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Operator: Hello, and thank you for standing by. My name is Sarah, and I will be your conference operator today. At this time, I would like to welcome everyone to the Armstrong World Industries first quarter 2026 earnings call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session. I would now like to turn the conference over to Theresa Womble, Vice President, Investor Relations and Corporate Communications. Please go ahead. Theresa Womble: Thank you, Sarah, and welcome to everyone joining our call today. On today's call, we have Mark Hershey, our CEO, and Chris Calzaretta, our CFO, and they will be discussing Armstrong World Industries' first quarter 2026 results and the rest-of-year outlook. We have provided a presentation to accompany these results that is available on the Investors section of the Armstrong website. Our discussion of operating and financial performance will include non-GAAP financial measures within the meaning of SEC Regulation G. A reconciliation of these measures with the most directly comparable GAAP measures is included in the earnings press release and in the appendix of our presentation issued this morning. Again, both are available on the Investor Relations website. Now during this call, we will be making forward-looking statements that represent the view we have of our financial and operational performance as of today's date, 04/28/2026. These statements involve risks and uncertainties that may differ materially from those expected or implied. We provide a detailed discussion of risks and uncertainties in our SEC filings including the 10-Q we filed early this morning. We undertake no obligation to update any forward-looking statement beyond what is required by applicable securities law. So now I will turn the call to Mark. Mark Hershey: Good morning, everyone, and thank you for joining us. As many of you know, this is my first earnings call as CEO of Armstrong. I stepped into this role with deep respect for the remarkable legacy of our company and the culture that has defined it for well over a century, one built on integrity, innovation, and enduring relationships across the building ecosystem. For generations, our success has been rooted in our people, and the long-standing relationships we have built in our industry. Their loyalty, work ethic, and dedication to our values have been crucial to sustaining growth, and our unwavering commitment to our customers to consistently deliver the highest quality, most innovative products, and best-in-class service levels that earn their trust and enable their success. This commitment to our distribution partners, the A&D community, the contractor community, and to building owners and operators—and the strength of those relationships—are a meaningful competitive advantage for Armstrong. And they must remain at the center of how we work. As I shared in February, our strategy will remain consistent. Building on a strong and proven foundation, I envision an even more innovative and productive Armstrong and an enterprise that is squarely focused on driving AWI's earnings power through consistent Mineral Fiber growth based on both AUV and volume as well as healthy margins in our Architectural Specialties, or AS, segment. Through our growth initiatives, we strive to grow volumes ahead of market rates supported by our advantaged market position, strong channel partnerships, and, importantly, market-driven innovation that expands the value we deliver. In addition to our digital growth initiatives, Canopy and ProjectWorks, our TempLock energy-saving ceilings products and our recently launched data center solutions are great examples of this innovation. This industry-leading innovation differentiates Armstrong, creates new demand vectors, and positions us at the center of key macro trends that support AUV and volume growth in the coming years. I'm confident that we are over the right targets with these initiatives, and we'll share more on our progress later in the call. Expanding and scaling our AS segment is another part of our strategy. With acquisitions and organic investments over the last decade, we have enhanced our ability to win more on every commercial construction project, leveraging our commercial reach and thereby efficiently expanding our wallet share. And because of the complementary nature of our segments, and the brand equity, relationships, and influencer access we have earned over time, we've consistently proven that when both AS and Mineral Fiber Solutions are specified on a project, our win rate meaningfully increases. Our goal with AS continues to be outsized organic growth, coupled with sustainable attractive margins driven by our portfolio and capability breadth, and scaling new companies on the platform. Acquisitions will continue to be a key enabler of that strategy. With M&A, we look for opportunities that reinforce a differentiated market position in commercial construction, expand our capabilities, and enhance our ability to support customers across all stages of the project life cycle. As we've expanded our portfolio, we are now able to serve more complex, design-driven projects while reinforcing the value of Armstrong as a total solutions partner. That advantage is evident in our acquisition of Zener, and more recently, Eventscape, through which we've significantly enhanced our design and engineering expertise. Both companies enable us to collaborate with a broader network of architects, designers, engineers, and contractors, allowing Armstrong to engage earlier—especially when design concepts and technical requirements are still being shaped. As a result, we're not only increasing our project participation, but also connecting with a wider array of key stakeholders, enhancing the visibility and the influence of the Armstrong brand and platform. The strategic imperatives I've outlined are designed to further solidify the resilience of our business and further support our attractive cash generation profile. With profitable growth and strong cash generation, we can invest in each of our capital allocation priorities, which remain unchanged. While I've already discussed M&A, our first capital allocation priority is reinvesting back into our business where we see the strongest returns. These investments focus on both productivity enhancement and capacity expansion for growth areas of our portfolio that generate higher AUV, including TempLock and our smooth white acoustical tile, or SWAT, mineral fiber products. And finally, we'll continue returning value to shareholders through dividends and share buyback, which Chris will detail in his comments shortly. Turning to the quarter. While we faced a few discrete headwinds, the foundational building blocks for value creation that we've historically demonstrated are fully intact and remain strong, as is our confidence in our outlook. Total company sales in the first quarter increased by 7% with top-line growth in both segments remaining solid. In the Mineral Fiber segment, sales increased 5% with solid AUV growth and a modest increase in sales volumes. Notably, we've grown Mineral Fiber sales volumes three of the last four quarters on a year-over-year basis. As expected, we saw some recovery in sales to federal government customers along with strong commercial execution and continued benefits from our growth initiatives. Also as expected, market conditions remained flattish—similar to how we exited 2025. Our 42%. This result was driven by strong AUV, along with productivity gains in our plants, and equity earnings contributions from our WAVE joint venture. Turning to AS. Sales increased 11%, driven by 7% organic growth and contributions from our 2025 and 2026 acquisitions, adding another four points to prior year results. We were pleased to see broad-based demand across most of our product portfolio, with organic growth improving sequentially, which has also continued steadily into April. Adjusted EBITDA for this segment declined in the quarter, primarily due to a one-time tariff adjustment relating to duties on aluminum, as well as targeted investments for growth in connection with growing demand. Looking forward in the AS segment, quoting activity has remained strong and our order intake levels have increased in the low double-digit range both in the quarter and over the last twelve months, supporting our full-year outlook—giving us some visibility early into 2027 as well. With an improvement in sales and lower cost headwinds, we expect AS segment adjusted EBITDA margin to significantly improve in the second quarter and that we will continue to make meaningful progress and expand margin toward our goal of 20% or greater EBITDA margin on a full-year basis. In support of that growth, our team continues to actively bid and win transportation and airport projects at a high rate. Year to date, we have already surpassed our entire 2025 order intake total for transportation projects. These large, complex projects often feature both high design and standard elements, with multiple AS product categories as well as Mineral Fiber Solutions. With our industry-leading portfolio, we are uniquely positioned to serve them. In addition to project wins at JFK and LAX mentioned on our last call, we have also won new projects at the San Antonio, San Francisco, and Dallas Fort Worth airports. Now before turning the call to Chris, I want to highlight two operational items within our plant network across both segments. First, on a total company basis, we had a strong safety quarter, with our total recordable incident rate well below one and well below industry average. This is a testament to the strong safety culture we have built across the enterprise, including our acquired companies. Among our greatest responsibilities is to protect the health and well-being of our employees throughout their workday. I'd also like to thank and congratulate our Mineral Fiber plants for successfully navigating a series of winter storms while maintaining strong quality and service levels for our customers. In fact, our perfect order measure for the first quarter exceeded our targets and reached a record for the month of February. As we have shared, this measure captures the full customer experience by assessing whether orders are shipped completely, delivered on time, priced and billed accurately, and received without damage. By holding ourselves accountable across every step of the order life cycle, the perfect order measure reinforces our focus on reliability, operational discipline, and customer trust—ensuring we do what we say we will do, every time. Success with this metric is among the key factors contributing to our ability to win in our markets and supports our consistent AUV performance. Now I will turn the call to Chris for a more detailed review of the financials. Thanks, Mark, and good morning to everyone on the call. As a reminder, throughout my remarks, I'll be referring to the slides available on our website. Chris Calzaretta: And please note that Slide 3 details our basis of presentation. We begin on Slide 6 with our Mineral Fiber segment results for the first quarter. Mineral Fiber net sales increased 5% in the quarter driven primarily by favorable AUV of 4% and a modest increase in volumes. AUV growth was primarily due to favorable like-for-like pricing while volume growth was driven by solid commercial execution and growth initiatives with overall flattish market conditions in the quarter. Mineral Fiber segment adjusted EBITDA grew 4% with an adjusted EBITDA margin of 42.4%. Mineral Fiber adjusted EBITDA growth was primarily driven by the fall-through of AUV, positive contributions from our WAVE joint venture, and slightly higher Mineral Fiber volume versus the prior year. These benefits were partially offset by higher input costs driven primarily by raw materials and energy inflation as well as unfavorable inventory valuation impacts, and an increase in SG&A expenses primarily due to higher gains in the prior year from deferred compensation. Achieving a consistently strong adjusted EBITDA margin reflects the continued resilience of the Mineral Fiber business, fueled by our value creation drivers of AUV growth, annual productivity gains, and contributions from our WAVE joint venture. As we look ahead to the second quarter, recall that last year's Mineral Fiber adjusted EBITDA margin performance of greater than 45% was a record high for the segment. We still expect strong performance next quarter even as we invest in our growth initiatives. On Slide 7, we discuss our Architectural Specialties, or AS, segment results. Net sales increased 11% in the quarter driven by solid organic growth along with contributions from our recent acquisition of Eventscape and the 2025 acquisitions of Parallel and Geometric. AS segment adjusted EBITDA decreased approximately $3 million, or 12%, versus the prior year. This decrease was primarily driven by higher manufacturing costs, which included a $2 million nonrecurring tariff adjustment, an incremental $2 million of costs of recent acquisitions, and approximately $1 million related to plant investments to support growth. The SG&A increase was primarily driven by $2 million of selling investments in support of top-line growth and $1 million of incremental expense from our recent acquisitions. I want to take the opportunity to further discuss the performance of the AS segment in the quarter on both an organic and inorganic basis. For reference, the organic adjusted EBITDA reconciliation for this segment is included in the appendix of this presentation. On an organic basis, net sales grew 7% driven primarily by broad-based growth led by our metal and wood categories. Organic AS adjusted EBITDA declined by 9% year over year, primarily driven by the nonrecurring $2 million tariff-related adjustment previously noted along with a total of $3 million of both higher selling expenses and manufacturing investments to support growth, all of which pressured segment operating leverage. On an inorganic basis, our recent acquisitions delivered $5 million of net sales in the quarter and were slightly dilutive to adjusted EBITDA. This anticipated short-term dilution was largely driven by the integration ramp that we experience from time to time with some acquisitions as we incorporate and scale these businesses onto the Armstrong platform. At the segment level, I'd like to note here that we expect the adjusted EBITDA margin for Architectural Specialties to significantly improve sequentially in Q2 and resume year-over-year adjusted EBITDA growth in 2026. I'll speak more on the second-half outlook for both segments shortly. On Slide 8, we highlight our first quarter consolidated company metrics. Net sales grew 7% and adjusted EBITDA increased 1%. Our consistent building blocks of solid AUV performance, incremental volume from both segments, and positive WAVE contributions were largely offset by higher manufacturing and input costs and higher SG&A expenses. Adjusted diluted net earnings per share increased 2% primarily due to a lower share count in the quarter reflecting an increase in the pace of share repurchases. Slide 9 summarizes our first quarter adjusted free cash flow performance versus the prior year. The 1% decrease was primarily driven by timing-related working capital and cash taxes, partially offset by higher dividends from our WAVE joint venture. We remain confident in our ability to deliver strong adjusted free cash flow growth in 2026 to support all of our capital allocation priorities. During the first quarter, we continued to create value for shareholders through disciplined capital deployment. We paid $15 million of dividends to our shareholders and repurchased $60 million of shares, representing an accelerated pace of repurchases as compared to recent quarters. As of 03/31/2026, we have $473 million remaining under the existing share repurchase authorization. In addition to shareholder returns, we continue to deploy capital in support of growth strategy in the first quarter, including the February Eventscape acquisition, as well as continued capital expenditures to support manufacturing productivity, innovation, and future growth initiatives across the business. With a healthy balance sheet that includes low leverage and ample liquidity, we remain well positioned to execute and advance our strategy. Turning to Slide 10. We are reaffirming our full-year guidance for net sales, adjusted EBITDA, and adjusted free cash flow. Given the accelerated pace of share repurchases in the first quarter, we are modestly raising our adjusted diluted EPS guidance to a range of 10% to 14% growth versus the prior year. We have also slightly revised our adjusted EBITDA margin assumptions primarily driven by our first quarter results. We continue to expect margin expansion in both segments for the full year, with Mineral Fiber adjusted EBITDA margin of approximately 44% and AS adjusted EBITDA margin of approximately 19%. On an organic basis, we expect AS adjusted EBITDA margin to be between 19% and 20%. Please note that additional assumptions are available in the appendix of this presentation. We continue to monitor geopolitical developments and their potential impacts on our business, including rising carrier fuel costs that have picked up in recent weeks. We have responded accordingly by implementing a fuel surcharge that took effect in late March. This is an example of our strong track record of mitigating inflationary headwinds as they arise. Before turning it back to Mark, I'd like to comment on our expectations for the second half of the year. We expect improved net sales and adjusted EBITDA growth in the second half of the year as compared to the first half in both segments, as well as improved adjusted EBITDA margin performance. In Mineral Fiber, we anticipate an acceleration in AUV growth, productivity gains, and WAVE contributions in the back half to support full-year adjusted EBITDA margin expansion in this segment. In AS, we expect organic net sales growth to accelerate in the second half of the year supported by strong order intake and healthy backlogs. We also expect higher inorganic contributions from our recent acquisitions. We remain confident in our outlook for 2026 and are well positioned to deliver strong results for the remainder of the year as we demonstrate the resilience of our business model. We remain committed to driving profitable top-line growth, margin expansion in both segments, and strong adjusted free cash flow to further our strategy and create value for our shareholders. And now I'll turn it over to Mark for further commentary. Mark Hershey: Thanks, Chris. As Chris outlined in his remarks, our view of the market remains consistent with how we began 2026 as we expect modest improvement for the year overall, even with the current uptick in uncertainty related to the geopolitical climate. This view reflects our current consideration of multiple macro, industry, economic, and on-the-ground inputs. Verticals like data centers, transportation, and health care are performing well. From a bidding perspective, we remain encouraged by the recent and consistent increase in overall project values as reported in Dodge data for both new construction and major renovation projects. With our robust portfolio, we are well positioned to serve that market environment. While we are also pleased to see some early signs of better discretionary demand, given elevated levels of uncertainty, it remains too early to shift our views on underlying market trends in construction. We will remain focused on driving our growth initiatives to gain traction and contribute incremental sales, giving us confidence in our ability to generate up to 1.5 percentage points of volume growth ahead of market-driven demand in 2026. These initiatives include ProjectWorks and Canopy, along with our energy efficiency and data center-specific solutions. First, looking at ProjectWorks and Canopy. Both are designed to improve sales volumes and AUV over time and further differentiate Armstrong with our customers. ProjectWorks continues to scale as we add more products from our portfolio to the platform, including, most recently, from our 2024 acquisition, 320% when projects go through this complimentary automated design service. Canopy also continues to reach new customers and improve from a revenue and profitability standpoint, more than tripling its EBITDA contribution in the first quarter. We are also pleased to see continued return customer growth along with healthy AUVs, nicely above our average AUV level for Mineral Fiber. Our newer product introductions that I mentioned earlier in the call are also gaining momentum. As we shared last quarter, our next-generation TempLock energy-saving ceiling products are now part of our SUSTAIN portfolio and meet the highest industry standards for sustainability. This makes TempLock even more attractive for building owners seeking standards that can increase their LEED v5 credits and differentiate their buildings from an energy efficiency standpoint. This innovation, with growing awareness of eligibility for tax credit incentives and validation by more real-world case studies, is driving growing interest, specifications, and adoption. Our TempLock pipeline continues to grow through heightened awareness, marketing, and commercial execution. These projects encompass a diverse set of verticals and project types. In February, we mentioned a couple of financial institutions in New York that are installing TempLock in new office construction projects. More recently, we've won projects that include a new health care facility in the Southwest, a Pennsylvania school district, and a small business office renovation in Pittsburgh, for an owner seeking the benefits of both the energy saving and the available tax credits for the product, the grid, and the installation. These, among others, are important points of validation for what we believe will be a meaningful driver for Mineral Fiber volume and AUV growth in the future. Our confidence in this outlook is bolstered by the urgent need for energy efficiency and grid stability as demands from AI, cloud computing, and data centers pressure grid systems. In addition, local and state regulations introduced over the last several years present real challenges for building compliance with carbon and energy reduction mandates. With few new solutions coming to market to tackle these challenges, TempLock is appealing for building owners facing these new regulations and even utilities looking for ways to protect the grid during peak usage hours. We believe this is a multiyear macro-driven opportunity for Armstrong and are pleased with the market development progress we're making so far this year. Data centers also represent a multiyear macro-driven opportunity supported by many of the same long-term trends tied to AI and the growing need for energy-efficient and resilient digital infrastructure. Over the past year, we've increased our capabilities and our market presence with expanded design-for-purpose offerings. The Armstrong portfolio—anchored by systems such as DynaMax, DynaMax LT Structural Grid, DataZone ceiling panels, and containment—builds on the core strengths of both Armstrong and our WAVE joint venture in manufacturing, specification-driven selling, and systems-based solutions for complex environments. Looking ahead to 2026, we see sustained activity across hyperscale, colocation, and enterprise data centers with customers increasingly focused on airflow management, support for higher power densities, and improved energy efficiency. We view data centers as a vertical market that aligns well with our capabilities and our disciplined approach to growth. Year to date, our pipeline for projects expected to ship in 2026 is more than 50% ahead of 2025 levels. These indicators of traction demonstrate we are well positioned to capitalize on both current and emerging market opportunities. We fully expect these efforts to not only contribute to our 2026 results, but also lay the foundation for future growth. With our dedicated employees serving our customers, our growth initiatives, and continued contributions from our core value creation drivers, we remain confident in achieving our 2026 outlook and in our ability to generate above-market growth, robust returns, and enduring value for our stakeholders as we move forward. With that, we'll be pleased to take your questions. Operator: Thank you. We will now begin the question and answer session. If you would like to ask a question, please press 1 on your telephone keypad. We ask that you please limit yourself to one question and one follow-up. Thank you. Our first question comes from Susan Maklari with Goldman Sachs. Please go ahead. Susan Maklari: Thank you. Good morning, everyone. My first question is on the bidding activity you're seeing out there, given the macro and obviously the start of the conflict in the Middle East during the quarter. Has that had any impact on the level of activity that you're seeing? And within that as well, can you talk about the new products and platforms and how that's perhaps driving some relative elasticity for you relative to the broader market? Mark Hershey: Thank you for the question, Susan. First on bidding activity, I think the best characterization of that would be that it's fairly stable overall. We have not seen a dramatic impact from the geopolitical backdrop. Both in the Dodge data that we use on the bidding activity and from an on-the-ground standpoint, we feel pretty good about the bidding activity. We've talked previously about bidding activity with project counts being down but project values being up. That continues. We continue to see that. That's a good thing for us. We continue to believe that that plays well to our strength—these larger, higher-value products—and, by the way, values that are up well above inflation for that matter. So bidding continues to hang in there, and we made some comments on our pipeline in our prepared remarks. Our intakes continue to be very strong—double-digit intakes—and good project visibility out into 2026 and beyond for that matter. On the new products that we mentioned in the prepared remarks, we continue to feel like we are absolutely over the right target on both energy savings and on data centers. As I mentioned, pipelines continue to build dramatically. We're seeing very good commercial execution from our sales teams on those projects, and it's giving us confidence in reiterating our view that we can get 150 basis points of Mineral Fiber volume growth ahead of market growth in the period. So in both cases—with data centers and energy savings—we're developing the market. We are, as Chris mentioned, adding selling resources. We're investing into these initiatives for growth. We're having more conversations, reaching more influencers, and feel really good about the traction of both of those initiatives. Susan Maklari: Appreciating that you outlined a lot of your initiatives and areas of focus as you step into the CEO role, just given the world that we're in today, can you talk about some of the things that you're focused on in the near term and how we should think about them coming through in the several quarters relative to some of the longer-term initiatives and things we should be watching for over time? Mark Hershey: Thanks, Susan. I'd say consistency—what you've seen from us over the last several years—we call it our winning formula, our building blocks for growth. So first and foremost, execution around our building blocks for growth: certainly AUV; certainly our product development focus on the innovation side and bringing new product to market; certainly across the enterprise, and I mentioned this in my opening remarks, productivity. Productivity from operations has been a hallmark of our Mineral Fiber business for a very long time. Extending that productivity mindset extends into the acquisitions we acquire, and just gaining operating leverage on the platform that we've built in Architectural Specialties over time. We know we'll go through cycles where we're adding on acquisitions—think about the last six months, we acquired three companies, a couple of smaller companies. There's a necessary ramp with those companies, but integrating them well, getting them up and running in our platform, and then getting the scale and the momentum behind those new additions is really important. So you'll see that in the near term, and we'll continue to be active on M&A—continue to build an active M&A pipeline—because that's also part of our strategy moving ahead. Susan Maklari: Okay. Great. Well, thank you for the color, and good luck with the quarter. Mark Hershey: Thank you, Susan. Operator: Our next question comes from Tomohiko Sano with JPMorgan. Please go ahead. Tomohiko Sano: Good morning, everyone. Mark Hershey: Good morning, Tomo. Thank you. Tomohiko Sano: On Mineral Fiber, volumes turned modestly positive, but in a flat market environment you highlighted commercial execution to push up 100 basis points. How's your view on volume trends for the second quarter and the full year changed compared to three months ago? We would appreciate any updated perspective on the drivers behind your outlook. Thank you. Mark Hershey: Thanks for the question. Overall, our view hasn't changed in terms of our Mineral Fiber volume outlook. We continue to be confident in that outlook. Just a couple of comments on Mineral Fiber volume in the quarter. I mentioned in my remarks we did see the federal government volume come through. We also saw, in addition to the commercial execution I mentioned, some flow business in the quarter, and that flow or discretionary business that we get for Mineral Fiber volume is an important signal for us. It comes through our distribution partners and that also contributed in the quarter. So across the board, we continue to grow AUV, but that flow business does tend to carry a lower AUV. But the higher end of our portfolio performed very well in Mineral Fiber volume as well—that SWAT part of the category—and so we're pleased with that. And that coupled with our initiatives gives us confidence in that outlook, Tomo. Chris Calzaretta: And maybe just to add on the volume, still expecting a modest step up in volume in the back half of the year and continued strong like-for-like performance and positive mix as part of that, AUV of about 6% for the year. Tomohiko Sano: Thank you, Mark and Chris. And just a follow-up on AS margins in Q2. You talk about the significant improvement in Q2, but could you please elaborate on the expected magnitude or level of this improvement? Any additional color on how you define significant and what we should anticipate in terms of margin recovery would be appreciated. Thank you. Mark Hershey: Thanks, Tomo. The way we're thinking about it is that the headwinds that we're seeing in the first quarter are largely short term in nature, and we don't expect them to continue throughout the rest of the year. So I think a fairly consistent margin performance through the rest of the year is how we're thinking about it without pinning it on a number. Obviously, you can see our guide and our outlook for margins overall for the year, and we're looking for a more consistent performance across all three of those quarters. Chris Calzaretta: Nothing to add. Again, still expect margin expansion for the full year in AS at the segment level. Mark Hershey: Yeah, and to add on to that, our outlooking margin expansion organically—confidence stems in part from what we're seeing in our pipeline, and the headwinds stepping away. Also, we've expanded margins in AS organically for four consecutive years, and we believe we've got the building blocks in place to continue to do that and that this will be our fifth year of organic margin expansion for AS. Operator: Our next question comes from Keith Hughes with Truist. Please go ahead. Keith Hughes: Thanks. I wanted to ask about this tariff issue more. Can you give us a little more detail of what this is about and is this going to be a continuing cost in quarters in 2026? Mark Hershey: Thank you, Keith. The short answer is no, we do not expect it to be a continuing cost, and happy to provide some color on it. Look, tariffs—as I think we've all seen—are a rapidly evolving area. There's been a lot of fluidity around the guidance, the application, frankly, the calculation of duties, and I want to applaud our team this year for constantly reevaluating that guidance and staying current on that. So we proactively, this quarter, in our reevaluation, decided to make a reconciliation, if you will, of our duty rates on, as I mentioned in my remarks, aluminum. These are finished goods that contain aluminum that are imports into the U.S. And so we made that reconciliation a one-time event. And with it, also deployed a series of mitigation measures so that we don't have this as a go-forward run rate. And I think over the years, we've proven our ability to mitigate those headwinds through a series of actions that can include supply chain changes, manufacturing changes, pricing if needed, so that we can mitigate that headwind. So we don't expect it to continue throughout the rest of the year. Keith Hughes: Okay. And one other question on AS. You talked about the manufacturing cost impacting the quarter. Was that primarily on the last acquisition you did? And is it just requiring some extra investment as you get into expand that? Or exactly where do those come from? Chris Calzaretta: Yeah, Keith, it's a little bit of both. It's the costs associated with manufacturing related to our recent acquisitions as well as some investments back into the organic side of the AS business within our plants. Keith Hughes: Okay. Thank you. Operator: Our next question comes from Rafe Jadracic with Bank of America. Please go ahead. Rafe Jadracic: First, I just wanted to start with you updating us on the inflation outlook for the year. Coming into the year, you were expecting mid-single digit with energy up low doubles and then low single digit on raws. Where is that tracking today? Chris Calzaretta: Thanks, Rafe. So just to reground on COGS inflation: raws are about 35% of our COGS, energy is about 10%, with a fairly even split between electricity and nat gas, and then freight's about 10%. So for total input cost inflation for the year, no change to our mid-single digit outlook that I shared in February, but a slight update on the components—let me walk through them here quickly. On the raw side, we expect mid-single digit inflation versus prior year. Freight—given a little bit of an uptick in the pricing of fuel—we're in that mid-single digit inflationary range. And then on energy, in that 10% range for the full year. So all in, no change to the total input cost inflation assumption of mid-single digits, but a little bit of shifting between the categories. Rafe Jadracic: That's really helpful. And then just the AUV acceleration in the second half of the year—I think 4% in the first quarter and then 6% for the full year. Was there any mix headwind in the first quarter that will reverse later in the year? Can you talk about the components of what's going to actually drive that acceleration as we get later in the year? Mark Hershey: Sure, happy to take that. We probably saw a little bit of product mix, and that does vary quarter to quarter based on the basket of product we're selling in our channels in a given quarter. There's probably a little bit of that in the quarter, and we expect that to even out the rest of the year. Our initiatives and our ability to continue to mix up will continue throughout the rest of the year, so we don't view that as a headwind going forward. And just stepping back, 5% overall sales top-line growth for Mineral Fiber—we feel really good about. From an AUV perspective, we got good pricing traction in the period. We got very good AUV fall-through in the quarter—well over our expected run rate there. So in terms of AUV overall, we're confident in that roughly 6% for the year. Operator: Our next question comes from Brian Byro with TRG. Please go ahead. Brian Byro: Morning. Thank you for taking my questions today. On the Mineral Fiber EBITDA margin outlook, even though Q1 was down a little bit year over year, had some pressures, still very good performance. It looks like you raised the full year to 44% instead of 43.5%. So, clearly, you have a good sense of being able to overcome whatever happened in Q1, even though it's still very good, and perform even better in the rest of the year than, I guess, you had thought three months ago. What is driving that increased confidence in margin for the rest of the year? It sounds like even better AUV traction, but more clarification on that would be great. Chris Calzaretta: Thanks for the question, Brian. Overall, the margin expectation for the full year in Mineral Fiber is largely unchanged. We're at about 44%. We were outlooking a little bit north of 43.5%. So really no change there overall. And as you stated, we expect a modest uptick in volume in the back half of the year and then an increase in AUV in the back half of the year based on Mark's comments associated with product mix. Still strong AUV fall-through, still strong productivity, and, again, really good contribution from our WAVE joint venture gives us confidence in that margin and our ability to expand margins at the segment level on a full-year basis. Brian Byro: Got it. And then on raising the EPS guidance, I guess from higher share repurchases, I was just curious to hear more on the thought behind that and when you decided that was the right approach. Was it looking at the stock price itself and looking at the demand outlook for the year and seeing that disconnect? Just share more about what triggered the decision to execute more on the buyback or execute it quicker. Chris Calzaretta: In Mark's prepared comments, there's no change to our capital allocation priorities. We have a high-return business and we seek to invest back there first. Secondly, we seek to grow inorganically, and you can see our track record there. And share repurchases have been our flex option. We take into account and look at a multitude of different things in contemplation of that. The uptick in EPS—the raise in the guide—was really based on our share repurchases in the first quarter. We took advantage of some opportunistic buying there. The full-year guide is reflective of that step up we saw in the first quarter in terms of repurchases. It continues to be our flex option as we go forward as well, but it's, again, an examination and a look at a whole host of different factors as part of our capital allocation. Mark Hershey: And I'll just add, we'll continue to be opportunistic. Implicit in that is confidence in our free cash flow outlook, as well as what Chris described there. Operator: Our next question comes from Garik Shmois with Loop Capital Markets. Please go ahead. Garik Shmois: Hi, thank you. On the improvement that you talked about in the flow—discretionary—part of the business, was hoping you could talk a little bit more on that: what verticals are seeing improvement and any sense as to how sustainable the growth is there? Mark Hershey: Sure. That's the part of the portfolio we have a little less visibility to. By its nature, it's discretionary. It shows up through our distribution partners. So it's a nice stable volume flow. Our ability to trace it back to specific verticals is limited. I wouldn't say it would be vertical specific—it would be more broad based, just based on what we're seeing overall in the markets as well as projects. And the same would be true for geographic. It's still an uncertain environment, and I think that's what weighs on the ability for that to be a more consistent part of our Mineral Fiber volume flow or volume outlook. But it's a good sign, and it's one of those signs that we look at very closely every quarter as an indicator of future activity. So I'd say the flow business we saw this quarter, coupled with the pipeline, is what gives us confidence in our outlook overall. Garik Shmois: Thank you for that. Just a follow-up on Mineral Fiber margins. You talked to the 44% for the full year, but you also did mention the second quarter you're up against a difficult comparison. Just wondering if you could frame Q2 EBITDA margins in Mineral Fiber a little bit more. Would you expect margins to be up in the second quarter? Any additional color would be great. Chris Calzaretta: Thanks for the question, Garik. I'll stop short of guiding to the quarter there. We are lapping a strong base period—it's probably going to be close. But, again, thinking about the overall building blocks that have been a true testament to that business will still be on display in the second quarter: really strong AUV contribution, strong pricing within that, productivity, and a disciplined approach to cost control, balanced with opportunistically investing back into the business for growth. Mark Hershey: Okay. Got it. Thank you. Operator: Our next question comes from John Lovallo with UBS. Please go ahead. John Lovallo: On the Architectural Specialties side, organic sales were up about 5% year over year in the fourth quarter, up about 7% in the first quarter. How are you thinking about the cadence of organic growth into the second half? And then can you also give us an update on, I think, there were four or five big projects that got pushed out last quarter—any update there would be helpful. Mark Hershey: Thanks, John. I think we continue to be confident in that high-single digit range of organic growth for AS. We're pleased with 7% in the first quarter, and I'd expect more of the same—high single digits—throughout the rest of the year. We did follow through on all five of those projects. One of those projects that we were talking about last quarter actually shipped and closed in the quarter, and the other remaining projects we expect in the first half of Q2. So that's consistent with what we were expecting—that they would flow through in the first half of the year—and we're on track for those. Chris Calzaretta: And, John, as you model the organic top line in AS, be thinking about a pretty sizable step up in the back half of the year compared to the front half. John Lovallo: Understood. Thank you. Operator: Our next question comes from Stephen Kim with Evercore ISI. Please go ahead. Stephen Kim: Thanks very much, guys. Appreciate all the color so far. I wanted to focus on the data center vertical for a second. First, what features really matter the most within the data centers? I understand the DynaMax—you need a very robust grid system—but in addition to that, the tiles: am I right in thinking that perhaps gasketed products might be more important in order to really minimize the airflow? Is there something else? And do some of these products have a quicker replacement cycle that you can anticipate? Mark Hershey: Thanks, Stephen. Happy to talk data centers a little bit. I think you're over the right target there—airflow management is part of the value proposition. Before you even get down to a specific kind of product attribute like gaskets or airflow management, what's winning is speed and labor efficiency and labor savings. So trust, relationships, the ability to support lead times, and a complete system that is capable of being installed on time, quickly, with minimal labor or rework—that seems to be a priority value proposition right now. And so that's what we've done with our system: a complete, connected, holistically designed system—not just the tile, not just the suspension. We've talked about walkable platforms before, we've talked about containment. That's really what we're aiming for, and then to bring the Armstrong power of go to market and service and distribution to that equation to really give contractors and the other influencers who are really prevalent in the data center space that confidence so it's repeatable, it's reliable, and they can get the data center up and running as fast as possible. So that's been our priority. Stephen Kim: That's very helpful and actually a good segue to the other question I had about the data centers. As we know, the data center starts and announcements were obviously very robust, but that may be starting to slow a little bit in light of the practical realities of actually getting these things out of the ground. Do you anticipate perhaps that completion of data centers—which I'd assume matters most for you—might actually have a little bit of a hiccup sometime in 2026–2027 after the initial surge? Is that realistic? And then longer term, what percent of sales do you think data centers could ultimately represent, either in two to three years or maybe even longer than that? Mark Hershey: On your first point, point well taken. It's very tough to crystal ball what that will look like in the future. There has been public opposition to data centers in different communities as well, and we've been monitoring that. We've got our eye on that. We haven't seen the demand wane—we mentioned the number of wins we've had—so I think the opportunity in the near term is real. And frankly, with some of our solutions—energy efficiency in particular, acoustical solutions, exterior solutions—we've got a value proposition for data center construction that is kind of community friendly, so to speak, and we're focused on that. But could we see that wane in the long term? We'll see. It's probably too early to call. On your second question—sizing—still difficult for us to do. We haven't set this out as a separate discrete vertical. It doesn't rise, in our view, to the level of, let's say, our health care or our retail vertical. But to my point earlier about having a diverse set of verticals, it's a good thing. There's a strong tailwind in it, and we're going to take advantage of it and pursue what we believe to be our fair share of that work while it's here. We reflect that positivity inside our office vertical as we present it. So it's a positive factor overall in our vertical mix. Stephen Kim: Just to clarify, could you comment on the replacement cycle on some of the products that go in, particularly the tiles? Would there be any reason to think that the replacement cycle might be quicker? Mark Hershey: Not that we've seen yet, and maybe it's too early to tell on that as well because we're seeing a lot of new demand right now with data centers and not a lot of major retrofit demand at this moment. As that time comes, we'll have a better sense for the cycle and if there's a comparable to, let's say, tenant improvement—is there a data center tenant improvement comparable? We just don't know that yet and haven't seen that yet. Operator: Our next question comes from Phil Ng with Jefferies. Please go ahead. Phil Ng: Hey, guys. Question for you, Mark. Some of these growth factors you've called out—whether it's transportation, particularly in AI/data centers—and then TempLock would be a little different approach, more smaller customer base. How should we think about pricing, margins, and mix broadly? Mark Hershey: We'll start with pricing. Pricing and AUV generally are favorable to our standard AUV. That's how you should think about it for TempLock, for DataZone tiles in data centers—that's certainly true. And as we mix up the portfolio generally, we're trying to drive the high end of our portfolio. As we ramp these solutions—and we're still in ramp mode; we're still in ramp mode for TempLock for sure, and we're still in ramp mode to a degree for data centers—we'll build and gain leverage over time. And I think it's fair to say that for this year we're still in that ramp mode for TempLock as we generate momentum and create demand overall. Phil Ng: About transportation? Mark Hershey: Transportation is very favorable because of the mix and because of the broad solution set that we see there. So you take the typical airport job like I was describing in my remarks. We see projects that are a blend of high-AUV Mineral Fiber, very high-AUV architectural solutions, and the power of our portfolio really comes into play there, and our margins reflect that as well on transportation projects. We do really well with that portfolio effect. Phil Ng: And to tie it all together, you guys are winning here. Who do you compete with? Is it your typical competitors on Mineral Fiber that have more of a commodity product? AS is probably a little more nuanced. Give us a sense for some of these larger complex projects—who are you competing with? It does feel like you have an advantage here, and even on the TempLock side as well. Mark Hershey: I appreciate the question. For that reason, two years ago we organized a specific transportation vertical–focused team, a very cross-functional team from multiple parts of our business. These projects are complex; they're multiyear. The wins that we announced this quarter we've been working on for several years to try to win them. You're dealing with different influencers, there's a regulatory dimension to this, there are different authorities involved. So it is a complex, sophisticated, long-term sale. I think one of the most compelling value propositions we bring relative to competition is the breadth. Because these airports have a wide array of needs—there's a wide array of spaces in them from lounges to concourses to the exterior facade, for that matter. And I think this is really where you see the power of our portfolio and the brand come into play. And it can be served through our distribution partners very reliably. So that's a powerful combination when you put it all together. Phil Ng: One last one for me for Chris. EBITDA for AS was a little weaker than we would have expected for Q1. It sounds like you're expecting that to improve nicely into Q2. You called out a few things that were temporary in nature—the $2 million tariffs. Were the investments in the business and M&A lumpier in nature in Q1 that will fade? Help us think through why things get better in Q2, and do you have enough levers for EBITDA to be up year over year in AS in Q2? Chris Calzaretta: Thanks for the question. A little bit of lumpiness is the way I would think about it. In terms of overall confidence, we absolutely believe we're going to not only grow but also expand margins on a full-year basis. Be thinking about some of the nonrecurring impacts that we saw in Q1 on the tariff front as largely the impact that will carry through for the full year. Other than that, we feel really good about the order intake, our backlogs as we mentioned, and are very confident in our ability to deliver the outlook that we have for the year. Operator: This concludes the question and answer session. I'll turn the call to Mark Hershey for closing remarks. Mark Hershey: Thank you, everybody, for joining the call today. Thank you for your interest in Armstrong, and we look forward to speaking with you soon. Operator: And this will conclude our call today. Thank you for joining. You may now disconnect.
Operator: Ladies and gentlemen, thank you for standing by. Welcome to the American Tower First Quarter 2026 Earnings Conference Call. As a reminder, today's conference call is being recorded. [Operator Instructions] I would now like to turn the call over to your host, Spencer Kurn, Senior Vice President of Investor Relations. Please go ahead. Spencer Kurn: Thank you, and good morning. Welcome to our First Quarter 2026 Earnings Call. I'm Spencer Kurn, Head of Investor Relations for American Tower. Joining me on the call today are Steve Vondran, our President and CEO; and Rod Smith, our Executive Vice President, CFO and Treasurer. Following our prepared remarks, we will open the call for your questions. Before we begin, I need to call your attention to our safe harbor statement. It says that some of our comments today may be forward looking. As such, they are subject to risks and uncertainties described in American Tower SEC filings, and results may differ materially. Additional information is available on our Investor Relations website. I'll now turn the call over to Steve. Steve? Steven Vondran: Thanks, Spencer. Good morning, everybody, and thanks for joining the call. I'm extremely pleased with our start to 2026. Our performance through the early part of the year, combined with favorable FX and straight line dynamics, led us to raise our full year outlook. The growth drivers shaping our industry continue to strengthen. Rising wireless data consumption, accelerating cloud adoption, rapidly expanding AI-driven workloads and future generational technology shifts, all point towards sustained investment and high-quality digital infrastructure. These trends are global, structural and long duration in nature, and they play directly to American Tower's core strengths. Over the past several years, we've taken decisive steps to ensure that we're optimally positioned for this next phase of growth. We strengthened our balance sheet, refined our portfolio, shifted our capital to our developed markets and aligned our revenue base with the highest quality carriers in each of our markets. As a result, I believe that American Tower is on its strongest strategic footing in at least a decade. Against that backdrop, I'd like to revisit the 3 strategic priorities for 2026 that I introduced last quarter, which are summarized on Slide 5 of today's presentation. First, driving durable revenue growth, including approximately 4% organic tenant billings growth across our global tower portfolio, but adjusting for onetime disrelated impacts and double-digit growth from our data center business. Our fundamental growth drivers are compounding. Mobile data consumption is growing at a rapid pace, supported by increasing smartphone penetration, continued 5G adoption, fixed wireless access and expanding enterprise use cases. In the U.S., industry analysts project that mobile data traffic will double over the next 5 years, requiring a commensurate increase in network capacity. Notably, those projections don't fully capture the potential incremental upside from the transition to 6G or AI-enabled applications. While still early, the engineering principles guiding 6G point toward denser networks, more distributed compute and materially higher throughput requirements, each of which should translate into increased activity across our tower portfolio. At the same time, AI investment is exploding. History suggests that technological revolutions tend to expand well beyond our initial use cases, and we expect that new AI applications are going to place meaningfully greater demands on wireless networks, both in terms of throughput and complexity. All these trends are inherently supportive macro towers. Terrestrial wireless networks are the only scalable solution capable of meeting this demand, and towers remain the most efficient, economical and flexible means of delivering network capacity, advantages that we believe will only become more pronounced over time. These demand dynamics extend across our international footprint as well. In our European markets, mobile data traffic is expected to more than double by the end of the decade, which is expected to drive significant amendment and colocation activity. There are emerging markets, mobile data traffic is expected to nearly triple by the end of the decade, providing a long runway for growth as these less mature markets develop. Over the long term, we continue to expect our international markets, and our emerging markets in particular, to grow faster than the U.S. These same sector tailwinds will translate into accelerating momentum at CoreSite. Demand is scaling rapidly on top of an already strong foundation, with sustained growth in hybrid and multi-cloud deployments and even sharper ramp in AI-driven workloads, including inferencing. Importantly, this quarter marked a clear inflection in interconnection activity, enhancing both the profitability of the platform and the long-term durability of customer relationships. CoreSite continues to stand apart as a uniquely differentiated digital infrastructure platform. Positioning its convergence of network connectivity, cloud on-ramps and enterprise ecosystems, CoreSite drives resilient leasing demand while capturing a high-margin interconnection revenue stream. This powerful combination delivers structurally higher returns and positions the business to outperform traditional single-tenant hyperscale data center models, especially as demand for interconnected AI-enabled infrastructure continues to grow. After more than 4 years leading CoreSite, my conviction on the platform is stronger than ever. The business has meaningfully exceeded our expectations, and we're increasingly enthusiastic about accelerating CoreSite's expansion as a core driver of long-term value within our portfolio. Our second strategic priority is driving operational efficiency. Operational excellence has long been a core strength of American Tower, and we continue to build on that foundation. In the first quarter, we made progress on reducing direct tower costs, particularly in areas such as land experience, maintenance, sourcing and internal technology platforms, and we remain confident in our ability to deliver 200 to 300 basis points of cash, adjusted EBITDA margin expansion in our tower business by 2030. In parallel, we're evaluating how AI can further accelerate efficiency gains across the organization. We believe this opportunity represents meaningful upside in future years. Our third strategic priority is disciplined capital allocation. We remain in a strong financial position with significant flexibility. During the quarter, we continue to prioritize growth capital toward our [indiscernible] return opportunities in our developed tower markets and at CoreSite, while also allocating capital towards share repurchases. Our capital allocation framework remains unchanged. After funding the dividend, we'll continue to evaluate a full range of options, including M&A, opportunistic share repurchases and further deleveraging, guided by a consistent mandate to generate durable cash flow growth and attractive long-term returns on invested capital. In summary, our first quarter results reflect a company that, throughout heightened industry volatility, has emerged stronger, more focused and better positioned for the future. The long-term opportunities ahead are extraordinary, and few companies are as well positioned as American Tower to support and benefit from the next wave of digital infrastructure investment. I'd like to thank our employees around the world for their execution and commitment, and our customers and shareholders for their continued trust. With that, I'll turn the call over to Rod to walk through the financial results and outlook in more detail. Rod? Rodney Smith: Thanks, Steve, and thank you all for joining the call. As Steve mentioned, we are off to a great start to the year, and our strong performance, coupled with FX and straight-line tailwinds, have led us to raise our full year outlook. I'll start by reviewing our first quarter results, and then I will touch on our revised full year outlook. Slide 7 shows a snapshot of our first quarter highlights. Consolidated property revenue grew approximately 3% year-over-year when excluding noncash straight line revenue and FX impacts. Normalized for the impact of onetime DISH churn, property revenue grew approximately 5% on a cash FX-neutral basis. Our growth was primarily driven by organic tenant billings growth of approximately 2% or 4% normalized for the impact of onetime DISH churn and complemented by data center cash revenue growth of approximately 17%. Adjusted EBITDA grew 1% when excluding net straight line and FX impacts. Normalized for the impact of onetime DISH churn, adjusted EBITDA grew approximately 4% on a cash FX-neutral basis. Cash adjusted EBITDA margins declined approximately 110 basis points year-over-year, primarily due to DISH-related churn, SG&A timing and higher fuel prices in Africa. Attributable AFFO per share declined approximately 1% when excluding FX impacts. Normalized for the impact of one-time DISH churn and excluding the impact of refinancing costs, attributable AFFO per share grew approximately 4% on an FX-neutral basis. Moving to Q1 organic growth and data center growth on Slide 8. We delivered consolidated organic tenant billings growth of approximately 2% or approximately 4% when excluding DISH churn. Across our segments, organic growth was in line with the expectations we laid out earlier this year, driven by solid demand across our global portfolio. In the U.S. and Canada, organic growth was approximately 1% and approximately 5% when excluding DISH churn. In Africa and APAC, organic growth was approximately 11%. As a reminder, churn is expected to be back half weighted, resulting in approximately 10% organic growth in the first half of the year and approximately 7% in the second half of the year. In Europe, organic growth was approximately 4%. And in Latin America, organic growth declined approximately 2%, primarily driven by elevated churn in Brazil. As discussed last quarter, the higher churn in 2026 is driven by a combination of delayed churn initially expected in 2025 and accelerated churn initially expected in 2027. Overall, we are encouraged by the prospects of an earlier-than-expected market repair in Brazil and the forthcoming acceleration in organic growth in 2027. Finally, on the right side of the slide, organic growth in towers was complemented by data center property revenue growth of approximately 17% when excluding noncash straight-line revenue. This double-digit growth was driven by robust demand for hybrid and multi-cloud installations, accelerating AI-related use cases and an inflection in interconnection activity. We believe this inflection marks the beginning of a durable long-term trend that reinforces CoreSite's value proposition while compounding its competitive moat over time. Now let's turn to our revised full year outlook. We are raising guidance across all of our key consolidated financial metrics, primarily due to incremental FX and straight line tailwinds. Starting with property revenue outlook on Slide 9. We are raising our outlook by approximately $145 million at the midpoint, representing a 1% increase to our prior outlook. Our revised outlook now implies approximately 3% year-over-year growth when excluding noncash straight line revenue and FX impacts. Normalized for the impact of onetime DISH-related churn, our outlook implies approximately 5% growth on a cash FX-neutral basis. The entries to outlook was driven by approximately $110 million of FX tailwinds and approximately $35 million of accelerated noncash straight line revenue in Latin America related to Oi. We are reiterating organic growth assumptions across all regions and continue to expect organic tenant billings growth of approximately 1% or approximately 4% when excluding DISH churn and data center growth of approximately 13% year-over-year. Moving to adjusted EBITDA on Slide 10. We are raising our adjusted EBITDA outlook by approximately $105 million at the midpoint, representing a 1% increase to our prior outlook. Our revised outlook now implies approximately 2% growth year-over-year, excluding noncash net straight line and FX impacts. Normalized for the onetime impact of DISH-related churn, our outlook for adjusted EBITDA implies approximately 5% growth on a cash FX-neutral basis. Turning to AFFO on Slide 11. We are raising our attributable AFFO outlook by $0.12 per share, representing a 1% increase to our prior outlook. Our revised outlook now implies growth of approximately 2% year-over-year. Normalized for the impact of onetime DISH-related churn and excluding the impact of refinancing costs, our outlook for attributable AFFO per share growth implies approximately 5% growth on an FX-neutral basis. We expect attributable AFFO per share growth on an FX-neutral basis to be faster in the back half of the year than the front half, primarily due to the timing of maintenance capital and cash taxes compared to the prior year periods. As a reminder, we continue to expect our services business growth and debt refinancings to each represent an approximately 100 basis point headwind to attributable AFFO per share growth this year. We continue to believe that we are well positioned to deliver our goal of industry-leading attributable AFFO per share growth and compelling total shareholder returns over the long term. Turning to capital allocation and our balance sheet on Slide 12, we remain disciplined stewards of capital. Our investment-grade balance sheet is well positioned for a variety of macroeconomic scenarios. As Steve mentioned, over the past few years, we have taken deliberate action to reduce risk in our business. As a result, today, we have the lowest leverage and the highest credit rating across our peer group, positioning us with exceptional financial flexibility going forward. Our capital allocation framework remains focused on maintaining financial flexibility, protecting our investment-grade credit profile and investing prudently to enhance long-term shareholder value. In 2026, our growth capital plan remains consistent with our prior outlook. We continue to expect to spend approximately 85% of our discretionary capital within our developed markets platforms, including over $700 million in success-based investments in our data center portfolio to replenish elevated levels of capacity, purchases of land beneath our tower sites and continued acceleration in European new builds, with over 700 new sites planned. Additionally, we repurchased approximately $184 million of American Tower stock during the first quarter plus an additional $19 million through April 21, bringing our total share repurchases, since we started buying back stock in Q4, to over $565 million. Turning to Slide 13 and in closing, we are off to a strong start in 2026, reflecting the fundamental strength and durability of our business model. Continued growth in mobile data consumption, together with strong demand for our interconnection-rich data center platform, supports a long and attractive runway of growth for American Tower. With our best-in-class portfolio of towers and data centers, combined with a strong balance sheet, we are well positioned to capture these opportunities and deliver on our objective of industry-leading attributable AFFO per share growth. And with that, operator, we can open the line for questions. Operator: [Operator Instructions] and wait for your name to be announced. Our first question comes from the line of Rick Prentiss of Raymond James & Associates. Ric Prentiss: A couple of questions. First, the Spectrum deal between EchoStar DISH and AT&T seems to be going very slowly. It feels to us like there's some issues in Washington. We're hearing that maybe one of the request is that escrow be set up with all the litigation and negotiation between the tower industry and EchoStar DISH. Can you update us on -- is that maybe one of the paths you're taking? And any other updates on what could be interesting process. Steven Vondran: Yes, Rick, this is Steve. We really can't comment on ongoing litigation or anything that's kind of going on in that space today. So we don't really have any updates for you guys on DISH. I'll just reiterate, we believe our contract is enforceable. We're continuing to defend it and core -- the litigation public. And you guys have access to that docket to see what's happening on that front. And we've completely derisked our earnings and our guidance by taking DISH out of our numbers. So anything that happened in that space is incremental upside to the guidance we've put out there. So at this time, there's really not much more we can say about that. Ric Prentiss: Okay. We'll keep monitoring and checking our Washington sources as well. Second question, Rod, you mentioned 700 new builds in Europe, 85% of your CapEx has been developed areas. What's -- because obviously, 9%, I think, inorganic growth in Europe. Walk us through what's happening there in Europe? What kind of -- what's the model there? There's been concern in the U.S. that when we see new builds, some of them have been uneconomic that others have done, not you guys. But walk us through what the opportunity is in Europe, what the contracts kind of look like and what the return profile might be there? Rodney Smith: Yes. I think, Rick, you've heard us say in the past that the European market is outperforming the original business case that we underwrote the Telefonica deal with. So we've been very pleased with the results. We've had upper single-digit growth rates across the region for a couple of years. That has moderated down into the mid-single-digit growth rate, but it's still a very compelling growth rate for such a high-quality set of economies. With the Telefonica deal, you may recall, we also announced at that time that we had a contract to build 3,000 sites of Telefonica over the next 10 years, starting at the beginning of that acquisition, that contract. So we've been executing on that. We've added a few additional build-to-suits with other carriers across the region. So building something in that market, we think, is a pretty compelling thing to do. And of course, the return profile is -- we expect it to be above our weighted average cost of capital in that region by a couple of hundred basis points over time. But the secular trends in Europe are very similar to the U.S., which is technology evolution, rolling out 5G networks, eventually, they'll push into 6G networks. There are new applications coming just like there will be in the U.S. that will drive mobile data consumption growth across the region. So again, we are in some of the greatest economies, not only in Europe but also in the world there with very compelling assets supporting some of the top-tier customers, including Telefonica, in a big way. So continuing to build sites and reinvesting some of the cash flow that we derive out of the Europe market back into the market as build-to-suits, we think is a really compelling thing to do to drive total shareholder return. So the market is solid, like any region across the world that we're in. We will continue to watch the outlook and the growth rates and the political trends, the regulatory trends, the market backdrop, we'll continue to watch that and be prudent every step of the way as we go forward. But at the moment, the market is performing very well and above our original expectations. So we're happy with it. Steven Vondran: Rick, I would just add that we are also winning some things that are outside the contract on very good terms because of our operational excellence. In Europe, a lot of the sites being built are difficult to build. And when they're difficult to build, the carriers value a good operator who can bring things online quickly and get through that kind of regulatory scenario. So we're winning business at healthy returns for us because of our operational excellence there. And again, in the U.S., as you noted, we haven't been building actively. A lot of those sites have been built in areas that aren't as hard to build. And we think that if we get back to where we're building things in hard-to-build areas, we've got advantage back in the U.S. as well. So we're excited about the prospect of building more sites everywhere in our developed markets. Ric Prentiss: And the return hurdles would be a couple of hundred basis points? Or what were you saying about it because obviously, we've seen some others that have stressed the thoughts of what you should build or not build. Rodney Smith: I mean I would say, Rick, from a return hurdle perspective, I don't want to get into the details here, but certainly, being above our weighted average cost of capital by a couple of hundred basis points over a reasonable amount of time, and I'm not going to get into the details in terms of the terms, that really is what we would expect based on just the fundamentals of the market and the investment that we're making. But with that said, longer term, can it be well above that? Absolutely very similar to what we see in the U.S., where we will build an asset -- we don't build a lot at the moment. We have in the past. You may start out at or even slightly below your weighted average cost of capital. In the near term, you get up to that weighted average cost of capital and get above that, which might be in the upper single-digit growth rate. But over time, with compounding results on the escalator and the new business you can get up into the teens in the U.S., we would expect certainly that direction for Europe new builds over the long term. Steven Vondran: Yes. Just to be clear, Rick, I didn't build stuff in bad economics previously. We're not going to start doing that. We're going to build things that make sense over time. Ric Prentiss: Great. Makes sense. We like that third pillar of capital allocation discipline. Operator: Our next question comes from the line of Michael Rollins of Citi. Michael Rollins: Steve, you mentioned that M&A is a possible option for capital allocation. I'm curious if you could describe how you're looking at those opportunities today, whether that's similarly or differently than the way you may have looked at this in the past. And if you could specifically comment on the possibilities of AMT participating in either a public to public or a public to private opportunities in the United States. And then, Rod, if I could just throw in one other question. So on Slide 11, that shows the normalized AFFO per share growth plus some of the specific factors that are weighing on 2026. How should this inform investors after 2026, what the right range of annual AFFO per share expectation should be? Steven Vondran: Sure, Mike. So I'll start with your question on M&A. We have a very disciplined capital allocation formula that we followed for a long time here, and we're not changing the way we think about that. We look at everything through the lens of how do we create the best long-term shareholder value at the best risk-adjusted rates of return that we can get. And so we do some pretty detailed financial modelings on everything that we look at in that space. And as you can imagine, we have an M&A team, they like to buy stuff. So we look at everything. There's not a process out there that we haven't had our toes dip in the water to see what that looks like. And in the past few years, we haven't found compelling opportunities to do that. We're hopeful as we go forward that there are things that would make sense. But for any M&A scenario, you've got to have a willing counterparty, a constructive regulatory environment and the economics have to make sense. And so we'll continue to evaluate all the opportunities in front of us. And that's whether it's in the U.S., in another developed market, in the data center space. Whatever comes available, we'll look at those M&A opportunities. And if we think that we can create shareholder value over time with those, we'll participate. But we're not going to be reactive to specific market trends that are out there. We're not -- we have enough scale in our business today. There's no sort of strategic imperative to overpay for anything. So we're not going to do anything that doesn't make sense economically. But we are hopeful that we're seeing a more active environment and we're hopeful that we can participate in that in some manner, but it may not work out, and it may. We'll just have to see what fits in with our disciplined capital allocation and what's going to create the best long-term shareholder value for you guys. Rodney Smith: Michael, thanks for joining the call. On your AFFO question, on Slide 11, we're showing a revised outlook that's about $10.99. That reflects a 2% reported growth rate year-over-year. Embedded within that is tailwinds of about 200 basis points from FX. It also has about 100 basis points of headwind for net interest, and within that includes 400 basis points of headwind due to the DISH churn. So there's a few pieces in there, a few moving pieces, but I think most of those notes are highlighted right on the slide there. So I would encourage everyone to kind of piece that together. This outlook for 2026 is in line with our longer-term view for AFFO per share growth, which is up in the mid-single digits to better than mid-single digits before you account for the impacts of FX and interest rates, whether those are tailwinds or headwinds, quite frankly. So we will get through the event-driven churn from DISH. And again, that's 400 basis points of churn. So that 200 basis points would go up to about 6% growth just adjusted for the impacts of churn. You take off the 200 basis points of tailwind from FX, that drops you back down to the 4% range. You remove the 1% headwind that we're picking up from interest rates and you get to 5%. So we're right in the -- maybe the lower end of that longer-term range, which is mid-single digits to upper single digit AFFO and AFFO per share growth rate over time. And we really do feel as though we've moved through a number of event-driven headwinds not only in the industry for us specifically, and we are moving into a time where we will benefit from the secular technology trends within the sector, that continuation of mobile data capital investment from the carriers, which we still see very stable, strong in that $30 billion to $35 billion range. The carriers continue to roll out their 5G networks kind of at the tail end of that. They'll move into filling in, densifying, increasing capacity across the network. That will all be good for us. New applications will come down the pike. And some will be driven by AI. And those should all fuel that secular trend of growth, which should be very constructive in terms of supporting us and our business to that mid- to upper single-digit AFFO per share growth. And in addition to all of that, Steve and I and the entire management team continue to stay very focused on cost management, direct costs, SG&A, smart capital allocation, very strong balance sheet management to make sure that all those pieces as well support and contribute to achieving our ambition of mid- to upper single-digit AFFO and AFFO per share growth. Operator: Our next question comes from the line of Eric Luebchow of Wells Fargo. Eric Luebchow: Great. Appreciate it. I just wanted to touch on the CoreSite business. So one of your peers was talking about doing some early exploration on the mobile edge. And given your ownership of CoreSite and this theme that you've been looking at for several years, curious if there's any update you could provide on whether you think there's a real market that could develop there in the next couple of years? And then separately on CoreSite, just curious, given it's a relatively small part of the business today, and data center multiples seem to be very high, demand seems to be off the charts. So do you think longer term, CoreSite makes sense within the American Tower family? Or could there be something strategic that you would do with it to potentially maximize value? Steven Vondran: Yes, thanks for the question. We're really encouraged to hear other people talking about the Edge. It's something that we believe partially in for a period of time now. And we do continue to have projects ongoing. We launched our data center in Raleigh as a little bit of a playground for people to come in and experiment with Edge. We are looking at incremental opportunities in that space to continue to work with ecosystem partners to develop the Edge. And what I'm most excited about is our wireless carriers are now talking about the Edge. They're engaging in discussions with chip makers and some of the cloud companies. So Edge is absolutely something that we think is going to continue to grow. We think it's going to be a material opportunity for us in the future. Timing, I'm not going to predict timing again because I was a little bit off my first time predicting it. But we do see a lot of momentum taking shape in that space. So we're very excited about the opportunities. And we think that we're positioned better than anyone else to provide the basic infrastructure that you need to support Edge in various forms that it may evolve, whether it's AI RAN, whether it's smaller regional data centers that are supporting more inferencing, which is what we're hearing is one of the use cases. We're in a great place to do that when you combine that interconnection ecosystem at CoreSite with our distributed land footprint and our abilities to service massively distributed real estate. So we're excited about the Edge opportunity. We continue to work through it. I don't have a projection for you yet because we're still in the early stages of how this is going to develop. But the momentum is there and all the people that are talking about it really reinforces our original thesis on that. And that's really why CoreSite is a strategically important asset for us. We do think it's a big part of our future, and we think that we're going to realize that synergy between towers and data centers. And in the meantime, we're going to continue to grow that company. It's performing well beyond our expectations when we underwrote that acquisition. And the tailwinds that are underpinning the growth in CoreSite are durable. And AI is one them, but it's not the only tailwind there. This highly interconnected ecosystem that we have there is different from most of the "data center" companies out there. I don't even like calling it a data center, to be honest, because it's really an interconnection hub. People come to us to connect to other people. They put their computer in a CoreSite facility because we give them access to other enterprises, the cloud on-ramps, and now to inferencing instances. So that kind of -- that's a nerve center for this rapidly developing kind of digital ecosystem out there, and it's going to continue to grow. So we're very excited about that as a part of our company. I do think it has a long-term place in our portfolio. And we think that the Edge will kind of finalize the synergies between the 2. But in the meantime, we're going to focus on growing our tower business, which has great tailwinds, as Rod mentioned, and we're going to focus on growing CoreSite and being that interconnection provider of choice as this ecosystem continues to develop. Operator: Our next question comes from the line of Jim Schneider of Goldman Sachs. James Schneider: In light of what you just talked about in terms of the -- some of the attractive growth prospects for emerging markets and overseas developed markets and maybe given some of the recent headwinds you've seen in terms of churn in the U.S., can you maybe kind of give us your latest thoughts about the relative attractiveness of M&A prospects across Europe, U.S. and emerging markets? Just wanted -- an impact, you talked about the U.S. being probably your preference in terms of an any potential skill acquisition. I'm wondering if you still see those pluses and minuses in the same way as you did before? Steven Vondran: Yes. Thanks, Jim. The U.S. continues to be our flagship market, and we love the opportunity to add scale here, again, subject to the right terms and conditions and economics and things like that. So yes, the U.S. will probably always be our primary focus, if there are opportunities there. There haven't been that many recently that met all of our criteria. Europe is a market that we continue to look at. And we've talked in the past about how patient we were to get into that market because of the terms and conditions that were required by us to show long-term growth for our shareholders. We're still not seeing a ton of opportunities there for incremental M&A that meet those criteria. There are things that are happening in Europe, but they're not things that we find long-term attractive at this point. So we'll keep looking at it. Like I said before, we have M&A people, they're looking at everything. And if we found something there, that would be on the table. In the emerging markets, and I just want to reiterate this. While those markets are a key component of our portfolio and they're going to give us outsized growth over time, the strategic decision that we made 2 years ago has not changed. And that is, we think they should be a smaller piece of our overall portfolio than they've been in the past, and we will continue to allocate capital toward developed markets away from those markets, not because we don't believe the growth. We do believe in the growth. They are doing well. They are incremental to our U.S. growth, and we think that's their function in the portfolio. But if they become too large of a part of the portfolio when there are macroeconomic shocks, it just puts a little bit too much volatility into the earnings. So we're not going to change our strategic direction just because some of the short-term dynamics have changed. We still think the best opportunity to create long-term shareholder value is to continue to invest in the U.S. and other developed markets. And we'll continue to see the secular tailwinds driving growth in that business for a long period of time. And then the emerging markets are a complement to that. And I'm so proud of our teams. They've managed through a lot of adversity in there. They're the best operators on both of the continents that we're operating in there. They're getting some great sales results in Africa. The Latin America team has worked through this kind of reset repair, and they're on a great trajectory to get back to growth for us. So I'm very excited about what the teams have been able to do there, but we're not going to change our strategic direction in terms of how we're investing. Operator: Our next question comes from the line of Nick Del Deo of MoffettNathanson. Nicholas Del Deo: I guess first, to build on the domestic new build activity commentary you provided in response to Rick's question earlier, it appears there is this comment that the carriers might be more interested in working with our large public tower company partners to undertake more new construction opportunities. I was wondering if you've had any similar discussions and if you think they might amount to anything? And then second, Steve, you talked about the importance of interconnection a moment ago. Cloud on-ramps have always been a very important part of that, strengthen those ecosystems. Can you talk about any steps you might be taking to proactively land neo cloud on-ramps or other deployments like that, that may be magnetic for AI workloads over the coming years? Steven Vondran: Sure. So when it comes to the kind of the build-to-suit market in the U.S., we're always talking to our customers about that. We have been for years even when the competitive environment was tough. It's a core competency that we've always had and we used to be one of the largest builders of towers in the U.S. So we think that there's an opportunity there as people become more rational on the economics. There's nothing to announce at this point. I will tell you that we're -- my sales team has always been there pitching those, and we're hopeful something comes through. And if and when it does, we'll let you guys know. But until there's -- until a deal is done, it's not done. So I wouldn't prematurely talk about that. When it comes to the interconnection on ramps, one of the things that was a core strength in CoreSite before we bought them, and we think it's gotten even more advanced since we've been working with them, is the ability to curate an ecosystem. And it's not just about the cloud on ramps. It's about making sure that you balance networks, enterprises and those cloud providers. And now you've got this kind of fourth category that you mentioned, which is inferencing hubs, and you've got other ecosystem players like neo cloud that are providing kind of services into that. And so what the team is very skilled at doing and they continue to do is making sure that we're creating an ecosystem where everybody wants to be there. Our problem is not demand. All of those players want to come into our facilities. And the reason that we attract cloud on ramps, the reason we attract inferencing is because we're bringing their customers to them. And we're providing space for their customers to house their data and interconnect natively to those cloud on ramps and those inferencing hubs. And so for us, it's really about keeping that balance and not getting too excited about a trend and not just trying to sell out a building a second that goes online to the highest bidder. It's about curating an ecosystem that gives us this long-term competitive moat around our business. And because of that, the vast majority of our revenue is with providers who are interconnected to 5 or more other people. Now that may have hundreds of interconnections, but 5 or more other people, that makes that whole ecosystem very sticky. It means that if there are downturns and -- in that kind of sector over time, that will be much more inflated than anybody else is for that because of the way we've carried the ecosystem. And so the team is very focused on continuing to build that. The inferencing hubs and the neo clouds are absolutely part of that ecosystem, and they're knocking on our doors. They want to be there. And our team is able to be selective and curate that right customer mix. And I'm confident that we will continue to be a leading interconnection provider and that we will be the provider of choice for all of those use cases over time. Rodney Smith: And Nick, I may add just a quick comment on our services business to complement Steve's answer on the U.S. new business. And just to really remind folks that our services business has been very active in the last several years. We had record-setting levels of service revenue last year at the $340 million range. Over the last several years, we've expanded our end-to-end solutions through acquisitions, owning, permitting and even construction management. We've got over 40 -- almost 43,000 sites across the -- across the U.S. with a very distributed services business and hundreds of people that support that business. And this year, we're going to have our third highest revenue year ever, so that business is still very robust. And there's a lot of capability there that directly translate into our ability to effectively and efficiently do large-scale bills for carriers if and when we get that opportunity. So we're really well positioned from an operational standpoint to move quickly on any kind of an opportunity like that. Steven Vondran: A good point, Rod. I hope our customers are listening to that. Rodney Smith: Yes. Operator: Our next question comes from the line of Madison Rezaei of Bernstein. Madison Rezaei: I just wanted to build on the prior M&A question here with a slightly different angle. Obviously not going to ask you to comment on any of the specifics, but how do you think about private and/or sort of consolidated portfolios in the U.S. shifting any competitive dynamics, if at all? Steven Vondran: I don't think it actually changes the competitive dynamic. There have been a number of privately held scaled tower portfolios in the U.S. for years. And so we haven't seen that affect the competitive dynamic at all in the tower space. It doesn't change the way we operate, hasn't changed our results or our ability to compete. So we don't think that having more private tower companies affects that. I think what it does reflect is that there's a disconnect, and there has been for years, and the multiples that private players will value towers out versus the public markets. And we really think the reason that they value them at a higher multiple and have for a period of time is they're taking a long-term view. They see past some of the short-term noise that's out there. And they see these long-term demand drivers that encourage us about our business. They see that mobile data growth is going to double over the next 5 years in the U.S., and that's going to require more network investment, which translates into new business for towers. They realize that AI is an incremental use case that's not even factored into those projections that could be a catalyst for even more growth and could be pretty substantial growth, depending on how that evolves over time. They're looking at the fact that 6G is just around the corner and that the 6G frequencies are likely to be in the 6 to 7 gigahertz range, which means much more [ DISH ] networks are going to be required. So when I look at kind of what's swirling around out there in the ether, about tower companies in our private world, it's encouraging to me to see that people are seeing the true value of towers and the fact that this is a growing long-term business that will be the backbone of digital infrastructure going forward. And so when I hear the rumors and see what's out there, to me, that just shows that the business model is still the best business model out there. It's still a place to create a lot of long-term value for our shareholders. It's the right place for us to be. Operator: Our next question comes from the line of Cameron McVeigh of Morgan Stanley. Cameron McVeigh: I just wanted to actually follow up on CoreSite. And I'm curious how you're thinking about expanding capacity at CoreSite versus reinvesting in retrofitting some of the current sites. And has your approach to expanding CoreSite capacity changed at all given some of the current supply-demand imbalance dynamics we hear about with regard to power and tight supply chains? Steven Vondran: Sure. A few years ago, we had to start thinking a lot longer term about both land acquisition, power acquisition and actually even ordering the components that go into it. We had some supply chain disruption as a result of COVID. And because of that, the team started taking a longer-term view. And that's put us in a really good position for where we are today. And we've had more construction over the past couple of years than at any time in CoreSite history. Because of the record sales we've had in the past few years, we've also really ramped up our capabilities to build more. So yes, we're being more aggressive. We're out buying more land, and we are looking at some new market entries. Nothing that we want to announce yet because it's premature to do that until you have a good idea about when you're going to break ground on it. But we think there are opportunities there. We've also looked at retrofitting some buildings. We have retrofitted some computer rooms. Sometimes that makes sense and sometimes it doesn't. But with higher density applications coming in, if you have the available power there, it can make sense to retrofit a computer room and take up the density levels in it. So that is something that we've looked at. We have done a little bit of that in the past. And we are designing our new facilities with more flexibility in the future to go higher density with multiple different cooling options in it as well. So we have altered the way that we build new sites and the way that we're looking for it. We've also looked at some existing buildings that have available power. And so you've seen us buy a couple of small ones in that space, and that's something that could be a strategy for us going forward to accelerate some of the development that we'd like to do. But we feel very good about the pipeline we have just kind of organically to build within our existing footprint, and we think there's some opportunities [indiscernible] the market. So overall, again, that business is performing so well. It's some of the highest returns that we can get on invested capital today, and it's continuing to grow rapidly. So we're excited about it, and we're going to continue to invest in it. Rodney Smith: Cameron, I would just add to Steve's comments here as he talks about our investment in land and additional power across our existing campuses, just to put a little bit finer detail on that if the -- last year, we had about 287, 280 megawatts of development held for development, and we've increased that by 200 megawatts. So that's where we're negotiating with power companies, securing that power in certain places, buying land and banking that land for additional development where we can expand campuses. So we are really well positioned to continue to lean into the demand across our footprint. Operator: Our next question comes from the line of Brendan Lynch of Barclays. Brendan Lynch: Rod, I appreciate all the color on the long-term AFFO per share growth outlook. You also mentioned an earlier return to normal in Brazil. Can you give us some color on what that actually looks like in terms of potential coloc and amendment growth and cancellations? Rodney Smith: Yes, absolutely. So I think everyone is familiar with where we are in Latin America. We are experiencing a higher level of churn this year. It's around 8% contribution to our organic tenant billings growth. That -- I'll highlight a couple of things, and I think I said this in my prepared remarks, but probably worth highlighting. That includes delaying some churn from '25 into '26 and also accelerating some churn, particularly on the oil side from '27 into '26. So we do think that the market there is peaking in terms of the churn that we would expect. We also have in -- a couple of hundred basis points of new business across the region. And that's a function of consolidation needing some of the markets that we're in across Latin America have been fragmented, including Brazil in the past, which we've seen the consolidation that we've worked through there. So with all that kind of put together, you end up with negative organic tenant billings growth for 2026. But because we're accelerating some of the churn from '27 into '26 and we've gotten through some of this market repair and consolidation across the region. And most importantly, in Brazil itself, we do expect to get back to accelerated organic tenant billings growth into '27. So moving from a negative OTBG into positive territory in the lower single digit to '27 and returning to kind of the expectation of normalized growth by the time we get out to '28 and beyond. But we do think that it is the beginning seeing much better results across Latin America as there are a rational number of carriers, 3 solid well-capitalized carriers in Brazil, and going forward, kind of the absence of this consolidation churn really sets us up well to get back to normal organic tenant billings growth and a normal new business contribution kind of across that region to organic tenant billings growth. Steven Vondran: Yes. I would just highlight that the 3 carriers in Brazil have all talked about investing more in their networks. We're absolutely seeing an increase in demand across the ecosystem there. So we're seeing the acceleration in new business applications in Brazil. So we're seeing that market repair take place, and we're excited about the prospect of Latin America being accretive to the U.S. growth rates over time, and we believe that we're on track to see that start happening, as Rod said, '28 and beyond. Rodney Smith: Yes. And maybe I would just highlight right there. I mean, Steve talked about the Latin America being accretive to our overall AFFO per share growth rates. I'll just take a step back and remind everyone of our -- the bits and pieces of our longer-term AFFO per share growth rate expectation, which is solid mid-single-digit growth in the U.S. market, probably better than that across the Europe market. That would be driven by a mid-single-digit organic tenant billings growth in the U.S., probably slightly higher in Europe, complemented by good cost controls in managing the expenses down the line. And then CoreSite double-digit growth, that's accretive to those growth rates. You look at the emerging markets, Africa is growing double digits. That's very accretive to the overall growth rates. Returning Latin America to normalized growth will also be accretive there. And that's how you get down to an AFFO and AFFO per share growth rate that will be in the mid-single digits or upper single digits. And of course, complemented by a strong balance buys, very smart capital allocation, whether it is driving the dividend, which I think you all know, we've got 5% growth for Q1 on the dividend. We expect that growth rate to be in line on average with our AFFO per share growth rate. So again, a mid-single-digit growth rate on the dividend, investing $1.5 billion to $2 billion in CapEx. And then looking at accretive M&A from time to time, where we see good opportunities and also balancing paying down debt, reducing our overall leverage further than the 4.9x that we ended this last quarter and also buying back shares. And based on my prepared remarks, I think you all know we bought back about $184 million worth of shares in Q1. That is in addition to what we did in Q4, which you put the 2 together, you're up well over $560 million devoted towards share buybacks. And that helps support that mid- to upper mid-single-digit growth rate on AFFO and AFFO per share going forward. Brendan Lynch: Great. Very helpful. Maybe just one other kind of quick one on the data centers. There are some press reports out there about DC construction being delayed in North Carolina. Seems there's a kind of growing wave of [ nimbyism ] across the country. Can you just talk about how you're kind of handling some of those restrictions? Steven Vondran: Yes. I mean unfortunately, we are seeing an increase in that. And for me, it's very reminiscent of my early days in tower. And one of the things that I did as a [ baby ] lawyer was permitting towers. And so it's a very similar phenomenon to that, and we're attacking it the same way. This is one of those synergies that may not be as apparent between the 2 companies, but we're using our government affairs team from American Tower our and our zoning and permitting team from American Tower to help the CoreSite team deal with that and also to help the data center coalition who's also attacking that from an industry perspective. And so we think we have a long track record of being able to work with communities and finding ways to address those concerns. And we're very confident that our team is able to tackle that as well as anybody in the industry can. But it is certainly something that's taking a little bit of airtime in the news and on social media, and it's something we're very aware of. At this point, it hasn't been an issue for us where we've had the scrap any projects or having significant delays. And so we believe we can navigate through that, but we're going to continue to work with the industry partners and our internal teams to make sure that it doesn't get worse. Operator: Our next question comes from the line of David Barden of New Street Research. David Barden: I guess I'll just ask it, right? What does it mean if SBA gets taken private? And how important is the multiple that they get taken private at? And if it's low, does that mean maybe you stop buying back stock; if it's high, do you start buying back more aggressively? Or do you start thinking about maybe taking parts of your portfolio and taking those private or selling them to private entities? I just -- I think it would be great to have you guys as the biggest tower company in the United States kind of just weigh in on what that means for everybody. And then I guess the second is, last week, SpaceX had a 3-day kind of diligence meeting, I guess the buy-side guys, sell-side guys are there. We're not investment banks, so we don't get involved in that. But some people are walking away from that meeting and the road show that's beginning, and thinking that one of the growth vectors to support a multitrillion dollar valuation is disrupting the terrestrial wireless market. And so give us your perspectives on both of those would be super helpful. Steven Vondran: Sure. On the SBA question, we're not going to comment on the rumors that are out there and any of the valuations that may be rumored to be out there. That's going to be what it's going to be. And we don't run our business based on what other people are doing with their business. When we think about our business and how we create the most long-term shareholder value, we're always looking at portfolio optimization. And the dislocation between public and private multiples is not something that's new. It's something that's been out there before. And you've seen us take decisive action when we think that we can create more value by selling something than by holding it. And we're always evaluating all the different opportunities in the portfolio, and we'll continue to do that. And like I said, we're going to figure out what creates the most long-term shareholder value. We believe that we have a lot of secular tailwinds driving growth in this industry. We believe that our portfolio is going to continue to grow and that we can deliver that mid- to high single-digit AFFO per share growth with our combined portfolio of our -- kind of the whole company here over time, and we believe that, that's going to drive a lot of shareholder value beyond where we are today. And so that's how we look at the industry piece of it. And in terms of our share buyback, we're doing our own calculations on what we think is going to drive value over time on that. And it's not really going to be influenced that much by what other people are doing in this space. We're going to continue to make our decisions based on our business, our growth prospects and what we think the right thing to do is. So like everybody else, we'll watch the market and see what happens, but we're going to continue to kind of the independent thinkers in terms of how we create value over time. In terms of the satellite piece of it -- and look, we've answered this question a bunch of times and I'll just repeat, we have a front row seat to this space. We have a Board seat with [ ASP ]. That's why we made the investment that we made in ASP. Satellites are complementary to terrestrial networks. We said it, other tower companies have said it, the carriers have said it, most of the satellite companies themselves have said it. We don't see anything that changes that. Now in the very ultra rural areas, it may be a better solution. But we don't have towers. We have a tiny, tiny number of towers in those areas. And quite frankly, they're not the top-performing towers in the portfolio. So if it does disintermediate a handful of towers, you're not even going to notice it. So from our business perspective, I don't lose a second fleet worried about satellites. I'm actually encouraged by satellite. It's going to provide ubiquitous coverage. It will enable some of the capabilities that they're talking about for 6G, which is going to continue to give new use cases to our customers, things that you can't do when you have a network that has holes in it. So I think the satellite story is going to play out over time. It's going to be a big positive for our carrier customers. That means it's going to be a big positive for us. And I think the short-term noise that people are hearing about this is just displaced. Operator: This concludes the question-and-answer session. I'd like to thank everyone for your participation in today's conference. This does conclude the program, and you may now disconnect.
