加载中...
共找到 39,028 条相关资讯
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.
Operator: Thank you for standing by. My name is Carly, and I will be your conference operator today. At this time, I would like to welcome everyone to the NexPoint Residential Trust, Inc. Q1 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. If you would like to ask a question during this time, simply press star followed by the number one on your telephone keypad. If you would like to withdraw your question, press star one again. Thank you. I would now like to turn the call over to Kristen Griffith, Investor Relations. Please go ahead. Thank you. Good day, everyone, and welcome to the NexPoint Residential Trust, Inc. conference call to review the company's results for the first quarter ended 03/31/2026. Kristen Griffith: On the call today are Paul Richards, Executive Vice President and Chief Financial Officer; Matthew Ryan McGraner, Executive Vice President and Chief Investment Officer; and Bonner McDermett, Vice President, Asset and Investment Management. As a reminder, this call is being webcast through the company's website at nxrt.nexpoint.com. Operator: Before we begin, I would like to remind everyone that this conference call contains forward-looking statements. Kristen Griffith: Forward-looking statements within the meanings of the Private Securities Litigation Reform Act of 1995 that are based on management's current expectations, assumptions, and beliefs. Listeners should not place undue reliance on any forward-looking statements and are encouraged to review the company's most recent Annual Report on Form 10-K and the company's other filings with the SEC for a more complete discussion of risks and other factors that could affect any forward-looking statement. The statements made during this conference call speak only as of today's date, and, except as required by law, NexPoint Residential Trust, Inc. does not undertake any obligation to publicly update or revise any forward-looking statements. This conference call also includes an analysis of non-GAAP financial measures. For a more complete discussion of these non-GAAP financial measures, see the company's earnings release that was filed earlier today. I will now turn the call over to Paul Richards for the financial results. Please go ahead, Paul. Paul Richards: Thank you, Kristen, and welcome everyone joining us this morning. We appreciate your time. I will cover our Q1 2026 financial results and then walk through a refresher on our full-year outlook. Matthew will then discuss the operating environment, our technology platform and AI strategy, as well as portfolio positioning. Q1 2026 results are as follows. Net loss for the first quarter was $6.8 million, or $0.27 per diluted share, on total revenue of $63.5 million. This compares to a net loss of $6.9 million, or $0.27 per diluted share, in Q1 2025 on total revenue of $63.2 million. Total NOI was $37.6 million across 36 properties, including Sedona at Lone Mountain, which we acquired last December. This compares to $37.7 million on 35 properties for Q1 2025. On a same-store basis across our legacy 35 properties and 12,984 units, total income was $61.4 million, down 2.2% year over year. Total operating expenses declined 1.6% to $24.8 million, resulting in same-store NOI of $36.7 million, a 2.7% decrease, and an NOI margin of 59.8%. Same-store occupancy closed the quarter at 93.6%. While the year-over-year comparison reflects the tail end of a supply-driven pricing reset, our monthly trajectory is improving materially, and Matthew will walk you through that cadence and the structural factors driving our confidence in the second half. We reported Q1 core FFO of $17.3 million, or $0.68 per diluted share, $0.03 better than consensus, compared to $0.75 per diluted share in Q1 2025. The year-over-year decline is primarily driven by interest expense, which I will address now. We have always been transparent that 2026 carries a meaningful interest expense headwind as certain swap positions fall off. Q1 total interest expense was $15.4 million versus $14.4 million in Q1 2025, with the swap benefit declining from $8.4 million to $5.5 million. Since we issued initial guidance in February, the forward SOFR curve has shifted 7 to 47 basis points higher across the remaining quarters of 2026. This adds approximately $2.2 million, or roughly $0.08 per diluted share, of incremental interest expense versus our original assumptions. Q1 came in essentially in line with our prior model. Q2 is modestly higher, Q3 steps up as swap positions begin to expire, and Q4 reflects the full run-rate impact. Full-year 2026 interest expense is now projected at $69.3 million versus $67.1 million in our original model. We do not attempt to forecast rates. We manage the risk. The same volatility that has moved the curve against us in recent weeks creates the entry points for our next swap execution. We have visibility into the maturity schedule and the optionality to execute forward-starting hedges before September, and we will move when economics are compelling, as we did with the $100 million JPM forward swap last April at 3.49%. We are not waiting for September 1. Interest rate swaps currently fix the rate on $917.5 million, or 62%, of floating-rate mortgage debt. We continue to evaluate opportunities to layer additional hedges and will act when risk-adjusted economics are compelling. Moving to expense detail. On the expense side, same-store operating expenses improved 1.6% year over year. Payroll declined 4.3%, a direct output of the centralized operating model and AI-enhanced leasing platform that Matthew will discuss in detail. Real estate tax decreased 11.2%, and insurance declined 23.5%, partially offset by a 15.2% increase in repairs and maintenance, which included bulk fiber service contract costs offset by revenue gains, and a 50.5% increase in marketing spend as we invested in lease-up velocity at properties below target occupancy. The repairs and maintenance increase reflects two primary drivers. First, we accelerated deferred maintenance at several properties as part of a deliberate portfolio quality initiative. Second, we incurred elevated one-time costs associated with lender-required CapEx at select Florida properties. These are episodic expenses that position the affected units for improved performance and do not reflect a structural change in our cost base. Importantly, our expense outlook is steady relative to our original model. Operating expense is on track, as is corporate G&A. On insurance specifically, we settled rates for our new policy renewal on April 1, achieving a 13.3% reduction year over year, better than the strongest end of our originally guided range of 0% to negative 10%. Moving to the value-add update. During the first quarter, NXRT completed 252 full and partial upgrades and leased 225 upgraded units, achieving an average monthly rent premium of $69 and a 19% ROI. Since inception, NXRT has completed over 10,100 full and partial interior upgrades across the portfolio, generating average monthly premiums of 13.3% and inception-to-date ROIs of 20.7%. In addition, we have completed 5,027 kitchen and laundry appliance upgrades and 11,199 tech packages, generating ROIs of 63.5% and 37.2%, respectively. For Q1, we declared a dividend of $0.53 per share, paid 03/31/2026. Since inception, we have increased our dividend 157.3%. We remain fully committed to the current distribution level. At our core FFO guidance midpoint, coverage stands at approximately 1.21x, and we expect coverage to improve as revenue trends strengthen through peak season into 2027. On the balance sheet and liquidity. On 01/30/2026, the company entered into a 55% LTV, $40.3 million mortgage loan secured by Sedona at Lone Mountain with Newmark. The loan matures on 02/01/2033, with all principal due at maturity, and bears interest based on 30-day average SOFR plus a margin of 1.23%. As of 03/31/2026, total indebtedness was approximately $1.6 billion at an adjusted weighted average interest rate of 3.3%, with $18.5 million of unrestricted cash and $143 million of undrawn capacity on our credit facility, providing approximately $161.5 million of available liquidity. We have no scheduled debt maturities until 2028, when our $33.8 million 4.24% fixed-rate loan matures at Residences at West Place. That loan should be easily refinanced with a new agency senior when the time comes. NAV per share. Our estimated net asset value at quarter-end is $47.70 per diluted share at the midpoint, using a blended cap rate of 5.5% across the portfolio. The range spans $40.66 at a 5.75% cap rate to $54.74 at 5.25%. Based on approximately 25.6 million diluted shares outstanding, the closing stock price as of yesterday at $26.36 represents a 44.7% discount to our midpoint NAV. Even at the most conservative end of our range, the stock trades at a 27% discount to estimated liquidation value. We believe the disconnect between public market pricing and the underlying real estate value is significant. The capital recycling initiatives we will discuss provide a path to validating these values through third-party transactions. 2026 guidance reaffirmed. We are reaffirming our full-year 2026 core FFO guidance range of $2.42 to $2.71 per diluted share as well as our same-store NOI range, with a midpoint of negative 0.5%. Two months ago, we issued initial guidance. Since then, we have absorbed two distinct headwinds and realized meaningful offsets that, in aggregate, fully neutralize the pressure. On the headwind side, a 7 to 47 basis point shift in the forward SOFR curve adds approximately $0.08 per share incremental interest expense and a slightly lower-than-modeled Q1 leasing environment. On the offset side, a stronger insurance renewal, expense discipline, and strategic fee income from our adviser private capital platform, which Matthew will address in a moment. Together, these fully absorb those pressures. Our core FFO and same-store guidance ranges are unchanged. We are also reaffirming our same-store sub-metric ranges for the year. To reiterate our full-year targets, we see the ranges as follows: same-store rental income growth of 0% to 1.9% (midpoint 0.9%); same-store revenue growth of 0.1% to 2.0% (midpoint 1.1%); same-store expense growth of 2.8% to 4.2% (midpoint 3.5%); and same-store NOI growth of negative 2.5% to positive 1.5% (midpoint negative 0.5%). With that financial overview, let me turn it over to Matthew. Matthew Ryan McGraner: Thank you, Paul. Let me start with the macro backdrop because the structural setup for our portfolio has become increasingly compelling, and even the largest real estate investors in the world are now publicly validating themes we have been articulating. Last week, Jon Gray described real estate as a sleeping giant at Blackstone and signaled conviction that an acceleration is approaching, particularly around sectors with favorable supply-demand fundamentals. Reinforcing this point, they highlighted the collapse in new supply that will be very supportive to fundamentals over time across major sectors, including multifamily, where industry forecasts call for deliveries this year to be at their lowest level in 12 years. Twelve years. That is the headline. Multifamily deliveries in 2026 will be at their lowest level since 2014. That is precisely the supply backdrop we are operating in, and it is the primary structural driver of our confidence in the second half of the year and into 2027. Let me put some numbers around it. National multifamily deliveries peaked near 100 thousand units in 2024 and are declining sharply. New construction starts have fallen 70% from their peak. Units under construction nationally have declined 29% from their Q1 2024 high of 760 thousand units. By Q4 of this year, net deliveries are projected to fall to roughly 69 thousand units nationally, the lowest level in a decade. In our Sunbelt markets, this deceleration is even more pronounced. In NXRT's specific submarkets, the demand picture is compelling. Q1 net absorption was positive 1,307 units against supply of 2,426 units, with total demand of 3,733 units. For the full year, our submarkets are projected to see 10,158 units of supply against 10,239 units of demand—effectively a balanced market, with demand now outpacing the remaining supply wave. On the demand side, homeownership remains increasingly out of reach. Today, average monthly mortgage payments run 36.7% above average multifamily rents nationally. Move-outs to purchase a home fell to 7.9% for the quarter, down from 10.6% a year ago. The longer-term demographic picture remains favorable, as I covered last quarter. The bottom line: while near-term fundamentals are weaker than initially expected in select markets, the structural setup is improving quarter by quarter. The supply cliff, the construction starts collapse, the demand-supply convergence—these are all intact and accelerating. The recovery is asymmetric rather than synchronized, with roughly 35% of our NOI already at or near equilibrium and another 44% reaching that threshold through the balance of the year. We expect fundamentals to stabilize and then accelerate as the back half of 2026 unfolds. On to operating performance. Let me walk through the leasing cadence because the monthly trajectory tells the story. Across 1,388 new leases signed in Q1, our new lease trade-out was negative 6.6%, or a $97 per unit decrease. On 1,528 renewal transactions, we achieved positive 2.3%, or a $33 per unit increase. The blended rate across 2,916 total transactions was negative 1.9%. The monthly progression is what matters. New lease trade-outs improved from negative 7.0% in January to negative 5.6% in March. Blended trade-outs narrowed from negative 1.9% in January to negative 1.7% in March. And the momentum has continued into April. New lease trade-outs have improved to approximately negative 4% month to date—a 300 basis point improvement from January to April. Blended trade-outs have narrowed to approximately negative 1.2%. At the market level, Las Vegas renewals led the portfolio at positive 12.2%, or a $164 per unit increase. Raleigh renewals grew 2.2%, with new lease trade-outs at negative 3.8%, the shallowest decline in the portfolio. Dallas generated 181 renewals at a positive 1.9%. On the occupancy front, the same-store portfolio closed Q1 at 93.6% physical occupancy, up from 92.6% at the start of the quarter and 92.7% at the end of Q4. April month to date has improved to 93.9%, and our leased percentage reached 95.9%, the highest since 2025. Per ApartmentIQ data, our portfolio is outperforming market comps by 130 basis points in occupancy, which validates both our pricing discipline and the effectiveness of our centralized leasing program. Resident turnover was 44.4%, essentially flat sequentially but down from 46.3% a year ago. Resident retention improved to 55.6%, with March reaching 57.2%. Same-store total income was $61.4 million, down 2.2% year over year. Rental revenue declined 3.1%, partially offset by a 39% increase in other income driven primarily by resident amenity fee programs, which added $469,000 of incremental revenue versus the prior year. The standout within revenue is bad debt. We achieved 0.55% of gross potential rent in Q1, down 45.7% year over year from 1.02% of GPR. This is a structural improvement driven by AI-enhanced screening and centralized credit evaluation, not a one-quarter anomaly. On to concessions. Let me address concessions directly because I know this is front of mind for our investors. First, the context. Our portfolio-level concession rate is 1.9% of gross potential rent. Per ApartmentIQ, the competitive set in our submarkets is running 5.7%. That is a 380 basis point advantage, and it reflects a deliberate operating philosophy. We compete on occupancy through operational execution and technology, not through concession givebacks. Our revenue per available unit exceeded comps by 3.77% in Q1. Second, the concentration. Total concessions were approximately $1.15 million in the quarter, up from $271 thousand in 2025. However, 39% of the year-over-year increase, or $342 thousand, was driven by a single asset in Pembroke, where a concentrated competitive supply wave entered the submarket in Q4 2025. Concessions were deployed proactively to defend occupancy and market position, and that strategy has worked. We closed Q1 at 94.1% occupancy at Pembroke and have continued to build, reaching 94.9% quarter to date. Concessions at Pembroke have already been reduced from one month free to a $500 incentive, which is a 75% reduction. Excluding Pembroke, the portfolio concession increase was approximately $535,000, or roughly two times the prior year—elevated, but a fundamentally different story than the headline. Third and most importantly, the forward trajectory. Our full-year 2026 operating forecast projects concession utilization declining 75% from Q1 levels by the second half of the year. Q1 ran at 2% of GPR; we forecast Q2 at 1% of GPR, Q3 at 50 basis points, and Q4 at 40 basis points. Simultaneously, financial occupancy improves from 92.8% in Q1 to 94.0% in Q2 and 94.1% in Q3. Six of our 10 markets showed improving concession environments sequentially in Q1 versus 2025—those are Atlanta, Las Vegas, Nashville, Orlando, Raleigh, and South Florida. Even in the four markets still facing supply-driven pressure, the rate of deterioration has stopped. As one-month-free concessions roll off, we realize approximately an 8% pop in effective rents without raising prices. This is an embedded tailwind that begins to materialize through the balance of the year as supply deliveries decelerate and seasonal demand strengthens. We believe Q1 was the trough for concession deployment in this cycle. Let me spend a few minutes on the technology platform Paul alluded to because Q1 results are a direct product of the investments we have been making. We are deploying a two-layer architecture model for technology. Layer one is property operations—BH Management and their Funnel Leasing AI CRM platform handling day-to-day leasing, maintenance, and resident services under their centralized operating model. Layer two is what we are building at the adviser level—NextPoint Intelligence, an asset management platform that drives better decisions at the portfolio, market, and unit level. We are literally building agents per property across the portfolio to enhance predictive analytics. This architecture is deliberate. Self-managed peers investing in AI must spend across both layers simultaneously. Our model delivers a disproportionate share of the AI impact at a fraction of the capital outlay. BH Management's Funnel AI platform gives us the property operations layer as a managed service, and we focus our investment on the intelligence layer for the highest-value judgments to happen. We will provide the full AI product roadmap and financial impact thesis at REITweek in early June. Q1 results from the platform. Our AI-powered Leasing Pro platform processed 31,882 leads and converted them into 1,571 signed leases during the quarter—a 4.9% lead-to-lease conversion rate versus the industry benchmark of 3.2%. Year over year, leads were up 26%, applications were up 34%, and move-ins were up 53%. Our lead-to-tour conversion was 36.8% for the quarter, the best of the four quarters since we launched our new AI-enabled CRM system. Self-guided touring technology enabled 24.7% of our leases to be executed after business hours—demand that would have been lost entirely without technology-enabled engagement. We hosted nearly 800 self-guided tours during the quarter and expect to surpass 1,000 per quarter as we move into peak leasing season. Fifty-nine percent of self-guided visitors submit a lease application—an extraordinary conversion rate that speaks to the quality of the funnel. The 4.3% payroll reduction, 45.7% improvement in bad debt, the 130 basis point occupancy advantage over comps, and concessions at 1.9% of GPR versus 5.7% for the comps—these are all outputs of a centralized, data-driven model. Turning to Sedona at Lone Mountain as a quick update on our latest acquisition. As a reminder, we acquired this 321-unit community in North Las Vegas in December for $73.25 million. Occupancy closed Q1 at 87.9%, and as of April 28, the property is approximately 90.3%, with a projected 30-day trend of 92.2%. The rent roll cleanup and operating recovery are ahead of our underwriting and tracking well ahead of budget. Q1 rental income beat budget by 6.7%, or approximately $88,000, driven by lower-than-expected bad debt write-offs. Total expenses beat budget by 13.4%, or $71,000. All in, NOI is leading budget by 13.4%, or $130,000, through Q1. We continue to target a 7.2% NOI CAGR through 2029, taking this asset from a high-5% cap acquisition to a 7.5% stabilized yield. On to the transaction market, capital recycling, and other earnings opportunities. Per Walker & Dunlop, Q1 2026 institutional multifamily sales volume was $15.1 billion across 213 deals at a weighted average cap rate of 5.09% and $260 thousand per unit. Full-year 2025 volume reached $161.6 billion, up 9.1% year over year. Institutional capital is returning selectively, with institutions and REITs comprising 36.6% of multifamily acquisitions in 2025—the highest share since 2019. Related to our capital recycling and transaction activity, I wanted to address proactively one element of our potential growth that Paul touched on—the role of strategic fee and interest income generated through our adviser's DST platform. Some context. Our adviser, NextPoint, is one of the largest sponsors of Delaware Statutory Trusts in the United States, distributing through the NexPoint Securities broker-dealer network. Since 2017, NextPoint has sponsored over $4 billion of DSTs across a variety of property types, including core and core plus multifamily. The DST market itself reached a record of $8.4 billion of equity raised in 2025, up 49% year over year, and multifamily is the largest category within it. Each DST transaction generates fee opportunities for sponsors—financing, acquisition, and asset management fees—and creates lending and bridge capital opportunities where a balance sheet partner is needed. Looking forward, we see meaningful potential for additional activity of this type within NXRT. The DST platform is active, the multifamily category within it continues to grow, and NXRT's balance sheet positioning is well suited to participate selectively. While we are not embedding additional transactions in our 2026 guidance, we believe this represents a credible source of incremental earnings optionality, essentially in the range of $0.10 to $0.20 of core FFO over the next 12 months under favorable conditions, balanced against our risk-adjusted return discipline and capital availability. More broadly, this reflects a deliberate strategy to diversify NXRT's earnings streams. Larger peers like Prologis, Welltower, Realty Income, Ventas, and Equinix have all built private capital platforms in response to capital markets dynamics where public equity costs can be prohibitive. NXRT possesses the core infrastructure, through its external adviser, to pursue a similarly and appropriately scaled strategy. We will be outlining the broader vision at NAREIT in early June. Let me close with this. We are entering the most favorable supply backdrop in over a decade. Again, Blackstone is calling multifamily a sleeping giant. New construction starts are down 70% from the peak. Deliveries are projected at their lowest level in 12 years, and demand is absorbing the remaining supply wave in our submarkets. The setup is asymmetric. 2026 absorbs the swap repricing and the supply tail. 2027 captures the supply cliff and earn-in. To put numbers around that earn-in, if new lease growth returns to 2% by Q4 of this year, consistent with the deliveries cliff, the carryover earn-in alone delivers 150 to 200 basis points of 2027 same-store revenue growth before a single new 2027 lease is signed. We are not providing 2027 guidance today, obviously, but the structural drivers are clear, and they compound in our favor. Against that backdrop, our operating platform is performing. Bad debt is at a multiyear low, payroll is declining, insurance renewed significantly better than expected, leasing conversion rates are at record levels, concessions are at 1.9% of gross potential rent versus 5.7% for the competitive set, and occupancy is building again—93.9% in April and rising. Potential DST transactions can generate incremental fee and interest income that diversify our earnings streams, but the operating thesis still stands on its own. The monthly trajectory is encouraging. New lease trade-outs improved 300 basis points from January to April, and we are entering the peak leasing season with strong conversion metrics, declining supply, and really tepid expectations. The trends and trajectories give us reason for optimism. We appreciate everyone's continued hard work here at NexPoint and BH. I will now turn the call over to the operator for questions. Operator: At this time, if you would like to ask a question, press star followed by the number one. We will now open the call for questions. There are no questions at this time. Oh, sorry. We do have a question from Michael Lewis with Truist Securities. Matthew Ryan McGraner: Thank you. Analyst: My first question, I wanted to ask—you talked about it a little bit—this 200 basis point difference between the occupied and leased percentages. I was just wondering if there is any opportunity to narrow that. And likewise, the resident retention in the mid-50% range looks like it was going up the last couple of months. Do you see upside there through operational efficiencies as well? Matthew Ryan McGraner: Yes, definitely. Thanks, Michael, and good morning. We definitely see an opportunity to continue to drive renewals and also retention, particularly as you get into the summer months—folks do not want to move in our Southeastern and Southwestern markets. That has always been a core focus, and any incremental improvement there obviously allows us to drive new lease growth as the supply wave captures. I know if you have anything to add to the first point. Yes. I think on that spread, we are here in April, the start of peak leasing season. The properties are looking great. Traffic flows—if you look at the highlights section, you can see Q2 last year traffic patterns. This is where our demand funnel is the widest. Getting that leased percentage higher helps us with pricing power. Fewer units available, we are able to push pricing dynamics a little bit more and try to continue to narrow that gap on the new lease pricing side. So that is the focus—pushing, as I alluded to, going into the back half of the year, continuing to hopefully start to inflect positively on rates. The more leases we can sign, the better pricing dynamics we have. Analyst: Okay. And then you know, you talked about the core portfolio like it was essentially in line. You kept the full-year same-store guidance. But occupancy was up quite a bit across the markets. Las Vegas was up a lot sequentially. I was wondering if the occupancy increase surprised you at all. And is it fair that Q1 ran in line with your expectations, or are you running a little bit ahead to start the year? How would you frame that? Paul Richards: I think Q1—Bonner, you can give your thoughts—but to me, Q1 felt better. I would not say we hit our budget. In fact, we missed our NOI budget by a quarter million or $300,000. But it did feel better from a demand perspective in that we saw the rent rolls continue to firm, we saw trends build, and we did not particularly give up that much relative to the prior quarters. I am pleased with, and as you can tell from my prepared remarks, I think it is firming out there, and I am pleased with the trajectory and the trends in occupancy. Bonner, if you have anything to add. Yes. On our more aggressive internal forecast, we would love to squeeze 10 to 20 basis points higher on occupancy. It is improving, and that is structurally where we are looking to go in the peak leasing season. I would say the major wins—Matthew described it in the call—the ability to squeeze that bad debt back down to 55 basis points is a real win. We utilize a software technology called Two Dots. We are getting to a point now where we can get to a credit screening approval on an application in a 15-minute interaction, and being able to close those leads the same day, same interaction—where some of our prospects may be applying here and across the street—time to decision is really important to us. That is helping occupancies. The operating platform that we are building is really helping. So I would say we are happy with occupancy and would love to continue to build it. We described a little bit of the uptick in concession utilization and hope to see that moderate. But overall, revenue expectations were within 1% of our optimistic goal for the quarter. Analyst: Okay. And then lastly for me, this seems like the most interesting question. I do not know exactly how to frame it, or if you can answer it, but the interest expense is going to be higher because rates are higher. It sounds like the offset is the fee income that you talked about. Is there anything—you said you are going to give more details at NAREIT. Is there anything more to say about how that is offsetting this year? What you need to invest or what you are earning or what you are going to be doing to earn—I think you said $0.10 to $0.20 over the next 12 months. Is there any more detail you could share on that? Bonner McDermett: Yes, happy to. Matthew Ryan McGraner: The one thing we know is that we are going to be wrong on the curve. It is bouncing around, it has bounced around, and unfortunately the sell side tends to model max rate pain and we get fundamentals out there possibly. That is the backdrop. As the NexPoint platform, we manage about $20 billion or so across a variety of property types with a built-out broker-dealer infrastructure across those property types. That allows NXRT to utilize that broker-dealer infrastructure. What I mean by that is NXRT would sponsor the DST program. Utilizing the balance sheet, we could be a lender to the transaction and make a spread above our credit line—you have a 300 to 400 basis point spread there. The sponsor takes acquisition fees, which could be 1% to 2% of the gross purchase price of the deal. You can estimate that fee income to be typically $1 million to $2.5 million per transaction. It adds up. Given the fact that we have been an aligned shareholder here since inception—when we took public with fee deferrals, fee waivers, extraordinary side-by-side alignment and ownership—this is just another tool in our toolkit to help earnings and diversify earnings. We think it is the right thing to do for the business. The hope is we do not need it—the curve comes our way, we are able to swap appropriately and opportunistically, and we just add this extra earnings layer on top of it. We see it as a good thing. Bonner McDermett: Thank you. Matthew Ryan McGraner: You bet. Operator: Your next question comes from Buck Horne with Raymond James. Analyst: Congrats. Just wondering if you could give us a little bit more detail on the real estate taxes line and what were the good guys, and how those year-over-year comps are looking as you peer into the back half in terms of appraisals or potential recoveries? What is going on with taxes this quarter and the outlook for the remainder of the year? Bonner McDermett: I am happy to help you with that. In Q1, we were still fighting last year's taxes. We got some wins on the board. In particular, Dallas County (DFW) had a number of favorable protests from last year rolling into the Q1 booking. In terms of overall outlook, we have been working with our tax consultants. We have gotten initial values notices in May in Texas and a couple other municipalities. Overall, I think our outlook is pretty stable. Valuations are down. There is less ammunition—there are fewer sales. We are really pushing the equal and uniform story for us. We believe taxes should be favorable this year. In the last couple of years, we have in our numbers roughly 4.1% year-over-year growth at the midpoint, with some of the savings in the Q1 booking. We are going to continue to shoot to outperform that. There is work to do there—some of those fights roll into the next year—but overall, the outlook is in the 3% to 4% range, and we booked three or four settlements in Q1 to help that quarterly number. Analyst: Got it. Got it. That is very helpful color. And just on the repairs and maintenance expenses that you mentioned—you pulled forward some deferred CapEx. Is that trend going to continue into the second quarter? When does that deferred CapEx spending or that maintenance spend start to normalize? Bonner McDermett: There were a few things that were a little bit noisy. Again, it is one quarter. Some of that is seasonal. Some of that is lender driven on the 2024–2025 items. We think repairs and maintenance broadly stabilizes. When you look at the component parts of R&M that we report, one of the things that is in there is that service contract billing, and it probably deserves some better specification outside that. That includes our bulk fiber contract billing, so it looks a little bit outsized, but there is a revenue offset there. Q1, I would say, we got hit by a couple of one-time items and a few of the deferred maintenance items Matthew mentioned. But I think the outlook for the year generally is pretty favorable—again, kind of inflation-level R&M growth—and we are certainly working to outperform. Analyst: Got it. Alright. Very helpful, guys. Congrats. Good job. Paul Richards: Thanks, Buck. Operator: There are no further questions at this time. Matthew Ryan McGraner: Thanks for everyone's participation, and we look forward to seeing everyone at NAREIT in June. Have a good day. Operator: Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.
