning data, the more Oatly gains traction, the more the category strengthens. And now we're winning, we're outperforming market and competitors with crossing the line of 30% share in oat milk for the first time. So as the outlook for North America, I would say controlling the controllables. And at the top of the controllables, we put the category development. Now we do put the category development. And for that, you will see 2 things. First, more visible brand investment, step by step, of course, because you know how we manage, how rigorous we are about our financial equation. And secondly, a step change in the U.S. traditional retail adopting the kind of portfolio you see in Europe. And I have to underline, step by step, you will see some this year, but the progress will go well into 2027. Hopefully, that gives you a full picture, Max. Operator: Our next question comes from Tom Palmer with JPMorgan. Unknown Analyst: It's Elsa on for Tom. So you now expect EBITDA to be at the low end of the full year range, just given some cost headwinds related to the Middle East conflict. Can you walk us through how those cost headwinds have impacted results in the first quarter? And what impact do you expect to see going forward, including any levers you potentially have to offset those costs as we move throughout the year? Jean-Christophe Flatin: Thank you. It's Jean-Christophe. I'll take this one. I mean it's a very important topic, as you can imagine. So I'll take the time to unpack that. Starting by the key statement that to date, we don't see an impact on demand because of the Middle East conflict. This is why I'm only answering on cost and EBITDA. So quickly, if we step back, what's the context of this guidance? Remember, everything we discuss today is only with what we know today. We continue to face daily unpredictability and volatility, and we really need to mobilize our agility to react and adapt. So now going to the heart of your question, when you look at the COGS, what do we see? On one hand, some of our COGS benefit from the fact that we have hedging on a number of energy contracts in our Europe factories. We have a number of advanced contracts on raw materials, and we have some structural advantages, which are related to choices we have made, like we have a pellet boiler in our Landskrona factory. We have an electric truck fleet in our Europe and International freight to warehouse network. All of that is helping us. However, on the other hand, the Middle East conflict has brought impacts into our P&L from the month of March onwards, and these costs are specifically fuel price related. The biggest one, shipping and logistics costs, both in Europe and International as well as North America. The second noticeable one is packaging costs worldwide. So when we do the net of the advantages we have and the new costs we see from the conflict, the net of the 2 is showing a total COGS and logistics net increase, which is already visible in March P&L and that we now expect to be fully at play in quarter 2. And honestly, too early to be much more precise than that for what could come after quarter 2, which is why when we had to review the full year outlook for this conversation, beyond the normal course of business, it means we have to evaluate both the potential full year cost impact of the conflict on one hand and our a bility to mitigate that on the other hand. And having done that, we now expect to deliver adjusted EBITDA towards the low end of the range of $25 million to $35 million. Operator: Our next question will come from Samu Wilhelmsson with Nordea Markets. Samu Wilhelmsson: A few questions from my side. I could start with North America. You mentioned that North American EBITDA was pressured by warehousing and transportation. So I was just wondering, is there a timeline or any measures in place to structurally fix the distribution economics? And do you project that it requires any additional CapEx? Daniel Ordonez: Sam, would you like to add to your list? Or is that the only -- you suggest that you have more questions? Samu Wilhelmsson: Yes, there are a few related to the cash flow. I can take them combined with. Daniel Ordonez: No, I'll take that from a business operation standpoint. I mean, listen, warehouse and transport, there are 2 ways to discuss that. There is the ongoing business as usual. We are dealing with that, and this is part of both the reports you have seen of quarter 1 and how we expect for the outlook of the market. There is -- of course, there is progress, but it has to do with the business as usual, nothing to highlight, to be honest with you. And then, of course, we're dealing with some of the consequences of the context that JC was just describing. All of that is blended on the guidance. So there is nothing structural and to be concerned about when it comes to the actual business operation in North America to highlight in this earnings call. Jean-Christophe Flatin: And to the double click of your question, Samu, there is no specific CapEx required or considered to deal with that. Samu Wilhelmsson: All right. Got it. Then on the free cash flow, first of all, maybe like thinking that how should we think about the Greater China strategic review's impact on free cash flow? Obviously, you can't comment on investment proceeds, but maybe from a point of view of the restructuring cash costs and from potential working capital release, is there anything relating to those that you would