Operator: Thank you for standing by, and welcome to Enterprise Products Partners LP's first quarter 2026 earnings conference call. Currently, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. To ask a question during the session, you will need to press star 11 on your telephone. To remove yourself from the queue, you'll need to press star 11 again. I would now like to hand the call over to Joe Theriak, Vice President of Finance and Investor Relations. Please go ahead. Joe Theriak: Thanks, Latif. Good morning, and welcome to the Enterprise Products Partners' conference call to discuss first quarter 2026 earnings. Our speakers today will be Co-Chief Executive Officers of Enterprise’s general partner, Jim Teague and Randy Fowler. Other members of our senior management team are also in attendance for the call today. During this call, we will make forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of '34 based on the beliefs of the company as well as assumptions made by and information currently available to Enterprise's management team. Although management believes that the expectations reflected in such forward-looking statements are reasonable, we give no assurance that such expectations will prove to be correct. Please refer to our latest filings with the SEC for a list of factors that may cause actual results to differ materially from those in the forward-looking statements made during this call. And with that, I'll turn it over to Jim. Jim Teague: Thank you, Jim. We got off to a very strong start this year and the business is performing well across the board. In the first quarter, we generated 2.7 billion of EBITDA in a short quarter. This was up 10% over last year. We generated 1.8 times coverage of our distributable cash flow. By any measure, this was an exceptional quarter. The assets we brought online over the past year, including the Bahia NGL pipeline, fractionator 14, and three Permian natural gas processing plants, continued to ramp throughout the quarter. In fact, frac 14 was full on day one. The gas plants were essentially full by mid-quarter, and if you look at Bahia and Shin Oak as a system, they're running at 80% of a combined 1.2 million barrels a day of capacity. Operationally, the quarter was outstanding. We set multiple operating records across the system. With the addition of Midtown West 2 in the Delaware Basin during the first quarter, we set a new record for gas processing plant inlet volumes. We processed 8.3 billion cubic feet per day of natural gas. That was up 7% from last year. We fractionated 1.9 million barrels per day of NGLs. That was up 16%. We loaded 2.3 million barrels per day of hydrocarbons at our docks, up 15%. We transported 14.2 million barrels of oil equivalent per day, up 7%. In total, we set 12 new volumetric records for the first quarter. Those results speak to both the scale of our system and the demand we're seeing across the markets we serve. On the market side, commodity prices were volatile throughout most of the quarter, and we tend to embrace volatility. In January, winter storm firm gave us a strong start to the year. Elevated demand for natural gas and propane created price dislocations across our SFE asset network as producers faced widespread supply disruptions following the sharp drop in temperatures. Our trucks, pipelines, and storage facilities enabled us to continue meeting customer needs despite these challenges, while marketing teams and asset flexibility allowed us to capture incremental value, and this was only the beginning of the volatility we experienced during the quarter. The ongoing conflict in the Middle East and restricted flows through the Strait have driven a substantial increase in demand for all forms of US energy, petrochemicals, and refined products. The supply shock dramatically improved US petrochemical margins, prompting our domestic petrochemical customers to run their units full out. One week before the start of the war in Iran, ethane-to-ethylene cracking margins were about 7¢ a pound. Today, they're 23¢. The ethylene-to-polyethylene spread was 20¢ per pound; now it’s over 45¢. It's no wonder why my former employer’s stock is up over 50% year to date. International demand for US feedstocks is as strong as we have seen in quite some time. The loss of Middle East hydrocarbon supply fractured the Asian supply chain. China's PDHs are, we hear, currently operating at less than 50% of capacity. As a result, Asian petrochemicals have been destocking inventories by consuming derivative inventories. The impact to hydrocarbon markets around the world has been significant, and we see this strong demand continuing through the remainder of '26 and maybe into '27. The demand pull is showing up very clearly in our marine export business. Our crude oil terminals are benefiting as volumes being released from the US Strategic Petroleum Reserve are being directed to international markets. And our ethane and LPG customers continue to line up at our docks for US NGL feedstocks. In the first quarter, we averaged around 70 million barrels per month across our docks, and we expect that strength to continue into the second quarter as we are scheduled to load more than 88 million barrels in April. On the upstream side, we continue to build on the momentum in our system. Producer activity remains constructive in the basins where we operate, and our assets are well positioned to capture volume growth. The combination of strong supply, growing export demand, and new projects ramping into service is creating real operating leverage across the business. We also saw strong contributions from the downstream side. In addition to record product flows, strong margins across our assets, and high utilization at our PDH facilities supported solid earnings and cash flow for the quarter. Our new assets are ramping well and volumes are at record levels. Demand remains strong, both domestically and internationally, and our system is performing the way it was built to perform. We entered 2026 expecting steady production growth and oversupplied markets which we thought would lead to another year of relatively benign commodity prices. This has clearly not been the case. Today, we believe the financial markets are underestimating the potential global supply implications from a prolonged closure of the Strait of Hormuz. Depending on the industry expert you ask, anywhere from 12 to 15 million barrels a day of crude oil, refined products, LPG, and petrochemical supplies are constrained. That is almost half a billion barrels of hydrocarbon supplies off the market every month. Shipping and geopolitical commentators estimate that the earliest the Strait could reopen for normal operations, including vessel repositioning, is July. And that does not account for the time required to repair onshore production and refining facilities damaged in the war. Until global supplies and inventories return to normal, we believe there will continue to be strong international demand for US energy and products. We're also seeing international consumers look to increase purchases of US energy as an avenue to improve the US trade balance and add greater resilience and security to their energy supply chains, given the current disruption of product flows in the Middle East. After the first quarter, we are encouraged by the momentum we are seeing across the business and increasingly confident in the outlook for the year. At the same time, we remain focused on what matters most: operating safely, serving our customers reliably, allocating capital with discipline, and creating long-term value for our investors. With that, I'll turn it over to Randy. Randy Fowler: Thank you, Jim, and good morning, everyone. Starting with the income statement items, net income attributable to common unitholders for 2026 was 1.5 billion, or $0.68 per common unit on a fully diluted basis, which is a 6% increase compared to 2025. Adjusted cash flow from operations, which is cash flow from operating activities before changes in working capital, increased 10% to 2.3 billion for 2026 compared to 2.1 billion for 2025. We declared a distribution of $0.55 per common unit for 2026. This is a 2.8% increase over the distribution declared for 2025. The distribution will be paid May 14 to common unitholders of record as of close of business on April 30. We are on track for twenty-eighth consecutive years of distribution growth in 2026. To our knowledge, this is the longest period of distribution growth of any US midstream company and is an example of Enterprise’s consistency and commitment to returning capital directly to our unitholders. The partnership purchased 3.1 million common units off the open market during the first quarter for approximately 116 million. In addition to buybacks, our distribution reinvestment plan and employee unit purchase plan purchased a combined 1 million common units on the open market for 37 million during the first quarter. For the twelve months ended 03/31/2026, Enterprise returned approximately 5.1 billion of capital to our equity investors. 93% or approximately 4.8 billion was in the form of cash distributions to limited partners, and the remaining 77% were 356 million of buybacks. Our payout ratio of adjusted cash flow from operations was 57% over this period. Since our IPO in 1998, we have prioritized returning capital to our partners, returning over 63 billion through distributions and buybacks. At the same time, we have reinvested capital to build one of the largest energy infrastructure networks in North America. Total capital investments were 988 million in 2026, which included 783 million of growth capital projects and $2.00 5 million of sustaining capital expenditures. In the first quarter, we also received the final payment of 596 million from ExxonMobil for the purchase of a 40% interest in the Bahia NGL pipeline. With the completion of major projects such as the Bahia NGL pipeline and Neches River Terminal, we believe our expected range of growth capital expenditures for 2026 will net to 2.3 billion to 2.6 billion after applying approximately 600 million in proceeds from asset sales already received. For 2027, we expect our growth capital expenditures to be in the area of 2 billion to 2.5 billion. Sustaining capital expenditures for 2026 are expected to be approximately 500 to 80 million. On the fourth quarter 2025 earnings call, we stated that discretionary free cash flow for 2026 had the potential to be in the 1 billion area. Even though our estimate of growth capital expenditures for 2026 has increased by 300 million as a result of investments in two new natural gas processing plants in the Permian, we still believe discretionary cash flow for 2026 has the potential to be in the billion-dollar area and, depending on commodity prices and spreads for the remainder of the year, could be higher. In terms of allocation of capital, as we have said many times, we see cash distributions to partners growing commensurate with operational distributable cash flow per unit. Let me repeat that. As we have said many times, we think distributions to partners will grow commensurate with operational distributable cash flow per unit growth. In the near term, we continue to expect discretionary free cash flow to be split between buybacks and retiring debt. In 2026, we still expect this split would be approximately 50% to 60% in buybacks. As we have said before, Enterprise's buyback program has both programmatic and opportunistic elements. In periods of momentum and volatility characterized by higher equity prices, we may elect not to chase price and instead retain cash in the opportunistic bucket for buybacks in future periods when momentum has [inaudible]. Similarly, in periods when there are significant price dislocations in equity prices, we may elect to pull cash forward earmarked for buybacks in future periods, such as bringing cash forward from 2027 to buy back the partnership units at more opportunistic prices in the near term. Our total debt principal outstanding was approximately 34.2 billion as of 03/31/2026. Assuming the final maturity date for our hybrids, the weighted average life of our debt portfolio is approximately seventeen years. Our weighted average cost of debt was 4.7%, and approximately 95% of our debt was fixed. At March 31, our consolidated liquidity was approximately 3.3 billion, including availability under our credit facilities and unrestricted cash on hand. As Jim mentioned, adjusted EBITDA increased 10% to 2.7 billion for 2026. As of 03/31/2026, our consolidated leverage ratio decreased to 3.2 times on a net basis after adjusting debt for the partial equity treatment of our hybrid debt and reduced by the partner's unrestricted cash on hand. Our current leverage ratio reflects significant investment in the large-scale projects that we recently brought into service, such as the Bahia NGL pipeline, Port Neches Terminal, and Frac 14, and the midstream asset acquisition from Occidental, where the debt is on the balance sheet but the resulting annual adjusted EBITDA generation for these investments is yet to flow into our twelve-month trailing EBITDA number. Our overall leverage target remains at three times plus or minus 0.25 times, or 2.75 to 3.25. With that, Joe, I think we can open it up for questions. Joe Theriak: Randy. Latif, we are ready to open the call for questions. Operator: Thank you. As a reminder, to ask a question, you will need to press 11 on your telephone. To remove yourself from the queue, you may press 11 again. Please limit yourself to one question and one follow-up or two questions to allow everyone the opportunity to participate. Please stand by while we compile the Q&A roster. Our first question comes from the line of Theresa Chen of Barclays. Your line is open, Theresa. Analyst: Good morning. Following up on the comments about the uptick for US energy demand in general and US export infrastructure demand in particular, can you walk us through the contract duration profile across your export docks today? Specifically, how much capacity is tied to contracts with near-term expirations that could be recontracted at higher rates? And longer term, how much incremental brownfield expansion capability do you have across your export assets? Tyler Cott: Hi, Theresa. This is Tyler Cott. I'll speak to the NGL exports specifically. I think we've said before, our NGL export docks are contracted around the range of 90%. On LPG, those contracts go through the end of this decade. On ethane, they extend, you know, ten to twenty years depending on contracts, so lengthy duration. We have 10% available for spot capacity in the near term, but long term, we're significantly contracted. Jay Bainey: Okay. And on the LPG side, in particular, given the recent strength in LPG export ARPs, alongside the commissioning timeline for Phase two of the Neches River expansion, can you talk about the incremental earnings uplift or cash uplift from spot cargoes in the interim? And related to this, when do you expect Phase two officially enter service to support your term commitments with customers? Tyler Cott: Sure. This is Tyler Cott again. Our operations team has done a fantastic job expediting a bit in the commissioning of Neches River Terminal. We're still in the process of commissioning it. Began in April, and at this point, we expect to complete commissioning for both ethane and propane sometime in May. In terms of spot utilization and earnings uplift, we really gotta get through the commissioning process here and see what we have. I think an important point to note about our business going forward is we have a significant amount of flexibility. So our spot business will be dictated across different products in terms of what the market needs at a given time. Jay? Jay Bainey: Yeah. Hey, Theresa. This is Jay Bainey. Just on the crude front of that, we've got a pretty wide mix of contract structures. So contracts that last through '28 and '29 and similar for '26, we have about 10% of open capacity. And, yes, I think we're having good conversations about '27. Analyst: Thank you. Operator: Thank you. Our next question comes from the line of Spiro Dounis of Citi. Your line is open, Spiro. Analyst: Thanks, operator. Good morning, team. Wanted to get back to the growth outlook really quickly. Jim, you sound incrementally more positive than when we last caught up. Obviously, a lot has changed. And then Randy, you seem to indicate that your operating cash flow is going to at least sort of mirror the increase in CapEx to keep that DCF/free cash flow kind of stable. So curious if you could give us an update on the sort of 3% growth you guys were talking about for '26 and the 10% growth you were talking about for 2027 on the last call? And as you answer that question, just curious if these two new processing plants are additive to that '27 outlook. Jim Teague: This is Jim. Yeah. I think I said modest in '26 and 10% in '27. I think we'll beat modest. Go ahead. Randy Fowler: I mean, as you think about twenties—sorry. Go ahead. Yeah. Yes. Spiro, I sort of like the point you made in your note that probably modest is a low bar now, and I think you're right. You know, again, it's sort of hard to come in and look at 2026 because, again, that’s just what's the duration of these commodity prices gonna be and the duration of spreads. So really shaping up to be a much stronger year than what we expected. And, again, because we were really coming in and not expecting much benefit at all from commodity or spread and really were relying on our fee-based businesses. So really hard to come in and give much guidance because you don't have much visibility, especially when you come in and look at the futures market, because we don't think the futures market really is representative of what the physical markets could be. So the endpoint is 2026 looks to be a much more favorable year than when we first started. Our commercial guys did a great job in underwriting two more natural gas processing plants in the Permian, which really will come on during 2027. We really did not have those baked into our 2027 numbers at the time, so that would be additive. And then, from the same token, you know, I think we're still in good shape to come in and do meaningful buyback and meaningful debt retirement in 2026, even with CapEx ticking up a little bit for these two new plants. Jim Teague: Yeah. Spiro, I've been around a while, and I have never seen a supply disruption like we're experiencing today. That supply disruption creates a lot of benefits that Enterprise is able to capture. Analyst: Yeah. And that's actually a good segue to the second question. Jim, you also talked about embracing volatility, and I know we go back a few years ago, you used to sort of talk about sort of 500 million or so outsized spread gains you guys would sort of find in any given year; that's been absent for about maybe the last two years or so. Just curious if it sounds like that's back. I don't want to put too fine a number on it, but in the environment you're seeing now, do you think you see a return to that 500 million, and what parts of the market do you see that from, obviously, export being a big one? Jim Teague: I don't know if it’s gonna be 500 million, 600 million, or 700 million, frankly. But I do expect that we're gonna have what you call outsized spreads. Frankly, typically, we have it every year. We just don't know which spread it'll be. Last year was pretty benign and unusual for us. As to what specifically it might be, I'll throw it to Tug. Tug: Yeah. I'll just add, I mean, this first quarter, we had some outsized spreads on natural gas when a storm firm presented some opportunities. But largely, the spreads that we've seen post Iranian conflict, those will come second quarter. Analyst: Great. Helpful color, guys. I'll leave it there. Thank you. Jim Teague: Thank you. Operator: Our next question comes from the line of Jean Ann Salisbury of BofA. Your line is open, Jean. Analyst: Hi. Good morning. We talked about this a little bit at the dinner, Tug, but it seems like international crackers that are running ethane are pretty happy that they do so right now. Has there been any interest in the last couple of months in more international conversions to ethane that could drive the next leg of ethane demand? Tug: Hi, Jamie. Yeah. This is Tug. So, yes, they were happy prior to the conflict, and they're even happier now. I will say that interest and demand we've seen on ethane—and I'll even throw LPG in there—we have quite the appetite for demand prior to the conflict, and I would say we have a similar appetite for demand post conflict. It made sense before, and it still makes sense today. Analyst: That's helpful. And I guess as a follow-up to that question, what's kind of the timeline if a cracker does decide to convert to ethane or take more ethane to the ethane being delivered? What should we expect, like, basically a couple of years for them and you to build that capacity? Jim Teague: That's probably—it’s not overnight, Jeanne. Yeah. And I think your couple of years is probably in the ballpark. Analyst: Alright. Thank you. I'll leave it there. Operator: Thank you. Our next question comes from the line of Michael Blum of Wells Fargo. Your line is open, Michael. Analyst: Thanks. Good morning, everyone. You know, at dinner a few weeks ago, you didn't really think you'd see any permanent shifts in where global buyers are gonna source their hydrocarbons. I thought maybe they'd move more to the US, but you seemed to think that that wouldn't happen. Curious just if you've had any change in your thinking there and, in a similar vein, I think at the time you didn't really think we'd see any reaction from US producers, and I'm curious if you still think that's the case. Jim Teague: Take the second one first. Jay and Natalie, what reaction by US producers? Natalie Gayden: This is Natalie Gayden. I'd say—and Jay can chime in here—I don't know that US producers have done much different. It seems to me that they're staying pretty disciplined. Sure, we see some movement in rig activity to different maybe producing zones or maybe different areas of their—if they have discretionary acreage. But other than that, I'd say they're keeping discipline. Jay Bainey: I'd agree with Natalie. We do hear some conversations from the independents about cadence maybe moving up where they think they can. On our gathering systems, we've seen incremental growth, call it, over the last three months. That could just be anecdotal. Jim Teague: As to the first question, Jean Ann, you know, a supply disruption like we have changes a lot of things. And we're seeing interest from countries, Tug, like India. But, you know, it's a funny thing. We're geographically challenged when it comes to LPG and India. And the question will be, when this is all over and everything returns to normal, do they still wanna lift US LPG when the AG is supposed to [inaudible]. Right now, they're showing a lot of interest. Analyst: Okay. Thanks for that. The second question was just on capital allocation. Randy, appreciate your comments on the 1 billion of discretionary cash. The question is, assuming you're able to realize stronger results this year as a result of the conflict, would you maintain that 50% or 60% allocation to buybacks versus debt paydown, or if that billion dollars turned into 1.5 billion, for example, would the incremental above plan just go to buybacks since your leverage is already within the target? Thanks. Randy Fowler: Yeah, Michael. I like the way you're thinking this morning. Yeah. Michael, I think we would still, in the near term, when we think about 2026, we'd probably still have that 50% to 60% split. You know, 2027 could be a different story, but I think 2026 still probably maintains that split. Analyst: Thank you. Natalie Gayden: Thank you. Operator: Our next question comes from the line of Brandon Bingham of Scotiabank. Please go ahead, Brandon. Analyst: Hey. Good morning. Thanks for taking the questions. I was just thinking about the two new plant announcements in the Permian. And I know it hasn't even really been a month since the update, but just curious what you think the go-forward cadence should be for Permian processing capacity? I believe previously you guys were around one or two a year. With the thought process, do you think we're moving more to a two-plus environment, or just, you know, how should we think about that moving forward? Natalie Gayden: This is Natalie Gayden. I think we're probably trending closer to two. And, obviously, that depends on how GORs shape up, but Corey's showing you that GORs are increasing. That is true. So I'd say we're trending more to two per year. Analyst: Okay. Great. Thank you. And then maybe just shifting over to the global supply-demand dynamics, especially on the demand side. Just curious what you guys are seeing for refined products and crude and what that might mean for your export business moving forward? Jay Bainey: Yeah, Brandon. This is Jay again. Yeah. We've seen volumes leave our dock. I mean, you go back to first quarter last year, think for fourth quarter we were up 70,000 barrels a day on exports. And then add that to the first quarter, that's another 70. With the SPR barrels now looking for second quarter, I mean, we could be well over 1 million barrels a day. Analyst: Okay. Great. Thanks. Operator: Thank you. Our next question comes from the line of Manav Gupta of UBS. Please go ahead, Manav. Analyst: Congrats on the good results. I just wanted to quickly focus on slide 17. It looks like PDH units are operating much better based on that slide. And I think you did do some kind of turnaround on the PDH unit too, and it's been operating better after that. Can you speak to those dynamics, please? Graham: Yes. This is Graham. PDH 2 has been running much better and much more consistent since the turnaround that we had last year. The teams have put a lot of work and worked very closely with our partner, and have resolved a number of the issues that we had, and I'm looking forward to sustained operation of that unit. PDH 1 as well. And we've invested a lot over the years in improving the reliability, and we still have projects that we're working. But I think what you're seeing in PDH 1 is much improved reliability of that unit as well due to the investments that we've made over the last few years in reliability as well. We've got good teams working out there, and we're just knocking down the barriers that we've had over previous years, and good work by those folks out at our Mont Belvieu PDH team. Analyst: Perfect. My quick follow-up is the macro comments you made at the beginning of the call, which were actually very informative. You know, you talked about 15 million barrels of total disruptions, and then Strait probably normally operating maybe only in July. I'm just trying to understand what does this do to the various storage levels of crude, refined products, LPG. Do you think, like, because of this depletion, storage levels could probably take a year or so to get fully replenished here? If you could talk about some of those dynamics, please. Tug: So if we look at the numbers, and I think Jim was pretty spot on with saying around 500 million barrels a month of lost supply depending on who you ask. As he pointed out, it's somewhere between 10 and 15 million barrels a day of lost supply through the Strait of Hormuz. That's crude oil, products, and NGLs. So just take 12 million barrels, for example, multiply that times sixty days. You've lost 720 million barrels through the Strait for global supply. So imagine if we can get back to normal, and let's say we're down a handful of barrels, you're only gonna get maybe 1 million or 2 million barrels above that. So it could take years to get back to where we were before the war. Jim Teague: What we don't know is what's been destroyed or damaged by the war and what it would take to repair that. I mean, we've heard about the strain that Qatar has, but there's still not a hell of a lot of information as to what of their assets have been damaged. Analyst: Thank you so much. Jim Teague: Thank you. Operator: Our next question comes from the line of John Mackay of Goldman Sachs. Your line is open, John. Analyst: Hey. Good morning, everyone. Thank you for the time. Just wanna go back to the 2027 kinda soft guide from the last call. You talked about it a little bit earlier in this one, but I just wanna put a little finer point on it. When you shared that update, were you thinking of '27 being a kind of what had, at the time, thought to be a kinda softer 2026 macro environment or 2025 macro environment where we weren't gonna have a lot of spreads? Or was 2027 meant to be a more kinda normalized environment maybe closer to what you outlined in the fundamentals update a couple weeks ago? Maybe just kinda walk us through the kind of macro behind the '27 piece. Randy Fowler: Yeah. John, this is Randy. I appreciate the question. Yeah. Really, what we were looking at when we saw the potential for 2027 was really just fee-based EBITDA growth. We were in a situation in 2025 and coming into 2026—Jim mentioned earlier that it was really a benign environment for commodity prices and spreads. So, really, the driver was fee-based cash flows off new assets going into service and around the acquisition that we did from Occidental Petroleum, that you'd start seeing those volumes show up on our system at the beginning of 2027. Those are really the drivers. Analyst: I appreciate that. That's clear. Thank you. And then maybe just switching to kind of the broader macro. You have commented a couple of times on this call about the disconnect between the, let's say, paper market and the physical market. Can you talk a little bit more about that and maybe what you think is driving the divergence or what could drive a convergence in that? Tug: Yeah. This is Tug. You're seeing strong physical premiums, for example, in dated Brent, but I really think what we're alluding to is the forward market may not be accurately reflecting what we're seeing in the physical market. It's probably not high enough. Analyst: Makes it sound like you'd expect the kind of futures market to drift up over time even if we get closer to, let's say, some clear resolution in the Strait? Tug: It sure looks like it. It looks like it. Analyst: Appreciate the time. Thank you. Jim Teague: Thank you. Operator: Our next question comes from the line of Gabe Daoud of Truist. Your line is open, Gabe. Analyst: Thanks, operator. Good morning, everyone. Thanks for the time. I was hoping maybe to just touch on the gas side just for a second. Maybe Haynesville gathering. Is there—in the shoulder season now and front month at 2.50—we'll see what happens in the summer, but curious if you're seeing any change in behavior. It does seem like privates build productive capacity to turn on at the appropriate price signal, but curious if you're seeing any change in behavior. Natalie Gayden: This is Natalie Gayden. You're right, the privates—you've seen some rigs or quite a few rigs actually running. And so I think we expect a little bit of a pop on our system in the Haynesville at the end of the year. But, otherwise, it looks pretty steady for the most part. Maybe a bit of growth. I don't know what Corey's got in the forecast, but something like that. Analyst: Alright, Natalie. Got it. Thanks, Natalie. And just a quick maybe shifting back to the Permian as the commercial team tends to win some new business, obviously, basin-wide. But just curious what's most important to producers today? Is it reliability, just given where pricing is; fees; maybe differentiation given your sour gas capabilities? Just trying to frame the competitive dynamics today. Thanks, guys. Natalie Gayden: Well, we always use our integrated value chain to compete, no doubt about that. And then cost of capital and what it takes to build out whatever a producer needs. I will say an established footprint that far reaches into areas of the basin that people are producing in is a competitive advantage because you're already there. And when producers wanna bring on gas in, you know, the next twelve months, you already have a foot in the door, per se. So I would say a mix of all of the things: integrated value chain and just geographical position in the basin. Tyler Cott: I'll just—this is Tyler—I'll just add that Natalie operates a super system out there, which provides our customers a lot of reliability. Analyst: Yep. Understood. Now that makes sense. Thanks, everyone. Jim Teague: Thank you. Operator: Our next question comes from the line of Julien Dumoulin-Smith of Jefferies. Your line is open, Julian. Analyst: This is Rob Mosca on for Julian. On the CapEx revision and the plan FIDs, I would imagine you'd line of sight to these projects when you issued guidance last quarter. Should we interpret this to mean that incremental FIDs, like a new frac, bias 2026 CapEx higher? And is what you have now actually a pretty firm number? And also, maybe if you could provide an update on those commercial agreements you spoke to with Exxon last quarter. Thanks. Randy Fowler: Yeah. The first part of your question, no, our CapEx guide does include anticipated projects that are under development. I won't talk to specifically any unannounced projects, but we do have some projects that are under development that are in that guide. Previously, where we were—we had on the two processing plants that we just announced with the earnings release this morning—we actually had the long lead items associated with that plant in our guide, just did not know when we were gonna come in and actually FID those. And the FID, again, just with the volume growth we've seen in the Permian, came earlier. So that was, if you would, the reason for the increase in the CapEx guide for this year because we'll see some of that CapEx happening late this year. Zach Stray: And this is Zach Stray. On the NGL side, on the fractionation side, you know, Natalie mentioned she's probably up on the upper end of her guidance. So always looking at building fractionators. We'd like to bring on fractionators full; helps the economics. We've got a lot of levers within the system. Honestly, we were probably a little late on 14, but we got a lot of levers. So we'll see if we need another fractionator. And if we do, we'll build one. Not sure what your question is on the Exxon side. But on the downstream agreements I would say that we talked about, I would say a lot of those agreements were just extensions of deals that we already had, and it was just a natural fit while we were in the conversations about Bahia to go ahead and extend those contracts. Analyst: Got it. No. That addressed it. Thanks for that. And for my follow-up, wondering how we should think about the quantum of LPG that could be shipped out of NRT-2 Phase two once it's online relative to the 360,000 barrels per day refrigeration capacity. It seems like you guys might have just one dock there. I'm wondering how contracted that capacity is until the expansion comes online on the LPG side at the end of this year. Thanks. Tyler Cott: Yeah. This is Tyler Cott. I'll just reiterate again that over the longer term, you know, we're contracting around the range of 90%. We have propane contracts that will start to ramp pretty quickly at NRT. And I think as we've said before, we expect NRT to do a good amount of propane in the balance of this year, and that will transition to ethane as our EHT capacity comes online late this year. Analyst: Alright. Appreciate the time, everyone. Operator: Our next question comes from the line of AJ O'Donnell of TPH. Please go ahead, AJ. Analyst: Morning, all. Wondering if I could just go back to some of the comments on damaged infrastructure in the Middle East. I think we saw from Saudi Aramco this morning they're gonna be halting LPG shipments through May. There's been some published price indexes from third-party sources showing that spot loading rates in the US Gulf Coast have been as high as 55¢. I'm just wondering, given that Phase two of Neches River will be up soon, curious how you would characterize that rate and what maybe you're seeing in terms of spot opportunities and how that could affect, you know, the return profile of your two new export projects. Tyler Cott: Yeah. We've seen elevated spot rates. They've been volatile. You know, they've been as high as kinda what you mentioned, and they're off from those highs now. I think, going back to what I said earlier, our system now has a significant amount more flexibility than it did previously. And so we'll respond to what products the markets need and have the highest value with the spot capacity that we have available, those products being ethylene, propylene, LPG, and ethane. Analyst: Okay. Great. Then I just had one more. On the crude business, looking at the Q1 results, could you provide a little bit more detail on the specific drivers behind the lower sales margin and lower transport revenues? Curious, you know, with the higher commodity strip and overall volatile basis spreads that you guys have been citing, is this something that we could see kinda, you know, reverting in Q2 and the rest of the year? Jay Bainey: Yeah. AJ, this is Jay again. You know, in Q1 results, we had a headwind with the Eagle Ford JV renegotiation on some fees there, and then some mark-to-[inaudible] noise. Lower spreads. But you brought up looking forward—the spreads increased, and that really didn't take place until, call it, April business, but your point’s valid. We see it definitely, at least as April looks now, that turning around. Analyst: Okay. Thank you very much. Operator: Thank you. Our next question comes from the line of Jeremy Tonet of JPMorgan Securities. Your line is open, Jeremy. Analyst: Hi. Good morning. Just wanted to come back to some of the commentary that you provided on the macro level. The industry, as you said, I don't think has really responded with a lot of new rig activity. And wondering what you think the industry would need to see in the market to pick up activity, and do you expect us to get there? Jim Teague: What we hear from producers is they're gonna stay disciplined. Natalie Gayden: I think that's true. I mean, they'll stay disciplined. We'll have a few companies that may break out from the pack, but they're private in nature and, you know, don't add a whole lot to the bottom line. So that's what we're seeing. Analyst: Do you see any certain price levels out there in the, you know, the '27 curve that might start to warrant more activity? Or just can't tell that? Tug: Nope. This is Tug. I don't think it's necessarily a specific price. It's probably more focused on the back of the curve being lifted up, and not just next year. It needs to get lifted up from when you're on that. Analyst: Got it. Thanks. And then just wondering for the CapEx backlog as a whole, if you might be able to share how much of that could be allocated to projects that have not taken FID yet. Just trying to get a sense for how that might look. Unknown Speaker: Oh— Natalie Gayden: For 2026? Randy Fowler: Jeremy, that's getting pretty granular. Analyst: 2027 works as well. Thank you. Randy Fowler: Probably for 2027, I would say probably half of 2027 is not spoken for. Analyst: Yeah. That's very helpful. Randy Fowler: Yeah. Thank you. Somewhere between 50–65%. Unknown Speaker: Thank you. Operator: Our next question comes from the line of Keith Stanley of Wolfe Research. Please go ahead, Keith. Analyst: Hi. Good morning. I wanted to clarify on Neches River Phase 2. Would you have contracted any of the LPG shipments on that since it's only an interim service until you switch to ethane? Or is that all spot? And then just wanna confirm the timeline you would switch to ethane. You're required to do that at year-end? Tyler Cott: We do have propane contracts that will be ramping up here at NRT on the flex train. And then as EHT comes online, we'll satisfy contract demand long term at EHT. Ethane commitments are generally driven by when the VLECs arrive; largely, that's later this year and into next year. Analyst: Got it. Bigger picture question as a follow-up. What would you say is the biggest opportunity for Enterprise with the situation in the Middle East and some of the commodity dynamics? Is there any particular business or commodity that you see as most exciting that you'd call out, or things we might not be thinking about? Jim Teague: Frankly, I think ethane has surprised me. The appetite for it—I could see that growing. And another one is we're gonna ship out what, Chris? 3 million barrels of ethylene this month? Chris: That's right, Jim. Yeah. Our ethylene exports over the last couple of months have been really high. Jim Teague: What excites me is how we have broadened the offering across our docks. We're not just an LPG dock. We're not just a crude oil dock. We're a hydrocarbon dock. And I think I'd like to see that grow. We've got our own targets for where we'd like to be. I'm not gonna share, but I like the broadening of the offerings other than a specific project. Randy Fowler: Got it. Thank you. And probably the only thing I'd add to that, just really what—just the improvement in fundamentals for our petrochemical customers has really been a big change, which is good to see for them, and we'll get the benefit from just volumes going through the system. But that's much improved. Jim Teague: Yeah. A healthy petrochemical business is good for Enterprise. And they were running pretty strong before this. What's changed—some are making a heck of a lot of money. Thank you. Unknown Speaker: Thank you. Operator: Our next question comes from the line of Jason Gabelman of TD Cowen. Please go ahead, Jason. Analyst: Yeah. Hey. Most of my questions have been answered. I want to ask about another commodity exposure you guys have around octane enhancement. You know, I think 2022, that business did, and '23, north of 400 million of gross margin. How are those spreads looking right now? Do you see that repeating this year? Jim Teague: And we just now are coming out of a turnaround on our Oleflex unit, and so we're not able to get full capacity. Unknown Speaker: But if— Jim Teague: But we're coming out of that, and we think it's gonna be strong through the quarter. Analyst: Got it. That was it for me. Thanks for the question. Operator: Thank you. I would now like to turn the conference back to Joe Theriak for closing remarks. Sir? Joe Theriak: Thanks, Latif, and thank you to our participants for joining us today. That concludes our remarks. Have a good day. Operator: This concludes today's conference call. Thank you for participating. You may now disconnect.
Operator: Good morning. My name is Tiffany, and I will be your conference operator today. At this time, I would like to welcome everyone to the Avidbank Holdings, Inc. First Quarter 2026 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. If you would like to ask a question during this time, simply press star followed by the number one on your telephone keypad. If you would like to withdraw your question, simply press star one again. Thank you. I would like to introduce the presenters Chairman and CEO, Mark Mordell; Chief Financial Officer, Patrick Oakes; and Chief Operating Officer, Gina Thoma-Peterson. You may begin your conference. Gina Thoma-Peterson: Good morning. Thank you for joining us today for the Avidbank Holdings, Inc. first quarter 2026 earnings call. Before we begin, let me remind you that today’s call is being recorded and is available in the Investor Relations section of our website at avidbank.com, along with our earnings release and presentation materials. Today’s call contains forward-looking statements, which are subject to certain risks, uncertainties, and other factors that could cause actual results to differ materially from those discussed. Those statements are intended to be covered by the safe harbor provisions of the federal securities laws. For a list of factors that may cause actual results to differ materially from expectations, please refer to our earnings release under the heading Forward-Looking Statements, as well as the disclosures contained within our SEC filings. We will also reference non-GAAP financial measures alongside our discussion of GAAP results. We encourage you to review the GAAP to non-GAAP reconciliations provided in our earnings release. With that, I would like to turn the call over to our Chairman and CEO, Mark Mordell. Mark Mordell: Thanks, Gina, and thank you all for attending our Q1 earnings call. We appreciate your interest as well as your support. As we stated in the release, overall, we are pleased with what we have accomplished not only for Q1, but more certainly what we have done over the last several quarters in putting ourselves in a more profitable metrics situation. I am not a big believer in seasonality, but as far as first quarters go, this was a pretty good quarter for us. We usually have some pullback and shrinkage, and we were able to grow loans by about $25 million, and our core deposits were reasonably flat. Although Patrick is going to give you more metric information, and we are going to follow it up with some questions after that. At this point, I would like to turn it over to Patrick to go through the quarter, the high-level metrics, and then we will open it up for questions. Patrick Oakes: Thanks, Mark. Good morning, everyone. Let me start with the headline numbers. In the first quarter, we earned net income of $9 million, or $0.84 per diluted share. That was up from $6.9 million, or $0.65 per diluted share in the fourth quarter. Return on assets improved to 1.46% from 1.12%, and return on average equity increased to 12.7%. Turning to the balance sheet, as Mark said, loans grew $24 million in the first quarter. That was driven mainly by a $26 million increase in non-owner-occupied CRE loans, partially offset by a $9 million decline in C&I balances due to higher payoffs and paydowns. Overall, loans are up $332 million, or 18%, since March 31, 2025. Deposits also moved higher, up $13 million in the first quarter, and they are up $270 million, or 14%, since March 31, 2025. We reported a net interest margin of 4.38% in the first quarter, up 25 basis points from the fourth quarter. Loan yields were essentially flat, and our interest-bearing deposit costs came down 20 basis points. As a reminder, the fourth quarter included a $726 thousand interest reversal on nonperforming loans, which reduced our margin in the fourth quarter by 12 basis points. In the first quarter, we also had the benefit of a special FHLB dividend, which added about 4 basis points to the margin. During the first quarter, we did see some upward pressure on our cost of interest-bearing deposits. The average cost for the quarter was 2.98%, and the spot rate was 3.03% at March 31. The provision for credit losses was $1.4 million in the first quarter, down from $2.8 million in the fourth quarter. Net charge-offs for the quarter were $2.8 million, or 52 basis points of average loans, primarily driven by the charge-off of two C&I credits. Nonperforming loans declined $16.3 million, or 75 basis points of loans, mainly reflecting the payoff of a construction loan and the charge-off of those two C&I credits. Noninterest income was $1.5 million, compared to $1.8 million in the fourth quarter. We saw higher core banking fee income, including service charges, FX, and credit card income. That was offset by lower warrant and success fee income and fund investment income. On the expense side, noninterest expense totaled $14.1 million, up $231 thousand from the fourth quarter, mainly due to higher credit-related legal and professional fees. We also saw another improvement in our efficiency ratio, which came down to 50.4%. Salary and benefits were flat at $9.6 million. Lower salary and bonus expense was offset by higher payroll taxes and benefits expense, along with fewer capitalized loan origination costs. We added three people in the first quarter, bringing total headcount to 154, and we expect to hire additional bankers in the second quarter. Book value per share increased to $26.33, and Tier 1 capital increased to 11.39%. During the quarter, we repurchased 25 thousand shares at an average price of $27.69, for a total of $693 thousand. The effective tax rate for the quarter was 27.5%. That included a discrete tax benefit related to equity award vesting, and we continue to expect the tax rate to be in the mid-28% range for the remainder of 2026. With that, Mark, back to you. Mark Mordell: Thanks, Patrick. As you can see, we have had a lot of improvements in our profitability metrics, which we mentioned earlier. At this point, I would like to open it up for questions, because that is what is really on your mind. So please, Operator: At this time, I would like to remind everyone, in order to ask a question, press star, then the number one on your telephone keypad. Your first question comes from the line of Andrew Terrell with Stephens. Your line is open. Andrew Terrell: Hey, good morning. I want to start off asking a question around the SaaS exposure in venture lending. I appreciate the commentary you put in the presentation. It is about $165 million of exposure, it looks like. Can you talk about the review you conducted in the quarter? There are a lot of headlines out there now. Maybe sum up for us what the conclusions around this review were. If you could talk about any reserves specifically against this pool, whether you are worried about loss content, and then how should we think about your interest in this space—software specifically—going forward? Are you pulling back the reins a bit, modifying underwriting standards? Just want to run the gambit on the SaaS exposure. Mark Mordell: From a 30,000-foot view, we did a deep dive and looked at where we were exposed. We are finding it is not just SaaS; it is how companies are dealing with AI. A lot of SaaS-based companies with a good space have been utilizing AI or starting to utilize it more in their business plan in order to compete, and those companies are going to be at the top end of the food chain. Companies that are not adapting are going to be more suspect as we go forward. If they are not able to get the funding that is necessary because their metrics are off and their platform is not going to be as competitive as anticipated, those are the ones we are concerned about. Patrick can get into some detail of how much dollar exposure we have, but what we found is that the vertical integration of AI and the SaaS model is really where we want to be. Those are much more specialized in workflow versus the horizontal type, which is more broad based. It does not mean one is necessarily better than the other, but one has a little more legs at this point. We have done a strong analysis and talked to VCs. Are there going to be additional losses embedded? I do not know. When we are talking about early-stage investing, it is really whether we are going to let their cash balances cross over their loan balances. It gives us another factor we have to monitor months ahead before that cash approaches their loan balance, so we know if we need to pull an investor abandonment clause or something of that nature, whether we are going to let them borrow, or let that cash cross over. We are being pretty critical of that from a credit perspective across the board. Patrick, any additional color? Patrick Oakes: As you can see from the schedule we provided with the breakdown we did with the venture group, it is really the horizontal segment—the smaller, more general piece—that I think is the most concerning in terms of whether they are going to be able to raise funds going forward. That portfolio is small. There are two loans in there that are either criticized or classified, about $4 million total. In fact, one of those is cash-flow positive. So far, the portfolio is doing well. The concern is what is going to happen six to twelve months from now. Between our bankers, the investors, and everybody else, everyone is on this and tracking it quite closely. Andrew Terrell: Great. It sounds like there is an important bifurcation of horizontal versus vertical. Within the vertical space, you are still going to be lending and forming new relationships, picking up new clients in that specific vertical. So no change there, just still being critical and diligent from a credit standpoint. Mark Mordell: Everyone is looking at it a little bit differently in terms of new fundings. There is a lot more funding going into the AI space in the venture community at this point. New fundings could argue for a very strong model going forward because they start off integrating AI. Some companies that are two to four years old are needing to pivot and have needed to pivot months or quarters ago to be more competitive, given the explosive growth AI has had. It all pours into the underwriting for everything we are looking at. It is similar to what we have done for the last several years: how viable are these early-stage companies, what is their burn, and how strong is their business plan. We do have some legacy credits, and we are monitoring those closely. Andrew Terrell: On the margin, you outperformed a bit this quarter even normalizing for the FHLB special. It sounds like maybe some deposit cost pressure into period end. Relative to that 2.99% interest-bearing cost and the 3.03% spot rate, where are you bringing on new deposits on a weighted average basis, and general expectations for the margin as we move forward? Patrick Oakes: I wanted to highlight the 3.03% spot because we are a growth bank, and we are having to put some deposit costs on at a higher level than we would like at this point, which is probably in the low 3% range on average. Hopefully we can drive that down over time, but right now we want to grow deposits. I would assume cost of interest-bearing deposits will stay above 3% at this point. Could it creep up a little? Potentially, short term. That will take the margin down a little bit from where it is today. Loan yield I am not as worried about. Andrew Terrell: I think that loan yield would be relatively stable. Patrick Oakes: It could go up or down a few basis points with loan fees and mix changes, but you will see the margin move down a little here. One other factor to keep in mind: DDA was probably a little bit high at 33.1%. We had some clients bring in money late in the quarter that moved to the DDA account. That change has moved into April, so I would not count on DDA remaining as high as it is today. That is a little bit of pressure too. Hopefully we can keep it in the mid-20s, but it is probably a little elevated. Andrew Terrell: Yep. Okay. Great. Thank you for taking the questions. Operator: Your next question comes from the line of Matthew Clark with Piper Sandler. Your line is open. Analyst: Hey. Good morning. This is Adam Kroll on Matthew Clark, and thanks for taking my question. Mark Mordell: Hello. Good morning. Analyst: Maybe we could get your updated thoughts on loan and deposit growth expectations for the year. I think your previous target was in the low double-digit range. Has that changed at all, and what are you hearing from your borrowers given some of the macro uncertainty? Mark Mordell: We did experience a little softness in the quarter in terms of people making decisions and fundraising, but I do not think our outlook has changed. We are looking for low double digits going forward. We have some work to do on the deposit side, as Patrick mentioned, but we feel pretty good about the overall pipelines across all verticals for loans. In terms of deposits, we have a strong pipeline, but timing is more of an issue because fundings are taking a little longer. People are doing a little extra diligence. There is geopolitical noise out there, which is constantly out there, so I do not know why that should be more of a factor this quarter than historically. Our outlook has not changed. We are built for growth and expect low double digits for the year. We do have some work to do on the liability side of the balance sheet. Analyst: Got it. Appreciate the color. Switching to expenses, they were really well managed during the quarter. How are you thinking about a 2Q run rate and overall growth for the year? Patrick Oakes: We have been doing some hiring. Mark can talk more about that. We added in the first quarter and more in the second quarter, so that will put a little pressure on expense growth, along with merit increases and some other items. The variable here is personnel expense. It was roughly $9.5 million; I could see that creeping up closer to $10 million for the quarter when you factor in everything. We did have a little bit higher legal and professional fees that could come down a bit to offset some of that, but expenses will definitely be up in the second quarter. Hopefully, that is all investment in growth. Mark Mordell: With the successful IPO we had, our profitability metrics trending well, and our long-term plan to scale, we will likely add more bankers this year than we have in the last several years. We brought on three in Q1, and we will probably have two to four more in Q2 and more after that as we look down the road. There is opportunity out there and some consolidation, and we will take advantage of it given our overall business plan. Analyst: Got it. Thanks for taking my questions. I will step back. Mark Mordell: Thank you. Operator: Your next question comes from the line of Gary Tenner with D.A. Davidson. Your line is open. Analyst: I wanted to follow up on the SaaS conversation and broaden it to the larger venture lending business. SaaS is a big part of that business, but what are you seeing in the pace of venture investment into startups at this point? Have you seen much diminution of that flow, and how does that impact both the venture lending and potentially the capital call business? Mark Mordell: As far as venture lending goes, it has gained a lot more momentum over the last couple of quarters. Everyone is doing the necessary homework because nobody wants to throw good money after bad. New fundings are at better valuations than for companies that are two or three years old. The question is can they pivot, and do they need to pivot? VCs and entrepreneurs are looking at it analytically. When this kind of transition or disruption happens, they decide to pick their horses. We monitor everything monthly—growth and metrics—and if they are not on plan, we know ahead of time and have those conversations. Like any time a vertical gets really hot, which AI is, there is more money going into AI-based investments than most anything else right now. We just need to use solid judgment across the board for new investments and be ultra-critical on existing investments. We need to determine whether they have an opportunity for new funding or are going to die on the vine, and whether we are going to let cash cross over our loan balance. That is our only savior at that point—not to let them borrow and to sweep the account if necessary because investors are not going to continue to support the company. Analyst: Thank you for that. I am sure you would have flagged this, but I want to confirm the $3.1 million construction loan that paid off in the quarter. There was no related interest recovery or benefit from that, correct? Patrick Oakes: Correct. We had everything that was owed to us on that one. Analyst: Okay. Thank you. Operator: Again, if you would like to ask a question, press star, then the number one on your telephone keypad. Your next question comes from the line of Timothy Coffey with Brean Capital. Your line is open. Timothy Coffey: Thank you. Good morning, everybody. Mark Mordell: Morning, Tim. Timothy Coffey: Mark, to follow up on the SaaS discussion, parsing through the loans and deposit data, it looks like the SaaS portfolio, both vertical and horizontal, has loan-to-deposit ratios somewhere around 45%. The total venture portfolio is somewhere around a 30% lower deposit ratio. Historically, has the SaaS segment always been around that 45% ratio? Patrick Oakes: What I hear from our bankers is these companies are still getting funding, but at a slower pace than previously. It is similar to 2022, where rounds of funding shrink a little and not get as much. Funders are being a little more careful, especially in some of the horizontal areas. It is probably a little less than historically. We could run that analysis; I have not done it, but that would be my gut. Mark Mordell: When there is a little stress in a vertical, they tend to spoon-feed rather than give two years of runway, which you see in a less concerning vertical. Companies are getting funded, but it is more metric based. They may fund for the next four to six months instead of two years, see where they end up, and whether they are getting necessary traction. That is typical in market disruption. That is why we are taking a closer look at these 60-plus accounts and watching them very carefully. Timothy Coffey: It sounds like I should follow up next quarter to see how things are playing out. Probably the next couple of quarters. Patrick Oakes: Yes. I will mark that down. Timothy Coffey: Mark, as you talk to clients in the technology and venture space, do you sense any material slowdown in planned IPOs or takeout activity? Mark Mordell: The IPO market has been quiet at best for a period of time. M&A, given some of the disruption, is slowing down until people figure out what is viable and what is not. There will be a lot of companies looking for soft landings that will find a soft landing. When there is this kind of disruption, people are cautious because some feel there will be more opportunities as stress rises in the marketplace, as opposed to getting too far ahead of it. We will continue to monitor the overall space like we do, but with this disruption, we have to pay attention to where money is flowing and what is happening from an M&A perspective. The IPO market is not something we are focused on at this point. Timothy Coffey: Appreciate that color. As you look to add bankers, are there specific geographies or business lines you are looking to support? Mark Mordell: The overall feeling is the same: the bankers we are adding will be more in the business lines than in real estate. We do a good job in commercial real estate and construction, but those two verticals require fewer employees than business lines like venture, traditional C&I, asset-based, sponsor, and search. You will see more bankers added in the business lines of our overall strategy because we feel that adds more to our franchise value. Timothy Coffey: Okay. Great. Patrick, a question about the margin. Coming into the quarter, we were looking for margin in the fourth quarter to be somewhere around 4.20% to 4.25%. Does that still seem reasonable given all the puts and takes discussed today? Patrick Oakes: It is probably going to be below that 4.30% we just printed—maybe around 4.25%, in that general range. Hopefully, we can stay above 4.25%, but I would guess in the 4.25% to 4.30% range. There are moving pieces to it, with deposit costs being the biggest one. Timothy Coffey: Alright. Those are my questions. Thank you very much. Patrick Oakes: Thanks, Tim. Operator: Your next question comes from the line of Matthew Clark with Piper Sandler. Your line is open. Matthew Clark: Hi, guys. Maybe just to follow up on credit quality. Could you provide some additional color on what drove the increase in criticized loans during the quarter and if there is any concern there? Mark Mordell: We are always concerned about credit. The biggest increase was a criticized real estate loan, which drove that up. We think it is a money-good loan. It is performing, but there are concerns about a near-term tenant vacating. It is a low loan-to-value relationship, and we think we are going to get through it. The main reason for the increase was a relationship that needed to be downgraded that consisted of two buildings in the South Bay. Matthew Clark: Got it. Appreciate it. Thanks for taking my question. Operator: There are no further questions at this time. I would like to turn the call back over to the presenters. Mark Mordell: Again, we certainly appreciate everyone’s interest and support, and appreciate attending our Q1 earnings release and earnings call. We look forward to following up with a solid quarter for Q2. Operator: This concludes today’s conference call. You may now disconnect.