Operator: Good day, and welcome to the Franklin Electric Co., Inc. Reports First Quarter 2026 Sales and Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker presentation, there will be a question-and-answer session. To ask a question during the session, you will need to press 11 on your telephone. You will then hear an automated message advising your hand has been raised. To withdraw your question, please press star 11 again. Please be advised that today's conference is being recorded. It is now my pleasure to introduce Director of Investor Relations, Dean Cantrell. Dean Cantrell: Thank you, Andrew, and welcome everyone to Franklin Electric Co., Inc.'s first quarter 2026 Earnings Conference Call. Joining me today is Jennifer Wolfenbarger, our Chief Financial Officer, and Joseph Ruzynski, our Chief Executive Officer. On today's call, Joseph will review our first quarter business highlights, Jennifer will provide additional details on our financial performance, and then Joseph will make some additional comments highlighting our distribution segment. We will then take your questions. A replay link of the webcast will be archived for seven days and a transcript and audio version of this call will be available on our website tomorrow. Before we begin, let me remind you that as we conduct this call, we will be making forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements are subject to various risks and uncertainties, many of which could cause actual results to differ materially from such forward-looking statements. A discussion of these factors may be found in the company's Annual Report on Form 10-Ks and in today's earnings release. During this call, we will present both GAAP and certain non-GAAP financial measures. A reconciliation of GAAP to non-GAAP measures is included in the appendix of our earnings presentation. All forward-looking statements made during this call are based on information currently available and, except as required by law, the company assumes no obligation to update any forward-looking statements. Earlier today, we published a slide deck to accompany our prepared remarks. The slides can be found in the Investor Relations section of our corporate website at franklin-electric.com. With that, I will now turn the call over to Joseph. Joseph Ruzynski: Thank you, Dean, and good morning, everyone. Thank you for joining today's call. I am pleased to share our results for the first quarter with you all today. Let us move to Slide 3. Our first quarter was a strong one for all segments. Organic growth was healthy across our end markets with volume growth and disciplined pricing across our segments. Our quarter finished with healthy backlogs and order trends as we entered the second quarter. Our balance sheet remains healthy as we look to continue to invest in our strategic initiatives and returns for our shareholders. Our launch of the Value Acceleration Office is off to a great start, with a strong funnel and some good initial returns. If we could move to Slide 4, I would like to look at our performance in terms of our strategic objectives and specifically growth. Our sales were up 10%, and each segment saw volume growth along with positive pricing and contribution from new products, channels, and new customers. Our operating income was up 9% with adjusted income up 17%. GAAP EPS was up 15% with adjusted EPS up 24%. Our adjusted EPS growth in Q1 more than doubled our sales growth year-over-year. This was helped by strong improvements in our income and SG&A productivity. We have worked through some thoughtful restructuring as we align our capacity and production to our regions and markets that are growing, and we work to streamline parts of our business that have grown through acquisition these past few years. We are positioned well for 2026 with a backlog of 10% and a positive book-to-bill as we enter the quarter. If we move to Slide 5, I would like to share our progress on some of our strategic priorities. Our value creation model starts with clear growth focus, and we continue to see opportunities to innovate and serve markets that are seeing good underlying strength. Our dewatering business was driven by 10% growth in the mineral OpEx market, and we are thoughtfully bringing together recent acquisitions in this space, channel expansions, and customer acquisition together to build a great part of our portfolio. In Q1, we launched a great addition to our pressure boosting portfolio with our new VersaBoost product. We are thinking of scale and velocity for new products and our VersaBoost Pro delivers smarter, reliable water pressure with effortless installation and lasting performance in residential markets. These types of launches will help us set a new bar in 2026 and 2027 for new product vitality and revenue. Our margin expansion efforts are on track with our new Value Acceleration Office, launched in 2025. Our funnel is growing, and we expect to solve our biggest growth and productivity challenges with sound governance and speed. We see our office delivering over $15 million in productivity this year with an opportunity to accelerate this as we move into 2027. Our expectation is to deliver over 100 basis points of productivity a year once we ramp up our efforts. We are pleased to see our focused margin improvement efforts in water treatment up 40 basis points and our distribution business up 20 basis points in the full year 2025. This demonstrates that growth and efficiency can work hand in hand. We are expanding our capital deployment for new projects this year and have recently inaugurated our new water factory in Izmir, Turkey, with more focused expansions and regional efforts in India, South America, and Mexico to name a few. We have continued to smartly buy back shares, 120 thousand in Q1, and have continued our dividend expansion in 2026, now at 34 years of growth. Most importantly, on team and talent, a big thank you to Franklin's employees, as our growth happens every day with every customer served. Every problem we solve, growth strategy we execute, and employee we keep safe helps us to grow and to build on our strong culture. Our people and our talent are our bedrock. With that, I will turn the call over to Jennifer to discuss the financial results in more detail. Jennifer Wolfenbarger: Thank you, Joe. Please turn to Slide 6. Our fully diluted earnings per share was $0.77 for the first quarter of 2026 versus $0.67 for the first quarter of 2025. First quarter adjusted diluted EPS was $0.83, a new first quarter record, compared to our 2025 first quarter adjusted diluted EPS of $0.67. The 24% year-over-year expansion in adjusted diluted EPS was primarily driven by the expansion of our adjusted operating income year-over-year. This is a testament to our commitment to expand the earnings power of our business. There were $3.9 million in restructuring costs in the first quarter of 2026 compared to $200 thousand in the prior-year first quarter. Restructuring costs in the quarter are primarily related to structural improvement initiatives across our global water operations. These actions will deliver savings in 2026 and will be accretive in 2027. The effective tax rate was 24.2% for the quarter compared to 25% in the prior-year quarter. The change in the effective tax rate was driven by favorable discrete stock compensation in 2026. Moving to Slide 7, first quarter 2026 consolidated sales were $500.4 million, a year-over-year increase of 10%. The sales increase in the first quarter was primarily due to price and volume growth across all three segments, as well as the positive impact of foreign currency translation and the incremental sales impact from recent acquisitions. Franklin Electric Co., Inc.'s consolidated gross profit was $175 million for the first quarter of 2026, up from the prior year's gross profit of $163.9 million. Gross profit as a percentage of net sales was 35% in the first quarter of 2026 compared to 36% in 2025, a decline of 100 basis points compared to the prior year. The gross profit margin was unfavorably impacted in the first quarter of 2026 by higher material costs driven by the hangover of tariffs. Selling, general, and administrative expenses were $123 million in the first quarter of 2026, compared to $119.6 million in 2025. The increase in SG&A expenses was primarily due to the incremental impact of our acquisitions in the past year. SG&A as a percent of net sales was 24.6% in 2026 and 26.3% in 2025. Without the impact of acquisitions, our SG&A as a percentage of net sales was 24%, an improvement year-over-year of 230 basis points. Consolidated operating income was $48.1 million in the first quarter of 2026, up $4 million or 9% from $44.1 million in 2025. The increase in operating income was primarily due to higher sales volumes in the first quarter. As previously mentioned, there were $3.9 million in restructuring costs in 2026 versus $200 thousand in the prior-year first quarter. These were related to structural improvement initiatives across our global water operations. Consolidated operating income before restructuring was $52 million in the first quarter of 2026, up $7.7 million or 17% from $44.3 million in 2025. The first quarter 2026 adjusted operating income margin was 10.4% versus 9.7% in the first quarter of last year, up 70 basis points year-over-year. Moving to the segment results starting on Slide 8. Global Water Systems sales were up 11% compared to the first quarter of 2025 driven by strong price, favorable currency exchange on sales, and additional volume from our recent acquisitions. Water system sales in the U.S. and Canada were up 7% compared to 2025. The sales increase was led by sales of all other surface pumping equipment up 17%, as sales of water treatment products increased 8%, and sales of groundwater pumping equipment increased 3%. These sales increases were partially offset by lower sales of dewatering equipment, large dewatering equipment down 9% compared to 2025 in the U.S. and Canada. Sales increased 1% in the first quarter due to the positive impact of foreign exchange rates compared to the prior year. Water system sales in markets outside the U.S. and Canada increased 17% overall. Foreign currency translation increased sales by 8% and recent acquisitions added roughly 7%. Excluding the impact of acquisitions and foreign currency translation, sales in 2026 increased in Asia Pacific and Latin America, as EMEA sales were down year-over-year. EMEA sales volume, specifically in the Middle East and Eastern Europe, were negatively impacted by the ongoing conflict in the Middle East. Global Water Systems operating income was $44.4 million, up $1 million versus 2025. The operating income margin was 14%, a year-over-year decrease of 110 basis points. There were $3.9 million in restructuring costs in 2026 in the water segment. Restructuring costs in the quarter are primarily related to structural improvement initiatives across our global water operations. Adjusting for restructuring charges, the water system's adjusted operating income was $48.3 million, up $4.9 million or 11% from the prior year, with operating income margin of 15.2%, up 10 basis points from the first quarter of last year. Moving to Slide 9. Distribution's first quarter sales were $150.9 million versus first quarter 2025 sales of $141.9 million, an increase of 6%. The Distribution segment sales increase was primarily due to higher volumes and price realization. The Distribution segment's operating income was $3 million for the first quarter, a year-over-year increase of $900 thousand. Operating income margin was 2% of sales in the first quarter, an improvement of 50 basis points versus the prior year. Operating income margin increased primarily due to higher sales volume, strong price realization, and solid leverage on SG&A costs from higher sales. Moving to Slide 10. Energy Systems sales in 2026 were $71.8 million, an increase of $5 million or 7% compared to the first quarter of 2025. Energy system sales in the U.S. and Canada increased 3% compared to 2025. Outside the U.S. and Canada, energy system sales increased 29%, primarily in Asia Pacific. Energy Systems operating income was $24.2 million compared to $21.9 million in 2025. The first quarter 2026 operating income margin was 33.7% compared to 32.8% in the prior year, an improvement of 90 basis points. Operating income margin increased primarily due to higher sales volume, solid price realization, and strong leverage on SG&A costs from higher sales. Moving to the balance sheet and cash flow on Slide 11. The company ended the first quarter of 2026 with a cash balance of $80.4 million and with $88 million outstanding under its revolving credit agreement. We used $40.9 million in net cash flows from operating activities during the first quarter compared to $19 million in 2025. The main driver for the change versus prior year is higher accounts receivable of $20 million driven by a year-over-year increase in net sales for the company. The company purchased 120 thousand shares of its common stock for approximately $11.3 million in the open market during 2026. As of the end of the first quarter of 2026, the total remaining authorized shares that may be repurchased is about 700 thousand shares. Yesterday, the company announced a quarterly cash dividend of $0.28. The dividend will be payable on May 21 to shareholders of record on May 7. Moving to Slide 12, the first quarter financial results were in line with our expectations and underlying demand remains. Although our confidence in the outlook is increasing, we are holding our full-year sales expectations of $2.17 billion to $2.24 billion and full-year adjusted diluted EPS to a range of $4.40 to $4.60. This range reflects some uncertainty in our global markets as we further assess macroeconomic and geopolitical outlook. Our outlook does not include a clawback of tariff-related expenditures. We have formally submitted our request and are awaiting a response. Now I will turn the call back to Joseph for some additional comments. Joseph Ruzynski: Thanks, Jennifer. If we move to Slide 13, we want to give a deeper look at our segments these next few quarters. We will share what we like about the businesses we are in and why we are optimistic about our opportunity to profitably grow them. We will start this quarter with a look at our distribution business. As many of you know, we built this segment fairly recently in our history, growing through our strategy of building channel solutions, adding new offerings, and smart acquisitions. It has become a recognized leader in the water distribution and services space along with our strategic partnerships and other leading distributors in the U.S. It has helped us to develop the strongest channel in our industry. This is an important channel for Franklin Electric Co., Inc.-manufactured pumps, motors, and drives, but also brings together leading products in a wide portfolio to serve the residential, groundwater, wastewater, industrial, agricultural, and water treatment markets. This business is now over $700 million with a solid return on invested capital and great opportunities to productively grow. Although we are proud of our 84 branches and 650 OSI locations and wide product portfolio, the real value in this segment is how we help our customers win and how we win with our customers. Starting with how we help our customers win: critical inventory at customer sites enables them to win jobs and deliver with speed, accelerate growth, and invest in strategic initiatives rather than tying up cash in inventory. Our on-site inventory program, or OSIs, couples real-time inventory with efficient replenishment and a continuously learning supply chain. We offer the most unique solutions in the industry and have grown our OSIs from zero to 650 as customers learn how having a wide range of products on their site refilled at the right time, for them to pull as their job requires, can lead to winning more business. For customers that order products from us for their daily business, we have built technology solutions to give them 24/7 visibility with our integrated customer portal, simplifying order placement, viewing invoices, and payments through one single platform. And our ability to help customers win means we work with them on the site during the job planning process to go beyond transactional support and offer value-added services including delivery, on-site support, training, design, and assembly services. How we win with our customers is by assessing their wider needs to ensure we bring the right solutions at the right time. We have grown our business and value to the markets we serve through a program we call cross pollination. As we see customer needs in areas like wastewater or water treatment, we have pulled on our expertise and products within Franklin and partnered with industry leaders to attend the markets that are growing faster. And we are doing it with the efficient service and leading technology platforms we are known for. Being part of the wider Franklin team has allowed us to think about data more strategically from end to end through manufacturing and to our suppliers. Our technology and data to close the last mile, realize operational efficiencies, and to provide the best-in-class customer experience both externally and internally is truly a differentiator. Our distribution segment has grown by adding products, service, technology solutions, and customers. We believe our current progress to grow margins will have the same success, and as we have grown organically and inorganically, we are now realizing the benefits of streamlining our process, leveraging our spends, and creating an efficient footprint. Our margin expansion focus brings with it solutions to better serve through technology and data that benefit all of our partners. Last year, we expanded our margins over 200 basis points, and we improved again in Q1. We feel that growing volume, creating more value to our customers, and margin expansion can work seamlessly together. With that, we will now turn the call back over to Andrew for questions before a few closing thoughts. Andrew? Operator: Thank you. Please press 11 on your telephone and wait for your name to be announced. To withdraw your question, please press 11 again. One moment, please. First question comes from the line of Michael Halloran with Baird. Michael Halloran: Hey, everybody. Good morning. Joseph Ruzynski: Morning, Mike. Michael Halloran: So, when I look at the guide and I look at the trends for the remainder of the year, it seems like a pretty prudent approach to guidance. Sequentials seem maybe a little below normal as we work through the rest of the year. Maybe just help me understand what is embedded in guidance from a revenue progression perspective. Is this a conservative thought process given what we do not know? And any nuances by end markets as we think through the rest of the year that you think we should know? Joseph Ruzynski: Good question, Mike. I think what we do not know is obviously what we do not know. We see the quarters on a standalone basis to be positive top and bottom line here through the next three. You are going to see from a sequential standpoint that normal performance, which is obviously a bit more muted given the growing seasons and the weather in Q1 and Q4. But our outlook for Q2 looks robust and looks on track. I think the parts that we do not know, and Jennifer alluded to those in the call, are obviously we have talked before about India and the Middle East and some of these green shoots that we see in some fast growth regions. We are trying to temper some of those expectations, but the underlying business is solid. We feel the market demand is steady. We made a couple comments there on book-to-bill and backlog here as we came into Q2, and it looks on track. So from what we can see, the underlying business looks healthy. Some of those unknowns in terms of ag prices, freight impact from Middle East conflict, some of the new customers that we have been fostering that are affected by those fuel prices or that disruption, those are really some of the unknowns. But the rest of the business read out largely as we expected, and it trends that way here as we go into Q2. Michael Halloran: And maybe something comparable on the margin side of things. Obviously, the energy systems margins in particular were robust in the quarter, and that seems to be even with some of the international mix in there. How should I think about the margin progression through the year? Are you assuming a step down? I understand there are variances quarter to quarter there. And anything in the water side as well that you think should be relevant as we are thinking forward? Joseph Ruzynski: I will give just a couple comments, and I will let Jennifer add. Energy had a great first quarter. We talked about the timing and expecting sequential improvement and year-over-year improvement here as we got into Q1. Q2 is a little bit of a blip for us where we got price out in front of tariffs, so that comp will look a little bit challenged, but Q2 last year was a high amount. The underlying margins, we expect to be strong even with the nice growth that we are seeing around the world for that business, which just shows the underlying strength. If there are headwinds that come from the Middle East conflict and some of the questions about oil and gas, it is a slight tailwind for sure here in the U.S. in that space, and we expect to continue to see that. I think from a distribution standpoint, there definitely were some mixed challenges. It performed as we expected, but some of their faster growing business, we are still working on upstream leverage. We are still working on a couple different things there. But again, good expansion. We expect them to expand; you are going to see that increase here as we get to the mid-quarters of the year. So on track there from a volume expansion standpoint. And then from a water standpoint, we have a number of things we are working on. Jennifer referenced restructuring. Clearly, as we are building factories and there is some work that we are doing there—some adds and some consolidations—we expect that to normalize. There is a little bit of inefficiency that we saw here in Q1. Some of those efficiencies that we are bringing into that business is to continue to work on post-acquisition synergies and barns. You see a portion of that sit in Latin America. But also new factories starting up; there is always a little bit of a problem there exactly. We can see that improvement from a year-over-year standpoint. Jennifer Wolfenbarger: I mentioned in my prior reports that [inaudible] taken back into the first quarter. [inaudible] cleared up either in 2026 [inaudible] opportunities. Uh-huh. And the investment from the [inaudible] would expect to see this. We feel the impact of it to change sort of the [inaudible] for '25 gives you [inaudible] price time for us to [inaudible] they are very, very cold because they are just emergent business. Operator: Thank you. Your next question comes from the line of Bryan Blair with Oppenheimer. Bryan Blair: Thank you. Good morning, everyone. Joseph Ruzynski: Morning, Bryan. Bryan Blair: I apologize if I missed this detail. I have had some technical difficulty. But what was volume and price contribution in Q1? And if we assume your team is trending toward the high end of the revenue guide—that seems realistic for the time being—what should we think about in terms of full-year volume and price contribution? And how different is that by segment? Joseph Ruzynski: Good question. The performance on volume and price was nicely balanced for us in Q1. If you look at the sales growth, volume was just under 30% and price was just over 30%, with acquisition and FX kind of rounding out those other two as you have seen. From a volume standpoint, we have done a lot of work in terms of leading indicators. You have heard us talk about this the last few quarters: innovation, new products—we like to highlight this—how we are finding those markets that are growing faster. Sometimes it is hard to predict where and when that volume will hit. That being said, Q1 read out largely as we expected. Price is going to be a comparable spread at the higher level here in Q2 as we put some of those price increases in. But we expect volume and price to be fairly balanced throughout the year. So that is at a higher level. Jennifer, if you want to comment at the segment level. Jennifer Wolfenbarger: I would say the caveat there is we continue to see inflation in various pockets, and we will continue to be very disciplined in our price strategy as we see those commodity inflation pressures come through, whether it be on the plastic side or copper. We are going to take the opportunity to pass that through from a price perspective as we have done historically. So I think, Bryan, just last comment: that volume line is one that we are watching closely. Joseph Ruzynski: We are investing in R&D. We are investing in new products. We have been talking about this—channel expansion, making sure that we are out serving in terms of the end market. So we like that as an indicator and a start to the year, that volume number. Bryan Blair: Understood. I appreciate the detail. And, Joseph, you offered a pretty good segue there. In terms of innovation and new product development, I just wanted to level set a bit. What time frame of new product intros do you roll into any vitality calculation? And the $160 million in new revenue by year three, is that a 2026 to 2028 reference? Or in general, what you are targeting on a rolling basis, and then how should we, given current visibility, think about the contribution to water and energy segment growth? Joseph Ruzynski: It is a 2026 to 2028 number, but I would tell you this: we are looking to add to that. We think that there is more that we can do, and we will continue to refresh that number and that outlook. We generally are using a three-year vitality—so products launched in the last three years, contribution to new product revenue. Really, what our team likes is this idea of new product revenue, so we normalize for cannibalization of course, but this is a big focus for us. And when we look at our end markets, that opportunity is going to increase. It is going to increase for two reasons. One is we have acquired some companies. Our ability to add technology onto that and bring those to new markets helps us from a new product to new region. The other is some of those faster growing markets that we reference, like the data center market, and we look at energy infrastructure. Those opportunities for us to launch new products and bring those to market, we think, will help us to accelerate that. So I think the outlook for new products continues to be positive. We are excited about VersaBoost; we just discussed that today. And these are bigger numbers. Our effort has been shrink the funnel but more volume and scale for fewer launches, and then really to pay attention to doing those successfully. And as a last quick comment on those, our expectation is new products are accretive. So it helps us in a number of ways. Operator: Thank you. Our next question comes from the line of Ryan Connors with Northcoast Research. Ryan Connors: Great. Thanks for taking my question. And, like Bryan, I also had some—you were breaking up for a little while there—so hopefully I am not asking something that has already been covered. But I want to touch on dewatering for a bit. You mentioned Australia strong, but if I heard you right, Jennifer, you were mentioning actually softness in dewatering, and specifically mine dewatering. I was a little surprised by that. I mean, I know that we have got kind of a mining CapEx cycle kicking off, expect to see some strength in that large dewatering piece. So can you just unpack that dewatering piece? What is going on in Australia, and then why we are not seeing more of that elsewhere? Joseph Ruzynski: I will just make a quick comment. Global dewatering is a great story for us, Ryan. I think Jennifer's comment was the timing of orders in North America pointed to a year-over-year that was flattish to slightly down. But globally, this is a real healthy space. Australia is a very healthy space. Rest of the world dewatering for us is up 30-plus points. So a smaller base, but we are quickly seeing that global business for dewatering outpace, and we think it will be as big or even bigger than what we have in the U.S. Just to start, the comment was really on U.S. and Canada. Jennifer Wolfenbarger: And we did see some timing impact, and that was more on the fleet piece of dewatering, not necessarily the mining side. Our outlook overall for dewatering for the full year is still growth expected across the globe, including U.S. and Canada. A little bit of timing on the fleet side in Q1 was really what my comment was meant to convey. Ryan Connors: Okay. Yeah. That clears it up nicely. Thank you. And then I wanted to follow up on the question earlier on energy and the margin specifically. It is pretty remarkable. If you look at the quick calculation, energy contributing 13% of revenue and more than a third of operating income. So two questions on that. Thinking big picture and longer term, are we going to top out here, just big picture on margins for energy long term, or is there any scenario where we could actually get north of this kind of pretty amazing low-to-mid 30s type of range? And then strategically, Joseph, how do you think about the fact that a segment that is relatively small in the mix on a revenue basis is becoming such a huge contributor to the bottom line? Just curious what your strategic thoughts are on that. Joseph Ruzynski: I would answer it two ways. I view it as we are okay with that right now. Here are a couple things that have contributed to their income and expansion. One is when we look at transformation, 80/20, and some of the good productivity work that we have in front of us still at Franklin, I would say that energy business, because they really went into the post-COVID hangover with some thoughtfulness, and the leaders there did a great job of really reinforcing that we can operate and operate healthy even when volumes are slightly off. It is a great template and a group blueprint, and we expect you are going to see that read out in the other segments. We have seen it in pockets of distribution and water treatment as we have talked about. Water has a great opportunity there. So I am okay with it as it sits today. You are going to see a better balance, though, out two or three years in terms of margin expansion in the other parts of the business. The other question in terms of is there a high end or a limit to what we see from an energy margin standpoint: I would tell you we are confident in performance at that level. But a few things that have really contributed to their growth, and these are parts of their business that are growing faster, are as they are investing in sensing technology and critical asset monitoring in the grid space. Those are helpful from a mix standpoint. So as their higher margin business becomes a bigger part of just that energy segment, even if we look at growth around the world, even if we look at some of the growth that is maybe lower margin, that is going to outpace it and at least keep us in a real healthy band there in the mid-30s as Jennifer talked about. In terms of what is that opportunity, I would say this: we are working on midterm guidance, and we will share that during our Investor Day. We have not announced the time yet, but stay tuned for that. We still see opportunity to expand further just based on smarter technology from a mix perspective and then, again, a business that has done a great job from a productivity execution here these last few years. Ryan Connors: Got it. Okay. Very helpful. Thank you for that. And then last one from me on kind of a big picture question. Hearing more and more about AI being leveraged in the industrial landscape for pricing specifically—sort of algorithmic pricing strategies for industrial companies, and particularly for industrial distribution. So curious, given your comments there on the distribution business, Joseph: is that something that you are using anywhere in the company, but specific to distribution? Just curious whether that is something you are doing. Joseph Ruzynski: We have a fairly dynamic pricing approach in distribution. I would say it is not embedded with AI where we sit today. We are fortunate to have really intimate business owners. Our regional presidents in that business are looking at competition, the weather, and input costs on a real-time basis and essentially allow us to stay well in front of that. There is more we can do. We have got a lot of great work done in terms of simplifying part numbers. We have got rationalization, and so we can see the same number from coast to coast now. This took us a couple years. We have a great ERP system. And I would tell you we hear the same thing, and we see the same opportunity you mentioned, which is AI can help us take that to the next level to be smart about pricing. We have really done some good work this last couple years. Pricing is one of those elements that has helped them to lift that margin, and we expect to see further margin expansion throughout the year based on smarter dynamic pricing. Operator: And our next question comes from the line of Walter Liptak with Seaport Research. Walter Liptak: Hi. Thanks, guys. Good morning. Joseph Ruzynski: Good morning. Walter Liptak: Some of the comments were breaking up on my end as well. I wanted to ask about the new products that you guys called out—the $160 million. I wonder if you could review for us the data center products, like where your run rate is currently, and what is the expected growth that you think you would be at three years out within that $160 million? Joseph Ruzynski: What we will do is share what part of that commercial and industrial space is data centers here as we get into our Q2 earnings. But I think we have mentioned this before: it is a sub-$50 million business for all products for us today. Where our focus is right now, Walt, is it is simply the fastest growing space for pumps, motors, and drives, not only in the U.S., but around the world. Given our application expertise and the fact that we have built supply chain expertise, that has really been a key focus for us right now—to serve. There is a great set of CDU manufacturers around the world and here in the U.S. that have done a great job putting a space together. We like our ability to respond with speed and velocity. Our first production line—we have been doing this kind of embedded in parts of our business—but a stand-alone production line is going up right now in our big facility here in the U.S. And what we will do is share that outlook in terms of how we see order trends and our expectation in terms of volume growth here as we get into Q3. It is an exciting space. It is a fast-moving space for anyone that follows that market. I think the trends here the last couple years point to a next good three to five years in that space from what we can see, and we will be ready for it. Walter Liptak: Great. And in the first quarter, the water segment had better-than-expected organic growth. Was part of that from data center-related products? Joseph Ruzynski: A small part—not material. I would tell you a couple things that really read out well. One is just our traditional business in residential and ag in the groundwater space had a nice first quarter of both volume and price. We talked about this in our Q4 call where we saw a little bit of a pullback in terms of channel inventory in that RSS or that surface pumping business. That has bounced back nicely. So we made a comment on where we touch HVAC or some of the specific residential markets—those had a nice recovery, not just a sequential recovery, but year-over-year showed some strength. So surface pumping overall was strong in that RSS space. And then, again, that global dewatering business was up for us about 10% even with the blip in North America due to some fleet timing. What is interesting about Q1 there is the consistent strength across those product segments. We are obviously watching places like ag, but it is a more normal year. We do not talk a ton about weather here, but it is a more normal year, so it looks solid. And then the rest of the business, again, a blend of new products, new markets, new customers. They seem to be gaining some traction. Jennifer Wolfenbarger: And I must add a comment regionally. We also performed very nicely across regions. We touched on Australia, which posted really strong growth in the quarter. We started to see some recovery in Mexico—smaller piece of our business, but good to see that. That was depressed in the last couple of quarters. I touched on [inaudible]. Walter Liptak: Okay. Thanks. You broke up a little bit there at the end again. And then the last one for me: the energy segment growth was good this quarter, but it seems like it was driven more on the international side. For 2026, I think some of your competitors are calling out a pretty strong retail fueling market, both U.S. and international. What are you seeing in the marketplace? Joseph Ruzynski: We see the outlook for the U.S., starting there, as good and healthy. Backlog looks healthy. What we are seeing—and I think I have mentioned this before, Walt—is we can see a little further in that business than other parts of our business. If you look at the aged backlog, it points through the summer. Build season looks robust. Globally, that business—the leader, Jay, and his team—have done a really nice job building further opportunities in places like India and the Middle East. Those we are watching a little more closely. We had a good quarter in Q1 in some of those areas where we see faster growth. It looks like Q2 is going to be a little bit slower just based on the global dynamic and how that touches fuel price and some of that investment. Other than that, we are still helping out with infrastructure, so if there is a need for that real time, we do. But the U.S. looks great. It is still the biggest part of our market, and the international prospects are still healthy. If and when the Middle East settles down, our view is out two or three years we have some really nice growth opportunities. The timing of those may be off slightly here this year. Walter Liptak: Okay. Thanks for pointing that out. Operator: Thank you. And our next question comes from the line of Matt Summerville with D.A. Davidson. Analyst: Hi. This is PJ Haliburon on for Matt Summerville. I was just wondering if you are seeing any impact from the updated Section 232 tariffs. Thank you. Joseph Ruzynski: Good question. The updated tariffs really had a fairly neutral impact to us—our business, our products. We did a complete review of that when it was announced earlier in April. In general, no major change there. The tariff news that has come out the last few months for us has been neutral to slightly positive just given the position of our product and where we manufacture it. We are largely an in-region, for-region manufacturer, so that has helped us a little bit to create some stability. We still are doing a little bit of work—including the 232s—of resetting our supply chain, but we expect to see some good progress and to finish some of that work up here over the next few quarters. The latest announcement had a largely neutral impact to us. Operator: I will now hand the call back over to CEO, Joseph Ruzynski, for any closing remarks. Joseph Ruzynski: Thanks, Andrew. Our first quarter was a great start to the year. Our execution for strategy transformation and serving our customers every day was strong. Our growth engine is fueled by serving faster growing markets, innovation, and channel expansion. The leading indicators show us we are working on the right areas. Our productivity path is on the right trajectory with pockets of strength and some great opportunities to accelerate. We are confident in 2026. Despite global challenges and risks, our strategy will give us the avenues to add customers, serve new markets, and increase our productivity throughout the year. We are confident in our strategy. We like the businesses that we are in. Thanks, everyone, and have a great week. Operator: Ladies and gentlemen, thank you for participating. This does conclude today's program, and you may now disconnect.
Operator: Good morning. And welcome to the FirstSun Capital Bancorp First Quarter 2026 Earnings Conference Call. At this time, all participants are in listen-only mode. Later, we will conduct a question and answer session. If you would like to ask a question during this time, simply press star followed by the number one on your telephone keypad. If you would like to withdraw your question, press star one again. Also, as a reminder, this call may be recorded. I would now like to turn the call over to Ed Jacques, director of investor relations and business development. You may begin. Ed Jacques: Thank you, and good morning. I am joined today by Neal Arnold, our chief executive officer and president, Robert Cafera, our chief financial officer, and Jennifer Norris, our chief credit officer. We will start the call with some brief remarks to highlight commentary around our first quarter results and the recent First Foundation acquisition before moving into questions. Our comments will reference the earnings release and earnings presentation which you will find on our website under the Investor Relations section. During this call, we will comment on our financial performance using both GAAP metrics and non-GAAP financial measures. Important information about these non-GAAP financial measures, including reconciliations to comparable GAAP measures, is included in the appendix to our earnings presentation and in our earnings release. During this call, we will also make remarks about future expectations, plans, and prospects for the company that constitute forward-looking statements for the purposes of the Safe Harbor provisions under the Private Securities Litigation Reform Act of 1995. Actual results may differ materially from those indicated by these forward-looking statements as a result of various important factors. Please refer to our earnings presentation as well as our annual report on Form 10-Ks and our other SEC filings for a further discussion of the company's risk factors and other important information regarding our forward-looking statements. We undertake no obligation to publicly revise or update any forward-looking statement except as required by law. I will now turn the call over to Neal Arnold. Neal Arnold: Thank you, Ed, and good morning. Thank you for joining us. It is a busy time right now at FirstSun Capital Bancorp as we have just recently closed the acquisition of First Foundation. All of our teams are hard at work on the integration of these businesses. We are seeing some great examples of teamwork throughout our business lines on the sales side as well as across our staff teams, so I am very encouraged by the progress we have made so far, and Robert will talk about that. I would like to start with some comments on our performance and some comments with regard to the First Foundation acquisition. We are pleased with the momentum we saw in our business to start this year. We believe our relationship-focused diversified business model, and being in some of the largest fast-growing markets in the country, continues to be an important driver to our overall performance. For the quarter, we had adjusted net income of $23.7 million, representing adjusted diluted earnings per share of $0.84 and adjusted ROA of 1.14%. We saw very robust loan growth of over 16% annualized in the quarter, as well as continued expansion of our net interest margin to a strong 4.25%, and we also saw solid revenue mix on the noninterest income side representing 24.7% of total revenue. On the asset quality side, we had higher provision, as I am sure you all saw, in the quarter due to a combination of factors: first of all, some portfolio downgrades as well as strong loan growth. Loan balances increased by approximately $267 million in the first quarter. We did see two loan charge-offs; we are seeing some deterioration in value realization in the event of loss. But the significant loan growth we saw in the first quarter materially impacted our higher provision expense. As we have noted before, in addition to traditional return measurements, part of our recurring performance monitoring focuses on what we call our credit-adjusted NIM, and we believe our performance there continues to remain strong. Turning to our recently completed First Foundation acquisition, as I mentioned, we are seeing some great energy across the teams since the deal closed on April 1, 2026. The sharing of information and knowledge across the combined branch teams, across the legacy First Foundation wealth advisory business, and our commercial and residential teams is already driving new business opportunity. I believe this teamwork will drive even greater long-term benefits to our future performance. As I have said from the beginning of this transaction, our focus is on derisking the acquired balance sheet through a repositioning strategy that will allow us to unlock the core franchise and capitalize on the great market opportunities in the newly acquired footprint, particularly in Southern California and in the deposit-rich markets of Southwest Florida. Our second quarter emphasis is on completing the post-acquisition balance sheet repositioning, and we believe we are well underway in execution. I will let Robert cover some of the details there. Our third quarter emphasis is on completing our main application system conversions and unlocking the rest of the additional cost synergies that are included in that. We believe the acquisition represents a significant step forward in the continued growth and evolution of this franchise. The combination enhances our presence in attractive high-growth markets and it further expands our regional footprint and gives us greater scale across our core businesses. Strategically, the expanded branch network will strengthen our ability to serve clients locally while enhancing our deposit-gathering capabilities and overall relationship density. In addition, the transaction significantly expands our wealth platform, which will allow us to deliver a more comprehensive suite of advisory and investment solutions to a broader client base. Taken together, we believe these benefits enhance our long-term growth profile and improve the revenue diversification and strengthen the durability of this franchise so that we drive sustainable long-term value for shareholders. Our near-term focus remains on disciplined execution of our acquisition-related activities and completing the balance sheet repositioning we talked about, successfully executing our system conversion, and realizing the identified cost synergies. As we move through this year, we are confident our execution will drive improved profitability, a stronger funding portfolio, and great long-term shareholder value. Overall, I am really proud of the hard work all of the teams have been underway on and excited by the momentum across our extended footprint and the opportunities that lie ahead. I will now pass the call over to Robert for some further color on our financial results as well as some of the integration activities underway. Robert Cafera: Thank you, Neal. Starting with our first quarter performance, on the balance sheet side for the first quarter, and on a spot end balance basis, we achieved healthy loan growth of over 16% annualized, primarily in the C&I portfolio as we continued to see success across the high-growth markets in our footprint. We saw our line utilization increase by 4% from the end of last year. Just as a reminder, recall that our line utilization was down 3% at the end of last year, so that piece is really just a function of timing. New loan fundings totaled $528 million in the first quarter, up 47% from the fourth quarter and 32% from the first quarter of last year. Loan growth was heavier on the back end of the quarter, so while average balances in Q1 saw a lesser growth rate, we see a nice tailwind here heading into Q2 from an NII perspective. I would also note that our pipelines remain pretty robust as we begin to move through the second quarter. On the deposit side, on both an average balance and period-end basis, our overall deposit balances were down slightly. Aside from general seasonality pressure that exists in the first quarter every year within a few segments in our deposit customer base, one specific component driving the decline in deposits was on the brokered deposit side, where balances declined by approximately $60 million. From a product mix perspective, you will see the negative influence to balances from the decline in brokered within the CD category as balances were down there in total, mitigated somewhat by average balance growth in interest-bearing demand and money market accounts. Turning to the P&L side, we are quite pleased with the first quarter net interest margin, which ended at a strong 4.25%, up 7 bps from the fourth quarter. This is now 14 consecutive quarters we have enjoyed a net interest margin above 4%. The NIM expansion was largely driven by improved funding costs, with interest-bearing deposit costs down 14 basis points compared to the prior quarter. All in all, we are very pleased with our margin performance and the corresponding 11% year-over-year net interest income growth. We believe this is a testament to our continued focus on relationship depth across our client base. On the service fee revenue side, we saw a really nice start to the year with noninterest income to total revenue of 24.7%. While noninterest income in total was up slightly compared to Q4, we saw approximately 25% growth over the first quarter of last year, with continued strong performance in our mortgage business. We also saw continued growth in our treasury service fee revenues in Q1, which continue to be a growth engine for us. Our total adjusted noninterest expense in the first quarter, excluding merger-related expenses, was up from the fourth quarter by approximately $2.8 million, primarily related to increases in salary and employee benefits. Our employee base increased in the first quarter as we continue to invest in our sales force. We do continue to see great opportunity in Texas and Southern California from a growth opportunity perspective. We also saw a bump, sequentially speaking, in the annual payroll tax and retirement account contribution, which resets in the first quarter every year. We also saw an increase in overall medical insurance costs. On the asset quality side, provision expense for the first quarter was $8.3 million and our allowance for credit losses as a percentage of loans was 1.2%, a decrease of 7 bps from Q4. As Neal noted, our provision expense for this quarter was due to a combination of net portfolio downgrades and our strong loan growth. We took a charge-off on a telecom loan that we had partially reserved for last year and we took a charge-off on an auto finance lender loan that we had fully reserved for last year, both of which were part of our charge-off expectations for 2026. These two loans drove the bulk of the $10.5 million in net charge-offs, or 63 basis points on an annualized basis. Overall, we are not seeing broad-based credit issues across any particular geography in our footprint or sector within our portfolio. However, we have seen a relatively consistent level of nonperformance in the portfolio as a whole, with an average level of nonperformers around 1% of the loan portfolio over the last year, although that level did come down slightly to 86 basis points at the end of the first quarter. I will just underscore what Neal noted earlier, and that is the significant level of loan growth we saw did result in incremental loan loss provisioning for us in the first quarter. Our overall level of credit-adjusted NIM, which we referenced on page 15 in our earnings presentation deck, came down slightly as well, but is still above peer averages. On the capital side, we continue to strengthen our position as we ended the first quarter with our TBV per share improving by $0.74 to $38.57. Next, I will turn to a few comments on the First Foundation acquisition. As Neal noted, there is a lot of momentum on the business side, and all of our integration activities are well underway. Our macro objective again is to derisk the acquired balance sheet and transform the business to look more like FirstSun Capital Bancorp. I will start with an overview on our balance sheet repositioning activities, and I will note that we have some details in the earnings presentation on this topic on page 20. At the end of the first quarter, before the transaction closed, First Foundation had already made significant progress on the loan downsizing, successfully reducing balances by approximately $1 billion, or 44% of the planned $2.3 billion in total loan downsizing. We are now actively working on the remaining $1.3 billion in total loan downsizing, and based on our ongoing work with certain counterparties there, we expect to be completed by the end of the second quarter. Even after the remaining planned repositioning activities are complete in the second quarter, we expect to continue to remix the acquired loan portfolio and specifically expect to continue to bring down the multifamily balances as they naturally hit their scheduled repricing dates over the next several years. We have approximately $310 million in scheduled repricing in the acquired multifamily portfolio over the remainder of 2026 and another approximately $400 million in 2027. Our focus here will be on keeping true relationships rather than where it is simply a credit-only situation. To us, credit-only is not a true relationship, and this is where we want to derisk the portfolio. Additionally, while our initial targeted balance reduction in the SNC portfolio is complete, we also expect to strategically continue to reduce the non-relationship balances in this portfolio on a go-forward basis, again with an emphasis on cultivating true relationships that have deposits and connections into our service revenue businesses like treasury management and wealth advisory services. Also, we expect to bring down the overall investor CRE concentration level to below 250% of capital by the end of the second quarter. As a reminder, while the legacy FirstSun Capital Bancorp investor CRE concentration level was less than 120% at the end of the first quarter, the loans acquired from First Foundation did result in that level increasing significantly post acquisition. As to the other components of our repositioning work, in the month of April, we completed all of the downsizing in the securities portfolio and have already meaningfully exited some of the higher-cost funding, including all of the acquired FHLB term advances totaling $1.4 billion. Similarly, we expect we will utilize the proceeds from all the remaining second quarter repositioning on the asset side to exit funding targeted in Q2, including our initial targeted brokered deposit balance exits. I will note that, similar to our continued remix plans on the loan side, we also plan to continue to bring down the brokered deposit balances as those remaining maturities occur in future quarters. We do expect we will be on target to bring down the overall wholesale funding ratio to approximately 10% by the end of the second quarter. As a reminder, while the legacy FirstSun Capital Bancorp wholesale funding ratio was only approximately 6% at the end of the first quarter, the acquired funding mix at First Foundation did result in the level of wholesale funding increasing significantly post acquisition. We are very pleased with our progress to date on all of our repositioning work and we believe we will hit our targets by the end of the second quarter. Our most significant application system conversion is scheduled for late September 2026. So while we have already begun to realize cost synergies post closing, and I would say we will be at roughly 65% phased in for the cost synergies at the end of the second quarter, we will not reach a fully phased state until the end of this year. That is largely related to the timing for our largest system conversion in September and another separate system conversion on the wealth business side scheduled for Q4. On the cost save side, once we are fully phased in, based on all our preliminary work to date, we believe the overall level of fair value marks may come down a bit as compared to our expectations at the time we announced the transaction in October. While this means we could see a lesser level of TBV dilution, perhaps by a couple percentage points, we expect it will also translate into a lesser level of interest rate mark accretion in the go-forward P&L. We also believe we will see a slightly higher CET1 ratio compared to our expectations at the time we announced the transaction in October, and expect we will have capacity for some nearer-term share repurchases. Specifically, as noted in our earnings presentation deck, we are expecting CET1 in the 11% range post repositioning, which compares favorably to the 10.5% we referenced when we announced the deal back in October. Finally, I thought I would make a couple references to our 2026 full year financial outlook, which we have updated to reflect the acquisition and includes preliminary estimates of purchase accounting