be willing to elaborate further? And then on the follow up, have you tracked what kind of revenue gross margin improvement levels you would need to get to a structural free cash flow, of course, excluding the effect of Greater China from that? Jean-Christophe Flatin: Thank you, Samu. I'll start with the context of your question, which is the strategic review. And here, as you know, our answer, our messaging is exactly the same as the last quarters. We continue to evaluate a range of options, including a potential carve out, with the very clear objective to accelerate growth and maximize value. As we work on that, we remain committed to our team, customers and suppliers. And it's a great opportunity for us, I think, to pay tribute to our great China team, who have remained focused on the business and continue to fight every day as we execute the ongoing strategic review. So a shout out to them at this occasion. MJ, I think you want to double click on the specifics. Marie-Jose David: Yes. The only specific, Samu, is on the allocation. We do not allocate any corporate costs to any individual segment. So just keep that in mind as well. Samu Wilhelmsson: All right. Then perhaps last question, a follow up with previous analysts regarding the guidance. You mentioned some rationale behind the guidance and what you have done there. But what kind of uncertainties would you see around the guidance, given that if the situation continues as planned, does that support your ongoing guidance? Or what would need to happen in order you to go back to the table or revise your guidance assumptions? Jean-Christophe Flatin: Thank you, Samu. Perhaps let me first repeat, to date, we are not seeing a demand impact from the Middle East conflict. So the question so far, with what we know today, the answer to your question is only on cost and therefore EBITDA. And when it comes to that, I think, honestly, I cannot predict the unpredictable or be any certain on the uncertainty. I think we flagged to you, like a lot of industries, most of the cost impact is fuel, so oil leading to fuel and then fuel leading to a few categories. These are the areas we are currently and constantly looking at and monitoring. So if there is one space we need to continue to pay attention daily to see what could happen, it is that. Operator: We'll take our last question from Andrew Lazar from Barclays. Samu Wilhelmsson: You mentioned that so far, you've not seen any impact on demand from the Middle East conflict. Organic sales were up 8% in the first quarter, and you're still looking for 3% to 5% for the full year. So I'm curious if there is something sort of discrete that you know of that will cause organic sales growth to decelerate from here to get into that 3% to 5% range for the full year? Or you're just being, I guess, prudent and thoughtful in case you see some impact on demand going forward? Jean-Christophe Flatin: Thank you so much, Andrew. And I think you just provided me with 2 great objectives that I will use again. But first, positioning ourselves on guidance is a balancing act. So let me unpack that for you. On one hand, as you can imagine, our recent quarter's performance definitely gives us confidence in our sales guidance. We just posted Q1. We drove very good growth in Europe and International. We see a return to positive volume and sales growth in North America. All of that are great signs of progress. It means our growth playbook is working, reinforcing the strategy, and therefore, we really focus ourselves on execution, controlling the controllables. That's on one hand. On the other hand, there are 3 considerations I want you to have in mind. First, you know better than me, 1 quarter does not make the year. Second, Europe and International sales strongly picked up in the second part of last year, which means we will compare ourselves to a stronger comp base in H2. And finally, as you said, even if to date we don't see a demand impact from the Middle East conflict, we all know how volatile and dynamic the current environment is and remains. And therefore, as you very well highlighted in your second option, we choose to be conservative and maintain our current outlook for the moment. And we will, of course, continue to monitor the conditions closely and come back to you. So I think you used prudent. I totally subscribe to that. Samu Wilhelmsson: Great. And then one last quick one. You mentioned that EBITDA in Q2 likely below the level that we saw in Q1. This might be getting too prescriptive, but would -- is your expectation that EBITDA could still be positive in Q2? Or based on what you know today, we should be thinking it's potentially even a bit negative year over year? Marie-Jose David: Andrew, this is MJ. So what we said is that Q2 will be lower than Q1. And what you've just heard is that we are managing current situation with all levers that we have. I'm not going to say more than that. We are definitely confirming our guidance. So I think with those 3 topics, you can take it. Operator: That does reach our allotted time for Q&A. I'll now turn the call back over to our presenters for any final or closing remarks. Daniel Ordonez: Thank you very much. Jean-Christophe Flatin: Thank you, everyone. Thank you for joining, and have a great day. Have a good day. Marie-Jose David: Thank you very much. Operator: Thank you. That brings us to the end of today's meeting. We appreciate your time and participation. You may now disconnect.