Operator: Good morning, and welcome to Nucor's First Quarter 2026 Earnings Call. [Operator Instructions] Today's call is being recorded. After the speakers prepared remarks, I will provide instructions for callers wishing to ask questions. I would now like to introduce Chris Jacobi, Director of Investor Relations. You may begin your call. Chris Jacobi: Thank you, and good morning, everyone. Welcome to Nucor's First Quarter Earnings Review and Business Update. Leading our call today is Leon Topalian, Chair and CEO, along with Steve Laxton, President and COO; and Jack Sullivan, CFO. Other members of Nucor's executive team are also here with us today and may participate during the Q&A portion of the call. Yesterday, we posted our first quarter earnings release and investor presentation to Nucor's IR website. We encourage you to access these materials as we will cover portions of them during the call. Today's discussion will include the use of non-GAAP financial measures and forward-looking information within the meaning of securities laws. Actual results may be different than forward-looking statements and involve risks outlined in our safe harbor statement and disclosed in Nucor's SEC filings. The appendix of today's presentation includes supplemental information and disclosures, along with a reconciliation of non-GAAP financial measures. So with that, let's turn the call over to Leon. Leon Topalian: Thanks, Chris. And as always, I want to begin by recognizing our 33,000 teammates across the company for their continued commitment to working safely. Safety is and will always remain our most important value. And at Nucor, that means more than the physical safety of our team. It encompasses the mental health of all of our teammates as well with May being mental health awareness month, it's a great time to reinforce that commitment. And as we move through 2026, we are firmly focused on making this the safest year in Nucor's history. Before turning to our financial performance, I'd like to briefly highlight a few leadership updates. Effective March 1, Jack Sullivan was promoted to Chief Financial Officer, Treasurer and Executive Vice President. Since joining Nucor in 2022, Jack has demonstrated strong leadership, deep financial acumen and a clear understanding of Nucor's culture and how to create long-term value for our shareholders. Congratulations, Jack. We also announced that Dan Needham, our Executive Vice President of Commercial, will retire in June after 26 years with Nucor. I want to thank Dan for all the sacrifice and leadership during this time in which he and his family the very best in retirement. Turning to Nucor's first quarter financial results. We generated EBITDA of approximately $1.5 billion and earned $3.23 per share. This is an excellent start to the year and a significant increase compared to the fourth quarter, driven by strong performance across all 3 of our operating segments. Consistent with our capital allocation framework, we returned $254 million to Nucor's shareholders through dividends and share buybacks during the quarter, while also reinvesting $661 million into the business. Roughly 40% of CapEx in the quarter went towards our new sheet mill in West Virginia. Operationally, our team has performed incredibly well during the quarter. One of the clearest indications is the record shipments our steel mills achieved for the quarter. At 7 million tons, this was the highest quarterly shipment volume in Nucor's history, reflecting strong execution across our 26 steel mills and growing contributions from recently completed projects. Equally encouraging is the momentum evident in our backlogs. At the end of the first quarter, our steel mills backlog was up to 4.7 million tons, a 20% increase from year-end and the highest level we've seen since the second quarter of 2021. And Steel Products, our backlog grew 9% from year-end with increases across all major product groups. I want to thank our operating and commercial teams for a strong start to 2026 and for putting Nucor in a position to deliver even better second quarter results for our customers and our shareholders. Turning to trade policy. The combination of Section 232, steel tariffs and trade remedy orders have been effective at reducing imports with that trend accelerating in the second half of '25 and continuing in the first quarter of 2026. Import share of the U.S. finished steel market declined from over 22% in the first quarter of 2025 to approximately 15% this quarter. More recently, we were pleased to see the administration reaffirm the 50% 232 tariff on steel and implement important changes to how derivative steel products are treated specifically applying tariffs to the full value of those products. This action simplifies administration and enforcement while closing a key loophole that has allowed for undervaluation and circumvention. Taken together with existing trade remedies, these measures are working to ensure a more level playing field for domestic producers. We appreciate the administration's recognition of the importance of a healthy and competitive American steel industry. That said, we remain vigilant and there is still work to be done as USMCA discussions continue, there is an opportunity to address ongoing challenges including steel subsidies provided by the Canadian government and the use of North American channels as back doors to our domestic markets, putting U.S. manufacturers at a competitive disadvantage. We also continue to advocate for policies that prioritize the use of American made steel in critical sectors such as energy, infrastructure, defense and shipbuilding. With that, I'll turn it over to Steve for an update on the growth initiatives and market outlook. Steve? Unknown Executive: Thank you, Leon, and thank you all for joining us this morning. Our team continues to make great progress on our new sheet mill project in West Virginia, and we'll see key milestones achieved in 2026. We're entering the final phases of construction and will be sequencing commissioning of operations throughout the year, beginning with the pickle line in the second quarter. By the end of the year, we expect commissioning, inspecting and testing of all equipment across the mill to be complete. Following commissioning, our priority will be to operate safely and reliably as commercial shipments begin ramping up in early 2027. We will be increasing production and advancing product development throughout 2027 and '28. And with capacity utilization and product offerings building steadily over time. Once fully ramped, Nucor West Virginia will supply some of the cleanest and most advanced sheet steel in North America with expanded capabilities to better service automotive and consumer durable markets. This positions Nucor to grow market share in the Midwest and Northeast, 2 large sheet consuming regions where Nucor is relatively underweighted today. In addition to West Virginia, we have several major capital projects under construction or ramping up, and we're making meaningful progress across all of them. Starting with projects under construction, in our Towers and Structures business, we're building 2 new utility towers facilities, 1 in Indiana and 1 in Utah. In Indiana, we expect to be fully operational in the third quarter of this year. And in Utah, we expect to reach full production by mid-2027. We are also advancing the construction of the second galvanizing line at our Berkeley County, sheet steel mill in South Carolina. Once complete, this line will expand our ability to service automotive customers in the Southeast. Equipment commissioning is planned for the middle of the year, and we expect production to begin in the fall. In addition to projects under construction and commissioning, we have recently completed several growth projects that are advancing their strategic and commercial plans as expected. In the bar group, our new micro mill in Lexington, North Carolina and our new melt shop in Kingman, Arizona, were both EBITDA positive in March. In the sheet group, our new galvanizing line at Crawfordsville, Indiana was also EBITDA positive in March, and we expect to commission the paint line later this year. Finally, our Alabama towers and Structures facility is expanding its customer base, improving production and on track to reach EBITDA positive run rates by the end of the summer. Before I turn the call over to Jack, let me share how we're thinking about the current market environment and Nucor's place in these markets. Already the established industry leader, producing roughly 1 out of every 4 tons of steel in the United States and having unparalleled range of product offerings in our downstream businesses, Nucor continues to find ways to grow. After achieving approximately 6% growth of shipments in 2025, we expect shipments to grow by more than 5% in 2026. A confluence of factors are enabling this. First, consistent with our comments on Nucor's fourth quarter earnings call in January, overall demand remains relatively stable. There are pockets of strength, such as data centers, energy, border fence and infrastructure. and there are some markets that have remained softer for now, including consumer cyclicals, traditional office, heavy equipment and agriculture. Taken as a whole, we expect domestic steel consumption to be stable with overall demand remaining flat to up 2% for 2026. Second, as Leon highlighted, enforcement of trade laws is stabilizing what might have happened in the past where patterns of flooding dumped imports shock the supply picture. And third, execution by our team with the investments we've made. Nucor is well positioned with the portfolio we've developed to service market segments exhibiting particular strength right now. A few examples include, we can supply 95% of the steel needed to build a data center. We're the leading manufacturer of HSF structural tubing that are the primary building materials for large sections of the border fence. Our industry-leading pre-engineered metal buildings and insulated metal panels offering helped to accelerate our customers' speed to market, which is increasingly valued in today's landscape. And as a leading domestic producer of beams [indiscernible] bar. We are an essential material supplier, an enabler for the construction of pipelines, LNG terminals, bridges, manufacturing facilities, and power generation and transmission infrastructure. Nucor's national reach, coupled with our strength in raw materials, steelmaking and downstream products provides supply chain integration, improved reliability and operating efficiencies that no other North American producer can match. We have the right capabilities and team for this moment, and we're always looking ahead to ensure Nucor remains well positioned as markets evolve. With that, I'll turn it over to Jack for a closer look at our first quarter financial results and our outlook for the second quarter. Jack? Jack Sullivan: Thanks, Steve, and good morning, everyone. In the first quarter, Nucor generated net earnings of $743 million or $3.23 per share, exceeding the midpoint of our guidance range by nearly $0.50. The beat was largely due to higher volumes and higher margin product mix. After some weather-related shipping delays early in the quarter, the team delivered a very strong March with our sheet, plate and rebar groups all setting quarterly shipment records while structural steel shipments reached levels not seen since 2021. Turning to the segment level results for the first quarter, the steel mills segment generated $1.1 billion of pretax net earnings, more than double the prior quarter. Volumes and average selling prices increased across all 4 product groups with sheet and structural being the largest drivers. Metal spreads also expanded across all formats. In Steel Products, we generated pretax earnings of $285 million, up 24% from the fourth quarter. Volumes increased 13% on stable pricing with our Tubular group setting a new quarterly shipment record. Strong demand related to the border fence was a significant contributor, and we expect that to continue for the next several years. We did see some margin compression due to higher steel input costs flowing through, but we expect this to ease as the year progresses and realized pricing catches up. And in our raw materials segment, we generated pretax earnings of approximately $45 million compared to $24 million in the prior quarter, reflecting higher DRI production following 2 planned outages in the fall. Pre-operating and start-up costs totaled $108 million for the quarter. As a reminder, we expect these costs to trend higher as we work our way further into 2026 and toward the completion of our West Virginia sheet mill. Moving to the balance sheet. Our strong investment-grade credit profile is the foundation of our capital allocation framework. It allows us to execute our strategy of disciplined investment to grow our business while still providing meaningful cash returns to shareholders. We ended the quarter with approximately $2.5 billion in cash and liquidity of $3.2 billion. Total debt as a percentage of capital sits at 24% and our credit ratings remain the strongest of any U.S.-based steel producer. Capital expenditures totaled $661 million for the quarter, and we remain on track with our $2.5 billion CapEx estimate for the full year. While this level of investment remains elevated as we finish several remaining growth projects, it is moderating compared to recent years. And as our CapEx is trending down, our cash from operations is moving up. That combination produced a meaningful increase in free cash flow for the quarter, and we expect this trend to continue. We also returned over $250 million to shareholders in the form of dividends and share repurchases or roughly 34% of quarterly net earnings. Consistent with our long-term track record, we remain committed to returning at least 40% of net earnings to shareholders on an annual basis. Looking ahead, Nucor's financial strength, highly variable cost structure and business diversification, position the company to invest in growth, reward our shareholders and navigate through economic cycles. Turning to our second quarter outlook, we expect higher consolidated earnings with improvement across all 3 operating segments. In steel mills, we expect stable volumes and increasing metal margins. The margin improvement reflects higher realized pricing, partially offset by rising raw material costs. Within the segment, we expect our sheet and plate businesses to be the largest contributors in the sequential increase. In Steel Products, we expect higher volumes and stable pricing. And some of our longer lead time products like fabricated rebar and joist and deck, margins have been impacted by rising substrate costs but are poised to improve as we work through backlogs and start to realize higher average selling prices. In raw materials, we expect higher earnings driven primarily by improved realized pricing for DRI. Taken as a whole, the earnings uplift across all of our operating segments will be partially offset by higher corporate and intercompany profit eliminations upon consolidation. As we look further into 2026, we continue to expect that Nucor's earnings and cash flow will trend significantly higher than 2025 as we benefit from strong nonresidential construction and infrastructure demand and begin to see returns from the investments we've been making these past few years. With the hard work and dedication of the Nucor team, we are confident in our ability to create value for our customers and shareholders. And with that, we'd like to hear from you and answer any questions you may have. Operator, please open the line for questions. Operator: [Operator Instructions] Our first question comes from Bill Peterson from JPMorgan. William Peterson: Congratulations on a strong quarter. Congrats to the new management appointees, and thanks for the details thus far. On the West [indiscernible], which you provided some granularity, I was hoping to get a bit more color on the phasing of commissioning the strategy through year-end and maybe what to expect for the next few years? I guess, specifically, how long do you expect the commission phases it be complete? When do you expect the construction of the galv line to be complete? And I guess, how should we think about when you're going to start production as well as the customer qualifications? And then any sort of thoughts on utilization in the next few years as well? I appreciate that. Leon Topalian: All right, Bill, thank you for the question. I'm going to kick it off and maybe just stay at a high level and then ask Steve Laxton or Noah to jump in with some more of the details around the commissioning of that mill. But look, I want to begin with the backdrop of our most important value, which is the safety, health and well-being of the entire new quarter 33,000 team member family. Today, we sit at 65 of our divisions are recordable free at this point. It is an amazing accomplishment, and I want to thank each and every one of our teams who are delivering exceptional results, and you will see and continue to see those amazing results continue as we push into the quarter. More specifically, Bill. And as we think about West Virginia, and we touched on it in the opening remarks. I and our team could not be more excited about the capability set that, that mill will bring [indiscernible] for our customers, our shareholders, the value that's going to be generated and created in the largest sheet consuming region in the United States. Johnny Jacobs, who is our Vice President, GM and his team have done an incredible job. And as you know, the work that sits behind the scenes during construction and start-up is tireless. It's thankless and it is just a really, really challenging environment. And those individuals have done an amazing job. So thank you to our entire West Virginia team. And again, I'll let Stephen, Noah maybe update some more on the details. Unknown Executive: Yes. Happy to do that. Thanks for the question, Bill. And I'll just echo what Leon said about the team in West Virginia. They've had a remarkable safety record. I'll lead off with that. They've only had 1 reportable in all the years of that project. So outstanding safety culture and leadership in that team. And in terms of the specifics of your question, right now, Bill, we're about 85% of the way through construction. So we still have work to do on the construction side. Having said that, we're starting right now with some of the commissioning, and we'll be sequencing that throughout the year. And so we'll start with the pick line, and then we'll bring up the cold mill and proceed through one of the galv lines, the automotive quality galv line will be the next thing we start up after that in commissioning. Ultimately, we'll get to commissioning the melt shop and in hot mill later in the year. By the end of this year, we'll be done with all the commissioning. We're on track to hit that milestone. And then we'll start moving up through production and ramp-up in '27. Bill, what you'll see there is a very intentional and deliberate plan from that team and our entire sheet group, Noah and our team in the Sheet Group have really design an excellent plan to bring that mill up in a very constructive and coordinated and intentional way. And so by the time we get to the end of 2027, you asked about utilization rates and markets are going to dictate some of that. So I might hedge here just a little bit depend on market conditions somewhat that we'll be operating somewhere near that 50% of capacity by the end of next year. And so that team is poised. We're going to make great progress over the next 1.5 years and into 2028, even with product development and continued penetration of the markets. Anything you want to add. William Peterson: Great. And Steve, obviously, I've been working with you as a CFO and now we have Jack congrats on -- for both of you. Maybe the next question is for Jack is your new role how should investors think about any potential shifts in strategy relative to recent years? Or anything you would continue anything you would change or just any sort of insights on how you're considering your new role. . Jack Sullivan: Yes. Thanks, Bill. I appreciate that. I step into this role with a lot of humility and gratitude to serve this great company and the 33,000 teammates to make it such a special place preceding me in the role are 4 highly accomplished Nucor CFOs. And really, my goal is just to carry on their long-standing tradition of doing 3 things really well. maintaining a healthy balance sheet, investing for the future and generating attractive returns for our shareholders. . And Steve Blackstone, who's sitting right here to my right, did a terrific job during his 4-year tenure, funding $15 billion in growth investments returning $9 billion to our shareholders and improving our credit profile along the way. So that's a pretty impressive tra factor right there. And as the old thing goes, if it ain't broke, don't fix it. So Bill, no major shifts from that winning strategy. But what I would say is, I think I bring a fresh set of eyes, a strong understanding of this business and how we make money. And just a lot of excitement to accelerate what is already 1 of the most compelling stories in American manufacturing. Operator: Our next question is from Alex Hacking from Citi. Alexander Hacking: A couple of questions. I'll ask them together, if that's okay. Firstly, on the sheet side, the new slow and steady approach to price hikes in this cycle that we're seeing right now, could you maybe discuss the rationale a little bit there and how the customer feedback has been? I mean I hear only good things from customers, but I'm curious. And then secondly, on structurals, demand are very, very strong. imports are down, but don't seem to be down that much. Is there any particular subsegment that's driving structural to be so good. Leon Topalian: Yes, I'll kick it off, Alex, thanks for the question. And again, keeping a little broader base. But the question you asked around sheet is an important one. And there's some very deliberate strategies there that I'll ask Noah to kind of walk us through because again, I think it's an important context as you overlay the backdrop of the current sheet market and demand today versus '21 and '22. And again, no can touch on that. You mentioned the structural side. And again, having spent 3 years at Nucor-Yamato our Nucor-Yamato team and our Berkeley beam mill continue to deliver excellent performance, both from a safety standpoint as well as from a just net earnings. They are absolutely on fire. Their backlogs are at historic levels. Their customers, customers are busier than anything that I've seen in again, my 30-year career. So -- where is that going? I mean, it's obviously the non-res data centers, energy structural side and infrastructure around energy and chip plants and facilities, warehousing and in an area that we're going to continue to see expanded into the military complex in the years to come for Nucor. So I would tell you it's hitting on all cylinders. And while data centers are white hot, everyone's looking to participate if you pulled out all of the data center backlog from Nucor mean it only takes that down about 10%. So the historic backlogs we're seeing are really, really spread out incredibly well across the enterprise that give -- give me great confidence that not only as we indicated, Q2 will be better, but I think 2026 is going to be a very strong year for Nucor -- or for Nucor. So with that, Noah, why don't you walk through a little bit of the sheet strategy and where we sit today. Noah Hanners: Thanks for the question, Alex. We like slow and steady, and our customers are like and slow and steady, and let's take a little time to unpack that. The fundamentals supporting pricing right now are really strong, and I would say the rally we're in is probably the strongest kind of fundamentals we've seen for some time. Maybe to give you some context for how we see the rest of the '26 would step back to the last inflection point in the market, which was Q4 of last year. The low side of pricing in Q4 of last year. And to think about how our strategies work differently this year. You recall that historically, what would have happened in that low point that trough in the market is we would have had opportunistic speculative buyers overloading their order books to try to time the market. And the result, if you think about traditional behavior in Q4 would have been that we would have overbooked on the mill side, lead times would have jumped significantly, prices would have jumped significantly and we would have really overshot basic market fundamentals. So then due to the spreads and the lead times we then inevitably create the surge of imports that arrived a few months later, similar to what we saw in the back half of '24. And that's what usually happens. We've seen this time and time again in the sheet world. But this time, our trajectory and our behavior has been markedly importantly different in this cycle. We didn't chase the market down in Q4. We managed our order book to match what we saw as true underlying demand. And you saw this reflected in our steady, I would call it, modest consistent approach with pricing [indiscernible] consistent modest increases that were supported by underlying demand. And then this is one factor that we believe has helped to keep imports low. If you think back to '24 and you saw imports that were 9 million-ish tons -- this year, we're tracking $4 million or under. So there's a 5 million-ton window of serviceable market for domestic suppliers. That's a huge impact to the positivity with which we see the market today. And then as importantly, the supply chain is really healthy right now. Inventory levels are modest, which just tells you we haven't seen the speculation that traditionally drives the volatility we would see in this market. A couple of other notes just on the strength of the current market while we have a pretty positive outlook. We have some key markets that are starting to show signs of positive outlook. Service center shipments are starting to move up. They're trending up. We heard from HVAC customers recently that are really in the nonresidential construction space about about a really strong second half there. So there's some tailwinds there in non-risk construction that yields some strength as well. And then you already heard mention of the Board defense, which is 1 million, 1.5 million tons over this year and next. So all that together, we believe, supports a strong operating environment through '26 and then into potentially next year. Operator: Our next question comes from Timna Tanners from Wells Fargo. Timna Tanners: I wanted to follow up, if I could, on the guidance comments. So the 5% year-over-year volume increase would seem to imply that this level that we saw in the first quarter year-over-year is not sustainable. So I'm just curious about what's driving that expectation? And I conclude just looking at the values that perhaps the bigger driver into Q2 could be price catching up with the market rather than volumes. Is that a fair conclusion? And if you could comment a little bit more about the moving parts, that would be great. Leon Topalian: Yes, Tim, look, I think both are true. I think you're going to see volumes. And again, Nucor's operating rate is about 87% right now, utilization across the board, some groups being a little higher, some a little lower. So we have room. And again, from a contract standpoint, when you think about sheet market and the things Noah just walked through, we remain and have tons available in a very strong market. So we maintained some discipline at not booking all of those tons through contracts. So we have spot tons to offer. But again, we have -- we still have availability. And again, I think you're going to see that continue to move up the demand drivers. Again, I'm not going to underplay this I've been in this business a long time. I've been in our long product businesses or [indiscernible] and -- from a loan perspective, our customers that I'm talking to today are busier than anything they've ever seen in their history. So when I tell you the demand driver drivers today are -- it's like '21, '22 or even beyond in some cases, depending on the product group. So it is an incredible market. So I do think you're going to see some improvements in volume, to your point, on the 5%. Yes, I think you're right. I think it's much more likely that it pushes closer to double digits. -- again, a number to say it's going to be at or above 10%. But we -- I think it will strongly be above that 5% mark. So you're going to see that move up as well. So I think that answered the 2 questions you were pulling on. Did I miss anything there, Tim? Timna Tanners: I think that's fair. I think I just -- it would be always helpful to get a little bit more color on how to think about some of the lags in pricing if you want, that would be great. And then I guess, the second question I was going to ask us to do a cost and Obviously, we all track scrap really closely, and that's a key one, but I just wondered if you could elaborate on some of the cost pressures that you alluded to earlier in the script, that would be great. Leon Topalian: Yes. Steve, actually, why don't I take both, I mean the cost as well as the lag effect on -- which, again, I think playing through, but will play through very positively as we head into Q2. SP1773698727 Here, Tim. The lag effect, just to elaborate on that just a little bit on the prior question. You know this, but for the other listeners on the call. of our volume goes to our downstream business, and that gets in our financial results backed out through intercompany Elen. So you see that impacting financial results for us, but also with over 70%, 80% of our business in sheet being contract and some other businesses that have a lag effect to the pricing as pricing trends move up, it does -- there is this catch-up effect that takes time. And so to the heart of the question you were asking just a minute ago you'll see some volume pickup. We had weather effect, particularly some of the downstream products. You'll see a little bit more volume pickup relative to pricing in our products grow. But on the sheet side -- or excuse me, steel side, you're going to see it the other way around. -- where the pricing is catching up with catching up with the trends that you're seeing today in the marketplace that's sort of putting a little bit finer point on your comment about the lag effect. And with regards to cost, new course costs have been down year-over-year and quarter-over-quarter. I think that's important to note. And a lot of that has to do with utilization. Our utilization is up and -- but also supplies and services are down on a few other little details. The 1 area that is up that might be on investors' mind is energy, but I think it's important to note that energy is around 10% of the cost in steelmaking and it probably has a far less pronounced impact than some investors might be thinking because of what some of our integrated competition has in terms of their costs. So our profile is simply different there. we hedge -- we typically forward by anywhere between 40% to 50% of the year's worth of natural gas heading into it. And most of our cost, 80% of our energy cost is related to power anyway. So we don't have quite the same degree of exposure to near-term moves and costs on that front. Operator: Our next question comes from Lawson Winder from Burfa Securities. Lawson Winder: Could I ask about the capital return? So in recent years, Nucor has exceeded the 40% net income return. I mean, last year, it was like just under 70% -- is there room to push that higher in 2026? And how are you thinking about that? And then the corollary to that would be looking at the investment opportunity set, are you seeing any new opportunities in which to invest in the business that could compete for that free cash flow versus capital return? Jack Sullivan: Lawson, it's Jack. Thanks for the question. In terms of share -- returns to shareholders, I think over the past 5 years, we've trended close to 60% of net earnings over that time. Starting out the first quarter a touch under that 40% target, and that was really the result of our earnings beat. So as we work our way further into the year, you should expect us to continue to close that gap and potentially exceed it. But when it comes to actual returns to shareholders, it's sort of that balancing act between staying true to our long-standing targets of roughly 40%, recently higher, but also being opportunistic about other areas to create value for shareholders. And a lot of that is through reinvestment. So we'll continue to do just that, balance reinvestment opportunities as they come along, maintain a healthy balance sheet along the way and make good on our commitment to shareholders. Lawson Winder: Okay. That's quite clear. And Jack, congratulations on the promotion. If I could ask follow-up questions related to joist and deck. You noted that pricing is expected to recover to help offset some of the higher substrate costs going forward in 2026. Can you just speak to some of the strength and weakness that you're seeing in the underlying market for that business? Jack Sullivan: Yes. This is John. I'll take that question, Lawson. So really, the biggest market for the joist and deck business is the warehouse market. That's really in a steady state. It's certainly not what it was in '21 or '22, but leveled off to a good position. The data center market continues to be really strong for us. That's where we're seeing a lot of our price increasing. And our backlog pricing has benefited from that and will continue to over the course of the year. So we feel good about where we are in that part of the business. Operator: The next question comes from Katja Jancic from BMO. Katja Jancic: Earlier, you mentioned the recent change to Section 232 tariffs impacting derivative products. Have you since then seen an increase in inquiries from manufacturers that could potentially try to reduce the impact? Or do you expect that to happen? Leon Topalian: Got you. I want to make sure I understand the question. With the 232, are we seeing our customers look to basically shore up their supply chains domestically? Is that. Katja Jancic: Right or even the nearshoring because there's an ability for them to reduce the tariff from 25% to 10% if they use 100% U.S. steel. So I'm just wondering if you're seeing any inquiries. Leon Topalian: Yes, we absolutely are. And again, I think what you've seen with Trump 2.0 and the trade things that he's implemented both from a NO and 232 is to create a long-term level fair playing field. And so again, we're seeing import levels trend down to 15%, which is certainly the lowest I've seen in my entire career at Nucor. So it's at a healthy and what I believe is a very sustainable level for the U.S. industry. But yes, to answer your question, and it's something that we will certainly support in the melted made in America provisions of any trade policy that gets enacted. And so yes, our customers are certainly aware of that and looking to see how they can control their cost and output. And so yes, the domestic industry is healthy. It's strong. And again, Nucor's best days are still in front of us. Katja Jancic: And maybe going back to the energy side. I understand that it's only 10%, but maybe looking more longer term, given that there is this expectation data centers are going to consume more energy and power costs are going to be moving higher. How are you thinking about your power costs longer term? Or are you thinking in any way to potentially look at longer-term contracts? Or how should we think about it? Leon Topalian: Yes, Katja, Look, this is something we've talked about for a long, long time. In fact, very early days from when I became CEO in 2020, we've taken small positions, but financial positions in things like NuScale Power, which is the small module reactor technology because we need all the power that we can get, not just in solar and wind, which are good. We're suppliers to both of those industries, but it's simply not enough. We've got to embrace -- or we believe Nucor believes we've got to reembrace nuclear power in this country. It is the cleanest, most sustainable, always-on demand-driven power that we can bring to the grid. So you saw us invest in NuScale. You saw us invest in Helion that we're incredibly excited about. But those investments also tied to being able to build those facilities, whether it's nuclear or vision and/or Fusion behind the meter so that we could generate our own supply, any excess then would go to the grid. So to your point, the demand profile and what the U.S. economy is not doing to keep up with supply has been an issue and something we've thought about for a very long period of time at Nucor. So we've made those positions. But Steve mentioned it earlier as well, part of the reason why we hedge our natural gas buys. It's part of the reason we got into drilling wells on our own to begin with. It's the reason why we have a great relationship in every state that we're in that we have a steel mill in with the utilities so that we maintain long-term uninterruptible power contracts that are very, very efficient and cost effective. So do I expect in the years to come that will get a lot of pressure? Absolutely, 100%. As you know, the data centers aren't pushing 200, 300, 400 megawatts. Now they're pushing gigawatts. These facilities are massive, and they are massive power consumers. And so we've been thoughtful about it. We continue to be thoughtful about it, and we will continue to invest in the things not because we want to make electrons, but we recognize that this nation has to reembrace nuclear. Today, China is building 46 new nuclear facilities. The U.S. is building 0. We've got to change that. And again, I think it's one of the clearest ways that we remain a superpower in cloud computing, AI and the things that are going to transform and revolutionize the U.S. economy. Operator: Our next question comes from Carlos De Alba Morgan Stanley. Carlos de Alba: So a couple of questions that are basically follow-ups from prior inquiries. One is on returning money to shareholders. As your CapEx starts to peak and you get the benefit of the new projects, would you have any preference between incremental buybacks or special dividends? Or are you agnostic to those 2 choices? Unknown Executive: Yes. I think -- thanks for the question, Carlos. With respect to the best way to return cash to shareholders, traditionally, our preference has been through -- there have been very few instances over decades in which we've contemplated a special dividend. Not taking that entirely off the table. It's just our traditional practice has been through buybacks and sort of dollar cost averaging our way through the year. Carlos de Alba: And then the other question is related to imports. The administration recently put out procedures for submissions by steel or aluminum producers that would be committed to new capacity in the U.S. This is related to the proclamation 10984 on imports of medium and heavy-duty vehicles and vehicle parts. How do you think this could impact potentially the announcement of new capacity in the U.S., steel capacity in the U.S. Unknown Executive: Imports from 50% -- sorry, not imports, but the tires from 50% to 25%. Leon Topalian: Look, Carlos, I think it's a fair question. And look, we've seen it. We've seen the interest from overseas. We've seen Nippon Steel come in and buy the U.S. steel assets, and that company no longer exists, right? It's now owned and operated by a Japanese company. You're seeing similar results in Louisiana with Hyundai building their sheet mill there. And when I think there are drivers to that, not just trade policy, but when you're the strongest economic situation in the world, people want to come here and build things. Certainly, there are some incentives for them to do that. But Ben, maybe just touch on some more specifics to Carlos' question. Unknown Executive: Yes, Carlos, I appreciate the question. We're obviously aware of that to EO. We've studied as well. I would not add much more actually than Leon did, right? We continue to study that. I think that a lot of people are always going to tend to move towards the U.S. market as strong as it is. However, we're still a wait-and-see approach on that EO, along with many other things that are coming out right now. Operator: Our next question is from Nick Kash from Goldman Sachs. Nicklaus Cash: I just want to double-click on Timna's question in response from earlier. So, the guide from 4Q was about 5% volume growth, and now it sounds like Nucor is expecting more than 5% volume growth for the year. You sound pretty positive and constructive on that in the environment. So I'm just trying to -- any more color on what specifically has changed over the past, I guess, 2 to 3 months? Are you more positive on the end markets? And does that give you conviction in heading into the back half of the year? Or are certain end markets seeing stronger-than-anticipated rate of change over the past 2 months, imports weaker than thought or what you're seeing potentially even across the backlog? Any additional color would be helpful. Unknown Executive: Yes, Nick, look, I appreciate the question. And I think you're seeing a trifecta come to fruition. So I think it's all the above. So I'll unpack it in 3 categories. One, I think in our core businesses, we're seeing incredible demand, incredible growth. Our long products groups are from rebar, MBQ, our structural backlogs are beyond numbers that we've ever seen. Our customers' customers in the nonres, the structural fabricators are incredibly busy. There is a demand picture today that is incredibly robust that I think is a part of that driver. The second piece of that is our expand beyond businesses that are continuing to ramp up. When we talk about insulated metal panels, our doors and door technologies, the towers and structures, greenfield plants, that we're building that, again, we are incredibly excited about what they're bringing to the table. And then the enclosures and data center spaces all are going to be contributing to a much healthier bottom line for Nucor and our shareholders, not just this quarter, not just in the coming quarters, but year-over-year, you're going to see it. And then the third and last and probably most important point, Nick, we spent nearly $20 billion since I took over the company as CEO. And our teams have done an incredible job of a, implementing that cash and projects safely. They've worked tirelessly to bring those projects through construction, commissioning, start-up, you're beginning now to see some of those in that planting and that toiling and just nurturing come to harvest. So for, again, years of working towards and building out, you're now beginning to see the harvest starting to hit the balance sheet, and that's only going to continue. The pent-up tsunami of earnings power that Nucor has invested is still yet to hit the balance sheet. It is why I am so incredibly optimistic and looking at where our share price closed last night, the opening this morning, we're just getting warmed up. And so Nucor's best days, weeks, months and years are still in front of it, and I couldn't be more optimistic. So those 3 factors combined bring to me what's going to generate the healthiest returns Nucor shareholders have ever experienced and ever seen and higher lows than Nucor has ever experienced by balancing out the M&A portfolio with countercyclical companies and product ranges that are in different end markets that, again, just stabilize the earnings portfolio through the balance sheet. So again, I couldn't be more optimistic. And that -- those 3 pieces really are why we feel very confident about 2026 and beyond. Chris Jacobi: We currently have no further questions. So I'd like to hand back to Leon Topalian, Chair and CEO, for any closing remarks. Leon Topalian: Well, thank you all for joining us on today's call. And before I conclude, I want to once again thank our team for delivering a strong start to our year and also for your unwavering commitment to becoming the world's safest steel company. I'd also like to thank our customers for the trust that you place in us each and every day. And finally, to our investors for your continued confidence in our long-term strategy. Thank you, and have a great day. Operator: Thank you. This now concludes today's call. Thank you all for joining. You may now disconnect your lines.
Operator: Greetings, and welcome to the Asbury Automotive Group First Quarter 2026 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Chris Reeves, Vice President of Finance and Treasurer. Thank you, sir. You may begin. Chris Reeves: Thanks, operator, and good morning. As noted, today's call is being recorded and will be available for replay later this afternoon. Welcome to the Asbury Automotive Group's First Quarter 2026 Earnings Call. The press release detailing Asbury's first quarter results was issued earlier this morning and is posted on our website at investors.asburyauto.com. Participating with me today are David Hult, our President and Chief Executive Officer; Dan Clara, our Chief Operating Officer; and Michael Welch, our Senior Vice President and Chief Financial Officer. At the conclusion of our remarks, we will open up the call for questions and will be available later for any follow-up questions. Before we begin, we must remind you that the discussion during the call today is likely to contain forward-looking statements. Forward-looking statements are statements other than those which are historical in nature, which may include financial projections forecasts and current expectations, each of which are subject to significant uncertainties. For information regarding certain of the risks that may cause actual results to differ materially from these statements, please see our filings with the SEC from time to time, including our Form 10-K for the year ended December 31, 2025, any subsequently filed quarterly reports on Form 10-Q and our earnings release issued earlier today. We expressly disclaim any responsibility to update forward-looking statements. In addition, certain non-GAAP financial measures as defined under SEC rules may be discussed on this call. As required by applicable SEC rules, we provide reconciliations of any such non-GAAP financial measures to the most directly comparable GAAP measures on our website. Comparisons will be made on a year-over-year basis unless we indicate otherwise. We have also posted an updated investor presentation on our website, investors asburyauto.comhighlighting our first quarter results. It is my pleasure to now hand the call over to our CEO, David Hult. David? David Hult: Thank you, Chris, and good morning, everyone. Welcome to our first quarter earnings call. Our first quarter results highlighted efforts to transform our business by optimizing our portfolio and successfully migrating to Tekion. Today, over 50% of our stores are running on Tekion. We remain on track and anticipate to be fully converted by the fall of this year. After which time, we expect to begin fully realizing the cost and efficiency benefits enabled by the new technology platform. . The first and second quarter of this year represents a peak in terms of number of stores, making the transition. As a result, costs related to integration and temporary disruption in store operations will also remain elevated as team members become fully acclimated to the new technology. Michael will provide additional color behind the transition and its impact on our financial performance. The first quarter also showcased a number of capital allocation decisions which Asbury -- which position Asbury for future success, while also returning capital to our shareholders. We divested 10 dealerships and a collision center at attractive multiples. -- representing approximately $600 million in annualized revenue. $147 million of the proceeds went towards repurchasing 678,000 shares of our stock, with the rest directed towards reducing our debt. In our view, our trading price undervalues the earning potential of the company, and we took advantage of this price to value dislocation to accelerate our repurchase activity. Moving on to our first quarter 2026 operational performance. Our results reflect the expected decrease in volumes as consumer demand moderated from last year's tariff turbine spike in sales. More challenging weather was also a factor as was the temporary disruption for the stores going through the Tekion conversion. While new vehicle volumes were down, gross profit on a per unit basis held up well. On an all-store basis, new vehicle PVRs were down just $73 sequentially, and 177 on a year-over-year basis. An indication profitability is beginning to approach normalized levels. Similarly, used vehicle PVRs on an all-store basis, was $1,847, which is up sequentially 5% and 16% year-over-year as the team continues to execute our strategy to maximize per unit profitability. Parts and Service had a more challenging quarter, driven by a variety of factors, including weather, a more cautious consumer and temporary disruption from our DMS transition. That said, we still expect fixed operations gross profit to grow at mid-single-digit rates over time. And now for our consolidated results for the first quarter. We generated $4.1 billion in revenue at a gross profit of $727 million, a gross profit margin of 17.7% and an expansion of 22 basis points. We delivered an adjusted operating margin of 5%. Our adjusted earnings per share was $5.37, and our adjusted EBITDA was $207 million. Before I hand the call over to our incoming Chief Executive Officer, Dan Clara, I want to take a moment to thank our team members to helping to make Asbury Automotive the company that it is today. Together, we have transformed our organization from a regional player to one with national scale in highly desirable markets, a balance portfolio and a leader in technology focused investments. It has been an honor and a privilege to serve as a steward of this business for the past 8.5 years. and I know our best days are ahead with Dan running the company. Dan I will hand things over to you to discuss our operational performance in more detail. Dan Clara: Good morning, everyone. Thank you, David, for the kind words. I feel I can speak for everyone here in saying that Asbury would not be as strong as it is today without your vision for growth and seeing the potential in this company. We all wish you the best in your next role as Executive Chairman. And now moving on to the quarter. I would also like to thank the team members for handling the challenges that were thrown at them this quarter. including severe winter weather in nearly all our markets and across multiple weekends. Our teams have been working diligently to make a transition to Tekion a smooth process and we are pleased with the early progress our stores are making. Changing the DMS is a complex endeavor for any dealer group, let alone one of our size, but it is necessary in order to elevate the guest experience and enhance our capabilities for strong operational performance. As an example, we converted the [Koons] dealerships last summer, and they are starting to show the power of the software. For that specific group in March, we saw gross dollars per technician up 21% year-over-year, and average productivity per service advisor up 16%. We are seeing efficiencies extend beyond the service day as support cost in the stores decreased by 5% at the same time. And now I'm going to provide some updates on our same-store performance, which includes leadership in TCA on a year-over-year basis unless stated otherwise. Starting with new vehicles. Same-store revenue year-over-year was down 9%. While we believe the winter weather impacted sales activity, we are also monitoring consumer behavior in light of ongoing geopolitical events. New gross profit per vehicle was $3,061 as luxury maintained GPUs in line with the prior year and import and domestic moderated as expected. On an all-store basis, which includes the positive impact of the Chambers platform, new gross profit per unit was $3,371, only down $177 year-over-year. Across all brands, our same-store new day supply was a healthy 54 days at the end of March, which we believe support resilient gross profit per unit. Turning to used vehicles. First quarter total used gross profit was up 1% sequentially. Used retail gross profit per unit was up 12% at $1,828, a $201 increase over the prior year and a $79 increase over our reported fourth quarter 2025 number. Our efforts in use continue to pay off. This represented our second consecutive quarter of progress in growing GPUs. We have seen sequential increases in GPUs in 6 out of the last 7 quarters, thanks to our teams executing more consistently. We anticipate the pool of used vehicles will increase through the year, aided by lease return activity, which can give us the opportunity to increase volume and maintain this level of. Finally, our same-store used DSI was 30 days at the end of the quarter, down from 35 days at the end of the fourth quarter. Shifting to F&I. We earned an F&I PVR of $2,307. The nonres deferral impact of TCA was $45 a -- so without the year-over-year impact of PVR would have been $2,351. We are on track to implement TCA in the timber stores by year-end, which will complete our rollout across all our platforms. And finally, in the first quarter, our total fund and yield per vehicle was $4,806. On an all-store basis, our front-end yield was up $70 year-over-year at $4,921. Now moving to Parts & service. Our same-store Parts & Service gross profit was down slightly year-over-year due to slowdowns associated with the winter storms. In addition, it is also important to note that when we convert stores to Tekion, there is a short-term effect of adjusting to the new software at the store level. We believe it takes about 4 to 6 months to overcome the muscle memory of the legacy software and start to see efficiencies take hold, like those I mentioned earlier. Now going back to the quarter's results. Customer pay gross profit was up 1% with warranty gross profit higher by 3%. During the month of March, we generated 4% growth for both customer pay and warranty gross, which was encouraging to see. April to date is trending similar to March. Overall, we believe our stores are well positioned for the extended period of growth within parts and service supported by the aging car park and increased vehicle complexity. Before I pass the call to Michael, I want to thank the team again for your hard work to deliver a guest-centric experience and striving for improvement to unlock further performance. And with that, I will now hand the call over to Michael to discuss our financial performance. Michael? Michael Welch: Thank you, Dan, and good morning to our team members, analysts, investors, other participants on the call. Our financial performance in the first quarter, adjusted net income was $102 million. Adjusted EPS was $5.37 for the quarter. In addition, noncash deferral headwind due to TCA this quarter was $0.26 per share. Our adjusted EPS would have been $5.63 without the deferral impact. . Adjusted net income for the first quarter of 2026 excludes net of tax, net gain on divestitures of $94 million, $5 million related to Tekion implementation expenses, $3 million of weather-related losses and $1 million related to the duplicate DMS related expenses. In our consolidated results, we estimate that the weather impacted gross profit by $19 million and EPS of $0.56. As stated in our press release this morning, during the quarter, we divested 10 dealerships and terminated 7 franchises, which included exiting the Alfa Romeo and Maserati brands. Combined, these stores generated an estimated annualized revenue of $625 million. Adjusted SG&A as a percentage of gross profit on a same-store basis came in at 66.9% which includes $2 million related to legal expenses for a specific matter. In March, we saw adjusted same-store SG&A in the low 60s. So we believe the SG&A number would have been more solidly within our expectations for mid-60s range without the severe weather headwinds. As Dan mentioned, there is some frictional costs associated with changing our DMS that will take time to work out. In the short term, the stores are slightly less efficient than the first 2 months of operating in the new DMS. In months 4 to 6, we see the stores become more efficient -- it is encouraging to see our team members lean into the tool and embracing the operational improvement as the new platform can provide. Overall, we believe any short-term headwinds are outweighed by the benefits to come. Before I move on, I will note that the onetime implementation costs at the stores and the cost of duplicate software have been adjusted out of our non-GAAP SG&A numbers as shown in our press release this morning. Next, the adjusted tax rate for the quarter was 25.1%. We also estimate the full year 2026 effective tax rate to be approximately 25%. TCA generated $15 million of pretax income in the first quarter. The negative noncash deferral impact for the quarter was $7 million. We generated $166 million of adjusted operating cash flow during the quarter. Excluding real estate purchases, we spent $46 million on capital expenditures in the first quarter and still anticipate approximately $250 million of CapEx spend for both 2026 and 2027. Adjusted free cash flow was $120 million for the first quarter. We ended the quarter with $1.2 billion of liquidity comprised of floor plan offset accounts, availability on both our used line and revolving credit facility and cash, excluding cash of Total Care Auto. Our transaction adjusted net leverage ratio was 3.2x at the end of the first quarter. As David mentioned, we took opportunities to optimize our portfolio through strategic transactions. Our divestitures in the quarter also reduced our CapEx burden, further allowing us to deploy cash to higher-return options. The proceeds of the divestitures combined with robust cash flow in our business allowed us to balance our capital allocation priorities, both reducing our debt level and repurchasing 678,000 shares. Our diluted share count is approximately 18.6 million shares before adjusting for any future buybacks. And finally, before we open the Q&A, I would like to thank David for his years of valuable leadership. David guided us very -- through a new level of growth and is still the team focused and guest-centric culture that makes Asbury what it is today. And with that, this concludes our prepared remarks. We will now turn the call over to the operator and take your questions. Operator? Operator: [Operator Instructions] Our first question comes from the line of Jeff Lick with Stephens. Jeffrey Lick: David, just want to extend my thanks and you'll be missed. Since we've got you, I was wondering if -- look, 1Q was obviously a pretty noisy quarter on a variety of fronts, weather being one of the most. I wonder if you can just give a state of the union of kind of where we are for yourselves and the industry in 2Q. Just thinking about new and then new has some implications for used. And then obviously, service and parts was a little lumpy. I mean you did mention it was up in March. But just kind of where do you think things stand now that the tax refund season is over? And obviously, we're not going to be getting is any more of the rest of this year. David Hult: Sure, Jeff. I'll take a shot and Dan can jump in. January and February were really rough for us from a weather perspective and we go far behind the 8 ball at that point before the weather started hitting in mid-January, we were actually facing well the first half of January. And then once we got hit with all the weather, we kind of didn't recover. March was a good sign for us. Last March and April, were extremely strong with the tariff pre sales for lack of a better term, but we really bounced back. And to Michael's comment, being in the low 60s for SG&A from March was a telltale sign for us. We see the same going into April. Very difficult to predict much beyond that with what's going on with the war in gasoline prices and other things and how long that lingers. One would think the longer that lingers, the more impactful that's going to be on our business. We're definitely feeling the slowdown. It's not all the same by brand, but we're still seeing a slowdown in new car sales into April as well. And just a top level, we were essentially back about 4,300 units or so in the quarter on new on a same-store basis. roughly, you're going to take in 2,300 to 2,500 trade-ins on those 4,000 and you're going to retail 80% of those cars. So there's a chunk of preowned that we normally have internally to sell that we don't have. So it will be a balancing act the next few quarters if new doesn't pop back where we're going to source vehicles. But I think Parts & Services is going to bounce back nicely and continue to grow as the year goes on, it does take us 4 to 6 months with Tekion to get the muscle memory right in the stores. It doesn't matter the market or the brand. It's just human behavior takes time. But once you get tested that 6-month window, you can really start to see some efficiencies as to why we would make this change in the DMS. We do believe it makes our folks more efficient and more productive, while certainly lowering our costs at the same time. I don't know if there's any you want to add. Unknown Executive: I think you covered up all, nothing to add. Jeffrey Lick: And then just a quick follow-up for Dan maybe is you wonder if you could just give us 1 thing with Tekion, where you look at it and say, it manifests itself in financial benefit where you say, you know what, we're making the right decision here yet -- it might be a little noisy for 4 to 6 months, but when you start to look at our P&L a year or 2 years from now, we made the right decision. I was wondering if there's one thing you could highlight. Dan Clara: I think -- Jeff, I think I covered it just 1 example of several that we're seeing earlier today. When you think about the efficiencies to -- that the new software brings. When you look at the gross dollars per technician being up 21% at cons and the average productivity per service adviser -- and then you add the fact that support cost has also decreased. It's a pretty nice mix and aligned with what we expected. And then to put icing on the cake, the guest experience is definitely improved upon by the ease of using the technology, the ability to enhance how fast that guests can be served. So we believe that it definitely gives us a competitive advantage that we need for the future, and it is definitely the right thing to do. Operator: Our next question comes from the line of Rajat Gupta with JPMorgan. Rajat Gupta: Great -- and then David, best of luck and hope to catch up at some point again. I want to just follow up on some of the first quarter results, especially around the new car units and even used car of 11% same-store decline and the 12% in use, is there any way to break up how much of it was weather? How much of it was just the Tekion productivity? And then how much of it was market. Any way to parse that out would be helpful. And I have a quick follow-up on SG&A. Dan Clara: Yes. Raj, this is Dan. I'll start it. On the -- when you look at the weather impact, I'm talking about from a same-store basis, we believe there's no closure in Q1 affected us somewhere in the $500 range and similarly in U.S. core volume. And then when you when you go down to the fixed revenue as well, obviously, that had a tremendous impact somewhere on a same-store basis, somewhere around $13 million impact. So it was a significant impact. And as you know, when we have weather-related issues, it's not just the data we're close. It's the days leading up to with all the media friends that happens and the days after the fact recovering David was in the Northeast of that time. And as you know, the Northeast was hit pretty severely and there were piles and poses now. So it was definitely a big impact. But glad that it's behind us and glad that March showed that we are directionally correct. And glad that April is similar to March so that we continue to build on the momentum. Rajat Gupta: Got it. And how much do you think you lost due to like just the Tekion rollout in 1Q because you'll probably close the store for like a day and like the Monday, I'm curious if that had any meaningful impact on the units. I know it probably impacted services, but anything on the units that you could flag? Dan Clara: So yes, on the -- I don't have the exact number, Michael, I don't know we have not shared that number. But on -- you bring up an excellent point because when we roll out the Tekion stores, we go through the conversion, Saturday and Sunday, and we closed operations on that Monday. So that is definitely a day that we lose from being able to serve our guests. And then Tuesday, we've reopened. But again, that's a competing new system were much lower than what we used to be until we developed that muscle memory that like I explained earlier, it takes between 4 to 6 months to get back to the efficiency levels. Rajat Gupta: Got it. Got it. And just to clarify in Mike's comments on SG&A on the call -- in the prepared remarks, I think you mentioned mid-60s excluding the weather headwinds. I just want to make sure we heard that correctly. Is it mid-60s even excluding some of the productivity losses from the DMS transition? I'm curious, like, what's a good steady-state number both taken. If it did not have weather, if it did not have DMS transition? What would have been a good steady-state SG&A to gross number in the quarter? Michael Welch: Yes. I think based on the March results that we saw that were in the low 60s, I think mid-60s without the weather would have been the right now for the first quarter. So we're still comfortable in that mid-60s range, going forward. And then at some point in the back half of the year as we start to see the Tekion efficiencies come through. I don't know if that's fourth quarter or where that shakes out. But sometimes we'll start seeing an approach toward the mid-60s after we get the Tekion efficiencies running through the system. Rajat Gupta: Got it. Just a final one on buybacks. Given the fact that you're ramping up buybacks here why EBITDA is coming down. I'm curious, is this you taking a view on the benefits of the Tekion rollout and the benefits you might see into 207 and beyond, that's giving you that confidence given like the cyclical backdrop still looks a bit choppy here. Just curious list thinking around the buybacks ramping up. Michael Welch: So a couple of things in there. In the first quarter, we disposed of the stores, and so we used those proceeds to buy additional shares in the quarter. But also as the share price continues to dislocate and get low levels at attractive prices for us. We took a view that we need to take advantage of that stock price. We do think the back half of this year and into 2017, the EBITDA comes up dramatically with the Tekion rollout behind us. And so we're kind of trying to balance the leverage ratio and the share buybacks. And if the share price is low, we're going to lean in a little bit of share buybacks. Operator: [Operator Instructions] Our next question comes from the line of Glenn Chin with Seaport Research. Glenn Chin: Just another follow-on related to Tekion, can you just confirm for us sort of the contour the tuck-on impact throughout the year? Do the cost and inefficiencies from the transition peak in 2Q? Michael Welch: No. So -- if you think about just the stack-up effect, we have first quarter was pretty heavy rollouts. 2Q has a decent amount of rollout and then we go kind of handle the West in 3Q. And so just the stack of all the storage, if you think about that 4- to 6-month window, it will probably peak in 3Q. At some point, call it, sometime in 4Q, we should be able to flip over the -- we have more stores that are past the 4 to 6 months. But I would say that the peak is going to be very late 2Q into 3Q is kind of where the peak will be. Glenn Chin: Okay. Very good. And I understood that you're going to adjust out sort of the explicit costs from Tekion, those time line around those, Michael, is also same? Michael Welch: No, it should be similar. 2Q and 3Q, 2Q pros a few less stores in it and 3Q has a few more. So just from an implementation cost perspective, it will be in a similar ballpark to 1Q, but maybe a little lighter in 1Q and similar to 3Q when you compare to 1Q. . Glenn Chin: Okay. Very good. And then I think Dan, you mentioned in your prepared remarks as well as last quarter, just hesitation around the consumer with respect to parts and service. Can you just -- any further elaboration on that, if you will? Dan Clara: Yes, Glenn. We saw the pullback, as you mentioned in Q4 going into Q1, there's a lot of uncertainties going on out there. So I would say that it is somewhat consistent, but there is -- keep in mind, there's a new award that has started. That is with oil prices at an all-time high is just keeping people on more of the defensive side of it. But again, when I go back into my remarks earlier today, it's encouraging to see what we saw in April, customer pay up and seeing the same trend going into April -- I'm sorry, in March going into April. Glenn Chin: Okay. Very good. That's it for me. David, we'll miss you, good luck with everything and your new position. David Hult: Thank you. Operator: Our next question comes from the line of Alex Perry with Bank of America. Alexander Perry: I guess just first, I wanted to double-click a little bit more on sort of the current stated demand with where gas prices have gone and just the impact of consumer confidence -- on the new vehicle side, when did you start to see the slowdown? Is that more sort of an April comment? And is that just on new? Are you seeing any impact to mix yet in terms of the mix of vehicles that consumers are buying? And what are you sort of seeing unused? Dan Clara: Yes. On the new car, it really goes back to -- I mentioned this on the fourth quarter, there was -- we didn't really get the pop for a lack of a better term that we get in December. January, as David mentioned earlier today, the first half of January before we got hit with the weather, we were facing okay. and then we just never recover from the weather. So from a new car perspective, I will tell you that really after the weather never recovered, February about the same in March the same trend continued. From a mix, typically, when you see gas prices at the levels where we are right now, it usually takes 5 to 6 months for consumers to start really changing their buying habits. We have not seen that. And what I mean by that is a consumer that is going to trade in a Chevy Tahoe for Honda Civic or what have you. We have not seen that, but the longer the war goes, I think the closer we're going to be getting to see a shift in consumer behavior, but we're not there yet. And from a used car standpoint, the demand of used cars is there. especially with the difference in the cost of sale between a new and used car. When you factor in all the items that have gone up, insurance rates, the average cost of maintaining a car. When you look at all that, the demand is definitely there for used cars. We strategically have made the decision to not chase the volume and to maximize the gross profit -- and as we showed in Q4, we were heading gross profit. Q1 when you look at margin, again, even though we were backwards in volume, our gross profit was ahead year-over-year for used cars. So we believe strongly that, that is the right strategy to continue to execute. And as the availability of used cars become readily available as we move throughout the year, then we can pull that lever while still protecting the margins that we have delivered over the last few quarters. Alexander Perry: Got you. Got you. That makes a lot of sense. And then I guess I just wanted to ask a little bit more on the Parts & Service trend. If we think about comps from here, I think you mentioned the rebounding earlier in the call. Is that primarily a factor of just getting past the weather impact? Is there something you're seeing in terms of sort of delayed effect from people that would have came into the first quarter starting to come in? Like can you just maybe talk about how you think about the Parts & Services? And what sort of drives that rebound? Dan Clara: Parts & Service, we've always been saying mid-single digits. We have a -- we've developed a very strategic plan to go and grow our fixed operations, meaning Parts & Service. And no different than what we've done with U.S. cars. It's about the execution -- when you think about -- and you can see it on the IR deck, the average miles coming through our shop or continue to be in the 70,000 mile range. So that gives us a lot of stability that we are retaining the guest and obviously, that we have the opportunity to continue to maintain those cars for those customers. And the last factor that I see tremendous potential is growing the CP count and really focusing on what we call the cycle time, how fast can we serve our guests, which is also one of the benefits that I mentioned earlier of going to Tekion. The faster we get that guest in and out, the higher the retention and the higher propensity for that customer to come back and do business with us and the more throughput that we can push through our service departments. Operator: Our next question comes from the line of John Babcock with Barclays. John Babcock: I guess just first of all, I was wondering if you could talk about Herb Chambers , how the integration is going there and if there's anything new to share on that front? And then also, if you can just remind us when you're pointing on implementing Tekion into that business. Dan Clara: Yes. Herb Chambers integration is going well. We are very happy with the talent, the people. We've got some great team members, great stores and what they have built together is impressive and now is up to all of us to work together as a team to take it to the next level. Tekion rollout at Chamber started last month. We've already converted. I think -- we have -- we need 2 stores, 22 or 24 stores, call it, in the 20% range with the rest of the stores. I think we have 8 more that are going to be converting in the month of May or June, I'm sorry, in the month of June. So by June, chambers will be completely converted to Tekion. David Hult: Okay. And the next question, just on GPUs because you do break it out across luxury imports and also domestic. And it seems like quarter-over-quarter, there was pretty good stability in luxury and imports, but domestic was down a decent bit. Is there anything we should take note of from those trends? Or... Dan Clara: Listen, the biggest impact that I'm seeing on domestic side is we still have the headwind of Stellantis. We are well aware of it. We're focusing on performing better with Stellantis, getting that inventory turn and maximizing the gross profit. But it really -- the biggest impact in the domestic was our Stellantis stores. . John Babcock: Okay. Very helpful. And then just my last question. Just I was wondering if you could share how much, if any, shares you bought back in April? Michael Welch: Yes, any shares we would have bought back in April would have been disclosed as part of the press release. So we did our share buyback early on in the quarter, took advantage of some share prices then. And so all those shares were purchased January through March. Operator: [Operator Instructions] Our next question comes from the line of Bret Jordan with Jefferies. Bret Jordan: On the plants, are you seeing any improvement in the trend? I mean it seems as if maybe they're making some product adjustments or maybe pricing adjustments? Are you seeing any traction there? Or is it pretty much the same? Dan Clara: From a high level, there are changes being made that make total sense, and it is a step in the right direction. -- but it's a double-edged sword because when they make those changes, I'll give you an example, they adjust the pricing for the new models coming in, but we still have the same model that is a year older that is more expensive than the new model coming in. And so that is where there is some pressure to the margins to be able to make sure that we liquidate that old inventory in the old pricing structure to make room for the new decisions that the management team is making. . Bret Jordan: Okay. And then I guess on the parts and service side of the business, you had a pretty hard warranty comp year-over-year. Could you sort of talk about what you're seeing? Are there any major warranty programs that are popping up that might give you some tailwinds in volumes in the balance of this year? Dan Clara: Yes. We had some big warranty comps. I'll tell you 1 of the -- I want to say surprise, but one of the, I guess, obstacles that we faced is 1 of our import OEM not a major decrease in warranty issues last quarter, which obviously more is something that we don't control. So we happily service the customers when they come in. but it's really outside of our control. Moving forward, we've seen some of the domestics that have issued some recalls and some additional warranty work. But it's hard to tell. Like I said, warrant is important to pay attention to it, but I cannot control it. That's why our focus is always on the customer pay. We're just after we serve the guests when the OEMs have any warranty issues. Operator: Our next question comes from the line of Ryan from Craig-Hallum. Matthew Raab: This is Matthew Raab on for Ryan. Just want to go back to the new GPUs, maybe putting a finer point there. We've talked in the past about settling out in that 2,500 to 3,000 range. you're at 3271 feels like inventory is pretty rational, and you're certainly getting the benefit of the Herb Chambers mix. I mean at this point, is there any reason why GPUs can't settle out near the higher end of that range? And if you have any expectation for new GPUs for 26, whether it's a year-end number or quarter-over-quarter decline through the rest of the year, that would be great. Dan Clara: Matt, thank you. Great question. And I agree with you. I think for the last several quarters, we've been talking about 2,500 or 3,000. We believe now that, that number is moderating, and it is closer to about 3,000 range. So to your point, excellent question. Operator: We have no further questions at this time. Mr. Hult, I'd like to turn the floor back over to you for closing comments. David Hult: Thank you, operator. We appreciate everyone joining our first quarter earnings call. And the team here looks forward to discussing our second quarter results in the future. Have a great day. Operator: Ladies and gentlemen, this does conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation, and have a wonderful day.