adjustments and expectations related to the balance sheet repositioning. You will see our 2026 outlook in the earnings presentation on page 21. On the balance sheet side for loans, given our continued focus on the remix of acquired balances, we expect balances to be relatively stable to post-reposition and post-mark balances through the end of the year and then expect to return to a balanced growth mode. While we expect healthy new loan origination levels this year, as I previously noted, we also expect to continue to remix the acquired First Foundation loan portfolio. This means we will have additional balance runoff and leads to our view of relatively stable balances in comparison to the post-reposition and post-mark starting point considering the acquisition. For deposits, given our continued focus on the remix of acquired balances, we expect balances to be relatively stable to post-reposition and post-mark balances through the end of the year and then expect to return to a balanced growth mode. On the NIM side, in addition to our strong legacy FirstSun Capital Bancorp NIM run rate, our repositioning work and the impact from purchase accounting will have a significant favorable impact to the most recent First Foundation first quarter NIM of 1.07%. We expect our full year 2026 net interest margin to be in the mid-3.80s range; however, for the next couple quarters, we expect to see a drop as we complete the downsizing in Q2 and as we work to further remix the acquired base in Q3, with the fourth quarter NIM expected to elevate into the 3.90s performance range. In terms of revenue mix, we expect our level of noninterest income to total revenue to decline into the lower twenties range. In terms of adjusted efficiency ratio, which excludes merger-related expenses, we expect to operate in the mid- to lower-sixties range for the next couple quarters and then drop to an approximate 60% level in the fourth quarter. In terms of net charge-offs to average loans, we expect levels to end the year in the mid-twenties in basis points, albeit on a higher average balance base post acquisition. Overall, we are very pleased with the progress we have made with respect to the acquisition to date. We believe the combined earnings profile will quickly take the shape of what you have become accustomed to from legacy FirstSun Capital Bancorp. I will now turn the call back to the moderator to open the line for questions. Operator: Thank you. We will now open the call for questions. Your line will remain open for follow-up questions. We ask that you pick up your handset when asking a question to allow for optimum sound quality. If you are muted locally, please remember to unmute your device. Please stand by while we compile the Q&A roster. Your first question comes from the line of Wood Lay with KBW. Wood Lay, your line is open. Please go ahead. Wood Lay: Hey, good morning, guys. To start on the size of the balance sheet, and as you mentioned, tangible book value dilution with the deal is coming a little bit better than expected because the marks are lower, but that could have a slight impact on EPS as well. But it also looks like, you know, the repositioning is ahead of schedule, and it is about a billion more than what was initially laid out at the merger announcement. How do you expect the smaller balance sheet to impact that $5.24 EPS run rate that you initially laid out at deal announcement? Robert Cafera: Morning, Wood Lay. Thank you. So, yes, we do see a little bit more in repositioning as we outlined on slide 20 in the earnings deck. That is largely related to, or entirely related to, I should say, a short-term leverage strategy that the First Foundation team deployed for the pendency period. So that is what is driving that. It was entirely wholesale deposit funded, and so that is, if you will, the reconciliation between the original $3.4 billion and what you see on slide 20 there of $4.4 billion. In terms of our expectations on an after-repositioning balance perspective, they are largely unchanged because that was an incremental leveraging on the balance sheet that was deployed post announcement. So, if you will, the balance sheet base, our expectations are largely unchanged from announcement as we look at 2026. We do see a lot of healthy opportunity and expect healthy origination in the core C&I space, and we expect that will be met with some incremental remix and balance runoff as we continue to work through and get the overall concentration levels down from the acquired balance sheet. We do, as you referenced, see some slight improvement in the TBV dilution as a result of where marks are coming in as we are looking at those here preliminarily now in the second quarter. We put some guidance on slide 21 in terms of the level of loan interest rate accretion for 2026. It is relatively comparable to what you saw in the investor deck back in October, or the announcement deck back in October. And that relative comparability extends into 2027 as well. So we feel pretty good about that $5-plus level as you look forward to 2027 that was referenced in the October announcement deck. Wood Lay: That is extremely helpful. I appreciate you walking through the moving pieces there. Maybe just thinking about the net interest margin, I appreciate the glide path you provided for 2026. But as we think about longer term, there are still some remix initiatives going on behind the scenes. Do you think the NIM is higher in 2027 as that remix occurs, improving off that 4Q expected base in the 3.90s range? Robert Cafera: Yes, as I had mentioned for the fourth quarter of 2026 and as we referenced in the deck on slide 21, we expect 4Q to be in the 3.90s range. As you look forward into 2027, I would expect a little bit of an uptick from that level, but it is going to be in that same neighborhood. We feel pretty good about that as a run rate as we extend out looking over the near-term horizon here, end of fourth quarter 2026 and for 2027. Wood Lay: Got it. Maybe just the last for me. You sounded a little more incrementally positive on buybacks and being active there. CET1 is coming slightly above where you laid out. Just thoughts on where you would like to keep CET1 for the pro forma company. Any target you are thinking of? Robert Cafera: Fair question. We have looked at an 11% level for CET1. I think we have referenced that in the past, and that is a level that internally, in our conversations with our board, we have said is a targeted level for CET1. And as you referenced, we do see the capacity for some near-term share repurchase activity. Those are always active conversations within our boardroom and will continue to be. But we feel really good about our capital positioning. Wood Lay: Alright. I appreciate you taking my questions. Operator: Thank you, Wood. Your next question comes from the line of Michael Rose with Raymond James. Michael, your line is open. Please go ahead. Michael Rose: Hey, good morning, guys. Thanks for taking my questions. Maybe just following up on some of the loan growth commentary that you provided. It sounds like there is going to be some ongoing remixing as we get beyond the second quarter into the third and fourth, but is that largely complete by the time you get to the end of the year? And then with, you know, some of the personnel shifts and changes that I think will happen on the First Foundation side, and ongoing hiring efforts, how should we think about the pro forma intermediate- to longer-term growth rate for the company beyond this year as some of those remixing activities run their course? Neal Arnold: Morning. I guess what I would say, Michael, is that the loan growth we had in the first quarter was surprising to us. Both Southern California and Texas are leading the way and we are seeing that across some of those markets. The remix that we are going to have going on is a multiyear one as we see maturities on the multifamily portfolio. Some of those we will keep as they become deposit clients; some of those will run off. The more loan growth we have on the C&I side, I would say the asset yield step-up will happen. The other thing I am pretty bullish on is the focus on core deposits across our franchise. The deposit teams have already kicked off their campaign, and we could see a material impact as we continue to improve the mix on the funding side. Obviously, getting rid of wholesale was the immediate priority, but I would say just remixing the core deposit work—Robert and the teams have been hard at it. Robert, I will let you add to that color. Robert Cafera: Just to underscore what Neal was referencing there, Michael, and back to one of the remarks I made in the prepared section, there is scheduled repricing in that multifamily portfolio here not only in 2026 but also in 2027 at somewhat elevated levels. So that is, if you will, a bit of a headwind from a growth perspective, but again it is all part of our overall strategy on bringing concentration levels down as we have talked about, and it will mute the overall growth in 2026 to that relatively stable level that we have referenced. There is roughly another $400 million in repricing scheduled, and as Neal referenced, our objective is to get deposit penetration within that base and convert to core relationships. That is what the team will be hard at work at. As we cast forward into 2027, I referenced returning to a growth mode. We certainly see more of a growth mode as we look out into 2027 and beyond. Michael Rose: Okay, that is helpful. I will not try and pin you down for a percentage in 2027. Maybe if we can switch to credit. I appreciate the reminder and the color on those two credits that were kind of the bulk of the charge-offs this quarter. Obviously, the guidance implies a pretty big step down in the combined charge-off rate as we move forward. You have been pretty clear that given the C&I mix and how it is higher than peers and the average size of your loans being a little bit higher, credit is going to be, on a ratio basis, somewhat lumpy. What gives you confidence that you can operate in that ~20 bps range not only this year but as we move forward as growth reaccelerates? Robert Cafera: You are right, Michael. Given our heavier C&I mix, we do see credit coming in some lumpy fashion at times. We have had the onesie-twosie as we look back over the course of the first quarter in 2026 and back into 2025. One of the things that we intently focus on, of course, is the overall return level within the business and the underlying economics that we are delivering. One of those metrics that we do point to is that credit-adjusted NIM level. Given we are in a heavy C&I business, credit spreads that we are operating with are obviously different than a CRE-heavy bank mix—i.e., we are 300-plus spreads, as opposed to 200–225 kind of spreads. We realize that the credit profile on the C&I side will lead to some lumpiness at times. As the teams work hard constantly on our portfolio, we are not seeing broad-based structural issues in a sector or in a geography within the portfolio. It is just one-off isolated instances—this past quarter a telecom company, an auto finance lender. Both of those we had spoken about and referenced in the prior year, and we are seeing some elevated loss realization levels there on those exits. But it is the overall performance in the business—being able to continue to operate strongly from an overall return perspective, that credit-adjusted return perspective—and the absence of any deep broad-based issues across the portfolio. We have been operating around the 1% NPA level, actually down in Q1 to 86 bps. The first quarter on an annualized basis looks a little elevated because we did take those couple charges in the first quarter. They were all part of what we saw coming at us for fiscal 2026. The point of realization became Q1 for both of those. Hopefully that gives you a sense for how we are looking at the business and what we are seeing that leads us to our guidance around that mid-twenties level on charge-off performance. Neal Arnold: Michael, I would just add we have never liked losing money, but the hard part with C&I is we do not have an industry concentration, and we are not seeing it out of any one sector or one geography. So it makes it hard to forecast. If I could plan for events, I would certainly rather not have charge-offs in our biggest loan quarter. It is what it is, and we do not take it lightly. We are provisioning on the front end for some extraordinary loan growth, and we will still continue to say we want more C&I opportunity because on a risk-adjusted NIM, it is the best thing we can do. Michael Rose: Totally get it. I appreciate all the color. Maybe just last one for me. If I go back to the slide deck from when you announced the deal, you talked about a 1.45% pro forma ROA and about a 13.5% ROTCE. Understanding some of the marks and the rate landscape have certainly changed, any updates to those targets? I know you talked about the tangible book value being a little bit less; I would expect there would be some change there. Any updates there? And if we were to exclude the impacts of expected accretion in 2027, what could those levels look like? Robert Cafera: As you look at returns in the business and in comparison to what we referenced in the announcement deck, given the lesser level of TBV dilution and the linkage on the mark side, there is some lesser level of accretion—not materially, as I mentioned a little bit ago—relative to our expectations on a bottom-line EPS perspective in 2027. We do think we are still in that $5 neighborhood for 2027. Returns as you look at next year will certainly be increasing over 2026 levels. I would say coming down a little bit in relation to what was in the announcement deck, but certainly above the most recent return levels that we delivered in fiscal 2025 in the low 1.20s on the ROA side. On the capital side, we will continue to look at the right mix of capital given our overall target levels, coming out a little favorably on that side and having a more near-term capacity for some possible repurchase activity, which can certainly impact favorably the return on tangible capital levels as well. Neal Arnold: The only thing I might add is I like the flexibility of the new combined balance sheet—that we have both the floating-rate growth in C&I and the term nature of the multifamily. On prepay and otherwise, I would not trade our balance sheet for anyone out there. Operator: Your next call comes from the line of Matt Olney with Stephens. Matt, your line is open. Please go ahead. Matt Olney: Thanks, and good morning, everybody. Going back to the repositioning efforts in recent weeks, it sounds like you are getting some pretty good pricing versus original expectations on the loan dispositions. Anything you can disclose or any color you can give us as far as the Shared National Credits or the multifamily efforts as far as pricing versus original expectations? Robert Cafera: I would say on the SNC side—very successful performance there. The initial targets on the SNC side First Foundation completed all of the strategic exits actually prior to 03/31, so real strong performance on the SNC side. On the multifamily side, we are very favorably pleased with our discussions so far, and we continue to work with counterparties on all the remaining loan sales that we believe will conclude and complete here in the second quarter. We are very pleased with what we have been talking about and what we think we will ultimately realize there, maybe slightly better than our original targets, but very, very pleased. Matt Olney: Thanks for that, Robert. And then on the expense side, any more color on expenses at the combined company that we will see in the near term? I think we can see the disclosure for First Foundation expenses and, obviously, FirstSun Capital Bancorp. Should we just add these two together initially before we recognize some of these cost savings? Or is there anything more nuanced in the run rate of either side that you want to disclose as we think about our estimates? Robert Cafera: Thank you for the question, Matt. You are right. As you look at First Foundation in the first quarter, it was, call it, a $56 million kind of run-rate level. If, to your point, you just add that with FirstSun Capital Bancorp and apply some cost saves—as I mentioned, we think we will be at about a 65% level on cost saves in the second quarter—we are well on our way in total on cost saves and actually expect to be slightly above our original targets there. The original target was 35% of the First Foundation core expense base, so if you just apply that math, that should give you a pretty close approximation for where we would see Q2–Q3, consistent with our expectations on efficiency being in the mid-60s for the next couple quarters and then dropping into the lower 60s in the fourth quarter. Matt Olney: Okay, appreciate that, Robert. And just to follow up on your last point there, I think we talked about that efficiency ratio getting to the 58% range when full cost saves are recognized, and I understand we do not quite see that in the fourth quarter given the timing of conversion. Do you still see that efficiency ratio moving to the 58% range in 2027? Robert Cafera: We do. If we are in the low 60s in Q4, as you look forward and go back to the October announcement looking at 2027 run rates, we do see improvement over that low 60s in the fourth quarter to get to around that neighborhood. So, yes, we feel real good about our overall projections from an efficiency ratio standpoint. Operator: Thank you. Your next call comes from the line of Matthew Clark with Piper Sandler. Matthew, your line is open. Please go ahead. Matthew Clark: Thanks. Good morning, everyone. I want to start on slide 20—the First Foundation deposits. On the right side, they are running off another $2 billion, so call it $6.75 billion after that. How much of that $6.75 billion do you anticipate to be noninterest bearing, just knowing that some of that might be ECR related? Robert Cafera: Fair question. In terms of the total mix of the portfolio on a go-forward basis, I would probably see, what would that be, low 20s. If you look at where our mix is on a noninterest-bearing to total base standpoint, we are between 20–25%, probably closer to maybe 23%. If you look go-forward, post acquisition, post repositioning, we will still be in the 20s, but that is going to drop a couple percentage points. Matthew Clark: Okay. And then on the margin here in the near term, I think your guide includes the 4.25% you just put up in the first quarter. That would suggest a decent step down in the margin here in 2Q. Any thoughts around the cadence of the margin to get to that 3.90% in the fourth quarter? Do we step down to like a 3.70% here in 2Q and build back? Robert Cafera: Fair question. As you look at the overall guidance for a mid-3.80s on the year and a Q4 in the 3.90s, how do you get there in the math for Q2 and Q3? You are going to see 3.60s–3.70s stepping from Q2 into Q3 before you get to the 3.90 neighborhood in Q4. Matthew Clark: Okay. And then if you were to strip out the Fed rate cut, what would that do to your margin guidance? Robert Cafera: It would have a nominal impact on the margin guidance—a basis point or two. Matthew Clark: And then just on the net charge-off guidance of the mid-20s, again, it assumes that pretty big step down, maybe to 20 basis points going forward. I am assuming that is partly because you are marking First Foundation’s balance sheet—so a lot of the portfolio will not have the losses there just because it has been marked up front. Is that fair and consistent with what you are thinking? Robert Cafera: We are marking the First Foundation balance sheet. Under the new guidance, the credit mark is now in ACL. So if ultimately we do see a loan that we have fully reserved for in purchase accounting, it is fully reserved for in that ACL line. If we see something on the First Foundation side, it will still roll through charge-off even though it will have no P&L impact, just to be precise on mechanics. So it could end up in a charge-off percentage base in 2026. But yes, relative to the 63 basis points in Q1, we see a step down. Those two credits in Q1 were part of our expectations for full 2026. The point of realization became Q1 for both of those. We see a step down in activity over the course of the next three quarters to get to that overall mid-20s for the full year. Matthew Clark: How much did those two credits contribute to the $10.6 million net charge-offs this quarter? Robert Cafera: More than $10 million. When I say bulk, it truly is bulk. Operator: There are no further questions at this time. I will now turn the call over to Neal Arnold for closing remarks. Neal Arnold: Thank you. We appreciate you all joining the call this morning and your continued interest in FirstSun Capital Bancorp. Thanks for the day. Operator: This concludes today's call. Thank you for attending. You may now disconnect.
Operator: Good morning, ladies and gentlemen, and welcome to Banco Latinoamericano de Comercio Exterior, S. A. First Quarter 2026 Earnings Conference Call. A slide presentation is accompanying today's webcast and is also available on the Investors section of the company's website at bloodex.com. There will be an opportunity for you to ask questions at the end of today's presentation. Please note today's conference call is being recorded. As a reminder, all participants will be in a listen-only mode. I would now like to turn the call over to Mr. Jorge Salas, Chief Executive Officer. Sir, please go ahead. Jorge Salas: Good morning, everyone. And thank you for joining us today to discuss Banco Latinoamericano de Comercio Exterior, S. A.'s results for 2026. I will begin with a brief overview of our quarter, then Annette, our CFO, will walk you through the financials in greater detail. After that, I will come back with an update on strategy execution, some thoughts on the macro environment, and our outlook for the rest of the year. Finally, we will open the line for questions. We began 2026 with a very strong quarter in terms of balance sheet growth while maintaining solid profitability in a highly competitive environment with very tight spreads and wide-open capital markets for LATAM issuers. The main highlight of the quarter was the continued expansion of our commercial portfolio. We reached a record of $12 billion, up 8% quarter over quarter and 13% year over year. This was fully in line with the growth path we have been discussing in previous quarters and supported by the additional capital flexibility provided by the AT1 issuance completed last year. Growth was driven mainly by medium-term transactions across Colombia, Brazil, and Guatemala. On the funding side, deposits once again reached record levels, closing the quarter at $7.3 billion, up 11% quarter over quarter and 25% year over year. This strong performance was broad-based across all depositor segments, with Yankee CDs standing out, surpassing $1.7 billion. This reflects continued client activity, the strength of our franchise, and our ability to continue growing deposits at very competitive spreads, which has also helped support margins in the current rate environment. Turning to revenues, net interest income totaled $70 million, down slightly in the quarter as the balance sheet continues to absorb the full repricing of last year's rate cuts. Latin America has been one of the more resilient regions in a volatile global environment. That has translated into strong liquidity, tighter spreads, and increasing competition. Even in that context, we were able to maintain our net interest margin at 2.34%, supported by disciplined balance sheet management. Strong asset growth, deposit increases, and active liquidity management helped offset pressure on spreads. Fee generation in the first quarter typically runs below fourth quarter levels in our two main fee businesses, letters of credit and syndications, so this seasonal pattern is not unusual. Importantly, when compared with the first quarter of last year, the underlying trend remains clearly positive. We continue to see a healthy pipeline in fees for the second quarter, which is consistent with how activity is evolving. Expenses also reflected the usual seasonality at the start of the year. That said, we do expect expenses to increase slightly over the coming quarters as we continue to execute the investment plan contemplated for the rest of the year. Efficiency levels for 2026 will remain within guidance at roughly 28%. Net income for the quarter reached $56.4 million, return on equity was 14.2%, and our Tier 1 ratio closed the quarter at 17.9%, allowing us to continue supporting growth from a position of strength. So overall, this was a quarter of strong growth and solid profitability despite a more competitive revenue environment. With that, let me now hand it over to Annette for a more detailed review of the financial results. Annette, please go ahead. Annette Vanjorde: Thank you, Jorge, and good morning, everyone. Let me walk you through the financial highlights for 2026. From a financial perspective, this quarter represents a solid start of the year. We continue to grow the balance sheet with discipline while maintaining stable profitability in a lower-rate environment, supported by continued strengthening of our funding mix and solid fee generation despite first quarter seasonality. Starting with earnings and returns, Banco Latinoamericano de Comercio Exterior, S. A. delivered net income of $56.4 million, up 9% year over year and broadly stable quarter over quarter, reflecting the consistency of our core earnings generation. Importantly, return on average assets remained stable at 1.8% even as we continue to grow the balance sheet. This reflects the bank's ability to expand while preserving sustainable profitability. Return on adjusted equity stood at 14.2%, in line with the previous quarter and within our 2026 guidance range, reflecting stable earnings generation. As usual, first quarter results should be assessed in context. The period is typically seasonally softer, particularly for fee income, and this quarter we operated in a lower interest-rate environment, which naturally placed some pressure on spreads and returns. As we will see through today's presentation, despite this backdrop, our first quarter performance reflected the benefits of disciplined balance sheet growth, stable net interest income, continued funding optimization, and higher fee generation compared to the same period last year. Let us now turn to balance sheet growth and commercial activity. The commercial portfolio reached $12 billion, increasing 13% year over year with growth across both loans and contingencies. Within this total, loan balances closed at $9.7 billion, reflecting continued execution of our commercial pipeline, while contingent exposures reached $2.1 billion. The quarter's performance was supported by the execution of a strong pipeline of medium-term transactions, including activity originated through our structuring and distribution team. At the same time, our focus remains on selective origination and efficient capital rotation, with 64% of exposures maturing in less than one year, supporting flexibility, disciplined risk management, and repricing capacity. From a composition perspective, diversification remains a key strength. Country exposures are well distributed, with no single country representing more than 15% of total exposure. Guatemala, Brazil, Colombia, and Mexico remain among our main markets while the overall mix reflects a balanced regional footprint. Industry diversification also remains strong. Financial institutions represent 25% of total exposure, while corporate lending is well spread across sectors linked to regional economic activity and trade growth. Starting this quarter, our commercial exposure includes a small bond position focused on LatAm issuers recorded at fair value through OCI totaling $234 million. This represents a tactical capital deployment tool allowing us to selectively capture opportunities within our existing credit framework while continuing to prioritize loan growth. The fair value OCI classification also provides flexibility to manage dispositions over time, including adjusting exposures as credit or market conditions evolve, consistent with our risk-adjusted returns objectives. With that, let me now turn to liquidity and the investment portfolio. As we continue to grow the balance sheet, maintaining a strong liquidity position remains a key part of our funding and risk management discipline. At quarter end, liquid assets totaled $2 billion, representing 14.5% of total assets, remaining well within regulatory requirements and providing flexibility to support commercial growth while preserving prudent liquidity buffers. The composition of liquidity remains highly conservative, with around 80% placed at the Federal Reserve Bank of New York, and the remainder primarily held with high-quality counterparties and multilateral institutions. The treasury investment portfolio closed the quarter at $1.44 billion, increasing 14% year over year. The investment book remained 96% investment grade, geographically diversified outside Latin America, and short in duration, with an average maturity of approximately 1.5 years. These characteristics make it a strong complement to our liquidity structure, providing earnings support and contingent funding capacity, as these securities are eligible for access to the Federal Reserve Discount Window through our New York agency. Overall, liquidity and investments continue to provide flexibility, resilience, and earnings support as we grow the balance sheet. Turning to asset quality, credit quality remains strong and stable, consistent with the bank's disciplined approach to origination, underwriting, and ongoing monitoring. At quarter end, total credit exposure reached $13.5 billion, with the vast majority remaining in Stage 1, representing 97.5% of total exposure. Stage 2 exposures represented 2.2%, or approximately $300 million, while Stage 3 remained minimal at 0.3%, or around $39 million. This continues to reflect the high-quality profile of the credit book. From a reserve perspective, total allowances reached $112 million, with a coverage ratio of 0.83%, broadly stable compared to the previous quarter. In addition, coverage of impaired credits remains strong at 2.9 times, reflecting a prudent reserve position. The increase in Stage 2 during the quarter primarily reflects our proactive credit assessment of selected exposures in the context of a somewhat more challenging operating environment. Importantly, impaired credits remain stable, and no material credit events were recorded during the quarter. Asset quality therefore remains a core strength of the bank, supported by high-quality exposures, prudent reserve coverage, and continued proactive risk management. Let us now move to the funding side of the balance sheet. We continue to see strong momentum in deposit growth, which remains the foundation of our funding strategy. Deposits reached a record level of $7.3 billion, representing 63% of total funding, increasing both in scale and relevance within our liability structure. Growth was broad-based, driven by corporate, financial institution, and multilateral clients, while Class A shareholder deposits continue to provide a stable and efficient anchor. In addition, Yankee CDs reached a record level of $1.7 billion, further enhancing the diversification and duration of our deposit base. As a result, deposits continue to support balance sheet growth through a more stable and cost-efficient funding structure, which remains an important driver of our ability to sustain margin within our guidance expectations. Beyond deposits, we continue to actively diversify our medium-term funding sources. During the quarter, we executed an additional tranche under our Middle Eastern syndicated loan, alongside other bilateral transactions, further expanding our investor base. More recently, we completed another successful issuance in the Mexican market of roughly $250 million, which was swapped into U.S. dollars at a cost well within our U.S. dollar curve. This transaction reflects our continued access to diversified funding sources as well as our ability to capture attractive opportunities while optimizing our cost of funds. This quarter’s results show continued progress in strengthening the liability side of the balance sheet, improving the quality, diversification, and duration of our funding while reinforcing the role of deposits in supporting both margin sustainability and balance sheet growth. Let me now turn to capital. Our capital position remains strong and well above our target levels, providing ample capacity to support continued balance sheet growth. At quarter end, our Basel III Tier 1 ratio increased to 17.9% from 17.4% at year-end 2025, while our regulatory capital adequacy ratio under Panama's banking framework stood at 14.7%, well above the regulatory minimum. It is important to note that these two ratios are based on different methodologies and therefore do not necessarily move in the same direction quarter to quarter. The Panama regulatory ratio follows a more standardized framework, while the Basel III ratio is more risk-sensitive and better captures changes in the underlying risk profile of our exposures. In the first quarter, the increase in the Basel III ratio was driven mainly by lower risk-weighted asset intensity, reflecting the regular revision of our internal risk parameters incorporating the continued strong performance of the credit book. Looking ahead, we continue to expect disciplined capital deployment through 2026, in line with our broader strategic execution. As capital is deployed, we expect the Basel III Tier 1 ratio to gradually move towards our 15% to 16% Tier 1 guidance range, which remains the appropriate operating level for the bank. Our capital position remains strong and continues to provide ample capacity to support growth while preserving balance sheet resilience. Moving now to net interest margin and spreads, during the quarter, net interest margin stood at 2.34% while net interest spread was 1.69%, reflecting resilient performance in what remains a challenging rate environment. Margins continue to be shaped by several dynamics. The rate cuts implemented in 2025 have had some impact on NIM, while ample market liquidity and strong competition for quality assets continue to pressure loan pricing, particularly in short-term lending. In addition, while loan average balances remained broadly stable, supporting consistent net interest income, most of the incremental balance growth was concentrated towards the end of the quarter. Therefore, the earnings contribution from this growth was only partially captured in first quarter NII, with a fuller impact expected to be reflected in subsequent periods. At the same time, these pressures have been partially offset by the execution of medium-term transactions which contribute to a more stable margin and support overall asset yields. On the liability side, continued deposit growth helps support balance sheet growth more efficiently, reinforcing a more stable and cost-efficient funding structure. Taken together, these factors demonstrate the resilience of our margin performance and the benefits of actively managing both sides of the balance sheet. Let me now turn to fee income. In the first quarter, fees and commissions reached $13.1 million, up 24% year over year despite this being a seasonally softer period for fee generation. Letters of credit and guarantees remain the main source of fees, generating $7.4 million in the quarter. This activity remains closely tied to our core trade finance business. First quarter was affected by seasonality, but we see good momentum as we move to the second quarter, supported by higher transaction volumes and increasing but gradual benefits of our trade platform. Credit commitments and other commissions were another important contributor, reaching $2.7 million, more than doubling compared to the same period last year. This reflects the growing relevance of medium-term transactions and committed facilities within our client offering. Our structuring and distribution team also continued to contribute to fee income, generating $3.1 million during the quarter, supported by two transactions closed in Costa Rica and Colombia. Importantly, this was achieved despite some transaction closings shifting from the first quarter into the second quarter. While fee recognition in this business can vary depending on execution timing, the syndicated loan pipeline remains solid. In addition, client derivatives are a part of our strategy to further diversify non-interest income. We are seeing growing client demand, particularly in connection with transaction execution. The pipeline remains active and, while the timing of individual transactions may shift across quarters, we expect this business to begin contributing more visibly as execution builds over the upcoming quarters. Taken together, fee income continues to show solid growth and increasing diversification, supported by trade-related activity, committed facilities, and structuring capabilities, with gradual contribution from client derivatives as activity builds through the year. To close, let me turn to operating expenses and efficiency. Operating expenses for the quarter were $22 million, reflecting the usual first quarter seasonality while also incorporating the impact of strategic initiatives that have moved into production, including higher depreciation, IT-related expenses, and the talent required to support execution. In that context, the first quarter expense base reflects the operating impact of initiatives already underway. The efficiency ratio for the quarter was 26.5%, remaining well aligned with our full-year guidance of approximately 28% and reflecting the bank's ability to absorb strategic investment while maintaining cost discipline. As we move through the year, we will continue investing selectively in technology, capabilities, talent, and execution capacity required to deliver on our strategic priorities while maintaining a strong focus on operating efficiency. In conclusion, the first quarter reflected disciplined balance sheet growth, resilient margins, strong fee generation relative to seasonal patterns, continued funding momentum, and a solid capital position. With that, I will now turn the call back to Jorge for his closing remarks. Thank you very much, Jorge. Jorge Salas: Let me briefly touch on strategy execution and make a couple of comments on the environment we are operating in. We continue to make good progress on our letters of credit platform. Processing times have consistently come down from almost five hours to about one hour per transaction. This productivity improvement has allowed us to handle smaller tickets profitably and deepen penetration with existing clients as we start to scale the letters of credit business. As outlined in our Investor Day last month, transactional deposits are a key component in the new phase of our strategy. In that sense, we have already onboarded our first correspondent banking client, still in pilot phase, and we are currently working on the second one. We now have the governance in place to incorporate additional correspondent banking clients during the year in a disciplined way. And we continue to see a strong pipeline of interested financial institutions in the region for these services, which we see as very encouraging. Turning to the macro environment, while global geopolitical and financial conditions have clearly become more volatile, our region continues to show resilience supported by healthy fundamentals, stable trade flows, and a positive investor sentiment. The reason is clear: Latin America's direct trade exposure with the Persian Gulf is very limited, and the region as a whole is a net commodity exporter. Higher commodity prices are historically beneficial for Banco Latinoamericano de Comercio Exterior, S. A. Obviously, net commodity importers, mainly Central American and Caribbean countries, will face some headwinds. The ultimate question, of course, is how long will this last? In any case, our view is that this environment reinforces the importance of disciplined lending and highlights the value of our ability to actively adjust regional exposures given the short-term duration of our lending portfolio. So when we look at the year as a whole, our view remains unchanged. The first quarter was consistent with our expectations, and we continue to make progress on the strategic front that supports the next phase of the bank. For that reason, and based on what we have seen so far in the year, we reaffirm our full-year guidance. We do so with confidence while remaining realistic about the competitive environment and the external conditions. We will now open the call for questions. Operator: Thank you very much for the presentation. We will now begin the Q&A section for investors and analysts. If you wish to ask a question, please raise your hand. If your question has already been answered, you can leave the queue by putting your hand down. There is also the possibility to ask your question through the Q&A icon at the bottom of the screen. You may select the icon and type your question with your name and company. Written questions that are not addressed during the earnings call will be returned by the Investor Relations team. Jorge Salas: Our first question comes from Iñigo Vega with Jefferies. Just a couple of comments on two areas. Iñigo Vega: Thank you. Two questions. First, what is your level of concern about the 70 bps sequential increase in Stage 2 loans in the quarter? Second, why are RWAs under Basel III down 2% quarter over quarter when the commercial portfolio is up 8% quarter over quarter? Only RWAs under the Panama framework align with asset growth. Jorge Salas: Yes, thank you, Iñigo. I will tackle the first question on asset quality and I am going to let Annette, our CFO, tackle the capital ratios question. The short answer is we are not worried. Asset quality remains very strong. The Stage 2 increase reflects more of a proactive risk management approach than any deterioration. We are just being more cautious on selected exposures, basically in Brazil. But we do expect normalization rather than deterioration going forward. The cost of risk is consistent with disciplined underwriting, and that, as I always say, has not changed and will not change. Annette, do you want to talk about capital ratios? Annette Vanjorde: Sure. As we mentioned on the call, we follow two different methodologies. One is the regulatory methodology as a bank regulated by the Superintendency of Banks in Panama, and we also, for reference purposes, follow the Basel III Tier 1 ratio. These are different methodologies. The Panamanian regulatory ratio is based on a more standardized approach where exposures are assigned regulatory risk weights based on their category, while the Basel III Tier 1 ratio is more risk-sensitive and reflects more directly the underlying risk profile of the portfolio, including borrower quality, country risk, tenor, probability of default, and other characteristics. This is why these two ratios can move differently in a given quarter. In the first quarter, our Basel III ratio improved despite the balance sheet growth because of lower risk-weighted asset intensity in the portfolio. This reflects the strong historical credit performance incorporated in the regular revision of our internal risk parameters. Also, the Ecuador country upgrade during the quarter impacted the Basel III ratio, as did the quality and mix of the new exposures added to the balance sheet. On the other hand, the Ecuador upgrade is reflected in the Basel III framework but does not have the same impact under the Panamanian ratio. This is one of the reasons why these two ratios behaved differently quarter to quarter. Looking ahead, we still expect the Basel III Tier 1 ratio to gradually normalize toward our 15% to 16% target range as we continue to deploy capital while maintaining ample capacity for disciplined expansion. Jorge Salas: The main point is that growth in assets does not necessarily imply higher capital consumption. Quality and mix are critical. Operator: Thank you. Our next question comes from Ricardo Buchpiguel with BTG. You can open your line. Ricardo Buchpiguel: Good morning, everyone, and thank you for the opportunity to ask questions. I have two. First, as you mentioned in the presentation, you saw a higher concentration of credit transactions closing toward the end of the quarter, which had a negative impact on NIM. It would be helpful if you could comment on what NIM would look like excluding this effect, just to think about the starting point for NIM in Q2. And for my second question, during the quarter we saw strong sequential growth in credit commitments and guarantees on the balance sheet, and yet revenues showed a 14% quarter-over-quarter reduction. It would be great if Samuel could walk us through in more detail how the monetization cycle of this product works and how seasonality plays out throughout the year so we can have better color on this line. Thank you very much. Jorge Salas: Samuel, do you want to talk about the commitments, and then Annette will talk about NII and NIM? Samuel Canineu: Sure. Thanks for the question, Ricardo. I will start with your question on commitments and then talk about letters of credit and guarantees. Commitment fees come from committed but unfunded exposures. That is indeed growing and is in line with the expansion of our project finance, infrastructure, and syndicated loan businesses. For project finance and infrastructure, for example, it is very common that part of the facility amounts will be disbursed not in one go, but rather as CapEx is being deployed. On syndicated loans, those tend to be bigger facilities, so it is common to give the client a couple of months to fund the transaction. These are commitments that will be funded in due time; they will become loans, and the commitment period in those cases is much shorter than the tenor of the actual facilities. Importantly, it generates fees that tend to be 30% to 40% of the loan margin. Finally, and this is very important, the commitments we have are not liquidity backstop facilities, which is a type of exposure that we do not like as they tend to be used when the underlying credit has deteriorated. Bottom line, commitment fees should continue to grow as the project finance and syndicated loan businesses grow. In terms of letters of credit and guarantees, the reduction this quarter versus the previous quarter is mostly in line with seasonality. Certain types of letters of credit are issued more toward the second and third quarters. This is a business that we continue to focus on with more new clients, and we do expect a pickup or return to normal levels as the year progresses. Annette Vanjorde: Ricardo, thank you for your questions. Regarding NIM and NII during the first quarter, as we mentioned, we have been proactively managing our balance sheet on both the asset and liability sides, which allows us to maintain a resilient NIM as we execute through the year. Our current NIM is affected by the rate cuts implemented in 2025. It is also affected by ample liquidity and competition for asset quality in the region, especially in the short-term segment of our lending exposure, and by the fact that some of the balance growth occurred toward the end of the quarter. We expect that growth to be reflected in the upcoming quarter, providing sustainable net interest income. We were able to offset some of these negative pressures by steadily executing medium-term transactions on the loan side, which provide more stable balances and margins, and by the growing participation of deposits and efficient liquidity management. With this NIM of around 2.34%, which remains within our guidance, we feel confident that the guidance for 2026 will remain around 2.30% as we have mentioned before. More importantly, we are complementing our revenues with the growth of fees, as Samuel just mentioned, to make the bank less sensitive to rate movements and provide more stable profitability. Ricardo Buchpiguel: Thank you. That is very clear. A quick follow-up: assuming you get a scenario with no rate cuts not only in Q2 but for all this year, do you believe there is upside risk to the guidance, both in NIM and ROE? Annette Vanjorde: For now, we see that as an upside, although we have seen a lot of pressure on margins. We are already seeing some benefit from higher-for-longer rates; however, these have been offset somewhat by pressure on loan origination yields. It has remained almost a neutral impact overall. Jorge Salas: It is almost a wash. Samuel Canineu: Perfect. Thank you. Operator: Our next question comes from Analyst with JPMorgan. Analyst: Hi, everybody. Thank you for taking my question. I am going to go back to capitalization. Just to be sure, on the decline in your Panama ratio, and also, would this ratio, the Panamanian one, be more relevant than Basel III since your requirements are based on Panama? Those are my two questions. Jorge Salas: Hi, Natalia. Annette Vanjorde: Both methodologies are important to the bank. Obviously, we are a local bank in Panama regulated by the Superintendency, and it is our priority not only to comply with the ratios but to have ample buffers versus the minimum requirements. Our AT1 transaction is based on our regulatory ratio, which we follow and monitor closely. The reason we include our Basel III ratio in all our presentations is to provide a more standardized reference point for investors to compare to other peers in the region. As we mentioned, the methodologies are different and some characteristics of our balance sheet are not well captured by the local regulatory ratio, so using both provides a more complete view. Analyst: Perfect. And then, if you could go again through the reasons for the decline in the Panamanian ratio, that would be great. Annette Vanjorde: This responds directly to the balance sheet growth we saw between the fourth quarter and the first quarter, which was around 8%. The Panamanian ratio is almost independent of country risk and is very neutral to exposures outside Panama, especially corporate positions. It does not differentiate between ratings or whether an exposure is investment grade or not. Those are characteristics that the Basel III methodology does incorporate into the calculation. The Panamanian ratio is more oriented to local banks with larger local exposure. In that sense, Banco Latinoamericano de Comercio Exterior, S. A. is an outlier in Panama—our Panama exposure is less than 5% today. Operator: Our next question comes from Andres Soto with Santander. Andres Soto: Good morning, Jorge, Annette, and team. Thank you for the presentation. My first question is regarding your top-line growth. We saw a strong performance this quarter, and at the same time, you are mentioning a tougher competitive environment. At what point do you believe this competition will make a dent in your loan growth expectations, or do you believe that the risk-adjusted returns you are getting now are attractive and you will continue to grow at the current pace? Or is your growth driven by the new products that you are introducing in your product offering? Jorge Salas: Thank you, Andres. I am going to let Samuel, our Chief Commercial Officer, talk about growth in the lending portfolio. Samuel Canineu: Thanks, Andres. We are very confident we will meet our guidance in terms of growth for the year. As you know, our exposure is very short term, so the landscape can change quarter to quarter. That said, we have ways to mitigate that. On one side, we are building a solid, medium-term, more value-added pipeline, which is the case right now in project finance, infrastructure, and syndicated loans. We are well prepared to continue deploying at the pace consistent with guidance. We have also been working hard to build the pipeline for short-term transactions, which is more affected by the competitive landscape. The way to do that is through our product strategy that we spoke about at our Investor Day, particularly structured trade and working capital solutions, which have been growing at a good speed with a promising pipeline. Last but not least, the increase in oil prices is a good tailwind because part of our short-term exposure finances cargoes, and those cargoes are bigger in size right now. That helps as well. Jorge Salas: Also, Andres, it is very important for us that the quality and durability of earnings is what matters, not just scale. Andres Soto: That is very clear. And connecting this with my question on fees, we also saw strong fees on a year-over-year basis, and I appreciate the explanation that Samuel provided regarding these products being fee-rich and providing those upfront and then on lending down the road. Is the current pace for fee income growth sustainable given the strategy of entering these products such as letters of credit and syndication, or are there any one-offs in the quarter that we should normalize going forward? Jorge Salas: No, there are no one-offs. The first quarter is typically, as Annette mentioned, softer than most in both of our fee businesses. Some transactions shifted into the second quarter, so it is more a timing effect than a slowdown. Fees are up 24% year over year, so the momentum is good. The bottom line is that fees are becoming a more structural revenue component over time. If something nonrecurring comes, of course we will mention it, but we are confident with the guidance on fees. Andres Soto: That is very clear. Thank you. Operator: Our next question comes from Daniel Mora with Credicorp Capital. Daniel Mora: Hi. Good morning, and thank you for the presentation. I have a couple of questions. The first one is, considering that a significant percent of the portfolio is related to oil and gas, do you see any tailwinds or headwinds derived from the conflict between the United States and Iran? Or is there any other sector or country that should be heavily impacted by high international oil prices? I know that you mentioned a couple of points on this matter, but if we can go deeper, that would be great. Thank you. And my second question is, what would be those elements that could take the 2026 ROE closer to the 15% upper band of the guidance, considering that loan growth has been quite strong, NIM, despite pressure, has been defended, and fees, even though the first quarter is softer due to seasonality, continued to grow by double digits, 24% to 25%? Given this strong performance, what could be even better to take ROE to 15%? Jorge Salas: Samuel, do you want to go ahead and talk about the oil and gas–related exposure? Samuel Canineu: It is a great question. On a net basis, it is much more of a tailwind than a headwind. For the more long-term exposure that tends to be linked to E&P investments, we are financing the lowest-cost producers in the region and the most competitive fields. Current oil prices, even if more spot-driven than long-dated forwards, are very positive for them, reducing portfolio risk. On the short-term trade business, typical cargo sizes are higher, so demand tends to be higher—positive in that sense. We do take risk on importers of petroleum products, mostly in Central America. You could argue there could be increased inflation and reduced profitability, but in most cases we are dealing with national oil companies in solid countries. It is more beneficial that we are financing bigger amounts than detrimental in terms of their credit quality. Net-net, it is definitely positive. Jorge Salas: I think the short tenor of our portfolio and the ability to reprice and reposition quickly is key. Our focus is not predicting geopolitics, but managing how shocks transmit into spreads, trade flows, and client risk. We have the ability to do that, and we have been showing that. Daniel Mora: Thank you. And on the second question? Jorge Salas: On upside to ROE guidance, it is a balance between higher-for-longer rates and margin pressures. You have both playing at the same time, and we will see what ends up happening. It is hard to predict at this point. Daniel Mora: Okay, perfect. Thank you so much. Operator: Our next question comes from Analyst with Boer Capital. Has the bank started looking at Venezuela as an opportunity for investment, and what is your outlook for the country? Jorge Salas: It is a good question. Venezuela might represent an upside scenario for Banco Latinoamericano de Comercio Exterior, S. A., but it is not included in our projections as of today. We are very actively assessing the risks and the opportunities. The bank used to be very active in Venezuela in the oil and gas sector and also with FIs and LCs. Venezuela used to represent between 4% to 5% of our total portfolio at some point. Today, our exposure is zero. We know the country well, and it is more a matter of timing on when to go back in. Operator: Thank you. That is all the questions we have for today. I will pass the line back to the Banco Latinoamericano de Comercio Exterior, S. A. team for their concluding remarks. Jorge Salas: Well, thank you all for your questions and your time today. We appreciate your continued interest in our bank. Because the year started in line with our expectations, we remain focused on executing with discipline. Thank you again, and have a good day. Operator: This concludes today's conference call. You may now disconnect.