Operator: Welcome to Sysco's Third Quarter Fiscal Year 2026 Conference Call. As a reminder, today's call is being recorded. We will begin with opening remarks and introductions. I would like to turn the call over to Kevin Kim, Vice President of Investor Relations. Please go ahead. Kevin Kim: Good morning, everyone, and welcome to Sysco's Third Quarter Fiscal Year 2026 Earnings Call. On today's call, we have Kevin Hourican, our Chair and CEO; and Brandon Sewell, our Interim CFO. Before we begin, please note that statements made during this presentation that state the company's or management's intentions, beliefs, expectations or predictions of the future are forward-looking statements within the meaning of the Private Securities Litigation Reform Act, and actual results could differ in a material manner. Additional information about factors that could cause results to differ from those in the forward-looking statements is contained in the company's SEC filings. This includes, but is not limited to, risk factors contained in our annual report on Form 10-K for the year ended June 28, 2025, subsequent SEC filings and in the news release issued earlier this morning. A copy of these materials can be found in the Investors section at sysco.com. Non-GAAP financial measures are included in our comments today and in our presentation slides. The reconciliation of these non-GAAP measures to the corresponding GAAP measures is included at the end of the presentation slides and can be found in the Investors section of our website. During the discussion today, unless otherwise stated, all results are compared to the same quarter in the prior year. [Operator Instructions] At this time, I'd like to turn the call over to Kevin Hourican. Kevin Hourican: Good morning, everyone, and thank you for joining us today. I'm pleased to report that Sysco delivered strong results in the third quarter of fiscal 2026. Our results were enabled by improving case volume trends, strengthening gross margin performance and disciplined operational execution. We delivered our progress improvement in a continued choppy macro environment. Given our positive momentum, we remain confident in our expectations for full year adjusted EPS to be at the high end of our annual guidance range of $4.50 to $4.60. Most notably, we delivered 3.3% local volume growth in our U.S. business, a 210 basis point improvement versus the prior quarter and our strongest quarter local volume growth in 3 years. We have clear momentum in our local business, and we have confidence that we will continue to post strong local results in Q4 and into fiscal 2027. While our primary focus for today's call will be the underlying strength of our core business, we will also discuss the strategic rationale surrounding our entry into the cash-and-carry space with our recently announced planned acquisition of Jetro Restaurant Depot. After my remarks, Brandon will highlight our financial outcomes and share his thoughts on the financial merits of the Jetro Restaurant Depot transaction. Before I begin, I would like to formally introduce our Interim Chief Financial Officer, Brandon Sewell. Although Brandon may be a new name to many listening to the call today, he has been an important senior leader within Sysco for the past 12 years. Most recently, Brandon served as CFO of Sysco's largest segment, our U.S. Foodservice business. Prior to the U.S. CFO role, Brandon held several senior leadership roles across the organization spanning global financial planning and analysis, merchandising and supply chain. He will work closely with our executive leadership team to ensure continuity and disciplined execution of Sysco's financial strategy as we conduct a full search for a permanent CFO across internal and external channels. As I've shared with many of you over the recent weeks, Brandon is a very strong candidate for the permanent role. In the meantime, we are thankful and appreciative to have his expertise and leadership as a steadying hand and expert in our business. Brandon, thank you for your leadership. Let's jump into our business results, starting on Slide #4. From a top line perspective, Sysco delivered nearly $21 billion of total revenue, a growth rate of 4.7% versus the prior year. These revenue results reflect positive and accelerating case growth across our local, specialty, national and international business units. From a bottom line perspective, we delivered adjusted earnings per share of $0.94, which was in line with our expectations and inclusive of the previously discussed $63 million headwind related to lapping lower incentive compensation in the prior year, reflecting an approximate impact of $0.10 per share. Our revenue growth was fueled by improving volume trends across our business, but most notably by our USFS local case volume. Overall foot traffic to restaurants remains challenged, and Sysco is improving our performance due to selling initiatives within our direct control. Gross profit was up 6.5% year-over-year, and when excluding the $63 million in incentive compensation headwind, our operating income and operating income margin would have expanded on a year-over-year basis, while our adjusted EPS would have expanded to be in line with or slightly better than our long-term earnings growth algorithm. Looking at our underlying momentum in this way gives Brandon, our leadership team and me the confidence in the trajectory of our core business. We are encouraged by our results overall as our teams delivered strong volume growth in a soft restaurant traffic environment. Per Black Box, traffic to restaurants was down approximately 1.9% in the quarter. Sysco's improved performance is being generated by increased sales colleague retention and increased colleague productivity. Our sales colleagues delivered our fourth consecutive quarter of improvement in new customer win rates. We are able to take share and grow profitably even in a market with soft overall conditions due to our sales colleague training initiatives and sales enablement tools that are increasing colleague productivity. Specifically, AI360 is improving new colleague onboarding, and it is helping colleagues of all tenures increase their selling effectiveness. When coupled with our customer growth programs like Sysco Your Way and Perks 2.0, Sysco was improving how we serve our customers. Our progress in local volume can be clearly seen on Slide 8 in our presentation. Looking ahead in our fourth quarter, we expect to deliver at least 2.5% of local volume growth. To be clear, posting a volume growth of 2.5% in our fourth quarter would equate to a 120 basis point improvement versus Q3 on a 2-year stack basis, a clear continued acceleration in overall business outcomes. Importantly, we are now growing our local business faster than our overall business, which is very helpful to the overall operating margins of the company. Turning the page to our national contract business. During our third quarter, our national business generated case volume growth of 1.4%. We delivered strong growth in our health care, travel and hospitality, and foodservice management businesses. The positive growth from these businesses was partially offset by softness in our national restaurant segment. The declining foot traffic to restaurants per Black Box has disproportionately affected our national chain restaurant customers and can be seen in our results as volume with these customers was down year-over-year. For the fourth quarter, we expect case volume growth for national contract customers to improve versus Q3, driven by continued strength in our nonrestaurant business and onboarding of net new customer wins in the national restaurant customer business. Turning to our International segment. We are very pleased with the performance being delivered by our International team. The momentum in our International business was fueled by every International geography. To that end, local case growth in our International segment was up 3.8% in the quarter. This growth is being generated by expanded supply chain capacity, increased availability of Sysco Brand and merchandise, increased sales headcount and easier-to-use technology. This strong demand, coupled with disciplined expense management, delivered adjusted operating income growth of nearly 13%. Impressively, this represents the tenth consecutive quarter of double-digit operating income growth and highlights the continued strength of Sysco International as a growth engine within the company. Before turning the call over to Brandon, I want to highlight some of the key points tied to our previously announced agreement to acquire Jetro Restaurant Depot, the leading cash-and-carry foodservice supplier in the United States, as well as provide a brief update on the recent performance of that business. The acquisition of Restaurant Depot is a bold new chapter of profitable growth for Sysco, one that creates a combined company that is expected to grow faster, be more profitable and return more value to shareholders than a stand-alone Sysco. Most importantly, we will increase our ability to help save restaurants money with a more efficient buying program and by expanding Restaurant Depot's low-cost leader format to 125-plus net new geographies over time. Our 2 companies are better together, and our end customers will benefit. The cash-and-carry channel is large, growing and resilient, with an approximately $60 billion to $70 billion total addressable market. Restaurant Depot is the leader in the channel with a best-in-class format that serves smaller customers that are seeking value, freshness and convenience. Restaurants tend to choose which channel they prefer first, and they select a business partner within their channel. Customers seeking savings and the ability to pay with cash or a credit card find the Restaurant Depot one-stop shopping environment very compelling. Sysco serves a larger customer that is seeking delivery and the support of an in-person sales colleague. These customers desire the convenience of delivery and the high-trust service that comes with our dedicated and well-trained sales force. Our sales consultants provide restaurant advice, culinary suggestions and even menu price optimization suggestions. The minimal overlap between these 2 customer types creates clear separation between the 2 channels. With that said, our new company will be able to serve more restaurant operators, reach more purchasing occasions, and provide savings to more customers when we are a combined entity. From a financial perspective, Sysco will gain access to a large, resilient and growing new channel customers that is entirely local. I'd like to spend some time sharing initial examples of our 2 companies will be better together: increasing enterprise profitability and improving how we serve local customers. The first benefit is in purchasing efficiency. We will deliver $250 million of net cost synergies through the transaction. I want to be very clear that we do not intend to reduce headcount at either company as a result of the transaction. The cost synergies will come from buying products and services more cost effectively than we do today. By combining our volumes, we can be more efficient for Sysco and for our supplier community. As a result, we will buy better. We are extremely confident in our ability to deliver against this cost reduction target. The second benefit will be generated through revenue synergies across 2 companies. As I said in the deal announcement, revenue synergies beyond opening new stores are not included in the accretion targets of the deal model. But first, let me address the new store opening opportunity. We have completed a thorough analysis of the geographic white space opportunity for new Restaurant Depot locations, and we are very confident in our ability to open 5 to 6 net new stores per year for the next 25 years. Or stated differently, we are extremely confident that the core U.S. market can easily accommodate 125 net new Restaurant Depot locations over time. Many of these locations can be served directly by Restaurant Depot's effective and efficient supply chain, and select new store locations will be enabled by leveraging Sysco's vast inbound supply chain capabilities. By opening 125 net new Restaurant Depot locations, we will bring the low-cost leader format of restaurant supplies to more customers, saving tens of thousands of restaurants money, and we will create thousands of new jobs in the process. The opening of these 5 to 6 new stores per year is included in our modeled assumptions to support Restaurant Depot's core revenue growth. Beyond opening new stores, I would like to highlight additional vectors of growth enabled by our combination. The upside from these concepts is not included in the accretion figures that we have shared with you. The first example is cross-selling each other's expansive product assortments. Restaurant Depot has a compelling opening price point product line that has been developed across decades. There are many Sysco delivery customers that would like to buy these products, and they would like to have them delivered on their existing Sysco order. For instance, a customer could be buying premium protein and premium produce, but they are less particular on select frozen products. Offering these delivery customers a lower price tier of merchandise would equate to incremental cases on existing deliveries. Those that know this industry well understand that the most profitable case is the incremental case added to an existing delivery. To avoid trade-down cannibalization, we can target customers with personalized offers and provide those offers to customers who are not buying from within a given product category. Next up is an even bigger idea. Sysco's primary delivery customer receives approximately 2 deliveries per week. Running a restaurant is a dynamic business, and our customers often run out of products between their Sysco deliveries. Sysco today does not have a cost-effective solution to meet those spur-of-the-moment needs. And as a result, our customers are forced to take action on their own and oftentimes are buying items across a wide array of retail options. By partnering with Restaurant Depot, Sysco's sales colleagues will be better able to solve the needed now customer scenario. Concepts like click-and-collect or same-day delivery from Restaurant Depot locations will be a tool in our sales teams arsenal to meet these customers' needs. As we continue to open new stores, the Restaurant Depot store location will become an increasingly convenient asset to be leveraged. One more example is how Sysco can help Restaurant Depot customers. As small customers find success in their business, they oftentimes open a second or a third location. By partnering with Sysco, Restaurant Depot can provide these growing customers seamless engagement across the 2 purchasing channels, delivery from Sysco when they want it and cost savings at the store when they have time to shop for themselves. We will develop a loyalty program that rewards our customers, big and small, for the incremental purchases that they make across our multichannel format. Buy more, save more. It will be simple to understand and we will reward customers for purchasing growth regardless of channel. By combining Sysco and Restaurant Depot, our business will be able to provide the type of service a customer is looking for when they need it, at a price point they desire to pay. Together, we will become a nationwide omnichannel food service provider that grows our business profitably. This transaction meaningfully expands our penetration of the local customer segment, the most profitable segment in Foodservice. Restaurant Depot's business is 100% local. The acquisition is expected to increase Sysco's local revenue by 1.5x, increasing our enterprise margins. Lastly, as I mentioned on the announcement call, cash-and-carry is a very resilient channel. During every economic downturn, cash-and-carry has taken share from the overall market. Why? Because restaurant operators seek to save money in those times, and Restaurant Depot is their 100% best way to save money while getting everything they need in a one-stop shopping environment. Gaining access to cash-and-carry increases Sysco's profitability and resilience. Any transaction of this size does come with integration risks, risks that we will carefully manage through a talented Integration Management Office. Most importantly, Restaurant Depot will be run as a stand-alone segment within broader Sysco. It will continue to be run by Richard Kirschner, its longtime CEO, and Richard's existing and talented leadership team. They will make all key decisions on how the cash-and-carry business will be run. There will be limited technology integration as Restaurant Depot was a retail storage business. There's no need for us to rip and replace key enterprise software that successfully runs Restaurant Depot today. From a culture perspective, our 2 companies are excited for how we can work together and engage on what I call pull, not push, growth opportunities. Sysco will help Restaurant Depot on topics where we can help, like opening new store locations, and Restaurant Depot will most certainly be able to help Sysco better serve that needed-now customer purchasing occasion. As I said in my introduction, the new company will grow sales faster, be more profitable and will return more value to our shareholders than a standalone Sysco. As Brandon will explain in a few moments, the deal is immediately accretive and is in the top quartile of deals from a year 1 and year 2 earnings accretion perspective. In a moment, Brandon will explain our commitment to quickly reduce our debt level. In summary, this transaction is good for our shareholders in the short, medium and longer-term time horizons. Looking ahead, we understand that investors want to learn about Restaurant Depot, including how Restaurant Depot is performing. We expect the deal to close by approximately Q3 of fiscal 2027. Between now and then, we will provide periodic updates on the performance of Restaurant Depot. To that end, we have been advised by Restaurant Depot that in their most recently completed calendar quarter, their volume growth was approximately 4% and their operating margins were in line with expectations. In closing, I want to reiterate that we are encouraged by the strong results of our core business. Our leadership team is committed to delivering at least 2.5% local case growth in the fourth quarter and adjusted EPS results at the high end of our annual guidance range. We will continue to deliver strong results as we prepare to create a bold new chapter of growth with Restaurant Depot as a part of the broader Sysco family. With that, I'd now like to turn the call over to Brandon. Brandon, over to you. Brandon Sewell: Thank you, Kevin. I'm honored to be in this role and genuinely excited to get to work. Many of you know that I worked closely with Kevin and the IR team here for many years, and look forward to connecting with our analysts and shareholders going forward. Importantly, our priorities have not changed. We are focused on executing our strategy, maintaining the financial discipline that has defined Sysco for years and continuing to deliver value for our shareholders. I'm proud of the operational momentum in our USFS segment where I was most recently CFO. I understand the importance of strong, consistent delivery of financial results, and going forward, I'm excited to add value to Sysco through the lead finance role. We have substantially improved our local case performance over the past year and know how important this KPI is to our shareholders. We plan to maintain the positive momentum in our underlying business at Sysco. In addition, we expect to successfully execute the Restaurant Depot transaction, maintain a laser-like focus on cash optimization ahead of the anticipated closing date, and then rapidly and deliberately delever our balance sheet by at least 1 turn over the first 2 years post acquisition, as seen on Slide 19. As part of our acquisition debt structure, we have built in $3 billion of term loans and $1 billion of upcoming debt maturities to ensure ample prepayable debt that will facilitate this deleveraging. This is our commitment, and we are confident in our ability to achieve it. With that, let me turn to the quarter. Our Q3 results included sales growth of 4.7%, an accelerated rate of volume improvement, continued margin management and adjusted EPS that was in line with previously communicated expectations of $0.94. Importantly, our largest and most profitable USFS segment delivered a step-up in top line growth and, as previously communicated, grew adjusted operating income by 5.1%. Additionally, free cash flow grew 19% year-to-date. We expect strong year-over-year growth for the full year, positioning us well in our cash optimization efforts. As Kevin highlighted, we're experiencing the benefits from structural improvements, especially as retention and productivity of our sales force continues to improve. With 1 quarter left to go, we plan to finish strong, and we remain confident in delivering our FY '26 guidance. Q3 benefited from continued tailwinds from our strategic sourcing initiatives, contributing to 6.5% gross profit growth and 31 basis points of gross margin expansion year-over-year. This performance also reflects favorable mix benefits, with stronger volume from local customers and sequentially improved mix from Sysco Brand penetration rates. Specific to local volumes, our stabilized sales colleague retention and incremental productivity improvements helped drive sequential volume growth across local and national customers. Importantly, our supply chain continued to deliver productivity improvements and performed at an exceptional level, anchored by improved fill rates and order accuracy and improved safety performance. Additionally, warehouse productivity across our supply chain is nearing 2019 levels, and we expect further positive momentum going forward. Turning to International. This segment remains a great example of the power of the Sysco playbook. The positive momentum over the past few years continued in Q3, with sales growth of 12.4%, including local case growth of 3.8%, gross profit growth of 14.6% and adjusted operating income growth of 12.5%. Our strategy is driving results with this quarter marking our tenth consecutive quarter of delivering double-digit improvements in adjusted operating income. Now let's discuss our performance and the financial drivers for the quarter. Starting on Slide 13, for the third quarter, our enterprise sales grew 4.7%, driven by growth across all segments. Total U.S. Foodservice volumes increased 2.3%, while local volume increased 3.3% in the quarter. This marked our strongest rate of local case performance since Q1 of 2023. Additionally, SYGMA results this quarter were solid, reflecting 2.5% sales growth and 5.9% operating income growth, reflecting increased strength in our supply chain operations. Sysco produced $3.8 billion in gross profit, up 6.5%, gross margin expansion of 31 basis points to 18.6%, and improved gross profit per case performance. This notable margin expansion reflects the impact of our strategic sourcing efforts, sequential improvement in Sysco Brand, driven by customer mix, incremental progress in our value tier offerings and effective management of product cost inflation across our category baskets. During the quarter, inflation rates for the enterprise were approximately 2.8%, and in USPL were approximately 0.5%. These rates moderated slightly on a sequential basis, which we believe will help with product affordability across the industry. Overall, adjusted operating expenses were $3 billion for the quarter or 14.8% of sales, a 51 basis point increase from the prior year, reflecting the lapping of $63 million in incentive compensation from the third quarter of the prior year and planned investments in sales headcount in higher growth areas of the business [ with ] fleet and building expansions. This is an important point. The incentive compensation lap negatively impacted adjusted operating expense growth by approximately 240 basis points, and adjusted EPS growth by approximately 1,100 basis points on a year-over-year basis. Corporate adjusted expenses were up 31.1% from the prior year, primarily driven by the previously disclosed incentive compensation from last year. Overall, adjusted operating income was $768 million for the quarter. For the quarter, adjusted EBITDA of $970 million was up 0.1% versus the prior year. Let's now turn to our balance sheet and cash flow. Our investment-grade balance sheet remains robust and reflects a healthy financial profile. We ended the quarter at 2.80x net debt leverage ratio. Turning to our cash flow year-to-date, our free cash flow was $1.1 billion, up 19%, highlighting strong quality of earnings and reflecting both typical seasonality and timing of CapEx. Before we turn to guidance, I would like to briefly recap the financial details of the planned Restaurant Depot acquisition. As Kevin highlighted, we recognize Restaurant Depot as a best-in-class financial asset and are very excited about the transaction. In calendar year 2025, the business generated approximately $16 billion in revenue and $2 billion in EBITDA at a 13% margin, significantly above foodservice industry averages. This strong margin profile reflects the compelling concentration around Restaurant Depot's local customers, which show very little overlap with existing Sysco customers. The company's CapEx is less than 1% of sales. which includes both maintenance and growth CapEx. As seen on Slide 10, unlevered free cash flow is approximately $1.9 billion, with high conversion due to its profile of having negative net working capital and limited CapEx. To put that in perspective, this is a business that generates substantial cash with very little reinvestment required to sustain it. That profile is rare, and it is exactly the kind of asset that strengthens the balance sheet over time. On a pro forma basis, the combination increases Sysco's revenue by approximately 20%, adjusted EBITDA by approximately 45% and free cash flow by approximately 55%. The EBITDA margin of the combined company would expand by approximately 150 basis points, to 6.7%, inclusive of annualized net cost synergies, and meaningfully widen our gap versus our peers. From an accretion standpoint, we expect mid to high single-digit EPS accretion in year 1 and low to mid-teens in year 2. We have confidence in line of sight into the $250 million in annualized net cost synergies, which achieved full ramp by year 3. Additionally, the only revenue synergies modeled are from the expected annual store opening plan of 5 to 6 net new stores per year, which is in line with the company's historical growth. By year 4, the combined business is expected to generate more than $2 billion in incremental annual free cash flow. This level of cash generation would fundamentally expand our future capital allocation flexibility, accelerate our balance sheet deleveraging, support dividend growth, enable share repurchases and create capacity for future M&A without requiring new debt. The transaction is valued at $29.1 billion and will be funded through a combination of cash and approximately 91.5 million shares of Sysco stock. In preparation for this transaction, we are preserving cash levels by suspending share repurchase and remaining disciplined with capital expenditures. We will be prepared for the post-close period where we expect net leverage to be approximately 4.5 turns. We're committed to rapid deleveraging, reducing net leverage to approximately 3.5 turns within the first 24 months. After that, we see a glide path over time to return to 2.75 turns net leverage. Now let's turn back to expectations for the remainder of the year. We are pleased to reiterate our expectations for FY '26 adjusted EPS guidance. We continue to expect full year 2026 EPS to be at the high end of our prior range of $4.50 to $4.60. Keep in mind that this continues to include an approximate $100 million headwind from lapping lower incentive compensation in fiscal 2025, an impact of roughly $0.16 per share. Excluding the negative impact of the incentive compensation on 2026, our outlook for adjusted EPS growth in FY '26 will deliver at the high end of approximately 5% to 7%, which is in line with our long-term growth algorithm. Notably, we are reiterating our guidance for adjusted EPS even after suspending our anticipated share repurchase plans of approximately $800 million for the remainder of the year. For added context, our approximate $800 million of share repurchase would be worth approximately $0.10 to adjusted EPS on an annualized basis. Our guidance also includes continued expectations for net sales growth of approximately 3% to 5%, to approximately $84 billion to $85 billion, driven by inflation of approximately 2%, volume growth and contributions from M&A from earlier in the year. Specific to volumes, we expect to deliver year-over-year local case growth of at least 2.5% in Q4. We have visibility to the financial contribution from Sysco-specific initiatives, and this positive momentum in local represents a step-up on a 2-year stacked basis compared to Q3 of approximately 120 basis points. As it relates to corporate expenses, we've identified an action against $60 million of run rate cost savings through organization-wide spending optimization and efficiency activities. This is an incremental update. The savings will begin in Q4, with carryover benefits across 3 quarters of FY '27. This benefit to Q4 is already included in our guidance range and helps offset the impact of our previously disclosed lower share repurchase plans for the year. We remain comfortable delivering adjusted EPS at the high end of our range. For Q4, our current view is for adjusted EPS to be approximately $1.51. This includes the carryover impact from the incentive compensation specific to Q4 of $11 million, as outlined on Slide 20. We are proud of our strong track record of dividend growth and value our dividend aristocrat status. For FY '26, we remain on target for shareholder returns of approximately $1 billion in dividends planned for the year. On a per share basis, our payout in FY '26 equate to an approximate 6% increase year-over-year. Looking ahead to FY '27, our Board of Directors recently approved a $0.01 increase to our dividend, bringing our quarterly dividend on a go-forward basis to $0.55 per share. Now turning to a few other modeling items. For Q4, we expect adjusted interest expense of approximately $175 million to $180 million, which ties to $690 million for the year; adjusted other expense of approximately $10 million, which ties to $55 million for the year; a tax rate of approximately 24%, which ties to 23% to 23.5% for the year; and adjusted depreciation and amortization of approximately $210 million, which ties to approximately $820 million for the year. Looking ahead, we are confident in our position and remain focused on leveraging our strength as the industry leader to drive customer growth while continuing to create value for our shareholders. With that, I will turn the call back to Kevin for closing remarks. Kevin Hourican: Thank you, Brandon. Q3 was a quarter displaying momentum and progress at Sysco. We are confident that our progress will continue, and we plan to deliver local case growth of at least 2.5% in Q4, which reflects continued sequential momentum on a 2-year stack basis relative to Q3. We are excited for the progress that we are making and we are committed to strong execution in Q4 as we deliver on our outlook. We're incredibly excited about the planned addition of Restaurant Depot to the Sysco family and look forward to sharing additional information over the course of the year. I would like to thank all Sysco colleagues for their dedication to our customers and for the strong progress that we are making as a team. I appreciate you all very much. With that, operator, we're now ready for questions. Operator: [Operator Instructions] We'll take our first question from Jeffrey Bernstein with Barclays. Jeffrey Bernstein: Great. Kevin, the first question is just on the Restaurant Depot acquisition. It seems like investors appear cautious, contrary to your enthusiasm. It looks like maybe it's creating a near-term stock price overhang. So I'm wondering if you can just share what investor feedback you've gotten in terms of the primary drivers of that concern. I think you noted integration risk, but just wondering what else you've heard and whether you believe any of such is justified. I'd hate for a deal that doesn't close for 12 months to remain an overhang when it does seem like the underlying fundamentals appear to have actually reached a positive inflection. So any color you could share on that would be great, and then I had one follow-up. Kevin Hourican: Okay. Jeff, first, let me just say, congratulations to you on your retirement, 25 years of coverage in restaurant distribution is a long time, and we appreciate your diligence and your good questions. Let me start with your first question and then we'll come back to you for your follow-up. What we've heard from investors are 2 things: Thing one, Restaurant Depot was an unknown entity being the fact that it was a privately held company. Its size, its profitability, its makeup, its durability of success is not something that investors have had visibility to. And then thing two, purchase price of $29.1 billion tied to an unknown entity surprised some folks. What we've heard from investors over the past 3 weeks, as Brandon and I, and Kevin Kim, have done a roadshow, is the more they get to know the asset of Restaurant Depot, the more excited they are about the acquisition. In fact, our plan in the month of May, Kevin Kim will provide color and feedback to investors about this, is to invite investors to tour with us, including a management presentation, introducing some of the key leaders from Restaurant Depot. What we are confident is that more investors learn about Restaurant Depot, the more they're going to like it. As I mentioned on our call, it is a very large total addressable market, cash-and-carry, a profitable market, one that is resilient during all economic conditions. And it gains Sysco access to that channel through the industry leader in that space. They've grown their profits, Restaurant Depot, with 30 consecutive years. They've grown their revenue in 28 out of 30 years, and their business is 100% local. Increases Sysco's profit. It increases our rate of growth. It will increase our overall profitability. And the deal's day 1 accretive, year 1 accretive, year 2 accretive, and we believe strongly that it will increase our total shareholder return. Today on the call, I provided some incremental color, and that is Restaurant Depot is off to a good start. And they're on a calendar year basis, so their Q1 calendar was a good quarter, 4% volume growth with profit in line with expectations. So we understand the concerns that have been raised relative to the debt. Brandon, maybe I'll toss to you to talk about our confidence in our ability to delever quickly. Brandon Sewell: Yes, absolutely. Thanks for the question, Jeff. So we have suspended our share repurchases in preparation for the acquisition. On day 1 of NewCo, we'll be at about 4.5 turns debt to EBITDA. And we have detailed plans to reduce that down to 3.5 turns in 24 months. I will add too that we have cushion built in for a rainy day. That also means that when we execute our plan and don't need that cushion, there is opportunity to accelerate. We're fully confident, we have the commitment from the Board and the entire leadership team, to do so. Kevin Hourican: Jeff, back to you for your follow-up. Jeffrey Bernstein: Great. The follow-up is just on the restaurant trends. The U.S. local garnering all the attention, 3.3%, a very nice acceleration on a 1-year basis. It seems like that's continuing the trend in recent quarters. On a 2-year basis, it was a modest deceleration. Wondering how you think about the underlying fundamental momentum, whether you place greater credibility on the 1 or 2-year? I know you mentioned the 2-year acceleration for the upcoming fiscal fourth quarter. I only ask that because it does seem like, most recently, we've had some more cautious commentary from restaurants, the largest pizza player yesterday talked about consumer confidence at lows and inflation pressure in consumer spending and competition on the rise. It seems like more headwinds for the industry. So I'm wondering kind of your assessment of how you assess your underlying 2-year or 1-year trend, and whether you feel good about the outlook considering the more cautious industry perspective? And by the way, thank you very much for your congratulatory comments. Very much appreciate it. Kevin Hourican: Jeff, good questions. They both matter. One year, 2 year both matter. Let me just quickly reiterate some of the stats. From a traffic perspective, Q2 into Q3 improved by 90 basis points. Sysco's performance in that exact same quarter improved by 210 basis points. And those are both on a 1-year basis quarter-over-quarter. So our rate of improvement relative to the overall market was 120 basis points better than the overall market, which is confidence and proof that the progress that we're making is from actions within our control. We are confident that we can deliver increased performance and improvement in Q4, which is why today we reiterated 2.5% volume growth for our Q4, which, as was called out, is an acceleration on a 2-year stack basis of 120 basis points. We don't need the macro to improve for Sysco to be able to deliver that outcome. And the reason is becoming from our sales colleague retention improvement, sales colleague productivity improvements. We've launched new selling tools, which are increasing our colleagues selling effectiveness, AI360 as an example. And our customer-facing programs like Sysco Your Way and Perks are continuing to resonate with our customers and perform. The overall macro $4 gas, Jeff, where we're seeing that in our business the most is national chain restaurants. And as I said in my prepared remarks, we're seeing declines year-over-year in national chain restaurants. And those are some of the prints that you're hearing about in public quarterly earnings. We're pleased with the performance in the local sector, specifically those mom-and-pop restaurants. There are a large number of customers not served by Sysco. And we can grow our business and grow our business profitably even in a macro that is choppy. My last comment is our [ non-commercial ] business, within our contract sales, continues to perform at a high level. The foodservice management, health care, travel and hospitality and education specifically. We're seeing volume growth in those sectors and we expect for an increase in our national volumes in Q4, mostly driven from those sectors. We do not anticipate same-store sales improvement from our national chain restaurants, and we have some new customer wins are onboarding in Q4 that will provide a bit of a tailwind to our CMU or corporate contract volume. Brandon, is there anything you'd want to add? Brandon Sewell: Yes. Just on a 2-year stack from Q2 to Q3, Sysco would have improved by about 60 basis points. And then Q3 into Q4, as we called out in the prepared remarks, it's about 120 basis points. So we see sequential improvement both on a 1-year and a 2-year stack. Operator: Our next question comes from John Heinbockel with Guggenheim. John Heinbockel: Kevin, 2 quick things. One, can you touch on the composition of net new account wins, right? Because that's probably growing a little faster -- local, growing a little faster than the 3.3%. And I'm curious, have the losses, the account losses, have they now completely normalized to where they were a couple of years ago? Or is that still an opportunity? And then lastly, you touched on the new business in national. How aggressive are you attacking that given the strength now in local? And how choosy are you being when you think about the profitability of those accounts? Kevin Hourican: John, very good questions. As you know, we track new loss and penetration across all customer types. Those are the 3 metrics that matter. In the most recent quarter, we saw a continued acceleration in our new, that is multiples of multiples of consecutive quarters of acceleration of new. So we're continuing to see progress in new, mostly fueled and driven by increased sales consultant headcount or boots on the ground within sales. We are seeing improvement in loss, consistent, steady improvement in loss. There's still room for improvement there. We have an internal goal of of a loss target that we are marching towards with continued improvement. We want to maintain our success in new and we want to continue to attack customer loss. And as our sales colleague retention improves, as our productivity of colleagues improves, as we're in front of our customers more frequently and more often in using tools like AI360 to sell better and serve better, we are confident that we can improve still the loss rate. What we're really pleased about is penetration. We had our strongest penetration performance in Q3 in a long time, and that too is a direct factor of selling effectiveness. What AI360 does for our sales colleagues more than anything is the power of data and intelligence to know what we can be selling, what we should be selling and what should be on Sysco's truck. And it preauthorizes deals for that sales colleague to be able to offer to that customer to get cases that should be on our truck, on our truck. And as you well know, that is the most profitable case, is that incremental truck case to an existing stop being made to a customer. So we're seeing really solid performance in pen, and obviously, it's the aggregate of new loss in pen that equals the 3.3% volume growth that we just delivered, and we're confident in our ability to continue to make progress as we head into 2027. On the national side of the ledger, as you know, we're very disciplined in our pricing approach. We have a Pricing Council that Brandon I and our Head of National Sales, Greg Keller, lead together where we make very disciplined intentional choices. We do not relax our guardrails for profitability when we're targeting net new business. The wins that we are making are happening because of our nationwide scale, in many times, our international scale, our ability to help those concepts grow outside of the United States, and the technology that we have deployed to national customers to make it easier for them to do business. So the wins that we have posted are because of our capabilities, not because of lowering margin profile. Operator: Our next question comes from Alex Slagle with Jefferies. Alexander Slagle: I just wanted to ask for a little more color on the local volumes. If you could provide any updates on the cadence. I know last year, there was a big acceleration in March and April, and sort of a lot of noise just with external dynamics. Just maybe if we could get a sense for the trend into fiscal 4Q that kind of leads to that 2.5% local case outlook and your confidence there? Kevin Hourican: Okay. Alex, I'll start this question and then toss to Brandon for additional color that he would have. I think I've been pretty clear on Q3, so I don't think I'm going to belabor that point. Your incremental part of your question was on how's April and how are we starting out in Q4. So if I could, I'll address that. April is an interesting month always because of the movement of Easter and it has an impact on the month on a week-over-week basis. With that said, April's performance was in line with our expectations. And therefore, we are on track to deliver against our at least 2.5% local volume growth in Q4, which as we've said a couple of times on this morning's call is an acceleration of 120 basis points on a 2-year stack basis. Brandon, what else would you like to say about Q4? Brandon Sewell: Yes. And the only thing I would say is, in Q3, 2 other things to call out is I always look at our geographies and we had consistent results across all of our geographies on AI360 as to what gives us confidence for that volume growth and the penetration to continue. I was on a recent ride-along with an SC and said, why do you use it? And he said, "It saves me time, makes me more money and identify products my customers are looking for." We see the usage of AI360 increasing, both in amounts of times per day and number of SC. So the tool is working and it gives us confidence. And we saw that, to Kevin's point, in April. Operator: Our next question will come from Sara Senatore with Bank of America. Sara Senatore: A question about Restaurant Depot and then a quick clarification on the mix shift from local and national. So you mentioned $250 million in net cost synergies. I just wanted to make sure I understand what that net means. Is the goal to reinvest some of the costs into lower prices for customers? Presumably, maybe there's -- that's where some of the synergies come in on the revenue side. And then the $250 million is what you'll let flow through the bottom line? Or just trying to understand what sort of that net means and how it will be split between investors and customers. Brandon Sewell: Yes, I'll take this one, Sara. The $250 million net, but what we mean by net is we do have to invest in Restaurant Depot to make it a public company, things like SOX compliance, cybersecurity, et cetera. And that's really the net portion. The other component -- the other components of $250 million of cost synergies are really mostly merchandising synergies. So it is taking the products that we buy today, comparing them across Restaurant Depot and across Sysco, and working with our suppliers to get increased merchandising benefits. So we've done that process through a clean room environment and a third party. We're highly confident in the number. The -- if you look in the deal model, it only ramps up to a full $250 million in year 3. So we're confident really on 2 fronts. One is the timing of it. We could execute it earlier in the process. And two, we have a significant cushion on the cost synergies. We significantly haircut it, and we're confident in that $250 million number. Kevin Hourican: And just to hit the nail on the head, the $250 million is what would drop to the bottom line. To the point that Brandon just made, when we over deliver against that purchasing target, we have an opportunity to share in that benefit with customers. We will share in that benefit with the customers in a very responsible, prudent way. But the $250 million can be put into the models as it relates to improved profitability of the combined NewCo. And just how we bring value to customers is the following. We're going to open net new Restaurant Depot doors, I said net 125 new doors. As we do that as a combined entity, we're bringing the low-cost leader, the one-stop shop way in place that restaurants can save money to more communities. That will save tens of thousands of restaurants more money. The other way we're going to save customers' money is by bringing Restaurant Depot's industry-leading value tier assortment into the Sysco assortment on Sysco's delivery trucks, which can enable a customer to be able to buy those products on their existing Sysco delivery. We've received a lot of questions about, well, isn't that cannibalization? I want to be really clear about this point. We have a very sophisticated personalization tool on our website and in AI360, and we will target those value tier products to those customers who are not buying that given category at all. So example, they're not buying frozen shrimp. We know the reason why is because our price point is too high with our Sysco Classic product, as an example only. And Restaurant Depot has a really terrific opening price point in frozen shrimp that we can gain access to in a cost-effective way. So that would be incremental business. But the $250 million would drop to the bottom line. And Sara, you had a second question. So back to you for your follow-up. Sara Senatore: Yes, and that's very helpful. I appreciate it. So to the extent there's upside to some of these savings, like you said, you could share them with customers, perhaps sharper on prices. And then the follow-up was just on the national restaurants. I just want to clarify, so you said [ volumes ] were down. Is that sort of in line with the industry? Or was there any kind of market share or gain -- share loss or gain that was going on there? I know you're looking to bring in new customers. But just trying to understand, as I think through improvement in local, to what extent has that been offset on perhaps -- on perhaps share loss in national? Kevin Hourican: Yes. It's not from share loss in national. It's comp store sales to existing national customers, consistent with traffic declines that are being experienced in the industry. Our improvement in Q4 is the retention of the customers we currently have, plus we will have onboarding of net new wins that were signed -- these are contracts that were signed previously. National is a long lead sales cycle, these contracts take a long time to negotiate. So we know the start ship dates or ship dates happening in April and May and in June, and that is all obviously included in our forecast, included in our guidance for Q4. Operator: Our next question will come from Edward Kelly with Wells Fargo. Edward Kelly: I wanted to just follow up on Restaurant Depot. Kevin, you talked about volumes up 4%. You get 1%, 1.5%, I guess, or so in new stores and some inflation. So I'm just curious, comps seem like they're probably up mid-3s. I want to confirm that. And then there's been a negative building narrative out there around underinvestment in the business, capital and labor and then around sustainability of margins. Can you just speak to these concerns and how you got comfort around the overall sustainability of the margin of this business? Kevin Hourican: Two great questions. Just as it relates to R&D in this period between sign and close, there's limited disclosure of reporting that were enabled at this time to be able to communicate. What we have is direct advisement from RD, and this is the color that I can share, is volume and overall profitability. So volume up 4% and profitability on track for the quarter. And those are 2 solid prints. 4% volume growth is a solid print, and it's coming with expected rates of profitability. So off to a good start in their Q1 and it's the type of color that we will provide throughout the rest of the year. And as the deal closes, obviously, we can get into much more metrics and in much more details on the composition of the P&L. To the second part of your question, Ed, as it relates to some of the statements that have made or comments that are made about RD, I'd like to give investors the confidence that we have on the sustainability of the profitability of RD. Let's first start with CapEx. There's perhaps a perception that underinvestment has occurred. We have detailed studied that particular topic. And as Brandon has called out, we have capital that is deployed at Sysco that isn't necessary in the RD model. Trucks, trailers, one of our largest capital investments is in our fleet. Restaurant Depot does not have a fleet. So that type of investment that Sysco has is not relevant for them. Specific to the stores themselves, we hired a third-party firm to do detailed assessments of literally every single location. Think about when you're selling your house and you get an inspection report. We have one of those reports for every single store. So we know exactly the conditions of the roofs, the parking lots. The most expensive part of the store is actually the chilling equipment for the freezers and the coolers. And the stores are in good shape. Restaurant Depot is a frugal, disciplined company who invests appropriately for what purpose of their store is. And I want to be clear, their stores are no-frills shopping environments. And this is on purpose. Think about like when you walk into a Home Depot and what that store looks like. It's not a fancy store. It's a fit-for-purpose store. So they don't invest in cosmetic things. They invest in price, they invest in the customer to have value be the lead story. And there is sufficient capital in the business to support the going-forward concern of the stores, and there's sufficient capital in the business, Brandon, as you called out, to open the 5 to 6 stores per year. There is more than ample capital being deployed. I've been asked a bunch of questions, well, would you do optimization? Could you do tests? Could you look at more investments in stores to see the return? Of course, we can do those things, and we will. But those would only be upside to the forecast. We would only invest if it had a strong return. And what we know for factual statements and representations, 30 years of profit growth, that Restaurant Depot is the tale of the tape. It's the proof that's in the pudding. And they've grown their revenue 28 out of 30 years. And their durability and consistency of their performance is significant and very impressive. So we are confident in the CapEx as a percent of sales being appropriate. The second question we've gotten a lot is the operating margins themselves, the 13%. I'll start and then, Brandon, I'm going to ask you to add your color on compare-and-contrast to our local business. It is durable. It has been produced and delivered year after year that 13% range. And the why is the tremendous efficiency of their box. They're full truckload from suppliers straight to their store that is a warehouse. The product gets unloaded, put away in reserve rack, brought down to a customer pick location. And they have obviously colleagues at the register to help with checkout. The customer does the rest of the work. The restaurant or owner does the rest of the work. They're doing the pick to pack the ship, the delivery to the restaurant, the unload. And because they are able to take all of that cost out of their system, they're able to hit price points that are 15% to 20% cheaper than delivery and able to do so at that rate of profitability. And they've been doing it consistently for years. They're very good at procurement. They have an excellent buying program led by a very tenured and experienced team that will be joining Sysco as part of our going-forward team. And we're confident in the ability to contain and sustain that profit rate. Brandon, what would you say about the 13%? Brandon Sewell: Yes. These customers who are going to Restaurant Depot are value-seeking customers. There are no salespeople and there are no trucks, as Kevin called out. The other piece of this is, in the Sysco view, our EBITDA is in the mid-single-digit range, but that includes large, medium and small customers. So if you look at Restaurant Depot, it is all small customers. And that small customer profile is in line with what we see within Sysco and our small customers. So it is in line with what our expectations would be. And we see that consistently as we look back to Kevin's earlier point in the Restaurant Depot profile. Kevin Hourican: So the third -- so we covered CapEx, we covered operating profit. The third, Ed, I think you may have mentioned, is staffing, labor and those orders, are they under-investing in the stores. We believe an appropriate level of payroll is being deployed in the stores. And that's also easily testable. If we just adding increased labor in select stores and there's an increase in the revenue flow-through, and that's a profitable investment, of course, those are the types of things that we would do. What we know is Richard and his team run a great business. They run a terrific P&L. And they're very disciplined operators and they've been doing it for decades. Operator: Our final question will come from John Ivankoe with JPMorgan. John Ivankoe: So the question is on declining private label sales as a percentage of broadline in U.S. Foods year-over-year, if we can kind of isolate the cause of that. And I did want to kind of look at the bigger picture in terms of how you plan on looking at private label between Sysco, Restaurant Depot, Jetro, between the 2 of you, I count at least 5 different private label efforts or kind of brands -- [ web brands ] that kind of represent brands, if you will, between the 2. So can we come to market maybe as Costco was done or a Walmart has done, some other types of food retailers and really kind of consolidate or professionalize or even be known for your sub-brands specifically and do a lot of cross-marketing between the Restaurant Depot and Sysco businesses? Kevin Hourican: John, these are good questions. I'll start with the first and acknowledge the point that Sysco Brand cases down year-over-year. We have begun to see progress with Sysco Brand. The decline in mix to last year did improve from Q2 into Q3. The progress was most strong in the smallest of customers, the 1 to 2-door operators. And why I call that out is that's the customer type where our SC, sales consultant, has the most impact, that SC who's there every week talking about our product, talking about Sysco Brand. During Q3 specifically, we launched Swap & Save a part of AI360. So now our SCs are equipped in the palm of their hand as they walk into that restaurant with suggestions to convert to Sysco Brand that do 3 things. it has to do 3 things for it to be prompted. It has to save big customer money. It has to help make the SCs more money. And also, of course, it makes Sysco more money. It has to hit all 3. And when it hits all 3, our SCs are excited about it because they make more money and they know they're saving the customer money as well. So we just launched this capability. We call it Swap & Save. It is in our tool, AI360, that Brandon said, is getting increased usage and utilization week-over-week, month-over-month. And we're seeing it show up in progress improvement, and we expect in our Q4 to see an acceleration in our performance, especially in local with Sysco Brand. So more to come, John, on that progress. It's steady as she goes. And as you know because I've talked about in prior calls, we have work to do on our assortment within Sysco Brand to improve our opening price point tier, and that's something that we will accelerate with Restaurant Depot. So which is a good segue to your question about brand rationalization and what the future looks like. I do want to be clear, we have 4 billion-dollar private label brands. So these are not small businesses. Actually, there's 5 billion-dollar-plus brands that we have within Sysco assortment. We have Sysco Reliance, which is our opening price point. We have Sysco Classic, which is the middle tier. And Sysco Premium, which is, as it sounds, the higher-tier product. So good, better, best. We have those 3. We have Select Others for things like produce and protein, but we don't need to cover that at this point. Your main question is like the core workhorse of the business. We have those 3 brands. Restaurant Depot has their own private label program. We'll talk to our customers first, like what do they need, what are they seeking, the type of label. We're not going to be in any hurry to add the Sysco name inside the Restaurant Depot box. We don't want to convey any message in that regard, other than the store is about saving the customer money. We will not be raising prices at Restaurant Depot's locations. I just want to be clear about that. But John, where we know we will have benefit is many of our same manufacturers are producing these products. And as Brandon talked about, he worked in this industry at a supplier, we can give that supplier a longer production run of the same product. Even if the box switches out to a different label 70% through the run, that is an easy switch for that producer that manufacturer on our behalf to do because they don't have to clean the production line in between producing for A and B. So we'll let the customer give us feedback on the actual labels on the box. What we know is that our private label teams can work collaboratively, we can fill assortment gaps on the opening price point side, specifically at Sysco. And there are some places in the Restaurant Depot store where they don't have private label at all today that we know Sysco can help them in that regard over time. Produce would be an example of that. So John, thank you for your question. Operator: That concludes our question-and-answer session. I will now turn the call back over to Kevin Kim, Vice President of Investor Relations, for closing remarks. Kevin Kim: Great. Thank you, everybody, for joining us today and your continued interest in Sysco. If you have any follow-up questions, please do not hesitate to reach out to the Investor Relations team here in Houston. Thank you very much. Bye. Operator: This concludes today's program. Thank you for your participation, and you may disconnect at any time.
Operator: Good day, and thank you for standing by. Welcome to the Central Bancompany First Quarter 2026 Earnings Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to turn the conference over to your speaker for today, John Ross, President and CEO. Please go ahead. John Ross: Thank you, operator. Good morning, and thank you for joining us for Central Bancompany's First Quarter 2026 Earnings Call. With me in the room today are our Chief Financial Officer, Jim Ciroli, Chief Customer Officer of Dan Westhues; and Chief Credit Officer, Eric Hallgren. As a reminder, I'd like to point out that the discussion today is subject to the same forward-looking considerations outlined on Page 3 of our press release. Today, we plan to briefly discuss first quarter highlights before opening the line for questions. Before I turn to the numbers, please allow me to share some nonfinancial highlights. In the first quarter, we were humbled to again be named one of America's Best Banks by Forbes as well as the best-performing U.S. public bank of more than $10 billion in assets by S&P Global Market Intelligence. Recognition from such organizations is a testament to the efforts of our nearly 3,000 full-time employees who I'd like to thank for their continued legendary service. With that, let's cover the financial results. For the quarter, Central Bank posted net income of $111.1 million or $0.46 per fully diluted share. Return on average assets of 2.2%, NIM on an FTE basis of $4.36 percent and efficiency ratio on an FTE basis of 45.7%. Relative to the first quarter of 2025, net income increased $16.3 million or 17%. Our asset quality remained consistent with 10 basis points of net charge-offs again this quarter and allowance covered 130 basis points of total loans. We remain encouraged by the continued resumption of growth in our balance sheet with ending loans excluding other consumer of nearly 6% annualized quarter-over-quarter and average deposits up 5% year-over-year. Lastly, capital levels at the holding company remained well above target with approximately $1.9 billion of excess or $7.80 per share. We leaned into capital deployment this quarter by announcing a meaningful increase to our quarterly dividend and repurchasing $32 million worth of our shares, taking advantage of attractive prices and expanded liquidity. We are pleased with these results and appreciate those on the line for joining us for this call. With that, I'd like to open the line for questions. Operator? Operator: [Operator Instructions] And our first question is coming from the line of Manan Gosalia of Morgan Stanley. Manan Gosalia: So it looks like loan yields held up nicely despite rate cuts at the end of last year. I was hoping you can help us with what's going on under the surface in terms of yields, spreads, fixed rate loan repricing, et cetera. Anything that can help us think through the forward look under different rate scenarios given that rate expectations have been moving around quite significantly over the past several weeks. James Ciroli: Yes, happy to, Manan. So this is Jim. So looking at it on a linked quarter basis, as you look at the loan yields, yes, sure, they came down 3 basis points, almost all about was loan fees, just coming off of higher prepayment fees in the prior quarter, which being that we had fewer prepayments this quarter. And I would also note that our loans kind of into the quarter, higher than our average. So we're showing kind of growth momentum coming out of the quarter and into the second quarter. So with fewer prepayments, we kind of like that scenario. What I would say additionally is that we repriced about $400 million in the quarter, and we anticipate about $1.8 billion more for the rest of the pricing when those loans are repricing. They're coming out at like a 5.80-ish type yield. And we continue to see loan opportunities at 300 basis points over similar maturity treasuries. So as those -- as that $1.8 billion reprices in the rest of the year, I think that could provide some upside to where we were in NIM. One of the things I would just point out, as you look at our NIM coming down I wouldn't necessarily focus on the loan yields coming down. They sure -- they came down 3 basis points. But if you look at the deposit side, our deposit costs came down 5 basis points if you factor out the shift higher in public funds that we kind of signaled on the last call. So public funds ended the fourth quarter higher, and we talked about the seasonality there and so seasonality would kind of go sideways during the quarter, i.e., the averages for the first quarter were going to be higher than the averages for the fourth quarter, the linked quarter in public funds. And that's exactly what we saw. And we anticipate that the public funds, you saw those. I'd point out Slide 9 that we added to the deck, but indoor public fund deposits at the end of the quarter, start to come down. So the ending balance was lower than the average balance, and that's exactly what we said on the call last time. Did I cover everything that you want me to cover there, Manan? That was a lot. Manan Gosalia: That was great detail. I really appreciate that. So then maybe just pivot over to the credit side. I see the credit remained broadly solid in the quarter. I guess if I really had to nitpick, 1 question is on the delinquent we've had a couple of quarters where they've edged up a little bit, and it looks like it was driven by commercial. So any thoughts you can give there on what you're seeing and your views on credit overall? James Ciroli: I'll turn to Eric Hallgren, our Chief Credit Officer in a second. What I tell you -- what I'm seeing right now is that we still continue to have a lot of small numbers on our asset quality statistics. And so when you have small numbers, small changes can seem like they're bigger than they actually are. So I think that really what we're looking at in our asset quality numbers continues to be pristine. And just like I said, small changes in that pristine-ness can lead to big percentage changes, but that doesn't necessarily mean anything. Eric, what color can you add? Eric Hallgren: Yes. Thanks, Jim. So the increase, Manan,as you noted, was primarily driven in the first quarter by commercial. That was really concentrated to a small number of markets and largely attributable to a handful of commercial clients. From what we see, we don't anticipate those delinquencies to grade any further and expect resolution here. So overall, we view it as isolated pockets of stress and not indication of systemic weakness kind of emerging as we look ahead for the rest of the year. Operator: And our next question will be coming from the line of Nathan Race of Piper Sandler. Nathan Race: Can I -- just going back to your other comments around some of the deposit flows in the quarter. I'm just curious how you think about working down some of the excess liquidity that kind of weighed on the margin in 1Q and just generally, how we should think about the size of the balance sheet, specifically kind of earning assets is a better jump-off point for the second quarter? James Ciroli: That's a great question, Nate. And I appreciate it because we really worked hard in the first quarter. If you recall, the path of rates it's terribly looking good in earlier parts of the quarter. But at the end of the quarter, where we like to extend duration to is about the 4-year mark with our security portfolio. And near the end of the quarter, we saw rates come up in that part of the curve. And so we stepped up the pace of our buying activity in March, and that continued into April as well. In fact, in April, we're seeing -- we're reinvesting that cash into about a 4.30% yield right now. So we continue to work hard to try to find great opportunities. You know we want to find things that are U.S. government guaranteed or at least sponsored by agencies of the U.S. government. We don't like taking on a lot of convexity risk and trying to deploy that money -- there's a lot of work by our treasury team. And so when the market comes back and where we want it to be, like it did in March and April, we were able to move even more and faster in that environment than we did. Nathan Race: Got you. That's helpful. Maybe changing gears a little bit. You guys are obviously continuing to build excess capital really strong [ clips ] going forward as evidenced here in 1Q as well. So Jim, would -- I'm sorry, JR, I would love to get your kind of thoughts on just kind of your optimism level for an acquisition announcement this year and just generally how conversations are trending. It seems like you guys have the competitive currency to share with potential partners, but would just love some updated thoughts on that front. John Ross: Yes. It's a very understandable question. More than half of our capital is excess, and it is a major focus of ours on a daily basis. Having said all of that, we have no real updates for you at this stage. You can kind of push replay on the comments we made last quarter. And just summarizing those briefly, we do think we're well positioned. We are in active discussions, nothing is imminent. We see everything that's out there, and we'll update you when we have a deal, but until then, we're just going to work really hard on it. So no real updates this quarter for you. Nathan Race: Okay. Fair enough. Helpful. Maybe one last one for me. The payments revenue tends to show kind of a seasonally decline in the first quarter. Just curious if you guys still feel like some of the initiatives you put in place, particularly with Dan and his team are bearing fruit? And do you still think some of the payments revenue projections that you've talked about in the past kind of hold true in terms of kind of a nice ramp over the balance of this year. James Ciroli: We do. I mean yes, I appreciate, Nate, as you noticed the seasonality between Q4 and Q1 really comes off of good quarter in Q4, and it comes down pretty sharply. But when you look at this on a year-over-year basis, what we're seeing is still -- the consumers still spending. So there's no concern from a consumer perspective. And we're seeing nice growth on the commercial side with some of the programs we're putting in place. So I would say, yes, we continue to feel pretty sanguine about that business as we look forward. Operator: And our next question will be coming from the line of Matt Olney of Stephens. Matt Olney: Just want to go back to the deposit discussion. And Jim, you already addressed the moving parts around the public funds and Slide 9 is helpful for that. Any general observations you can share as far as just the competitive dynamics for deposits in your marketplace and kind of what you're seeing more recently? James Ciroli: That's a fair question, Matt, and welcome to coverage on our stock. So looking forward to spending more time with you as well. What you're going to find as you look at us? Is we're out there generally growing deposits at around -- adjusting for seasonality, which we had a lot this quarter. Adjusted for seasonality, we're growing deposits kind of mid-single digits across our markets, but we're doing that through our acquisition campaigns where we're focused on growing checking accounts. So we're focused really on being our borrowers -- or I'm sorry, our depositors' primary checking account. We're focused on primacy overall. And I think this quarter, once you normalize the activity, you can see the growth that I'm talking about in terms of mid-single digits. So we're not really out there competing for the yield-seeking funds. We're out there competing on service, trying to be people's primary checking accounts in the markets that we serve. So I don't think we would be the best to ask the competitive questions. Yes, I think it is competitive out there from what I hear, but that's not really the market we compete in. Matt Olney: Okay. Appreciate the color on that. And then I guess going back to the capital discussion, I think you noted in the prepared remarks you stepped up the share repurchase program this quarter, just over 1 million shares. I guess, help us appreciate your capital allocation strategy and where buybacks come into play? And I think JR already addressed the M&A question. So just put that aside for a second. Just I'm trying to appreciate the -- I think you disclosed that ROIC around 12% based off kind of what you guys think about it. Any more color you can share on capital allocation and the buybacks? James Ciroli: Yes. So one of the things I would point out is that even with the $32 million that we bought back this quarter and we stepped up the dividend we still continue to grow our excess capital number. So from $1.8 billion to $1.9 billion, as JR said, more than half of our tangible book value is excess capital. So -- and when we look at that excess capital and we look at -- we value that roughly at dollar for dollar. I don't know how else you value that. And you strip out and you look at what our core capital is and compare that to any measure you want, trailing 12 months, next 12 months of expectation. Looking at 2027 earnings, we think the stock is still cheap. And if we intend to use that stock in an M&A transaction, using -- having it that cheap is something that we like to work against. We'd like to get that stock a little bit more value to the marketplace. JR, anything you want to add to that? John Ross: No. I mean, to your point on ROIC, we do calculate it. We calculate it in the same way that we look at other bank acquisitions because we think that's a good practice. And we look at several other methods as well. But practically speaking, it's the intuition of bringing a single-digit P/E multiple on a forward basis when you look at the core bank is very attractive. Now obviously, $32 million is a drop in the bucket compared to our excess capital. The one last thing I would add that we were pleasantly surprised with the increase in the liquidity in the stock, which will maybe provide us more opportunities on that front as we go forward here as well. We were a little bit constrained in our initial resolution of the $50 million because we were concerned about impacting the liquidity of the stock. But we've been pleasantly surprised to see a pickup here. Operator: Our next question will be coming from the line of Christopher McGratty of KBW. Christopher McGratty: Jim, on expenses, really good performance in the quarter. Can you speak to sustainability and maybe broader operating leverage expectations? James Ciroli: Great question. Look, I think what you saw on a quarter-over-quarter basis, has that come down a little bit. What I would share with you on the current quarter, we've signaled that we're going to have some additional costs of around $5 million a year in terms of public company expenses when we look at it. The first quarter has about that run rate in it. So the other thing I would share is that we are still in the middle of our core conversion, but during the quarter, we owned capitalized $700,000 of the dollars that we spent. So I think the first quarter NIE is fairly loaded. I think that's a fairly sustainable run rate. There might be a little uptick because we do merit increases in March, but there's not going to be much of an uptick that I would expect. Christopher McGratty: Okay. That's helpful. And if I could go to the Slide 5, the updated rate sensitivity static analysis. I think it was of a touch call it, 100 basis points from last quarter. But the base case shows a pretty good ramp in both years. Can you speak to just broader -- any strategies being contemplated to lock in the margins given higher for longer is seemingly a base case? How we should be thinking about progression of NII as you get a little bit better growth in the loan fee adjustment that you talked about? James Ciroli: Chris, I appreciate the question. I really go back to what I was talking with Nate about in answering Nate's question, I think that one of our biggest opportunities is to continue to invest our excess cash. And because most of the quarter the differential between the 4-year point on the curve, the overnight point in the curve was slight. That's kind of steepen a little bit with an anticipation that we won't have a rate cut until sometime late in '27. And as that environment has improved, we've accelerated our investing strategy to put that excess cash to work. But also having said that, I think the real opportunities come from continuing to grow noninterest-bearing deposits, I think there's still some movement to do on the deposit cost side and managing those down. I'd point out that 90% our deposit base is non-maturity. And so in order to work that down from the rate cuts we saw in late '25 our market CEOs have to go out there every day and try to manually work that count with their depositors. And so it's not something that just mechanically comes down. We still think a low 20s beta is appropriate. But because of that nature of the non-maturity deposits, that's going to take a little while to come in. And then I'd point out the seasonality, too, is we roll out of first quarter with the higher public fund deposits, and that's why we put Slide 9 there, Chris, to help give you transparency on that phenomenon, the seasonality. So as that comes down, like I said earlier, had we not mixed higher in public fund deposits, our cost of deposits would have been down 5 basis points on a linked-quarter basis. And so as we see those public fund deposits come down across Q2 and Q3, I expect that the mix in lower in those costs will continue to benefit on net interest margin as well. Christopher McGratty: Okay. Just if I could squeeze one on the -- like the excess cash. Where does that -- how does that settle in terms of proportional balance sheet over the next couple of years? Like where do you want to run cash to earning assets? James Ciroli: I don't think of it as much that way as I think about -- so it's not necessarily a percentage [indiscernible]. And that's probably [indiscernible] million on the balance sheet. Operator: I'm showing no further questions at this time. I would now like to turn the call back to John Ross, President and CEO. Please go ahead for closing remarks. John Ross: Thank you operator and thank you those on the call for taking an interest in our [indiscernible]. Operator: Thank you for joining today's conference call. You may now disconnect.
Operator: Good morning, and welcome to the Polaris 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 J.C. Weigelt, Vice President, Investor Relations. Please go ahead. J.C. Weigelt: Thank you, Gary, and good morning or afternoon, everyone. I'm J.C. Weigelt, Vice President of Investor Relations at Polaris. Thank you for joining us for our 2026 first quarter earnings call. We will reference a slide presentation today, which is accessible on our website at ir.polaris.com. Joining me on the call today are Mike Speetzen, our Chief Executive Officer; and Bob Mack, our Chief Financial Officer. Both have prepared remarks summarizing our 2026 first quarter results as well as our expectations for the remainder of 2026 and then we'll take your questions. During the call, we will be discussing various topics, which should be considered forward-looking for the purpose of the Private Securities Litigation Reform Act of 1995. Actual results could differ materially from those projections in the forward-looking statements. You can refer to our 2025 10-K and our other filings with the SEC for additional details regarding risks and uncertainties. All references to 2026 first quarter actual results and future period guidance are for our continuing operations and are reported on an adjusted non-GAAP basis, unless otherwise noted. Please refer to our Reg G reconciliation schedules at the end of the presentation for the GAAP to non-GAAP adjustments. Before I turn the call over to Mike, I'd like to recognize the upcoming retirement of Peggy James on May 1. Peggy has been an integral part of the Polaris Investor Relations team for more than 20 years, and her contributions over that time have been tremendous. We will miss her experience and steady presence on the team and wish her all the best in retirement, likely spending more time with their grandchildren, more time on the golf course and enjoying more snowmobiling. Now I'll turn the call over to Mike Speetzen. Go ahead, Mike. Michael Speetzen: Thanks, J.C. Good morning, everyone, and thank you for your interest in Polaris. We delivered a strong start to the year with our first quarter results reflecting strong fundamental performance across the business. I'm proud to say our team did an excellent job focusing on what we could control, executing commercially driving operational efficiencies, advancing our tariff mitigation plans and optimizing our portfolio. Results exceeded our expectations during the quarter, with reported sales up 8% or up 14% organically, excluding Indian Motorcycle and its related impacts. And we delivered adjusted EPS of $0.13, which was well above our expectations. And EPS, excluding Indian would have been $0.26. First quarter sales were driven by double-digit growth in our Power Sports segment. led by our utility RANGER line, our fast-growing commercial business and Snowmobiles. PG&A also had another great quarter, bolstered by strong performance in utility and 14% growth in snowmobile, accessories, parts and apparel as ridership remains strong. Across our portfolio, North American retail grew 1% with ORV up 3%, both measured exclude used vehicles. We ended the quarter with share gains in both ORV and Snow as well as with Godfrey pontoons. Dealer inventory levels remain healthy, reflecting strong operational alignment across our manufacturing plants, shipment plans and retail channels. Our margins, even with 240 basis points of headwind from tariffs, we're able to improve gross margins by 389 basis points. This was higher than our initial expectations due to a better mix within ORV and Marine, more favorable net pricing as well as improved operational efficiencies. Adjusted EBITDA margins increased 277 basis points with strong operational performance, partially offset by the timing of certain operating expenses moving into the first quarter. This resulted in an adjusted EPS of $0.13, well above our original expectations. Overall, it was a strong start to the year, and we believe the actions we have taken to refocus Polaris are creating a stronger foundation for the future. advancing our focus on leadership in Powersports, localizing and strengthening our operating footprint and positioning Polaris to deliver higher earnings power and stronger returns over time. Digging deeper into retail, North American ORV retail was up 3%, and we gained share for the fourth consecutive quarter. While retail within the recreational category continues to be challenged, down high single digits this quarter, we are seeing strong growth in our utility business, which speaks to the strength and diversification of our product portfolio. Utility ORV, which now makes up 70% of ORV revenue grew to a high single-digit rate as the industry continues to grow. While the growth in utility remains broad-based across our product portfolio. We did see an uptick in demand for vehicles used to move equipment and people across large data center construction projects that can span hundreds or even thousands of acres. As these build-outs continue to expand, we see this as a secular tailwind for the business and believe we are well positioned to continue gaining share in supporting that demand. The monthly cadence of retail performance in the quarter started out strong in January and February given a constructive consumer backdrop. However, this was followed by a decline starting in mid-March, which correlated with increased geopolitical tensions and rising oil prices. Interestingly, we are now seeing retail performance return to growth in April with positive metrics across all categories, excluding youth, where we continue to build back inventory. For Snowmobiles, the '25'26 season delivered retail growth of 25% and driven by early season snowfall in the flat lands. Conditions varied later in the season, but many mountain areas experienced lower snowfall with some seeing close to low snowfall levels on record. Despite this, we gained multiple points of share due to our strategic promotional activity to help dealers move noncurrent inventory and innovation in the Wide Track and Sport Utility segment. Turning to Marine. First quarter retail was down low double digits according to the last SSI report, which is not a complete data set with important states yet to report. The first quarter represents about 10% of annual retail and therefore, we don't extrapolate these results the rest of the year. Importantly, boat show activity was up year-over-year for both brands, and there remains strong excitement around our premium offerings at both Bennington and Godfrey. Before moving on, I want to touch on our product portfolio. something that can be hard to fully appreciate through a 10 or 20 dealer survey. Simply put, this is the strongest portfolio I've seen in my nearly 11 years at Polaris. Our broad ORV lineup delivers a distinct customer on distinct customer needs, whether it be for a work vehicle to find their next adventure or to have an unmatched day on the dues. Our category-defining utility vehicle, the RANGER XD 1500 sets the sets the bar for capability, while the Polaris expedition offers the industry's only adventure vehicle. And for customers looking for uncompromised performance in the wide open category, the Razor Pro R has continued to define what's possible with victories at the car, King of the Hammers Desert race and our recent wins at the San Felipe 250, demonstrating the vehicle's leadership. The innovation at the top carries down across the lineup. We've talked about the success of the RANGER 500, which delivers exceptional value to customers and continues turning at dealers at unprecedented levels. and the recent launch of the new RANGER 1000 cab and RANGER XP 1000 cab, which strengthens our offering in the latest and fastest growing full cab utility category. In fact, we are seeing strong double-digit utility side-by-side retail growth in April on the heels of this launch. In our seasonal business, we launched our model year '27 snowmobile lineup in February which featured the expansion of our Rec utility sleds and the new 9RVR1dynamics. Originally launched on our Razor lineup, Dynamics technology was later introduced in our snow portfolio in 2025 and it remains the industry's only snow system with full shot control. This year, 1/3 of SnowCheck orders included dynamics. In Marine, we continue to set the standard for innovation and quality with the newly redesigned Bennington QX and the Godfrey Sanpan, which was named Boating Magazine's Pontoon of the Year and the Hurricane Sundeck 3200 won the innovation award at the Miami Boat Show. It's easy to focus on individual products, but would truly differentiates Polaris as the strength of our entire portfolio. We're the global leader in powersports, and we operate like it, living the riding experience and constantly working to make it better. And while it's still early, I'll say this, I have not been misexcited about what we have yet to come. Dealer inventory continues to be in a good place as we've taken a thoughtful approach in pacing our shipments in line with current demand. Our dealer inventory levels are healthy across our major categories. With some help from Mother Nature this last season, we made significant progress on snowmobile inventory and ended the quarter down over 50% from a year ago. We exit the snowmobile season with dealer inventory healthier than it's been in many years. So whether you look at our inventory on a days sales basis, which remains near 100 days or on a current to noncurrent mix, which skews positively to more current our inventory at dealers is in a good spot. We remain committed to the alignment of build, ship and retail as we partner with dealers to provide them with the right mix and quantity of vehicles to succeed. I'm now going to turn it over to Bob to provide you with more details on the financials. Robert Mack: Thanks, Mike. We delivered a strong first quarter with results that exceeded our expectations coming into the year. Before turning to the quarter, I want to note that we are now reporting our business in 3 new segments: Polaris Powersports, Marine and Aixam & Goupil. Going forward, we will discuss our performance through this new segment structure, which I'll touch on in more detail in a moment. . Sales were up 8% or approximately 14% organically when excluding Indian Motorcycle. Growth was led by strong hour sports performance in ORV, commercial and seasonal, and we also benefited from positive net price reflecting higher year-over-year selling prices and lower promotional activity. Internationally, our Powersports segment was up 7%, which includes ORV and seasonal products sold outside of North America. Adjusted EBITDA margin improved by approximately 280 basis points, primarily due to favorable mix in all segments. Net price also flowed through to benefit margins, and we continue to see gains from operational efficiencies. These improvements were partially offset by higher operating expenses, largely related to the timing of certain costs moving earlier in the year than originally planned. Tariffs also posed a 240 basis point headwind in the quarter but were in line with expectations. Keep in mind that the significant new tariffs were first imposed in April 2025. Altogether, this strong operating performance drove adjusted EPS of $0.13 above what we expected back in January. Now turning to our new segment structure, which we introduced during the quarter. The reportable segments are Polaris Powersports, Marine and Aixam & Goupil. We designed the structure around our customers who they are, what they buy and where they buy it, which better aligns the organization with our dealer channels and how we go to market. Polaris Powersports is almost 90% of total sales and includes all products from the former Off-road segment with the addition of Slingshot. Marine remains the same and carved out of the former On Road segment is Aixam & Goupil which are 2 small vehicle businesses in Europe. Aixam manufacturers, smaller license free passenger cars, 1 would typically see in city centers and rural towns in Europe, while Goupil focuses on light-duty electric utility vehicles, sold to municipalities and transportation companies. Both businesses are based in France. Now moving to our segments. Sales in Polaris Powersports were up 14% year-over-year Ranger and commercial shipments far outpaced last year's levels as utility demand continues to grow across a variety of categories. PG&A was up 14%, driven by parts and continued oil sales which are a strong indicator of an active engaged rider base. Gross margin in the quarter was up 422 basis points, overcoming the anticipated significant headwind from tariffs due to strong mix, positive net price and operational efficiencies. Sales in Marine were driven by a richer mix of pontoons given the recent launch of the Bennington QX and Godfrey Sanpan lineups which have generated significant excitement with dealers and customers. Both of these are premium lines for each brand. There was also a modest benefit from net pricing. Gross margin improved 64 basis points year-over-year again, driven by the mix benefit in the quarter, which we expect to continue throughout the selling season as well as higher net price. Aixam & Goupil sales were up 9%, driven by higher shipments for Goupil and higher year-over-year pricing with Anexo. Gross margin improved 294 basis points driven by higher mix within this segment. With our renewed focus on our core business lines following the completion of the separation of Indian, our top capital priority in 2026 remains investing in higher-margin profitable growth while maintaining a disciplined and balanced approach to returns and leverage. Second, we continue our long-standing commitment to returning capital to shareholders through dividends, marking our 31st consecutive year of dividend growth. Third, we remain focused on debt reduction following more than $530 million in debt reduction during 2025, which supports our ongoing improvement in our leverage profile. From a working capital perspective, our lean initiatives are driving meaningful efficiency gains. We continue to target a negative working capital position supported by better alignment across demand planning, procurement and production, continued supply chain localization and ongoing optimization of payables. First quarter free cash flow is typically our weakest quarter of cash generation in the year due to seasonal payments while a net outflow, our first quarter cash flow was better than we had planned. Overall, we are very confident in our financial position. Our capital deployment is disciplined. Our cash generation remains strong we continue to strengthen balance sheet flexibility. We are reaffirming the guidance we updated on March 3 when we raised our outlook following the earlier-than-expected closure of the Indian motorcycle separation. While we remain pleased with the operational performance of the business, which drove much of the first quarter over performance. Importantly, we believe this performance is grounded in operational discipline execution and factors that are within our control. We continue to manage the business, anticipating a relatively flat retail environment with build, ship and retail closely aligned. This approach helps maintain healthy dealer inventory and reduces the need for excess promotional activity, which benefited results in the first quarter. Given our first quarter performance, strong underlying fundamentals in the positive retail trends in April. The business demonstrated the capability to support a higher outlook. However, given the current level of uncertainty, we have decided to take a prudent and disciplined approach to the outlook given factors outside of our control, including uncertainty around the consumer driven by higher energy prices and ongoing geopolitical conflicts as well as the evolving tariff environment. This year, we are expecting our financial results to return to historic seasonal patterns with the second and third quarters being our highest revenue and EPS quarters. Specifically, for the second quarter, we expect sales to grow year-over-year in the range of 5% to 7%, driven by utility and our plan to ship in line with retail. Adjusted EPS is expected to be between $0.70 and $0.80. While this assumes no change in current tariff policy, we expect a negative year-over-year impact from tariffs to be between $30 million and $35 million. We still expect the Indian motorcycle separation to be accretive by approximately $50 million to adjusted EBITDA, which is more weighted to the back half of the year and into January 2027 due to motorcycle sales seasonality. Looking ahead, we remain on track with our tariff mitigation strategy to reduce China source material cost of goods sold from 14% last year to below 5% by the end of 2027. Based on current policy, we continue to expect total tariff costs of approximately $215 million this year, excluding potential refunds related to EPA tariffs paid in 2025 and into 2026. As a reminder, we paid approximately $125 million in IEP tariffs, and we intend to seek refunds for the full amount. The work we've done to realign the portfolio and implement lean across our plants is already driving operational gains and we expect that momentum to continue. Combined with the strength of our product lineup, this positions Polaris in a renewed way, 1 that emphasizes dealer partnership, rider driven innovation, profitability and returns. We are more aligned, more focused and more disciplined than we have been in many years, and we are confident in the path ahead. With that, I'll turn the call back over to Mike. Go ahead, Mike. Michael Speetzen: Thanks, Bob. Let me spend a moment on our clear vision to win because this really anchors how we're operating Polaris today. At the highest level, our ambition is unchanged to be the global leader in powersports that starts with a solid foundation built in our brands, our people and our culture and a disciplined focus on execution. There are a lot of distractions in the world right now, which makes it even more important to stay focused on what we can control and execute relentlessly against those priorities. Operationally, we're seeing steady improvement inside our manufacturing facilities. The actions we've taken over the past several years around lean are increasingly showing up in cost performance, quality and delivery. And as volumes increase, we expect these efforts to continue to pay dividends. On innovation, I'd put our product portfolio up against any of our competitors. We continue to invest in new products that expand our reach, strengthen our premium position and drive differentiation across our portfolio. From a working capital standpoint, we remain focused on driving efficiencies and executing the fundamentals to improve cash generation. We generated over $600 million of free cash flow last year and continuing to deliver strong cash generation remains a top priority. Dealer health is also critical. We continue to partner closely with our dealers to ensure they have the right product mix and the right inventory levels to meet customer demand. This balanced approach remains a clear strategic advantage at the dealership level. All of this supports a very clear vision to win. We are here to deliver for our customers by providing the best innovation, quality and experience in the industry. In leaning into our innovation, we are strengthening and advancing our #1 market share position in powersports. And finally, we believe we're positioning Polaris for long-term financial growth with a model built on consistent cash generation, attractive returns and sustained value creation. The consistency of this strategy and the discipline of our execution gives us confidence in how we're navigating today's environment and building Polaris for the future. Our priorities for 2026 are unchanged from what I outlined 3 months ago. We continue to expect a relatively flat retail environment, which is consistent with what we've seen so far this year. Utility remains the stronger growth component of the portfolio relative to recreation. We will continue to operate our facilities so that production shipments in retail remain aligned. And if demand shifts based on dealer feedback or data, we are prepared to flex production accordingly. We closed the Indian motorcycle separation earlier than expected and thus far, the separation has gone smoothly. Our lean journey continues with additional lean lines coming online later this year. In total, we've achieved over $240 million in structural savings through this journey. We remain committed to executing our tariff mitigation strategy. we expect tariff policies to continue to change, including potential changes from the review of the USMCA trade agreement. While the ultimate outcome remains uncertain, our goal is clear. We remain committed to the U.S. with the largest powersports manufacturing footprint in the industry, supporting U.S. workers and suppliers. We are also well underway with our goal to reduce China source components to under 5% of material cost of goods sold by the end of 2027. We have a dedicated team in place. We're on track, and I'm confident we can achieve this goal. So to wrap up, we're encouraged by the way the year has started. Our teams are executing incredibly well in a dynamic environment. Our product portfolio is strong, our dealers are healthy and our strategy is working. While there are factors outside of our control, we remain sharply focused on what we can control. We believe the actions we've taken to refocus Polaris are creating a strong foundation for the future by advancing our focus and leadership in powersports, localizing and strengthening our operating footprint and positioning Polaris to deliver higher earnings power and stronger returns over time. We believe this positions Polaris well to navigate the near term and to create long-term shareholder value for stakeholders. We appreciate your continued support. With that, I'll turn it over to Gary to open the line for questions. Operator: [Operator Instructions] Our first question today is from Craig Kennison with Baird. Craig Kennison: First, I just want to say to Peggy, it's been a pleasure working with you, and you will certainly be missed. But my tariff question is fairly multifaceted. So if you'll give me a second to ask it. Could you help us unpack your tariff exposure in guidance after the IEEPA ruling and including recent Section 232 changes. And to that end, I think regarding IEEPA, if I'm right, you have a $30 million tailwind in 2026 relative to 2025, and that is not in guidance. And then regarding Section 232 changes, could you help us what is expected as an impact in 2026 and break that down into the growth and the mitigated impact. Thanks for indulging the long question. Michael Speetzen: Well, I mean, it certainly is a complex topic, Craig. So let me I'm going to kind of take you through a few different aspects and then provide you a little bit more color around 232 because we've clearly gotten a lot of questions. As Bob mentioned, our tariff impact has stayed consistent with what we talked about at around $215 million. The math works this way. With the Supreme Court ruling that pulled the IEEPA tariffs off, but then the administration immediately put the 122 tariff in place at 10%, not the 15% that they talked about. Those changes yielded about a $40 million benefit to us. Unfortunately, when the 232 changes were made, that effectively offset that. So to dispel some of the commentary that's been out there, we are not unaffected by 232. We are definitely affected by it. So number one. Number two, the rules around 232 are pretty complex, and I'm not going to try and go through and pull all that apart. But safe to say, we do have a different product portfolio as well as a very different manufacturing footprint. We're not manufacturing everything down in Mexico. And obviously, as you know, we have manufacturing in Minnesota as well as in Alabama. And then the third component I'd say, around 232 is we are a significant consumer of U.S. steel. And as you know, from the regulations, there are different tariff rates based on U.S. versus non-U.S. steel components. So in a nutshell, that's essentially where we're at. There's been some questions around, hey, how does this start to annualize into Obviously, tough to predict what's going to happen with tariff policy. But assuming the tariff regime that's in place at this moment, and assuming the same volumes that we would have, we would not expect tariffs to be greater than what we're experiencing this year. And in fact, we're working hard, as I indicated in my prepared remarks, to pull down the amount of China source content that's coming into the U.S. that we're paying tariffs on with the goal of getting below the 5% of material cost of goods sold next year. And obviously, there's some timing differences with how things flow out of inventory. But we think, if anything, that gives us the opportunity to get in there and further mitigate that. The last thing I would say is that, that excludes any funds from the refund. As Bob indicated, it's about $125 million. We are in the process of either going through or understanding the refund process that's unfolding and we'll be working hard to get that money that's rightfully ours to get back. Craig Kennison: That's really helpful, Mike. So are you saying that the incremental impact of the Section 232 changes for 2026 should be around $40 million, which offsets the benefit you had from other issues. . Robert Mack: Correct. Yes. And as you stated in your question, Craig, we originally thought it was $30 million back in March as we've done the math, that's about 40%, and we hadn't changed our guidance to reflect that. and we're also not changing our guidance to reflect the 232 since they kind of net out. Michael Speetzen: And I think -- and I'm sure the question is going to come up around guidance, but I do think that's a prime example. I mean when we were at a conference in March. The question was, hey, with IEEPA coming off, there's an inherent benefit. Why are you not taking guidance up and it was for this very reason. I mean, we knew that the 232, we also know that 301 is under review, there's a common period coming up in May. USMCA is under review, that's going to start in July. There's been a comment period leading up to that. I mean there's just a tremendous amount of uncertainty around this. And so we're obviously being conservative in the way we're approaching things, but we think that's prudent given this environment. Robert Mack: The other thing, there's been a lot of discussion about inventory. And so let me talk a little bit about how these different tariffs work. So the when the EPA tariffs went away and the 122 came in, right, there's about a quarter lag on when we see that impact because we're bringing parts in about a quarter ahead of production. And so -- by the time it gets into a product and rolls through cost of goods sold, there's at least a quarter lag or more, whereas the 232s were announced, I think, on a Friday and went in effect effectively on Monday. . And there's been some things written and talked about that, hey, we've got 100 days of dealer inventory. And so we're not seeing an impact for 100 days. That's not how it works. The 100 days of dealer inventory has already been recognized into revenue. We've sold that to the dealers, and it's being replenished every day. And certainly, like a lot of companies, we paused shipments for a short period of time as we dug in to understand the new rules and adjust our systems to be able to process all that but we started shipping relatively quickly after they were announced. So we're feeling the 232 impact almost immediately. So it's not a 100 day deferral because of the dealer inventory on 232. Operator: The next question is from James Hardiman with Citi. James Hardiman: So there was a lot to digest on the tariff front. If that weren't complicated enough, and it's probably too early to have a great feel for this. But maybe initial thoughts on the competitive environment that, that now creates for 2026 and I don't know, 2027 is probably too far out to really get your arms around. But I think as we sit here today, you guys should now be benefiting on the cost side relative to, I think, your competitor up north, right, the Canadian competitor and then presumably your major Chinese competitor who also imports from Mexico think the Japanese are generally in a good place from this, but maybe walk us through how you're thinking about that if that impacts sort of your ability to price or your ability to gain share? Any initial thoughts on that front would be great. Michael Speetzen: Yes. Thanks, James. And yes, there's a lot there because there's a lot there. And this organization, unfortunately, has had to spend a tremendous amount of time on it, and I'm proud of the work they've done and the team we've got on top of it. Look, I don't want to get into commentary about our competitors and what they're dealing with from a cost perspective. What I can tell you, though, is that there's not a tremendous amount of price elasticity in this market. . I'll remind you that there was significant price taken coming out of COVID when the supply chains and the massive amount of inflation that this country went through. And so the pricing had already been somewhat elevated through that process. And the consumer backdrop isn't incredibly strong the Utility segment, which obviously makes up the majority of our ORV business has remained strong. But that doesn't mean there's an infinite level of price elasticity there. The REC side, whether that be the Marine or the razor portion of our business is incredibly sensitive to everything that's going on. As I mentioned in my prepared remarks, when we saw oil prices spike and that combined with what's going on overseas, we saw those customers pull back Utility remained strong during that time period, which was encouraging. But I just don't think there's a tremendous amount of elasticity in the marketplace. I mean, we'll obviously continue to look for that. And quite frankly, our focus from a competitive standpoint is exactly what I went through in my script. It's the products. We have the best innovation in the market. We're moving fast. We're regaining our foothold. We've gained share for 4 quarters in a row in ORV and that's really going to be the focus that we have inside the organization and continue to be the push. I'm really excited about products that we're going to be launching this year and then the visibility we have out for the next several years. And regardless of the cost positioning, I think we're going to be in an incredible spot to continue to win. Robert Mack: Yes. One thing I would say, James, is everybody needs to keep in mind with tariffs. It's not that we're not impacted. I mean we've been dealing with this since 2018. And as Mike stated, when he started the answer to that question, we have a team that meets every day is highly focused on this. We've been executing our plans to mitigate tariffs. And so as we came into the 232 announcements, we're well versed in what our steel and aluminum content is by part and by product. And so we were able to get on top of that fairly quickly. It is incredibly complicated, and it's tough to figure out where it's going to go. But I don't think it's going to dramatically change the overall competitive dynamic given all the things Mike said about elasticity in the market. James Hardiman: Got it. That's really helpful. And then to the guidance, by my math, you'd be -- once we sort of factor in the earlier Indian close, you beat the first quarter by almost $0.50, obviously not flowing it through to the full year. And in the prepared remarks, you called out, I think, 2 items. One, just uncertainty around the consumer and two, the evolving tariff environment. I guess, as I sit here and listen to your other comments about how things sort of slowed down and then reaccelerated in April. That seems like maybe we're coming out of the other end in a better place. . And then the tariff conversation, I guess maybe let me ask the question this way. Like if we don't see some sort of unforeseen downturn in the consumer from here, right, after April has gotten a little bit better. And if we don't see some incremental new tariffs beyond 232 that we're not even really thinking about at this point, does that scenario equate to upside relative to what you've laid out today? Or am I not thinking about that the right way? Michael Speetzen: No, I think you are. I mean, I think Bob and I tried to be pretty blunt in our comments that we were playing this conservative, prudent, whatever the words are that you want to choose. But I think, look, if the consumer backdrop continues playing out like it has. And if tariff policy, fingers crossed were to just stay where it is today. We would have certainly been looking at taking guidance up. And I think what I'd reinforce is the business is performing better than it ever has. When you step back and you think about the fact that we've got dealer inventory aligned in an environment where things are fairly static, we actually grew revenue on an organic basis, 14% and I talked about our gross profit coming in at 20.5%. That's up year-over-year despite the tariff headwind. And if you pulled tariffs out, which I wish we could, we'd be at 23%. I mean that is a significant improvement, and I think reflective of the improvements we've made in our operational efficiencies, warranty, utilization of the factories gaining share for 4 quarters in a row and ORV cash flow performance despite the headwinds of the tariffs, strong safety performance in the business alignment with our dealers. We've rightsized this portfolio to really get focused on the most profitable. I mean, James, we have this business in a really good spot. And I think the first quarter results really reflected that I would really like to see us get past the uncertainty on the tariffs because it's not just uncertainty for us to predict financially, but it is uncertainty from a consumer standpoint. I mean inflation is a big deal right now. And certainly, the conflict overseas is generating inflation from an energy perspective. But even outside of that, the consumer hasn't necessarily demonstrated significant strength. And so I think getting some certainty around tariff policy would certainly alleviate that pressure. And I think start to put the consumer in a better spot in terms of future interest rate expectations and things like that. So I think the message for everyone is this business is performing better than it has in years. We're excited about that. And with some stability, we would certainly see this generating even more upside than we saw in the first quarter. Robert Mack: Yes. I mean if you look at the incrementals in the first quarter, with tariffs factored in, it was above 40% if you accounted for the tariff headwind has been over $70 million. So just really, really solid performance. And obviously, we benefited a really good strong mix in the quarter. We continue to see strength at the high end and the low end of the market with the middle kind of being the weakest part. But that high-end mix served us well in the quarter. And obviously, we had some carryover price from price increases, normal price increases we took out in last year. But -- so the company is performing really, really well. To Mike's point, this is really just not having great visibility into what happens with the consumer given the ongoing conflicts around the world. And then what's going to happen with tariffs. We know the 122s have to -- they have to expire in July. I don't know that there's a way to extend them. And what we don't know is what, if anything, will come in after that. So that's the caution. James Hardiman: And Peggy, you will be missed. Good luck with the next chapter. . Operator: Next question is from Joe Altobello with Raymond James. . Joseph Altobello: Just want to follow up on the tariff commentary, make sure I understood you right. So if we assume nothing changes, and I know that's a big assumption at this point. It sounds like at worst, tariffs are neutral and could potentially be a tailwind for '27. Michael Speetzen: Yes. The caveat to that is that we are still working the mitigation efforts that we talked about. And so flowing through the effect of getting our China-based spin down sub-5%. And how that stratifies into '27 obviously, is an unknown, but should be a net benefit. We continue the focus on the lobbying efforts that we've been pursuing to evaluate some sort of relief across the powersports industry. I think that's probably a more difficult task in this current environment with everything that's going on, but we have continued to press forward and we continue to have support from key constituents in places like Minnesota and Alabama. And then obviously, there's a lot of caveats to that, right? Aside from tariff policy remaining consistent. It's also volumes and things like that. But I think from an annualization of the impacts and the fact that the IEEPA net of [ 122 ] favorability was almost essentially perfectly offset by the 232 impact coming in, that's effectively where we would be. Robert Mack: Yes. I think if you're thinking about next year, the $215 million we guided to this year, plus or minus a little, is probably a good place to start. To Mike's point, we'll have where we land on mitigations, which involves moving a lot of parts and a lot of timing that we won't know yet that continue to evolve through the year. But the timing -- while the timing was different with the EPA stuff happening in February and the 232 stuff happening in April because of the lag they sort of balance each other out, if you think about them on a full year run rate basis. So we think that's where it will be, depending on whatever the administration decides to do with new tariffs and then obviously, all the things Mike talked about with volume and other things that we don't have visibility into for '27 yet. Joseph Altobello: Got it. Very helpful. And just a follow-up on that. I think, Bob, you mentioned earlier there was some spending that got pulled forward into the first quarter. Could you quantify that for us? And secondly, would you expect all of that to reverse in the second quarter? Or is it spread out throughout the year? Robert Mack: So it was kind of split evenly between profit share or incentive comp. And that's purely because the way we had originally had a forecast to lose money in Q1. And now we're obviously had the earnings we have. So we had to recognize more profit share in the quarter. And then the other stuff is really kind of just a myriad of corporate things that got pulled into the quarter. So all of it will turn around, and I think it will turn around relatively evenly through the course of the year. Joseph Altobello: And how much was it in the quarter, sorry, roughly? . Robert Mack: I'm sorry, it was about $30 million in the quarter. And I think we're still on our guidance for OpEx for the year. So we're not seeing anything that says we're going to spend over what we guided. It's just timing in the quarter. And like I said, it will turn around over the next 3, not all in Q2. . Operator: The next question is from Noah Zatzkin with KeyBanc. Noah Zatzkin: I guess maybe just 1 on the ORV gross margin coming in better than expected. Obviously, I think price mix and ops contributed there. Is there any way to quantify or frame the magnitude of the ops improvement that played a part there -- and then just how should we be thinking about the potential margin benefit of ops improvement looking through this year and then as you move into next year? Robert Mack: Yes. So if you think about it for the quarter, I would say the biggest driver was volume and mix. We said we had good mix. Next would be net price and then after that would be the plant performance. I think that the -- as you think about the year, the price will continue. We did our normal price increase. promo, we don't expect radical changes in promo. There'll be some seasonality of promo as we head into peak selling season. Obviously, Q1 is typically a light promo quarter plant performance, I think, will continue really kind of on pace. And so I think that will be an ongoing benefit. The margin profile in Q1 was really, really good. and mix played a big piece of that. We had strong mix into sort of high-end utility vehicles. If the consumer demand stays, that mix will continue to look good. if we see a slowdown, obviously, that could change. So a little bit tough to predict right now. But as long as we don't see a drop off in volume, the factory performance that we saw in Q1 should continue really for the rest of the year. Michael Speetzen: Yes. No, it's something to keep in mind, we've been undershipping retail for the last couple of years. And now that we've got things more in line the volume recovery going through the factories, a matter of factory utilization is now getting up closer to 70%, still not at the optimal level, but much better than where it was last year. So when you couple that with the things that Bob talked about with mix, you couple that with the work we've done around lean. I mean, it puts us in a really good spot. And that's why when I talk about the future value creation of the company. I mean, we're still in the early days. We've only effectively got on lean line at each of our factories, and we're in the process of expanding that this year. And this is going to be a multiyear journey, but we're looking at you sprinkle in a little bit more volume and the amount of efficiency and volume leverage. As Bob mentioned earlier to 1 of the other questions, it's exciting to see that come through and encouraging in terms of the amount of earnings leverage that we can get moving forward. Robert Mack: The other thing to keep in mind, which doesn't jump out just as you look at the puts and takes in the guidance, and it's staying where it is, is commodities, we went into the year thinking commodities were going to be about a $20 million headwind. We think it will be double that, maybe a little more now. And primarily driven by steel and diesel and diesel really is a proxy for both diesel in the transportation side and resins in the production side. And we're forecasting to overcome that with our operational efficiencies inside of our guidance but that will be a little bit of an offset because that's a headwind, I think, across most industries right now. . Noah Zatzkin: And maybe just 1 kind of housekeeping question. I think there was a $22.5 million adjustment related to distressed supplier. Just kind of any color there would be helpful. Robert Mack: Yes. So we had one of our suppliers was part of the first brands bankruptcy. And so we made payments during the course of the evolution of the bankruptcy to help get inventory and keep inventory flowing. And then we partnered with several other customers of the supplier to help facilitate that company being sold and approved by the bankruptcy court to be sold to another industry participant. And so that $22 million is us taking through period costs, the support payments we made to facilitate that transition. It would have been a tough supplier to transition, and we would have lost a lot of margin if we had lost supply. So -- and I think that was true for sort of all of the participants in the industry. And so we all had to step up to sort of rescue the supplier and get it out of the first brands bankruptcy, which we were able to do and it's performing well now, and I think we've moved on from it. So just a 1 period -- 1 quarter impact from that. Michael Speetzen: No, I would say it just demonstrates the fact that we are the leader in powersports. We saw this supplier struggling well before that bankruptcy. We had been working with them closely. And so we were able to effectively take charge of the process and guide it to another supplier so that we could ensure continuity, not just for us, but many others in the industry. And again, I would just point to this team. and the culture that we have, the focus around execution and relentlessly pursuing everything we can to ensure we execute and deliver for the customer. And I think this is a prime example of the team doing that. I'm really proud of what they accomplished. Operator: The next question is from David MacGregor with Longbow. David S. MacGregor: You mentioned the RANGER 500 performing well. I just wanted to get your thoughts, Mike, on how you're thinking about the opportunity in developing product line extensions and Utility and other categories just down into lower price points. Michael Speetzen: Yes. I mean, look, it's something that we've actually been focused on for quite a while. Obviously, Indian is not part of the portfolio, but it was something that we focused on there in terms of trying to get a sub-$10,000 entry point for the Scout lineup. It's something we're focused on, not just in the RANGER product category. I would say it's a gap that we have within the ATV lineup. And the reality is we're not going to overpivot down into the value segment. But as the industry evolved over the last decade, 1.5 decades. So has the price point. The vehicles become larger, more capable, more sophisticated, more options. And I think we and many others kind of rush to the high end of the category, and we ended up leaving a gap at the lower end. And when we looked at the price points, we look at the size of the consumer group and then we also studied entry points for consumers, whether that's coming in at a value RANGER or coming in on our ATV lineup, we know that a significant portion of those customers end up trading up as well as expanding. So for example, someone coming into ATVs, eventually a good portion of those folks are going to go into the side-by-side category. And the nice part about that is they're not just buying side-by-side, so they keep buying ATVs. And so we've really taken a very customer-centric view. I wouldn't sit here and tell you that we're going to overexpand into the value segment. We just think it's an important price point to have. I think even what you saw us do with the RANGER 1000 cab and the RANGER XP cab providing lower price points that give people features that they're looking for, but obviously don't dilute what we have at the high end where you get far more features and higher-performing vehicles, but allowing people to experience some of the things that they want to at a price point that's a little bit more attractive than where they'd have to go to today. And so I think it's an important aspect of the business and making sure that we have a broad and diverse portfolio. And then obviously, that complements everything we do to continue to look for extensions outside of the core portfolio, like we did with Polaris XPEDITION where we have significant market share and really don't have any competition in that adventure space and an area where we can continue to find derivative vehicles and expand. David S. MacGregor: Great. Great color. Just as a follow-up. I guess I wanted to focus on the REC segment. And if you think about REC, as you look at the various moving parts in that category, obviously, there's higher rates and weak consumer confidence and those would certainly be cyclical factors. But what are you seeing that you might characterize as structural change in REC that would impact that business going forward? Michael Speetzen: Yes. I don't -- I think the only structural change is there were a few different dynamics that happened. I think you had a little bit of a pull forward or acceleration during COVID. People went out and bought a lot of stuff. And then you went through a brief period probably 1 year, 1.5 years, where people stopped using vehicles. And I think a lot of that was as folks are being called back to the office. There was a rebalancing of what they were doing in their off time. But for the last couple of years, we've seen strength in vehicle usage. We've talked about it a number of times on the call. We track everything from the number of miles that come in, the repair activity, spare parts volume, tire consumption, oil consumption, everything that we look at on a monthly basis continues to point to usage of the vehicle, where we have the ability to track ridership through RIDE COMMAND, we can see that the miles written has increased. So we know people are using the vehicle. I think what's happened is we've had a bit of a delay in the replenishment repurchase cycle. What I will tell you is that when we see those brief moments of stability, either encouraging interest rate moves or inflation starting to tick down we see the REC customers starting to come back in. We're not seeing huge movement, but we're seeing not negative from a retail standpoint. And so from my standpoint, I think its folks are waiting for the moment to come back in. We know that they want to. There's been so much innovation since they last purchased a vehicle, and we know they're dealing with extended repurchase intervals. And when you couple that with the fact that they're using the vehicles, they're going to come back in. So I don't know that we see a permanent structural. I think we've just got a lot that happened over the last several years. And then right now, I think these consumers, because it's a want vehicle, not a need, they're waiting for some stability in the backdrop, whether that's macro, geopolitical inflation, energy costs, you name it. I think a little bit of stability will go a long way to at least stabilize that market and get it back to a little bit of growth. Operator: The next question is from Tristan Thomas-Martin with BMO. Tristan Thomas-Martin: Just 1 quick tariff qualification question. The $40 million headwind from the [ Jansen ] 232, is that a gross figure or a net figure? Michael Speetzen: It's net figure. Robert Mack: Yes. I mean we don't have any mitigations -- we're not -- this is they've been in place for 2 weeks. So there's not net of mitigation. Michael Speetzen: Yes. And there's -- I mean, we're not going to get into the detail by product and all that kind of stuff. But I mean, when I make comments like we were a heavy consumer of U.S. steel, I think you can interpret that, that means we're probably at the lower tariff rate. But there really isn't a whole lot you can do. I mean, yes, could we shift manufacturing? I'd tell you, we are not in a stable enough environment from a policy decision that I'm going to go do anything significant, pulling something out of Mexico and putting it in the U.S. and then subject it to a different set of tariffs. . And we know the 301 regime is under review. We know USMCA is under review. So at this point, we're just focused on broader mitigation efforts, the things I articulated earlier, whether that's the China spend content reduction as well as the lobbying efforts that are underway. And aside from that, we're going to go focus on all the other elements that we can drive efficiencies inside of the company. And I think you saw when we focus what came through in the first quarter. Robert Mack: Yes. Just to clarify, Tristan, I couldn't tell if you said 30% or 40%, it's 40% effectively offset by 40% from the IEEPA 122 switch. And then the only other thing I would point out, I would never say that we would benefit from the difficult market in recreational products, but as you folks know, as Utility has done well, our primary plan for Utility is -- and we also make a much of ATVs up in ROS. So that's that the mix has certainly benefited us more towards our U.S. footprint. . Tristan Thomas-Martin: Okay. That makes sense. And then just reason a little more. Just on -- given the new segments, anything you wanted to flag in kind of a margin standpoint, whether it's seasonality or incrementals or anything else we should be thinking about? Robert Mack: Yes. So I think as we pointed out, we are returning to normal seasonality here in -- we think in 2026. So you'll see obviously, Q1, typically our smallest revenue quarter to Q2, Q3 will be larger. Q4, you should think that it's going to look fairly similar to Q1. again, mix is going to play a big part in this. mix was really strong in Q1. We'll just have to see what retail looks like and how that drives mix in Q2 and Q3. But otherwise, it's just be normal seasonality. Michael Speetzen: And I think the only other thing would be just as we get through the second quarter, then your tariff year-over-year starts to become far less noise because it ramped it was very small in Q1 built in Q2 and then we were kind of at run rate Q3, Q4. So... Robert Mack: Yes, we'll still have tariff -- pretty good tariff headwinds in Q2 relative to 2025, the tariffs didn't -- they started in April, but by the time you sort of got them in and they went through inventory, they didn't really hit until Q3, I think we only had about $10 million of tariff in Q2 last year. So it will be more similar to Q1 this year. . Operator: Next question is from Gerrick Johnson with Seaport. Gerrick Johnson: Just wanted to talk about TSAs real quick. I know they're neutral to your earnings but how did they affect the various buckets in the first quarter? Robert Mack: Yes. So it is complicated, but you basically had about $25 million of that flowed through revenue, and that's us really selling engines and some limited motorcycles that we finished up in Q1 to India. That came at a negative that was recovered in other income. And then there's about another $5 million in OpEx, which has also recovered in other income. So think about it as $25 million in revenue at a little bit of negative GP, $5 million to $6 million in OpEx, that plus a little bit of margin all recovered in other income. So not really significant, but a little bit slightly a bit better than breakeven, but just a geography issue. . Gerrick Johnson: Okay. Great. That's helpful. And finally for me, the impact of youth ORV in the quarter, honestly found it a little odd since youth is mainly sold in the fourth quarter. So how did that impact your ORV retail inventories? What would ORV have been without youth or with youth? Robert Mack: It wasn't -- the impact wasn't dramatic. I mean it's -- the issue with youth is we continue -- we had to move it out of China. We moved into Mexico. We're just starting to ship the RANGER 150. We haven't been shipping those. It wouldn't have changed retail a whole lot in terms of actual percentages, and it certainly would have impacted margins. . Operator: This concludes our question-and-answer session, and the conference has also now concluded. Thank you for attending today's presentation. You may now disconnect.
Operator: Greetings, and welcome to the Incyte First Quarter 2026 Earnings Conference Call Webcast. [Operator Instructions] As a reminder, this conference is being recorded. [Operator Instructions] It's now my pleasure to turn the call over to Alexis Smith, Vice President, Head of Investor Relations. Please go ahead, Alexis. Alexis Smith: Thank you. Good morning, and welcome to Incyte's First Quarter 2026 Earnings Conference Call. Before we begin, I encourage everyone to go to the Investors section of our website to find the press release, related financial tables and slides that follow today's discussion. On today's call, I'm joined by Bill, Pablo and Tom, who will deliver our prepared remarks. Steven, Dave and Mohamed will also be available for the Q&A portion of today's call. I would like to point out that we will be making forward-looking statements, which are based on our current expectations and beliefs. These statements are subject to certain risks and uncertainties, and our actual results may differ materially. I encourage you to consult the risk factors discussed in our SEC filings for additional detail. I will now hand the call over to Bill. William Meury: Thank you, Alexis, and good morning, everyone. We're off to a strong start in 2026 with net sales up 20% year-over-year, driven by strong demand across our entire portfolio. In parallel, we advanced the pipeline with key regulatory and clinical milestones. We view '26 as a year of strategic progress as we transition Incyte beyond a single cornerstone product toward a high-quality, growth-oriented portfolio across hematology, oncology and immunology. This progress will come from multiple sources, the continued organic growth from our commercial portfolio, the execution of life cycle launches of key brands, the advancement of a broad increasingly late-stage pipeline and a focused approach to business development. The sequencing and pace of execution here matters as these efforts are intended to lay the foundation for a future beyond Jakafi. During the quarter, the FDA accepted our regulatory application for povorcitinib in patients with moderate to severe HS. The application was submitted ahead of schedule and is supported by a robust high-quality data set across both pre- and post-biologic patient populations. If approved, we believe povo should be a significant growth driver for Incyte as the first FDA-approved oral anti-inflammatory treatment for HS, a disease which affects more than 300,000 people in the United States. We also remain on track for several regulatory decisions this year, including Jakafi XR, which has the potential to generate meaningful sales and serve as an important sales bridge and Opzelura for moderate atopic dermatitis in Europe, a key future growth opportunity for the brand and our international business. Finally, we expect global submissions from Monjuvi in the first-line DLBCL in the first half of the year with approval and launch anticipated in early 2027. Across the pipeline, we continue to advance novel compounds that support our broader transition to a hem/onc I&I company. The pipeline reflects a deliberate balance of risk and reward, combining programs with the potential for outsized returns alongside opportunities that can deliver incremental but highly reliable growth. This work is backed by an experienced clinical development and clinical operations team and consistent execution across trials. In hematology, we had a positive end of phase meeting with the FDA in the first quarter and are on track to initiate our Phase III study in evaluating our mutant CALR antibody 989 in previously treated CALR positive patients with ET by midyear. This represents an important step as we continue to build a portfolio of molecularly targeted therapies, which Pablo will discuss in more detail shortly. In oncology, we now have 4 pivotal trials underway across colorectal, ovarian and pancreatic cancers, including the recent initiation of our G12D program in first-line pancreatic cancer earlier this month. These programs target areas of significant unmet need and represent meaningful long-term growth opportunities for the company. In immunology, we are advancing registration programs in mild to moderate HS for Opzelura and moderate to severe HS, vitiligo and PN for povorcitinib. In addition to the regulatory acceptance for povo and HS mentioned earlier, today, we announced positive results from both Phase III registration studies in adults with nonsegmental vitiligo. These results will support a regulatory application in nonsegmental vitiligo expected in the first half of 2027. Over time, we believe the I&I portfolio at Incyte has the potential to become a significant contributor to the business, representing approximately 1/3 of total revenue by 2030. Finally, I want to take a moment to talk about management. At this stage of the company, our results depend largely on the strength of our management team. Experience, judgment, decision-making and the ability to execute strategic plans. With that context, we have made several executive appointments. This morning, we announced the appointment of Suky Upadhyay as Chief Financial Officer. Suky brings deep experience leading large finance organizations, most recently Zimmer Biomet and Bristol-Myers Squibb. We also announced the appointment of Pablo Cagnoni as President, Incyte and Global Head of Research and Development; and Steven Stein as Executive Vice President and Chief Medical Officer and Head of Late-stage Development. Additionally, Mohamed Issa was appointed as Executive Vice President and Head of U.S. Commercial, coinciding with the integration of our U.S. commercial operations into a single organization. Mohamed is an experienced executive with a track record of new product launch planning and operations. The new structure is intended to establish consistent standards and enterprise-level capabilities across analytics, market access, sales operations and patient services, creating a launch-ready organization in 2026. These capabilities can be leveraged across the portfolio to maximize the return on our commercial investments. Taken together, these appointments give us the management experience and operational oversight for the next phase of the company. Now turning to the quarter. Total revenue in the first quarter of '26 was $1.27 billion, up 21% over prior year. Net sales in the first quarter totaled $1.1 billion, representing 20% growth year-over-year. Sales increased for every marketed product, both in the United States and internationally, and was driven by strong prescription and volume demand across the portfolio. Jakafi sales in the first quarter were $758 million, up 7% year-over-year. Prescription demand increased 6% with broad-based growth across all indications, MF, PV and GVHD. New patient starts remain strong. The prescriber base is stable and a formulary coverage is broad, providing an important foundation for the Jakafi XR launch. We anticipate the approval and launch of XR in the middle of the year. Our immediate focus will be on securing adequate formulary coverage for XR over the next 12 months post launch. We estimate that XR can achieve 10% to 30% of Jakafi's business by 2029. We'll provide more insights on the launch in future quarters. Sales for our core business, excluding Jakafi, were up 63% year-over-year, with contributions across hematology, oncology and immunology. This business will be supported by 4 new product launches over the next 12 months including Jakafi XR, Opzelura for moderate AD dermatitis in Europe, Monjuvi in first-line DLBCL and povorcitinib in HS. As we've discussed, our core business ex Jakafi has the potential to approach $3 billion to $4 billion by 2030, reflecting the strength of the portfolio and continued execution. It is becoming an increasingly important part of how we transition the company for long-term growth. Opzelura continues to be the largest single contributor to the core business ex Jakafi with sales of $143 million, up 20% versus prior year. In the U.S., sales were $106 million, an increase of 12% versus the first quarter of '25. The underlying prescription demand for this business is strong, up 17% year-over-year, which is supported by the continued adoption of nonsteroidal topical therapies. Internationally, growth remains robust in vitiligo where we see strong uptake across markets. In the first quarter, sales totaled $37 million, up 56% year-over-year. Internationally, growth remains robust in Vitiligo, where we see strong uptake across markets. As a reminder, Opzelura is under review by European regulators for moderate AD, and we expect approval and launch in the second half of the year. The moderate AD indication has the potential to contribute meaningfully to top line revenue beginning later this year. For full year '26, we anticipate that roughly 80% of revenue will come from the U.S. and 20% from international markets. In Hematology and Oncology, net sales grew 116% to $204 million. Niktimvo, Monjuvi and Zynyz were the largest contributors to growth in the quarter. Niktimvo has now entered its second year following its launch in the first quarter of '25. Net sales were $55 million in the first quarter of '26, reflecting a strong consistent new patient start profile and solid persistency. We've built a broad growing prescriber base with virtually every BMT center in the United States using Niktimvo with all becoming repeat customers. Within 12 months, Niktimvo has captured 32% of the third line plus market. Finally, formulary and payer coverage remains strong for the brand. Monjuvi sales were $49 million in the first quarter, up 67% year-over-year. Growth was primarily driven by uptake in follicular lymphoma following approvals in the U.S. and international markets. Looking ahead, the potential U.S. approval in first-line DLBCL represents an incremental growth opportunity starting in 2027. Finally, Zynyz sales were $41 million in the first quarter with rapid and robust adoption in SCAC. Now I'll turn the call over to Pablo. Pablo Cagnoni: Thank you, Bill, and good morning, everyone. We have made strong progress year-to-date across our hematology, oncology and immunology franchises, delivering key regulatory and clinical accomplishments. Turning to hematology. We achieved several important milestones for 989, our mutant CALR monoclonal antibody, where pivotal development efforts continue to advance. Most notably, this includes the positive end-of-phase meeting with the FDA in the first quarter. As a result, we're on track to initiate the Phase III study evaluating 989 in patients with previously treated essential thrombocythemia midyear, a key inflection point for this program. Our JAK2 V617F inhibitor program, 058, continues to progress. During the first quarter, we initiated our Phase I dose escalation study evaluating the ASD formulation of 058 in MPN patients with a JAK2 mutation. Preliminary data in a modest number of patients anticipated by year-end, which we expect will provide early evidence of clinical efficacy as well as an increased understanding of the viability of the ASD formulation for future development efforts. In parallel, we're progressing our next-generation compounds through preclinical studies. We remain confident in the underlying thesis that the inhibition of V617F will lead to positive clinical outcomes in patients with MPNs that harbor this mutation. Lastly, in addition to the previously announced positive top line data for tafasitamab in first-line DLBCL, we plan to present the full data set during a featured oral presentation at the upcoming ASCO Annual Meeting in June. This data supports global regulatory submissions for tafasitamab in first-line DLBCL with approval and launch anticipated early next year. Turning to oncology. During the quarter, Zynyz was approved by the European Commission for patients who previously untreated squamous cell anal carcinoma, adding a second indication for Zynyz in Europe. In our pipeline, this month, we initiated a Phase III study evaluating our KRAS G12D inhibitor, 734 in combination with chemotherapy in first-line pancreatic ductal adenocarcinoma or PDAC patients. This marks a significant step for the program as it enters late-stage development in a setting with substantial medical need. Finally, in immunology, we have made meaningful regulatory and clinical progress advancing our late-stage portfolio. Notably, this includes the new drug application acceptance by the FDA for povorcitinib in moderate to severe hidradenitis suppurativa as well as the positive results of our Phase III registrational program evaluating povorcitinib in patients with nonsegmental vitiligo. I will now turn to 989. In the first quarter, we had a positive end of face meeting with the FDA on the development program in ET. The Phase III trial will evaluate 989 compared to best available therapy in both type 1 and nontype 1 mutant CALR positive patients with ET who are resistant or intolerant to at least one prior cytoreductive therapy. The trial will utilize a flexible dosing schedule starting with 750 milligrams IV every 2 weeks, with a single dose escalation option built in to allow for appropriate optimization based on early platelet response. The primary endpoint is durable complete hematologic response or DCHR at week 24. The reduction of mutant CALR VAF from baseline will be evaluated as a key secondary input in the trial, further underscoring the unique mutation-specific and potentially disease modifying profile of 989. We're encouraged by a dialogue with the FDA and have a clear and executable path towards forward Incyte second-line ET with a Phase III study on track to initiate midyear. In parallel to ET, we're progressing our development efforts in myelofibrosis, or MF, where we are evaluating 989 as the first and second line treatment option. Data from our ongoing Phase I program will be shared throughout the year. We remain on track to initiate a Phase III trial evaluating 989 as a second-line treatment in mutant CALR policy patients with MF in the second half of 2026, pending alignment with the FDA in the middle of the year. The Phase I cohort evaluating 989 as a single agent and in combination with ruxolitinib in patients with previously untreated MF is enrolling well. Finally, we initiated and completed a Phase I study evaluating a subcutaneous formulation of 989 in healthy volunteers, supporting our strategy to expand utility and improve convenience for patients. These results enable the initiation of a Phase I study in mutant CALR positive patients in the second quarter. I will now turn to our oncology portfolio. Starting with 734, a KRAS G12D inhibitor, which is emerging as a very important pipeline opportunity for Incyte. The Phase III trial evaluating 734 in combination with standard of care chemotherapy, gemcitabine plus nab-paclitaxel or modified FOLFIRINOX in first-line PDAC is underway. More than 200,000 patients are diagnosed with PDAC with G12D being the most common driver mutation impacting 40% of patients. Today, there are no molecular targeted therapies for patients with pancreatic cancer and chemotherapy has been the foundation of care for decades. What we believe is particularly important is the combination profile of 734 with standard of care chemotherapy. To date, 734 has demonstrated a manageable tolerability profile we combined with either gemcitabine plus nab-paclitaxel or modified FOLFIRINOX without compromising chemotherapy dose intensity. Given how PDAC is treated in practice, especially in the first-line setting, that ability to combine effectively with both full dose chemotherapy regimens is critical. This is reflected in our Phase III development program. Our maturing Phase I data reinforces our conviction in this opportunity, which we view as increasingly derisked. We plan to share efficacy and safety data from the Phase I study in combination with modified FOLFIRINOX and gem/nab in first-line PDAC patients in the second half of the year. The distinguishing feature of our development approach is the scale and depth of our Phase I clinical program where roughly 400 patients have been treated with 734 across PDAC, colorectal, non-small cell lung and other 12D mutated cancers. This has allowed us to build a robust and comprehensive understanding of both clinical activity, safety and tolerability across tumor types and treatment settings, which is informing our development efforts. With a strong early clinical foundation and Phase III development now underway, our focus remains on execution as we advance this program that has the potential to become the first KRAS G12D specific inhibitor approved in first-line PDAC. In parallel, we continue to evaluate expansion opportunities in additional G12D-driven tumors, and we plan to share more about our efforts later this year. Oncology portfolio has reached an important inflection point with each of our core programs now in registrational development and actively enrolling patients. Pivotal efforts for A90, a TGF-beta receptor 2 by PD-1 bispecific are underway. The Phase III trial evaluating A90 in combination with FOLFIRINOX bevacizumab in first-line MSS colorectal cancer patients is ongoing. In the second half of the year, we anticipate sharing additional data from the Phase I study in combination with FOLFIRINOX, in first-line colorectal patients as well as a combination with bevacizumab in previously treated patients with colorectal cancer. 667, our CDK2 inhibitors in pivotal development in patients with platinum-resistant ovarian cancer Cyclin E1 over expression, a biomarker-defined population with significant medical need. The MAESTRO clinical program consists of 3 studies, 2 ongoing trials, a Phase II single arm study and a Phase III versus investigator's choice chemotherapy and a planned Phase III study in the first-line maintenance setting, which we expect to initiate in the second half of 2026. Finally, in immunology, we have made significant progress advancing our late-stage development efforts for povorcitinib, our oral JAK1 small molecule inhibitor. This includes the NDA acceptance in HS and as announced today, the positive results from our Phase II/III registrational program in nonsegmental vitiligo. In HS, last month, at the American Academy of Dermatology Annual Meeting, we presented late-breaking 54-week data from our Phase III STOP-HS program, which reinforced both the durability and the breadth of response associated with long-term povorcitinib treatment. Continuous improvements in clinical outcomes were observed at week 54 and with up to 71% and 57% of patients achieving HiSCR50 and HiSCR75 respectively. Further, up to 29% of patients achieved HiSCR100, the most stringent end point in HS which represents a 100% reduction in abscess and inflammatory nodules count with no increase in draining tunnels. Up to 20% of patients achieved complete clearance of draining tunnels and nodules at week 54. Clinically meaningful improvements in skin pain, fatigue and quality of life measures, outcomes that are highly relevant to patients and clinicians managing this chronic disease were also observed. Finally, from a safety perspective, both 45 and 75 milligram doses were generally well tolerated throughout the study, supporting the profile for chronic use in HS. This data supports the potential for povorcitinib to deliver symptom control and durable disease improvement in patients with moderate to severe HS, both before and after biologic therapy. With the regulatory application accepted, we look forward to working with the FDA towards a potential approval and launch in early 2027. Today, we also announced positive results from our Phase III program evaluating povorcitinib in adults with nonsegmental vitiligo. Our Phase III program is evaluating the efficacy, safety and tolerability of povorcitinib compared to placebo in patients with nonsegmental vitiligo across 2 identical Phase III studies, STOP-V1 and STOP-V2 for 52 weeks. The program enrolled over 900 patients including 456 patients who received a 30-milligram dose of povorcitinib. In both trials, povorcitinib achieved the primary endpoint of greater than or equal to 75% reduction in facial vitiligo area scoring index, F-VASI, from baseline to week 52, demonstrating statistically significant and clinically meaningful reductions in facial vitiligo compared to placebo. Statistically significant improvements were also observed in key secondary endpoint measures including total vitiligo scoring index 50 or T-VASI 50 at week 52. The 30-milligram dose of povorcitinib was well tolerated. The overall safety profile for 52 weeks is consistent with prior studies with no new safety signals observed. Across both studies, rates of treatment-emergent adverse events of special interest were low between 2% and 3% and similar between the povorcitinib and placebo treatment groups. There were no major adverse cardiovascular events. Only one TEAE of VTE was observed in the povorcitinib treatment group in a patient with multiple confounding risk factors, including smoking history, high BMI and intercurrent pneumonia. These results provide a clear and compelling path towards registration planned for the first half of 2027 and underscore the opportunity to add an oral alternative treatment for patients with vitiligo to our portfolio. We plan to share additional data from the trials in the second half of 2026. Povorcitinib continues to produce compelling data in immune-mediated dermatological conditions. We have seen success in translating early Phase II findings into larger registrational programs with now 4 post Phase III trials across HS and vitiligo. As we look ahead, we expect data from our third indication for prurigo nodularis by end of year. In addition to povorcitinib, we are evaluating Opzelura in a Phase III registrational program for the treatment of mild to moderate HS with top line results expected end of year. If positive, this result would support a supplemental new drug application in 2027. And if approved, Opzelura would provide the first topical treatment option for patients with HS. Our JAK/ANKO franchise is well positioned to provide topical to oral solutions across mild to severe immune-mediated dermatological conditions, and we look forward to providing more updates this year. To close, we have a catalyst-rich year ahead with multiple late-stage data readouts, regulatory milestones and pivotal trial initiations across our 3 core franchises, underscoring the breadth, depth and maturity of our pipeline. With that, I'll turn it over to Tom for a financial update on the quarter. Thomas Tray: Thanks, Pablo. As Bill mentioned earlier, our total revenues and net sales for the first quarter were $1.27 billion and $1.10 billion, respectively, increasing 21% and 20% from the prior year. Our GAAP R&D expenses were $516 million for the quarter, increasing 18% from the prior year, driven by continued investment in our late-stage development assets including our mutant CALR, G12D and CDK 2 programs. Moving to SG&A. GAAP SG&A expenses were $328 million for the quarter, increasing 1% year-over-year. Ongoing operating expenses for the first quarter of 2026 increased 14% year-over-year compared to a 19% increase in ongoing revenues during the same period, leading to a continued increase in operating leverage and margins. We reaffirm our full year 2026 total net sales, R&D and SG&A operating expense guidance. Total net sales guidance for the full year 2026 is $4.77 billion to $4.94 billion representing a 10% to 13% increase from the prior year. This includes net sales expectations for Jakafi of $3.22 billion to $3.27 billion, Opzelura of $750 million the $790 million and hematology and oncology products of $800 million to $880 million. Total GAAP R&D and SG&A operating expenses are expected to be $3.495 billion to $3.675 billion for the full year. Finally, we anticipate cost of sales to remain relatively stable, representing approximately 9% of net sales. I'll now turn the call back over to Bill. William Meury: Thanks, Tom. In closing, we're off to a strong start to the year. Our core business continues to deliver durable growth. Our pipeline is advancing with multiple catalysts ahead, and we've strengthened our leadership team to support the next phase of execution. As we look ahead, we see 2026 as a year of execution with multiple inflection points across the business that we believe will further strengthen both our near-term performance and long-term growth trajectory. And with that, I'll turn the call over to the operator for Q&A. Operator: [Operator Instructions] Our first question today is coming from Tazeen Ahmad from Bank of America. Tazeen Ahmad: Congrats on the positive data for povo for the nonsegmental vitiligo. I wanted to ask what your thoughts are as you prepared the next step, how do you see this coexisting with Opzelura in the commercial space? What's been your experience with marketing and this indication so far? And do you think that each of these drugs could be appealing for a different segment of vitiligo? William Meury: Yes. Thanks for the question, Tazeen. I'll make a few comments and then ask Mohamed, our U.S. commercial head, to also expand on how we're thinking about vitiligo. I think there's a real opportunity here with the FDA approvals of oral treatments to essentially unlock the vitiligo market in the same way that advanced systemic therapies unlocked AD and psoriasis. I think that these approvals will create awareness that vitiligo is a chronic inflammatory disorder. And I think that is important for everybody that's going to be in the market. This is definitely about medicalizing the condition. Frankly, I think Incyte does have an advantage in that we have a topical to oral solution. There is a natural sequencing that sets up in the vitiligo market and we're able to cover sort of the waterfront with both Opzelura as well as with povorcitinib. And that's ultimately going to be, I think, the key to success here -- we have the advantage of incumbency. We have direct ties to the providers. We know how they think about this condition. We understand the education that's required to increase the treatment rate -- and we, of course, have interactions with payers on this front, too. And so I think it's going to be an important contributor to povo being 1 of the 3 indications that we're pursuing right now. Mohamed, do you have anything to add? Mohamed Issa: Really well said, Bill. Look, maybe just some context to the indications. We have obviously reason to believe there's 1.5 million people living with vitiligo in the U.S. and only 20% to 30% seek treatment, like Bill mentioned, a good portion of those patients, about 35% of them have a BSA less than 5. Those are going to be really good patient segments for Opzelura. You even have a patient segment between 5 and 10 BSA. That's also a target patient population for Opzelura. And then for patients with BSA greater than 10, where systemic therapy is most likely we estimate that total addressable market to be about $1.5 billion to $2 billion, which gives povo a great opportunity to address that need as well. And like Bill mentioned, having a topical to oral continuum for vitiligo and even HS if both products get approved, puts us in a really unique position as Incyte to satisfy that patient journey from the beginning all the way to advanced treatment. Operator: Next question today is coming from James Shin from Deutsche Bank. James Shin: I appreciate all the color on 989. But I just wanted to check in, will 989's EHA update be mostly a check-the-box kind of update? Or will there be some new wrinkles to glean? And just if I could sneak one in. I don't know if Suky is on the call, but Bill, I know you guys mentioned previously having expense discipline, but what changes, if any, will Suky brings? William Meury: Great. James, you snuck in a second question, so there may be a penalty after the call. I'll let Pablo answer the first question. Pablo Cagnoni: Thank you for the question. So the update at EHA it's going to be pretty substantial. We have continued to enroll in these studies. We have longer follow-up and we have continued to deepen our translational understanding of the effects of 989 in patients with both ET and MF. So you should expect continued growth in number of patients. In ET, we'll have approximately 100 patients enrolled and we'll report data in those. For MF in terms of the second line, we'll have about 45 patients, 45 patients, single agent and about 15 to 16 patients in combination with ruxolitinib. And I think, first of all, the data has continued to evolve well. We think the durability is an important point. We think the continued tolerability of 989 in this patient population is very important. And we do think that continue to see how the translational part of the story continues to evolve with clear evidence of disease eradication disease modification by 989 in patients with MPN is very important. So you should expect to see a lot more of that at EHA. William Meury: Yes. And as it relates to Suky, look, he has extensive experience at both large and small companies. We have a very strong finance department at the company. He's going to focus on the things that a CFO needs to focus on. both strategically and operationally. You want to make sure that your budget planning process is efficient and sharp. You want to make sure that capital allocation decisions are made intelligently. There's, of course, a role in terms of setting up the right systems so that we can scale the company and we're really glad to have him. So thanks, James. Operator: Next question is coming from Stephen Willey from Stifel. Stephen Willey: So I guess, congrats on securing the 24-week CHR endpoint in the pivotal ET trial. But just wondering if you can provide some more detail around the mechanics of dose escalation just in terms of the platelet response criteria that will be used to trigger that and then just how that works from a timing perspective. And then just as a follow-up, just given some of the flexibility here that you were given from the agency around the EP around the ET end point, just curious how you think this now kind of reads into your ability to secure additional flexibility from the agency in the pivotal second-line MF trial? William Meury: Go ahead, Pablo. Pablo Cagnoni: Certainly, so let me start with your last point there because I think it's very important. We had a very constructive set of interactions with FDA. So we're very, very happy how these conversations are going. And I think they recognize 989 is a fundamentally different way to treat patients with MPN. It's truly not only molecular targeted therapy but has the potential for disease modification, and that needs to be contemplated as we implement Phase III trials and as we select endpoint for these Phase III trials. So in terms of the conversations on MF, we believe, as you alluded to, that this will allow us to have a conversation with FDA about defining endpoints in MF that truly reflect the effects of 989 in terms of normalizing hematopoiesis, which we think it's a critical difference compared with existing therapies for patients with MF. So we'll provide more updates on this later in the year, but we think that dialogue is going to be very constructive as it was in ET. In terms of your specific question about ET, if you remember the data we presented last year, with 989 does in patients with ET is a very rapid normalization in platelet count that happens very soon after the first dose. And by the end of the first cycle, it's about a month, most of the patients that will normalize plates have done so. So we believe that an early dose escalation at that point for patients that are not early responders is the right approach here to take into account the heterogeneity that we see sometimes in the response. So we believe that by this, we'll be able to cover patients with all kinds of mutations and have a treatment effect across the board in patients with ET. Operator: Our next question today is coming from Etzer Darout from Barclays. Etzer Darout: Great. Thanks for today's earnings update. So we noticed the updated guidance for ruxolitinib now in the second half versus early 2027 for first-line GVHD. Just -- maybe if you could talk about your expectation for that study? And given sort of the move up in time line, potential to maybe accelerate the pivotal program in combo with ruxolitinib? William Meury: I just want to -- I want to make sure your question is related to Niktimvo and the Phase III study with Jakafi? Etzer Darout: Yes. The movement in the second half out versus early 2027 that you had previously guided to? William Meury: Go ahead, Pablo. Pablo Cagnoni: So let me take that. So the study -- the randomized Phase II study combining Niktimvo with rux and comparing that with rux and steroids, accrued very quickly, well ahead of schedule. As a result of that, we'll have data before the end of this year, and that will help us define the rest of the regulatory strategy to bring Niktimvo to first-line chronic graft versus host disease patients. Operator: The next question today is coming from Ash Verma from UBS. Ashwani Verma: So just on 989, trying to understand the implications of this flexible dose escalation in ET pivotal trial design for the MF indication. So I mean how do you think that plays out? Like could this be a challenge if you have to titrate patients and some don't get the benefit of the efficacy unless you get the 2500 mg dose? And especially like how would that be relevant if you're pursuing the first line MF indication? Pablo Cagnoni: When you look at the data that we presented twice last year, a substantial percentage of patients with ET respond by normalizing platelet count at doses well below the dose escalation of 2,500. Based on that, we think that the starting dose of 750 milligrams IV every other week, is the right way to start because a lot of the patients with normalized platelet count with that. And that alone will support achieving the primary endpoint of the study, which is durable complete hematologic response at 24 weeks. Now there's a percentage of patients like it tends to happen molecular targeted therapies that are less sensitive to 989. And for those patients, we thought one step up to 2,500 should cover the efficacy in that patient population. So we basically designed the study to try to cover the heterogeneity in this population. We believe that the early dose escalation step is the right way to do it. We believe that the rapid effect of 989 normalizing platelets in patients that will do so, will allow us to very quickly make that determination. And obviously, as I mentioned at the beginning, we had a very constructive discussion with FDA, and we reached an agreement on this. Operator: Next question is coming from Michael Schmidt from Guggenheim. Michael Schmidt: I had one on 734, the KRAS G12D program. So nice to see the chemo combo study now up and running in PDAC. Pablo, just curious how you think about either potentially pursuing other registration opportunities in PDA perhaps with investigational therapies such as pan-RAS inhibitors? Or -- and then how do you think about addressing other tumor types such as lung and colorectal cancers? Pablo Cagnoni: Thank you for the question, Michael. So first of all, let me just say, we are very pleased how this -- the data are evolving. We'll have an update for all of you later in the year, but the combination with chemotherapy, which we showed the ability earlier this year at the ASCO GI meeting, but now the response rate data is coming in, and we'll have that as well as more durability data later in the year, and we're very pleased with the progress of this program and the implementation of the Phase III pivotal trial in first line. In parallel with that, we've done a lot of work in other contexts. First of all, in pancreatic cancer, we have a strong interest in adjuvant and we're trying to decide the right design there. You'll hear more about that in the second half of the year. We're also then in combination with Erbitux, which I think one of the really important advantage of 734 in this competitive landscape is the absence of rash. And so the combination with EGFR inhibitors is key, and it will be key, we believe, to develop these therapies in colorectal cancer. So you'll hear more about that later in the year, which could be both in combination with Erbitux alone or Erbitux plus chemotherapy in different lines of therapy in colorectal cancer. And finally, we have enrolled a cohort of patients with non-small cell lung cancer. We'll have data on that in the second half of the year. All this gives you an idea how we're going to potentially expand this program later in the year, and we'll give you a comprehensive update when we present the updated data. Operator: Next question is coming from Matt Phipps from William Blair. Matthew Phipps: I'll follow up on 734. I just wanted to confirm that all studies have resumed enrollment following that temporary pause a month or so ago to review those pneumonitis events? And I guess, is a history of pneumonitis and going to be an exclusion criteria for DAWN-303 Phase II study? Pablo Cagnoni: So let me recap on what happened here because it's important to have clarity. We had the event of pneumonitis. We reported -- we did a full program review that encounter 4 cases of pneumonitis in more than 350 patients treated. Importantly, 3 of those patients were receiving 734 in combination with chemotherapy. And 2 of the patients had concurrent infections. And an in-depth review of the data concluded there was no signal that about the incidence of 734 producing pneumonitis in these patients. But it's very important to remember. Now the Phase III study was never put in pause. We -- what we did is in order to amend consent forms and investigator brochure, Europe, it's an administrative reason, they put enrollment on hold in the Phase I study. So that -- those have been amended now. It will reopen. Nothing ever stopped in the U.S. We have continued to enroll patients. The implementation of the Phase III study continues apace without any interruptions. Operator: The next question is coming from Judah Frommer from Morgan Stanley. Judah Frommer: Just curious on Opzelura. If you could comment on competition, within the nonsteroidal topical market. Is that still a growing pie? Are you fighting for share just within the market kind of ex steroids? And then just curious on -- in terms of the long-term guide for Opzelura doubling, how important is it to have povo approved in those indications for those multiple tools within the tool bag for those indications? William Meury: Yes, Judah, thanks for the question. I'll start with the second question that you asked and then double back on the first. When you think about this business over the next 5 years, there's essentially 3 components to growth. And I do believe Opzelura has the potential to grow it, let's call it, a 10% to 15% CAGR over this period of time. First component is organic growth, which is what you're talking about, continued penetration of the AD and vitiligo markets. The second component of growth is the launch of the HS indication for Opzelura and mild to moderate HS. And then there's the launch of Opzelura in Europe for atopic dermatitis, which could throw off $200 million to $300 million in incremental sales. And it doesn't require any heroic math to forecast at Opzelura can approach $1 billion -- let's call it $1.3 billion roughly by 2030. Now as it relates to competition in the United States, I'm not so much focused on these modest market share shifts that you can see between products on a monthly basis. A few points here. In the first quarter, our share of new patient starts in the United States was 46%. And new patient starts, as you know, our NBRx is sort of the future, it's growth. TRx is tell you a lot about the base in the past. But when you're really monitoring and managing a business, you're focused on that NBRx number. NBRx volume or new patient start volume in the first quarter was up over 30% year-over-year and was at a higher rate than the market. And we had 2 to 4x more new patient starts in the first quarter than any of the other branded topicals. I think the real key here, and this is true for us as well as anybody else that has a topical is that the use TCIs of is starting to moderate, and there is a shift from TCIs and steroids to these nonsteroidal branded topicals. And you see that month-to-month and quarter-to-quarter. I think the benefit we have is Opzelura is superior in terms of skin clearance and itch relief relative to a TCI. And it is a better long-term option than steroid. I think the product is set up perfectly over the next 5 years, and we're in a very, very strong position, and you have the benefit of operating in a market where there's a real tailwind, and that is the move away from steroids and TCIs. I think that probably covers it. I think as it relates to Povo, I think that's upside. The fact that we are able in both vitiligo and in potentially HS to offer a complete treatment solution topical to oral, that's how I think about it. Thanks for the question. Operator: Next question today is coming from Ren Benjamin from Citizens. Reni Benjamin: Congrats on the quarter. My question is on 058 in the Phase I with the new ASD formulation. Can you talk to us a little bit more about how we should be evaluating those results? And when we see it in the second half, what you're looking for and how we view this and will the deal you made with Prelude and that molecule for which you have an option. When do you guys ultimately make a decision between the 2 and how? Pablo Cagnoni: Thank you for the question. So as I mentioned during my prepared remarks, we are now in the clinic with the new formulation, and we're going to have an update for you before the end of the year. What we would love to see here is that with the new formulation, if we achieve the right exposures that our preclinical data predicted were necessary to see an effect that then we will be able to confirm our conviction that inhibiting VC617F in this way with pseudokinase inhibitor, will deliver positive clinical outcomes of patients with MPNs. So that's basically the goal of the program for this year to deliver enough exposures with the new formulation to achieve concentrations that will hit the target hard enough to show clinical outcomes that matter. Now when it comes to Prelude, we see that as a next-generation program potentially for us. We have internal next-generation programs, and we have an external next generation program, which is a Prelude 1. That's a time-based option. We'll have to make a decision at some point in time. And that data will be compared with the data from our internal programs as well as the data from the LEAD 058, and then we'll make a decision which once we move forward. Operator: Our next question is coming from Mitchell Kapoor from H.C. Wainwright. Unknown Analyst: This is [indiscernible] on for Mitchell Kapoor. Congratulations again on the data. I was curious about povorcitinib in HP. So where do you expect to be earliest uptake to take place? Would you say in biologic naive patients post biologic failures or patients with specific disease features such as like draining tunnels pain or a high inflammatory burden? William Meury: Yes, Mitchell, thanks for the -- or excuse me, [indiscernible] thanks for the question. I'll make a few comments and then Mohamed will add. First of all, I would just step back and say that I think the HS market is tailor-made for an oral. This market is set up for sequencing oral to injectables. And that's something that's been missing. Think about all the value that's been ascribed to orals in the obesity market and povo has the potential to be the first oral anti-inflammatory. We expect to have a broad label, both in the pre- and post-biologic setting, which I think is a real advantage. 70% of our clinical data is in prebiologic patients. As it relates to early uptake, you certainly could envision that patients who are on a biologic right now, 1 of the 17s are TNF who have active disease or aren't achieving pain relief or have some injection fatigue could be an early source of utilization. And if you think about the size of the biologic market, there's a range out there in terms of the estimates, it's 50,000 to 75,000 patients. If povorcitinib was to get 10% of 50,000 on an annualized basis, you'd have a couple of hundred million dollars in revenue. But I think the most important point here is we expect that we will capture patients at 2 distinct inflection points after an antibiotic before a biologic. And then after a biologic, whether it's a 17 or TNF alpha. And Mohamed right now is working on preparing that launch. So it is completely wired for success. Mohamed, do you want to add anything? Mohamed Issa: Yes. Look, I mean, HS, as we know, is a large and growing market and has a significant unmet need. The disease is debilitating. It's characterized by chronic pain, drainage and flares and obviously, highly heterogeneous, right, with multiple cytokines. So when you think about the market, as Bill just described in terms of its size, 300,000 patients in the U.S., 200,000 actively seeking treatment and yet only 50,000 of them are in advanced therapy. So povo is positioned to address this market as the first and only oral treatment with biologic-like efficacy across all of the treatment parameters that are quite debilitating and by competing, like Bill mentioned, in both the pre- and post-biologic setting, povo has the potential to be somewhere between $500 million to $1 billion in peak sales. And I think at launch, you can expect an opportunity to capture patients on both sides of that inflection point. Operator: Our next question today is coming from Srikripa Devarakonda from Truist. Srikripa Devarakonda: And congrats on the most recent clinical data as well with povo. I have a question on the rux mutant CALR combo with the first-line data that is expected year-end. Can you remind us of data that suggests any synergistic benefit? And given how well ka is entrenched in the myelofibrosis market, if CALR mutant patients are doing well on Jakafi, where do you envision mutant CALR fitting, like is it a combo? Is it -- could it be a switch add-on? Pablo Cagnoni: Thank you for the question. So let me offer a couple of points. So let's start with the first part of your question about synergy. Preclinically, we saw additive to synergistic effects combining 989 with Jakafi and CALR mutated models. And I think what's important to remember is, first of all, Jakafi as well as it works and as important as a step forward, it has been in patients with MPNs as particularly in CALR mutated patients, very little, if any, disease modification potential. It controls the symptoms, some of the symptoms of the disease. Obviously, it leads to spleen responses. All those effects are much less in patients with CALR mutations. In fact, if you look at the control arms of the COMFORT study or the MANIFEST study, the SVR35 and Jakafi in CALR-mutated patients is approximately 20%. That's in previously untreated patients. So obviously, there's a need for something better for CALR mutated patients even in first-line MF. The second part of the question is Jakafi does have a package, which is obviously produces a fair amount of anemia and thrombocytopenia. So what we're looking to do with 989 is fundamentally different. We're looking to restore normal hematopoesis. We're looking to eliminate malignant megakaryocytes from the bone marrow. We're looking to eliminate CD34 positive mutant CALR positive cells from peripheral blood. And as a result of that shift back to normal hematopoiesis, which as we've seen already, translates into improvements in anemia as well as spleen responses and symptom improvement. So when we put this whole package together, we'll show you the data by the end of the year in a larger group of first-line patients, we will have for you a regulatory strategy for 989 in first-line MF. But we think that the effect of 989 and Jakafi are fundamentally different in this patient population. Operator: The next question is coming from Brian Abrahams from RBC Capital Markets. Brian Abrahams: Sounds like you've made a lot of progress with the 989 subcu form, having completed the healthy volunteer study. So I guess I was wondering if you could maybe tell us about the observations there. And then the scope and dose range that you're going to be testing in this ongoing Phase I study in patients and whether that in and of itself could potentially be bridging or whether you'll need integration of the subcu form into the Phase III? William Meury: Thanks for the question, Brian. Pablo? Pablo Cagnoni: So the data from the healthy volunteer study, as I mentioned in my remarks, has allowed us now to move very quickly into patients. We're going to test a very broad range of doses. Let me just assure you that they will cover all the potential doses that we're using in Phase III in ET and that we could conceivably use in Phase III in patients with MF. So we will have that covered. In terms of implementing this in Phase III studies, this is a question of timing, Brian. Speed is really important here. We need to bring this medicine to market for patients with ET and MF as quickly as possible. We will not slow down the AD study. We're probably not going to slow down the second-line MF study to incorporate the subcu, and we'll have a bridging strategy at the back end -- our goal is to incorporate a subcu formulation in the first line MF study. And right now, the plan allows us to do that. We'll provide an update on both before the end of the year. Operator: Our next question today is coming from Jessica Fye from Morgan Stanley. Jessica Fye: I had another one on 989. I was hoping you could touch on the potential translatability of the ET design to MF as it relates to starting dose. And I guess really more specifically the potential for an up-titration approach particularly in the context of a potential 6-month primary endpoint where we're presumably going to be looking at SVR35 and TSS50 versus looking for an early platelet response like in ET? Pablo Cagnoni: Thank you for the question, Jess. So the journey in MF is just a little bit earlier. We need to spend a little bit more time with FDA discussing the design of the second-line MF study. So I'm going to be a little bit let's open about answering the question in detail. Now I think that the fact that we have an agreement on the potential for -- the potential on the step-up escalation in ET certainly can build -- we can build the framework around that in MF. I think the more important thing in MF to be honest, is to have a constructive dialogue with the agency on the primary endpoint of the study, which we intend to do and for which we have a lot of supporting data. As I mentioned in an answer to a previous question, 989 is a fundamentally different type of medicine for patients with MF. This is about normalizing hematopoiesis not just a nonspecific inhibition of JAK that leads to some symptom improvement and spleen response. It's about normalizing hematopoiesis. We think that needs to be contemplated into the primary endpoint for the study in MF, and we intend to have that conversation with FDA. Conceivably, we could have the same to address the heterogeneity across the population, we could have a dose escalation step as well. In this case, it could take a little bit longer, but we'll have that conversation with the FDA as at the right time. Thanks, Jess. Congratulations on the move to Morgan Stanley. Operator: Our next question today -- actually our final question today will be coming from Derek Archila from Wells Fargo. Derek Archila: Congrats on the progress. This one is for Pablo. If you frame the setup for EHA and the update there earlier, but I guess, is the expectation we should see deepening responses in these MF cohorts at the update I just wanted to reconcile the eradication comment that you made. Pablo Cagnoni: So it's always -- look, we will have data that continues to show the effect of 989 as a disease-modifying therapy. And that consistently will show that we can continue to eliminate -- dramatically reduce in some patients close to eliminate the malignant population of megakaryocytes in the bone marrow and in peripheral blood. And you should see more of the translational data at EHA. Operator: We reached the end of our question-and-answer session. Ladies and gentlemen, that does conclude today's teleconference and webcast. You may disconnect your lines at this time, and have a wonderful day. We thank you for your participation today.