Operator: Welcome to Franklin Resources, Inc. Earnings Conference Call for the Quarter Ended 03/31/2026. Hello, my name is Nicole, and I will be your call operator today. As a reminder, this conference is being recorded, and at this time, all participants are in a listen-only mode. I would now like to turn the conference over to your host, Selene Oh, Head of Investor Relations for Franklin Resources, Inc. You may begin. Selene Oh: Good morning, and thank you for joining us today to discuss our quarterly results. Statements made on this conference call regarding Franklin Resources, Inc. which are not historical facts are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements involve a number of known and unknown risks, uncertainties, and other important factors that could cause actual results to differ materially from any future results expressed or implied by such forward-looking statements. These and other risks, uncertainties, and other important factors are described in more detail in Franklin Resources, Inc.’s recent filings with the Securities and Exchange Commission, including in the Risk Factors and the MD&A sections of our most recent Forms 10-K and 10-Q. Now I would like to turn the call over to Jennifer M. Johnson, our Chief Executive Officer. Thank you, Selene. Jennifer M. Johnson: Welcome, everyone, and thank you for joining us today to review Franklin Resources, Inc.’s second fiscal quarter results. I am joined by Matthew Nicholls, Co-President and CFO, and Daniel Gambach, Co-President and Chief Commercial Officer. We will take your questions shortly, but first I will highlight key results and themes shaping our business. This was an excellent quarter for Franklin Resources, Inc., with $16.9 billion in long-term net inflows across public and private markets, reflecting the strength and breadth of our diversified global platform. We delivered record gross sales and generated positive long-term net flows in every region, reflecting sustained client demand and strong local engagement. Importantly, each of our key growth drivers—private markets, retail SMAs and Canvas, ETFs, and solutions—contributed meaningfully to these results. This quarter is a clear example of the power of our multiyear strategy in action. We are ahead of our five-year plan and remain focused on delivering strong investment outcomes, deepening client relationships, and continuing to evolve our capabilities to drive sustainable, long-term growth for our clients and shareholders. In my travels meeting clients around the world, one message is consistent: Our clients look to Franklin Resources, Inc. as their trusted partner for one-firm reach and resilience of a global platform together with the distinct expertise of our investment groups. As client expectations continue to evolve, more asset owners seek multifaceted partnerships with fewer firms that can deliver across asset classes, styles, and regions. We believe our business is well-suited to meet that demand. We are seeing a clear structural shift in how clients allocate capital and partner, including increased demand for vehicles such as active ETFs, customization, and tax-managed solutions, and prioritizing firms that can deliver across public and private markets, offer global consistency in how they invest and operate, and bring together capabilities into outcome-oriented solutions. This is not a short-term reaction to market conditions; it reflects a more fundamental change in expectations. Scale, breadth of capabilities, and the ability to deliver them in an integrated way are increasingly defining competitive advantage. Against this backdrop, we remain focused on executing as one Franklin Templeton. This means bringing together our strengths as investment specialists, innovation drivers, thought leaders, and strategic partners seamlessly in every client interaction. To that end, we continue to simplify our go-to-market approach to better serve clients and capture opportunities across the business. Ultimately, our strategy centers on helping clients achieve better outcomes by staying focused on performance, solutions, and partnership. We are continuing to build a business that is more resilient, more relevant, and positioned to deliver long-term value for our clients and shareholders. Now turning to our results. This quarter marks another step forward in the successful execution of our strategy and reflects the growth potential of our business. We delivered another consecutive quarter of positive long-term net flows of $16.9 billion, driven by multiple, diversified investment groups with continued progress across our key areas of investment and growth. This momentum is reflected in long-term inflows of $118 billion, up 28% quarter-over-quarter and 38% over the prior-year quarter, excluding reinvested distributions. Gross sales increased across all asset classes, highlighting the strength of our global distribution platform and the progress we are making across the business. Looking ahead, our institutional pipeline of won but unfunded mandates remained strong at $20.2 billion, consistent with the prior quarter, supported by steady funding rates and ongoing replenishment from new wins. Our assets under management of $1.68 trillion remain well-diversified across asset classes, client segments, regions, and investment groups. Public markets continue to be a core strength and an important driver of growth. Multi-asset AUM stands at $207 billion and generated $9.5 billion in positive net flows, marking our nineteenth consecutive quarter of positive flows in that asset class. These results reflect growing client demand for outcome-oriented, comprehensive solutions that span public and private markets. Across equities, net outflows were $4.7 billion. Investor activity remained selective, and we saw positive net flows across large-cap value and core, systematic, and single-country ETFs, infrastructure, and sector strategies. In fixed income, net outflows were approximately $300 million during the quarter; however, excluding Western, fixed income flows were positive $3.6 billion, marking a ninth consecutive quarter of positive long-term net flows. Momentum continued in multi-sector, munis, stable value, and global fixed income strategies. Turning to alternatives, Franklin Resources, Inc. is a leading manager of alternative assets with $283 billion in alternative AUM. Our breadth and scale continue to position us as a partner of choice for clients seeking differentiated sources of return and access to private markets. We fundraised $14.3 billion in alternatives this quarter, including $13.2 billion in private market assets, diversified across alternative credit, secondary private equity, real estate, and venture credit. Fiscal year-to-date fundraising in private markets reached $22.7 billion, already in line with full-year 2025 levels, positioning us to exceed our $25 billion to $30 billion annual fundraising target, which was already adjusted upward at the start of our fiscal year. Within alternatives, private credit continues to be an area of focus. While market attention has increased, the opportunity remains highly differentiated across strategies and risk. Our alternative credit capabilities in the U.S. and Europe are focused on the middle market, with a disciplined approach to underwriting and credit selection, and include diversified portfolios that have less than 10% exposure to software. Alternative credit represents $96 billion in AUM and was a significant contributor to fundraising this quarter. Looking across our broader alternatives platform, we continue to see strong momentum in secondary private equity where investors are increasingly focused on liquidity solutions, portfolio rebalancing, and access to high-quality assets at more attractive entry points. We are also seeing a pickup in demand for private real estate, including in the wealth channel, as investors position for opportunities emerging from the current market environment. Franklin Resources, Inc.’s private markets $8 billion core evergreen products spanning secondary private equity, real estate equity and debt, and private credit continue to gain traction. These products had positive net flows, contributing approximately $1 billion to fundraising in aggregate in each of the last two quarters. Across the platform, clients are increasingly engaging with us for broad and differentiated investment vehicles, and we are seeing that demand translate into sustained, diversified growth. ETF AUM reached a new high of $61.6 billion, a 67% increase from last year, with $4.5 billion of net inflows, our eighteenth consecutive quarter of positive flows. Active ETFs now represent 45% of ETF AUM, further extending our active management strategies into new vehicles. This is evident in areas such as the conversion of 10 of our muni funds into ETFs in Q1, which generated over $600 million in positive net flows this quarter, and the success of our Putnam Focused Large Cap Value ETF, which is close to $10 billion in AUM. Delivering personalization at scale continues to represent a compelling long-term opportunity. Advancements in technology are enabling us to extend capabilities traditionally associated with separately managed accounts more efficiently and consistently across a broader client base. A leader in retail SMAs, we manage $168.3 billion in AUM and generated $2.7 billion in net inflows during this quarter. With more than 40 years of experience, we are well-positioned to deliver at scale through our breadth of capabilities along with our custom indexing platform, Canvas. Canvas continues to gain momentum and reached record AUM of $22.9 billion, a 27% increase from the prior quarter, with positive net flows of $5.3 billion reflecting strong client interest in personalization and tax efficiency. Since its acquisition in 2022, Canvas has been net-flow positive in each quarter and continues to scale across all distribution channels, supported by our over 200 partners and expanding adoption across retail, RIA aggregators, and traditional RIAs. This growth underscores a broader shift in the industry where tax efficiency is becoming increasingly central to portfolio construction and the adviser-client relationship. Including Canvas, our tax-managed products now represent $110 billion in AUM. As the industry evolves, we continue to invest in areas of long-term innovation, and digital assets remain a key focus. Earlier this month, we announced plans to acquire 250 Digital, an active cryptocurrency investment management firm, and to launch FranklinCrypto. Alongside Franklin Templeton Digital Assets, we are bringing together crypto-native expertise with Franklin Resources, Inc.’s global distribution to target institutional growth. FranklinCrypto will expand Franklin Resources, Inc.’s existing crypto and blockchain venture capital investment offerings and will broaden the firm’s digital assets investment management platform. From a regional perspective, our growth remains globally diversified with positive net flows in all regions. Internationally, Franklin Resources, Inc. manages nearly $500 billion in assets, with positive long-term net flows of $5.5 billion in aggregate. Non-U.S. gross sales grew 29% quarter-over-quarter with particularly strong momentum in EMEA and APAC. As a leader in emerging markets, Franklin Resources, Inc. was appointed trustee and manager of the National Investment Fund of Uzbekistan in January 2025, supporting the country’s privatization agenda and governance reforms across state-owned enterprises. In April, USENIF confirmed plans to proceed with a dual listing on the London and Tashkent stock exchanges, marking an important step in advancing Uzbekistan’s capital markets and broader privatization strategy. This engagement reflects our role as a trusted partner to official institutions and continues to drive deeper relationships with central banks, sovereign wealth funds, and government-related entities. Now turning to investment performance. Investment performance remains competitive, supporting both client retention and organic growth. Over half of our mutual fund and ETF AUM is outperforming its peer median over the three- and ten-year periods, and approximately two-thirds over the one- and five-year periods. This strength is further supported by our municipal strategies where 95% of AUM is outperforming its peer group over the three-year period. Similarly, over half of strategy composite AUM is outperforming its benchmark over all time periods, and 71% over the ten-year period. In fixed income, 83%, and in equities, 82% of AUM is outperforming benchmark over the one- and five-year periods, respectively, reinforcing the depth and durability of our investment capabilities. Turning briefly to our financial results, adjusted operating income was $475 million, increasing 8.5% quarter-over-quarter and 25.8% from the prior-year quarter. These results reflect the continued execution of our strategy, with disciplined expense management alongside targeted investments in areas of growth and innovation, positioning the firm for sustained, long-term performance. Taken together, our performance this quarter underscores the strength of our platform and the progress we are making against our multiyear strategic priorities. We are building a more diversified, higher-growth business with multiple drivers of organic growth, and we are seeing that momentum continue to build, positioning us to deliver long-term value for our clients, shareholders, and employees. I want to thank our employees around the world for their continued dedication and focus on serving our clients. Their efforts are fundamental to the successful execution of our strategy and the progress we are delivering across the firm. With that, we will open the call to your questions. Operator? Operator: If you would like to ask a question, please press 1 on your telephone keypad. The confirmation tone will indicate your line is in the question queue. If anyone should require operator assistance during the conference, please press 0. We request that you limit yourself to one question to allow for participants on the call this morning. Our first question comes from Alexander Blostein with Goldman Sachs. Please go ahead. Alexander Blostein: Thank you. Hey, Jenny. Good morning, everybody. I wanted to start with a question around private markets growth. Obviously good momentum in the quarter, $13 billion. I was hoping you could break that down by key strategies as well as whether Lexington, their flagship fund, contributed to that at all. And as you look out for the rest of the year, what are going to be some of the bigger drivers for the rest of 2026 in private markets fundraising? Jennifer M. Johnson: Sure. Great. Thanks for the question, Alex. As you recall, last year we had set a target of $13 billion to $20 billion in the alt space to raise, and we ended up raising $22.9 billion. This year, we raised that to $25 billion to $30 billion, and we would expect to be above $30 billion. When you look at this quarter, I cannot give you details on Lexington’s flagship funds, but I will give you some insights. Our largest contributor was our private credit managers, but Lexington was meaningful. Lexington is in the market with their flagship fund, and they are right on track. There is demand for secondaries, but they are also in the market with other products—their co-invest and their middle market—which all contributed as well. There were no catch-up fees in this quarter. You will get a specific update on Lexington’s flagship fund when they do a filing, probably towards the second half of 2026. All of our alternative managers contributed to this quarter’s momentum. There were over 30 vehicles that contributed, so it was a very diverse and strong quarter, and we felt very good about the flows across the board. Alexander Blostein: Great. Thank you. You saved me a follow-up on the catch-up fees there. I did want to ask about the comment you have in the release around the dry powder. You give us the total AUM, $263 billion in private markets. Some of this fee-paying, some of this not fee-paying. Is it possible to break down the non-fee-paying piece and help us think through the timing of when that is going to come into the fee-rate run rate? Jennifer M. Johnson: It obviously varies with each manager. Alex, let us get back to you with what we are willing to say publicly on that, so give us a little bit here. Matthew Nicholls: But actually, only fee-earning AUM out of balance is about 90%, approximately 89%. Alexander Blostein: Yep. Do you want to— I think the next question? Operator: Our next question comes from Glenn Paul Schorr with Evercore. Please go ahead. Glenn Paul Schorr: Hi. Thanks very much. A question on Canvas and tax optimization strategy. There has been a lot of growth. There is a lot of competition, but also really low penetration. Could you talk about what you see for further growth in terms of penetrating the current base of clients, any capacity issues you might see, and importantly, how you differentiate in a crowded field, meaning leveraging the brand and distribution relationships that you have? Jennifer M. Johnson: What I would say is, one of the differentiators of Canvas versus others is that it was built by quant people as opposed to tax people. It is much more about the technology, which gives it a lot more flexibility going forward. Canvas is being selected in many cases because people recognize it has really impressive technology. When we added the managed options solution over it, it gave us more creativity around product development. For example, if you have high-basis concentration in a stock, you can use the managed options component to make a more tax-efficient portfolio. What started out as a direct indexing opportunity has evolved into an ability to take that technology as an overlay and create tax-managed, tax-efficient overlays on active strategies. Our conversations are now not just about using it as a platform to manage SMAs or direct indexing, but also using it as a way to optimize the tax efficiency of our strategies, opening up more partner conversations. Daniel, do you want to add? Daniel Gambach: I will add two aspects to the success we are having in the tax alpha and tax optimization space, which is growing very fast for the industry and we are capitalizing on it. First, our retail SMA presence, being so big at close to $170 billion, makes us uniquely positioned, including the legacy business that we have on the SMA side. On Canvas, there are two elements to highlight. One, the tax optimization that we do is unique and differentiated because we can receive in-kind positions and we are very flexible in how we do the optimization, and clients are focused on that. The other part is we add simplicity and we are very innovative. Canvas includes, as Jenny mentioned, not only direct indexing, but we also have risk-factor overlays, we have options for income within the same platform, and we have added fundamental third-party manager tax optimization, including for our different fundamental managers. On top of that we have added long/short—130/30, 140/40—all on the same platform. Finally, we have added municipal bond ladders in the same platform. The simplicity is giving us substantial momentum. It has grown at a 72% CAGR and grown 10 times since acquisition to $23 billion. The momentum will continue. AUM doubled over the past 12 months, and we expect that to continue given how differentiated the platform is. Glenn Paul Schorr: Alright. Thanks for all that, Jenny and Daniel. Appreciate it. Operator: Our next question comes from Craig Siegenthaler with Bank of America. Please go ahead. Jennifer M. Johnson: Operator, maybe— Operator: We can just move to the next one. We will get Craig back on. Seems like there is a technical problem with Craig’s line. Jennifer M. Johnson: Okay. Operator: Our next question comes from Daniel Thomas Fannon with Jefferies. Please go ahead. Daniel Thomas Fannon: Thanks. Good morning. Matt, just wanted to follow up on the guidance that you gave. There has been some change from last quarter, but you also reiterated things you have been saying around flat with fiscal years 2024 and 2025. Could you clarify the moving parts? And in the quarter, there was an announcement of some voluntary retirements across the equity division. I assume that is incorporated in this guidance and maybe the outlook for the year, but is that incremental or not? Matthew Nicholls: Yes, the voluntary buyout is included in our full-year projection. First, I will go through the quarter guidance and then the annual. On the third quarter guide, our effective fee rate we are guiding to mid-to-high 37s, very consistent and stable with the second quarter. Compensation we are guiding at $830 million, assuming a $50 million performance fee at a 55% payout. IS&T is $155 million, which is in line to slightly higher than last quarter based on AI investment specifically. Occupancy is $70 million in the guide. And G&A we expect to be a little higher at $210 million to $215 million, but this includes elevated fundraising-related expenses around $23 million to $25 million and an additional $9 million to $10 million for advertising and marketing. For the full year, as outlined on page 14 in the IR deck, this assumes flat markets from now and excludes performance fees. We continue to guide approximately in line or slightly above fiscal year 2025 expenses excluding performance fees. This assumes current market levels, higher sales and fundraising that we have presented today, and stronger performance. Strong performance means we have some compensation-related expenses tied to better performance that are formula-driven, so that is going up a little bit. For perspective, we end up at the level illustrated on the page, which is about 1.5% higher versus 2025. We would expect investment management fee revenue to increase at 4x that rate at least. Meaning, if expenses increased by 1.5%, we would expect investment management fee revenue to increase by at least 6% year-over-year, all else equal. This is consistent with previous commentary on margin expansion going into our fiscal year-end. That would result in fiscal fourth quarter margin in the high 29s and for the year in the 27s for the full year, both representing meaningful margin expansion ahead of plan and on our way to 30%+ margins later in 2027, all ahead of plan as presented last quarter. Jennifer M. Johnson: Thank you. Next question, operator. Operator: Our next question is from Patrick Davitt with Autonomous Research. Please go ahead. Patrick Davitt: Hey, good morning, everyone. There has been a lot of press focus on secondaries PE strategies and the policy of marking up deals immediately upon close. Much of that has been focused on other companies. Could you give us more color on how much of Lexington’s fund performance is driven by that initial markup versus natural appreciation, and more broadly, do you see the increased attention on this practice impacting regulatory scrutiny or demand for the asset class? Thank you. Jennifer M. Johnson: The issue that happened there was because I think a manager changed the policy and was unclear in how that went down, which created a lot of noise. Traditionally, in secondaries, the discount-to-par markup is about 20% to 25% of total return over the life of a fund. That gives you a sense that most of the appreciation really comes in the asset itself. That is the beauty of a firm like Lexington, a premier buyer of these deals. They are selective as to which deals they choose and they have a ton of information—information on 55 thousand private companies—so they are tracking and deciding which underlying funds they believe are going to have the best upside opportunity. That is how they are underwriting it, and then they negotiate a discount. That gives you a sense. Operator: Our next question comes from Michael J. Cyprys with Morgan Stanley. Please go ahead. Michael J. Cyprys: I wanted to ask about AI. Could you update us on how you are using AI across the organization today, the use cases that have been most impactful so far and key learnings, and if you are able to help quantify any of the benefits that you are seeing? As you look out over the next couple of years, what steps are you taking to further embed AI throughout the organization? I know, Matt, you mentioned some uplift on expenses in part from AI investments. Maybe you could elaborate on some of those investments and how you are thinking about the longer-term benefits. Jennifer M. Johnson: We look at AI across growth and efficiency. Having run technology, I do not think many companies can say AI is yet material; everyone is doing a lot. I am proud of our work because we were early adopters in multi-agent orchestration of AI—our Intelligence Hub—which is our platform used for distribution in partnership with Microsoft. If I bucket our AI efforts, in distribution and investments it is about growth opportunities; in operations and technology it is about efficiencies and throughput. The simple problem is ensuring salespeople are seeing the right clients and having the best conversation. The Hub pulls data from CRM, product systems, external product systems, and maybe social media. LLMs are not great with analytics, so you marry them with other agents. Early on, we see our wholesalers seeing about 10% more clients. It is too early to quantify the sales uplift, but we see administrative efficiency gains and signs of sales uplift, and we are rolling it out more broadly. Our investment teams use AI differently by team. We run hackathons; teams create agents and put them in a central library for reuse. We created a virtual research analyst for one team, where we fed views and philosophy, and it will generate ideas and challenge proposals—“have you thought about these things?”—and it has reviewed historical trades. The important thing is a centralized group to share AI expertise and learnings. Where we outsource, we are reviewing contract lengths so AI efficiencies do not accrue only to vendors. In-house, in reconciliation, RFPs, and other functions, we are seeing some efficiencies. It is early, and in technology we measure how much code is being written by AI to gauge adoption. Matthew Nicholls: In terms of spend, we have a fully staffed dedicated centralized team. Within that team, we have individuals focused on investment and sales functions and on effectiveness and efficiency. There is a revenue part and a cost part. We are tracking dollars spent versus dollars saved or gained from using and adopting AI. It is early days, but we are building that discipline. Operator: Our next question comes from William Raymond Katz with TD Cowen. Please go ahead. William Raymond Katz: Thank you. On the tax minimization/tax optimization side, there has been discussion around a potential adverse tax rule for Exchange 351. It seems arcane, but it has been coming up in investor dialogue. How real is that as a change? Is that more of a disclosure issue? Would that have any impact on the business? Second, on Lexington XI, you previously raised $22 billion, and I know Matt just gave some guides around platform or placement fees into the new quarter. Is there any reason to think that the next fund will not be of similar size? And third, on capital return, could you talk a bit about your priorities looking ahead? Thank you. Jennifer M. Johnson: I will quickly jump on Lexington and then turn it over to Matt on the tax point. There is no reason to believe the next flagship will not be at least the size of the last one. As I said, they are on track and there is good demand for secondaries, and we do not see cannibalization with the evergreen funds we have done in secondary. That is going smoothly. On the tax question— William Raymond Katz: It is a bit arcane, but in the index/ETF world there is discussion between ICI and the IRS. Just in terms of an adverse ruling about tax optimization under the exchange, would that limit maybe the use of options as a way to shield income? Jennifer M. Johnson: I am on the ICI board, and we talk a lot about the unequal tax treatment of mutual funds versus ETFs because of in-kind redemptions. There is always a worry that goes away. The reality is it is actually unfair that a mutual fund investor has to pay capital gains because the fund experienced gains versus their individual ownership, like they would if they owned a stock. That has been a disadvantage for mutual funds. ICI discussion is often about making mutual fund treatment more fair. I am not aware of discussions about ETFs losing theirs as much as the hope that mutual funds become more fair. Daniel Gambach: I will add that none of our major ETFs use options overlays in the way in which they are constructed. We have not been hit with that question given the nature of our current ETFs. We do have an excellent options capability within our SMA business, which we call MOST, and we have seen substantial demand there. On SMAs with individual securities, there is no such discussion. But on 351 exchanges in ETFs, we are not part of those; we do not have products structured like that. Jennifer M. Johnson: And to clarify the point, there are some strategies for high-net-worth investors who contribute via 351 exchanges. We have not really participated in that. It could impact ETF share classes as part of a mutual fund; we will see how that evolves. Operator: Our next question comes from Brennan Hawken with BMO Capital Markets. Please go ahead. Brennan Hawken: Hey, good morning. Thanks for taking my question. Two questions on alts fundraising. Thanks for providing the evergreen AUM. Could you talk about what sort of flows you are seeing on a quarterly basis and how we should think about that? And on Lexington, you referenced that you would be giving an update at year-end. Can you help us understand why it would be year-end? Is that your updated expectations for the first close? Jennifer M. Johnson: On Lexington, they are actively fundraising. They will decide on the timing of their first filing. It has not been year to date, so it will be in the second half or towards the end of the year—our fiscal year-end could also see an update, potentially even in July. On evergreen, we have said that we are raising about $200 million a month across our three strategies. We have three that are over $1 billion, and we continue to see that kind of demand—about $200 million a month into the three evergreen strategies. Brennan Hawken: And that has remained consistent recently? Jennifer M. Johnson: Yes. Diversity helps. Daniel Gambach: It is important to say that we do not have a big BDC or large exposure to software within the platform. We have continued to raise in line or higher across all our evergreens—secondary PE, real estate debt, real estate equity—over the last two years, in line with our penetration in the wealth business. We have not seen a slowdown from our end. Operator: Our next question is with Benjamin Budish from Barclays. Please go ahead. Benjamin Budish: Hi, good morning, and thanks for taking the question. Following up on alts fundraising, you mentioned that most of it came from credit in the quarter, obviously not from BDCs. Can you unpack what pockets of credit you are seeing the most demand for? And a quick housekeeping on G&A: you mentioned some one-time fundraising expense associated with larger flagships. Should we think about those as recurring or near-term elevated but not in the run rate for next year, unless more flagship fundraising returns? Matthew Nicholls: On expenses, I would not call it one-time in the sense you could have other quarters with elevated fundraising, but $23 million to $25 million is obviously a large number and would be one-time associated with a good fundraise expectation with higher-fee-type alternative asset funds. Jennifer M. Johnson: On alts fundraising, on the credit side, we have both BSP and what was formerly Alcentra, which we are calling BSP Europe. We had strong fundraising from both. Part of it was CLOs, but they also have an opportunity fund, a real estate debt fund, special situations—contributions came across the board. There were at least 15 different funds that contributed to credit. We are also seeing Clarion with real estate pick up. Clarion has tremendous performance. People have been nervous, and there is about $20 billion in redemption requests on private credit managers out there; that money will go somewhere else. People like real estate because it is a good source of income and an inflation hedge, and we are seeing that pickup in interest. Our venture group has done well too. The key message: this was a very diversified raise as opposed to a concentration—over 30 entities raised money in our alts space. Daniel Gambach: One more point: this quarter, we had positive contribution from every region. In the alts fundraise, 40% came from outside the U.S., about 16% from EMEA and 23% from APAC. We launched new vehicles in Korea, Thailand, and Taiwan, with strong momentum in Japan, a key market where we are increasing investment. In EMEA, we now service 11 markets, five more than a year prior, given increasing demand for our LTVs across all three capabilities, including ventures. Benjamin Budish: Great. Thank you all very much. Operator: And our last question comes from Kenneth Brooks Worthington with JPMorgan. We are seeing ETF distribution fees being requested by intermediaries and being dismissed by some of the largest ETF managers. How is Franklin Resources, Inc. thinking about ETFs and distribution fees, and do you see the potential for ETF access to drive market share shifts in ETFs potentially favoring Franklin Resources, Inc.? Jennifer M. Johnson: Since Daniel’s career started at BGI in the early days of ETFs, I will let him answer this one. Daniel Gambach: Thank you for the question. ETFs are one of the most exciting developments at Franklin Resources, Inc. Our platform reached $62 billion at the end of the quarter, double what we had 18 months ago. Organic flow growth fiscal year-to-date—two quarters—is 49%. We are growing across the board. Three main drivers: Active ETFs—45% of what we have—grew 70% year-over-year. Our Focused Large Cap Value ETF (PVAL) is nearing $10 billion and has doubled in six months, and we plan to launch ETFs for every major fundamental PM with a large franchise. Second, we converted 10 muni mutual funds last quarter; now that is a full growth platform, helping growth in ETFs, muni mutual funds, and muni SMAs. Third, single-country and regional ETFs represent 30% of the platform, all with excellent inflows—we grew over $3 billion into country ETFs, including Korea, Japan, and Taiwan. Given our heritage in managing local markets, we will continue to develop and launch more country and regional ETFs. Fourth, systematic and smart beta is 20%, managed by Franklin Templeton Investment Solutions; our Franklin International Low Volatility High Dividend ETF is approaching $5 billion. We have a great track record and are doubling down. Our capabilities leverage excellent relationships and partnerships with clients. Our U.S. wealth platform is almost $800 billion with hundreds of salespeople covering advisers. We review our business with all platforms regularly. As we evolve our platform and value to clients, we will prioritize platforms that deliver the most value to us. On ETF distribution fee discussions, we are creating business plans with partners. Those that invest in education, sales and support, and impact the business will continue to be major partners as we discuss how to grow together. ETFs are an area where you will hear much more from us. Jennifer M. Johnson: To that last point, platforms always want more revenue share. ETFs are not structured the same way as mutual funds. Depending on the platform, they can influence growth and opportunity for ETFs or not. If the platform will have positive influence, then that is a discussion. If they cannot influence, then we would not consider those fees. Kenneth Brooks Worthington: Got it. Because some are not going to participate in or do not want to participate in the fees, do you think it drives share to shift from those that are willing to partner with distribution to those that are not? Jennifer M. Johnson: Different platforms have different influence. If you can heavily influence, yes, there will be some amount of shift on what you can influence. But the reality is financial advisers are getting more independent. If they are on one of these platforms and they are an RIA, they do not care what the platform is telling them; they are going to sell what they sell. That is where having a huge sales force is important because it is hand-to-hand. If they choose the model from the platform, then the platform influences it. Most of the big RIAs who are big ETF users decide on their own. Matthew Nicholls: A quick point of clarification from an earlier question. I think Alex asked about alternative asset fee-generating versus non-fee-generating. To be clear, approximately 90% is potential to earn fees. Current fee-generating AUM is about 80%. That is on the full $283 billion and varies depending on the manager; that is blended. Operator: Our next question comes from Brian Bertram Bedell with Deutsche Bank. Please go ahead. Brian Bertram Bedell: Great. Thanks for squeezing me in. One on FranklinCrypto. Jenny, could you talk about what market you are targeting and the different product types as you evolve Franklin Templeton Digital Assets? And on tokenization of money funds, the Benji Fund, what is your view on how much tokenized money funds could accelerate given the use cases and yields within digital asset platforms? Jennifer M. Johnson: I love blockchain because it is an efficient technology that drives down costs—good for our industry and clients. But you have to have a wallet to hold a token. All of our traditional distributors, very few have a wallet, so you have to go to the exchanges. The near-term opportunity is with crypto exchanges—Kraken, Ondo, Coinbase, Binance—that have wallets. Two things are happening. One, it is an obvious place to integrate Benji so people can put money into cash. If assets sit in a stablecoin, they do not earn yield; they can shift into a money market fund and earn yield. Second, the top five exchanges have roughly a billion wallets. From a new-client-base perspective, that is interesting, and they are thinking about offering traditional products. We have launched tokenized ETFs—eight on Kraken and five on Ondo—and we are talking to other exchanges. These are for investors interested in more traditional products. You could not hold an ETF or mutual fund unless it was tokenized because they have no other way of custody. We think that is an interesting new opportunity. We are also bringing in a small team, 250 Digital. They have an institutional crypto venture capability. There are institutional investors who want exposure to the space but are not comfortable with a small firm. As part of Franklin Resources, Inc., we think we will see demand from institutional clients interested in investing in the venture part of the crypto space when they start this fall. Brian Bertram Bedell: So we should expect an acceleration of tokenized products as you roll this out over the next few quarters? Jennifer M. Johnson: These things are often a hockey stick. It depends on adoption of tokenized ETFs on exchanges. We are seeing some traction where Benji is an option in programs, and we are starting to see traction there, but it takes time to educate in this space. Matthew Nicholls: We think someone was trying to get in earlier with a question on capital management, so why do we not answer that while we have time? On capital management priorities, our dividend is always top of the list. We want to protect and increase the dividend each year. Our organic growth is taking up more capital than in the past. Our seed capital and co-invest balance sheet allocation has increased to $2.9 billion, up from $2.8 billion last quarter. We expect that to be close to $3.0 billion by the end of the year. We always repurchase our employee-related stock grants to hedge and keep the same amount of shares outstanding. Then we have opportunistic share repurchase. M&A is very active, mostly distribution-related, and some bolt-ons related to alternative assets, in particular overseas. Most of the M&A or inorganic activity is around partnerships and strategic activity in connection with distribution. Jennifer M. Johnson: Great. I think you covered it very well, Matt. Operator? Operator: This does conclude today’s Q&A session. I would now like to hand the call back over to Jennifer M. Johnson, Franklin Resources, Inc.’s CEO, for final comments. Jennifer M. Johnson: Thank you for participating in the call today. We are a people business, and I want to thank all our employees for their hard work and dedication to the company. We look forward to speaking with all of you again next quarter. Thank you. Operator: Thank you. This concludes today’s conference call. You may now disconnect.