Operator: Good day, ladies and gentlemen, and thank you all for joining us for this Cincinnati Financial Corporation First Quarter 2026 Earnings Conference Call. Today's session is also being recorded. It is now my pleasure to turn the floor over to Investor Relations Officer, Dennis E. McDaniel. Welcome, Dennis. Dennis E. McDaniel: Hello. This is Dennis E. McDaniel at Cincinnati Financial Corporation. Thank you for joining us for our First Quarter 2026 Earnings Conference Call. Late yesterday, we issued a news release on our results along with our supplemental financial package including our quarter-end investment portfolio. To find copies of any of these documents, please visit our investor website, investors.synthin.com. The shortest route to the information is the quarterly results section near the middle of the investor overview page. On this call, you will first hear from president and chief executive officer, Stephen Michael Spray, and then from executive vice president and chief financial officer, Michael James Sewell. After their prepared remarks, investors participating on the call may ask questions. At that time, some responses may be made by others in the room with us, including Executive Chairman Steve Johnston, chief investment officer Steven Soloria, Cincinnati Insurance’s chief claims officer, Mark Shambo, and senior vice president of corporate finance, Andy Schnell. Please note that some of the matters to be discussed today are forward-looking. These forward-looking statements involve certain risks and uncertainties. With respect to these risks and uncertainties, direct your attention to our news release and to our various filings with the SEC. Also, a reconciliation of non-GAAP measures was provided with the news release. Statutory accounting data is prepared in accordance with statutory accounting rules, and therefore is not reconciled to GAAP. Now I will turn the call over to Steve. Stephen Michael Spray: Good morning, and thank you for joining us today to hear more about our results. Performance for the first quarter of the year was good and included several aspects that demonstrated the success of our proven strategy and our ability to execute it. Both our insurance and investment operations performed quite well. Net income of $274 million for 2026 included recognition of $82 million on an after-tax basis for the decrease in fair value of equity securities still held. Non-GAAP operating income was strong at $330 million for the quarter compared with an operating loss of $37 million a year ago. The 95.6% first quarter 2026 property casualty combined ratio improved by 17.7 percentage points compared with first quarter last year, including a decrease of 14.2 points for catastrophe losses. We had an excellent 87.5% accident year 2026 combined ratio before catastrophe losses for the first quarter. Turning to premium growth, our consolidated property casualty net written premiums grew 7% for the quarter, including a favorable 2% effect from net reinstatement premiums recorded in first quarter 2025. Our strong financial position and sophisticated pricing and segmentation models allowed us to benefit from market disruption over the past few years. We stayed the course providing a stable market for our agents, in turn, growing at an accelerated pace. In fact, in just the last seven years, we have doubled the size of our consolidated property casualty net written premiums. As those market challenges shift, growth is slowing as our underwriters continue to emphasize pricing and risk segmentation on a policy-by-policy basis in their underwriting decisions. Estimated average renewal price increases for most lines of business during the first quarter were lower than 2025, but still at levels we believe were healthy. Commercial lines in total averaged increases near the high end of the low single-digit percentage range, and excess and surplus lines was again in the mid single-digit range. Our personal lines segment, including personal auto and homeowner, was in the high single-digit range. Our premium growth objectives are further supported by exceptional claim service and our deep relationships with best-in-class independent insurance agents. Next, I will comment on first quarter performance by insurance segment compared with a year ago. As we pursue profitable premium growth, we believe pricing discipline in a challenging market contributed to strong profitability this quarter. Commercial lines grew net written premiums 3% with a 98.6% combined ratio that increased by 6.7 percentage points, including 6.0 points from higher catastrophe losses. Personal lines grew net written premiums 15% driven by Cincinnati Private Client. The combined ratio for personal lines was 96.8%, 54.5 percentage points better than last year, including a decrease of 41.9 points from lower catastrophe losses. Excess and surplus lines grew net written premiums 8% and produced a very good combined ratio of 89.3%. Cincinnati Re and Cincinnati Global each continue to contribute to profitability and reflect our efforts to diversify risk and further improve income stability. Cincinnati Re’s first quarter 2026 net written premiums decreased by less than 1%. Its combined ratio was an outstanding 79.7%. Cincinnati Global’s combined ratio was also stellar at 78.7% along with premium growth of 31% as it continues to benefit from product expansion in recent years. Our life insurance subsidiary continued to deliver excellent results, including 24% net income growth. In addition, term life insurance earned premiums grew 7%. I will end my commentary with a summary of our primary measure of long-term financial performance, the value creation ratio. Our VCR was 0.2% for 2026. Net income before investment gains or losses for the quarter contributed 2.1%. Lower overall valuation of our investment portfolio and other items contributed negative 1.9%. Now I will turn it over to Chief Financial Officer Michael James Sewell for additional insights regarding our financial performance. Michael James Sewell: Thank you, Steve, and thanks to all of you for joining us today. We reported growth of 14% in investment income in 2026 driven by strong cash flow from insurance operations. Bond interest income grew 12% and net purchases of fixed-maturity securities totaled $624 million for the first three months of the year. The first quarter pretax average yield of 5.02% for the fixed-maturity portfolio was up 10 basis points compared with last year. The average pretax yield for the total of purchased taxable and tax-exempt bonds during the first quarter of this year was 5.37%. Dividend income was up 13%, including a $6 million special dividend received from one of our equity holdings. Net sales of equity securities totaled $54 million for the quarter. Valuation changes in aggregate for the first quarter were unfavorable for both our equity portfolio and our bond portfolio. Before tax effects, the net loss was $71 million for the equity portfolio and $220 million for the bond portfolio. At the end of the first quarter, the total investment portfolio net appreciated value was approximately $7.7 billion. The equity portfolio was in a net gain position of $8.1 billion while the fixed-maturity portfolio was in a net loss position of $4[inaudible] billion. Cash flow continued to benefit investment income growth. Cash flow from operating activities for the first three months of 2026 was $656 million, more than double a year ago. Regarding expense management, our first quarter 2026 property casualty underwriting expense ratio decreased by 0.6 percentage points, reflecting a favorable 0.7 points from the effect of net reinstatement premiums in the first quarter 2025. Turning to loss reserves, our approach remains consistent. We aim for net amounts in the upper half of the actuarially estimated range of net loss and loss expense reserves. As we do each quarter, we consider new information such as paid losses and case reserves, then we update estimated ultimate losses and loss expenses by accident year and line of business. For the first three months of 2026, our net addition to property casualty loss and loss expense reserves was $466 million, including $419 million for the IBNR portion. During the first quarter, we experienced $81 million of property casualty net favorable reserve development on prior accident years that benefited the combined ratio by 3.2 percentage points. On an all-lines basis by accident year, net favorable reserve development for the first three months of 2026 included favorable $72 million for 2025, favorable $25 million for 2024, and an unfavorable $16 million in aggregate for accident years prior to 2024. I will conclude my comments with first quarter capital management highlights. We paid $133 million in dividends to shareholders. We repurchased approximately 1.1 million shares at an average price per share of $164.93. We believe both our financial flexibility and our financial strength are in great shape. Parent company cash and marketable securities at quarter end was $5.6 billion. Debt to total capital remained under 10%. And our quarter-end book value was $101.60 per share, with nearly $16 billion of GAAP consolidated shareholders’ equity providing plenty of capacity for the profitable growth of our insurance operations. Now, I will turn the call back over to Steve. Stephen Michael Spray: Thanks, Mike. I think this quarter’s solid results demonstrate that we have the people and plans in place to keep building on our success regardless of market cycles and conditions. Our associates continue to answer the call for our agents and the communities they serve, developing deep relationships and informing smart underwriting decisions. Early in March, AM Best also expressed their confidence in our plans by affirming our A+ rating, citing our strong balance sheet and operating performance. If you would like to hear more about how we will continue to deliver value for policyholders, agents, associates, and shareholders, we invite you to join us for our annual meeting of shareholders this Saturday, May 2, at the Cincinnati Art Museum. You are also welcome to listen to our webcast of the meeting available at investors.synfin.com. As a reminder, with Mike and me today are Steve Johnston, Steven Soloria, Mark Chambeau, and Andy Schnell. Jim, please open the call for questions. Operator: We will now open the call for questions. Gentlemen, thank you for your remarks. And to our phone audience, at this time, if you would like to ask a question, simply press star followed by the digit one on your telephone keypad. Pressing star and 1 will place your line into a queue, and I will open your lines individually and you will be invited to direct your question. We will take our first question today from the line of Michael Wayne Phillips at Oppenheimer. Please go ahead. Michael Wayne Phillips: Yes. Thank you. Good morning, everybody. Thanks for the time. I guess, Steve, I want to dive a little more into the renewal price change in commercial. It seemed to decelerate a little more than maybe we have heard from others, but it is obviously hard to really accurately say on that. I guess your high end of low single digit, obviously it is impacted by your commercial property and comp. They are not a small piece of that segment. So maybe could you provide any comments on the pricing environment in your commercial casualty specifically, what that looks like today, and maybe how that compares to what you see as loss trends in commercial casualty? Stephen Michael Spray: Yeah, thanks. Good morning, Mike. Good to hear from you. The high end of the low single-digit range—just so you know—that is all in. That takes into account some of the impact that we get from our three-year policies. Specifically to casualty, and not bifurcating it down, but just all in on casualty, we are getting mid single-digit increases. I think more importantly, from my perspective, with shifting market cycles, our focus is on being a package writer, focused on policy-by-policy risk selection, terms and conditions, and then using the pricing tools that we have and segmenting the book. That is where we focus most of our efforts versus any straight average. The straight average just does not tell the story through any market cycle. But I think even now, as things are softening, it is even more crucial that our underwriters, working with agents, continue to deliver on that segmentation strategy. Michael Wayne Phillips: Okay, Steve. Thank you. I guess, switching over to personal, specifically the umbrella book. You have grown that nicely in the last couple of years. I think you are north of $200 million or so of premium—so small base. But can you just talk about your strategy there? How big do you want that to be, say, the next year or two? Does it get to a half billion in the next two years? And thoughts on the volatility of that business in terms of losses—so just thinking about how much you want to grow in the near term on that. Stephen Michael Spray: Yeah. Thanks, Mike. I have no specific guidance on how large we want to grow that umbrella. Again, in personal lines, as you know, we are a package writer, and so in many cases that umbrella comes along with that, probably even more so with our focus on private client. Those individuals—higher net worth folks—are desiring larger limits, and we have the balance sheet and the expertise. That has performed well for us. Legal system abuse in commercial lines has been well documented, and so it is something we pay attention to—certainly in personal lines, especially with umbrella and excess. But we feel good about where we are there, and we will continue to grow it. Michael Wayne Phillips: And then just one quick numbers question if I could. Mike, the $72 million on 2025 accident—I assume that is homeowners and property ones? Michael James Sewell: Repeat that again. Michael Wayne Phillips: Yeah. Mike, you mentioned the $72 million of favorable in 2025. I was just curious to make sure—was that homeowners and commercial property? Michael James Sewell: Yes. Michael Wayne Phillips: Okay. Cool. Thank you, guys. Stephen Michael Spray: Thank you, Mike. Operator: Our next question today will come from the line of Joshua David Shanker at Bank of America. Joshua David Shanker: Yes. Thank you for taking my question. But first, I just want to say, Dennis, on Dennis’ retirement, it is a big deal at Cincinnati Financial Corporation. I wish Dennis the best and he is just the best in the business, so I only have great things to say and think about him. So we are going to miss you, Dennis. Dennis E. McDaniel: Well, thank you, Josh, and the good thing is the team is ready to continue to execute. I am around for a few more months, but thank you. Joshua David Shanker: Well, so here are my questions. First of all, when I look at the growth rate of the homeowners business and I compare that to other personal and auto, I kind of think of a high net worth package as you want everything from the customer—or maybe I am wrong about that. You know, you sell a whole package. We want your cars. We want your toys. We want your art. Why is there such a difference in the growth rates? Are you looking for a property-only type of high net worth purchase, or what is the difference between the growth rates of the subgroups within personal lines? Stephen Michael Spray: Yeah. Thanks, Josh. You are all over it. We are a package writer both in middle market personal lines and in private client. We want to be an online solution for the policyholders. But you make a great point. I think one of the advantages that we have by being a premier carrier for our agents in middle market and high net worth is diversification that naturally comes with that business. High net worth—you are right—is more property driven. Homes are larger. There may be fewer vehicles, but high net worth generally is property driven, less auto. Middle market is the opposite—lower property, higher auto. And then, you did not ask this, but I will take it a step further: you get geographic diversification between middle market and high net worth as well. Middle market, in general, tends to be more in the center of the country; private client is more Northeast, West Coast, and Florida driven. Joshua David Shanker: When I look at the numbers—23% growth in the homeowners segment—but the new business production is down a lot. I assume most of that growth is really coming through rate these past couple of quarters. Can we bifurcate between how much rate you are asking and how much your appetite for unit growth has changed in the past six months? Stephen Michael Spray: Yeah, you are right. There are a lot of moving parts. One thing I would say I would go back to, Josh, is that last year we had reinstatement premiums in the homeowner line and that is making the comps different, so I would point you to that. With regards to the new business, after the loss last year in California, as we have discussed, we did an immediate after-action lessons learned. And so growth in California new business really slowed last year. It has kind of picked back up here in the first quarter, but not enough to overcome what came down there. We have still got a lot of rate working into the book. I think the biggest thing, though, Josh, to wrap it all up—again, a lot of moving parts—but if you look at 2024 and 2025, and we have talked a lot about this, they were historic hard-market years, especially for personal lines. So I think we are just really returning back to maybe a little bit more of a normal state. Joshua David Shanker: Is there a decline in the amount of new business, as measured by number of homes, that you are putting on in 1Q26 versus 1Q25 and 1Q24? Stephen Michael Spray: Yeah. In commercial lines, our policy counts are growing. In personal lines, the exposure units have been down a little bit. So to answer your question, yes, policy counts are down a bit. Joshua David Shanker: If you— No, no, you can continue. I think it is a good thing you were saying. Stephen Michael Spray: Which we think is a good thing. Stephen Michael Spray: We are getting more rate for less exposure. We think that bodes well. Joshua David Shanker: And then in California, when you are raising price, are you finding that you are retaining that customer—that the customer is happy to stay on that price—or is that causing a higher amount of churn? Stephen Michael Spray: There is competition back in California now. Just as a reminder there as well, Josh, all new homeowner business that we are writing today—and have been over the last several years—is on an excess and surplus lines basis. So the rates, I think over the last several years there, have been pretty stable. We feel they are adequate and we are comfortable with the pricing there, but we are seeing some additional competition come back into California for new business. Joshua David Shanker: Well, thank you very much for all the clarity. Stephen Michael Spray: Great questions, Josh. Thank you. Operator: Next, we will hear from Michael David Zaremski at BMO Capital Markets. Michael David Zaremski: Great, thanks. First question, shifting to capital management. We saw elevated share repurchase levels—I think the highest we have seen in a while. I can see that the capital currently versus historical, we can see top-line growth is running a bit lower as the market becomes more competitive. Maybe should we be run-rating this level of buybacks unless things change meaningfully on the valuation of the CINF stock? Michael James Sewell: Yes, Mike, this is Mike. It is a great question and thank you for it. It was probably, I will say, a little elevated for Q1 of this year. But is it unusual? No, it is not. We still have said that we are doing maintenance—maybe a little bit of maintenance plus. The last year that we did a little over 1 million shares in Q1 was back in 2020. So, six years ago, we did 2.5 million shares. But if I start to look at full years, we have done almost 1.1 million this year. Last year, we did 1.3 million, 1.1 before that. In 2022, we did 3.7 million. So I would say this is not unusual. I would call it maintenance plus. And we will see how things go the rest of the year and what we determine to do. Michael David Zaremski: Got it. Thanks for the clarification there. Maybe switching gears to the question I think we get the most on—back to the lawsuit/social inflation lines of business. We can see from your KPIs that the casualty has been favorable for the last five quarters, and the underlying in commercial auto, etc., seems to be improving a bit. Would you say you are getting over the hump of more rearview-mirror there, or is it still to be determined and you are making sure to be very careful on growth, using your analytics in those lines of business? Thanks. Stephen Michael Spray: Yeah, thanks, Mike. You are all over it. I would say it is both. We are confident in the pricing and the risk selection that we are seeing there. But I would also say we are not out of the woods as an industry, and specifically us, when it comes to social inflation—legal system abuse, as we prefer to call it. You are seeing some tort reform push around the country. We monitor that. APCIA, I think, does an excellent job on behalf of the industry. But I think there is still a tremendous amount of uncertainty around that. You can see it in our ex-cat accident year picks, both in commercial casualty and commercial auto. I think commercial auto is the epicenter. So I do not think we are over any hump, but I think we are prepared for what might come at us—based on our picks and, as you mentioned, the analytics, the way we are pricing risk-by-risk and doing risk selection. Michael David Zaremski: Got it. That is helpful. Then just lastly, stepping back, when we think about the overall competitive environment in commercial lines—and taking into account your risk selection analytics, etc.—is it fair, if we paint a broad brush, to say pricing power in commercial lines is still biased downwards versus kind of stable over the coming year, despite still material levels of social inflation impacting the broader industry? Stephen Michael Spray: Mike, I will not project forward for you. Where we are right now, I would say you cannot paint the whole book with a broad brush. We are definitely seeing pressure. The larger the premium, the larger the account, the more pressure there is there. Peel that back a little bit—it is even more so on commercial property. We are still seeing net rate, but as I mentioned to Michael earlier, the average really does not tell the story. It is looking at every single policy, on a risk-adjusted basis, and making decisions from there. Our underwriters—I cannot speak highly enough of how they are executing on that through all market cycles. And I think what makes it more efficient and effective is that they are dealing with the most professional agents in the business who can convey value. That is what we are looking for—long-term consistency, stability, and predictability. I would be remiss if I did not mention just how our underwriters and our agents are executing on that. Michael David Zaremski: And just lastly then, I know Cincinnati Financial Corporation has been proactively moving into the—larger account is not the right word; I do not want to compare you to Chubb or AIG—but bigger premium policy levels over many years now. Does that just mean maybe the hit rate could be a bit lower on the larger premium stuff if the current competitive environment sticks? Thanks. Stephen Michael Spray: Yes, Mike. Absolutely. And you are right. We have always written larger accounts for our agents, but we really decided to get deliberate about it and build out expertise within the last decade. We continue to grow that unit. Our agents are responding well to the expertise that we bring to the table across all disciplines there. But yes, as we are growing that, it might be putting a little bit more of an outsized pressure because not only are we not winning on some accounts based on our view of the risk, retention is struggling there a little bit too. Michael David Zaremski: Thank you. Stephen Michael Spray: Thank you, Mike. Operator: Jon Paul Newsome at Piper Sandler, you have our next question. Please go ahead. Jon Paul Newsome: I was wanting to go back to the reserve issues. There was a very small change in the past pre-2024. I presume that is pretty much all casualty at this point. Are we making a little bit of a statement or not? I do not want to read too much into $16 million, but about what is going on with casualty reserves there? Michael James Sewell: No, Paul. Let me state that again. In total, we had 3.2 points of favorable development; it was $81 million. So this is in total. $72 million of that favorable development was for accident year 2025. $25 million was favorable for 2024. And then the remaining $16 million unfavorable was across multiple years prior to that. So it is really spread across multiple accident years. I would say nothing is really popping out to me. Jon Paul Newsome: There was a statement in your 10-Q that was sort of a qualifier for the reiteration of your long-term combined ratio goals, something along the lines of there are several reasons why 2026 results might be below the long-term targets. Any color on that thought and what we should be thinking about in terms of what you are concerned about? Stephen Michael Spray: No, Paul. Nothing more to read into that. Our long-term target is still 92 to 98. We will continue to underwrite and price risk-by-risk. We are still writing the same mix of business—everything there is consistent. With the market putting more downward pressure on rate, I think it is just an acknowledgment that we will be prudent in our picks there. Jon Paul Newsome: Okay. Makes sense. Thanks, guys. Appreciate it. Stephen Michael Spray: Thank you, Paul. Operator: And a reminder to our phone audience that it is star and 1 if you have a question or even a follow-up. We will hear now from Meyer Shields at KBW. Meyer Shields: Great, thanks so much. I guess one question: you talked about the 108 agency appointments in the first quarter. I know that historically, Cincinnati Financial Corporation has been very demanding in terms of agency quality. Does that number have to slow down at any point in time? And maybe less big picture, I was hoping you could talk about which geographic regions are seeing the most appointments right now. Stephen Michael Spray: Yeah. Thanks, Meyer. The strategy as a company has always been to have as few agents as possible, but as many as necessary. You look at us on a relative basis to the industry and to our peers: I think we have about roughly 2,400 agency relationships operating out of 3,500-plus locations. We have always had a limited distribution model, and even adding three or four hundred agencies—or whatever it might be—in a year is still a relatively small number. But I think the most important point, and you make it, Meyer, is I feel like in my thirty-five years, one of the keys to our success is we have always done a great job of underwriting agencies. You point to that with the quality, and that is a big focus of ours—just making sure that we are aligned with these agencies, that they are professional, they are centers of influence in their community. We think that there are a lot more agencies across the country that meet those standards, and we will continue to appoint while keeping our standards high. To your question on various states, we feel like we can appoint agencies in any state and do well, but we do prioritize agency appointments in those states we feel like right now we have a better-than-average shot at good risk-adjusted returns. Meyer Shields: Okay. Great. That is very helpful. Another question: do either Cincinnati Global or Cincinnati Re have any exposure to the political violence, marine, or energy risks in the Middle East right now? Michael James Sewell: To answer that—and thanks for the question, Meyer—it is very little. There was a little bit more on the Cincinnati Re side, but it was $5 million. On the Cincinnati Global side, it was $1 million, and actually it was below $1 million. So very minor in total, but we will be watching that one day at a time. Meyer Shields: Okay. Perfect. Thank you so much. Operator: We have no further questions from our audience at this time. Mr. Spray, I am happy to turn the floor back to you, sir, for any additional or closing remarks that you have. Stephen Michael Spray: Thank you, Jim, and thank you all for joining us today. We look forward to speaking with you again on our second quarter call. Operator: Ladies and gentlemen, this does conclude today’s meeting, and we thank you all for your participation. You may now disconnect your lines and have a great day.
Operator: Good day, and welcome to the TransUnion 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 Greg Bardi, Senior Vice President, Investor Relations. Please go ahead. Gregory Bardi: Good morning, and thank you for attending today. Joining me on the call are Chris Cartwright, President and Chief Executive Officer; and Todd Cello, Executive Vice President and Chief Financial Officer. We posted our earnings release and slides to accompany this call on the TransUnion Investor Relations website this morning, and they can also be found in the current report on Form 8-K that we filed this morning. Our earnings release and the accompanying slides include various schedules, which contain more detailed information about revenue, operating expenses and other items, as well as certain non-GAAP disclosures and financial measures along with the corresponding reconciliation of these non-GAAP financial measures to their most directly comparable GAAP measures. Today's call will be recorded and a replay will be available on our website. We will also be making statements during this call that are forward-looking. These statements are based on current expectations and assumptions and are subject to risks and uncertainties. Actual results could differ materially from those described in the forward-looking statements because of factors discussed in today's earnings release and the comments made during this conference call and in our most recent Form 10-K, Forms 10-Q and other reports and filings with the SEC. We do not undertake any duty to update any forward-looking statement. With that, let me turn it over to Chris. Christopher Cartwright: Thanks, Greg, and let me add my welcome and outline today's agenda. First, I will review our first quarter results and updated 2026 guidance. Second, I'll discuss how AI is accelerating innovation across to you and driving higher data usage among some clients. And then I'll pass to Todd, who will detail our first quarter results and provide second quarter and full year '26 guidance. So we started the year very strong, exceeding our first quarter guidance for revenue, adjusted EBITDA and adjusted diluted earnings per share. This is our ninth straight quarter of at least high single-digit organic constant currency revenue growth with 11% growth versus our 8% to 9% guidance. Excluding FICO mortgage royalties, revenue grew 7% and which is also above our expectations. Now U.S. markets grew 14%. Financial Services led the way up 24% or 14% excluding FICO mortgage royalties. We delivered broad-based strength across lending types driven by modest volume growth, pricing actions and sales momentum across both credit and noncredit solutions. Emerging verticals had another healthy quarter growing more than 6% led by insurance and public sector. International revenue was flat organically as expected. Canada and the U.K. grew high single digits and Africa grew 10%, and India declined mid-single digit, slightly better than we'd expected, and we expect a gradual improvement throughout the course of the year. Now strong revenue growth translated into 12% growth in adjusted diluted earnings per share. In line with our disciplined M&A approach focused on highly strategic bolt-ons, we recently completed 2 acquisitions. TransUnion to Mexico extends our global playbook into an attractive market where we now hold the leading position. The smaller acquisition of RealNetworks Mobile division adds complementary messaging capabilities to our leading trusted call solutions. And in addition to completing these acquisitions, we repurchased $25 million of shares year-to-date through April. We have ample capacity under our $1 billion repurchase authorization and expect to increase repurchases over the rest of the year. Our outperformance reflects consistent execution in a relatively stable operating environment. The strength of our diversified portfolio positions us to navigate potential changes in economic conditions. And as a reminder, our customers entered 2026 with cautious optimism. Lenders anticipated loan growth supported by their strong balance sheets, healthy consumer finances and expectations for rate cuts throughout the year. In February, the conflict in Iran added uncertainty about inflation, interest rates and the potential impact on consumers. The 10-year treasury rate in the 30-year mortgage rate are currently 4.3% and 6.3%, respectively, after briefly dipping below 4% and 6% in late February. We continue to monitor market dynamics and potential second order impacts on consumers and customers. To date, we have not observed any change in customer behavior tied to these developments. Through mid-April, volume and revenue trends have remained at or ahead of our expectations. We saw a brief pickup in refi-driven mortgage activity during February's rate debt, followed by a March normalization previous levels. U.S. nonmortgage lending remains healthy. Against this backdrop, we delivered another strong sales quarter, underscoring sustained demand and commercial momentum for our credit marketing and fraud solutions. An uncertain market underscores the importance of our durable growth strategy. We have the broadest, deepest and most relevant solutions portfolio in our history. Our fastest-growing products include trusted call solutions, True IQ, identity-based marketing and next-gen fraud models, which address customer needs across economic cycles. Looking ahead, we expect our strongest ever cohort of new product launches and major enhancements in 2026. While our investments in global AI-enabled platforms position us for cost efficiency and operating leverage. Against this backdrop, we are maintaining our full year organic constant currency guidance, including revenue growth of 8% to 9%. We are balancing first quarter outperformance driven by healthy underlying trends against macro uncertainty and the need to maintain prudently conservative guidance. The increase to the high end of our guidance, $154 million of revenue, $39 million of adjusted EBITDA and and $0.04 of adjusted diluted earnings per share primarily reflects the addition of TU to Mexico. Our guidance approach remains unchanged. If current trends continue, we expect to perform at or above the high end of our range. Alternatively, we expect that we could absorb a reasonable level of market softening within our guidance range. Todd will provide additional details on our guidance assumptions. At the high end of guidance, we expect to deliver our third consecutive year of high single-digit organic constant currency revenue growth and double-digit adjusted diluted EPS growth. Now this consistently strong financial performance underscores the strength and durability of our growth strategy. And as we highlighted throughout our Investor Day last month, AI can enhance that strength and fuel a new generation of growth. Our proprietary and differentiated data assets anchor our competitive advantage as we move into an AI future. Our contributor or credit databases are sourced from thousands of institutions operating under demanding regulatory frameworks. Our industry-leading identity graph combines our proprietary data with billions of dynamic disparate signals in near real time, creating a network effect that powers our marketing and fraud solutions. We power our customers' complex mission-critical workflows with governable, explainable data and deep domain expertise, delivering effective and deterministic outcomes. And these solutions are priced economically relative to the significant value that they provide. Instead, we believe AI is a growth accelerant, enabling us to activate our data to serve our customers more effectively. Already, AI drives tangible growth for TransUnion in 2 ways. First, by increasing demand for our data; and second, by accelerating our pace of innovation. Now let me provide additional context for what we highlighted at Investor Day to explain how these dynamics are converging. From a demand perspective, AI models are only as good as the data we can learn from, and customers are prioritizing the freshest, highest-quality signals. Our powerful and flexible [indiscernible] platform enables customers to integrate our best-in-class data directly into their AI environments. As AI-driven workflow scale, we see customers expand their use of TU's data, shifting from episodic transactions toward more embedded partnerships. For these reasons, our most AI-enabled customers are already consuming more data and adopting innovations faster. While most of our customers are early in their AI journey. Let me share 2 examples of how TransUnion facilitated AI adoption for 2 lenders and then how we scaled our relationship as a result. Now 1 of our most sophisticated fintech customers has embedded AI across underwriting, portfolio management, customer service, marketing and fraud prevention. As these enabled programs scale, the customer expanded their use of our credit, identity and fraud signals within their workflows. Their AI underwriting models also refresh data more frequently, driving higher credit volumes. Their spending with TransUnion increased by more than 60% from 2022 and approaching $15 million in revenue in 2025 and outpacing 50% loan growth and volumetric unit pricing. Also a top 5 credit card issuer has embedded to use data across its AI-enabled governance, risk management, servicing and engagement workflows for its 50 million-plus accounts. These workflows support daily customer engagement and risk triggers rather than periodic checks. As a result, our relationship has evolved from a point-in-time transactional data vendor to a mission-critical, enterprise-wide partner under a multiyear subscription-based contract. TransUnion's revenue with this customer increased by over 20% from 2022 to $20 million in 2025. And despite a decline in new accounts during that period. We see opportunity to deepen its relationship further by cross-selling additional credit in noncredit solutions. Now our next-generation AI power products reflect and drive increased demand for our data. During Investor Day, we highlighted 3 of these solutions, all built on the OneTru platform, these solutions enhance fast-growing products operating at scale, including True IQ, marketing audiences and fraud analytics to enable continued growth. they industrialize in-demand customized analytics into scalable solutions that drive higher data usage and monetization across our portfolio. So first, TruIQ Analytics orchestrator uses Google's Gemini models to streamline advanced credit modeling with natural language prompts. Analytics orchestrator scales the expertise typically delivered in highly effective but ad hoc innovation labs into a self-service solution. This enables customers to build models faster and more frequently with less reliance on our data science teams. We expect analytics orchestrator to increase data usage drive new revenue streams, enable stickier customer relationships. In marketing, we are transforming our static audience segments into curated and outcome-driven audiences by TransUnion built off our identity backbone. We're also providing self-service search and discovery tools that accelerate activation and improve campaign performance. We expect improved efficiency and speed to drive increased consumption of our marketing audiences. And in front, our AI model factory unifies our identity data and advances analytic capabilities to respond to evolving fraud threat vectors. We're launching new fraud models at 2 to 3x faster than previously possible with 10 new models launched in the last 12 months, including our credit washing and synthetic identity solutions. We generated tens of millions of dollars of incremental pipeline from these new fraud models. So in summary, AI will continue to accelerate our pace of innovation and expand the ways customers consume data, supporting durable growth across our solution suites. Now with that, I'll hand it over to Todd. Todd Cello: Thanks, Chris, and let me add my welcome to everyone. I'll build on that overview with first quarter results before providing guidance. Starting with the quarter, we exceeded the high end of our guidance across all key metrics by $41 million on revenue and $18 million on adjusted EBITDA or $22 million and $8 million, respectively, excluding the Mexico acquisition. Total revenue increased 14% on a reported and 11% on an organic constant currency basis led by U.S. Financial Services. Excluding FICO mortgage royalties, organic growth was 7%. Growth was broad-based and aligned with the innovation priorities outlined at Investor Day. Credit, excluding FICO mortgage royalties and fraud, both grew high single digit driven by continued traction in TruIQ, alternative data and trusted call solutions. Marketing Solutions delivered mid-single-digit growth with healthy identity performance. Consumer Solutions grew low single digit including another quarter of double-digit growth internationally. Adjusted EBITDA increased 10%. Adjusted EBITDA margin was 35.2%, down 100 basis points year-over-year. As anticipated, underlying margins contracted modestly in FICO mortgage royalties were a 120 basis point headwind. Our Mexico acquisition contributed 25 basis points in the quarter. Adjusted diluted earnings per share was $1.18, up 12% year-over-year and $0.08 ahead at the high end of our guidance. In the first quarter, U.S. markets revenue grew 14% on an organic constant currency basis versus the prior year. Across all our B2B verticals, we delivered strong bookings and retention rates to start the year. Financial Services revenue grew 24% or 14% excluding FICO mortgage royalties. The environment remains constructive, and we outperformed underlying volumes driven by TruIQ, alternative data and noncredit solutions. Within financial services, credit card and banking rose 5% on stable lending volumes and strength from trusted call solutions. Consumer lending grew 13% and supported by sustained consumer demand and strong FinTech performance. FinTechs continue to perform well with increasingly diversified funding bases and delinquency trends within historical norms. Auto was up 11%, outpacing modest industry volume declines through pricing, share gains and new wins across our solution suites. Mortgage revenue grew 50% excluding FICO royalties, revenue grew 24% compared to inquiries up 7%. Inquiries were slightly better than anticipated, with additional outperformance through pricing and increased adoption of non tri-bureau solutions. Emerging verticals grew 6%, led by another quarter of double-digit growth in insurance -- within insurance, credit-based marketing continues to recover as insurers and pursue profitable growth. Consumer shopping also remains active. We drove new wins and growth across core credit driving history, trusted call solutions and marketing solutions. Across our other emerging verticals, public sector grew high single digits and is positioned for a strong year. tech, retail and e-commerce, and media grew mid-single digits. Communications grew modestly tenant and employment declined modestly but is expected to return to growth over the rest of the year. Consumer Interactive was flat, driven by indirect channel growth and breach-related wins, offset by declines in the direct channel. In international, all revenue growth comparisons are on an organic constant currency basis. International revenue was flat in the quarter, reflecting varied results across our diversified portfolio. Our 2 most developed markets drove outperformance against subdued market conditions. U.K. grew 7%, driven by healthy volumes from our largest banking and fintech customers as well as new wins across verticals. Canada grew 9%, reflecting another quarter of innovation-led growth as well as strong performance from fintechs and insurance. Africa performed well, too, growing 10% with strength across banking, FinTech and retail. Across our other emerging markets, India, Latin America and Asia Pacific, growth was softer, reflecting subdued conditions and timing dynamics. India declined 5%, slightly better than guided. We expect a gradual recovery in consumer lending, supporting mid-single-digit growth for India in 2026. We also continued to accelerate the pace of innovation in India. Most recently, we announced a strategic partnership with the leading Indian telco geo to enable branded calling across its 500 million subscribers as we continue to expand the reach of our leading trusted call solutions globally. Latin America was flat organically with growth in Brazil, offset by modest declines in Colombia and other markets. TransUnion to Mexico which was recorded as inorganic, grew well in the first quarter on the heels of double-digit growth in 2025. Asia Pacific declined 18%, primarily by lapping onetime contracts, as well as softer volumes. Performance across India, Latin America and Asia Pacific is expected to improve in the second quarter and as the year progresses. Turning to the balance sheet. We ended the first quarter with $5.6 billion of debt and $733 million of cash. During the quarter, we funded the approximately $660 million purchase for TransUnion New Mexico with $520 million drawn from our credit revolver as well as cash on hand. As a result, our leverage ratio at quarter end increased modestly to 2.8x. For the remainder of 2026 we plan to continue to execute our balanced capital allocation framework, prioritizing debt prepayment and capital return to shareholders. We have repurchased $25 million so far this year and expect to increase the pace of repurchases over the remainder of the year. We also remain committed to pushing our leverage ratio towards our long-term target of under 2.5x. Before getting into guidance details, I want to reiterate our approach. Even with first quarter outperformance and healthy underlying momentum we are maintaining our full year organic growth assumptions. This reflects our disciplined guidance philosophy and provides flexibility in an uncertain environment. In the second quarter, we are guiding revenue to be between $1.271 billion to $1.283 billion, up 12% to 13%. Acquisitions add 4% and and FX has an immaterial impact on our guidance. We expect organic constant currency revenue growth of 8% to 9% or 5% to 6% excluding FICO mortgage royalties. We anticipate mortgage revenue growing over 30% or 10% plus excluding FICO, compared to a mid-single-digit decline in inquiries. We are guiding adjusted EBITDA to $439 million to $445 million, up 8% to 9%, implying a margin of 34.5% to 34.7%. Underlying margins expand by 20 to 40 basis points, offset by an 80 basis point drag from FICO royalties and a 60 basis point impact from acquisitions. We expect our adjusted diluted earnings per share to be between $1.13 and $1.15, up 4% to 6%. For full year guidance, we expect revenue to be between $5.1 billion and $5.135 billion, up 11% to 12%. Acquisitions add 3.5% and and FX has an immaterial impact on our guidance. Our organic constant currency assumptions are unchanged at 8% to 9% or 5% to 6% excluding FICO mortgage royalties. Our segment level assumptions are also unchanged. For mortgage, we continue to expect growth of 28% or 6%, excluding FICO, compared to mid-single-digit inquiry declines, unchanged since February. While the first quarter exceeded expectations, we modestly lowered volume assumptions for the remainder of the year to account for recent interest rate volatility. Full details on mortgage assumptions are provided in our appendix. We anticipate mid-single-digit international revenue growth for the year, driven by gradual recoveries in India, Latin America and Asia Pacific, following a softer first quarter. We expect adjusted EBITDA to be 1.796 billion to $1.816 billion in 2026, up 9% to 10%. That results in a margin of 35.2% to 35.4%, down 60 to 80 basis points. Underlying margins are expected to expand by 50 to 70 basis points driven by revenue flow-through and remaining transformation savings. This strong underlying expansion is offset by a 90 basis point drag from FICO royalties and a 40 basis point impact from our acquisitions. We anticipate adjusted diluted earnings per share to be $4.68 to $4.75, up 9% to 11%. For other guidance items, depreciation and amortization is now expected to be approximately $640 million or $320 million, excluding step-up amortization from our 2012 change in control and subsequent acquisitions. We anticipate net interest expense of $245 million, up $25 million from February reflecting $20 million related to debt financing for the Mexico acquisition and $5 million from higher sulfur on floating rate debt. Our adjusted tax rate is expected to be approximately 25.5%, modestly better than anticipated, driven by favorable geographic mix of earnings and changes in tax law that became effective in 2026. Capital expenditures are expected to be approximately 6% of revenue. We expect free cash flow conversion as a percentage of adjusted net income to be 90% or greater in 2026 and going forward. Slide 17 reconciles our updated full year guidance relative to February. As shown, the increase is driven by our consolidation of TransUnion to Mexico, with nonoperating items having a net neutral impact on adjusted diluted EPS. While TransUnion to Mexico is accretive to 2026 earnings, it is modestly dilutive to our adjusted EBITDA margins this year. Importantly, the Mexico business operates at margins above our company average. The 2026 margin impact is driven by accounting mechanics rather than ongoing economics. Historically, our 26% ownership was accounted for under the equity method, contributing approximately $17 million of adjusted EBITDA in 2025 with no associated revenue. Following the acquisition, Mexico's revenue is fully consolidated, while only the incremental adjusted EBITDA associated with increasing our ownership from 26% to 94% is additive versus prior reporting. As a result, consolidated margins appear modestly lower due to revenue consolidation despite the business's strong underlying profitability. In addition, during 2026, we will incur onetime integration expenses related to the Mexico and Mobile division of [ Mural ] Networks acquisitions, which we are not adding back to adjusted EBITDA. Our 2026 guidance fits within the context of our medium-term financial framework, which we reintroduced at our March Investor Day. Over the medium term, we expect to deliver high single-digit organic revenue growth, 50 basis points of underlying margin expansion and low to mid-teens adjusted diluted earnings per share growth. This guidance is anchored in our repeatable earnings model and the momentum we are delivering today and not dependent on a recovery in U.S. mortgage or other markets. Our medium-term financial framework reflects our value creation flywheel. Our multiyear transformation is now enabling faster innovation and improved commercial outcomes. We are scaling the business on a common technology and operating platform and deploying AI across the enterprise to drive further productivity. Our scalable growth drives compounding cash flow that we will deploy to fund our growth, optimize our balance sheet and increasingly return capital to shareholders. With that context, I will turn the call back to Chris for closing remarks. Christopher Cartwright: All right. Thanks, Todd. So before closing, I want to provide our perspective on last week's announcement from the FHFA Director and the HUD Secretary. These developments are an important milestone and a 20-year journey to enable competition and modernization in mortgage credit scoring. So as noted by Director Pulte, Fannie Mae and Freddie Mac have begun accepting VantageScore 4.0. Freddie Mac took delivery of VantageScore loans during an operational test and will soon securitize them. The FHFA is expanding this pilot with a group of lenders and the GSEs will communicate pricing guidelines. Additionally, HUD Secretary, Scott Turner announced that the VantageScore will also be accepted for FHA mortgages starting later this year. With the combination of Vantage 4.0 and TransUnion's comprehensive trended and alternative data will expand access to creditworthy consumers and promote affordability while maintaining safety and soundness within the mortgage ecosystem. And we have taken several steps to foster industry adoption, most recently announcing the industry's first 99 [indiscernible] VantageScore 4.0 mortgage pricing. Adoption of VantageScore can drive hundreds of millions of dollars of savings for lenders and consumers. Managed Score also represents an incremental revenue opportunity over time. We plan to support continued score valuation from our customers with free vintage score offered to those customers who purchased the FICO score through the end of 2026. We are also offering customers multiyear pricing for credit reports and Vantage 4.0, providing better pricing certainty to lenders. And more broadly, our actions reflect our belief that effective mortgage underwriting and responsible financial inclusion are ultimately driven by the quality and the depth of the data used. As stewards of data on over 295 million U.S. consumers, we continue to invest in data sets and analytics that support the fairest and the most accurate credit decisions across economic cycles. So in summary, we started 2026 with a good first quarter, growing both our revenue and our earnings by double digits. We've raised our guidance based on our recent acquisitions and anticipate a strong year. We're guiding 8% to 9% organic constant currency revenue growth and 9% to 11% adjusted diluted earnings per share growth. And AI continues to accelerate to use growth reinforced by the dynamics that we highlighted, expanding data demand and accelerating innovation, and we look forward to continuing this conversation in future quarters. Now with that, let me turn it back to Greg. Gregory Bardi: Thanks, Chris. That concludes our prepared remarks. For the Q&A, we ask that you each ask only 1 question so we can include more participants. Operator, we can begin the Q&A. Operator: [Operator Instructions] And the first question will come from Toni Kaplan from Morgan Stanley. Toni Kaplan: And thanks for the comments at the end on the press conference from last week. I wanted to ask a question about that conference. There was a comment made about scrutinizing pricing in the credit bureau industry. And I was hoping you could just maybe talk about you've already sort of provided the $0.99 down from a higher like the $4 level you were originally talking about. And so I guess what are the areas, maybe in particular, on pricing that investors should be thinking of are maybe under scrutiny? Christopher Cartwright: Well, Tony, and thank you for the question. It's an important question. And going back to that press conference from last week, I mean, well, first of all, we're just really excited to see the momentum at the FHFA. And in the GSEs for accepting Vantage 4.0 and the progress in completing the LLPAs and the pricing guides generally. We see strong demand in the market. And so I think you'll begin to see some rapid adoption of that. Yes, we're not entirely clear on what Director Pulte was referring to in his comments. We are following up to try to get clarity on those I think there's a lot of speculation that it could be a reference to the Tri-Merge. And look, I think we've been pretty clear in recent years about the importance of the tri-merge in underpinning the safety and soundness of the mortgage market in the U.S. and ensuring that the potential pool of mortgage applicants that are scored accurately and qualify for mortgages is as substantial as it can be while also accurately assessing the risk that lenders are undertaking that will eventually be passed on to the GSEs and to investors. I mean, in short, the rationale for the tri-merge is that it drives the efficacy of underwriting and financial inclusion because you're getting full access to all of the data that's available for diligence. And I think sometimes, discussions about changing from the tri-merge don't appreciate that credit bureau data is not a constant across the 3 bureaus. We have different furnitures. There have been new lending types that have emerged in recent periods like fintech, financial innovation like NPL and now the bureaus are actively developing alternative data like rental and utility and others, our files have diverged even more. And so using data inconsistently or excluding a report means you'll either be mispricing risk or lowering access for creditworthy borrowers or lowering the hurdles for potential mortgage fraudsters. So we firmly believe Tri-Merge is the gold standard. It's deeply embedded in mortgage underwriting processes. The industry is already digesting a good degree of change, whether it's the early assessment program, and most recently, score competition, which is terrific. And I think this would be an even more substantial change at a time when stability is particularly important as this administration contemplates the IPO of the GSEs. And I think we got to remember that we charge $10 to $12 per report. That is a fraction of closing costs. It's less than 1%. And by pulling all 3 reports, you optimize across all the dimensions of the mortgage process. you can score the largest number of consumers and qualify the largest proportion for homeownership, you mitigate risk, you ensure accurate pricing and you minimize the risk to taxpayers via the GSEs. And ultimately, you ensure that investors who are buying these assets once securitized fully understand the risk management process from which they were generated. So look, we -- look, I know from my own discussion some last week, there's a lot of support in the industry for the tri-merge whether it's legislators or regulators or investors, I think they understand the value of maximizing the diligence on this. So we'll just have to wait and see. And obviously, -- we look forward to further discussions with the director with the FHFA. I think goodness always comes from that, and we would certainly welcome it. Operator: The next question will come from Andrew Steinerman from JPMorgan. Andrew Steinerman: My question is on India. Looking back to the Analyst Day recently, transient outlined to double-digit revenue growth, organic revenue growth profile longer term for TransUnion India. How long would it take to get to that cadence? And what needs to change to get there? Christopher Cartwright: Well, thanks for the question, Andrew. India is a great part of the TransUnion story, and we're super pleased that we own that asset, and it's a wonderful market and a growing economy. But it's an economy that's had a variety of macroeconomics and also regulatory shock in recent years, some of which were exacerbated by the conflict with our and in Middle East and rising energy prices and the like. I think despite that, we have seen some stabilization for consumer lending volume and commercial lending volume, which is helpful. And we're also growing through some kind of onetime exceptional and anomalous stuff. And so we did okay against our guidance in the first quarter. And we believe we now, with this foundation of stability are going to pivot back toward growth and overall, we think India will deliver mid-single-digit growth over 2026. And and hopefully, that gets us back to sustained low double-digit growth and beyond as the economics and the political environment inside should stabilize there. I mean the regulatory environment, not the political environment. Operator: And the next question is from Andrew Nicholas from William Blair. Andrew Nicholas: Chris, in your prepared remarks, I think you made the comment that most of your customers are still pretty early in their AI journey. And so I was hoping you could flesh that out a little bit more. What are you kind of seeing in terms of pace of adoption what's a reasonable time line for some of your customers to get a little bit more ready on that front? And any comments on what would be kind of slowing that or expectations for adoption there? Christopher Cartwright: Yes. Thanks, Andrew. Well, look, I would just -- stepping back, I would say, societally and economically, we're still in the very early innings of AI adoption. I think you've got certain sectors of the economy where the adoption is fairly deep like software development, if you will. Those are the guys that created it. So it's not surprising that they are deeply applying it to their work first. And then I think you've got kind of mass experimentation going on just about everywhere else. I think you're going to see that accelerate as people understand the technology more deeply and its potential across all types of business processes and functions. And if you even here at TransUnion, I mean our developers have been using it for a while. They are dramatically more productive. It's not order of magnitude, productivity increases yet, but it's solid. 30% plus productivity kind of ranging depending on the nature of the development activity. And frankly, it really helped us accelerate the delivery of the OneTru platform and the migration of our products and our legacy technology onto that platform. At the -- at a recent Investor Day, which you attended, you would have seen the true true analytics orchestrator. That is 1 of the most potent applications of AI that we have here at TransUnion, we're using it across our data and analytics organization. We're seeing 2 to 3x productivity improvement that's allowing us to build more models more frequently with greater accuracy than we could previously. And all of the internal use is designed to ready the application, the agent for licensing and usage independently by our clients, which is what I was referring to in my prepared remarks. So look, we're very much in the early innings. But I don't think there's really anything that's going to slow this down. I think the productivity potential and the potential to lower the cost of things that today are very difficult but can become substantially more cost-effective and thus can be consumed in greater quantities, that's what I see happening going forward. Operator: And the next question will come from Jeff Mueler from Baird. Jeffrey Meuler: On the updated pricing guidelines and dedicated Vantage LLPA grid. I guess just have they been communicated to the 21 initially approved lenders? Have you seen them -- if so, any perspective you can provide on what they look like? If not, just when do you expect them, given that it sounds like they're finalized and how important do you think they are to the share shift that you expect? Christopher Cartwright: Yes. Now I'll remind you that for our guidance purposes this year, we didn't assume any share shift. We viewed this year as 1 of learning experimentation and transition. And we're not clear on exactly which lenders are in the initial cohort of 21 and we're not clear on whether the FHFA has communicated the LLPAs to all of them. We know from discussions with the FHFA staff and also from the CEO of Vantage score that the guides are complete and that they're in dialogue with the firms that are in this initial cohort, but I'm not sure about the time frame for public release. mean some of these questions, they just simply have to be answered by the FHFA. But I think the director was very clear and forceful and enthusiastic that they're ready to go they're ready to scale, and he's really excited to push that forward and get competition going. Operator: And the next question will come from Faiza Alwy from Deutsche Bank. Faiza Alwy: I wanted to ask about the contribution of noncredit products to your growth in financial services, particularly outside of of mortgage and sort of what the traction has been there? And relatedly, if you could touch on the -- you alluded to some macro uncertainty likely related to the conflict and that you could absorb a reasonable level of market softening within the guidance range. So I was hoping you could double-click on that because I'm assuming to the extent there is softening, it would impact more of your credit growth. Christopher Cartwright: Let me pull back to lens a little bit and just kind of characterize this first quarter. I mean, obviously, we're off to a good start. We're nicely ahead of expectations, and we're well positioned to deliver a third straight year of high single-digit revenue growth, low double-digit profit flow-through and low to mid double-digit EPS. The strength is really coming out of the U.S. right now. A lot of strength in mortgage, which I know Todd will double click on in the call. Consumer lending also very strong in auto and card off to very solid starts as well. So we're very pleased with that. On the emerging market side, we're right on our plan. This is how we modeled revenue growth for the course of the year. This is a solid start at 6%, and it does position us to achieve our plan of high single digit for the full year. Now obviously, with the conflict in Iran, there are new uncertainties and new pressures on the cost of energy and thus inflation and thus potentially interest rates as well. In February, the 10-year got down to about 4%. The 30-year mortgage was around $6 million -- we got a little disproportionate volume bump because refi was reactivated. That was fairly short-lived, and then we kind of reverted back to the previous levels of volume, which I'll remind you are almost represent a floor now for ongoing mortgage natural purchase activity in the U.S. But -- we like to have a conservative guide, particularly in the early part of the year. We point investors to the high end of the guide. Our goal is to hit the high end and exceed the high end we have a reasonable level of contingency to achieve that, which we will hopefully release throughout performance over the course of the year. And given this heightened geopolitical risk, we just thought it prudent not to flow through the revenue and the profit at this point. Another thing to be very clear on, though, is that through really the beginning of this week, our volumes across all of our credit categories are steady. So we're not seeing really any negative impact on any type of loan volumes at this point. And if we maintain this level of stability and kind of volumes, we would fully expect to deliver at or above the high end of the guidance over the course of the year. This kind of stability and performance, it's also there on the subprime side, drilling into consumer lending, which had a very strong 13% growth rate in the quarter. We've been looking at the level of delinquencies there amongst subprime borrowers. They're holding up exactly as you would expect, solid underwriting practices, small loan amounts, good controls, FinTech players, accelerating their use of alternative data to fully understand risk and so while all of the players in this space expanded their credit box a bit last year and again in the first quarter, the delinquencies are solid. And so we're not really seeing anything problematic at this point. Todd Cello: Faiza, I'm going to go back. This is Todd, to the beginning of your question as it pertains to contribution of noncredit to financial services. So Chris just gave you all the details about what we saw in Financial Services and excluding mortgage, we continue to see stable volumes. But the diversification of our products, we had a couple of three, what I would consider to be outperformers. First, the TruIQ analytics platform continues to perform well within financial services as well as alternative data and then our trusted call solutions has been a winner with our financial services customers as well. Operator: And our next question will be from Manav Patnaik from Barclays. Manav Patnaik: Yes, I guess I just wanted to follow up on the second part of that. Chris, you talked about absorbed a reasonable level of market softening within the guidance range. I was just hoping you could put some parameters on that? Like what is the low end of the range, I guess, imply from some of the volume trends you're seeing today? Todd Cello: So Manav, I'll take that one. Thanks for the question. So I think what -- if you listen back to the prepared remarks, we just continue to see stability within our volumes. And we're happy to print a very solid Q1, where organic constant currency, excluding the FICO mortgage royalty was 7%. But for all the reasons that Chris just went through geopolitically, we just felt it was the right move to not raise the guidance for the beat that we had in Q1. So in essence, what happens, then it's just math. When we look at the growth rates for the rest of the year by us printing a 7 and then maintaining the organic constant currency growth rates, we end up for the full year at a 6% rate. And then when you look at it for the second quarter in the guide, it's also 6% at the high end, which is implying the second half is 5%. So if you believe, which we do, that volumes continue to be stable, we orient you towards the high end of our guidance, that should mean if things stay stable, we should beat in the subsequent quarters. In the event that we don't, I think you'd see that we've built some cushion here and based on keeping the organic constant currency rates. So there is some push in there. But then the range itself at the low end would provide some cover for us. So we're very comfortable with the guidance that we're providing this morning. Christopher Cartwright: Yes. And Manav, as you know, these past 3 years, we've really prioritized stable and consistent delivery at the high end or above in our guidance. That was certainly our posture going into 2026. And just given the uncertainty and given the outperformance, we thought it would be prudent to add a bit more contingency on the revenue and the profit side. And we did it again out of an abundance of caution, not because we're seeing any negativity in our volumes at this point. Operator: And the next question will be from Ashish Sabadra from RBC. Ashish Sabadra: I just wanted to better understand if the Iran conflict is having any impact on the international markets. I was just wondering if you could provide some any color on your conversations with customers or if you've seen any trends softening in those international markets? Christopher Cartwright: Yes. So I think we've definitely covered our views on the U.S. market, and we'll leave that on the international side, yes, there has -- there is more exposure to rising energy prices in the international market. There's been some exposure into India. But early on, the Trump administration is allowing India to purchase Russian oil, which is helping offset some of those inflationary pressures. In the Philippines, which is a great part of our business, but a small part of our business, I think things are particularly difficult. They're highly dependent on imported energy. And there's been a considerable run-up in the prices. And the government there is almost you're running a coved like playbook with energy subsidies going out to consumers and the like. And that was part of the reason why we had a difficult quarter in Asia Pacific although, frankly, the primary driver is just the end of the onetime analytics work that we were doing in Hong Kong to prepare for this transition to the MCRA. We think that's kind of finished and out of the system now. And so the comps improve and the performance is already stabilizing there. But I think that's some flavor for where we're seeing some energy impact elsewhere in our portfolio. Obviously, the U.K. and Europe has more exposure, and we've got a great business in the U.K. We think we're performing really well there competitively. And again, it was another quarter of high single-digit growth. Operator: And our next question will come from Kelsey Zhu from Autonomous. Kelsey Zhu: Could you maybe talk a little bit more about your expectation around VantageScore market share gains and future pricing policy in the mortgage vertical over the medium term? More specifically, Cycle 100's latest pricing model is $0.99 upfront and then $65 at closing. I was wondering if VantageScore pricing could adopt a similar framework of lower cost upfront and then the success via closing? Or is that not something that you're considering? Christopher Cartwright: Yes. So thanks for the question. Obviously, in terms of the pricing model and the pricing levels, there's a lot of options in the medium term. I think TransUnion's position, and I see this reflected in the behavior of our competitors as well, is we just need to get this started, right? We've been talking about price competition since 2006 when the bureaus came together to form the VantageScore. Finally, we've got a regulator that was willing to push this and make it happen. And we have very attractive pricing at roughly $1 per score with no tail, no success fee attached to it, which is which is important to note. And I think in terms of pricing and model, it depends on your perspective and what you're trying to accomplish. The goal of the administration, the goal of FHFA is to reduce borrowing costs and therefore, help home affordability and charging $65 for the score as opposed to just buying at 1 time for $1, that's a material price difference, right? And so we're just focused on the introduction. We're focused on the transition, and we're focused on share gain. But we acknowledge that downstream, we have a lot of optionality. But in the meantime, let's just continue to plow forward here. It's a more modern score, Vantage 4.0. It rests upon a broader foundation of trended credit information as well as alternative data. It's been 2 decades in the making. And we're just excited that competition is here and the playing field is leveled and we're excited to get after it. Operator: The next question will come from Jason Haas from Wells Fargo. Jason Haas: Just wanted to follow up on the strength in mortgage. Can you just talk about what drove the strength there outside of mortgage -- or outside of the FICO score? Todd Cello: Sure. Jason, it's Todd. I'll take that one. So as you probably recall, in the first quarter, we guided for a modest increase in inquiries and 35% growth for mortgage revenues. And we ended up posting 7% increase in inquiries and 50% growth. So the outperformance that we saw primarily pertained to volumes. And Chris spoke to that earlier. In particular, in late February, when the 30-year mortgage rate dipped below 6%, we saw a pretty significant increase in volumes. But as I'm sure you're aware, with the conflict in Iran. We saw an increase pretty immediately in early March of the 10-year treasury and thus, the 30-year mortgage went back up and those volumes dropped back to previous levels. So the outperformance is primarily just related to that dynamic that I articulated. I would say that the pricing assumptions that we had assumed are pretty much held. So there are not much noise there. Other thing I'd highlight as well is that when you think about these moves in interest rates, you see how a drop in interest rate had such a significant increase in a short period of time. If rates were to go up, let's argue the opposite way, it would be a modest negative because we're already near the floor of activity when we're talking about volumes that we haven't seen since the mid-'90s. But when you go the other way and you see a 25 basis point drop it's pretty significant, what the opportunities would be from a volume perspective, in particular, the ReFi population. And we included some slides in the appendix of today's materials. And you can get a sense on one of those slides as to just the population of consumers that would be eligible to ReFi. So the opportunity there is pretty significant. However, we're not there yet, right? So when you look at the guidance for the rest of the year, for the second quarter and for 2026 for the full year, we're calling for inquiries to be down mid-single digits. And again, upside would come if we just see that a little bit of move on the interest rates. Christopher Cartwright: Yes. And I think another element of the mortgage outperformance is that on the prequalification side and on the early assessment side, the volumes that we're experiencing have been favorable to our guidance assumptions. And look, we are solidly into the third year of the early assessment program from the GSEs and just changes in mortgage prequalification practices. And I think it's worth noting that, I mean, look, when you think about tri-merge and potential changes to the system, our data gets consumed primarily because the market participants want to fully understand risk and they want to optimize price. And that particularly matters if you're a lender and you're going to sell on certain mortgages to the GSEs because variances in credit scores per the LPAs can have a material variation in what you can realize for those loans. And so even though in theory, you only have to pull 1 credit report during the prequalification process. We see the industry settling into somewhere between 2 and 3. There are still a lot of players that are pulling 3, and there's a number of players that are increasing the number of poles they do for mortgage because really understanding the risk and optimizing around price matters a lot to their economics and the relative cost of a credit report is small. Operator: Our final question today will come from Scott Wurtzel from Wolfe Research. Scott Wurtzel: Just wanted to ask on TCS I'm wondering if you can unpack some of the drivers of the growth that you saw during the quarter. And just as a kind of related follow-up, I know there's sort of the trusted messaging opportunity as well down the line, if you can talk about sort of your expectations for a time line in terms of productizing that and when we can see that start to contribute to growth. Christopher Cartwright: Great, Scott. So another really strong quarter for trusted call solutions, kind of a [indiscernible] component of our fraud mitigation services. And we think we're positioned for another really strong year there. It is a unique and differentiated offering. It's a very durable offering. And I mean I think you just it underscores that even though we have been in this era of digital commerce analog commerce over the phone is still really important to ensuring the authentication and the safety of various transactions. And we want to extend that to the tech side of things. Increasingly, there's fraud in the SMS channel in the text channels generally and that's why we bought the mobile division of real networks. They've got some great underlying technology. We think it will take us about a year to complete the integration and the productization of that technology. But then it is the perfect complement to all of the business that we've generated and all the market penetration that we've got there. And I think going forward, just the combination of authentication over the phone and over the text combined with all of our digital device behavioral and reputational assets is kind of an unbeatable combination in the fraud space. Todd Cello: And I just want to add some numbers and remind you what we presented at Investor Day pertaining to trusted call solutions. So this was a $27 million product for us in 2021. At the time of the Neustar acquisition, this year, we are expecting it to be a $200 million product at the end of 2026. And in 2028, we expect that to be a $300 million product. Gregory Bardi: All right. Chris, Todd, I think that's a good place to end. Everyone, thanks for the time today, and have a great rest of your day. Thank you. Operator: The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
Operator: Good day, and thank you for standing by. Welcome to the First Quarter 2026 NOV Inc. Earnings Conference Call. At this time, participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. To ask a question, please press star one one on your telephone. You will then hear an automated message advising your hand is raised. Please be advised, today’s conference is being recorded. I would now like to hand the conference over to your speaker today, Amie D'Ambrosio, Director of Investor Relations. Please go ahead. Amie D'Ambrosio: Welcome, everyone, to NOV Inc.'s First Quarter 2026 Earnings Conference Call. With me today are Jose A. Bayardo, our Chairman, President and CEO, and Rodney C. Reed, our Senior Vice President and CFO. Before we begin, I would like to remind you that some of today’s comments are forward-looking statements within the meaning of the federal securities laws. They involve risks and uncertainty, and actual results may differ materially. No one should assume these forward-looking statements remain valid later in the quarter or later in the year. For a more detailed discussion of the major risk factors affecting our business, please refer to our latest Forms 10-K and 10-Q filed with the Securities and Exchange Commission. Our comments also include non-GAAP measures. Reconciliations to the nearest corresponding GAAP measures are in our earnings release available on our website. On a U.S. GAAP basis, for the first quarter of 2026, NOV Inc. reported revenues of $2.05 billion and net income of $19 million, or $0.05 per fully diluted share. Our use of the term EBITDA throughout this morning’s call corresponds with the term EBITDA as defined in our earnings release. Later in the call, we will host a question-and-answer session. Please limit yourself to one question and one follow-up to permit more participation. Now let me turn the call over to Jose. Jose A. Bayardo: Thank you, Amie. Good morning, everyone, and thank you for joining us. The first quarter of 2026 unfolded against a rapidly changing backdrop due to the conflict in the Middle East, and I would like to start by thanking our team, particularly those in the region, for keeping each other safe while doing everything possible to support our customers in a very chaotic environment. Despite the disruption, NOV Inc. achieved its lowest ever total recordable incident rate and lost time incident rate during the quarter. As I mentioned on our last call, HSE performance reflects pride, accountability and ownership in operations, which translates into higher quality, reduced downtime and better service for our customers. The actions of our people and the results they achieved demonstrate how deeply these values are embedded in our culture. Turning to our financial results, NOV Inc. generated revenue of $2.05 billion and adjusted EBITDA of $177 million during the first quarter of 2026. As previously disclosed, we estimate that the conflict in the Middle East negatively impacted revenue by approximately $54 million and EBITDA by $32 million. Bookings in our Energy Equipment segment for the quarter totaled $520 million; while this resulted in a book-to-bill of 80%, orders improved by $83 million year over year and represented our strongest first quarter order intake since 2019. We also had strong bookings in our fiberglass and drill pipe businesses within our Energy Products and Services segment where we do not report book-to-bill and backlog figures. As the conflict escalated during the quarter, the most pronounced impacts were felt across our capital equipment and aftermarket operations, where the movement of goods, access to customer sites and overall logistics became increasingly constrained, significantly affecting quarter-end deliveries. Our service and rental businesses, particularly those supporting land-based operations, experienced substantially less disruption. For our capital equipment businesses, the primary challenges were associated with shipping finished equipment into and out of the region. As shipments were rerouted through alternate ports, transit times were extended and freight costs increased materially. In addition, safety concerns and access limitations prevented customers from visiting facilities or project sites to participate in typical factory acceptance testing and inspections for manufactured equipment and goods, resulting in delayed delivery schedules. Supply chain constraints became more pronounced as we progressed through the month of March. We experienced delays in receiving raw materials and critical components, and the unpredictability of logistics introduced additional costs and complexity. These disruptions impacted manufacturing throughput, thereby reducing absorption and contributing to higher costs. In our aftermarket operations, the challenges were somewhat different but equally impactful. We experienced difficulties getting spare parts into the region, while safety concerns affected customers’ willingness to pick up or accept orders. At the same time, customer activity was curtailed and certain projects were suspended, deferring demand for parts and limiting service and repair activity. Offshore projects, in particular, faced disruptions and rig-related slowdowns. Together, these factors created meaningful disruption in the final month of the quarter. Importantly, much of this impact was timing-related and, in many cases, deliveries have now occurred and others have been delayed rather than canceled. Freight costs increased significantly during the quarter, at times by as much as three to four times normal levels, and combined with lower manufacturing absorption contributed to higher operating costs. Outside of the affected region, our businesses performed well and in line with expectations. We remain focused on improving operational efficiency in what continues to be an inflationary environment that may be further pressured by the ongoing supply chain disruptions and knock-on effects to the petrochemical complex. We will cover second quarter guidance, which assumes conditions in the Middle East remain consistent with where they are today—meaning the ceasefire holds, but the Strait remains closed, which continues to constrain logistics and increase both the time and cost of doing business. While that is our current assumption, the situation remains extremely fluid. Logistics have improved since the height of the conflict; the trade routes are more complex, more costly and carry higher risk of delays. While we cannot predict how conditions will evolve, our supply chain and operations teams have significant experience managing through disruption, and they are taking action to mitigate risk and serve our customers. Our operations in the Middle East serve not only as a regional hub but also support customers across both Eastern and Western Hemispheres. One of the actions we are taking is to reroute manufacturing for customers outside the region to facilities elsewhere in our global network. While this helps mitigate risk, it may not necessarily improve delivery times and adds additional cost. No one can predict when the conflict will end, so we cannot reliably forecast the second half of the year. What we can say is the market is increasingly primed for a recovery, and if the conflict ended and the Strait reopened in the near term, we could still conceivably achieve our prior expectation of full year 2026 results that are broadly in line with 2025. With that context, let me now step back and talk about what we are seeing more broadly in the market. Coming into the year, the prevailing view was that the global oil market was oversupplied by 2 million to 3 million barrels per day. This was driven by a wave of non-OPEC production growth from projects sanctioned during the COVID period, combined with the unwinding of OPEC+ production curtailments. As a result, we expected 2026 would be another challenging year as the industry worked through the supply overhang. Against that backdrop, in North America, operators were expected to remain disciplined and focused on maintaining production levels efficiently while returning capital to shareholders. In the Middle East, activity was expected to gradually improve, supported by the reactivation of suspended rigs in Saudi Arabia and continued momentum in the UAE, Kuwait and Oman. Offshore momentum was expected to build steadily, with an increasing need for long-cycle deepwater developments offsetting plateauing short-cycle North American supply as the primary source of incremental production in the coming years. That was the setup just a few months ago. Today, the world looks dramatically different and the market outlook has shifted materially. The conflict in the Middle East has resulted in approximately 10 million barrels per day of shut-in production and damaged key energy infrastructure, shifting the market from a modest surplus to a meaningful deficit and requiring drawdowns of strategic reserves worldwide. While there is no clear timeline for when trade flows will normalize or when production can fully return, it is increasingly clear that even after the conflict is resolved, the market will remain undersupplied for an extended period of time and will require a significant increase in investment. One industry analysis suggests that approximately 10 thousand wells across the region are currently offline, with up to 3 thousand requiring meaningful intervention to return to normal operations and roughly 1 thousand potentially requiring major workovers or recompletions following extended shut-ins. Not all this production may return; depending on the duration of the disruption, there is the potential for permanent capacity loss ranging from approximately 500 thousand to as much as 2.5 million barrels per day. Restoring this production will require meaningful activity beginning with intervention and workover operations, followed by incremental drilling to replace lost capacity. In addition, depleted strategic reserves will need to be refilled, and energy security concerns are likely to reinforce the need for exploration, development and production capacity. Many countries are likely to expand or build new reserves over time, creating an additional source of demand. At the same time, reserve lives have declined meaningfully during the last decade, and current conditions likely serve as an additional catalyst for operators to replenish and increase reserves, reinforcing the need for increased exploration and development activity. While the conflict has clearly created near-term disruption, we believe it will also accelerate and amplify a meaningful new recovery cycle. The work required to restore production alone will drive elevated levels of activity over multiple quarters and potentially longer depending on how conditions evolve. However, the implications extend well beyond the Middle East. We believe the combination of supply disruption, tighter market conditions and a renewed focus on energy security will increase urgency for investment across the industry—not only to restore production but also to secure reliable and diversified sources of supply. For much of the past decade, the industry has operated with constrained investment, limited exploration and reduced greenfield development. The industry became highly efficient and focused on doing more with less; as a result, reinvestment in assets declined and attrition occurred across the global equipment base. Even prior to the conflict, we saw areas where we expected that a modest increase in activity would require a disproportionate increase in investment in the service complex. However, with the prevailing view just a few months ago, it appeared that the industry would have time to gradually increase investment over the coming years as markets rebalanced. That is no longer the case, and for NOV Inc., this change is particularly meaningful. As a provider of capital equipment and technologies used to drill, complete and produce oil and gas, our business is directly tied to the level of investment across the industry. After years of underinvestment, the industry is not starting from a position of excess capacity. Demand will not inflect overnight. The events of the past two months have accelerated and amplified the need for investment, and we are beginning to see early indications of this in our customer conversations. In North America, operators remain disciplined, but some are accelerating plans to complete drilled but uncompleted wells that they had previously planned to defer, while others are backing away from plans to release rigs and some will add rigs. The North American service complex is already tight, having experienced significant attrition and the export of excess equipment to international markets. While pricing will need to improve before service providers and drilling contractors materially increase capital spending, the conditions for that to occur are increasingly falling into place. In international land markets, investment had already begun to increase, driven by the emergence of unconventional development and a growing focus on energy security. As mentioned, a healthy amount of the equipment supporting this growth has come from underutilized assets in North America, but the availability of these underutilized assets has largely been exhausted, meaning new-build equipment will be required for higher levels of activity. Once conditions normalize in the Middle East, we expect a meaningful increase in activity associated with restoring curtailed production, followed by a resumption of longer-term development programs, including unconventional resource development. We also expect continued growth in other international markets including Argentina, where our revenue increased 14% year over year, and Venezuela, where we have already seen a step change in demand for our progressive cavity pumps and are now fielding an increasing number of customer inquiries for additional tools and equipment. In offshore markets, we continue to see the early stages of a sustained upcycle, supported by improved project economics driven by standardization, industrialization and technology. These factors have materially lowered breakeven costs, making long-cycle offshore developments increasingly competitive and positioning them as key sources of incremental supply. We have seen steady growth in demand for offshore production-related equipment, and we expect—and are preparing for—that trend to accelerate. Consistent with that view and our focus on leaning into high-return growth opportunities, we recently approved a $200 million expansion for our subsea flexible pipe manufacturing facility in Brazil. This investment is intended to address what we believe is a developing capacity shortfall in the industry as offshore activity increases. Bookings for our offshore production-related equipment remained healthy in the first quarter, supported by a large subsea flexible pipe order for Brazil and a large FEED study associated with a complex harsh environment FPSO, reflective of increasing confidence in the long-term market outlook. In offshore drilling, our customers are seeing an increasing pace of contracting activity, along with a meaningful increase in the duration of those new contracts. We now expect the number of drillships under contract in 2027 to reach the highest level since 2015. Higher levels of future activity drive reactivations and upgrades, such as a large reactivation project we recently received for a rig going to the North Sea, and drive additional recurring spare part sales. While offshore project timelines are longer and more complex, we believe the outlook for increased activity has become even more compelling. Energy security concerns are increasing the urgency to advance offshore developments, which offer scale, longevity and better economics. Additionally, we are seeing operators beginning to increase exploration budgets and accelerate development activity, including brownfield expansions that leverage existing infrastructure to efficiently increase production. And our pipeline of opportunities is expanding, consistent with improving industry forecasts for new project FIDs. As a result, we expect an acceleration in deepwater investment project activity over the coming years. Looking ahead, while near-term conditions remain fluid, the broader setup is becoming increasingly constructive. We remain focused on disciplined execution, improving operational efficiency, expanding margins and delivering for our customers as we navigate a dynamic environment. The near term will continue to be influenced by the situation in the Middle East; however, when conditions stabilize, we expect delayed activity to resume and underlying demand trends to become more evident. The industry is entering a period of increased activity and reinvestment to restore production, rebuild capacity and meet future demand. NOV Inc. is extremely well positioned for this environment. Our global footprint, intentional and diverse portfolio and strong market positions will provide meaningful earnings leverage to improving market conditions over time. With that, I will turn the call over to Rodney. Rodney C. Reed: Thank you, Jose. Consolidated revenue for the quarter was $2.05 billion, a decrease of 2% year over year. Net income was $19 million, or $0.05 per fully diluted share. Operating profit was $47 million, which included $37 million in other items, primarily related to a non-cash stock compensation charge, severance and facility closures. Adjusted operating profit was $85 million, or 4% of sales, and adjusted EBITDA totaled $177 million, or 9% of sales. The conflict in the Middle East resulted in delayed shipments of capital equipment and spare parts and increased operating costs through higher freight expenses and less absorption at our manufacturing facilities, impacting our first quarter revenue and EBITDA by an estimated $54 million and $32 million, respectively. As we move into the second quarter, our focus remains on the safety of our team and supporting our customers as we work through the delivery of key equipment, parts and services. Adjusting for the estimated impacts from the Middle East conflict that I just mentioned above, year-over-year revenue would have been flat, supported by strong demand for our offshore production equipment, high-performance drill bits and increasing adoption of our digital services, offset by lower global drilling activity levels. First-quarter margins were negatively impacted by about $30 million in tariff costs year over year and a lower mix of aftermarket revenue due to the completion of certain large reactivation projects in 2025. We are focused on improving margins, both through accretive top-line growth—with our Energy Equipment segment achieving four straight quarters of year-over-year revenue growth—and reducing our cost structure. Let me focus on cost reductions by highlighting our strong efforts to streamline our businesses, increase efficiency, and drive better margins and profitability. Since 2025, we have reduced global headcount by 8%, exited over 40 facilities, established a global service center in Kochi, India to better leverage the use of shared services, and increased our investment in IT systems to improve efficiency of operations and support functions. As we mentioned previously, through the first few quarters of these initiatives, tariff costs, upfront IT investments and inflationary pressure in areas like medical costs and certain raw materials are largely offsetting these cost reductions. As we progress through our cost-out program, we will realize additional cost savings and, excluding impacts from the Middle East, expect our efforts to begin to more than offset the tariff and other inflationary costs beginning in 2026. We continue to execute on our return of capital program. During the quarter, we repurchased 3.5 million shares for $67 million and paid dividends of $33 million, which reflected our announced 20% increase in the quarterly dividend. We also extended our $1.5 billion revolving credit facility by one year through 2030. Over the past eight quarters, we have returned over $900 million to shareholders through dividends and share repurchases. During the second quarter, we plan to provide shareholders with a supplemental dividend to true up our 2025 return of capital program where we committed to returning at least 50% of excess free cash flow. Additionally, we filed a claim for a refund associated with the Supreme Court’s ruling on AIPA tariffs. Our first quarter results do not reflect the benefit for this potential refund and we have not factored the refunds into our guidance. Capital expenditures for the year, including our investment in our flexibles facility in Brazil, should be between $340 million and $370 million. We continue to expect to convert between 40% to 50% of 2026 EBITDA to free cash flow, with generation of cash ramping through the remainder of the year. Moving to our segments, starting with Energy Equipment. First-quarter revenue was $1.19 billion, an increase of 4% from a year ago, led by continued strength of our offshore production-related businesses. EBITDA for the first quarter was $131 million, or 11% of sales. EBITDA margins compared to 2025 were negatively impacted by a lower mix of aftermarket revenue, which I will cover in more detail, and higher costs from disruptions in the Middle East. Capital equipment sales accounted for 63% of the segment’s revenues in the first quarter of 2026, growing 16% year over year, led by strength in our subsea flexible pipe, process systems and marine and construction businesses. Aftermarket sales and services, which accounted for the remaining 37% of Energy Equipment revenue, experienced a 12% reduction year over year, primarily the result of certain large reactivation projects completed in 2025 and the negative impact of disrupted deliveries and reduced offshore rig activity in the Middle East. Capital equipment orders for the first quarter were $520 million, resulting in a book-to-bill of 80% for the quarter and an ending backlog of $4.23 billion. Orders during the quarter were led by subsea flexible pipe awards in Brazil and Europe, a semisubmersible rig reactivation project in the North Sea, and a large FEED study for a harsh-environment turret system. Offshore activity outlook, bid pipelines, and customer conversations remain constructive, and we continue to expect full-year 2026 book-to-bill to be near 100%. Our subsea flexible pipe business continued its outstanding performance, achieving record quarterly EBITDA for the third consecutive quarter. Margins improved, driven by strong operational execution and progress on higher-quality backlog, and our quarterly book-to-bill was over 100%. Reflecting the strength of offshore development, demand for subsea flexible pipe has been exceptionally strong, exceeding 100% annual book-to-bill for each of the past four years and extending our backlog into 2028. Our Process Systems revenue was slightly below last quarter’s record level and up more than 50% compared to 2025, reflecting robust activity in offshore production and onshore international gas markets. Record EBITDA for the quarter was supported by a healthy backlog and solid execution. Orders during the quarter included offshore processing equipment and two CO2 treatment projects involving gas dehydration and membrane separation. The Middle East is an important region for this business, and FIDs for several projects could see some temporary delays; however, we expect demand for gas processing systems to remain strong in the region as well as in other international and deepwater markets, where four FPSOs have reached FID so far this year, with the industry forecasting six to eight additional FIDs for the remainder of 2026. Revenue from our drilling capital equipment business declined around 10% year over year, resulting from high progress in the prior year on a large 20 ksi BOP project that was not fully offset by higher revenue from new-build land and jack-up rigs in Saudi Arabia. During the quarter, the business was awarded a contract to support a semisubmersible reactivation, including mud systems, a crane and a BOP stack. Our marine and construction business revenue increased in the high-teens percentage compared to 2025, driven by higher revenue from cranes as well as pipe and cable lay systems, partially offset by lower activity related to wind turbine installation vessels. Demand for cranes from multipurpose support vessels remains high, which should drive additional orders over the coming quarters. Tendering activity for KBAL vessels also remains active, and we still see the potential for a second-half WTIV order, with the industry forecast continuing to suggest a shortage of future installation capacity. We believe that the disruption to energy markets tied to the conflict in the Middle East is renewing urgency around energy security and supply diversity, which will drive demand for all sources of energy. Revenue for intervention and stimulation capital equipment declined approximately 20% year over year due in part to delayed wireline and coiled tubing equipment deliveries to customers in the Middle East, where we were awarded coiled tubing data acquisition hardware and software packages and continue to see broad-based opportunities for our pressure control products. While North America-related demand was soft through 2025, in 2026 quoting activity has recently increased for pressure pumping capital equipment, and during the quarter, we booked several coiled tubing equipment orders supporting more efficient operations for longer laterals. Turning to the aftermarket portion of the Energy Equipment segment, revenue from our Drilling Equipment aftermarket business was most acutely impacted by the Middle East conflict due to suspended rig operations, logistical challenges and delays in upgrade projects. Revenues were down mid-teens percentage year over year and down 12% sequentially. In addition to the impact from lower Middle East activity, the year-over-year decrease is partially related to lower service and repair work due to timing of active projects. Encouragingly, spare parts bookings remained robust during the quarter, higher than their four-quarter rolling average. Given the logistics delays and booking activity, spare parts backlog is at the highest level it has been for the last seven quarters. The business is also executing on roughly 35% more projects compared to this time last year. We expect aftermarket activity to pick up slightly in the second quarter and more materially in the back half of 2026, partially dependent on the timing of the resolution of the Middle East conflict. Revenue from aftermarket parts and services for intervention and stimulation equipment was essentially flat sequentially and down mid- to upper-single-digit percentage year over year. Compared to 2025, wireline and coiled tubing-related aftermarket rose slightly, more than offset by lower North America pressure pumping activity; however, we are seeing increased activity related to reactivations and consumable parts. For the second quarter, we expect Energy Equipment segment revenue to be down 2% to 4% year over year, with EBITDA in the range of $135 million to $155 million. Moving on to the Energy Products and Services segment. Our Energy Products and Services segment generated revenue of $897 million, down 10% from 2025. Results were negatively impacted by disruptions in the Middle East that delayed deliveries of capital equipment. Beyond those delays, segment results reflected lower levels of global activity, which more than offset market share gains in our drill bit business and increasing adoption of our digital services. Adjusted EBITDA was $96 million, or 10.7% of sales. Lower volumes, combined with the absorption impact at our manufacturing facilities, higher tariff costs and inflationary pressures affecting raw materials, drove larger-than-normal decrementals. As I previously mentioned, we remain focused on growing market share and reducing costs through rightsizing operations and consolidating facilities to improve profitability. For the first quarter, the sales mix within Energy Products and Services was 54% service and rentals, 29% capital equipment and 17% product sales. Revenue from services and rentals declined in the mid- to upper-single-digit percentage range year over year as lower global activity more than offset drill bit market share gains in North America and growing adoption of NOV Inc.’s wired drill pipe services, including downhole broadband solutions. Our ReedHycalog bit business continued to gain market share in the U.S., growing revenue 8% compared to a 7% decline in the U.S. rig count since Q1 2025. The business remains focused on supporting our customers and advancing bit performance while also mitigating higher tungsten carbide costs, which have increased by approximately 400% since 2025. In addition to drill bits, our downhole tools, ESPs and production chokes have components that include tungsten carbide. Our teams are focused on mitigating higher costs through sourcing, pricing and operational actions. Revenue from our digital services business expanded significantly compared to 2025, with strong operational performance from our wired pipe services. Based on customer interest, we expect to see continued growth and adoption of our services that provide real-time broadband data transmission from the bottom of the drill string. Rentals of our downhole technologies were impacted by lower activity in North America and Saudi Arabia, but remained mostly steady across other markets as softer activity was offset by adoption of our new technologies, including our Agitator RAGE and Positrac torsional vibration tools in Asia, the Middle East and offshore Brazil. Within our wellsite services business, increased rentals of our TundraMax mud chiller systems and solids control equipment were offset by lower activity in the Middle East and Latin America. Additionally, the business was awarded a contract to deploy its InnovaTherm thermal treatment technology in Guyana, supporting more efficient drilling cuttings management. This will be our first deployment of the technology in Latin America. Our tubular inspection business decreased mid-single-digit percentage from lower levels of activity in North America and a temporary slowdown in our Tuboscope operations as activity in Argentina shifts from Comodoro to the Vaca Muerta. Further development of our TK Dracon premium thermal insulated coating partly offset lower coating activity in international markets, which we expect to pick up in the second quarter. Sales of capital equipment declined in the low double-digit percentage range year over year, primarily due to the Middle East conflict that delayed deliveries of composite pipe. These delayed deliveries, along with lower industrial activity and the timing of composite projects for FPSOs, resulted in a significant decline in revenue versus the prior year for our fiberglass business. While these headwinds weighed on the quarter, the business achieved record quarterly bookings, driven by demand for our produced water transport projects, fuel handling and FPSO-related applications. Given the strong bookings along with production and delivery delays related to the Middle East conflict, backlog is at the highest level in ten quarters. We expect second quarter results to meaningfully improve and revenue in the second half to further increase compared to the first half, supported by robust demand and execution on the strong backlog. Drill pipe orders were also strong, outpacing the average quarterly bookings for the past three years, with offshore demand leading the bookings mix. These bookings follow strong orders in 2025, which contributed to drill pipe sales increasing in the mid-teens percentage range year over year. Backlog for the business sits at its highest level in two and a half years, and we expect strong backlog conversion in the second quarter. The segment’s product sales declined in the mid-teens percentage range year over year, as reduced drilling activity in the Middle East and Asia decreased demand for certain drilling tools for the quarter. However, we did receive a sizable order for drilling motors destined for Turkey that should support sales later in the year, and we have good visibility into the bulk shipments that typically happen in the second half of the year. For the second quarter, we expect Energy Products and Services segment revenue to decrease between 6% to 8% year over year, with EBITDA in the range of $100 million to $120 million. With that, I will turn the call back to Jose. Jose A. Bayardo: Thank you, Rodney. In closing, while the first quarter presented challenges, it also marked a significant shift in the market environment. We believe a meaningful new capital equipment cycle is unfolding, which will cause NOV Inc.’s technology, equipment and expertise to be in great demand over the coming years. We are confident in how we are positioning the company for the future and remain intently focused on delivering long-term value for our shareholders. To the NOV Inc. employees listening today, thank you for your dedication and commitment to safety and execution. We will now open the call for questions. Operator: If your question has been answered and you wish to remove yourself from the queue, please press star one one again. Our first question comes from Arun Jayaram with J.P. Morgan Securities. Your line is open. Arun Jayaram: Jose and Rodney, I was wondering if you could maybe talk a little bit about the flexibles business at NOV Inc. You mentioned how you are doubling capacity over the next several years in Brazil, but I would love to get a little bit of thoughts on where that business is today, perhaps from a top-line basis, and how you see that progression over time as you are increasing capacity there? Jose A. Bayardo: Yes. Good morning, Arun. Thanks for the question. Our subsea flexible pipe business has had extremely strong performance coming out of the pandemic and continues to crank out really good results. The bookings outlook is very favorable. As we sit here today and take in orders, we are looking at lead times that are already extending into 2028 for some projects with some of our customers. Looking further into the future, Brazil will continue to have a tremendous amount of growth. They are pretty transparent in terms of guidance to the public regarding their future activity, and if anything, things continue to ramp up. It is not only continuation with new project development, but we are also entering a time period in which existing infrastructure is aging, and we are on the cusp of a big replacement cycle for offshore Brazil, in addition to more new capacity that is needed. Additionally, we have talked about the solution we have been working on for CO2 corrosion resistance that we are feeling very good about. We think we will need some incremental capacity for that. Elsewhere around the world, even last quarter we were talking about steady improvements and building momentum in the offshore space as a logical source of incremental supply to displace what North America has done over the last year in terms of supplying that incremental barrel to meet demand that continues to grow. All the stars are aligning as it relates to economics, need and opportunity in the deepwater environment, and it is consistent with what we are hearing from our customers. Beyond Brazil’s replacement cycle, other markets have similar needs, and more importantly, many markets have both greenfield development and big plans related to infill projects to leverage existing infrastructure from a production facility standpoint. They are going to need a lot of additional pipe to connect new step-out wells into that infrastructure. Everything looks really good from a demand perspective, and as we map out our capacity and our competitors’, it is pretty clear that in a few years the industry is going to be short on capacity, and we see a great opportunity to step into that and support our customer base. Arun Jayaram: Yeah. Makes sense. Jose, the guidance was quite clear, but I was wondering if maybe you could help us understand what you and Rodney are embedding for 2Q in terms of the Middle East impact. In 1Q, you highlighted a $54 million revenue impact and, I believe, $32 million of EBITDA. What are you assuming as your base case, understanding there is uncertainty in 2Q? Jose A. Bayardo: Good question, Arun. As we look at Q2, it is not a matter of taking March times three for us. There are a number of puts and takes, including that in the third month of the quarter we tend to have a lot of deliveries happen toward the end of the quarter. For some reason, that is just the nature of the business—people want to take everything in the last couple of weeks of the quarter. More importantly, while the disruption is still meaningful and significant in terms of impacts on timelines and logistics costs, things are much improved from the height of the conflict. What we are primarily contending with right now is the closure of the Strait. Our assumption in Q2 is that the Strait remains closed; however, conditions on the ground otherwise are in line with what we are seeing now, which is a resumption of trade activity getting steadier and a more constructive environment than at the peak of the conflict. Putting those pieces together, we are looking at a slightly larger impact than we saw in all of Q1, but not a huge difference. Operator: One moment for our next question. Our next question comes from James Michael Rollyson with Raymond James. Your line is open. James Michael Rollyson: Hey, good morning, guys. Lots of interesting commentary to open there, Jose. As you see things unfolding now and based on conversations with customers so far, you mentioned increased activity and amplifying that activity once it settles down. Maybe add a little color around what conversations you are having, how broad that is, and how you expect this to translate. One of the things you have mentioned over the last several quarters is that NOV Inc. has not been firing on all cylinders—it has shifted around from one market to another—and it sounds like what you are saying implies maybe a more broad-based recovery over a period of time. I am trying to fit NOV Inc. into that equation. Jose A. Bayardo: Thanks for the question, Jim. A quarter ago we felt very good about the mid- to long-term outlook, but we anticipated that 2026 would be another somewhat rough year with the supply overhang. We have seen several years of improving fundamentals within the deepwater space that have driven growth and margin improvement within our Energy Equipment segment. The other big chunk of our Energy Equipment business, our rig business, has been in a more difficult environment over the last 12 to 18 months as our primary customers contended with white space in the offshore environment while the industry waited on FPSOs to come out of shipyards and be put in place to commence drilling campaigns. We saw a wave of those FPSOs launch at the end of the year—about 15 coming into the market—and that has resulted in what we expected: a massive increase in the number of tenders to offshore drilling contractors and a substantial increase in the average duration of those contracts. That was the setup for later this year and into 2027 that we are excited about. In the interim, we expected North America to remain flattish with significant discipline, and potentially some downward flow due to the supply overhang. Fast forward to today, that overhang is gone. We are at an extreme deficit. There is going to be a need to accelerate activity in the Middle East to bring things back online and resume plans to steadily bring production and activity back up, particularly in Saudi with bringing back the suspended rigs. We already had, and continue to have, good momentum related to development of unconventional resources within the broader Middle East as well as in Latin America. That is continuing, and we expect it to be amplified and move forward with more urgency once things settle down. First and foremost, we hope for a quick resolution to the conflict in the Middle East so that our employees, customers, vendors and stakeholders can get back to life as usual in a safer environment. Whether we like it or not, the world is very different today than it was three months ago, and that is a more constructive market for a provider of capital equipment and efficiency-enabling tools to enable the production of energy around the world. Demand is going to be very high. Late this year and into 2027, we could finally be in that environment where all eight cylinders of NOV Inc.’s engine can fire, and we can demonstrate significantly higher earnings power than what we have been able to show in a limited market over the last several years. We are looking forward to demonstrating that capability, and the team has worked incredibly hard to position us for that environment. James Michael Rollyson: Got it. Appreciate the color. If I transition that into the cost and margin outlook, you have faced a lot over the last few years and still ramped margins until the recent air pocket and the Middle East conflict. You mentioned normalizing tariffs with your cost-out program in the second half of the year, but we also face the Middle East impact. How many lingering impacts might fall out from that, and as we get into 2027 and beyond, how do you think about margin progression given moving pieces on the cost side? Rodney C. Reed: Thanks, Jim. I really wanted to highlight the hard work from the team on cost reductions throughout the last 12 months. As mentioned in the prepared comments: headcount reduction down 8%, facilities down about 40, and business process improvements including shared service center opportunities in India. All of that has improved our cost structure. Some headwinds over the last 12 months—tariffs and other inflationary items—have offset most of that. Looking at 2026 and into 2027, starting with Energy Equipment: we have had four straight years, 2021 to 2025, of top-line growth and margin improvement, reflecting the strong portfolio. Business units with technological differentiation have more pricing leverage in their markets, lifting margins. In 2025, our rig aftermarket business, with white space in the market, did not have as much margin impact; as we look to the second half and into 2027, we see a meaningful impact from rig aftermarket going forward. For the Energy Products and Services side, similar story: good market share gains in ReedHycalog—8% up on drill bits in North America versus a 7% decline in rig activity—and highlights in digital services. Over the last 12 to 18 months, as the U.S. market declined about 15% from an activity perspective, that has not been a pricing-rich environment; but as we roll out new technologies to create more efficiencies on longer laterals, those are areas where we can get better pricing leverage. The cost-out is the hard work we control, and the market setup we are seeing on the Energy Equipment side with production equipment, the improving aftermarket, and where Energy Products and Services is heading, leads to better margins in 2026 and then in 2027. Operator: One moment for our next question. Our next question comes from Marc Bianchi with TD Cowen. Your line is open. Marc Bianchi: Thank you. Rodney, when you were talking about tariffs, you did not mention the new proclamation from the administration that is going to change the way February works. Should we take that to mean you do not see that being a big change for you? Rodney C. Reed: Let me give a couple of comments on tariffs. Starting with the positive news: in February, the Supreme Court ruled the AIPA tariffs unlawful. We have started to file claims for a refund associated with that ruling. That is not in our Q1 numbers and not in our Q2 guidance, but, in round numbers, what we paid in under AIPA is about $40 million. The administrative process of filing those claims and working through it will determine the end result, but that is a general ballpark. The other changes during the quarter were some of the exclusions from a February perspective, which has a mixed impact across our businesses—beneficial to some and a detriment to a couple of others—and replacing some of the AIPA tariffs, as you know, is Section 122 tariffs. Putting those together, as mentioned in Q4, our tariff expense was about $25 million; in Q1, we expected a slight increase, which is what we saw. Going forward, tariffs being in that ~$30 million range—which is reflected in our Q2 guidance—is a good marker. So, on the changes you referred to—one on the refund and two on the February changes—the latter probably adds a touch of incremental cost. Marc Bianchi: Okay, that is very helpful, thank you. The other one is on the second quarter. The war impact is a little bit more on a dollar basis than in 1Q—recognizing we have three months of disruption, so on a run-rate basis, it is less. There were some deferrals of shipments from 1Q into 2Q, and maybe further deferrals from 2Q into 3Q. What does the run rate of the business look like? Is there help that 2Q is getting from those deferrals, or is it a wash because more gets deferred into 3Q? Jose A. Bayardo: Mark, I would say it is effectively a wash. Yes, you have the benefit of some delayed deliveries from late Q1 falling into Q2. But we are going to see ongoing logistics delays, and, as noted in prepared remarks, we are rerouting some manufacturing to other facilities around the world to reduce risk, which actually extends lead times in many situations. There are areas where things will continue to slide out quarter to quarter. Overall it should be a wash, but hopefully we will find a way to start catching up a bit as conditions improve. Operator: One moment for our next question. Our next question comes from Douglas Lee Becker with Capital One. Your line is open. Douglas Lee Becker: Jose, on the last call, you mentioned leaning harder into M&A and organic growth. We saw the expansion in Brazil, but now we have this underlying shift in the industry. Do these changes make you more aggressive on allocating growth capital or on M&A going forward? Jose A. Bayardo: Good question, Doug. As highlighted last quarter, we were shifting from a more conservative, defensive mindset given the market environment of recent years to a more offensive mindset. We talked about leaning into compelling organic growth opportunities, including the expansion of our subsea flexible manufacturing facility in Brazil, which we are very encouraged about. The market setup is spurring additional confidence in our outlook and opportunity set. We will remain extremely disciplined, particularly in M&A, but we want to be opportunistic and lean hard into organic growth opportunities out there, and we expect more to emerge as the market tightens. Very encouraged on that front. Douglas Lee Becker: It was encouraging that the full-year book-to-bill is still expected to be near 100%. Do you think there was any impact to orders in the first quarter from the Middle East conflict? Tough to gauge, but how might orders progress as the year goes forward, assuming the conflict ends relatively soon? Jose A. Bayardo: There are always puts and takes when a shock like war breaks out, which lends uncertainty for a short period. Our customer base has quickly gotten over the initial shock of disruption, and confidence continues to build around a sustainably higher oil price that will drive more activity and urgency and start pulling FIDs forward. As touched on in the prepared commentary, industry outlooks for FPSOs have increased versus expectations coming into 2026. Looking at the number of offshore opportunities we are pursuing, we are seeing a much wider set of customers than a year ago, more LNG opportunities in Asia, and firmer timelines. To be determined exactly how things play out, but hopefully you get the sense we are more confident about the order outlook going forward. Operator: One moment for our next question. Our next question comes from Analyst with Barclays. Your line is open. Analyst: Good morning, Jose. You talked about a new capital equipment cycle starting up. It has been a long time since we have seen one, and the last one likely looks different than what we are about to enter. You gave guidance for this year, but thinking about 2027 and 2028, what does a new capital equipment cycle mean to NOV Inc.? Where are the key drivers you really see—aside from FPSOs—in terms of orders over the next few years? Jose A. Bayardo: Thanks for the question. It is always hard to predict the future, but it is clear there has been limited investment across the industry, particularly in the service complex asset base. We went from excessive investment to a market that has slowly normalized over about a decade as activity declined. A couple of quarters ago, we started pointing out that the market for equipment is tighter than most appreciate. We thought the oil supply overhang would give the industry ample time to recognize the issue and start investing, but recent events have accelerated and amplified the process. It starts as it usually does: pricing and utilization go up for service companies and drilling contractors, cash flow improves, and they reinvest in their asset bases aligned with activity needs. I do not think it will be constrained to any one market—this is an environment where all eight cylinders get to fire across our businesses, including capital equipment and enabling tools and technologies across our EPS segment. Expect continuation and amplification of deepwater activity; acceleration and amplification in unconventionals driving pull-through of modern drilling and completion efficiency-enhancing tools; and offshore drilling needed to support offshore development. The marketed utilization of the deepwater fleet is already around 95%, as tight as it has been since the prior cycle. Customers will continue to bring other assets back where possible, but opportunities are limited and costly. That will allow drilling contractors to gain pricing leverage and improve dayrates. Operators could start getting nervous about availability. I do not want to speculate on a newbuild cycle, but it is not off the table—though a few years away—and that conversation is coming up more frequently. In the interim, there are more upgrade and reactivation opportunities, including upgrades to digital capabilities, automation and robotics, rapid emergency disconnect systems to reduce BOP shear times, and upgrades to 1,400-ton hoisting capacity. Long way of saying: there is material upside across our operations; exactly how far it goes is to be determined, but the outlook is strong. Analyst: In terms of North America, it looks very tight from attrition and equipment moving out of the U.S. Are you having those conversations yet around unconventionals, or is it still a little early? Jose A. Bayardo: It is early days, but the conversations are happening. There is more discussion related to reactivating the limited stacked equipment that can come back, and some talk about new capital equipment orders. As Rodney mentioned, we saw demand for coiled tubing equipment in North America this quarter. Large-diameter, extended-reach coil already has some legs. We are seeing some of that translate into orders. That said, this geography has been through difficult conditions with everyone highly disciplined. Pricing for the service complex has not been good; they will focus on getting utilization and pricing up before materially expanding capacity. But I believe that is coming. Operator: Ladies and gentlemen, this does conclude the Q&A portion of today’s presentation. I would now like to turn the call back over to Jose for any further remarks. Jose A. Bayardo: Thank you, everybody, for joining us this morning. First and foremost, we really hope and pray for a very quick resolution to the conflict so that our friends and colleagues can get back to life as normal across the Middle East. We are very optimistic about the mid- to longer-term outlook. We remain confident in how we have positioned the company for the future and believe that will present the opportunity for us to demonstrate meaningfully higher earnings power over the coming years. We appreciate everyone joining us this morning and look forward to visiting with you again in late July. Operator: Thank you, ladies and gentlemen. This concludes today’s presentation. We thank you for your participation. You may now disconnect, and have a wonderful day.