Operator: Welcome to the COPT Defense Properties First Quarter 2026 Results Conference Call. As a reminder, today's call is being recorded. At this time, I will turn the call over to Venkat Kommineni, COPT Defense Properties' Vice President of Investor Relations. Mr. Kommineni, please go ahead. Venkat Kommineni: Thank you, Dee. Good afternoon, and welcome to COPT Defense Properties' conference call to discuss first quarter results. With me today are Stephen E. Budorick, President and CEO; Britt Snider, Executive Vice President and COO; and Anthony Mifsud, Executive Vice President and CFO. Reconciliations of GAAP and non-GAAP financial measures that management discusses are available on our website, the results press release and presentation, and in our supplemental information package. As a reminder, forward-looking statements made during today's call are subject to risks and uncertainties, which are discussed in our SEC filings. Actual events and results can differ materially from forward-looking statements and the company does not undertake a duty to update them. Stephen? Stephen E. Budorick: Good afternoon, and thank you for joining us. We are off to a solid start in 2026, and all aspects of the business are on track to achieve our objectives for the year. Based on our strong results in 2025 and our outlook for 2026, in February we recommended, and our Board approved, an increase in our annual dividend of $0.06 per share, or 4.9%, marking our fourth consecutive year of dividend increases. Since 2022, our dividend has increased 16.4% and our FFO per share has increased 15.3%, demonstrating our attractive total return investment profile, all while maintaining a conservative AFFO payout ratio below 65% and continuing to have the capacity to self-fund the equity required for external investments. For the first quarter, FFO per share was $0.69, which is $0.01 above the midpoint of guidance and represents a 6.2% year-over-year increase. Same-property cash NOI increased 5.4% year-over-year, driven in part by a 70-basis-point increase in our average occupancy. We executed 1.2 million square feet of renewal leasing and achieved a 91% retention rate. This included the full renewal of our nearly 1 million square foot campus leased to the U.S. government near Lackland Air Force Base in San Antonio. These renewals address a significant portion of our 2026 maturity risk, reducing our expiring annualized rental revenue from 21% at the beginning of the year to 11%. We executed 92 thousand square feet of vacancy leasing; we are right on track to meet our full-year target of 400 thousand square feet. We executed 384 thousand square feet of investment leasing, which consists of two previously announced full-building leases at National Business Park. Year to date, we have committed nearly $250 million of capital to new investments consisting of 620 Guardian Way, which is a fully leased build-to-suit project at National Business Park, and two new investments totaling nearly $100 million. Based on these strong results, we are elevating forward guidance metrics, and Anthony will provide additional details in his section. Regarding these two new investments: first, we committed $55 million to a 150 thousand square foot development project at Redstone Gateway, which sits inside the fence within our secure parcel on Redstone Arsenal. This investment creates Anti-Terrorism/Force Protection (ATFP)-compliant inventory for the United States government in advance of expected requirements. We are currently seeing demand for multiple government missions experiencing growth related to missile defense and space activities, which in aggregate exceeds the capacity of the building. Second, we committed roughly $43 million to the acquisition of 17 acres of land in a ground lease in the Westfields submarket in Chantilly, Virginia. The ground lease has very attractive long-term economics and is supported by two highly strategic, 100% leased office buildings known as Mission Ridge. These buildings are occupied by the FBI's technology division, including their cyber group, and two leading defense contractors who are among our top 20 defense IT tenants. This transaction provides us with essentially perpetual control of a strategic land parcel in one of our priority submarkets in which we currently have a dominant market share, and importantly, a senior position in the capital structure, which should lead to an opportunity to acquire the leasehold interest at attractive terms sometime in the future. Recall, last quarter we acquired Stonegate One in this same Westfields submarket, which was a $40 million purchase of a 140 thousand square foot building that is fully leased to a top 20 U.S. defense contractor. As shown on Slide 15 of our flipbook, Stonegate and Mission Ridge are located within a half mile of each other in the same rich ecosystem of defense contractors supporting the adjacent U.S. government demand drivers. In March, we were very pleased to receive the news that Moody's upgraded our investment grade rating by one level to Baa2 with a stable outlook. Over the past five years, we have issued $1.8 billion of unsecured debt in four separate offerings. We achieved strong pricing in each of those transactions with a weighted average credit spread of 120 basis points and a maturity of nearly nine years. Clearly, our fixed income investors recognize the inherent strength of our strategy and our portfolio, and we are pleased to receive that recognition from Moody's as well. We are one of only three office REITs with a Baa2 rating, which we believe acknowledges our proven performance over the last six years, which encompassed the global COVID pandemic, a significant increase in both inflation and interest rates, along with factors that led to the highest U.S. office national vacancy rate in over 40 years. Turning to the defense budget, earlier this month, President Trump submitted the FY 2027 budget, which the administration describes as a historic paradigm shift for investment in our national security infrastructure. The top-line figure for the defense budget request is a record $1.5 trillion, which is nearly a 45% increase year over year, and it is comprised of a base budget of $1.1 trillion and anticipated reconciliation funding of $350 billion. Our business is really driven off the proposed base budget of $1.1 trillion, which has been described by House Armed Services Committee Chairman Mike Rogers as the new baseline. The FY 2027 proposed budget represents nearly a 30% increase over last year and nearly a 50% increase over the last five years. The defense base budget request includes a $16 billion increase for intelligence, or 14%, which is the largest year-over-year increase in over 20 years; a $4 billion increase for DoD cyber funding, or 25%, which is the largest increase in the history of DoD cyber funding; and an additional $18 billion for Golden Dome, which brings appropriations and requests to date for this program to roughly $40 billion of the $185 billion total. $21 billion was appropriated for Golden Dome in FY 2026. Only a small portion of this amount has actually been awarded to date, which bodes well for emerging demand through the end of the year, and there is still more than $160 billion yet to be appropriated. This current and anticipated funding should provide a long runway of tenant demand that will develop and support the Golden Dome initiative in the coming years, as there is typically a 12 to 18 month lag time between appropriations and lease executions. The FY 2027 defense budget is a continuation of a 12-year trend of growth in defense spending and represents one of the few areas of public policy that garners strong bipartisan support. The country's significant investment in the priority missions which our locations support should result in a favorable demand backdrop for our portfolio over the near and medium term and provide additional opportunities for external growth. With that, I will turn the call over to Britt. Britt Snider: Thank you, Stephen. We finished the quarter with strong occupancy at 94.4% in the total portfolio and 95.6% in the defense IT portfolio. Year over year, occupancy increased in both portfolios by 80 basis points and 30 basis points, respectively. During the first quarter, we executed 92 thousand square feet of vacancy leasing, nearly 70% of which is tied to cyber activity. Year to date, we have signed 152 thousand square feet of vacancy leasing, which equates to 38% of our full-year target of 400 thousand square feet. We have approximately 115 thousand square feet of prospects in advanced negotiations, which we define as over 90% likely to execute. Taken together, we have over 265 thousand square feet of leases either executed or in advanced negotiations, which amounts to two-thirds of our full-year target. In April, we leased the remaining floor at 8100 Rideout Road in Huntsville to a top 20 U.S. defense contractor. This lease doubles the tenant's footprint in the building to over 50 thousand square feet and brings the property to 100% leased. Twenty-three of the 24 operating buildings in our Redstone Gateway park are now 100% leased, bringing this nearly 2.5 million square foot campus to 99.6% leased, with only one 10 thousand square foot suite of availability. Also in April, we signed a 12 thousand square foot expansion lease at Franklin Center in Columbia Gateway with a top 10 U.S. defense contractor. This lease increases the tenant's footprint in the building to 60 thousand square feet, and we are tracking 155 thousand square feet of prospects on the remaining 55 thousand square feet of availability. Turning to renewal leasing, we executed 1.2 million square feet in the quarter, with tenant retention of 91%, cash rent spreads up 3.8%, and GAAP rent spreads up 12%. Our quarterly volume was driven by the full renewal of our U.S. government campus near Lackland Air Force Base in San Antonio, which totaled 953 thousand square feet and accounted for over 40% of our annualized rental revenue expiring in 2026 at the beginning of the year. Cash rent spreads on the San Antonio renewals increased 4.2% with annual rent bumps of 3%. Once we include these four large lease renewals in San Antonio, our track record for retention on leases in excess of 50 thousand square feet becomes even more impressive. For large leases that expire between mid-2024 and year-end 2026, we have renewed nearly 3 million square feet with a retention rate of 97%. We have eight leases remaining totaling 950 thousand square feet, all with the U.S. government. We expect 100% retention on these leases, with executions anticipated in 2027. Additionally, since we started providing this disclosure nearly four years ago, we have renewed over 5 million square feet of large leases, a retention rate of over 97%. Moving on to development, we commenced two projects in the first quarter and our active pipeline now totals over 1 million square feet at 73% pre-leased and amounts to over $500 million in capital commitments. Each of these seven projects is on schedule and on budget, and five of the seven are 100% pre-leased. The two developments with available space are both inventory buildings in Huntsville: one inside the fence targeting government tenancy, and one outside the fence for defense contractors. We commenced construction of 410 Goss Road in the first quarter, which is designed for the government inside the fence, and we are tracking demand that exceeds the availability in the building from multiple missions, all of which require secure facilities that are ATFP compliant. We achieved substantial completion of 8500 Advanced Gateway earlier this month, which is outside the fence and is currently 20% leased to a defense contractor. We are finalizing a lease for a full floor, which we expect to execute imminently that will increase the lease rate to 40%, and we are working on another deal for two full floors, which would increase the lease rate to over 80%. We have already planned the next inventory building, RG 6300, and expect to commence development once we approach that 80% threshold. Our development leasing pipeline, which we define as opportunities we consider 50% likely to win or better within two years or less, currently stands at nearly 1 million square feet. Beyond that, we are tracking an additional 600 thousand square feet of potential development opportunities. With that, I will hand it over to Anthony. Anthony Mifsud: Thank you, Britt. We reported first quarter FFO per share of $0.69, which was $0.01 above the midpoint of guidance and represents a 6.2% increase year over year. The quarter benefited from the earlier-than-budgeted commencement of several leases, strong renewal leasing, the timing of certain R&M projects, and unbudgeted real estate tax refunds from continued successful assessment appeals. These favorable items were partially offset by higher-than-forecasted net winter weather-related expenses. Same-property cash NOI increased 5.4% year over year, driven by the burn-off of free rent on development and acquisition leases commenced in prior years and a 70-basis-point increase in same-property average occupancy. We received $2 million less of nonrecurring real estate tax refunds in 2026, which muted this quarter's strong growth by approximately 200 basis points. Same-property occupancy ended the quarter at 94.2%, which is a 60-basis-point increase over the year and was driven by a 500-basis-point increase in the Other segment. With respect to capital transactions, on March 16, we repaid our $400 million bond, which carried an interest rate of 2.25%. Recall that we prefunded the capital for this maturity roughly seven months ago, when we issued $400 million of five-year unsecured notes at 4.5% at a sector-leading credit spread of 95 basis points. The increased interest on this $400 million of debt results in $0.09 of higher financing costs in 2026. We have no significant near-term refinancing risk, as our next bond maturity is not until 2028. As Stephen mentioned, Moody's upgraded our investment grade credit rating in March to Baa2. In its press release, Moody's highlighted the strong operating performance of our specialized office portfolio, our solid EBITDA-to-interest expense ratio, and income growth from assets under development. I would like to give special recognition to our team who worked diligently to achieve this important milestone, which represents the culmination of years of effort and outreach. We appreciate that Moody's recognizes the strength and specialized nature of our strategy, platform, portfolio, and tenants. With respect to guidance, we increased the midpoint for several items. We increased the midpoint of FFO per share guidance by $0.01 to $2.76, which is driven by the contribution from both the outperformance during the quarter and the Mission Ridge land acquisition, partially offset by the accounting treatment for the dilution from our exchangeable notes. We increased the midpoint of same-property cash NOI growth by 50 basis points to 3% due to stronger renewal leasing and unanticipated real estate tax refunds. We increased the midpoint of tenant retention guidance by 250 basis points to 82.5%. We increased the midpoint of capital committed to new investment guidance by $40 million to $290 million due to the Mission Ridge land acquisition. Finally, we are establishing second quarter guidance for FFO per share in a range of $0.68 to $0.70. With that, I will turn the call back to Stephen. Stephen E. Budorick: In closing, we are off to a great start to the year, with leasing volume right on track with the full-year plan. We delivered FFO per share growth of 6.2% year over year, marking our 23rd consecutive quarter of year-over-year growth. We increased the midpoint of 2026 guidance for four key metrics. We increased the dividend again in the first quarter by 4.9% and have increased it over 16% over the last four years. We committed nearly $250 million of capital to three new investments year to date, and since the beginning of 2025, the strength of our strategy has resulted in over $500 million of capital commitments to new investments consisting of eight projects in five different markets. Eighty percent of the dollar value is for 100% pre-leased projects, and 20% of the dollar value is creating much-needed inventory to meet the demand we are seeing from both the U.S. government and defense contractors in parks where we have little to no availability. These investments, combined with the expected additional opportunities from the substantial increase in the proposed defense budget, will support the continued track record of growth we have delivered in NOI and shareholder value. With that, operator, please open the call for questions. Operator: Thank you, Mr. Budorick. To ask a question, please press 11 on your telephone and wait for your name to be announced. To withdraw your question, please press 11 again. Our first question comes from Seth Bergey of Citi. Your line is open. Seth Bergey: Hey, thanks for taking my question. You have a slide in the flipbook on the long-term growth rate of about a 4.5% FFO per share CAGR. With the increase in defense spending, is that how you think about the long-term earnings power, or do you see a path to that accelerating as defense spending increases and the development pipeline continues to mature? Stephen E. Budorick: Sure. The slide you are referring to demonstrates the 4.5% growth rate we have compounded at for the last seven or eight years. Looking forward, this year our growth is a little muted because of the $0.09 of additional interest expense Anthony referred to in his comments, so we expect to get somewhere around 1.5% of growth. Looking forward, we generally expect we can return to the growth path that we have experienced recently, and, hypothetically, there could be upside to that from the increase in defense spending. I remind you that the bill has not even been passed and appropriated yet, so it is aspirational, but it certainly supports the continued trend we refer to over the last 12 years of increases in investment, which will be good for our business and potentially lead to a better outlook. Seth Bergey: Great. And then with the acquisition, that is the second acquisition you have made in that submarket. Are there any other types of buildings or ground leases that you are looking at in that market? And as the business improves and defense spending increases, are you seeing any changes to other players in this space? Stephen E. Budorick: To the first question, if you look at the aerial on Slide 15, you will see that market is, as we described it, a rich ecosystem of defense contractors supporting the local missions, and we own about 28% of that market now. There are certainly buildings that have great tenants with characteristics that would be compatible with us that, under the right price or terms, we would be very interested in buying. There are none currently available, but it is certainly one of the top three markets we have staked out, and we keep a pretty sharp eye on opportunities there. As to other players and increased competition, nothing meaningful that I could talk about. There are several investment groups that are considerably smaller that like to invest in Northern Virginia in similar assets, and I think their interest will remain high as it has been in the past, but I cannot say that I identify any new entrants. Operator: Thank you. Our next question comes from Steve Sakwa of Evercore ISI. Your line is open. Steve Sakwa: Yes, thanks. Good afternoon. Stephen, are you thinking about the development pipeline and development starts any differently today, given all of the positive backdrop and tailwinds you talked about? Are you willing in some of the submarkets to have a little bit more spec product? And is the tenancy changing given some of the new entrants into the defense contracting business? Stephen E. Budorick: We are not yet ready to start accumulating more inventory than we traditionally have, but we are certainly, for the last year and increasingly so, putting ourselves in a posture to move extremely quickly by redesigning and, in some cases, addressing land conditions in advance of the opportunity to cut our delivery timeframe. To the extent that demand ramps up, particularly in Huntsville where we expect it to ramp up to support Golden Dome, we are prepared to move more aggressively, but we need to see that demand materialize a little more formally than it has been. Steve Sakwa: Got it. And as you think about vacancy leasing, maybe talk about where the focal points are and the prospects for driving occupancy even higher from current levels. Britt Snider: In terms of prospects, in Northern Virginia we have been able to push some cash rents on recent deals, which is a good sign. The growth in cyber funding in the PW corridor is an area where we are starting to see more activity after a quieter period, and the funding is being allocated to missions we support in our buildings, including the cyber mission force. Those are two areas—Northern Virginia and the PW corridor—where we are going to see heightened vacancy leasing. We have certainly seen it in Columbia Gateway at the beginning of this year. We do not have any vacancy to lease in Huntsville; we are down to our last suite. Operator: Thank you. Our next question comes from Blaine Heck of Wells Fargo. Your line is open. Blaine Heck: Great, thanks. The FY 2027 budget request at roughly $1.5 trillion is clearly a major positive. Stephen, assuming that goes through, given that the increase is so substantial, do you think your tenant base will need to start leasing a bit earlier and get out ahead of the funds coming in, or do you think the normal 12 to 18 month lag still holds? Stephen E. Budorick: Remember, you need to break that $1.5 trillion down into $350 billion that is anticipated to be a reconciliation appropriation, and if you break that down, that is really going for things that would not affect leases in our portfolio—such as increased inventory, munitions, shipbuilding. The almost 30% increase in the base budget certainly should affect our tenant base and hypothetically could influence their need for space. But again, it is too early; it has not been passed or appropriated. And then once it is appropriated, it has to flow through to the contractors. I think the 12 to 18 months is still going to hold. Blaine Heck: Very helpful. We noticed your potential future opportunities in the development pipeline came down by about 400 thousand square feet from last quarter. Was there any specific driver behind that reduction? Any projects that might have fallen out of that bucket? Stephen E. Budorick: We harvested some with deals that we announced last quarter, and we made a decision on one particular mission to reduce the possibility of future demand because they look pretty committed to a MILCON solution. Operator: Thank you. Our next question comes from Thomas Catherwood of BTIG. Your line is open. Thomas Catherwood: Thank you. Good afternoon, everybody. Going back to leasing, Britt, in the past you have talked about dialing back on tenant improvements and free rent, and that has shown up in the numbers. Two questions: how much growth are you getting on a net effective basis now, and as availabilities get tighter, how much more can you pull back on concessions? Britt Snider: On NER, it is something we are very focused on for every deal. I do not have the exact percentage, but we have had an enhanced focus over the past couple of years. In certain markets, especially Northern Virginia, we have been able to pull back on concessions more than in the past. For tenants needing mission-critical space, they are willing to contribute more dollars to build out and upgrade their SCIFs, whereas we are staying generally at the same level, if not pulling back, and certainly in free rent we are really trying to pull back. Thomas Catherwood: Would you say that is low single digits or high single digits on a net basis? Britt Snider: Probably mid-single digits growth rate. Stephen E. Budorick: Yes, that is about right. Thomas Catherwood: Perfect. And Stephen, traditionally we thought of COPT Defense Properties with a focus on defense intelligence markets, and you have shied away from markets more focused on defense manufacturing or deployment. With the push to modernize defense capabilities, those lines seem to be blurring. Is that fair, and is that driving you to look at other markets you had not looked at before? Stephen E. Budorick: If we are going to bridge into the realm of defense we have not traditionally served, it would be in conjunction with one of our tenants in a specific opportunity to support them with third-party capital. We have had conversations in the past with some of our tenants to move to other markets; we have not yet made that decision. I cannot say that is accelerating now, but on an individual basis we consider it. Operator: Thank you. Our next question comes from Richard Anderson of Cantor Fitzgerald. Your line is open. Richard Anderson: Thanks. Good afternoon. Speaking of other markets, what about Des Moines? What is the latest there as you look to build out data center shells? Britt Snider: Data center shells in that market? It is going to be a great corn crop this year. Stephen E. Budorick: No real update. We are at an impasse on power. We are waiting for the power situation to materialize. We told you in prior calls that to move forward today, the economic terms were too burdensome. We elected to step aside, let others lead in that market, and wait for the power company to adjust to the elevated demand for power for data in the market. We continue to see this as three to four years out. Richard Anderson: As far as Huntsville, you mentioned 99.6% leased, 10 thousand square feet available in a single suite. That campus has the potential to be twice the size. With all that Golden Dome activity, what is the chance you could have the high-class problem of not having enough space? Stephen E. Budorick: That is a long runway away. We have at least 2.5, really more like 3 million square feet of capacity. To the extent that we have that great news and we are absorbing it, recall that our partner, in essence, is the U.S. government. We lease land from them. It is an extraordinarily large parcel of property in the U.S.—the Redstone Arsenal—and we believe, in light of that kind of success, we can find a way to expand our enhanced use lease and continue to support the growth of the missions on the Arsenal. That is the least of my concerns. Richard Anderson: On vacancy leasing, you are tracking 400 thousand square feet. In past years, you blew away your vacancy leasing targets. You are tracking in line now. Is that because the more you get occupied, the harder it is to execute on vacancy leasing? Should we not expect the 400 thousand target to go up meaningfully this year? Stephen E. Budorick: Generally, that is fair. As our properties get as full as they are, it becomes more difficult to have inventory that matches exact emerging demand. We have done a good job continuing to attack it. We do get some space back, even with our extraordinary retention, that we can bring to market. The wildcard is whether we can make some hay with our other assets where we have more vacancy. We like to set a target and beat it, so we plan to do our best to beat the 400 thousand square foot goal, but we are comfortable we are going to make it. Richard Anderson: One last one. On the defense budget, given its size, is it reasonable to assume it will take longer to pass, or because it is bipartisan, might you get to a final budget pretty soon after October 1? Stephen E. Budorick: That is tough to handicap. We seem to find ourselves in new circumstances continually trying to get things appropriated and funded. I would think it is going to be difficult, not because it does not have bipartisan support, but because we have some adversarial objectives in the overall direction of the country, and it seems like anything is a potential bargaining chip, as we are seeing right now with the Department of Homeland Security unfunded at a point in time where we absolutely need the funding for so many reasons. Anyway, anything is possible. Operator: Thank you. Our next question comes from Dylan Brzezinski of Green Street. Your line is open. Dylan Brzezinski: Hi, guys. Most of my questions have been asked, but since you called out potential for vacancy leasing to accelerate in the PW corridor and Northern Virginia, it looks like Navy Support remains the most underleased in the portfolio, albeit still at a high level. What are the vacancy leasing prospects there? Britt Snider: It is a much smaller portfolio for us, but in Navy Support we are seeing some improvements, especially in the Pax River area. There is a lot of autonomous vehicle and drone work happening there, so there has been some pickup. With our buildings next to the D.C. Navy Yard at Maritime Plaza, those have also seen quite a bit of activity and significant increases in occupancy over the past year. There is a lot of activity at the D.C. Navy Yard and contractor support there is critical. Pax River and the D.C. Maritime Plaza are two areas where we are seeing real prospect activity increase. Dylan Brzezinski: And on acquisitions, any noticeable pickup, or is it still one-off opportunities? Stephen E. Budorick: We are currently not looking at anything, and it continues to be one-off. Remember, we have a very focused investment strategy. In the broader market there is more activity, but within the small set of assets we would invest in, there is nothing currently we are tracking. Operator: Thank you. As a reminder, if you have a question, please press 11. Our next question comes from Anthony Paolone of JPMorgan. Your line is open. Anthony Paolone: Yes, thanks. Good afternoon. You touched on this a little bit, but that 1 million square foot development leasing pipeline for what is basically about 180 thousand square feet you have—how much of that pipeline is for that specific space versus requirements you might consider for incremental starts? And to the extent you do not accommodate them, where do these folks tend to go? Stephen E. Budorick: Many of the items in that development pipeline anticipate new projects. I would say 25% to 30% are for things we are actually building currently. Some is overflow for the next set of buildings that would follow. It is more about where the demand is and ensuring we have inventory ready when it is time to move forward. Anthony Paolone: Second, on the regional office portfolio, it is small and not much expires this year, but looking out the next couple of years, expirations start to get heavier. Any updated thoughts on how to mitigate that or the risk of that getting in the way of growth at the core? Britt Snider: The team is already starting to address some of those expirations over the next several years with tenants, and they are working on transactions to pull those forward and get them done early to mitigate the risk. We want to ensure that our headline remains where it belongs, which is in our defense IT portfolio, and not on any blips within the other portfolio. Operator: Thank you. Our next question comes from Steve Sakwa of Evercore ISI. Your line is open. Steve Sakwa: Just one quick follow-up. Stephen, you have talked about selling some of the non-core office assets at the right time. We have seen some successful new developments in Washington, D.C., at exceptionally high rents. Does that make 2100 L Street a more viable disposition candidate today? Stephen E. Budorick: Those benchmark rents support an increased expectation of value for the asset. They have been driven by a relatively small component of demand—very well-funded tenants that want true trophy space in a market that does not have any available. I do not think the investment cash flow has quite picked up enough where it would make sense to market that. I do not think we are that far away. Certainly, I think that opportunity comes quicker than we will see, say, in Baltimore or Tysons Corner. Operator: Thank you. I will now turn the call back to Mr. Budorick for closing remarks. Stephen E. Budorick: Thank you for joining our call today. We are in the office, so please coordinate with Venkat if you have a follow-up question you would like to discuss. Thanks again. Operator: Thank you for your participation today in the COPT Defense Properties First Quarter 2026 Results Conference Call. This concludes the presentation, and you may now disconnect. Unknown Speaker: Good day.
Operator: Welcome to LGI Homes, Inc. First Quarter 2026 Conference Call. Today’s call is being recorded and a replay will be available on the company’s website at www.lgihomes.com. After management’s prepared comments, there will be a question-and-answer opportunity. At this time, I will turn the call over to Joshua D. Fattor, Executive Vice President of Investor Relations and Capital Markets. Please go ahead. Joshua D. Fattor: I will remind listeners that this call contains forward-looking statements, including management’s views on the company’s business strategy, outlook, plans, objectives, and guidance for future periods. Such statements reflect management’s current expectations and involve assumptions and estimates that are subject to risks and uncertainties that could cause those expectations to be incorrect. You should review our filings with the SEC for a discussion of the risks, uncertainties, and other factors that could cause actual results to differ from those presented today. All forward-looking statements must be considered in light of those related risks, and you should not place undue reliance on such statements, which reflect management’s current viewpoints and are not guarantees of future performance. On this call, we will discuss non-GAAP financial measures that are not intended to be considered in isolation or as substitutes for financial information presented in accordance with GAAP. Reconciliations of non-GAAP financial measures to the most comparable measures prepared in accordance with GAAP can be found in the press release we issued this morning and in our Quarterly Report on Form 10-Q for the period ended 03/31/2026, which will be filed with the SEC today. This filing will be accessible on LGI Homes, Inc. and the SEC’s website. I am joined today by Eric Thomas Lipar, LGI Homes, Inc.’s chief executive officer and chairman of the board, and Charles Michael Merdian, chief financial officer and treasurer. I will now turn the call over to Eric. Eric Thomas Lipar: Thanks, Josh. Good afternoon. Good afternoon, and welcome to our earnings call. The first quarter played out largely as we expected, reflecting disciplined execution across the organization and steady demand for our homes. As the quarter progressed, sales activity improved across most of our markets, enabling continued backlog growth and providing a solid foundation as we have transitioned into the spring selling season. During the quarter, we delivered a total of 916 homes. Of this total, 881 homes contributed directly to our revenue of $320 million. The remaining 35 closings were currently or previously leased homes, the gains from which were reflected in other income. Notably, our average selling price increased nearly 3% to approximately $363,000, demonstrating our ability to preserve pricing while continuing to support affordability through targeted price discounts and financing strategies. We ended the quarter with 142 active communities and averaged 2.2 closings per community per month. This was consistent with the pace achieved last year and in line with our expectations for the period. During the first quarter, our top five markets on a closings-per-community basis were Charlotte with 4.6, Las Vegas with 3.2, Phoenix with 2.8, and Northern California and Seattle each with 2.7 closings per community per month. Our gross margin before inventory-related charges of 20.2% and adjusted gross margin of 23.4% were both modestly above the high end of our full-year outlook, highlighting the benefits of self-development, the durability of our operating model, and the strategic choices we continue to make around pricing incentives and inventory management. Sales activity during the quarter was positive. Net orders were 1,221 homes and our cancellation rate was 45.6% driven by buyers who were ultimately unable to qualify for financing. Our backlog at quarter end was 1,699 homes, which represents a 63% increase year over year, a 22% increase sequentially, and marks the highest number of units in backlog since 2022. Before turning the call over to Charles, I want to emphasize our confidence in the long-term fundamentals of the housing market. The persistent undersupply of attainable housing, coupled with favorable demographic trends, continues to support a long runway of demand for homeownership. LGI Homes, Inc.’s 100% spec, entry-level focused business model centered on providing an affordable alternative to renting is purpose-built for this backdrop. Underpinning that model is a strong, low-cost land pipeline which is nearly 100% on balance sheet, providing investors full transparency into our capital structure, driving margin durability by capturing the developer’s economic value, and minimizing reliance on external partners whose priorities may not align with the long-term value creation we are focused on. These advantages underpin our confidence as we focus on execution today while investing to drive durable, long-term growth for many years to come. With that, I will invite Charles to provide additional details on our financial results. Charles Michael Merdian: Thank you, Eric, and good afternoon. Revenue in the first quarter was $319.7 million based on 881 homes closed at an average sales price of $362,924, up 2.9% year over year, primarily driven by geographic mix and a lower volume of wholesale closings. The 9% year-over-year decrease in revenue was driven by an 11.5% decline in closings, partially offset by higher ASP. Of our total closings, 111 were through our wholesale channel, representing 12.6% of total closings, compared to 179, or 18%, during the same period last year. Our first quarter gross margin was 18.7%, in line with the guidance provided on our last call. Gross margin, excluding impairment-related charges, was 20.2%, compared to 21% in the same period last year. The year-over-year decline was primarily attributable to financing incentives and discounts on older inventory, partially offset by the structural margin benefit of our self-developed lot positions and our disciplined approach to pricing. Adjusted gross margin was 23.4%, up 110 basis points sequentially, in line with our result last year, and above the guidance we provided on our last call. Adjusted gross margin excluded $10 million of capitalized interest and $389,000 related to purchase accounting. Combined selling, general, and administrative expenses totaled $60.5 million, or 18.9% of revenue, an improvement of 200 basis points year over year. Selling expenses were $32.7 million, or 10.2% of revenue, compared to 12% in the same period last year. The decrease was primarily due to overall cost efficiencies in advertising spend. General and administrative expenses were $27.9 million, or 8.7% of revenue, compared to 8.9% in the same period last year. Other income was $4.9 million, driven primarily by the sale of 35 currently or previously leased homes and gains from the sale of finished lots and commercial land. Adjusted EBITDA increased 30% to $24.4 million, representing 7.6% of revenue, compared to 5.3% in the first quarter of last year. Pretax net income was $4.3 million, or 1.4% of revenue. The effective tax rate in the first quarter was 50%, above our outlook, and reflects the timing impact of share-based compensation expenses that vested during the quarter. This impact is isolated to the first quarter, and we continue to expect our full-year effective tax rate to be approximately 26.5%, in line with our previously issued guidance. First quarter net income was $2.2 million, or $0.09 per basic and diluted share. Excluding impairment-related charges and associated tax impacts, net income was $5.6 million, or $0.24 per basic and diluted share. Turning to our land position, at March 31, we owned and controlled 59,028 lots, a decrease of 12.9% year over year and 3% sequentially. The decrease reflects our continued strategy of aligning land investment with current sales trends, acquiring lots in markets where demand supports it, and moderating investment where inventory rebalancing is still underway. Of our total lots, 51,193, or 86.7%, were owned. 7,835 lots, or 13.3%, were controlled. Of our owned lots, 34,168 were raw land or land under development, approximately 20% of which were in active development and 80% were in engineering or undeveloped land. Of the remaining 17,025 owned lots, 13,404 were finished vacant lots, and 3,621 were completed homes or homes under construction. During the quarter, we started 1,137 homes to support the seasonal uplift in sales trends. I will now turn the call over to Josh for a discussion of our capital position. Joshua D. Fattor: Thanks, Charles. We ended the quarter with $1.7 billion of debt outstanding, including $579 million drawn on our revolver, resulting in a debt-to-capital ratio of 44.8% and a net debt-to-capital ratio of 44%. The slight increase sequentially reflects our typical first quarter cadence as we invest in vertical construction ahead of the spring selling season. We remain focused on reducing leverage as we work through older inventory and selectively monetize lot positions, with a long-term objective of maintaining a ratio of total debt to capital near the midpoint of our 35% to 45% target range. Total liquidity at the end of the quarter was $355 million, including $61 million of cash on hand and $294 million available under our revolving credit facility. We ended the quarter with over $2.1 billion in equity, equating to a book value per share of $90.50. At this point, I will turn the call back over to Eric. Eric Thomas Lipar: Thanks, Josh. We are encouraged by what we are experiencing in the market as we transition into the spring selling season. As always, affordability and consumer confidence remain important considerations for buyers, particularly in a volatile rate environment. However, despite an uptick in interest rates late in the quarter driven by geopolitical uncertainty, recent trends have remained healthy across most of our markets, suggesting many buyers are looking beyond short-term rate movements and focusing on value and the impact of the tools we are using to support affordability. Buyers continue to inquire about homeownership and engage with our sales teams, and we are right on track to achieve the full-year guidance metrics we provided on our last call, including annual closings between 4,600 and 5,400 homes, 150 to 160 active communities by year end, an average selling price between $355,000 and $365,000, and SG&A as a percentage of revenue between 15% and 16%. However, based on first quarter margins exceeding the range of our previous guidance, and our visibility into our growing backlog, we are raising our full-year gross margin to a range between 18.5% and 20.5%, and adjusted gross margin between 22% and 24%. We believe we are executing well on the elements of our business that we can control, and we are positive about our ability to achieve our full-year expectations. Finally, I want to thank our team members for their ongoing dedication to our company and our customers. Being recognized for the sixth consecutive year as a Top Workplaces USA employer based on direct employee feedback is a significant honor and underscores the strength of our culture as experienced by our people. Thank you for your hard work and for ensuring that LGI Homes, Inc. is providing the best customer experience in the industry. We will now open the call for questions. Operator: Thank you. If you would like to ask a question, please press 1-1. If your question has been answered and you would like to remove yourself from the queue, please press 1-1 again. Our first question comes from Trevor Scott Allinson with Wolfe Research. Your line is open. Trevor Scott Allinson: First one is on gross margin, better than you were anticipating. You are raising your full-year guidance as well, so that is encouraging and heading in the right direction. You talked about some strategic decisions around pricing incentives. Can you talk about what drove the better gross margin than what you were anticipating and what is driving your improved outlook for the year? And then second is on demand trends through the quarter. It sounds like those were still relatively healthy. Did you see any impact in March when rates went up and you had the Iran conflict really start to take off? And then how has demand trended so far in April, perhaps relative to seasonality? I am not sure if I heard an April closing number as well, and any color so far on how April is shaping up as well. Eric Thomas Lipar: Yes, Trevor. Thanks. This is Eric. I can start. I think the driver of gross margin is a couple of different things. One is we are seeing cost relief consistently throughout the quarter. The team is doing a great job of reducing our older inventory, so our newer inventory that is closing in the quarter is benefiting. We were able to push pricing in a number of select communities across the country in the quarter, and, also, geographic mix always plays a part in gross margin as well. Because of the success in the first quarter, we thought it was prudent to raise gross margin for the year, and we are comfortable with that new range. On demand trends, January and February were tougher closing months. March recovered based on the strength of February sales, and that strength continued into March. We anticipate closing between 400 and 450 in April. It is still a little early; we are waiting for all of our final underwriting and mortgage commitments to get everything scheduled over the next couple of days, but it should be similar to March, similar to last year, somewhere in that 400 to 450 range for the month of April. I would say sales trends in April have been similar to March. There does not seem to be an impact because of war or higher rates. There is a little bit of seasonality built in, but we continue to spend money on marketing. We are continuing to see demand. Our teams continue to do a great job with that customer experience, working with them on affordability, working with them on down payment, paying off debt—whatever is needed to get them into the house. It is still a challenging time, but our teams are doing a great job dealing with those challenges of affordability and really working hard and producing results that, relative to the last couple of years, are more positive. Operator: Our next question comes from Michael Rehaut with JPMorgan. Michael Rehaut: Good afternoon. Thanks for taking my questions. Just also, obviously, going to be a lot of focus on the gross margin. To revisit that, if I may, Eric, I think you cited cost relief, some pricing power, and some mix. I just wanted to clarify, are those factors all what played out to the upside relative to your original expectations when you provided guidance for the quarter, or was there one particular factor that more drove the upside versus others? And then as we think about the rest of the year for this metric, I believe you took up the adjusted gross margin outlook to a range of 22% to 24%. In the first quarter, excluding purchase accounting, you were closer to the high end of that range, 23.4%. How should we think about the second quarter coming up, and are there any factors that might push you more towards the middle of the range, which would imply maybe the rest of the year on average being slightly below the first quarter? Lastly, the cancellation rate being somewhat elevated the last couple of quarters, what impact might that have on operations, if any? Eric Thomas Lipar: I think it all played a factor, Michael. Also, the way we usually focus on guidance, we want to be conservative. We were not sure going into the year where gross margin was going to be exactly, so it was probably a conservative guide to start with, which we hope is still conservative, but we are comfortable with the number for now. A lot of our gross margin strength is tied to the strength of our balance sheet and the value of our land. LGI does a lot of self-development across the United States, so our gross margin should be higher than the peer group. We have to make sure we are capturing that developer profit inside of that gross margin as well as providing incentives to our customers to keep up with the competition. We are still leaning into incentives, but increasing gross margin at the same time. On the second quarter, it is going to depend on mix and other factors on pricing, but generally we expect the second quarter adjusted gross margin to be similar to the first, which is why we are right in the middle or just above the midpoint of our range on our annual guidance. On cancellations, the emphasis should be on our closing guide, and the closing guide remains the same. Our backlog is the highest since 2022, which we are excited about. From this point forward, it is really just managing the pipeline. Because of the challenging affordability situation and the challenging absorption rate, we have been working with customers. We have had a lot more flexibility keeping customers on the houses longer as they are saving up for down payment, paying off some debt, and working on their credit scores. We think that has been a positive strategy and a great customer experience, as well as benefiting LGI. As that backlog has grown, that may not be a tool that is needed as much. We will analyze that community by community across the United States. We need to continue to work with those customers and continue to follow up. Our team of 400-plus salespeople across the United States is one of LGI’s strengths, as we have the team in place to keep in contact with these customers. We are still dealing with an affordability-challenged market, but we believe we are up for that challenge. The team and leadership are doing a great job. We anticipate cancellation rates remaining elevated versus historical for the last couple of years, but we think that is a positive and necessary for this point in the cycle. Operator: Our next question comes from Alex Rygiel with Texas Capital Securities. Your line is open. Alex Rygiel: Thank you. Backlog has increased sequentially. Has the time to close on this also increased, and do you see any evidence that time to close could be improving? And to follow on that, are you still seeing an improvement in the move-up buyers? Eric Thomas Lipar: I would say generally yes, Alex. We do not have the information in front of us, but time to close—with customers saving for down payment, as an example—is going to be elevated. The other thing that is happening in our business, which is positive, is sales relative to the amount of houses we had under construction is increasing. So we are selling more customers further out, and customers are going on houses that are under construction or on houses with permits in hand or permits pending that we have not started construction on. That is going to lengthen the time under contract to close, but we also think that is positive as well. On move-up, the overall business is so focused on the entry-level buyer that it is tough to judge, but we are seeing success in our Terrata brand. It is about 10% of our community count nationwide, around 15 communities. But the overall market, like we said in our scripted remarks, is still a challenging market. We are dealing with some economic uncertainty and consumer confidence headwinds—those are still there. Our optimism comes from being relative to expectations. We feel really good where we are, and we feel really good with our guidance for the year. Operator: Our next question comes from Jay McCanless with Citizens Bank. Your line is open. Jay McCanless: Hey, good afternoon, everyone. First question: really good gains in the Northwest—average sales price up 7%. The West was up 5%. Was this more of a one-off thing, or is this representative of what you have sitting in backlog right now and maybe helps you get to the high end of that ASP guide for the year? And if you think about price/cost right now, it sounds like you are seeing a little lower direct cost, but what are you seeing for land, and especially with lumber prices starting to move up, how are you feeling about that for the balance of the year? Also, in your prepared comments, you talked about how the age of some of the specs you are selling now are younger. Do you have any type of metric around the average age of your homes in the field now versus a year ago? Eric Thomas Lipar: It is community specific, Jay. We have opened up some new communities, and I think the whole industry is going to be facing this: as new communities come online, our lot cost is going to be higher. That is directly going to have an impact on ASP. There is going to be a geographical mix component in our average ASP for the year. Certainly, the West has the highest average sales price, so the percentage of the West compared to the rest of the company for the year will dictate where we are in the ASP range or even exceeding it. On cost, we have not seen a lot of land development cost increases. In house cost increases, with oil where it is right now, we do not expect our house cost to go down. We do not really forecast costs going down over the next few quarters or years. We tell all of our employees we believe house prices are going up because every component of building a house and developing land is likely to be higher over the next few quarters and next few years. That is going to continually drive our ASP higher. On the age of specs, I do not have anything quantifiable. Charles Michael Merdian: What I would add, Jay, is we are running about 2,100 completed units right now, and that is a little heavier than we typically would like on our overall inventory. We have about 1,300 that we have started. We did not start a lot in January, but that trend is increasing as we get into the summer. As we continue to work on our older inventory, we would expect our completed inventory units to start to work their way down into a more balanced level. Typically, we would want to see about half of our inventory complete and about half in progress. So we are still a little bit heavier weighted to complete, but that is a focus, and we expect that to trend down. On development costs, we have 13,000 finished vacant lots, so the development costs that we are seeing are really going to affect most of those communities 12 to 18 months out. Another reason why we feel very strongly about our balance sheet, land, and inventory is because those costs are generally pretty locked already as those sections have been developed. We run just above 20% of our ASP in finished lot costs and feel pretty confident in that number going forward, with maybe some potential upside as we get into the later part of the year and next year. Operator: Our next question comes from Alex Barron with Housing Research Center. Your line is open. Alex Barron: Hi, good afternoon. I just wanted to confirm your order ASP seems to have gone up in the quarter. I am getting that from looking at the ASP in the backlog relative to last quarter. What drove that? Was there a big change in mix? And in terms of the wholesale business, do you have a breakdown of what percentage of the orders came from that versus regular sales? Also, do you have any guidance or suggestions on how to think about the other income line item? Eric Thomas Lipar: The backlog ASP is elevated primarily because of results in the West. In the West, we tend to sell further out, with not as much spec inventory on the ground. So that probably comes down a little bit in the future and will be consistent with our annual guidance for ASP. On wholesale, closings were 12.6% of our closings in Q1. Charles Michael Merdian: I would add that the backlog at the end of the quarter has just over 400 units related to wholesale. We had a fairly large transaction in the fourth quarter, and not a lot of activity in the first quarter. I would say order activity in the first quarter was pretty limited from the wholesale business, but we do have a decent backlog—over 400 is up 70% from last year’s first quarter—so we feel good about the units we have under contract going in. As the wholesale market evolves as the year goes on, we will evaluate where the full-year results end up. On other income, it is pretty variable. Over the last few quarters, we have been around the $5 million number, and that is a combination of selling lots and commercial land and also the profit from our previously leased homes. There is potential for that to bounce around a little bit, but for modeling purposes, if you look at what we have done over the last several quarters and extend that out, that is a reasonable guess at this point. Operator: Thank you. At this time, I am showing no further questions. I would like to turn the call back over to Eric Thomas Lipar for closing remarks. Eric Thomas Lipar: Thanks, everyone, for participating on today’s call and for your interest in LGI Homes, Inc. Have a great day. Operator: Thank you. This concludes LGI Homes, Inc. First Quarter 2026 Conference Call. Have a great day.