Operator: Ladies and gentlemen, welcome to Avery Dennison Corporation's earnings conference call for the first quarter ended on 03/31/2026. During the presentation, all participants will be in a listen-only mode. Afterward, we will conduct a Q&A session. At that time, if you would like to ask a question, please press star 1 on your telephone keypad to raise your hand and enter the queue. As a reminder, this webcast is being recorded and will be available for replay on the Avery Dennison Corporation investor website. I would now like to turn the call over to William Gilchrist, Avery Dennison Corporation's Vice President of Investor Relations. Please go ahead, sir. William Gilchrist: Thank you, Lucas, and welcome to Avery Dennison Corporation’s first quarter 2026 earnings conference call. Please note that throughout today’s discussion, we will be making references to non-GAAP financial measures. Non-GAAP measures that we use are defined, qualified, and reconciled from GAAP on Schedules A4 to A8 for the financial statements accompanying today’s earnings release. I remind you that we will make certain predictive statements that reflect our current views and estimates about our future performance and financial results. These forward-looking statements are made subject to the Safe Harbor statement included in today’s earnings release. On the call today are Deon M. Stander, President and Chief Executive Officer, and Gregory S. Lovins, Senior Vice President and Chief Financial Officer. I will now turn the call over to Deon. Deon M. Stander: Thanks, Gilly, and hello, everyone. We delivered a strong start to 2026, with first quarter organic sales up 1%, driven by mid single-digit volume/mix growth, and adjusted EPS up 7% year over year. These results once again demonstrate the benefits of our diversified portfolio and our strong productivity and cost control management. Our performance this quarter was a clear display of our resilience, as stronger Materials Group results offset a softer Solutions Group performance. Growth in our base label materials business more than compensated for temporary softness in certain high value categories. As we have seen in past cycles, geopolitical uncertainty has triggered a significant shift in raw material inflation. While we do not know how long this inflationary pressure may last, we are responding proactively, implementing price increases and driving material reengineering where necessary to offset these pressures. Our history of successfully managing through inflation cycles gives us high confidence in our ability to protect our profits. Furthermore, our proven ability to manage security of supply to meet customer demand remains a distinct competitive advantage, helping to ensure we remain the partner of choice for our customers if supply chains were to tighten. We continue to take decisive actions to drive both earnings growth and business resiliency by leaning into our proven playbook. Firstly, our focus remains on investing in innovation and service-led differentiation to drive growth through share gains and expand new business opportunities. To this point, we recently signed an agreement to invest an incremental $75 million in Williard, a move that deepens our long-standing partnership and strengthens our enterprise-wide Intelligent Labels platform. This investment includes a dedicated joint go-to-market team to accelerate adoption across retail, food, and logistics. It also positions us as the preferred inlay commercial partner, leveraging our leadership in design and manufacturing to bring commercial scale to Williard’s complementary technology. Secondly, we are maintaining our commercial and operational agility by taking swift commercial, procurement, and cost actions to stay ahead of inflationary pressures. Thirdly, we are extending our scenario planning, a strength of ours, and driving greater productivity and disciplined cost management to protect our bottom line through a wide range of scenarios. Turning to our segment results. Materials Group delivered reported sales growth of 11% over the prior year. On an organic basis, sales grew approximately 2%, driven by mid single-digit volume and mix growth that was partially offset by deflation-related price reductions. The quarter’s performance once again highlighted the strength of this business. We saw strong growth in our base categories, which grew mid single digits and provided a critical offset to a quieter quarter for our high value categories, which were down low single digits. Within our high value platforms, Graphics and Reflectives declined mid single digits, and Performance Materials were down low single digits, reflecting a combination of difficult year-over-year comparisons, customer order timing, and softer auto end market sales. We anticipate these high value categories to return to growth as we go through the year. In label materials, we observed some customer prebuying during March that has persisted into April. While it is difficult to predict the exact amount and timing of the unwind, we currently expect this volume to largely unwind during the second half of Q2. Our teams remain focused on aligning production levels and cost structures with the shifting demand, utilizing our framework for managing stocking cycles. From a profit standpoint, adjusted EBITDA was up low double digits and margin up a 10 basis point increase compared to the prior year. This was a direct result of our team’s execution. We leveraged our operational rigor as well as contributions from raw material engineering initiatives. These efforts effectively countered the headwinds from a less favorable product mix and high employee-related costs, ensuring we grew the bottom line while continuing to serve our customers. In the Solutions Group, reported sales for the quarter decreased 3%, with sales down 1% on an organic basis. The quarter was defined by the steady performance of our high value categories, which grew low single digits and continue to serve as the long-term growth driver of this segment. Within the high value categories, VESCOM and Embellix both delivered solid mid single-digit growth, which was partially tempered by Intelligent Labels, which was down low single digits. In our base categories, sales were slightly worse than expected, down mid single digits. From a profitability perspective, adjusted EBITDA margin for the quarter was 16.4%, down 80 basis points compared to the prior year. While we realized clear benefits from operational efficiencies and a net benefit from pricing and raw material costs, these gains were more than offset by high employee-related costs, lower base category volumes, and our investments in future growth. We remain committed to these investments, as they are critical to ensuring innovation-led differentiation, which translates to strong long-term growth and margin expansion. Turning to our enterprise-wide Intelligent Labels platform. Sales were down low single digits compared to the prior year, a result that came slightly below our growth expectation. However, this headline number really reflects a tale of two different dynamics across our end markets. In our largest category, apparel and general retail, we saw encouraging performance. Despite the high hurdle of a pre-tariff comparison from 2025, sales were up low single digits. This growth was fueled by successful program expansions, demonstrating that adoption in apparel continues to expand. Conversely, we saw a more pronounced headwind in logistics, where sales were down low double digits. This is largely a reflection of softer logistics customer demand and managing inventory during this customer’s transition to an updated chip. We remain focused on the long-term adoption curve here, and as we navigate these varied market timings, we are continuing to position the platform for the retail and food rollouts we have planned for the back half of the year. Looking ahead, we continue to expect 2026 growth for our enterprise Intelligent Labels to outpace 2025, with performance more heavily weighted towards the second half of the year as major programs scale. In apparel and general retail, we expect to deliver full-year growth, while our food category is set for an inflection as our rollout with the largest U.S. grocery retailer across bakery, meat, and deli ramps up in the back half of the year. Finally, in logistics, we are lapping outsized volume and share in 2025 and proactively managing this by expanding pilots with new partners throughout 2026. Turning to our outlook for the second quarter. We anticipate earnings growth at the midpoint of our guidance range with organic sales growth of 0% to 2%. Our performance will once again be driven by the levers within our control: scaling our differentiated solutions in both our high value category and base businesses, accelerating pricing to offset increased raw material inflation, maintaining a relentless focus on productivity and cost management, and effectively deploying capital to drive earnings. In summary, our first quarter performance, as well as our ability to grow share and earnings, demonstrates our differentiation in a dynamic environment. We are focused on the underlying secular growth drivers that inform our strategy, as well as the business resiliency actions to manage through cyclical pressures and inflationary shifts with agility. The proactive actions we are taking to ensure supply chain resilience and accelerate innovation-led differentiation, evidenced by our deepened partnership with Williard, further strengthen our competitive moat. Our proven strategies, market-leading resilient businesses, agile teams, and disciplined capital allocation approach drive confidence to continue to deliver growth in 2026 and beyond. I want to extend my sincere gratitude to our global team for their focus on creating value for all our stakeholders, their agility, and their continued dedication to excellence. Over to you, Greg. Gregory S. Lovins: Thank you, Deon, and hello, everybody. In the first quarter, we delivered strong adjusted earnings per share of $2.47, up 7% compared to prior year. Earnings growth was driven by higher volume, productivity, and favorable foreign currency translation, partially offset by higher employee-related costs and targeted growth investments. As Deon mentioned, the quarter benefited from customer prebuys ahead of price increases, particularly in the last few weeks of March, which we estimate was an approximate $0.05 tailwind to earnings in the quarter. First quarter reported sales were up 7% over prior year, with organic sales up 1% as strong volume/mix was partially offset by deflation-related price reductions. Reported sales also benefited from approximately five points of growth from foreign currency translation and one point of growth from the Taylor Adhesives acquisition. Adjusted EBITDA margins were 16.4% in the quarter and comparable to prior year. We generated strong adjusted free cash flow of $104 million in the quarter, primarily driven by an improvement in working capital compared to prior year, as well as continued disciplined capital expenditures. And our balance sheet remains strong, with quarter-end net debt to adjusted EBITDA ratio of 2.4. Our capital allocation during the first quarter remained consistent with our established framework, and we returned $133 million to shareholders through a balanced combination of $72 million in dividends and $61 million in share repurchases, with the majority of the repurchases completed in March. These actions underscore our commitment to returning capital while preserving financial flexibility and balance sheet strength to define our capital allocation approach. Turning to the segment results for the quarter. Materials Group organic sales growth came in 2% higher year over year, as mid single-digit volume/mix growth was partially offset by low single-digit deflation-related price reductions. Organically, base categories grew mid single digits, more than offsetting high value categories, which were down low single digits. Turning to label materials, we believe we successfully gained share during the quarter while also benefiting from customer purchase timing ahead of price increases. From a regional perspective, volume/mix in North America was up mid single digits, while Europe delivered approximately 10% growth. In emerging markets, Asia Pacific also grew approximately 10%, and Latin America grew high single digits. Organic growth in our high value categories in Materials Group was down low single digits overall, with low single-digit growth in specialty and durable labels, which was more than offset by a mid single-digit decline in Graphics and Reflectives, and a low single-digit decline in Performance Materials, which includes our performance tapes and adhesives businesses. Regarding the Taylor Adhesives acquisition, the business continues to perform in line with our expectations. Materials Group adjusted EBITDA was up 12% compared to prior year, with margins up 10 basis points. The expansion reflects our continued strong execution on leveraging productivity, the net benefit of pricing and raw material cost, inclusive of material reengineering, and strong label volumes, partially offset by employee cost, mix, and investments. Regarding raw material cost, we experienced low single-digit year-over-year raw material deflation in the first quarter. That deflation shifted to inflation as we went through March. We saw impacts on commodities which are linked to petrochemical prices. Our teams are leveraging our proven playbook to navigate the inflation spike through strategic sourcing and the implementation of pricing. Overall, we are anticipating high single-digit sequential inflation in the second quarter. Shifting to Solutions Group. Organic sales were down 1%. High value categories grew low single digits; base categories declined mid single digits. This reflects continued softness in apparel demand as we lap a strong pre-tariff baseline in 01/2025, as well as ongoing inventory management from our customers. Within high value categories, VESCOM was up mid single digits, driven by the continued benefit from new program rollouts, and Embellix was up mid single digits, driven by both the World Cup and industry growth. Intelligent Labels fell low single digits on lower logistics, industry, and general retail. Solutions Group adjusted EBITDA margin was 16.4%, which was down 80 basis points year over year, continuing to benefit from our productivity focus and net pricing and raw material costs, but these were more than offset by higher employee-related costs, lower base category volumes, and ongoing growth investments. Turning to our outlook for the second quarter. We anticipate reported sales growth of 2% to 4%. This sales growth includes organic growth of 0% to 2%, approximately 1% from currency translation, and approximately 1% from the Taylor Adhesives acquisition. We expect adjusted earnings per share in the range of $2.43 to $2.53, representing approximately 3% growth year over year at the midpoint. This earnings growth is driven by benefits of productivity actions more than offsetting headwinds from wage inflation and growth investments; the anticipation of destocking, which is projected to impact label material volumes in the latter half of the second quarter; and the normalization of 2025 temporary savings, largely from incentive compensation expense; and a net benefit from combined currency, share count, interest, and tax. We have also outlined key contributing factors for our full year 2026, which are largely unchanged from our prior outlook, on slide nine of our supplemental materials. We continue to expect an approximate $0.25 EPS benefit from the combination of favorable currency, which largely benefited Q1, and a lower share count, partially offset by a higher adjusted tax rate and interest expense. We have increased our expectations for restructuring savings, anticipating greater than $55 million as we continue to lean into our productivity levers. And we remain committed to strong adjusted free cash flow, targeting roughly 100% conversion for the year with fixed and IT capital spending of approximately $260 million. Assuming current economic conditions persist, we anticipate sequential increases in earnings throughout the year, in line with our recent historical seasonal patterns and excluding the impacts of destocking from the prebuy timing. In summary, we delivered a strong start to the year, achieving adjusted EPS growth of 7% compared to prior year. These results reflect our ability to drive volume and productivity while navigating a dynamic environment. We are well positioned to offset the latest round of significant inflation by leveraging our procurement excellence and proven pricing discipline. We generated $104 million in adjusted free cash flow this quarter and returned $103 million to shareholders. We continue to operate within our disciplined capital allocation framework while maintaining a strong balance sheet. With that, we will now open up our call for your questions. Operator: Ladies and gentlemen, we will now begin the question and answer session. If you would like to ask a question, please raise your hand now using star 1 on your telephone keypad. If your question has been answered and you would like to withdraw your registration, please press the pound key. To accommodate all participants, we ask that you please limit your question, and then return to the queue if you have additional questions. Please stand by as we compile the Q&A roster. Your first question comes from the line of Ghansham Panjabi from Robert W. Baird. Ghansham, please go ahead. Ghansham Panjabi: Thank you, operator. Morning, everybody. So on Intelligent Labels, how did that play out relative to your initial expectations for Q1? And also, has your view on 2026 core sales for this business changed just given the events over the past couple of months or so? Deon M. Stander: Hi, Ghansham. Q1 played out slightly lower than we had anticipated, mostly on the logistics volume that we saw both at the customer level and some changes as they were managing through inventory in preparation for a new chip they were having. While we have not given an outlook for the rest of the year, I still believe we are going to see growth through the whole of 2026 relative to 2025 overall, Ghansham. In particular, we are going to see the second half of the year when some of the new programs ramp, particularly in food. We talked about the Walmart ramp for us in the second half of the year. We also have a number of other apparel programs that were planned and a couple of new ones that are also coming along as well. Overall, while it is difficult to know how the second half of the year will play out from a macro perspective, I feel good about our ability to drive those new programs and have them roll out, and hence we will start to see an expansion in growth rate as we go through the year. Operator: Your next question comes from George Staphos from Bank of America Securities Incorporated. George, please go ahead. George Leon Staphos: Thanks very much. Hi, everyone. Good morning. Thanks for the details. I wanted to peer into the revenue bridge for the quarter. You said sales growth is put at 2% to 4%. Organic is 0% to 2%. We have one from FX and one from Taylor, so it suggests there is not a lot of impact, if we are not misreading this, from pricing. Can you talk about how the work you are doing to offset cost pressure will materialize in terms of pricing in Q2 and perhaps more in Q3 given lags? Relatedly, any common denominator in terms of the weakness in volume we saw in the high value categories in Materials? Thank you. Gregory S. Lovins: Thank you, George. I will start with the first question. I think you are talking about the second quarter outlook. We are seeing high single-digit sequential inflation in Q2. We are implementing price increases pretty much across the globe to manage through that, with low to mid single-digit price impacts, so we would expect, sequentially from Q1 to Q2, to offset that inflationary pressure. From a year-over-year perspective, we still have some carryover deflation, which is part of what drove pricing down, as I talked about in the first quarter—down low single digits in Q1 versus prior year—really driven by carryover pricing with the deflation that we were seeing last year. Some of that carryover price down offsets some of that price increase in the second quarter, but we would expect a slight overall net price increase in Q2 versus prior year. Deon M. Stander: The only other thing I would add is that historically, when we talked about price and inflation, we have seen about a quarter gap. As we have gone through the last few cycles, our ability to manage pricing, sourcing, and inflation is much improved, and we do not anticipate any real gap in the timing of how we manage inflation and the pricing we put through. In terms of your high value category question on Materials Group overall, there were some idiosyncratic reasons in the first quarter, particularly on Graphics and tapes, which were down largely due to the really strong comp in the first quarter of last year, some intra-quarter inventory dynamics with some distributors, and some end market sales softness reflected in our Graphics business. Our anticipation is that as we go through the year, we are going to see a return to growth for those categories and overall volume increase. Operator: Your next question comes from Jeff Zekauskas from JPMorgan. Jeff, please go ahead. Jeffrey John Zekauskas: Thanks very much. You are estimating flat earnings per share in the second quarter relative to the first quarter. Normally, the second quarter is seasonally stronger. I understand there is a little bit of prebuying and you called that out as being a nickel, but usually the seasonality is stronger than that. So is what is restraining second quarter earnings growth the timing of the raw material inflation that you will get back later? And then in the third quarter, you are usually seasonally weaker than you are in the second, but you will have growth in Intelligent Labels and a little bit more price. In the third quarter, are we beginning to go up or flat or down? Where do we stand? Gregory S. Lovins: Thanks, Jeff. On your first question, as I mentioned, we had about a nickel benefit of prebuy in Q1, which then comes out of the second quarter and creates really a $0.10 swing from the first quarter to the second quarter. Historically, we have had somewhere around $0.10 to $0.15, depending on the year, of sequential seasonal benefit, as you mentioned, largely offsetting that. Looking at other factors, I would say we have a very slight price/inflation lag impact, but that is largely offset by productivity increases as we move through the year as well. Overall, it is really the seasonal benefit offset by the prebuy impact that is largely driving that. For the rest of the year, as we mentioned, we do expect continued sequential earnings growth as we move through the year. Prebuy impacts, as you said, would lower Q2 and should be a benefit from Q2 to Q3. We expect continued improvements in high value category growth as we move through the back half of the year, continued earnings impacts from share buybacks, and continuing to drive productivity growth. We would expect to continue to see sequential improvements in earnings as we move through Q3 and Q4. Operator: Your next question comes from John McNulty from BMO Capital Markets. John, please go ahead. John Patrick McNulty: Good morning. Thanks for taking my question. Maybe just dig a little bit more into the IL business. Logistics was weak, it sounded like on two things: customer volumes and then the chip change. Presumably, the chip change is a temporary thing and you get that back. Can you help us think about how much of it was just from general weakness in volumes versus that chip shift? And then as a secondary related question, the investment that you just made in Williard—if you can give us some thoughts on how you can leverage that opportunity and how that maybe brings that business more meaningfully to you over time. Deon M. Stander: John, the majority of what we saw in logistics softness is down to end customer demand volumes, and I think you have seen that publicly announced today as well. There was some degree of impact on the chip timing, but it will largely be resolved by the time we get through the second quarter. On logistics, recall what we talked about in our last call: we drove outsized growth and share in 2025, and this year we are going to be lapping that. That growth and share came because a large number of our competitors were not able to service the account as anticipated, and we stepped in to provide support. Our planning and expectation is that it will normalize in time. We have yet to see that in the first quarter, but that is our planning and expectations at the moment. We are also expanding positive pilots in logistics with other logistics providers. Turning to Williard, I am really pleased with the investment in this complementary technology. They have been a partner of ours for a long time, and we are deepening that relationship, specifically with a joint go-to-market and our role in providing support as the largest manufacturer and designer from our scale and network. Williard is reliant on Bluetooth, so it is not RFID in the way that you think about it, and it is largely applicable when you think about condition monitoring—when items need sensing related to changes in temperature, humidity, and light. This is where the technology really comes to bear. We have always talked about having a portfolio of sensors that are applicable to each business case. Think about this being really applicable in food, pharmaceutical, and some logistics at case and pallet level where you need more of that condition sensing technology. Our view as we move forward is twofold. It opens up total addressable market further for our Intelligent Labels platform overall—we think that condition monitoring is probably another 75 billion units in the long term—and at the same time, it gives us a position of strength as we think about our breadth of solutions that we can provide in partnership to all of our customers moving forward. Operator: Your next question comes from the line of Joshua Spector from UBS. Josh, please go ahead. Joshua David Spector: Hi. Good morning. I wanted to just clarify two things. On the price/cost side, Greg, I think you talked about it being a slight negative in Q2. Is all the cost flowing through in Q2, or do you have something else to deal with in Q3 based on what we see today? And then in your answer to Jeff’s question earlier around your comments about sequential earnings growth through the year—you had the qualifier about historical earnings seasonality—but I heard you answer that you think earnings would be up in Q3, and then seasonally you are normally up in the fourth quarter. Is that the right way to think about it, or would you characterize it differently? Gregory S. Lovins: On price/cost, I mentioned a slight headwind in Q2 from timing. We are continuing to see inflation increase as we move here into April and early May, so we are continuing to do price increases. Some regions are seeing higher inflation than others and are even entering a second round of pricing action. There may be a slight headwind, but overall, pricing is pretty closely matching inflation as we go through the second quarter. There will be some carryover sequential inflation in Q3, so inflation that we are seeing somewhat in the middle of the second quarter will flow into the third quarter as well. We will see a little bit of sequential inflation impact then, as well as a sequential price benefit from Q2 to Q3. We are not giving second-half guidance, but our expectation is to continue to drive significant productivity—we increased our restructuring outlook as we gave in the slides today—continue to drive high value category growth, and continue to allocate capital to increase earnings. Our focus is on continuing to drive sequential improvement as we move through the quarters. Operator: Your next question comes from the line of John Dunigan from Jefferies. John, please go ahead. John Robert Dunigan: Thanks for all the details, Deon and Greg. Really appreciate it, and congrats on performing well in a pretty tough environment. I wanted to ask on the Intelligent Labels business—you talked about the headwind from the logistics share gains that you had last year, but I think you mentioned that you did not really see any of that giveback in Q1. How much should we pencil in for a headwind year over year here in 2026? Deon M. Stander: John, we are not forecasting the remainder of the year, but we are anticipating and planning for some of that outsized volume and share that we gained in 2025 to be lapped if things normalize. We are working to offset that with additional pilots we are expanding with some of our other logistics customers. The biggest part of our overall IL program during 2026 is going to be our food program as we roll out with Walmart during the second half of the year. Recall I said we thought it would be somewhere in the high single-digit to low double-digit equivalent value across a two-year period on our total 2025 IL revenue. We are still planning to see the start of that significant ramp during the second half of this year. Because of that announcement, we have also seen more inbound from other food retailers and food supply chain players who are interested in understanding how they can leverage the technology. I am encouraged by two pilots that are running—one in North America and one in Europe—with large grocery retailers, as well as a supply chain part of the direct-to-store delivery for one of our retail customers, which is a different use case. Overall, from a food perspective, we are seeing direct ramp, and then in apparel, we will continue to see new programs roll out—a couple that are already in flight and two that will start later in the second part of the year. The other piece that I am encouraged by is the traction we are seeing with innovation technology in this area. We spoke last year about the rollout with the Inditex Group based on our loss prevention and visibility solution. We now have a second customer, another footwear brand, that is starting to use that as we go into the second half of the year, so not just new customers, but extending technology to drive new use cases as well. Operator: Your next question comes from Mike Roxland from Truist Securities. Mike, please go ahead. Michael Andrew Roxland: Thank you, Deon, Greg, Gilly, for taking my questions. Deon, just to follow up on John’s question, it sounds like you are expecting or pretty confident in Intelligent Labels ramping in the back half of the year relative to the first half. To the extent you can comment, how do you think about the cadence of IL over the duration of the year? To hit your guide for 2026 in terms of growing beyond 2025, it implies some lofty growth which seems like it is going to be more 2H weighted than 1H weighted. And then, secondly, any update on your key logistics customer and the deployment internationally? Deon M. Stander: Mike, you are right. We are going to see a significant ramp in the second half of the year, and sequentially our run rate of growth will improve as we go from here through the second half of the year. That gets us to growth above 2025 by the time we exit the end of the year. As it relates to our logistics customer, we are continuing to work with them on the international expansion, and that is going relatively well according to plan. The second piece we are doing—you probably saw some commentary in the press—is that not only are we focused on the last-mile fulfillment centers where we have been very active over the last couple of years, but as they orientate to first mile—this is the shippers themselves, their own franchise stores, and other customers—we are involved in providing support in that regard as well. Ultimately, in logistics you are going to get a combination of business models: some will choose to focus on last mile first, others will focus on first mile. We are seeing that with two or three other logistics players as we go through some of the pilots as well. Operator: Next question comes from Matt Roberts from Raymond James. Please go ahead, Matt. Matthew Burke Roberts: Good morning, everyone. Thank you for the time. Deon, a couple times throughout the call you referenced the playbook for cost reduction and specifically for inflationary pressures. Given you all have a unique window into a wide range of end markets and into how your customers are thinking about pricing going forward, whether that is in food, apparel, or other categories, how are your customers looking to offset their own cost via price, and what impact do you expect that to have on the volume outlook going forward? You talked about extended scenario planning. How far are we from reaching a threshold of consumer elasticity, if you will, after years of price increases at retail? Deon M. Stander: Sure, Matt. Relative to our assumptions at the start of the year, it is clear that inflation will be higher than we had originally planned, and the economic indicators are lower than when we started the year. What is difficult for us is to estimate the impact, timing, and consequence of how that may play out in the second half. We are expanding our scenario plans and widening them further to make sure we are prepared for all eventualities in the volume environment that may or may not play out. The biggest part of why I feel confident in our earnings growth trajectory as we go through the year—just to reiterate—is because we are going to continue to accelerate productivity. You have seen we updated our restructuring to $55 million, with the largest part playing out in the second half of the year. We know our high value categories will continue to expand as we go through the year—not just because Materials Group had some idiosyncratic challenges in Q1 that will improve, but also because our IL growth will ramp in the second half. Finally, we have the impact of share count reduction that will help us in the second half as well. Looking at our end markets overall, it varies by region and within end markets. In our materials label business, customers in regions with stronger inflation have been more cautious; some have been doing prebuying—particularly in Europe, some in Asia, and a little emerging in North America. On the end market side, retailers and brands are thinking about consumer confidence. CPG volumes have been muted for the last couple of years, and encouragingly at the start of this year we have seen a couple of CPGs indicate they are seeing some volume growth. That could be a positive benefit for us despite inflation. In apparel, sentiment has been soft for a long time—it went through tariff challenges last year—and now apparel customers are thinking about what inflation may mean for end market demand; it is a discretionary purchase. That said, apparel imports continue to be very low; apparel inventory-to-sales ratios are at the lowest since 2021, and as we go through the year we may see some upside as things normalize. We continue to work with customers on back-to-school sourcing and ultimately into holiday. Our assumptions are that if we do not see any further deterioration in the macro environment from where it is now, we would anticipate sequential earnings growth as Greg called out as we go forward through the year. Operator: Your next question comes from Anthony Pettinari from Citi. Please go ahead, Anthony. Anthony James Pettinari: Good morning. Just following up on Intelligent Labels. Understanding the big ramp is in the second half of the year, was there anything notable in terms of the exit rate in the first quarter? Was that stronger or weaker? It seems like comps could get potentially easier in Q2. Did you see any acceleration in March or April? Deon M. Stander: Nothing that stood out dramatically, Anthony. In the second quarter, we should see easier comps on our apparel and general merchandise because, if you recall, tariffs really took hold in the second quarter of last year when we saw a negative outcome then as well. As I look at where we are now, our current run rates in April reflect on both businesses a continuation of what we saw during March overall. Apparel continues to be solid from what we can see initially, and for our materials business, particularly our labels business, we continue to see some of that elevated activity which Greg spoke about, and we are unwinding as we get through the second quarter. Operator: Your next question comes from Hillary Cacanando from Deutsche Bank Securities. Hillary, please go ahead. Hillary Cacanando: Hi. Thanks for taking my question. In terms of capital allocation, you bought back $61 million in shares this quarter. Given that your leverage is stable at 2.4 times, how should we think about the pace of buybacks for the remainder of the year, particularly balancing against your investment pipeline? Gregory S. Lovins: Thank you, Hillary. We continue to follow our playbook on share buybacks, taking a return-based approach using a grid. In a period where we see share price increase, we may pull back a bit on the pace; in a period like we saw in March where the share price decelerated, we increased our pace. The vast majority of our Q1 share buyback actually came in March, and April continued at a relatively similar pace. It will depend on how things play out through the year, and we will continue to take a return-based approach accordingly. Overall, we feel good about the capacity we have to continue investing in the business organically—CapEx and innovation-related investments—and investments like Williard to help increase our future growth rates, as well as looking at opportunities for both M&A and continuing share buybacks. We feel good about our capacity across all of those fronts and will continue to take a balanced, disciplined approach. Operator: Your next question comes from George Staphos from Bank of America Securities Incorporated. George, please go ahead. George Leon Staphos: Thanks very much for taking the follow-on. Two quick ones. First, can you elaborate further on how you are expanding the scenario planning? Is it just pulling more levers on the productivity and maybe ramping the buyback as the market has allowed you, or are there any other elements you can share in terms of how you are expanding the playbook? Secondly, in terms of prebuys—recognizing you are in business to serve your customers—what are you doing to prevent too much prebuying that gives you a bit more of a destocking that has to be managed into Q2 and perhaps into Q3? Deon M. Stander: Thanks, George. In terms of expanding our scenarios, you touched on major drivers. We look to understand where there are additional productivity opportunities for us in lower volume scenarios or, alternatively, if volume continues to grow. The other element is innovation: when we have new products or solutions in the pipeline, can we accelerate them to get to market quicker? Our teams are also focused on what it takes to continue to win and drive share with customers—both new and existing—through commercial excellence backed by innovation, quality, and service delivery. Those relationships present opportunities to increase our share of wallet. Typically, in more uncertain or inflationary environments, particularly if supply chains are challenged, we see migration back to market leaders because customers trust the security we provide, and that may represent another upside in terms of share gains. Gregory S. Lovins: I think some of that addresses the question on prebuy as well. There are two primary reasons that customers do prebuy: to ensure certainty of supply and to manage price increases they see coming in the market. Our global scale is a big competitive advantage when it comes to ensuring certainty of supply—leveraging our procurement excellence and sourcing strategy. We learned a lot from the challenges of 2021 and 2022, expanded our supplier and sourcing strategies, and feel good about our ability to ensure certainty of supply. That helps limit the impact of prebuys getting too large. What we are seeing here is a much lower scale than what we saw in 2021–2022, when we saw three or four quarters of inventory building before the destock happened in late 2022 and early 2023. Right now, it is about a month or so of inventory build. We are going to continue to manage that very closely and see how it plays out as we move through the quarter. Operator: Mr. Gilchrist, there are no further questions at this time. We will now turn the call back to you for any closing remarks. William Gilchrist: Thank you, Lucas. On behalf of everyone at Avery Dennison Corporation, I want to thank everyone for joining today’s call and for the continued interest in Avery Dennison Corporation. This concludes today’s conference call. Deon M. Stander: Thank you.
Operator: Good day, everyone. My name is Stefan, and I'll be your conference operator today. At this time, I'd like to welcome you to Allegion's first quarter earnings call. [Operator Instructions] At this time, I'd like to turn the call over [indiscernible], director of Investor Relations. Jobi Coyle: Thank you, Stefan. Good morning, everyone. Thank you for joining us for Allegion's First Quarter 2026 Earnings Call. With me today are John Stone, President and Chief Executive Officer; and Michael Wagnes, Senior Vice President and Chief Financial Officer of Allegion. Our earnings release, which was issued earlier this morning, and the presentation, which we will refer to in today's call, are available on our website at investor.allegion.com. This call will be recorded and archived on our website. Please go to Slide 2. Statements made in today's call that are not historical facts are considered forward-looking statements and are made pursuant to the safe harbor provisions of federal securities law. Please see our most recent SEC filings for a description of some of the factors that may cause actual results to differ materially from our projections. The company assumes no obligation to update these forward-looking statements. Today's presentation and commentary include non-GAAP financial measures. Please refer to the reconciliation in the financial tables of our press release for further details. Please go to Slide 3, and I'll turn the call over to John. John Stone: Good morning, everyone. Thanks for joining us. The Allegion team has remained agile in a volatile environment and stayed focused on serving our customers alongside our strong channel partners. In Q1, we delivered high single-digit revenue growth, led by the Americas nonresidential business and contributions from acquisitions. In the Americas, performance was in line with our expectations we outlined back in February. In our International segment, top line growth was led by acquisitions, which are on track. However, our Q1 organic revenue growth and margins in International were negatively impacted by an ERP implementation in one of our legacy mechanical businesses. Production rates there have started to improve, and we expect to recover the Q1 shortfall over the remainder of the year. As you'll see on the next slide, Allegion remains committed to balanced, disciplined and consistent capital deployment. And finally, with respect to our outlook for the year, we are raising our reported revenue outlook to 6% to 8% to include the DCI acquisition, and we are affirming our outlook for organic revenue growth of 2% to 4% and adjusted earnings per share of $8.70 to $8.90. Please go to Slide 4. Taking a look at capital allocation for the first quarter, starting with our investments for organic growth. The latest example of this is our next-generation LCN Senior Swing series of auto operators for heavy-use doors across health care offices and other high-traffic environments. Easy to install and upkeep, these automatic door operators self-adjust in real-time to external pressures like wind, allowing smooth, safe and consistent operation while saving the building time, energy and maintenance calls. Turning to acquisitions. Earlier in March, we closed the acquisition of DCI, a West Coast-based manufacturer of holly metal doors and frames, specializing in custom design and quick ship capability. Historically, we've had to rely on our Cincinnati, Ohio, manufacturing facility to serve customers on the West Coast, which extended lead times and drove higher freight costs compared to local suppliers. DCI makes us far more competitive on the West Coast, helping the totality of our Americas nonres business, not just our door offering as customers purchase complete door and hardware packages together. DCI today has a low double-digit EBITDA margin, resulting in limited EPS accretion in the current fiscal year. But the strategic nature of this acquisition gives us significant improvement in serving our customers at a better cost position. I'm confident our execution and pricing discipline will drive higher profitability over time and expect performance to improve moving forward. Moving to dividends. Allegion paid $47 million in dividends in the quarter, consistent with the long-term framework we outlined at our Investor Day last year. We repurchased $40 million of Allegion shares in the first quarter. Our Board also recently approved a new $500 million repurchase program. As we've said in the past, you can expect Allegion to be balanced, disciplined and consistent with capital deployment oriented towards profitable growth and driving long-term returns for shareholders, including share repurchase as appropriate. Mike will now walk you through the first quarter results. Michael Wagnes: Thanks, John, and good morning, everyone. Thank you for joining today's call. Please go to Slide #5. Revenue for the first quarter was over $1 billion, an increase of 9.7% compared to 2025. Organic revenue increased 2.6% in the quarter, led by our Americas nonresidential business. The enterprise organic revenue increase was driven by price realization, partially offset by volume declines. Q1 adjusted operating margin was 21.2%, down 150 basis points compared to last year, partially driven by a combination of volume declines and mix. Price and productivity net of inflation and investment and inclusive of transactional FX were favorable by $5.3 million. However, this resulted in a 40-basis-point headwind to margin rate in the quarter. I'll provide more details on revenue and margins within each of the regions. Adjusted earnings per share of $1.80 decreased $0.06 or 3.2% versus the prior year. EPS from acquisitions was more than offset by higher tax and interest and other in the quarter. Finally, year-to-date available cash flow was $80.3 million, consistent with the prior year. Please go to Slide #6. Our Americas segment delivered revenue of $809.9 million, which was up 6.9% on a reported basis and up 4.5% on an organic basis. Our nonresidential business increased mid-single digits organically, driven by price realization. Demand for our nonres products remains healthy and spec activity continues to be strong. Our residential business was flat in the quarter, with price realization offset by volume declines as residential markets remain soft. Electronics revenue was up mid-single digits for the quarter, and we continue to see electronics as a long-term growth driver of the business. In addition, reported revenues increased 2.1 points of growth from acquisitions and a slight tailwind from foreign currency. Americas adjusted operating income of $227.4 million increased 2.9% versus the prior year. Adjusted operating margins were down 110 basis points in the quarter. Price and productivity net of inflation and investment and inclusive of transactional foreign currency was favorable by $9.9 million. However, this was a 30-basis-point headwind to margin rate. The transactional foreign currency headwind relates to the prior year benefit of $3 million that we disclosed in Q1 last year, driven by the Mexican peso. Operating margins were also impacted by acquisitions, which were a 40-basis-point headwind. Additionally, volume declines and unfavorable mix were a headwind to margin rates. Please go to Slide #7. Our International segment delivered revenue of $223.7 million, which was up 21.5% on a reported basis and down 5.3% organically. Organic revenue declines were the result of volume weaknesses in our mechanical business, primarily related to the ERP disruptions John discussed earlier. This was partially offset by growth in electronics and price realization. Net acquisitions contributed 15.9% to segment revenue. Currency was also a tailwind, positively impacted reported revenues by 10.9%. International adjusted operating income of $17.9 million decreased 4.8% versus the prior year period. Adjusted operating margin for the quarter decreased 220 basis points. Price and productivity net of inflation and investment was a 210-basis-point headwind, inclusive of operational inefficiencies associated with the ERP mentioned earlier. Additionally, volume declines were a headwind to margin rates, which was mostly offset by acquisitions. Please go to Slide #8, and I will provide an overview of our cash flow and our balance sheet. Year-to-date available cash flow was $80.3 million, consistent with the prior year. For 2026, we still anticipate our ACF conversion will be approximately 85% to 95% of adjusted net income. Next, working capital as a percent of revenue increased in the first quarter due to acquired working capital, which does not impact cash flow. Finally, our balance sheet remains strong, and our net debt to adjusted EBITDA is at a healthy ratio of 1.7x, which supports continued capital deployment. I will now hand the call back over to John. John Stone: Thanks, Mike. Please go to Slide 9. One quarter into the year, we are affirming our organic revenue growth outlook of 2% to 4% and adjusted earnings per share outlook of $8.70 to $8.90. We are raising our reported revenue outlook by 1 point to 6% to 8% to include the acquisition of DCI. You can find more details on our outlook in the appendix. While our core demand assumptions are unchanged from our February call, I'll provide some additional details on our view for the remainder of the year. In the Americas, our markets are largely as we expected to start the year, but we're experiencing higher inflation. Based on current conditions, we anticipate an incremental headwind of approximately 1% of COGS from tariffs and other inflation. We expect to offset this on a dollar basis through a combination of price and cost actions. However, given current volatility, we are not updating our organic growth assumptions to include any incremental price at this time, similar to our approach in the first quarter of 2025. Most importantly, we expect this to be neutral to 2026 adjusted operating income dollars and earnings per share. For international, we expect to catch up on production impacts from the ERP implementation during the remainder of the year, supported by existing orders and backlog in that business. Our core demand assumptions are similar to our prior outlook. And beyond the ERP catch-up, it's also important to note that our electronics businesses are a source of strength in the International segment, and we expect these to ramp seasonally through the year. We have not experienced a notable demand impact from the effects of the conflict in Iran and our exposure to the Middle East is negligible. For the organization, we're committed to serving our customers while remaining agile in the current macro and input cost environment. Please go to Slide 10. In summary, Allegion delivered nearly 10% revenue growth in Q1 and deployed capital effectively for the benefit of our shareholders. Before turning to Q&A, there's one more highlight from Q1 that I'm proud to share with you today. Allegion was honored for the third consecutive year with the Gallup Exceptional Workplace Award. This recognizes our team for fostering one of the most engaged workplace cultures in the world. And we are 1 of only 5 companies to earn this award with distinction in 2026. We know highly engaged teams deliver stronger results for our customers, our shareholders and our partners. With that, we'll take your questions. Operator: [Operator Instructions] Our first question will come from Joe O'Dea with Wells Fargo Securities. Joseph O'Dea: Can you hear me? Operator: Joe, please go ahead. Joseph O'Dea: Sorry about that. Getting used to this new format. Starting on the demand side in Americas, it sounds like spec activity largely pacing as expected. But just interested in any color on the time from spec to order, if you're seeing any elongation in that with respect to what you would normally see on spec to order and what you're currently seeing the degree to which tariffs and other inflationary pressure is behind that? And then just related, we have heard some comments around kind of data center crowding out and inability to service other projects because of data centers growing more activity and the degree to which you're seeing any that? John Stone: Yes, Joe, this is John. I'll get started there. And I'd say, like we said in the prepared remarks, spec activity is strong in nonres, might go so far to even call it very strong in recent months. And I'd say it's broad-based. We've got a portfolio and a channel reach that affords us broad end market exposure. So we're seeing broad-based growth on the spec side. Channel checks with our largest customers support that view. To the more detailed points of are we seeing elongation from spec to shovel ready or doors being hung, not really. I don't think that environment hasn't meaningfully changed. But that is the reason why we don't disclose a whole bunch of detail because the line of sight from a spec to revenue for us really depends on the vertical and the project. You could imagine smaller projects or maybe multifamily office renovations for tenant improvements could be pretty quick, something like a very large hospital complex could take a couple of years. But suffice it to say, spec activity has been strong. Channel checks also, we feel, support our outlook. On the question about data centers crowding out other projects, I would feel like not in our space do I see that really as an impact. That being said, I feel good about the position -- the competitive position we've carved out for doors and door hardware in data centers, and that it's a small part of our business, but it has been growing nicely. Joseph O'Dea: That's helpful detail. And then on the tariff side and the 1% of COGS headwind that you talked about, just in terms of how you're addressing that? Are surcharges already in the market? How much of this is price? How much of this is more kind of cost mitigation on your side? And is it primarily tied to the latest kind of tariff changes and the impact that it has from Mexico? John Stone: Yes. I think -- so there's been -- like the last many months, there's been a flurry of changes with respect to trade and tariff policy. IEEPA was declared on constitutional, right on the heels of that Section 122 was implemented. Soon after that, there was a wide range of Section 232 changes. And when you net all of that out, along with some inflationary pressures on fuel in particular, we see an impact -- a net impact of around 1 point of COGS. And think of the playbook we used a year ago. Some pricing actions, it could be surcharges, it could be list price increases, they are not yet in the market and that's why we're not yet updating any organic revenue guide as a result. We'll certainly announce that to the market to our customers first as we work through all of the details there. And as always, there's an enormous amount of details to work through on all the different trade policies. There are some cost actions that we're taking, I think, just normal hygiene for a company our size, and that will contribute. So when you add it all up, we expect to mitigate this on a dollar basis at the adjusted operating income line and net earnings per share. Michael Wagnes: Joe, maybe I'll just jump in and add. If you think about the mix between price and cost, obviously, it's going to come from more pricing than cost actions due to the size we discussed. But similar to last year, look for us to make sure that we're driving that price and productivity to cover that inflation and investment. That's something we've been talking to you for a number of years about. Operator: Our next question will come from Tim Wojs with Robert W. Baird & Company. Timothy Wojs: Maybe just the first question. I guess if I look at North America margins, I was wondering if you can maybe just add a little bit of color on some of the mix puts and takes this quarter. I think it's been a while since we've had kind of a negative mix impact in the bridge there. So maybe just add some color there as to what the drivers were, and how you see that kind of playing out for the rest of the year? Michael Wagnes: Yes, Tim. So if I bring you back to Q1 of last year, we had really strong volume leverage and positive mix. And what that was, it included mix within nonres. And specifically, our nonres business is so much more than just a lock. It's the mix between the different businesses within nonres. This quarter was a little different than Q1 of last year. So it was some negative mix. If you think of the Americas and you take a step back and think of the full year, don't look at -- don't expect to see a headwind for mix for the full year for the Americas. You did have a headwind in Q1, but full year, think of it like most years mix kind of evens out over the course of the year for the Americas. Timothy Wojs: Okay. Okay. So it's mostly product mix on -- within nonres. Okay. Michael Wagnes: It's product mix, yes. Timothy Wojs: Okay. I got you. I understand. Okay. And then I guess how -- to that, like how would you kind of expect margins in North America to kind of sequence through the year? I guess, that mix impact kind of drove it, I guess, a little kind of weaker Q2 than we -- Q1 than what we thought. So just trying to understand kind of how we should expect margins in North America to kind of pace this year? Like would you expect kind of a negative variance in Q2 as well? Just trying to think through those pieces. Michael Wagnes: Yes. As you think about -- let's talk just margin rate for the Americas. As you progress throughout the year -- obviously, in Q2, we do have the peso impact from Q2 of last year. I'll call that to your attention. We put that on the earnings deck of Q2 in '25. But throughout the rest of the year, expect most of the expansion to come in the back half of the year. We'll get better sequentially. You could think of the second quarter as improving from where it was in Q1 versus the prior year, but the Q3 and Q4 is where you really start to see the margin expansion. And then for full year, I'll just add, don't forget, obviously, for each of the quarters, we got to now put in DCI. DCI is going to be a margin rate impact. You could think of it as 30 basis points for a full year. Q1 obviously only had 1 month of activity. The last 3 quarters, obviously, will have 3 months. So those are the 2 items I would call out. But if you think about margin expansion, think of it more in the back half, and part of that is the comp that you're going up against vis-a-vis 2025. Operator: Our next question will come from Tomo Sano with JPMorgan. Tomohiko Sano: Can you hear me? John Stone: Yes. Tomohiko Sano: Okay. In first quarter, the Americas electronics business was up mid-single digits, which is a little step down from the double-digit growth seen in Q4. Could you provide more breakdown of volume versus price contributions for Q1? And any color on what drove the decelerations? And do you anticipate any changes in the growth perspectives after 2Q, please? Michael Wagnes: Yes. Tomo, if you think about nonres, we said in the prepared remarks, nonres was driven by price realization. Just to remind you, Q1 of last year, really strong volume growth in nonresidential. You could think of that at the higher end of mid-single-digit volume growth for nonres last year. So this year, obviously, a little less when you think of volumes. Full year for nonres, expect to see volume growth for the full year in nonresidential. I think that remains a strong market for us like we talked about. And so I think Q1 in nonres, if you think about volumes, part of that is just the comp in the prior year. John Stone: And Tomo, this is John. On the electronics side, yes, mid-single growth this quarter. Look, a year ago, it was double digit, very strong. I think when we still -- when we look over the cycle, if you will, we still see electronics being a long-term growth driver for Allegion. The adoption rates are still increasing and growing. And I think that is providing that point of outgrowth that we expect to achieve. So I still feel good about our position in electronics. We're still rolling out new products, and I think still stand firm that, that's a long-term growth driver for the company. Tomohiko Sano: Just 1 follow-up. There was a commentary that ERP implementation and legacy mechanical business were key headwinds for the International segment in Q1. Were there any execution challenges associated with these factors? How do you view the prospects for recovery in International operations from second quarter, please? John Stone: Yes. It's a very timely question, Tomo. And yes, the ERP implementation was limited to one of our legacy mechanical businesses in Europe. And so while we haven't sized that exact amount, it does explain most of the organic revenue and margin decline in the quarter. I would say, since I've been here in Allegion, we've done a lot of ERP implementations. It's a core part of just investing in the core business. And we've had a lot of very old systems to update. This was one of them. We've never had to talk about this before. Every other ERP implementation has gone very well, this one we've just had a lot of struggles with. As I said in the prepared remarks, very recently, our production rates are getting back on track. And so it's not a demand issue either. The customer orders are there, the backlog is there, it's our execution that needs to improve. And I think it is improving. I do have confidence we will recover the Q1 shortfall over the course of the year. Operator: Our next question will come from Jeffrey Sprague with Vertical Research Partners, LLC. Jeffrey Sprague: John, just picking up on the ERP. So are there any other implementations that you're planning for this year? Have you -- are you done upgrading what you want to do in Europe? And also, just to comment on catching up. I've seen companies before have these snafus and they don't catch it up, right, because you fail to deliver so somebody else fill that void so you can get back to run rate, but maybe not lose -- regain what you lost. So maybe just a little bit more context on that. John Stone: Yes. Jeff, those are very salient points and something we're watching very, very carefully. I would say we have been holding on to the customer orders. We still have more inbound customer orders. We do have a backlog that supports our commentary, and our execution is improving. And so I do feel confident that we'll recover this Q1 shortfall over the balance of the year. It won't all happen like immediately, but it will happen over the balance of the year. I think as I mentioned, we've done a bunch of these implementations over my tenure here at Allegion. We do have more in the works. There are more businesses that do need these system upgrades. And I don't anticipate we're going to have a problem like this again. Jeffrey Sprague: And could you just maybe address also Europe in a little more detail, right? Not a lot of direct Middle East exposure, but Europe is probably most prone to seeing collateral economic damage first from what's going on. Is there any visible change in tone there, business trajectory, orders, just kind of year to the ground, what you're seeing real time in those markets? John Stone: It's a good question. And I'd say, consistent with our prepared remarks, the demand has shaped up about the way we saw it shaping up when we introduced the guide back in February. The big miss was, again, our own challenge with that ERP. So our electronics businesses in Europe still performing well. Our acquisitions in Europe are basically right on track, so feel good about those elements. Like in general, markets are still not super strong and agree they are more directly impacted by the 2 active conflicts, but I think market demand is about how we saw it at the February guide. Operator: Our next question will come from Joe Ritchie with Goldman Sachs. Joe, please unmute your line and ask your question. Okay. We'll circle back to Joe. Our next question will come from Julian Mitchell with Barclays Equity Research. Julian Mitchell: Maybe just based of the commentary around the Americas margins being down year-on-year in Q2 and also the fact that the International catch-up on ERP isn't all coming in the quarter of Q2, should we expect that this year is a bit more back-end loaded than normal in terms of kind of first half, second half EPS contribution? I think in recent years, you have been sort of 47%, 48% of EPS in the first half. Should we think this year is maybe more like mid-40s because of that Americas margin pressure and ERP headwind? Michael Wagnes: Yes, Julian, as you know, we don't really give quarterly guidance, right? So if I give first half, second half, I'm giving an EPS for Q2. I'll just share just a little more from what I said earlier. In the Americas, I wouldn't expect big headwinds on margin rates year-on-year in the second quarter. I just don't expect to see much expansion there, right? So you can think of it as not expansionary. For International, International, I think it's fair to say, second quarter, a little softer versus last year on margin rates. Similar to Q1, we talked about the sequential improvement versus Q1 of '26 will be similar to the sequential improvement you saw in '25. And then you start to see it recover some. If you think of the Americas, though, think of it more, a little more margin expansion in the back half of the year. This is not a massive margin expansion delta, it's more margin expansion in the back half and you know what Q1 was. Julian Mitchell: That's helpful. And then just on the kind of PPII, you had that 40 bps margin headwind in the first quarter kind of total company. How are you thinking about that sort of play out over the balance of the year? I think when I'm thinking about sort of total margins, you've got a volume improvement to margin rate in the back half from easier sort of volume comps so that helps with that margin step up in the second half. But just wondering kind of any puts and takes on PPII, how is kind of pricing playing out and competition and that type of thing, please? Michael Wagnes: Yes. So obviously, you saw the headwinds in Q1. If I break it out between the 2 businesses, similar to what you would expect in margin rates, Americas, expect to see for the full year, right? Our full year PPII, expect to see some margin expansion there, dollar positive. International is going to be a little tougher this year. So at an enterprise level, I expect the total company to be roughly around the Americas for the full year, a little more in the back half than first half obviously. Q1 was poor, second quarter, certainly better than what you saw in the first quarter. And then think about the core business. We expect this business to get back to that core incrementals we outlined at Investor Day, right, the core ex acquisitions and currency of that 35% plus as you think of our business for the remainder of the year. Operator: Our next question will come from Joe Ritchie with Goldman Sachs. Joseph Ritchie: Okay. Great. Moving around just the International segment, right? This is a segment that, historically, you've tried to scale via acquisition. I recognize that you had the issues with ERP this quarter and that impacted it. But I'm curious, like as you kind of think about like does it make sense for Allegion to have an international presence? The domestic business is doing so well. Is there -- does it ever make sense for it to be more of a domestic centric company and maybe it's just too difficult to scale the business internationally? John Stone: Yes. I think probably Q1 earnings call is not the time to have such a conversation, Joe, but I would say one business with an ERP challenge that we haven't had before driving a miss. I don't think such a extreme conversations are necessary right now. I'd say we've been very pleased with the growth we've seen in International. We've been very pleased with the portfolio improvements we've seen in International. The market conditions have been rather soft, but our teams have performed well. And one what I consider a temporary blip on the legacy mechanical side with this ERP implementation, we're going to overcome that. I have confidence there. It's not a demand issue. We've got some operating performance that needs to improve, and we'll improve it. Joseph Ritchie: Fair enough. And then, I guess, just the follow-on is just around capital deployment. Just given kind of like the start to the year from a share perspective, I'm just wondering like how you're thinking about buyback versus M&A at this point? John Stone: Yes, it's a great question, Joe. And I think as you saw in Q1, we did repurchase $40 million worth of shares. And you saw that our Board authorized a $500 million share repurchase program. So I think, that being said, our expectation and your expectation of us should be balanced, disciplined and consistent capital deployment for the benefit of our shareholders. And certainly, we understand where we're trading right now. And I'd say, on top of that, our M&A pipeline is active with good quality, bolt-on acquisitions. So I would say expect us to do both for the benefit of our shareholders. Operator: [Operator Instructions] Our next question will come from [ Reef Judd Rose. ] Unknown Analyst: I just wanted to follow up on the electronics growth in the quarter, just the mid-single digit. I think in the fourth quarter, it was low double, which is what you did through 2025, if I remember right. You're calling out like a tougher comp there. How should we think about that growth through 2026? And maybe just a little bit more color around the deceleration? Michael Wagnes: Yes. I have to apologize. When I answered that previous question, I struggled to hear the question. I answered about the nonres business, so I apologize. With respect to electronics, electronics was really strong for us last year, right? And it was strong in each of the 4 quarters. I expect to see electronics to be a long-term driver of growth for us. We keep on talking about this, including Investor Day. Quarter-to-quarter, it can move around a little. But if you think about electronics for us, think of it as, hey, this is going to be the accelerated growth driver. And over the course of the year, it tends to outgrow the mechanical. We expect that to be the case for 2026 as well. Unknown Analyst: Okay. That's helpful. And then just on the 1% of incremental inflation on COGS, is there any way to parse out how much is tariffs or like incremental 232 versus just broader metals inflation and anything else? And then just the -- you've had a lot of success historically offsetting price. How do we think about the cadence of that through the year? How much of a lag is there between when you start to see the inflation versus when you can raise price? Michael Wagnes: Yes. If you think of our business, we try to manage all cost inputs. So when we talk about it, we talk about pricing and productivity has to cover that inflation in those incremental investments. Tend not to give details by each subsection, just think of it as a total cost inflation number we provided. And then as far as lags, I would say, historically, there is a little lag between pricing and inflation, meaning the inflation could be a little sooner, but it's not enough where I would call it to your attention to change it much. What you tend to find is the cost inflation comes, but it sits on the balance sheet until it gets sold and flush through COGS. So it's not that dissimilar historically. We'll continue to monitor it. And as there's updates throughout the year, we'll just provide you more details. Operator: Our last question will come from Alexander Virgo with ISI Evercore. Alexander Virgo: I wondered if you could just dig a little bit more into the ERP impact. Just what was it that surprised you? What was it that went wrong? And I guess, I appreciate your point that you've implemented many of these in the past and not had to talk about them before. So what is it that, that you're taking away from this to ensure it doesn't happen again? And then if I could just follow up on the electronics side of things. Are you happy that you can get what you need from the perspective of chips and supply chain? Do you have enough buffer? Is it just a case of pricing that will end up coming through there? John Stone: Yes. Good question. So on the ERP, again, it's just a case of a legacy system been in place and highly customized over 25, 30 years, people got very accustomed to it. New workflows just slowed us down in this legacy mechanical business. And people are adjusting to it, people are adapting to it, people are learning and getting better with the new system. Again, as we've turned the chapter into 2Q, I do see our production rates are improving, our demand still supports the outlook, customer orders backlog still support the recovery and our operating performance is giving us confidence that we will recover the Q1 shortfall over the balance of the year. Then shifting over to electronics on the supply chain, certainly with the conflict in the Middle East, we've been watching component supply chains very carefully. Haven't yet seen any major disruption, and I do feel, as a company, we're better positioned with respect to electronic supply chain than we were back in the pandemic time frame. Operator: Our next question will come from David MacGregor with Longbow Research. David S. MacGregor: I just want to go back to the mix question and it was asked earlier. Just in the Americas business, how much of the margin pressures are, you think, resulting from the introduction of more value-oriented products like the Performance Series and the Von Duprin 70 and those products? Michael Wagnes: I don't think it's that, David. It's really the mix. This isn't a case where someone is trading down. This is the mix between the various businesses that we have. And so it's not a case where you're trading from a high price point to a mid-price point offering. It's more of the mix between the various product lines that we offer. David S. MacGregor: So you're not seeing any change in terms of how these jobs are being spec'd in terms of more value orientation? Michael Wagnes: No, no. I would not say that's the case at all. David S. MacGregor: Okay. All right. And just a follow-up, I guess, on the residential business, are you confident that you held market share in that business this quarter? And I guess, what are the strategic options available to you to maybe affect a stronger position versus some of the secular trends? John Stone: Yes. I think, David, on the resi side, for a while now we've been dealing with just a relatively soft end market. We've still seen electronics growth in resi. I think that has been a positive for us and continue to introduce new products in the electronics segment. As you've heard from, I think a lot of companies new build is very soft, aftermarket is probably just treading water. And so overall, the market remains a little bit soft. I think in terms of our share, all the indicators that we watch on, on point-of-sale and other things would indicate, yes, our market share is definitely holding up. Operator: At this time, I see no callers in the queue. So I'll now hand back to the CEO, John Stone, for closing remarks. John Stone: Well, thank you all very much for the Q&A and attending the call today. We look forward to connecting with you on our Q2 earnings call in July. Be safe, be healthy.
Operator: Welcome to the Five Star Bancorp First Quarter Earnings Webcast. Please note, this is a closed conference call and you are encouraged to listen via the webcast. After today's presentation, there will be an opportunity for those provided with a dial-in number to ask questions. Before we get started, we would like to remind you that today's meeting will include some forward-looking statements within the meaning of applicable securities laws. These forward-looking statements relate to, among other things, current plans, expectations, events, and industry trends that may affect the company's future operating results and financial position. Such statements involve risks and uncertainties, and future activities and results may differ materially from these expectations. For a more complete discussion of the risks and uncertainties that may cause actual results to differ materially from the company's forward-looking statements, please see the company's Annual Report on Form 10-K for the year ended 12/31/2025, and in particular, the information set forth in Item 1A, Risk Factors. Please refer to Slide 2 of the presentation which includes disclaimers regarding forward-looking statements, industry data, unaudited financial data, and non-GAAP financial information included in this presentation. Reconciliations of non-GAAP financial measures to their most directly comparable GAAP figures are included in the appendix to the presentation. The presentation will be referenced during this call but not followed exactly and is available for closer viewing on the company's website under the Investor Relations tab at fivestarbank.com. Please note this event is being recorded. I would now like to turn the presentation over to James Beckwith, Five Star Bancorp President and CEO. Please go ahead. James Beckwith: Thank you for joining us to review Five Star Bancorp financial results for Q1 2026. These results were released yesterday and are available on our website, fivestarbank.com, under the Investor Relations section. Joining me today is Heather Luck, Executive Vice President and Chief Financial Officer. Q1 2026 marked another period of outstanding achievement for Five Star Bancorp. Underscored by robust growth across all markets we serve and consistent strong performance. During the quarter, we continued to deepen our client relationships and expanded our presence in key geographies while investing in both talent and technology to support ongoing organic growth. Our commitment to disciplined execution and differentiated customer service was evident in our solid results. Q1 2026 earnings per share increased to $0.87 per share, up $0.40 per share from the prior quarter, with annualized growth in loans held for investment of 14% and annualized deposit growth of 26%. We remain well positioned to capitalize on new opportunities and drive sustainable value for our shareholders, customers, and communities. Financial highlights during Q1 2026 include net income of $18.6 million, up 6% from the prior quarter; return on average assets of 1.55%, an increase of 5 basis points from the prior quarter; return on average equity of 16.73%, an increase of 76 basis points from the prior quarter; net interest margin of 3.7%, an increase of 4 basis points from the prior quarter; and average cost of total deposits of 2.13%, a decrease of 10 basis points from the prior quarter. Our Q1 results were driven by robust loan and deposit growth. Loans held for investment grew by $138.5 million, or 14% on an annualized basis. Total deposits grew by $268.3 million, or 26% on an annualized basis, with non-wholesale deposits up $350.2 million offsetting an $81.9 million reduction in wholesale deposits. This shift reflects our focus on building stable, relationship-based core deposit funding. Our asset quality remains strong, with nonperforming loans representing just 7 basis points of total loans held for investment, a reflection of our conservative underwriting. We continue to be well capitalized with all capital ratios well above regulatory thresholds for the quarter. We remain committed to delivering value to our shareholders. In Q1, we paid a cash dividend of $0.25 per share and declared an additional $0.25 dividend expected to be paid in May 2026. Our total assets increased by $276.9 million during the quarter, largely driven by loan growth within the commercial real estate portfolio, which increased by $116.2 million. Competition has increased, but our loan pipeline remains strong. Ongoing uncertainty surrounding energy supply chains and global economic consequences of the Iran conflict has triggered volatility in interest rates. We believe we are well positioned for changes in interest rates, as approximately 75% of our loans held for investment are adjustable or floating. This gives us flexibility to respond to market shifts and helps protect our earnings in a volatile environment. Our prudent underwriting standards, comprehensive loan monitoring, and focus on relationship-driven lending have contributed to maintaining strong credit quality. As a result, we have a very low volume of nonperforming loans, which declined by $280,000 during the quarter. We recorded a $2.7 million provision for credit loss during the quarter, primarily related to loan growth. The increase in total liabilities during the quarter was the result of growth in interest-bearing and noninterest-bearing deposits, related to both new accounts and inflows from existing customers. Non-wholesale deposits increased by $350.2 million while wholesale deposits decreased by $81.9 million. Noninterest-bearing deposits accounted for approximately 28% of total deposits, an increase from approximately 26% as of December 31, 2025. Approximately 61% of our total deposit relationships totaled more than $5 million. These deposits have a long tenure with the bank, with an average age of approximately eight years. We believe our deposit portfolio to be a stable funding base for our future growth. On that note, I will now turn the call over to Heather Luck for the results of operations. Heather Luck: Thank you, James, and hello, everyone. Net interest income increased to $43.5 million, a 3% increase from 2025, supported by both volume and margin expansion. Our net interest margin improved to 33.7% from 3.66% in the prior quarter, reflecting disciplined pricing and a favorable mix of assets, and interest income increased by $926,000 from the previous quarter, mainly due to a 4% increase in the average balance of loans. The increase in interest income was augmented by a $166,000 decrease in interest expense due to a 10 basis point decline in the average cost of deposits. While the average balance of deposits increased by 5% during the quarter, a 5% increase in the average balance of noninterest-bearing deposits combined with a decrease in the costs associated with deposits resulted in a net decrease in total interest expense. Noninterest income increased to $1.6 million in the first quarter from $1.4 million in the previous quarter, primarily due to an increase in fees from swap referrals and a special FHLB stock dividend recognized during the three months ended March 31, 2026, partially offset by an overall decline in earnings related to investments in venture funds. Noninterest expense decreased by $263,000 in the three months ended 03/31/2026. This is primarily due to the release of a $1 million loss contingency on an SBA loan that did not occur during the prior quarter. This was partially offset by an increase in salaries and employee benefits related to increased headcount to support customer-facing and back-office operations. Our efficiency ratio improved to 38.57% from 40.62% in the prior quarter, primarily driven by the release of the loss contingency. The provision for income taxes for the quarter ended 03/31/2026 increased by $1 million as compared to the prior year, primarily due to an increase in taxable income recognized and a net reduction in transferable tax credits recognized during the quarter of approximately $664,000. And now I will hand it back to James for closing remarks. James Beckwith: Thank you, Heather. Five Star Bancorp's success serves as strong testimony to clients who value our team of committed professionals who provide authentic relationship-based service. We continue to ensure our technology stack, operating efficiencies, conservative underwriting practices, exceptional credit quality, and prudent approach to portfolio management will benefit our customers, employees, community, and shareholders. As we look to Q2, we remain committed to our disciplined approach to growth, prudent risk management, and delivering value to all of our stakeholders. We are excited about the opportunities in our markets and confident in our ability to continually execute on our strategic priorities. Our focus will remain on expanding our presence in key geographies, deepening client relationships, and investing in technology and talent to support our long-term success. We appreciate your time today. This concludes today's presentation. We will now open the call for questions. Operator: We will now begin the question and answer session. To ask a question, those dialed in may press star then 1 on your telephone keypad. If you are using a speakerphone, please pick up your handset before pressing the keys. The first question today is from Evan Kwiatkowski with Raymond James. Please go ahead. Analyst: Hey, this is Evan on for David Pipkin Feaster. Good morning, everybody. I just wanted to start on the Southern California expansion announced earlier. I know it is early innings, but on a high level, I am just curious what you are most excited about for that market and how the team down there has been ramping up so far. I also wanted to gauge your thoughts on potential de novo expansion in Southern California alongside those hires and how you see that market evolving broadly. James Beckwith: Well, thank you for the question. We are very excited about the team that we brought on. We have four business development officers and two support staff. They are very confident, and so far, deal flow seems to be very, very strong from them. It is a lot of fun for us engaging with them in a market which is just substantial—much bigger market than Northern California, as you know—and so the deal flow that we are seeing right now are just great credits, C&I-based, and we are excited about the opportunities that the team is presenting us. In terms of de novo operations or potentials, we have a team in Newport Beach right now and then we have a team up in Los Angeles County and Ventura County. As they continue to mature and develop, the next step for us would be to open a full-service office in those localities. But we want to see substantial growth coming from those teams, and it will help us get to where we want to be ultimately, which is to have full-service offices. Analyst: That is really helpful. Excited to see how that develops. And then maybe sticking on the growth side, originations were really strong during the quarter. I am just curious where that is coming from broadly. Is it more a function of increasing demand in your markets or increasing contribution from existing bankers or new hires? And then maybe just curious where you are seeing the most opportunity for growth within specific segments as well. James Beckwith: It is coming from a lot of different places. Our existing business development people—we now have 46 of them working for the company, but during the quarter it was 42—and everybody is producing. Everybody is doing quite well across our verticals and our geographies. We are seeing substantial growth coming from all the way up into Redding, all the way down to Walnut Creek in the Bay Area, and our ag team also is doing quite well. So we are hitting on a lot of cylinders right now in terms of deal flow and really good relationships that our seasoned professionals are bringing in. I could not really single out one, but maybe on the depository side, our government book has done quite well on growth in relationships. We are excited about that. Our manufactured home and RV folks are doing well also. But it is coming from a lot of different sources, which we are all very, very excited about. Analyst: On the deposit side, it was good to see the growth during the quarter, which allowed you to pay down some wholesale funding. What was primarily driving that, and do you see any opportunities for additional funding cost leverage from here, especially given the prospect of no Fed cuts this year? James Beckwith: Right. We are going to continue to focus on reducing our wholesale deposit book, with a desire to be out of it by 12/31. Hopefully, we will be able to do that more quickly. That is our plan. So that will provide maybe some relief in our interest cost, and it is really going to be dependent upon continuing to push deposits. The value of our franchise, we recognize, is in our deposit base, and we are executing quite well on that in terms of bringing on new relationships. Noninterest-bearing deposits saw substantial growth in Q1, and we hope and expect to see that growth continue. As I mentioned previously, our government banking team has done quite well. That team really covers the entire state. Their focus is on cities and counties, but moreover their focus is really on special districts, and they have done quite well in that space. Their pipelines remain very strong, so we are excited about that. Analyst: That is great. Thanks, guys. Great quarter. James Beckwith: Thank you. Operator: The next question is from Woody Lay with KBW. Please go ahead. Woody Lay: I had a follow-up on deposits. The focus is continuing to pay down wholesale deposits. But if I look over the past year, it is pretty incredible the mix change that has undergone there. Is that being driven by some of these sub-verticals that have allowed you to grow core deposits? Is it new customers to the bank? Is it expanding the wallet of current customers? Would love your take on that. James Beckwith: It is a great mix between deposit flow from existing customers and new relationships that we brought on. Often a deposit relationship—or any banking relationship—takes a while to mature, and so we are seeing some growth coming from the business that we put on in 2025 as those relationships kind of work their way over to us, Woody, and so that is exciting. But also, our first three months have been very strong in terms of new deposit growth and new accounts, so we are excited about that. Again, our government book has done quite well, but our growth in deposits is coming from all different types of verticals. It is very much aligned with our objective to pay down our wholesale book. It is pretty evident what we have been able to do for the last six months with that, and hopefully we will be out of brokered deposits, as I mentioned, by 12/31. We would certainly like to do that more quickly than by the end of the year, and we will see how the second quarter goes. Woody Lay: I would imagine paying down the brokered has been a positive to net interest margin, and we saw the NIM take another step up in the first quarter. How are you thinking about continued NIM expansion from here, especially if cuts are flat, and then the incremental impact that rate cuts could provide? James Beckwith: We do not know how much juice is left in terms of the impact rates will have on our NIM. We are kind of thinking it is settling around where it was for the quarter. But we do expect increases in net interest income to come from growth, and that is our sense right now. NIM might move up a couple of basis points, but nothing substantial like we have seen for the last four quarters. We are settling in on this NIM range of 3.70% to 3.75%. Hopefully we can maintain it there and have net interest income being driven by growth. Woody Lay: On loan growth, it remains really strong. I have heard anecdotal commentary across the industry of some increased competition, especially among bigger banks. Are you seeing that within your footprint? James Beckwith: We have been doing this for quite some time, and competition is always present. We mentioned it in the script—competition is out there. Yes, on good deals, people are fighting for them, and you have to be careful that your growth is spread out amongst several relationships and your pricing is something that you can make money on. We know it is going to be competitive for the best deals, and that is our mindset when we come to work every day. We are winning our fair share—we are not winning everything. If we were winning everything, maybe we are not pricing it right. The function of our growth—what is really driving it—is just the number of people we have, the boots on the ground so to speak, relative to our size. In total headcount, we just have more business development people, so the opportunities that are coming to us are really being driven more than anything else by the number of folks we have in the space. Woody Lay: That all sounds good. Thanks for taking my questions. James Beckwith: You bet. Operator: The next question is from Andrew Terrell with Stephens. Please go ahead. Andrew Terrell: Good morning. I wanted to stick on margin and deposits for a bit. How much of the deposit growth this quarter was related to the government or the special district business line? And I would love to get a sense for where you are bringing on, cost-wise, the incremental dollar of core deposits versus what is rolling off on the wholesale side—pricing-wise. James Beckwith: The growth in our government book in the first quarter was quite substantial, as I mentioned. It is about $189 million to $190 million, so it really drove the overall increases in deposits. Other verticals did quite well also, but that one kind of stands out. Now, that money that came in is really priced right on top of our brokered deposit book, so there is no incremental pickup, if you will, in terms of cost reduction with that money coming in versus having the brokered deposits go away. For some of these counties, that is their liquidity, and we hope to bring on some noninterest-bearing deposits through that process with those relationships, and we have. But a lot of that growth is really coming right at the margin. Heather Luck: And just for reference, to compare the two: our brokered book at the end of the quarter was sitting at about 3.82% for the actual brokered deposits, and the ladder rate is about the 3.80% range. So we are pretty much just swapping dollar for dollar. Andrew Terrell: Okay, makes sense. On the noninterest-bearing deposits—fantastic growth this quarter. Was there anything in the end-of-period figure for noninterest-bearing, which I think was $1.23 billion, that was elevated specifically at period end and has normalized in the second quarter so far, or is that a good base to work off of? I am asking because it is a lot higher than the average. James Beckwith: A couple of things drove noninterest-bearing deposits. One, we do have a title company that is doing quite well—pretty big relationship. Also, with some of our folks in our Newport Beach office, they are bringing on their customer base, which is escrow companies, and all those monies are noninterest-bearing. We expect to continue to see growth in our Newport Beach office from those two folks that we brought on. In combination with that and all the other C&I business we have been doing up and down the platform, that really drove noninterest-bearing deposits. Those two matters kind of stand out. Andrew Terrell: Last one from me: I think last quarter we talked about kind of 10% growth for the year on both sides of the balance sheet. You are pretty close on the deposit side already. Any updated expectations on the pace of balance sheet growth or targets for the year? James Beckwith: We guided pretty consistent with what our plan is, but obviously we exceeded that, which is a good thing. We could probably see maybe 10% to 12% growth on both sides of the balance sheet for the remainder of the year, but we will have to see how it goes. We are excited—our pipelines are pretty robust right now, frankly. With the bringing on of this new team in Southern California, we expect to really drive growth on both sides—both deposits and loans. Their book and their client and prospect base are really very strong C&I operating companies, which will bring in some nice noninterest-bearing deposits. So that is where we are right now on that 10% to 12% growth. Andrew Terrell: If I could ask one last one: normalizing the expense base, it looks like $18.4 million or so for the quarter. Can you update your thoughts on the expense run rate going forward? Heather Luck: You could probably add back $1 million to adjust for the release of the accrual. But if you add about $500,000 to that, we are still consistently falling in that $14.8 million to $15.5 million range, and I think we will stick to that probably for the next quarter or two. Andrew Terrell: Great. Thanks so much. Operator: The next question is from Gary Tenner with D.A. Davidson. Please go ahead. Gary Tenner: Thanks. Good morning. I wanted to ask a follow-up, James, to your comments a moment ago on the Newport office and bringing escrow company deposits. Does any of that start leaning into deposits that show up on the expense line from any kind of earnings credit noise, or are these pure noninterest-bearing deposits? James Beckwith: The earnings credits are pretty robust in that space, and we are not doing anything in terms of earnings credit rate for those new customers outside of what the market rates are. But there will be some expense associated with that based upon those earnings credits. We fully expect that and have planned for it, so it has a cost, to your point, Gary. Gary Tenner: Thanks for that. Also a follow-up on expenses in general. You have been year-over-year expenses up about 20%, first quarter to first quarter, adjusted for that $1 million SBA liability. Obviously you are built for growth. Is the pace of investment changing at all over the next 12 months versus the last 12 months in terms of hires, etc.? James Beckwith: We are investing in the business. We announced this month that we are bringing on—I guess the announcement was five people, but we are actually bringing on six. That is a substantial cost. These folks are not cheap, and we will continue to invest back in the business because, take the Bay Area, we are desirous of being in the South Bay from Palo Alto all the way down to San Jose. We are obviously looking at opportunities there. So we are going to continue to invest. Your question is, is the pace going to be consistent with what it has been in the past? The answer, I think, is yes. Heather Luck: I think we are following what really worked well in the Bay—hiring smaller teams of people and smaller tranches of people. We are starting to do that in Southern California as well, and that has worked really well for us to integrate them into the company. You are going to have some stair-stepping, and we will have some resets each quarter on what our new expectation for expenses are. That likely will happen over the next year or two. Gary Tenner: You have clearly developed a playbook that works for moving to new markets. I appreciate the thoughts on that. James Beckwith: Thank you. Operator: Showing no further questions, this concludes our question and answer session. I would like to turn the conference back over to management for any closing remarks. James Beckwith: Thank you. I want to reiterate our appreciation for the trust and support of our shareholders, clients, and employees. The results we shared today are a direct reflection of the dedication and hard work of our entire Five Star Bancorp team, as well as the enduring relationships we have built with our customers and communities. It is our privilege to continue to be a driving force of economic development, a trusted resource for our clients, and a committed advocate for our communities. We look forward to speaking with you again in July to discuss earnings for Q2. Have a great day and thank you for listening. Operator: The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.