Operator: Greetings, and welcome to Public Storage First Quarter 2026 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. If you would like to enter the queue, please follow the prompts from your phone system. As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Brandon Reagan. Thank you. You may begin. Brandon Reagan: Thank you, Operator. Hello, everyone, and thank you for joining us for our first quarter 2026 earnings call. I am here with the Public Storage leadership team, H. Thomas Boyle and Joe Fisher. Before we begin, we want to remind you that certain matters discussed during this call may be forward-looking statements within the meaning of the federal securities laws. These forward-looking statements are subject to certain economic risks and uncertainties. All forward-looking statements speak only as of today, April 28, 2026. We assume no obligation to update, revise, or supplement statements that become untrue because of subsequent events. A reconciliation to GAAP of the non-GAAP financial measures we provide on this call is included in our earnings release. You can find our press release, supplemental report, SEC reports, and an audio replay of this conference call at our Investor Relations website, investors.publicstorage.com. We ask that you initially limit yourself to two questions. However, if you have additional questions, please feel free to jump back in the queue. With that, I will turn the call over to H. Thomas Boyle. H. Thomas Boyle: Good morning, everyone, and thank you for joining us. I will frame my comments around four points. First, the PS 4.0 era is now underway, with the new team in place and our Own It culture gaining momentum. Second, the announced acquisition of National Storage Affiliates (NSA) is an important early milestone in that strategy. Third, our operating platform, PSNext, is strengthening the customer experience while also improving how we run the business, with first quarter results in line to a touch better than expectations. And fourth, even ahead of the forthcoming recovery in storage fundamentals, we are continuing to invest behind a broader value creation engine that we believe can drive stronger per share growth over time. Let me start with PS 4.0. What PS 4.0 is really about is building the next phase of Public Storage around a simple idea: we have a unique opportunity to create value by combining the scale of our platform, the strength of our brand, the quality of our portfolio, our unique Own It culture, and increasingly the advantage of our data and analytics capabilities. We hosted our 160-person leadership team a few weeks ago to kick off the new era, with an enthusiastic response internally. Our teams have embraced the strategic vision, and there is real energy across the organization around what comes next. That matters because strategy only creates value if the organization is aligned behind it. Right now, that alignment is getting tighter. The energy is being translated into urgency for execution. That takes me to point number two: NSA. The announced acquisition of National Storage Affiliates is a major step forward for us and a very clear example of PS 4.0 in action. When we discussed the transaction in March, we highlighted three things. One, the portfolio combination is compelling. The two portfolios deepen our brand, scale, and operating presence across the national opportunity set. Two, there is meaningful upside from bringing that portfolio onto our platform. On the M&A call, we discussed the customer experience opportunity with managing the properties under the Public Storage brand and PSNext operating model. This will also lead to revenue potential and margin upside. And three, we structured the transaction with a win-win joint venture that optimizes portfolio structure for Public Storage and preserves financial strength. Public Storage will wholly own 46% of the over 1 thousand assets in the portfolio, with the remaining in joint ventures. Importantly, the transaction maintains our industry-leading balance sheet. When I step back and look at the NSA acquisition, I do not see a bigger company; I see a stronger platform, a deeper portfolio, and a broader opportunity set for value creation. This will drive differentiated per share earnings growth in coming years. Integration planning is progressing well. The teams are engaged, the workstreams are moving, and we are preparing the business to execute well upon closing. I also want to thank both the NSA and Public Storage teams. Transactions like this require an enormous amount of focus, coordination, and professionalism. We appreciate the strong collaboration we are already seeing across both organizations. There is obviously much more to come as we work toward completion, but I am encouraged by the work that is underway. That leads to point number three: the operating platform. A big part of why we are excited about NSA is that PSNext is built for this. PSNext is an operating platform that is increasingly shaping how we serve customers, price inventory, manage demand, and drive efficiency across the business. Customers are increasingly interacting through digital channels—whether through our website, app, agents, and over time, more through large language model–driven interfaces. We are building our operating model around those shifting customer expectations. That customer focus is central to PS 4.0. The team is aligning in this direction. Let us connect that strategy to what we are seeing in the business today. The operating environment remains uneven. We are seeing lower customer move-in activity overall in the first quarter, with some weather impacts and modest demand. At the same time, we have driven better rental rates than expected, and importantly, our existing customer base remains very healthy. Move-out activity was meaningfully lower in the quarter, leading to better occupancy than last year. This is not a one-speed environment; it is a market where execution matters. That is where the operating model transformation becomes so important. We are improving customer experience in a way that supports performance both on the revenue side and the expense side. We are seeing that playbook continue to develop, and that gives us confidence not just in integrating NSA, but improving the performance of the broader portfolio over time. Now point number four: the value creation engine. We are not waiting for the environment to get easier. We are acting now. We have confidence in the long-term fundamentals of storage and have the opportunity to invest today to benefit the platform over time. That mindset is important because while the near-term environment remains uneven, the longer-term setup is compelling. Several longer-term drivers support that optimism. Self-storage adoption has increased over the last decade. Participation has broadened across customer cohorts, with strong participation from younger generations. Our units present an affordable space solution in a high cost-of-living environment. Competitive supply is slowing as new development becomes harder and more expensive. We like that backdrop, and we are positioning the company now to outperform as the environment improves. NSA is the first major milestone of our value creation engine, but it is not the only one. We continue to execute upon value creation through multiple levers—acquisitions, development, expansion efforts, and our lending platform. Our capital will be allocated across those levers in order to: one, improve our portfolio; two, accelerate per share earnings and cash flow; and three, compound our returns. Our external growth and capital allocation capabilities continue to build. In March, we announced the strategic data science partnership with Welltower. That partnership brings together Welltower’s capital allocation–oriented data science platform and Public Storage’s operational pricing and customer analytics capabilities to better our micro market targeting and portfolio construction over time. Our value creation engine is driven by a combination of our PSNext operating platform advantages, enhanced data science approach, and team investments. To summarize the quarter: one, we launched PS 4.0 and aligned the organization toward a new strategic vision; two, we announced the NSA acquisition, which—with a unique structure—strengthens our scale, our platform, our portfolio, and our value creation opportunity; three, we continued advancing PSNext in our operating model transformation with a strong focus on customer experience; and four, we expanded the reach of our value creation engine through both external growth and the Welltower data science partnership. We are realistic about the operating environment—it remains uneven. But we are also optimistic about the demand and supply setup over the next several years, about the capabilities we are building, and about our ability to translate those investments into stronger per share earnings growth over time. With that, let me turn it over to Joe. Joe Fisher: Thank you, Tom, and good morning, everyone. The topics I will cover today include our first quarter results, a summary of recent transactions, and a balance sheet and capital markets update. Core FFO in the quarter was $4.22 per share, up $0.10 per share, or 2.4% year-over-year. These results were driven by better-than-expected same store NOI and significant growth from our non-same store portfolio and ancillary income initiatives. Same store revenue and NOI growth in the quarter were flat and positive 0.4%, respectively. Move-in rents, while still negative, came in better than expected at minus 2.4% versus full-year expectations of down mid-single digits, which had been expected to start the year lower and improve throughout the year. Occupancy was positive year-over-year by 0.4% versus guidance assumed at flat for the year. Lastly, our existing customers continue to perform well, as demonstrated by a material reduction in churn. We continue to see a market that is mixed by geography. In a number of Sunbelt markets, new supply continues to weigh on performance and pressure revenues, but at the same time, we are seeing strong growth in many of our coastal and Midwest markets. Lastly, Los Angeles continues to be hindered by the state of emergency, with the most recent extension through May. As a reminder, we have assumed the state of emergency remains in place all year at a negative 80 basis point impact to same store performance. But given the quality of our portfolio, low supply, high occupancy, and strong performance in other Southern California markets, LA will be a strong tailwind for performance in the future. Expense growth performed very well at minus 1.1% for the quarter. In property tax, we did see earlier-than-expected appeal wins of approximately $3 million in the quarter, which we had previously expected in the second quarter. Away from property tax, PSNext helped drive negative growth in payroll, R&M, utilities, and marketing. Outside of the same store pool, NOI growth of 27% in our non-same store pool and ancillary growth of 12% lifted results. Non-same store performance and our external value creation engine continue to be a substantial and repeatable driver of shareholder value. If we utilized a same store definition similar to that of peers, NOI would have been 50 basis points better in the quarter. While we are pleased with our results, having started the year ahead of our expectations, we have not adjusted our guidance at this time, with busy season still ahead of us. As we spoke about in our initial guidance, the leading indicators of our business remain positive, but year-over-year revenue growth as a lagging indicator will soften midyear. Onto transactions. Year-to-date, we acquired or are under contract for $186 million. The first quarter is typically a slow quarter for external growth. However, we continue to see opportunities that are a great fit for our PSNext operating platform and expect to have more activity to discuss in the second quarter. On the development and expansion front, we had openings of $45 million during the quarter. The development pipeline stands at $618 million with stabilized yields targeting 8% and remaining amounts unfunded of $416 million. For our lending business, we had $143 million outstanding at a current rate of approximately 7.9%. Lastly, our fortress balance sheet remains in excellent position from both a metric and liquidity perspective. At quarter-end, we had available liquidity of $1.3 billion between our line of credit and cash on hand, plus approximately $600 million of annual free cash flow. Subsequent to quarter-end, we issued $500 million of well-priced 10-year unsecured notes at 5%, with proceeds utilized to pay down our revolving credit facility and improve liquidity. Our balance sheet remains one of the strongest in the REIT sector, with debt to EBITDA of just 2.9 times, debt plus preferred equity to EBITDA of 4.2 times, and debt plus preferred equity to enterprise value in the low-20% level. In summary, we are encouraged by our start to the year and by the opportunities we see ahead. We delivered solid results, maintained a fortress balance sheet, and continued to execute against our capital allocation priorities. We remain disciplined on deployment, constructive on the long-term fundamentals of the business, and confident in our ability to drive per share value creation. I would like to turn the call back to the Operator to open up for Q&A. Thank you. Operator: Thank you. At this time, we will be conducting a question-and-answer session. As a reminder, please limit yourself to two questions. A confirmation tone will indicate your line is in the question queue. Our first question comes from Michael Goldsmith with UBS. Your line is now live. Michael Goldsmith: Good morning, good afternoon. Thanks for taking my questions. Joe, in your prepared remarks, you talked about a material reduction in churn during the quarter. Can you talk a little bit more about that specifically? Was that just in the month of March or throughout the quarter? What do you think is driving that, and what is the impact on the financials from a material reduction in churn? Joe Fisher: Hey, Michael. Good afternoon. Good question, and definitely a good statistic to highlight for us, as we have been very encouraged by the existing customer dynamic and them staying with us longer. We did see a pretty material reduction in churn and move-outs coming down in the quarter. In terms of what is driving that, I think it is a multitude of factors. One, we are seeing good pay rates and minimal delinquency from the existing customer and an ability to continue to pay those ECRIs as they come through. The health of the overall customer is strong at this point in time. At the same time, from a customer experience standpoint and focus on that experience and length of stay, as part of PS 4.0 we have talked a lot about the customer obsession. The teams are laser-focused right now on customer experience to ensure we deliver a good product and a good experience overall. Hopefully that results in a longer length of stay for us. From an economic perspective, that existing customer is more profitable for us. The more that we can hold onto that individual, and have less inventory available to sell going forward, that helps pricing on the new side as well, and you saw that move-in rate come up materially and ahead of expectations in the first quarter. Michael Goldsmith: As a follow-up, can you talk about what you have seen through April? I know we are lapping Liberation Day. Just trying to get a sense of the latest operating metrics. H. Thomas Boyle: Sure, Michael. We saw similar trends in April to what we saw through the first quarter—better churn year-over-year, so lower move-out volume; lower move-in volume; occupancy flat to a touch better; and improving trends as it relates to move-in rates—move-in rates flat to a touch positive through the month of April. Busy season is here and just getting started. We have a busy stretch ahead in May, June, and July. The team is ready, and we look forward to updating you on second quarter activity as we move forward. Michael Goldsmith: Thank you very much. Good luck in the second quarter. H. Thomas Boyle: Thanks, Michael. Operator: Our next question comes from Samir Khanal with Bank of America. Your line is live. Samir Khanal: Good morning, everybody. Joe, should we think about the cadence of revenue growth here? As we think about the next few quarters, you are tracking well above the midpoint in the first quarter. Help us unpack revenue growth. And secondly, how should we think about your investment activity this year, excluding NSA, and maybe comment on the lending platform? Joe Fisher: Hey, Samir. I would bifurcate that into two pieces—leading indicators and lagging indicators. On the leading side, we started off the year really well across the board—move-in rates, churn, occupancy, etc. We feel really good on that front. What we communicated in our original guidance was that year-over-year revenue, as a lagging indicator, does get a little bit worse before it gets better. We had some pressures in third and fourth quarter of last year that flow into the year-over-year number as we get into 2Q and 3Q. So we do expect year-over-year revenue to come down a little bit. But sequentially, we continue to be positive in terms of those trends Tom just talked about going through April. H. Thomas Boyle: On the transaction market, we are seeing similar trends to last year, which was encouraging—a broadening of the seller set, a combination of single one-off transactions as well as some smaller portfolios. The first quarter tends to be a little quieter seasonally, so I would expect that transaction volume picks up as we move through the year. A more stable interest rate environment, more stable operating trends, and a broadening seller set all point to encouraging trends. As Joe highlighted, we have acquired or are under contract for around $200 million year-to-date in acquisition activity, driven by our investments in capital allocation capabilities—building the team, enhancing data science, and utilizing the PSNext operating platform to drive differentiated cash flow. We are built for the small one-off transactions, which is where we have been most active year-to-date. About three-quarters of the activity has been off-market. We are targeting micro markets that fit well for the portfolio. The balance sheet is poised to support that level of activity, and we will keep going from here. Joe Fisher: On lending, this continues to be a growing part of the business. It was a slow start to the year, but we expect it to continue to grow over time and significantly enhance both the value creation and the size of the platform. Demand for lending is a little lighter right now, which, given the backdrop of lower development starts and lower supply, is a net long-term positive for the industry. It is also competitive among lenders making new loans. We remain disciplined on rate and underwriting metrics. We have not deviated to date. We may miss a few deals because of that, but we think that is in the long-term interest of shareholders. From a guidance perspective, there is no big implication to this year whether we are more or less aggressive on external growth. The focus is on compounding per share earnings into 2027–2028 and setting up the growth profile there, not a big swing factor for 2026. Samir Khanal: Got it. Thank you. Operator: Our next question comes from Todd Michael Thomas with KeyBanc Capital Markets. Your line is now live. Todd Michael Thomas: Thanks. First, a follow-up on revenue cadence. Would the pressure you anticipate on same store revenue growth in 2Q and 3Q—absent LA—still be there, or could stronger coastal and Midwest markets carry the recovery more evenly through the balance of the year? Joe Fisher: Hey, Todd. It would come off a little bit in both coastal and Sunbelt in 2Q and 3Q. You saw some broader-based weakness back in 3Q and 4Q of last year when new move-in rates went more negative than where we are today. It is a bit more broad-based in 2Q and 3Q. It is not material, but it is expected to be slightly lower than the first quarter. On LA, the state of emergency is still in place through May. In guidance, we factored it in for the entire year, at minus 80 basis points to same store revenue for the full year. Because of timing and comps, LA on a same store revenue basis does continue to get worse throughout the year if the state of emergency remains in place. We do not have insights one way or the other on timing. As I said, it should be a material tailwind to recapture market rent growth in the future. Todd Michael Thomas: Thanks. And on NSA integration, can you talk about measures to ensure NSA’s operations during peak leasing season are intact—leasing, revenue management, etc.—and any incremental thoughts on expected revenue or expense synergies as you work toward closing? H. Thomas Boyle: We have been encouraged by the dialogue and collaboration between the National Storage team and the Public Storage team. We are developing deep plans to integrate the properties as we move into the third quarter. In the interim, they are running their business well and we are doing the same. As we discussed on the M&A call last month, the plan is to integrate those assets immediately onto the PSNext platform, start the rebranding process, welcome their customers and employees, and get going in the third quarter. We will share more as we get closer. Joe Fisher: No change to synergy timing and value creation versus what we put out in early March. We still expect $110 million to $130 million of synergies over time. From an accretion perspective, 2026 is expected to be breakeven. By stabilization in 2028–2029, we think we will have $0.35 to $0.50 of per share earnings compounded on top of our existing profile. At our multiple, we had talked about total value creation of over $1.5 billion coming off a 10 billion transaction. We are excited to get going on the integration and prove the upside we have outlined. Todd Michael Thomas: Great. Thank you. Operator: Our next question comes from Eric Jon Wolfe with Citi. Nicholas Joseph: Thanks. It is Nick Joseph here with Eric. As part of the structure of JV in certain properties and full ownership of others, is there a difference in occupancy between those properties going into the JV versus what will be wholly owned? And is there any difference in stabilization that would drive different return profiles? H. Thomas Boyle: No. There is pretty similar occupancy between the different pools today. Both sets of assets have been owned by NSA for a period of time, and occupancies are in a similar place. As we thought about the formation of the joint venture—creating a win-win and a different return profile for the JV compared to on-balance-sheet—the drivers were more around market mix and composition rather than occupancy. Nicholas Joseph: Got it. Thank you. Operator: Our next question comes from Nicholas Philip Yulico with Scotiabank. Please proceed with your question. Nicholas Philip Yulico: Thanks. Looking at average occupancy in same store versus where you ended on occupancy, the year-over-year delta is different—not as much occupancy growth at period end versus year-over-year in the fourth quarter. Did something happen in March—were you pushing prices and saw some occupancy loss? Can you unpack that? Joe Fisher: Hey, Nick. From an occupancy perspective, we came in quite a bit better than expected in the first quarter given the lower move-out activity we saw. One thing you might be referring to is the change if you look at same store occupancy in fourth quarter 2025 versus first quarter 2026. It did come down a little sequentially, but we added about 17 million square feet into the same store pool from 2025 to 2026, predominantly weighted toward Sunbelt markets, which are running a little lower from an occupancy perspective. If you are thinking about 4Q versus 1Q, I would not read much into that. Focus on the year-over-year momentum we are seeing. Nicholas Philip Yulico: The follow-up is that the year-over-year delta in ending occupancy in 1Q versus 4Q showed lower year-over-year growth at ending. Anything late in the quarter that impacted March ending occupancy? H. Thomas Boyle: There was not anything in particular toward the end. As Joe mentioned, we were encouraged by lower churn through the first part of the year, and our models adapted to that, which led to a little more pricing power as we moved through the quarter. Through the quarter, churn was helpful, rates improved, promotions were down, marketing was down, and occupancy was up year-over-year—encouraging leading indicators as we move forward. Nicholas Philip Yulico: That is helpful. Thanks. Operator: Next question is from Brendan James Lynch with Barclays. Your line is now live. Brendan James Lynch: Thanks for taking my questions. Tom, following up on churn being lower year-over-year, could you discuss some of the initiatives driving that outcome and how much is in your control given most customers are not generally moving out to go to a competitor? H. Thomas Boyle: Great question. There are a number of factors. As Joe touched on, there are macro factors—overall activity levels, GDP growth, job growth—which we think are benefiting churn levels into the first quarter. We are also focused on customer experience—PS 4.0’s customer obsession—delivering a better product and service, which supports longer length of stay. Affordability relative to alternatives is also a factor. Brendan James Lynch: Thanks. And on more challenged markets like Tampa, Atlanta, and Phoenix, do you anticipate dynamics continuing to improve, or is there new supply or other challenges that could still emerge? H. Thomas Boyle: We continue to expect new supply to taper down, and that is impacting many of those markets. Tampa had storm-related comps that we are lapping. We have seen encouraging trends in Dallas, Atlanta, and Phoenix where new supply is being absorbed. Revenue growth is still negative year-over-year but improving sequentially. That speaks to modest improvement as we move through 2026 and forward. Joe Fisher: One thing we are watching is third-party data on occupancy and rate. We seem to be leveling out and stabilizing, which is a good sign for the trajectory coming out of this period. As supply comes down and we execute our initiatives to capture more than our fair share, we are optimistic that we have reached a period of stabilization cyclically. H. Thomas Boyle: Stepping back, the recovery in some of those markets has taken longer than we would have liked, but absorption is taking place, and strength in coastal markets continues to build. While timing has been slower than hoped a couple of years ago, we are investing in the platform, focused on deploying capital, improving operations, and taking advantage of the opportunity set. Brendan James Lynch: Thank you both. Operator: Our next question is from Juan Carlos Sanabria with BMO Capital Markets. Your line is now live. Juan Carlos Sanabria: Good morning. On churn and the interplay with ECRIs, the implied contribution of ECRIs seems to have come down. Is there greater ability for local or corporate to soften ECRIs if the customer complains to keep them on board and reduce churn? How should we think about ECRIs and churn given the moderating macro? H. Thomas Boyle: The encouraging thing is we have seen really steady customer behavior across the board—lower delinquency, stable payment patterns, and lower vacate activity. I would add price elasticity to that list; we have not seen a shift there. Replacement cost components of the ECRI modeling are improving as well. As for overall contribution on a year-over-year comp basis, a big component is Los Angeles—this year we cannot send rental rate increases at all, whereas last year we could send more modest increases. That is the primary component of the year-over-year comp change. Stepping back, price elasticity remains healthy, customers place value on our product, and rents remain affordable versus alternatives, which supports lower vacate activity. Juan Carlos Sanabria: Bigger picture: lessons from prior periods when oil or energy prices spiked and any impact on storage and churn? H. Thomas Boyle: In prior periods of macro stress—excluding COVID—we typically saw vacate activity tick higher. Encouragingly, we have seen the opposite, and that has continued through April. On oil and gas prices specifically, we have seen increases at several points over the last 10–20 years without a material impact on storage activity. That goes back to the needs-based nature of our product—customers come to storage because of life events, not discretionary choice. We are monitoring customer behavior closely, and it has been encouraging to date. Juan Carlos Sanabria: Thank you. Operator: Our next question comes from Caitlin Burrows with Goldman Sachs. Your line is now live. Caitlin Burrows: Hi, everyone. A number of 1Q metrics came in better than expected. Is the reason for no change to guidance simply that it is too soon with busy season ahead, or are there known offsets like timing of acquisitions or debt that we should note? Joe Fisher: It is the former. Hopefully you pick up our positive tone on the start to the year. We are very encouraged, but we are still early with a busy season ahead. We still have NSA to close and integrate. Our focus is on how we will finish the year, not how we started it. We will revert back in February with, hopefully, a positive update. Caitlin Burrows: Got it. On supply, you mentioned ongoing competition in some Sunbelt markets. How long do you think that takes to dissipate, and what makes you confident those headwinds do not reemerge? H. Thomas Boyle: Sunbelt markets have strong demand trajectories—population growth, job growth, income growth. We are encouraged by the longer-term setup in markets like Tampa and the West Coast of Florida, Atlanta, and Dallas-Fort Worth. New supply periodically impacts real estate cycles in those markets, and we are in that phase. Encouragingly, new supply is tapering and being absorbed. Sequential trends have been improving quarter-over-quarter in many of those markets. Development is more challenging nationwide—longer city timelines and processes, higher financing and construction costs, and, in many Sunbelt markets, lower current revenues. Economic barriers to entry are rising. We anticipate supply takes another leg lower this year and likely further into next year. Joe Fisher: It is important to note that our ability to lean into development reflects our team quality, scale, and PSNext. Our 8% stabilized yields are not representative of the broader market. That value creation is unique to us, which is why we can continue to lean into development while others pull back. Caitlin Burrows: Thanks for the details. Operator: Our next question is from Michael Anderson Griffin with Evercore ISI. Your line is now live. Michael Anderson Griffin: Thanks. Circling back on PSNext and how it relates to marketing spend and targeted marketing—can you give examples of how customer acquisition or marketing spend, leveraging data from Google or AI, has changed with PSNext relative to how Public Storage was doing it previously? H. Thomas Boyle: There is a lot there to unpack. We welcomed our new Revenue and Marketing Officer, Ayush Basu, earlier this year, and he is shaping our revenue and marketing strategies. Working with our existing team, we leaned in through the first quarter on targeting initiatives—both via Google and website conversion—to target customers with attractive lifetime value. They are working closely with Natalia Johnson and her data science team to utilize our data more precisely. When a customer lands on our website, we estimate lifetime value and tailor pricing and promotion mix accordingly. On Google, we go find more customers like that. All of those are in the mix, and we are excited to see what these leaders drive from here. Michael Anderson Griffin: Thanks. And a clarification: On the $185 million of deals that closed subsequent to quarter-end, were any related to the Welltower data science partnership, or were they already in the hopper? H. Thomas Boyle: Those were already in the hopper. The Welltower-related opportunities are to come. Michael Anderson Griffin: Great. Thanks so much. Operator: Our next question comes from Spenser Bowes Glimcher with Green Street Advisors. Your line is now live. Spenser Bowes Glimcher: Thank you. In LA, how long has it historically taken to get customers back to market rents after rent freezes, and could this catch-up take longer this time given a weaker demand landscape? H. Thomas Boyle: The demand landscape in greater Los Angeles remains healthy. Orange County, San Diego, and other nearby counties continue to see strong demand, high occupancies, and good rental rate trends. We have a differentiated, attractive, and irreplaceable LA portfolio that we have owned for decades and continue to improve. As for returning to market rental rates, that is not within our control today. Historically, after the Hill and Woolsey fires and the COVID emergencies, it took roughly 18–24 months to get back to prior rent levels. Those emergencies lasted longer than where we sit today, so that provides a guidepost. We will not rush, given our platform and brand breadth in LA, but we are confident in our ability to accelerate to market rents over 12–24 months once allowed. Spenser Bowes Glimcher: Thank you. And on the transaction market, what are you seeing in terms of assets on the market, the bid-ask spread, and cap rates? H. Thomas Boyle: We have been encouraged by a broadening seller set—activity from institutional sellers, mom-and-pop sellers, and everything in between. Stability in operations and interest rates has narrowed the bid-ask spread. On cap rates, stabilized product is trading in the 5s, getting into the 6s as we put them on our platform, reflecting PSNext’s ability to drive higher cash flow. About three-quarters of our year-to-date activity has been off-market, with targeted micro market focus. NSA, on the other end of the spectrum, is a large portfolio opportunity. We are interested across the spectrum and have tactics and team investments to address both. Spenser Bowes Glimcher: Great. Thank you. Operator: Our next question comes from Ravi Vijay Vaidya with Mizuho. Please proceed with your question. Ravi Vijay Vaidya: Thank you for taking my question. You offered comments on how you expect revenue to trend throughout 2026, but how do you expect expenses to trend given the strong start? Joe Fisher: Hey, Ravi. We had a lot of success in 1Q—better than expected—with property taxes, personnel, marketing, utilities, and R&M all down year-over-year. We had about a $3 million one-time benefit in property taxes from an appeal win we originally expected in 2Q, so there is no change to full-year guidance—just timing. Looking forward to our midpoint, we still expect constrained expense growth overall and relative to peers. It will tick higher as we track toward the midpoint we previously laid out, but we have many initiatives to keep expense growth constrained and below inflation. Ravi Vijay Vaidya: Got it. One more: You had less promotional activity this quarter than a year ago. Is that something we should expect going forward, and how do you consider promotions when both move-in and move-out volumes are declining? H. Thomas Boyle: Promotions are one tool; I would also highlight marketing and rental rates as tools to drive conversion and traffic into the customer acquisition funnel. Promotions have been down fairly consistently over the last year. Move-in rental rate trends have been improving, and marketing came down a bit given less churn and less inventory to re-rent. These are encouraging trends across all three levers. We will continue to use them dynamically at the store level to optimize revenue. Ravi Vijay Vaidya: Thank you. Appreciate it. Operator: Our next question is from Michael William Mueller with JPMorgan. Your line is now live. Michael William Mueller: Hi. On the lending program, are you looking at it largely as a lending business to make money in, or does there need to be an angle to ultimately get to the real estate or management? And how big could it ultimately be? Joe Fisher: Mike, of course we are looking to make a strong risk-adjusted return in the lending business. It is around a $150 million business today. We think it could grow into the $500 million to $1 billion range over time, but we are not striving to get there for its own sake—we will remain disciplined. There are ancillary benefits: it can be a potential feeder for future acquisitions, we secure third-party property management on these assets, and we provide tenant insurance. When you look at the platform’s profitability, you should take a holistic view of the loan yield plus these additional revenue and cash flow streams. Michael William Mueller: Got it. Thank you. Operator: Our next question is from Eric Thomas Luebchow with Wells Fargo. Your line is now live. Eric Thomas Luebchow: Tom, you touched on move-ins being down year-over-year due to less inventory. Can you talk about top-of-funnel demand—web search, in-store traffic—and whether recent volatility in mortgage rates, fuel prices, and slower home sales is creating any caution from incoming customers? H. Thomas Boyle: Some of the same macro themes influencing lower churn are also impacting move-ins. It varies by market. In stronger markets like Minneapolis, San Francisco, New York, and Boston, top-of-funnel trends are good. In markets still absorbing new supply—several in Florida, Dallas, and others—incoming traffic is a bit softer, as expected. Big picture, more modest incoming demand paired with lower churn and less inventory to rent is a favorable combination and gives us a bit more pricing power. Eric Thomas Luebchow: And a follow-up on acquisitions: Given the size and complexity of NSA, does it impact your willingness to pursue larger, more complex portfolios, or should we expect more one-off private-market assets to trade this year? H. Thomas Boyle: Bigger portfolios are tougher to predict and are dependent on sellers. Our team is built for one-off acquisitions and micro market targeting, and we have been investing in team size and data science to enhance that. Those capabilities are certainly applicable to portfolios as well. We do have a big closing coming in the third quarter. Around that immediate closing window, we will prioritize NSA integration to ensure it goes smoothly. Away from that, we are looking to continue to deploy capital at attractive risk-adjusted returns and grow per share earnings over time. The teams are built, the balance sheet is in a good spot, and we expect to be active through 2026. Operator: We have reached the end of the question-and-answer session. I would now like to turn the call back to H. Thomas Boyle for closing comments. H. Thomas Boyle: Thanks, everyone, for joining this morning and afternoon. We appreciate the questions and look forward to updating you on how the busy season progresses through the second quarter. Thanks very much, everybody.
Operator: Good day, and welcome to the Hope Bancorp, Inc. 2026 First Quarter Earnings Conference Call. All participants will be in a listen-only mode. Please signal an operator by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star and then one on your touch tone phone. To withdraw your question, you may press star and then two. Please note that this event is being recorded. I would now like to turn the conference over to Mr. Maxime Olivan, Investor Relations Manager. Thank you, and over to you. Maxime Olivan: Thank you. Good morning, everyone, and thank you for joining us for the Hope Bancorp, Inc. investor conference call for 2026. As usual, we will be using a slide presentation to accompany our discussion this morning, which is available on the Presentations page of our Investor Relations website. Beginning on Slide two, let me start with a brief statement regarding forward-looking remarks. The call today contains forward-looking projections regarding the future financial performance of the company and future events. Forward-looking statements are not guarantees of future performance. Actual outcomes and results may differ materially. Hope Bancorp, Inc. assumes no obligation to revise any forward-looking projections that may be made on today's call. In addition, some of the information referenced during this call today includes non-GAAP financial measures. For a more detailed description of the risk factors and a reconciliation of GAAP to non-GAAP financial measures, please refer to the company's filings with the SEC as well as the Safe Harbor statements in our press release issued this morning. Presenting from management today will be Kevin Kim, Hope Bancorp, Inc. Chairman, President, and CEO, and Julianna Balicka, Hope Bancorp, Inc. Executive Vice President and Chief Financial Officer. Peter Koh, Bank of Hope President and Chief Operating Officer, is also here with us as usual and will be available for the Q&A session. With that, let me turn the call over to Kevin Kim. Kevin? Kevin Kim: Thank you, Maxime. Good morning, everyone, and thank you for joining us today. Our first quarter 2026 results reflected strong year-over-year growth in net income, revenue, loans, and deposits, driven by organic growth and the strategic benefits of the Territorial Bancorp acquisition. Quarter over quarter, our pre-provision net revenue grew, supported by improved efficiency and continued progress in lowering our cost of deposits. Beginning with Slide three, you will find a brief overview of our results. Net income for 2026 totaled $30 million, up 40% year over year from $21 million in the prior year period. Quarter over quarter, net income decreased from $34 million, reflecting higher provision for credit losses and income taxes, partially offset by growth in pre-provision net revenue. Pre-provision net revenue for the first quarter totaled $47 million, up 43% year over year from $33 million and up 1% quarter over quarter from $46 million. The provision for credit losses increased in the 2026 first quarter, primarily reflecting higher net charge-offs due to the successful resolution of problem loans. This quarter, criticized loans decreased $26 million, or 7%, from the prior quarter. The effective tax rate was higher in 2026 as the 2025 fourth quarter tax provision benefited from true-up items. On 03/31/2026, we announced the accretive acquisition of the Commercial Banking unit of SMBC Manubank, which we will refer to as Manubank throughout this call. We expect the transaction to close in 2026, subject to regulatory approvals and satisfaction of other customary closing conditions. We are very excited about this transaction, which aligns with our key priorities of building our commercial banking capabilities, expanding our reach among middle market and multinational clients, and growing our core deposit franchise. We believe Manubank will deepen our presence in the greater Los Angeles market and add a highly complementary commercial banking platform, including diversified middle market lending, franchise finance, and specialty deposit verticals such as trust and estate banking. The pending transaction will bring a unique opportunity to combine SMBC Manubank's Japanese banking division with our established Korean subsidiary banking group, creating a differentiated, scaled platform to serve Asian multinational businesses operating in the United States. From a financial perspective, the pending acquisition is expected to add approximately $2.5 billion in commercial and industrial and commercial real estate loans, and $2.7 billion in deposits, of which only approximately 3% are CDs and which we anticipate will contribute a lower overall cost of deposits. We project this transaction to be meaningfully accretive to earnings in 2027, strengthen our recurring core earnings power, and improve our profitability, including returns on equity, through an efficient deployment of capital without the issuance of new shares. In addition, we will establish a collaboration and partnership agreement with SMBC, which is expected to create meaningful opportunities to expand our services to a broader global multicultural customer base. Overall, this is a highly attractive transaction that we believe will support our progress toward achieving our strategic objectives. Moving on to Slide four, during the quarter, we returned capital through a repurchase of approximately 604 thousand common shares totaling $7 million and representing about 0.5% of total shares outstanding. We have $29 million of remaining capacity under our existing authorization, which we intend to deploy opportunistically. Our Board of Directors declared a quarterly common stock dividend of $0.14 per share, payable on or around 05/22/2026 to stockholders of record as of 05/08/2026. Under the terms of the definitive agreement, the pending Manubank acquisition will be settled in an all-cash transaction and is expected to result in a net cash benefit to Hope Bancorp, Inc. On this slide, you can see our optimized pro forma capital ratios, and we are anticipating a tangible book value earn-back period of approximately two years. The pro forma tangible book value dilution would come from the creation of the core deposit intangible and the net impact to equity from balance sheet marks and acquisition-related charges. Continuing to Slide five, loan balances were essentially stable linked quarter. At 03/31/2026, gross loans totaled $14.74 billion compared with $14.79 billion in the prior quarter. Year over year, gross loans increased 10% from $13.34 billion at 03/31/2025, reflecting the impact of the Territorial acquisition and organic residential mortgage growth. As we enter the second quarter, our loan pipelines are strong and building, reflecting improving production trends and increased activity across our markets. On the deposit side, deposits were $15.73 billion at 03/31/2026, growing 1% quarter over quarter. Non-maturity interest-bearing deposits were up 3%, and noninterest-bearing demand deposits were up 0.5%. Higher-cost CDs were intentionally run off. Year over year, deposits increased 9%, primarily due to the Territorial Bancorp acquisition. With that, I will ask Julianna to provide additional details on our financial performance for the first quarter. Julianna? Julianna Balicka: Thank you, Kevin, and good morning, everyone. Beginning on Slide six, our net interest income totaled $124 million for 2026, up 23% from 2025 and a decrease of 3% from the prior quarter. Quarter over quarter, the decrease in net interest income reflected the impact of a lower day count in the first quarter and a modest decrease of 0.4% in average earning assets, in which average loans were up but other earning assets declined. The first quarter 2026 net interest margin was 2.90%, unchanged quarter over quarter. The impact from decreased loan yields was more than offset by lower deposit costs. Year over year, our net interest margin expanded 36 basis points from 2025. The increase was primarily driven by improvements in our funding costs. The cost of our average interest-bearing deposits decreased 77 basis points to 3.37% in 2026, down from 4.14% in 2025, equivalent to a deposit beta of over 100% relative to the decline in the federal funds target rate over the same period. The full impact of the Fed funds target rate cuts is still benefiting us with the continued repricing of time deposits. In the first quarter of 2026, we originated time deposits at a blended rate of 3.62%, down from a blended rate of 3.99% on our maturing CDs. On Slide seven, we present the quarterly trends in our average loan and deposit balances and our weighted average yields and costs. Onto Slide eight, we summarize our noninterest income. For 2026, noninterest income totaled $17 million, down $1 million compared with $18 million in the prior quarter and up $1 million compared with $16 million for 2025. The quarter-over-quarter decrease in noninterest income was primarily due to less gains on the sale of investment securities and lower customer-level swap fee income, the latter of which reflected less underlying transaction activity in the first quarter. During 2026, we sold $53 million of SBA loans compared with $46 million sold in 2025. Accordingly, we recognized SBA gains on sale of $3 million for 2026, up approximately $700 thousand from 2025. Moving on to noninterest expense on Slide nine, our noninterest expense totaled $94 million in 2026, down from $99 million in 2025. The sequential quarter decrease reflected continued expense management discipline. Year over year, noninterest expense increased from $84 million in 2025, primarily due to the inclusion of Territorial's operating expenses. The efficiency ratio for 2026 improved to 67%, down from 68.2% in the prior quarter and down from 72% in the year-ago quarter, demonstrating continued positive operating leverage alongside disciplined expense management. Next, on to Slide 10, I will review our asset quality, which has continued to steadily improve and reflected a quarter-over-quarter reduction in nonperforming loans. This was primarily driven by successful resolutions of problem loans. At 03/31/2026, criticized loans totaled $325 million, down 7% quarter over quarter and down 28% year over year. The sequential quarter improvement included a 23% reduction in special mention loans and a 2% reduction in classified loans. The criticized loan ratio improved to 2.22% of total loans at 03/31/2026, down from 2.39% at 12/31/2025 and down from 3.36% at 03/31/2025. Net charge-offs were $11 million for the 2026 first quarter, or annualized 29 basis points of average loans, compared with 10 basis points annualized for the prior quarter and 25 basis points annualized for the year-ago quarter. Reflecting the linked quarter change in net charge-offs, the 2026 first quarter provision for credit losses was $9 million, up from $7 million for the 2025 fourth quarter. The allowance for credit losses totaled $155 million and the coverage ratio was 1.06% at 03/31/2026, compared with $157 million and a coverage ratio of 1.07% at 12/31/2025. With that, let me turn the call back to Kevin. Kevin Kim: Thank you, Julianna. Moving on to the outlook, on Slide 11 we present our updated management outlook for the full year 2026, including the preliminary impact of the pending Manubank transaction, which we expect to close in 2026, subject to regulatory approvals and satisfaction of other customary closing conditions. Accordingly, we expect loan growth of over 20% between 12/31/2025 and 12/31/2026, reflecting the impact of the Manubank transaction and organic growth. Relative to our assumptions at the beginning of the year, we are moderating CRE loan growth ahead of the transaction close to manage pro forma loan concentration. Our current pipelines are strong and building, and we anticipate commercial and residential mortgage loan growth will continue to be robust in 2026. We anticipate year-over-year total revenue growth to be at the higher end of our 15% to 20% range for the full year of 2026, assuming one quarter of contribution from the pending Manubank transaction. The incremental revenue from Manubank would be partially offset by the impact from the aforementioned slower commercial real estate loan growth. We assume no Fed funds target rate cuts in 2026. We anticipate unchanged pre-provision net revenue growth, excluding notable items, at a range of 25% to 30% for the full year 2026. This includes a quarter's worth of impact of Manubank's operating expenses. We anticipate the benefits of cost savings from the Manubank transaction will begin from 2027. Accordingly, we project the Manubank transaction to be meaningfully accretive to 2027 earnings. We continue to assume a steady asset quality backdrop and a full-year effective tax rate between 25% and 26% in 2026. With that, operator, please open up the call for questions. Operator: Thank you. We will now begin the question-and-answer session. To ask a question, you may press star and then one on your touch tone phone. If you are using a speakerphone, please pick up your handset before asking the question. Participants are requested to please restrict your questions to two per participant. If at any time your question has been addressed and you would like to withdraw your question, please press star and then two. At this time, we will pause momentarily to assemble our roster. From the line of Gary Tenner from D.A. Davidson, please go ahead. Gary Tenner: Thanks. Good morning. I wanted to ask about the repurchase activity in the quarter. Could you characterize the forward appetite here and whether you have an updated target payout ratio or target capital levels we should be thinking about? Kevin Kim: That will depend on cash flow generation and growth opportunities. We will continue to evaluate opportunistic repurchases within that framework. We still have capacity under our share repurchase authorization, and we already purchased $7 million of shares since it was refreshed last quarter. So that is where we stand today, and we do regularly review our capital allocation priorities. So the use of capital to repurchase our shares will be opportunistic. Gary Tenner: Okay. Appreciate that. And then, Julianna, can you provide the purchase accounting benefit for the quarter? Julianna Balicka: Not material. Gary Tenner: Not materially different than last quarter, or just in dollars not material? Julianna Balicka: Not materially different quarter over quarter. About similar. It is $4 million. Gary Tenner: Okay. Julianna Balicka: Thank you. I believe I have answered this question in prior quarters. It might have been even your question. With the Territorial transaction, the residential mortgage loans are long-dated loans. It is a long-term portfolio. So the purchase accounting benefit is going to be a steady benefit each quarter for a number of years, as opposed to when you do a commercial loan acquisition where it is a much shorter weighted average life of the portfolio, so there is much more fluctuation to purchase accounting benefit. Gary Tenner: I appreciate that. I just wanted to confirm the number. Thank you. Operator: We have the next question from the line of Matthew Clark from Piper Sandler. Please go ahead. Matthew Clark: Hey, good morning everyone. Thanks for the questions. I want to start on the expense run rate. Some pretty good improvement here from the fourth quarter. Just want to get a sense for whether that is sustainable and what a normalized run rate might be here in the first quarter. Julianna Balicka: Thank you, Matt. This quarter, you saw some good expense management, and I would say I will go back to our comments about expense for the full year of 2026 relative to last quarter, when we made comments around the fourth quarter as a jump-up point for a run rate. The first quarter was a good quarter with some good control, but I would anticipate that as our production strengthens and our revenue growth strengthens throughout the year, the expenses will tick up from there. But overall, we will stay within the original comments that we made for you last quarter regarding full-year growth that we talked about. Matthew Clark: Got it. Okay. And then are you opting out of the CECL double count with the acquisition? Julianna Balicka: We are still going to evaluate. Matthew Clark: Okay. Okay. And then just the spot rate on deposits, if you have it, and I know there is going to be an incremental benefit from CD repricing, but just thoughts on deposit cost outlook with the Fed on hold? Julianna Balicka: Sorry. Could you repeat the second part of your question? Matthew Clark: Just the deposit cost outlook with the Fed on hold and competitive pricing on the CD side. Julianna Balicka: Right. Our CDs are continuing to reprice, as we quoted in our script about how much pickup we are getting each quarter. So when we look at our deposit cost outlook for the rest of the year, each quarter we see about 5 to 7 basis points of interest-bearing deposit cost reduction, just from the mathematics. Matthew Clark: Yep. Got it. Thank you. Just getting fresh on the CECL double count. Julianna Balicka: In our 10-K and 10-Q, you would have seen that we already adopted the ASU for the Territorial transaction. Matthew Clark: Okay. Thanks again. Operator: Thank you. Participants, if you have a question, please press star and then 1. We have the next question on the line of Kelly Motta from KBW. Please go ahead. Kelly Motta: Thanks for the question. Maybe to kick it off with loan growth, your guidance implies some pullback in commercial real estate with an eye to manage those concentrations. Can you provide any color into Q1 being down a little bit? I am wondering if that was in anticipation of signing this deal, what you were seeing in terms of payoffs, and, kind of strategically moving forward, your organic outlook for resi and commercial as you manage ahead? Julianna Balicka: For our outlook, looking forward on a full-year basis, I would expect our organic loan growth to be mid-single digits, and it would come from C&I and residential mortgage, C&I of course being the higher-percentage loan grower. And I would expect flat CRE balances. Kelly Motta: Okay. That is pretty helpful. And can you remind us your pro forma CRE concentrations for SMBC Manubank? Julianna Balicka: It will be something in that 320% range, depending on where the final balances land. Kelly Motta: Got it. That is helpful. And then just a point of clarification on your guidance. I believe you said that you have about a quarter of SMBC Manubank, like a quarter’s worth of results. I know the close is in the second half of the year. Could you just provide what was baked into the guidance in terms of timing—earlier in the second half of the year versus the end? I just want to make sure I am modeling that appropriately. Julianna Balicka: Nothing more complicated than just plugging in a close at the midpoint of the second half of the year for simple arithmetic. The close will come when it comes in the second half of the year. Obviously, we would like to close earlier than later, but for the pure mathematics of an outlook, we are using mid–second half. Kelly Motta: Got it. That is helpful. Maybe last question for me. Net charge-offs were up a little bit, although you did have improvement in NPAs and, I believe, criticized. Can you provide any color and overview as to what you are seeing in the book and anything you are incrementally watching more? Thank you. Peter Koh: Sure. Net charge-offs, I think, are a little elevated this quarter. It is up and down a little bit, but still within the reasonable range that we have been expecting, and a lot of these represent previously identified credit concerns that we are cleaning up right now. Overall, we feel very good about asset quality. You see continuing improvement in asset quality trends. NPLs were down, and criticized assets have been coming down sequentially quarter over quarter. So overall, I think we are in good shape in terms of credit. Kelly Motta: Great. Thank you so much. Operator: We have the next question from the line of Timothy Coffey from Brean Capital. Please go ahead. Timothy Coffey: Thank you. Good morning, everybody. Julianna, what were the new loan yields—the yields on the new loans in the quarter? Julianna Balicka: The yields on the new loans were approximately 6.4%. Timothy Coffey: And then kind of on the organic margin, I think the conventional thinking was that we would see expansion going into the back half of this year. Is that still a reasonable expectation? Julianna Balicka: If the Fed funds stays flat and we continue to have improvement in our cost of deposits from the repricing of CDs, and if interest rates stay flat for loan yields, all else equal, then you would see margin expansion because the earning asset side would not come down with rate cuts. In fact, it would benefit because the back book of our low-yielding CRE loans would continue to mature and reprice to market rates, and we are continuing to improve our cost of funds. Timothy Coffey: Great. The rest of my questions have been asked and answered. Thank you. Operator: That was the last question. I would like to turn the conference back over to management for any closing comments. Kevin Kim: Thank you. In summary, with our continued progress across our key strategic priorities and the addition of a compelling strategic transaction, we believe we are well positioned to continue building momentum and delivering long-term value for our stockholders. In closing, I would also like to thank our colleagues for their ongoing dedication and commitment, which remain critical to the execution of our strategy and the strength of our organization. Thank you all again for joining us today, and we look forward to speaking with you next quarter. Bye, everyone. Operator: Thank you. The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
Operator: To ask a question, press 1 on your telephone keypad. If your question has been answered or you wish to remove yourself from the queue, press 2. If you are using a speakerphone, please lift the handset before asking your question, and please refrain from typing and have your cell phones turned off during the question and answer session. Your host for today's conference call is Matthew Grover, Senior Director of Investor Relations. Matthew Grover, you may begin your conference call. Matthew Grover: Thank you, and welcome to AvalonBay Communities, Inc. First Quarter 2026 Earnings Conference Call. Before we begin, please note that forward-looking statements may be made during this discussion. There are a variety of risks and uncertainties associated with forward-looking statements, and actual results may differ materially. There is a discussion of these risks and uncertainties in yesterday afternoon's press release, as well as in the company's Form 10-Ks and Form 10-Q filed with the SEC. As usual, the press release includes reconciliations of non-GAAP financial measures and other terms that may be used during today's discussion. The attachment is also available on our website at investors.avalonbay.com, and we encourage you to refer to this information during the review of our operating results and financial performance. When we get to the question and answer session, we kindly ask participants to limit their questions to one and rejoin the queue if you have any follow-up questions or additional items to discuss. With that, I will turn the call over to Benjamin Schall, CEO and President of AvalonBay Communities, Inc., for his remarks. Ben? Thank you, Matt, and thank you, everyone, for joining us today. Benjamin Schall: I am here with Kevin P. O’Shea, our Chief Financial Officer, Sean J. Breslin, our Chief Operating Officer, and Matthew H. Birenbaum, our Chief Investment Officer. As is our custom, we have also posted an earnings presentation, which Sean and I will reference during our prepared remarks before turning to Q&A. Starting with the key takeaways on slide four, our first quarter results exceeded our expectations, driven by lower expenses, higher development NOI, and the benefits of our share buyback activity, which was not included in our original outlook for 2026. Our portfolio is well positioned heading into peak leasing season, with very low turnover, solid occupancy, and rents tracking as expected through the first four months of the year. We are also benefiting from the ramp in development NOI in 2026, which will further accelerate during the year and into 2027. Leasing velocity at our projects in lease-up has been strong in a typically slower first quarter, which bodes well for the upcoming peak leasing season. During the quarter, we completed $340 million of dispositions and repurchased $200 million of our shares at an implied cap rate in the low 6% range. Turning to slide five, same store residential revenue grew 1.6% year-over-year, with occupancy up 10 basis points to 96.1%. During the quarter, we started nearly $190 million of new development, with two starts in suburban New Jersey, and we are on track for $800 million of planned 2026 development starts with projected initial stabilized yields of 6.5% to 7%. Our performance in Q1, both operationally and from a capital allocation perspective, sets us up well for the balance of the year. Slide six details the components of our favorable first quarter core FFO per share results relative to our initial outlook. Of our $0.20 of NOI outperformance, 20% was revenue-driven and 80% was attributable to lower operating expenses. On the expense side, certain operating costs budgeted for the first quarter are now expected to be incurred over the balance of the year. Other drivers of our outperformance for the quarter were $0.01 of favorable development NOI from our lease-up communities, as well as $0.01 from our share repurchases in the quarter. Looking ahead, slide seven highlights several factors that continue to support apartment demand and our operating outlook as we move through 2026. First, market occupancy in our established regions remains solid, supporting near-term fundamentals and allowing us to enter the peak leasing season with relative strength. Second, our customers continue to experience healthy wage growth, which will support rent growth throughout the year. Third, the supply backdrop remains very constructive in our markets, with new market-rate apartment deliveries expected to stay at historically low levels for the foreseeable future. And fourth, the economics of renting versus homeownership remain very favorable. During the quarter, the percentage of customers leaving us to purchase a home declined to 8%. Taken together, these factors give us confidence in the resiliency of apartment fundamentals and in the positioning of our portfolio as we move through the balance of the year. Slide eight highlights the strength of our operating and development capabilities to drive differentiated internal and external growth in the years ahead. On operations, we continue to leverage our scale and leadership in centralization, technology, and AI to deliver superior service for our residents and drive operating efficiencies and incremental NOI. Our forecast has us on track to generate $55 million of annual incremental NOI by year-end, our original Horizon 1 target. Our next set of priorities includes the further deployment of AI solutions and our seamless digital self-service experiences, additional enhancements to our technology and data platforms, and further optimization of neighborhood and centralized staffing, all on our way to our Horizon 2 target of $80 million of annual incremental NOI in the coming years. On development, our sector-leading platform is poised to contribute meaningful earnings and value creation in the coming years, with $3.5 billion of development underway, with a projected initial stabilized yield of 6.3% at quarter end. These investments were match funded with capital raised over the past three years at a weighted average initial cost of 4.9%. This spread is well within our strike zone, targeting yields of 100 to 150 basis points above our cost of capital and underlying market cap rates. These deals were conservatively underwritten on an untrended basis and, in many instances, are seeing favorable construction cost buyouts relative to pro forma. These communities will also deliver into an operating environment with meaningfully less new supply. With this tailwind of activity, we continue to expect a meaningful ramp in development NOI and are projecting $47 million of development NOI this year, increasing to $120 million in 2027. Turning to slide nine, we had three dispositions close during the first quarter, and we continue to deploy capital into accretive share repurchases. Beyond crystallizing the significant public-private disconnect in asset values, selling 40-year-old high-rise assets improves our go-forward cash flow growth profile, particularly after factoring in CapEx. Including our repurchases last year, we have now repurchased $690 million of our stock and have $914 million of remaining authorization. In summary, we have a high-quality portfolio well positioned heading into the peak leasing season, operating and technology initiatives that continue to drive internal growth, and a development platform that we expect to contribute an accelerating stream of earnings over the next several years. With that, I will turn it over to Sean to walk through the operating environment and leasing trends in more detail. Sean J. Breslin: Thank you, Ben. Turning to slide 10 to address recent portfolio trends, year-to-date asking rent growth has been pretty consistent with historical norms and our original expectations for this year. Since January 1, the average asking rent for our same store portfolio has increased in the high 4% range, and, importantly, the growth we have experienced this year is well ahead of what we realized in 2025, setting us up well for better rent change as we look forward. Turning to slide 11, our same store portfolio is well positioned as we look ahead to the peak leasing season. Occupancy has been north of 96% and trending modestly ahead of our budget. Turnover remains well below historical norms; it even ticked down 50 basis points compared to Q1 of last year, supported by a variety of factors, including a historical low 8% of residents moving out to purchase a new home and declining new supply in our established regions. As a result, the number of homes available to lease has been lower than last year and has contributed to the 260-basis-point ramp in rent change we have experienced since the beginning of the year. Looking forward, we expect a continued acceleration in rent change. Renewal offers for May and June were delivered at an average increase in the 5% to 5.5% range, which is about 100 basis points higher than where we sent offers for February and March. In terms of regional color, the stronger performers continue to be in the New York Metro Area and Northern California, both of which produced revenue growth slightly ahead of our budget through Q1. Within the New York Metro Area, the strongest markets were New York City and Northern New Jersey. In Northern California, San Francisco has been the strongest market, followed by San Jose and then the East Bay. The entire region has benefited from relatively healthy net job growth over the last few quarters, so the strengthening we have experienced in San Francisco and San Jose started to spill over into the East Bay this past quarter. The Mid Atlantic also outperformed our revenue budget for the quarter, albeit modestly, with slightly higher occupancy across the region and greater other rental revenue. With the hangover from job cuts over the past year starting to fade, we believe the meaningful reduction in new supply will help support the stabilization of the Mid Atlantic region sometime this year. I would not say it has turned the corner just yet, but it is definitely more stable than mid to late last year. In terms of the weaker markets, Boston, Los Angeles, and Seattle modestly underperformed our revenue expectations during the quarter, and the other regions were collectively on plan. Moving to slide 12 to address our lease-up portfolio, we generated very strong leasing velocity of 32 per month during Q1, well ahead of our historical velocity of 23 a month, and we generated that velocity at an average effective rent that is slightly above our original pro forma. It is clear our customers value the new differentiated product we are delivering in these various submarkets and selected an average lease term that exceeded 15 months during the quarter. The occupancies that result from our leasing activity will continue to support the meaningful increase in development NOI projected for this year and into 2027 as Ben noted earlier. Overall, we are off to a good start this year with same store metrics trending at or slightly ahead of expectations, strong leasing activity at our lease-up communities, and the recycling of capital into buybacks at a compelling value. I will now turn the call back to our operator to begin Q&A. Thank you. Operator: We will now open the call for questions. If you would like to ask a question, please press 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press 2 to remove yourself from the queue. For participants using speaker equipment, it may be necessary to pick up the handset before pressing the star keys. To get to as many of your questions as possible, we kindly ask participants to limit their questions to one. You can rejoin the queue after with any follow-ups. Our first question comes from James Colin Feldman with Wells Fargo. Please proceed with your question. James Colin Feldman: Hi. Thanks for taking the question. If you could provide an update on your thoughts on hitting your new renewal and blend guidance for the rest of the year. You still have a pretty meaningful ramp, so can you remind us of the math behind it and what kind of tailwind that gives you? And then as you think about the markets that are doing better and worse, and the expansion markets, how they fit into the story—what gives you comfort on keeping the guidance where it is and your ability to hit those numbers? Sean J. Breslin: Hey, Jamie. In terms of the outlook, to remind everybody, we expected rent change to average 2% for the calendar year 2026, which reflected the first half forecast at 1.25% and the second half at 2.5%. Breaking it out between move-ins and renewals, we reflected move-ins being about 0% for the year and renewals averaging around 3.5%, blending to that 2%. As I mentioned in my prepared remarks, asking rent growth is pretty much tracking about what we expected; it is actually slightly ahead. We came out in the first quarter slightly better than we anticipated, and we have pretty good momentum going into the second quarter. You can interpolate the math required for Q2 to get to the 1.25%, and we feel very confident we are in the right strike zone to hit those numbers. In terms of markets, momentum is certainly strongest in the New York Metro Area and the Bay Area. It is nice to see strength spill over into the East Bay, which typically lags San Francisco and San Jose. The expansion regions are collectively pretty much on track—some slightly ahead, some slightly behind, but as a basket, on plan. Operator: Thank you. Our next question comes from Eric Wolfe with Citibank. Please proceed with your question. Eric Wolfe: Good afternoon. It looks like the percentage of available homes in April is down year-over-year, and you mentioned very low turnover in April as well. Does that allow you to be a bit more aggressive on asking rents and new leases going forward? Maybe some thoughts on what the current data is telling you about pricing power into May and early results on new leases in May? Sean J. Breslin: Yeah, Eric. Based on what we saw in the first quarter, and as Ben indicated in his prepared remarks, we are slightly ahead of our revenue plan— a little bit on rate and a little bit on occupancy. Looking forward, to get to our 1.25% blended for the first half, April started in the high-1% range, almost 2%, so we think we are in good shape overall. Low turnover and low availability continue to support slightly better pricing power. That is certainly better than 2025, where around this time of year things started to soften. The lines continue to spread further, which bodes well for the rest of the leasing season and the second half of the year. Operator: Thank you. Our next question comes from Stephen Thomas Sakwa with Evercore ISI. Please proceed with your question. Stephen Thomas Sakwa: Thanks. I wanted to focus on dispositions and the buyback. How aggressive or large would you be willing to pursue both sides of that equation, given the dislocation we have seen in apartment valuations of late? Kevin P. O’Shea: Sure, Steve. I will offer a few comments. We are in a very strong position to create value through both development and share buyback activity, supported by our balance sheet and continued access to the asset sale and debt markets. First, buybacks and development are both highly attractive to us today; it is not a binary choice. At current pricing, our stock implies a cap rate in the low 6% range, which makes repurchases attractive and immediately accretive. At the same time, development remains compelling, with projected initial stabilized yields in the mid-6% range or higher, while also driving longer-duration earnings growth and portfolio refreshment. Second, our capital plan for the year contemplated that we would be a net seller of about $100 million—roughly $500 million of dispositions and $400 million of acquisition activity. Year-to-date, we have completed $340 million of asset sales and $200 million of share repurchases, which has effectively replaced a portion of the acquisition activity we originally planned. Third, we are already marketing additional communities for sale, which will provide additional proceeds. If our stock remains attractively priced, we would consider additional repurchases and do so instead of acquiring the remaining $200 million of acquisitions in our plan, on a leverage-neutral basis. How much beyond that? We are open to doing more and are prepared to be nimble, while preserving our balance sheet strength and flexibility so we can deploy capital to the highest and best use available. I would not put a single fixed number on how much more we could flex dispositions up to fund buyback activity. The ultimate level will depend on the timing and amount of future asset sales, the valuation of our shares at the time, and the remaining capital gains capacity we have. In a normal year, without special tax planning, we typically have about $100 million in disposition capacity where we can keep the proceeds. We also have a very clean tax position and could use one-time levers to increase disposition capacity, with proceeds available for any purpose, including buybacks. Operator: Our next question comes from Jana Galan with Bank of America. Please proceed with your question. Jana Galan: Thank you, and congrats on the strong start to the year. A question on the decision to maintain the midpoint of FFO guidance despite the $0.05 outperformance in the first quarter. You said close to $0.02 is expenses that may be incurred later in the year, but you are also benefiting from share repurchases being larger and earlier. Can you walk us through that? Kevin P. O’Shea: Sure, Jana. We think affirming guidance is the disciplined and appropriate decision today. We are off to a strong start with revenue trends on track, a first-quarter earnings beat, and completed buyback activity that should add a couple more cents of incremental earnings as the year progresses. At the same time, we are still early in the year, with peak leasing ahead of us, and some of the Q1 beat was expense timing, not a full-year run-rate change. While full-year earnings are currently tracking modestly ahead of our original plan, it is more appropriate to affirm full-year guidance today and revisit on the second-quarter call when we will have a much better read on peak leasing season and the balance of the year. Operator: Our next question comes from John Pawlowski with Green Street. Please proceed with your question. John Pawlowski: Thanks. Matt, a question on the Avalon Sunset Tower sale. Are you able to share the cap rate both on your seller NOI as well as your best guess of the cap rate on the buyer's NOI? You have owned the property since the mid-1990s, so I am curious what type of property tax reset would be felt on that property. Matthew H. Birenbaum: Hey, John. That is a very atypical transaction. You are right—it is an early-to-late 1960s vintage asset and subject to San Francisco rent control, so it is not representative of where the San Francisco asset sales market would be today. There is also an overhang with regulatory upgrades that will be required—seismic and sprinkler retrofits—which really was part of what drove us to sell it. The cap rate we would talk about as a market cap rate—the buyer’s forward T-12—we think was probably in the low 5% range. That does provide an allowance for a certain amount of CapEx that the buyer is going to have to do related to that retrofit work, so it does not map cleanly to anything else. There are other assets we own in San Francisco where, given the loss to lease, those would probably honestly be in the low- to mid-4% cap rate today, which is more typical for valuing the portfolio. John Pawlowski: And then, Sean, a question on two markets where their economies have been stuck in the mud—DC and Los Angeles. Do you expect pricing power to either reaccelerate from here in the coming quarters, just muddle along, or get worse before it gets better? Sean J. Breslin: Good questions. As I see it today, the Mid Atlantic feels a little bit better. Things were rough mid to late last year, but on-the-ground feedback—both from leasing and renewals—shows less angst among prospective and existing renters. We have been able to peel back on concessions a bit. Average asking rent year-over-year is about flat now—we thought it would be down a little—so it feels a bit better. Job worries have faded some, and in certain submarkets—particularly more defense-oriented—there may be a little optimism. If I had to pick one of the two today, I would say the Mid Atlantic looks a little better. In Los Angeles, it has been tough, and there is not necessarily a near-term catalyst other than potential investments related to the World Cup and Olympics. Tax subsidies to promote entertainment content development have not really trickled in yet. We have not seen a clear demand catalyst yet in LA other than very diminished supply; we are looking for it on the demand side. Operator: Our next question comes from Austin Todd Wurschmidt with KeyBanc Capital Markets. Please proceed with your question. Austin Todd Wurschmidt: Thanks. Good afternoon. Sean, you referenced operating momentum into the second quarter. Was there any specific pickup in demand into April that drove the acceleration in lease rate growth after what looked like a fairly modest improvement from 4Q to 1Q? Anything specific in early spring that drove the improvement? Sean J. Breslin: I would not point to significant macro factors; it is more regional drivers. You heard my commentary on the Mid Atlantic and why that feels better. There has been good momentum in the New York Metro Area for obvious reasons. Softer places are what we expected—LA, Boston with basically no job growth over the last six months, and very little in Seattle. It is more a regional story in terms of momentum rather than a macro shift at this point. Operator: Our next question comes from Adam Kramer with Morgan Stanley. Please proceed with your question. Adam Kramer: Thanks. A more philosophical question: historically you have focused on job growth in the deck, but today you highlighted wage growth. Do you think one is a better indicator of apartment demand? And second, with regards to job growth, are you still assuming an uptick in the second half, or is there a different forecast now? Benjamin Schall: Hey, Adam. It is both jobs and wages—we look to total income growth as the driver of rent growth over time. On your second question, our guidance and reaffirmed outlook for this year are based on the economic environment we were experiencing in the second half of last year and continuing into the first quarter, not on any forward inflection. The two main drivers we talked about being different in the second half are: cumulative benefits of lower supply in our established regions—now down to roughly 80 basis points—and softer comps in the second half, which you can see in the presentation. We do look at job forecasts—those are tough to peg month to month. We have generally looked at NABE; NABE’s forecasts are down some, but when we put the pieces together, it does not change our outlook for the second half. Given Sean’s commentary and our start to the first four months, we feel pretty good about our progress and the setup for peak leasing season and the remainder of the year. Operator: Our next question comes from Richard Allen Hightower with Barclays. Please proceed with your question. Richard Allen Hightower: Good afternoon. On development, given the progress you are seeing year to date—Matt mentioned construction costs are maybe a little more attractive versus original underwriting—how quickly can you ramp up the development pipeline, given moving parts and other potential uses of capital? Could you increase the development start number, and what is the lag on that process internally? Matthew H. Birenbaum: It is always a combination of bottom-up and top-down. Bottom-up is the deals themselves; at any given point, we have a significant pipeline we are managing through entitlements, final design, and permitting. At the end of the first quarter, our development rights pipeline was about $4.2 billion. Through the normal course, those deals would bubble up over the next couple of years to being ready. Top-down is how they underwrite, our cost of funds, alternative uses, and the capital allocation decision. We focus on preserving flexibility and think we do a good job with that, so we would have the ability to dial up development more—whether next year or even later this year—if conditions are favorable and it is the right capital allocation decision. In addition to our own pipeline, we also have our Developer Funding Program (DFP), where we provide capital to third-party merchant builders. Roughly five of the 25-to-30 deals under construction today are DFP deals. Those can ramp up more quickly because someone else has done the early pre-work and the deal is ready and looking for capital. There is a lot of that business out there right now. Most of it does not underwrite—which is why you are not seeing starts pick up in a meaningful way—and we like that. We are consciously trying to take a larger share of a shrinking pie of development activity, and we think we are well positioned to keep doing that. Benjamin Schall: To add to Matt’s commentary, at points in the cycle like now, where others are pulling back but we have competitive advantages and a differentiated cost of capital, it allows us to structure deals more optimally. When Matt talks about having $4.2 billion in a development pipeline, we control that at a very low cost. In today’s environment, we can get control of land with much more flexibility than in past environments. Kevin P. O’Shea: And we have the financial flexibility to lean into those opportunities should they manifest. Access to the Lehman—[inaudible]—market is excellent; we priced ten-year debt in the low 5% range. We have access to the transaction market; we just sold $340 million of 40-year-old assets at a 5.4% cap rate. We could sell more representative assets at a lower cap rate, which would give us an opportunity to fund, accretively, development projects that might stabilize in the mid-6% range if there is more we want to have as a quick start to lean into. Operator: Our next question comes from Haendel St. Juste with Mizuho Securities. Please proceed with your question. Haendel St. Juste: I was looking at the turnover chart. We have gone from almost 60% back in 2009, to 41% a year ago, and now in the low thirties. Understanding affordability dynamics, demographics, and the operating platform, is this level in the low thirties sustainable? Is it a new norm? How should we think about turnover over the next year or two, and what is embedded in the guide for this year? Sean J. Breslin: The 31% is a Q1 number and tends to be one of the lower quarters. On an annual basis, the last couple of years we have been mid-40s and then low-40s. Our expectation for this year is we remain in the low-40s. Several factors drive turnover. Substitutes include availability of for-sale product; we do not see that changing anytime soon. Even if rates come down, the available inventory is not there across our established regions. That remains a tailwind or at least neutral for the foreseeable future. Other substitutes include other available supply; that has ticked in our favor the last couple of years, coming down to historical levels and projected to dip even further over the next year or two. The rest are normal life events—marriage, divorce, children, caring for parents—things that happen regardless. The primary things that move turnover up or down are the options within a market. It takes a while to build new multifamily and to entitle single-family in these markets, so we have a pretty good runway for a couple of years on that point. Operator: Our next question comes from Michael Goldsmith with UBS. Please proceed with your question. Michael Goldsmith: Good afternoon. Thanks for taking my question. I am here with Ami Probandt. On renewals, nice acceleration there—what is driving that? Is it in line with your expectations? And how have renewal negotiations trended recently? Sean J. Breslin: Overall, we have seen nice acceleration this year, as indicated in our release and in the move from Q1 into April. Both occupancy and lease rates are blending to slightly ahead of our original budget, so we are in good shape. Seasonally, asking rents tick up and renewals drift up behind it. Stronger markets—like those I mentioned—see a nicer pickup versus softer ones like Boston, LA, and Seattle. We have seen good movement across most regions with a few exceptions, slightly ahead of our original expectation. Operator: Our next question comes from Alexander David Goldfarb with Piper Sandler. Please proceed with your question. Alexander David Goldfarb: Thank you. On lease-ups, the pace is exceeding normal monthly levels, yet new rents overall are still muted. You mentioned only two standout markets—New York and Northern California—and a lot of your development is elsewhere. How should we think about the strong lease-up pace versus still-muted rents overall? Is it heavy concessions, or why are lease-ups so strong while pricing is still soft? Sean J. Breslin: On the lease-up basket for the quarter, that is nine communities: four in New Jersey, one in Charlotte, two in the Mid Atlantic, one in South Miami, and one in Austin. In general, customers are compelled by the product we are offering. On concessions, customers are choosing on average longer lease terms—over 15 months—and we are doing roughly six weeks free, around 9%, not terribly different from normal. Matthew H. Birenbaum: It is a combination of compelling product in submarkets that have not seen much new supply in a long time. Most of the development NOI is coming from the four New Jersey deals plus South Miami; those are the ones where rents are quite a bit higher than the other markets. In South Miami, for example, the community is over a brand-new fresh market on the south/east side of US-1, with walkability and schools that comps in other neighborhoods do not have. In New Jersey, Avalon Wayne has both townhomes and flats; it is the first new product Wayne has seen in probably 35 years. That is part of our development strategy. One of our starts this quarter is Saddle River—another place with seven-figure home values in Bergen County and no new multifamily in two generations. We are getting an outsized share of demand because of the differentiated and compelling nature of what we are offering. Operator: Our next question comes from Analyst with RBC Capital Markets. Please proceed with your question. Analyst: Thanks. Sean, following up on the average lease term over 15 months—does that come from you nudging people in that direction to lower expirations in-season, or is there a broader shift away from a normal one-year lease term? Sean J. Breslin: It is a little of both. The season and our desired expiration profile for the subsequent year matter. In some markets with townhomes—like Wayne and South Miami—families want to get through the school year and have some time. On average, we were nudging less in Q1 than normal, and people were picking longer lease terms, particularly with that product. Nice to see the preference for slightly longer terms come through from customers. Operator: Our next question comes from Analyst with Cantor Fitzgerald. Please proceed with your question. Analyst: Thanks. I wanted to dive into new and renewal lease rate growth. You mentioned offers out at 5% to 5.5% for renewals and 3.5% renewal for the full year. Is it fair to say that the flat new lease rate growth embedded in guidance could be greater based on numbers you see today, but you are holding the line until you have more information? Sean J. Breslin: We are generally tracking on plan; rates are slightly ahead. Q1 has fewer expirations than Q2 and Q3. We see a nice trajectory in asking rent growth, and things look pretty good. We will have a much better data set as we get through Q2, with a lot more leasing to do. We will revisit at midyear and update our thinking then. We have not seen anything yet that says we should do anything different than reaffirm what we already said. Operator: Our next question comes from John P. Kim with BMO Capital Markets. Please proceed with your question. John P. Kim: Thank you. What are you seeing in terms of market concessions competitors are offering? Any noticeable change as you enter peak leasing season? And what are you expecting for your concessions versus last year? Sean J. Breslin: Concessions are very much regional. In the markets I indicated as stronger or weaker, that is where you will see activity. Concessions are up in Boston, Seattle, and LA year-over-year, and down meaningfully in Northern California and the New York Metro Area. It depends on the market and submarket. For example, in Denver’s particularly urban submarkets, you can see 2.5 to 3 months free; in the suburbs it might be six weeks. In parts of the Mid Atlantic, some places are down to no concessions; others are a month. Hard to generalize overall. On a net effective basis, rates are tracking in line with what we expected—modestly ahead, but not a lot. Operator: We have reached the end of the question and answer session. I would like to turn the floor back over to President and CEO Benjamin Schall for closing remarks. Benjamin Schall: Thanks for your questions today. Thanks for joining us, and we look forward to visiting with you soon. Operator: Thank you. This concludes today's conference. You may disconnect your lines at this time. We thank you for your participation.
Operator: Stand by, your meeting is about to begin. Good afternoon, everyone. Welcome to Ares Capital Corporation's First Quarter Ended March 31, 2026 Earnings Conference Call. As a reminder, this conference is being recorded on Tuesday, 04/28/2026. I will now turn the call over to John Stilmar, Partner of Ares Public Markets Investor Relations. Please go ahead, sir. John Stilmar: Thank you. Good morning, everybody. Let me start with some important reminders. Comments made during the course of this conference call and webcast, as well as the accompanying documents, contain forward-looking statements and are subject to risks and uncertainties. The company's actual results could differ materially from those expressed in such forward-looking statements for any reason, including those listed in its SEC filings. Ares Capital Corporation assumes no obligation to update any such forward-looking statements. Please also note that past performance or market information is not a guarantee of future results. During this conference call, the company may discuss certain non-GAAP measures as defined by SEC Regulation G, such as core earnings per share or core EPS. The company believes that core EPS provides useful information to investors regarding financial performance because it is one method the company uses to measure its financial condition and results of operation. A reconciliation of GAAP net income per share to the most directly comparable GAAP financial measure to core EPS can be found in the accompanying slide presentation for this call. In addition, the reconciliation of these measures may also be found in our earnings filed this morning with the SEC on Form 8-Ks. Certain information discussed in this conference call and the accompanying slide presentation, including credit ratings and information relating to portfolio companies, was derived from or obtained by third-party sources and has not been independently verified. Accordingly, the company makes no representation or warranties with respect to this information. The company's first quarter ended 03/31/2026 earnings presentation can be found on the company's website at www.arescapitalcorp.com by clicking on the First Quarter 2026 Earnings Presentation link on the homepage of the Investor Resources section. Ares Capital Corporation's earnings release and Form 10-Q are also available on the company's website. I would like to now turn the call over to Kort Schnabel, Ares Capital Corporation's Chief Executive Officer. Kort Schnabel? Kort Schnabel: Thanks, John, and hello, everyone, and thank you for joining our earnings call today. I am joined by Jim Miller, our President; Jana Markowitz, our Chief Operating Officer; Scott Lem, our Chief Financial Officer; and other members of the management team who will be available during our Q&A session. Let me start by providing a few thoughts on ARCC's performance, current market conditions, and our positioning in this environment. We believe we are off to a strong start in 2026 with solid earnings and strong fundamental portfolio performance. Our core earnings of $0.47 per share represent an annualized ROE of 9.6% in what has historically been a seasonally slow quarter for originations. Our overall portfolio quality remains healthy with continued low levels of nonaccruing loans and problem assets. We are seeing an improving investment environment as terms and economics are becoming more attractive on new transactions, and we believe our strong balance sheet and available liquidity of approximately $6 billion provide us significant advantages in this environment. Let us now discuss the changes we are seeing in overall market conditions. Heightened capital markets volatility, geopolitical uncertainty, and net outflows from retail products exacerbated an already seasonally slow market period in the first quarter. These factors contributed to not only lower transaction volumes but also diminished competition and improved lending conditions, as lenders more heavily dependent on retail flows have retrenched and the syndicated bank loan market has been uneven with many banks exhibiting diminished risk appetite. As a result, we are seeing a reset underway with wider spreads, lower leverage levels, and more attractive overall deal terms across the market. New transactions today are being discussed at 50 to 75 basis points of enhanced levels of fees and spread, alongside a half to full turn of lower leverage and tighter documentation versus the second half of last year. As risk premiums widened during the first quarter, overall market activity slowed as the market searched for clearing prices during this period. However, over the past three to four weeks, we have seen a noticeable pickup in new deal activity as borrowers recalibrate expectations for economics and terms and continue to pursue their capital needs. One of the key themes we see unfolding is that the ability to provide capital at scale and with certainty is becoming increasingly differentiated. We believe these types of situations are creating greater economic opportunities for the largest and most stable platforms with capital. Our healthy levels of available capital, combined with our connectivity to the broader Ares U.S. Direct Lending platform and its significant dry powder from institutional sources, position us well to capitalize on these market conditions. Our diverse, high-quality portfolio also continues to perform well. Our granular level of diversification further advantages us, as loan concentration is one driver of growing dispersion in results across our market. With investments across 607 companies and an average position size of less than 20 basis points, we believe this level of diversification meaningfully limits idiosyncratic risk to any one position. Our borrowers generated organic weighted average LTM EBITDA growth of approximately 9% through the end of the first quarter, in line with ARCC's ten-year average and more than twice the growth rate of the companies within the broader syndicated loan benchmark. Portfolio fundamentals also remained solid with broadly stable interest coverage and leverage levels, low loan-to-value ratios by historical standards, and revolving credit facility utilization in line with historical norms. Our nonaccruals also remained well below historical average levels. With this as context to the overall health of the portfolio, let me provide some important updates about our views on the specific strength and position of our software investments. As I articulated on our last earnings call, not all software companies carry the same level of AI disruption, and in fact, many are embracing AI and seeing enhanced growth. We believe the most important question is not how much software exposure we have, but what types of companies we have invested in, what staying power, risks, and opportunities our companies have through this latest technological cycle. Nearly all of our software companies are focused on what we view as foundational infrastructure for complex businesses, and this infrastructure often powers customers' core operating systems. These software products generally operate as systems of record in regulated end markets, have high switching costs, and benefit from proprietary data. Importantly, our software investments are supported by large diversified businesses with a weighted average EBITDA of $340 million, strong cash flow, and meaningful equity cushions, even as valuation multiples have come down for most software companies broadly. Most of these companies are also protected by business models with strong contractual cash flows and continue to sign up new customer contracts as they move forward and invest in AI themselves. To pressure test this view of our software investments, we proactively engaged a top-tier global management consulting firm in 2025 to challenge our AI risk assessment across our software-oriented portfolio companies. Prior to engaging this firm, we conducted extensive diligence in 2025 and ultimately selected this firm not only for its deep technical expertise, but also for its reputation as a rigorous and objective evaluator. As part of this independent study, the consulting firm had direct access to each borrower, its financials, and, if relevant, the associated financial sponsors or other key owners of the business. This enabled them to assess whether AI is likely to be additive, whether it could enhance or hurt positioning depending on execution and product evolution, or whether it poses a direct risk to the core business absent significant strategy change. The consultant’s study found the largest differences between higher- and lower-risk companies to be system-of-record positioning, high switching costs, the benefit of regulatory barriers, proprietary data moats, and control of data. The firm also assessed human dependency, data availability, risk of error, and task structure, among other dimensions. Overall, the independent review conducted over the past several months found that the AI-related risk across our software-oriented portfolio is relatively limited. The report indicated that about 85% of our software portfolio at fair value represented low risk, with only a small subset of companies categorized as higher risk. These higher-risk companies represented only 1% of reviewed names by fair value and 2% by count, or only about 0.3% of ARCC's total investment portfolio at fair value. An additional 14% of reviewed companies by fair value and count were classified as medium risk, representing only about 3% of ARCC's total investment portfolio at fair value. Importantly, medium or higher risk classifications do not imply current business impairment. Rather, they reflect the need for continued investment in product evolution, with many of these companies well positioned to adapt within the time necessary. Of the 85% of names categorized as low risk, these companies are well positioned to adapt and, in the majority of cases, benefit from AI-driven enhancements. In these businesses, AI is primarily augmenting existing SaaS platforms through incremental or high-value features layered on top of core software, with existing revenue streams largely maintained and incremental AI upside accruing to incumbent vendors. While we believe we have a solid view of the positioning of our portfolio, we recognize the need to remain vigilant with our portfolio companies on this topic. We also will remain disciplined in allocating new capital to the software sector. As we seek to take advantage of opportunities in the current market, it is critical that we are supported by a conservatively constructed balance sheet and a stable capital base. As Scott Lem will address, our substantial available liquidity of approximately $6 billion and our well-structured liability profile, with minimal near-term maturities, offer us the flexibility to pursue opportunities with both new and existing portfolio companies. Our outlook for relative stability in our earnings leads us to maintain a stable level of quarterly dividends. Importantly, core EPS, taken together with $0.15 per share of net realized gains, was well in excess of the dividend this quarter, providing a strong underlying foundation for current distributions. That foundation is further supported by ample spillover income, modest leverage, a more stable rate environment, and credit performance that aligns with our historical track record. Looking ahead, with spreads widening and turns improving, and given our strong competitive position, we continue to believe that ARCC's current dividend approximates the long-run underlying earnings power of our business. And our significant level of spillover income provides an added degree of flexibility and can serve as a short-term bridge during periods of seasonally slow transaction levels. These factors position us to continue building on our track record of stable or growing regular quarterly dividends for sixteen consecutive years. With that, I will turn the call over to Scott Lem to take us through more details on our financial results and balance sheet. Scott Lem: Thanks, Kort Schnabel. I will begin by reviewing certain key financial metrics from the first quarter, followed by an analysis and discussion of our robust balance sheet and liquidity, and conclude with details of our dividend and the taxable spillover referenced earlier by Kort Schnabel. This morning, we reported GAAP net income per share of $0.13, down from $0.41 in the fourth quarter of 2025 and $0.36 for the same period a year ago. The decline was largely driven by net unrealized losses primarily due to spread widening in private credit markets causing market-driven unrealized depreciation. Core earnings per share were $0.47 in the first quarter of 2026, down from the $0.50 we reported both last quarter and a year ago, primarily due to the impact of a full quarter of current base rates on our interest income, as well as lower capital structuring service fees. The decline in capital structuring service fees is largely due to reduced market activity typical in the first quarter and in addition to softness from the broader credit market volatility that Kort Schnabel mentioned earlier. Now turning to the balance sheet. Our total portfolio at fair value at the end of the first quarter was $29.5 billion, consistent with the end of the fourth quarter and up from $27.1 billion a year ago. Our net asset value ended the quarter at $14.1 billion, or $19.59 per share, which represents a decline of $0.35 per share from a quarter ago and $0.23 per share from a year ago. This decline in the first quarter contrasts with the long-term NAV growth we have generated alongside paying a stable level of dividends. For example, ARCC has delivered NAV growth exceeding 10% over the past five years and more than 30% since inception. Supporting the strength of our balance sheet, we had an active quarter enhancing our liability profile by accessing over $1.25 billion of incremental debt financing to further build on what we believe is a best-in-class balance sheet structure. Reflecting our long-standing strategy of being a consistent issuer in the investment grade notes market, we kicked off the year by issuing $750 million of long five-year unsecured notes at an industry-leading spread of 180 basis points over Treasuries, which we swapped to SOFR plus 172 basis points. During the first quarter, we remained active with our diverse bank capital providers and specifically expanded our SMBC funding facility by $500 million at similar or improved terms, including a five basis point reduction in the spread. On the topic of banks, I would like to take a few minutes to share our perspective on bank financing markets and the stability of banks providing capital to our sector. At ARCC, across our four credit facilities, we maintain relationships with more than 40 banks and lending institutions, many of which have been longstanding supporters of ours. The weighted average length of these relationships exceeds thirteen years, with several dating back more than twenty years to the early days of our company. Over that time, we have continued to broaden and deepen these partnerships, with most of these banks and lenders working with us not only at ARCC but across the Ares platform. We believe these well-established long-term relationships, combined with our scale, capabilities, and performance, provide us with unique and consistent access to capital across multiple markets, especially with our banking and lending partners. Additionally, drawing on our experience successfully navigating the Global Financial Crisis, we view the structure, duration, and diversification of our funding facilities as essential factors in ensuring balance sheet stability. As a reminder, all our credit facilities are fully committed with no maturities before 2030 and no mark-to-market provisions. Unlike pre-crisis facilities, which often involved margin calls and shorter maturities that impacted capital availability and liquidity, our current facilities offer stable access to capital throughout the commitment periods. Our experience through the Global Financial Crisis also reinforced the importance of maintaining diverse funding sources, which has been one of the keys to our success and will remain one of our most important strategic priorities. Reflecting this focus, we are the highest rated BDC across all three major rating agencies, with the longest ratings history—nineteen years with two agencies and sixteen years with the third—and more than fifteen years of experience issuing investment grade and convertible notes. The combination of our ratings and the fact that the vast majority of our assets are funded by unsecured debt and the largest permanent equity capital base in the sector further bolsters our position in the eyes of our banking partners. More recently, in 2024, we further enhanced the diversity of our funding sources and broadened our lender base through the securitization market. By generally issuing only through the AA tranche, we are able to achieve similar advance rates to what we receive on our credit facilities while further advancing our financial goals and benefiting from Ares' strong reputation with investors. Looking forward, while market participants may anticipate tighter credit conditions and reduced access for certain private credit managers, we believe BDCs affiliated with large-scale leading managers who possess long-term proven track records, extensive capabilities, and deep and enduring relationships, such as ourselves, will continue to receive strong support on attractive terms from debt capital stakeholders including investors, banks, and other lending institutions. Overall, our liquidity position remains strong, totaling approximately $6 billion. In terms of our leverage, we ended the first quarter with a debt-to-equity ratio net of available cash of 1.10x versus 1.08x last quarter, leaving us with meaningful headroom to support investing while maintaining ample cushion to absorb potential future volatility. Finally, our first quarter 2026 dividend of $0.48 per share is payable on June 30, 2026 to stockholders of record on June 15, 2026. ARCC has been paying stable or increasing regular quarterly dividends for sixty-seven consecutive quarters. In terms of our taxable income spillover, we currently estimate that we will carry forward $988 million, or $1.38 per share, available for distribution to stockholders in 2026. I will now turn the call over to Jim Miller to walk through our investment activities. Jim Miller: Thank you, Scott Lem. I will start with some additional context on our investment approach in the current environment and then walk through our investment activity, portfolio performance, and overall positioning. We have always viewed ourselves as patient, long-term relative value investors, and we believe that perspective instructs our constructive and opportunistic approach during periods of market volatility. In these environments, capital availability generally decreases, lending terms may improve, and our partnership-oriented solution becomes increasingly pertinent and valuable to our borrowers. Beyond the decades-long positioning of our platform around these principles, there is compelling empirical evidence supporting the resiliency and opportunity within the private credit sector, which we believe remains underappreciated in parts of today’s broader market narrative. Our own Ares Quantitative Research team recently examined twenty-five years of aggregated private credit data to evaluate the association between managers' ability to invest during periods of market-wide volatility and the subsequent levels of returns. In short, this study found that U.S. private credit managers that invested more actively during periods of elevated volatility generated, on average, more than 10% higher levels of annual returns than those managers that were not as active during the same volatile market conditions. While this analysis does not address manager-specific outcomes, current market conditions reinforce the importance of manager selection in this environment and further underpin our strategy of maintaining plenty of flexible capital to invest during these periods. In the first quarter, our team originated over $3.2 billion in new investment commitments, with 70% of transactions coming from existing borrowers. As transaction volume slowed in the second half of the quarter, our strong relationships allowed us to selectively invest in top-performing existing portfolio companies. These opportunities focus on achieving attractive, risk-adjusted returns and reinforced our ability to support our best borrowers and sponsors, particularly during periods of volatility. Our first quarter originations reflected meaningful sector diversification across 22 different industries and 57 sub-industries. As Kort Schnabel noted earlier, the shift in supply-demand dynamics across direct lending is beginning to translate into more favorable pricing and terms. We are beginning to see this come through our new originations, as spreads on first-lien originations in the first quarter increased by approximately 20 basis points quarter over quarter, while leverage levels declined by nearly half a turn of EBITDA. We ended the quarter with a portfolio of $29.5 billion at fair value, which was stable quarter over quarter as new fundings were offset by fair value changes and repayments. Repayments during the quarter, excluding sales to Ivy Hill, totaled approximately 7% of the portfolio at cost and continue to serve as a source of natural liquidity that we can deploy into today's market. As part of this repayment activity, we exited four equity co-investments, which were the primary drivers of our $114 million of net realized gains in excess of losses in this quarter. As a reminder, since inception, Ares Capital has generated more than $1 billion in net realized gains in excess of realized losses across more than $70 billion of exited investments over the last twenty-one years. These latest four exits generated a mid-teens weighted average realized IRR. Importantly, over the last ten years, our equity co-investment portfolio generated an average gross IRR well in excess of the double-digit total return of the S&P 500 Index. As we have discussed previously, these minority equity investments are made selectively, generally alongside loans we originate and underwrite ourselves, allowing us to participate in the equity where we see particularly strong upside cases. Another important component of our repayments this quarter was the collection of PIK income. In the first quarter, our PIK income, net of collections, represented approximately 7% of total interest and dividend income, which is below our historical five-year average. As we have discussed previously, we have selectively used PIK over our history and have been transparent in our PIK reporting, including explicitly disclosing PIK collections in the statement of cash flows. From a portfolio composition standpoint, approximately 90% of our PIK income is structured at origination and is associated with larger, well-performing companies, not reactive amendments. As with all investments, PIK investments are underwritten with the same discipline as cash-pay loans, with a strong focus on structure, leverage, and exit protections. Importantly, over our twenty-one year history, and across more than 190 realized PIK investments, we have generated a return measured by a multiple of our invested capital, or MOIC, of 1.4x. This MOIC is a modest premium to the 1.3x MOIC on all of our exited investments since our inception in 2004. We believe that this demonstrates the selective use of PIK does not create unnecessary levels of risk in our portfolio or correlate to future losses. On the contrary, it has supported our strong returns over the past twenty-one years for our shareholders. Repayments also offer us an opportunity to assess our valuation process over time. We believe the scale we have built in portfolio management is a meaningful competitive advantage. The merits of our large team and time-tested process are reflected in our realized outcomes at exit. Specifically, when comparing realized investments exited over the past two years to their respective fair values one year prior to exit, we found that 99% of fully paid-off U.S. debt investments were realized at valuations in line with or better than their valuations one year prior. We believe these observations underscore the rigor of our valuation process. Turning now to further details on borrower health. The financial position of our portfolio companies remains solid, with interest coverage stable sequentially and improving year over year, and leverage levels broadly stable. Our investments remain well protected by substantial equity cushion beneath us, with an aggregate loan-to-value ratio in the portfolio in the mid-40% range. Supported by these underlying portfolio trends, the credit performance of our portfolio remains solid. Our nonaccruals at cost ended the quarter at 2.1%, a 30 basis point increase from the prior quarter, but still well below our approximately 3% historical average since the Global Financial Crisis and the BDC historical average of approximately 4% over the same timeframe. Our nonaccrual rate at fair value also remained low at 1.2% of the portfolio, stable quarter over quarter and well below our historical levels. Our overall risk ratings remain stable, and the share of our portfolio companies in our higher-risk categories, Grades 1 and 2, remains below our five-year average and notably lower than our portfolio companies in Grade 4, which are outperforming companies. With this backdrop of our portfolio continuing to perform well, we would note that, as we have said several times in the past, we would not be surprised to see credit quality and nonaccruals across the industry revert closer to historical norms from what has been a period of unusually low levels in the industry, particularly given slower economic growth, repercussions from geopolitical issues, and supply chain disruptions. We are already seeing higher levels of manager dispersion, and we believe this trend will continue. Shifting to the second quarter, as Kort Schnabel noted earlier, market activity has remained slow as participants continue to work through price discovery. Through 04/23/2026, total commitments were approximately $200 million. Our backlog was approximately $1.8 billion as of the same date, and our activity levels, as measured by discussions, have increased in recent weeks. Additionally, our current backlog reflects a 35 basis point increase in spreads and a 40 basis point increase in fees as compared to the first quarter for first-lien loans. As a reminder, our backlog contains investments that are subject to approvals and documentation and may not close, or we may sell a portion of these investments post-closing. While we are beginning to see deal flow pick up, we expect this slower start to affect both originations and exits in the second quarter. In summary, we believe ARCC is navigating this period of market transition from a position of strength. The current environment is reinforcing the advantages of scale, balance sheet strength, capital availability, underwriting discipline, and portfolio management. Supported by a well-performing diversified portfolio and significant liquidity at ARCC and across the broader Ares platform, we believe we are well positioned to thrive in this market and continue generating attractive dividends for our shareholders. As always, we appreciate you joining us today, and we look forward to speaking with you next quarter. We will now open the call for questions. Operator, please open the line. Operator: Certainly. Thank you, Mr. Miller. The Investor Relations team will be available to address any further questions at the conclusion of today's call. We will go first to Analyst with JPMorgan. Analyst: Hey, guys. Thanks for taking my questions this morning. Look, it is obviously an interesting time. You have talked about the widening of spreads, and you have talked about better origination fees. I am curious, when we look at some of the other elements of transaction structure, particularly things like covenants and control provisions, if the market is readjusting as well. I think that when we sort of hear what has happened over the last couple of years, that has been one area of concern, and I am curious if that is normalizing also. Kort Schnabel: Yes. Thanks for the question. I can jump in on that one, and if anyone else on the team wants to chime in. I would say yes, those other non-economic terms and documentation provisions are moving more positively in our direction as well as the economic points of fees and spread, as I mentioned in the prepared remarks. Whether it is getting a financial covenant on companies that might have been previously on the margin of getting one, I would say that is tipping in our direction. I do not want to overstate it. Obviously, high-quality borrowers are still able to access deals from the private credit market covenant-light, but at the margin, it is moving in our direction, as well as collateral protection terms and other documentation terms that a lot of people have been talking about certainly of late. So yes, it feels like certainly a better time. Obviously, our market moves a little bit more slowly, so we will continue to watch and see how things change from here. Analyst: Great. If I can just ask one quick follow-up to that. So I think what I am hearing from you is in terms of all of deal structure mean reversion. It is not like we have swung from a wildly bullish market to a wildly bearish market in terms of wider spreads and so on. And given all of the noise and drama we had during the first quarter, is this just a reflection of the continued supply of capital from both the public and private BDCs sort of insulating those moves? Kort Schnabel: I think it is probably a little bit of two things. I think it is, one, supply of capital and the changes that we are seeing in the flows in the retail and wealth channel. But I think it is probably also just part of what Jim Miller said in his prepared remarks, which is that I think people do recognize that the risks out there are a little bit higher now, with the geopolitical developments and slowing economic growth, and that probably is also influencing people's behavior when it comes to pricing new deals. So I think it is a little bit of both of those things. But in terms of your comments around reverting to the mean, I think that is correct. I do not think we are saying we are in an environment today where spreads are blown out super wide. Obviously, we got to a very tight place last year. It is good to see them widening, but like we said, 50 to 75 basis points of kind of total yield improvement between spread and fees does not indicate a blowing out of spreads. Analyst: Got it. Thank you, guys. I really appreciate you taking my questions this morning. Kort Schnabel: Sure. Thanks. Operator: Thank you. We will go next now to Finian O'Shea with Wells Fargo Securities. Finian O'Shea: Hey, everyone. Good morning. Following up on that topic, and Jim Miller, you talked about the benefits of investing in volatility. This sort of activity on the runway does sound like the higher-quality kind of deal that would reprice down when the retail vehicles, say, eventually recover, and that could pressure NOI more. So as you approach book and can raise capital, how aggressive do you want to be in terms of growing into this environment? Thanks. Kort Schnabel: Thanks, Finian O'Shea. I will start by saying that I do not think we are in need of growing the capital base right now with the $6 billion liquidity position that we have. We also do our best, when we are in a market like this, to get call protection on deals so that we can lock in terms when the market is favorable for us like it is today. Certainly, there is some period of time that will pass and you will end up in scenarios where repricings will come back to the market. I think we are seeing that pendulum actually swing both ways. We have opportunities right now to reprice many of the deals in our portfolio as they look for amendments or add-on acquisitions—things like that—and we are doing a lot of that right now. So that is sort of how the market works. It is not as rapid as in the public markets. In the private markets, you will see insulation from those repricings to a certain extent. It is not as rapid; you do not have as much activity, the volatility is not as high, and you just see a little bit more stability, and the bands on either side are tighter. And then, as it relates to raising capital, we will just evaluate that quarter to quarter, month to month as we see what is in the pipeline, the nature of the market at that point in time, and where the stock price is. Finian O'Shea: It is helpful. A follow-up, Scott Lem, I appreciate your comment on the bank side of the funding arena. I think it is fair to say you are a desirable counterparty; you have also done your job in fighting those borrowing spreads down for yourselves. And we have seen banks sort of push back. I think there were a bunch of repricings upward in, say, 2022, 2023. Do you see any of that on the runway as your spreads widen? Will the banks, do you think, fight their spreads back up? Scott Lem: Thanks, Finian O'Shea. Yes, I do think that there is potential for that. We are not seeing it at the moment. As you saw during the quarter, we actually repriced some of our facilities down a little bit. So these things will ebb and flow. I think for us, if it does move, it is not going to be just for us; it would be for the whole sector. If that is happening, that should mean that we would be able to put pressure on the asset side too. So our ability to take increases on our liabilities should be commensurate with increases on the asset side. But it is too early to tell right now. Operator: We will go next now to Arren Cyganovich at Truist Securities. Arren Cyganovich: Thanks. The April-to-date trends were quite low. You highlighted that as borrowers are trying to adjust to the new spread and document environment. You mentioned that things have picked up in recent weeks. Should we expect kind of a similar slowdown that we saw last year due to the tariff stuff we saw in the second quarter? Or do you think that this could actually potentially pick up as you have had these conversations in recent weeks? Kort Schnabel: Yes. I will try to answer that one. It is obviously really hard to predict, and I probably do not want to venture a guess as to how we are going to see transaction activity evolve from here because it just has been very up and down. Obviously, you mentioned last year, kind of similar things—things really slowed down with the tariff noise and then the second half was extremely busy and we posted record volumes. It was really hard to see that coming when we were sitting here in April–May. I guess what I would say about the backlog, or the activity the last few weeks since the end of the quarter: obviously there is a little bit of a lag effect. So the stuff that we are committing to in the first few weeks of April has been sort of teed up and discussed through investment committee for weeks, if not months, prior to that leading up to it. So, a little bit of a lag effect. We are starting to see the comments we had in the prepared remarks—namely that we are starting to see a pickup just in terms of our cadence of deals that we are seeing come through investment committee, I would say, in the last three to four weeks. So we are at the front end of seeing that pickup. We did want to go out and make sure that people are aware we are seeing that. But whether it is sustained or not, I think it depends on a lot of different variables out there—maybe most notably just the geopolitical situation. I think if that can get resolved in a sustainable manner, then I think you could see things really pick back up meaningfully. But that is something that is just really hard to predict. So hopefully that helps a little bit. Arren Cyganovich: Yeah, no, absolutely. It is obviously something that is evolving rapidly. So I appreciate those comments. The other question I had was around the consulting that you hired, and I appreciate all the numbers. It kind of fits with what you have been saying to us publicly in terms of the higher-quality type of well-protected enterprise-type of companies—some small risk from AI, some, I guess, medium risk as you kind of pointed to that. I think the biggest question that people have, and this is going to take quite a while to unfold, is companies are doing well now; they are going to probably continue to do well in the near term. But at some point, they have to be refinanced, and the markets have down, I do not know, 40% or so. What are some of the options if you have a private equity firm that maybe bought a company at 21 times EBITDA and now they are trading at 13 and maybe do not want to exit those, and you probably do not want to hold on to those loans through the next cycle? So maybe you could just talk about the refinancing risk and some of the options that you will have to use whenever you get to that kind of point of refinance whenever that occurs. Kort Schnabel: Yes, sure. Obviously there is a fair amount to unpack on the software topic. I guess, just specifically to the refinancing risk: number one, there already is a market that exists currently, despite the fact that the deal flow is low. We are seeing deals get done in the software space. There have been a couple in the last month or two where the market has been able to finance these transactions. They are for higher-quality borrowers without AI risk. They are coming in at, obviously, a little bit wider spreads, but they are getting done. We actually had one company in our portfolio that we did not think was particularly risky, but sort of on the straddle of low to medium category, and we decided to not extend maturity, and the lender group took us out of that name. So just as one case study of our ability to exit when there is a maturity, if we are not willing to provide an extension. Again, there are so many names in the book it is hard to go granular on a call like this, but I would just remind everyone that our loan-to-values on our software book as a whole still are very healthy and low relative to the broader book. We took a lot of markdowns on the equity values on our software names in our portfolios, and the LTV in our software debt book still stands in the low 40%s, below the LTV of the total book. The EBITDA growth rate of our software companies remains consistent with the growth rate of the rest of the book at 9% year over year. And I would also say, we can spend more time if people want to on the consultant study and the different categories and risk ratings—we obviously have a lot of detail there—but we did actually make an effort to unpack and do a maturity waterfall on the entire software book and compare the maturities in the lower-risk category versus the higher- and medium-risk category. The maturity profile actually for the higher- and medium-risk names is materially shorter—it is 2.4 years versus 3.9 years on the total book. The low-risk names are about 4.2 years. So, when it comes to trying to mitigate technology risk, obviously shorter maturities are better. And to the final specific point of your question, when we get to the point of the maturity and if we are not willing to give an extension, then we are going to have a conversation with the owner of that business. If it is a financial sponsor, then in most cases we are probably going to request that a capital injection is made in order to pay down our debt and derisk us to get a maturity extension. Obviously, it is a case-by-case basis; it is hard to generalize. But we are not unfamiliar with having some difficult conversations with sponsors about underperforming names. We have done it over a long period of time and feel confident we will be able to do that again now. Arren Cyganovich: Thanks. I appreciate it. I know it is a tough question. Operator: Thank you. We will go next now to John Hecht with Jefferies. John Hecht: Maybe a little bit of a tack-on to the prior question. I really appreciate all the context you gave us around your software portfolio and understand you had a highly regarded third-party management consulting firm evaluate your exposures. I am wondering, are you able to give us any, call it, sensitivity analysis around impacts or disruptions to revenue as revenue models shift within the portfolio? And what that did to, call it, leverage calculations during that exercise. Kort Schnabel: I am sorry. So, you are asking about how are the revenue trends changing within the different categories? John Hecht: When you analyzed sensitivity or exposure to AI disruption, did that include an assessment of potential revenue model shifts for the software companies? And if so, can you give us any, call it, materiality of the revenue shift as the industry changes? Kort Schnabel: Sure. Yes, I think I get it. Why do I not just give a little bit of color around the definition of these three categories? I was anticipating people might want to go into this because I think it will help with your question. The first thing I would say is we are not seeing any significant deterioration in the performance of these companies, regardless of whether they are in the low or the medium risk. I should say, in the high-risk category—again, it is only 0.3% of the entire portfolio at fair value, and it actually is only three names in that high-risk category—one of them is Pluralsight, which people know is not performing well. So within that high-risk category, there are performance issues. But in the medium-risk and low-risk categories, this portfolio as a whole continues to perform very, very strongly. So to the prior question, nothing is happening yet in the numbers; it is all about the look-forward into the future that everybody wants to talk about and is focused on. So maybe just on the definitions of these categories: the low-risk names are companies that were identified by the consultants and us, by the way—they validated the work that we have been doing ourselves rating these names for the past six months—as companies that have lots of layers of mitigants to AI risk. We have talked about this before: whether it is system-of-record positioning, proprietary data, regulated end markets, network-based business models—all these things that insulate a company from being disrupted. That low-risk category—these companies have lots and lots of those mitigants, and what I would just kind of say is they do not have to do a lot to prevent disruption, and they actually will likely benefit from AI. The 85% of the companies that are in that low-risk category in our software book are much more poised to benefit from AI than to be disrupted. The medium-risk category, which is 14% of the software portfolio, or 3% of the total portfolio—what I would say about this category is there are still mitigants that exist—some of those mitigants I mentioned before—just fewer than in the low-risk category. And these companies need to execute on their own AI strategy and keep evolving their products in order to stay competitive. So to your point, I do not know if it is a revenue model change; it is just making sure that they are evolving their product suite to incorporate AI so that they can stay competitive and ahead of the curve. That is how I would categorize those names. And really importantly, in this medium-risk category, we are not saying, nor is the consultant saying, there is going to be disruption. In fact, the study specifically states that many of these companies are well positioned to adapt within the time necessary to adapt. But it is just that there are fewer mitigants than the companies in the low-risk category. In the high-risk category, the definition there is these companies really need to transform their business model in order to survive the disruption risk. I do not know if that helps with your question, John Hecht, or not. But hopefully that color helps provide some more insight into the study. John Hecht: That helps a lot. I really appreciate that. My second question is, you talked about the deal environment—it has temporarily been impacted by all the global stuff—but maybe you are seeing some early indications of a renormalization. We have been waiting for a long time for this wave of private equity portfolio maturities and how there is a lot of pressure to liquidate and return capital to LPs. I am wondering, assuming this geopolitical stuff stabilizes, is there anything obstructing that wave of potential activity beyond this? And do you guys have an opinion about when and if that wave might occur? It feels like all the ingredients are still in place if you take out the volatility that is going on in the world and the market right now. Kort Schnabel: The pressures on the private equity firms to return capital are only increasing. The hold periods are lengthening. Again, even though economic growth overall is slowing a little bit, in the sectors that we invest in, growth is still really strong. So I really do not see any other barriers that would prevent us from being able to get back to a really active deal environment. Obviously, noise around software is likely to hamstring volumes within that sector specifically. But other than that, I do not really see any other barriers. Jim Miller: Maybe I will add, Kort Schnabel. There is a fair amount of healthy discussion and dialogue in the sectors and areas that are unaffected—be they geopolitical or software—so I think there is an optimism around deal flow. It is not optimal for a private equity firm to bring their company to market in the midst of the most intense moments. But there is a lot of interest in migrating towards companies and getting invested in companies that are sheltered from some of those issues, and I think there is a lot of optimism there. So I think those will lead the way, probably, and then you will see a more active broader market. If history repeats itself, that is what we should expect to see over the next few quarters. John Hecht: Wonderful. Thank you guys very much. Kort Schnabel: Sure thing. Operator: Thank you. We will go next now to Paul Johnson with KBW. Paul Johnson: Yes. Thanks. Good afternoon. Thanks for taking my questions. Credit is still relatively strong today, but I was wondering, in relation to just the NAV decline this quarter, how much of that would you say is kind of just the broader mark-to-market with spreads this quarter versus credit-specific write-downs? Scott Lem: Yes, happy to take that. More than two-thirds of the marks we have had—around 70%—are mark-to-market related rather than credit related. So the significant majority of it is from mark-to-market. Paul Johnson: Got it. Appreciate that. And then you guys have done—I mean, you have clearly done some extensive analysis on the book. You have provided a lot of transparency on top of that. But I was wondering if I could just ask kind of higher level on marks more specifically on software investments: how do the discount rates move quarter to quarter? And is the assumption that the fundamentals of these companies—because it sounds like a lot of them still have very strong performance—is fundamental performance just strong enough to offset any sort of spread widening that we would have seen in the quarter? Or is it just more of a lag effect that we might expect to see throughout the year if spreads continue to widen out? Jim Miller: Yes. Look, I think everyone would like to try and create a generalization around how to approach the answer to that question, which is just not easy to do. It is probably a good moment in time just to express—and we had said some of it in our prepared remarks—that we have an extraordinarily extensive valuation process that has worked for a really long period of time, and it has proven out to be quite effective. It is really a bottoms-up, company-by-company analysis. And every company is distinctly different. To answer that question, you have to go look at that company. You have to look at the comparables that are very specific to that company. And that is even within software—there are so many categories that exist within software. So broadly speaking, you want to draw a parallel to the broadly syndicated market or to mark-to-market issues there, but it is not something we should do. We should just look at them one-off. So there is not a simple answer to that question. What I will say is there is clearly an impact on EV and it was more pronounced in software for the quarter. So the assumption is fair. But that EV does not just flow directly into mark-to-market on the loan. Once again, the private market—as Kort Schnabel said—is active and still active in software. And so there is some movement, but what we are looking at a lot in the analysis, which is bottoms-up again, is what the private market is doing for these companies and what the indications there are. And so that is a better—one of the more important variables, I should say—that goes into the equation. Kort Schnabel: Maybe I will just add one more bit of color to further illustrate what Jim Miller was talking about—that it is not so simple. Obviously, when spreads widen, that affects the value of the loans and marks should go down, but it is not that simple on a portfolio-wide basis because on each individual name, that might not occur. For instance, if we have a software company that has performed extremely well and delevered, such that the pricing and the spread on that loan is actually somewhat wide relative to the risk, we do not mark that loan above par—we mark it at par. And so when spreads then widen, that loan can stay at par because the performance indicates that the pricing is still appropriate for the risk. So that loan might not get a markdown even in the spread-widening environment, whereas another software name that is more levered might get a markdown in a spread-widening environment. So that is just one example of many of why you have to do it name by name; you cannot do it on a portfolio-wide basis. But obviously, we are paying very close attention to each one of these names. We have got third parties in here validating all of our marks. And as Jim Miller said, about 70% of the write-downs were mark-related. Paul Johnson: Got it. Appreciate that. Very helpful answer. Thanks, Kort Schnabel and Scott Lem there. My last question here was just in terms of Cornerstone software that was marked lower this quarter; Medallia—which you are not an investor, not a lender to—but Medallia getting restructured this quarter; Pluralsight—which you have a very small investment—also, that company is struggling a little bit. I was wondering if you could just kind of tell us broadly for these companies what exactly do you think it is that those companies are lacking in terms of the challenges that they are going through today? Is it lack of a critical system-of-record? That sort of thing? For these companies to be running into trouble today. Kort Schnabel: Yes, I appreciate the question. I really just think we always hesitate to dive into any individual name and really start getting into trends or performance results on individual names, so I do not think I am going to necessarily go there and get into that level of detail. On any portfolio, when you have 600-and-some names and 130 software names, you are going to have some names that are going to underperform. We thankfully only have a few of them. Pluralsight has been underperforming for a while; people understand what is going on there. Some of the other names you mentioned, performance is actually fine—more of just a mark-to-market issue based on how the market is viewing those kinds of credits. Not everything is what it seems. A lot of it is not really performance related. Other than that, I just think it is not appropriate to dive into individual name discussions. Paul Johnson: Okay. Fair enough. Thank you very much. Operator: Thank you. We will go next now to Brian McKenna with Citizens. Brian McKenna: Great, thanks. So one more follow-up on your software exposure. How much of the roughly $1 billion of the more at-risk software investments are sponsor-backed? Then you also have the largest portfolio management platform in the industry, so I am curious how you can leverage that entire team to get out ahead of any potential AI risk and really how you and that team ultimately drive better outcomes within this part of the portfolio. Kort Schnabel: Sure. So again, in that high-risk category, all the names are sponsor-backed actually. There are only three names. We will go back and check, but I believe all three are sponsor-backed. In terms of our portfolio management and our playbook, I am glad you raised it. It is something that we think is differentiating for our platform. It is something we try to highlight a lot. We have an over 50-person portfolio management and restructuring team. We have operated over twenty-one years here through lots of different cycles, including the GFC. We are not afraid to have tough conversations with the owners of businesses. As I already mentioned once on this call before, the first thing we look for is if there is a liquidity problem, the owner of the business has to put in capital to support the liquidity problem. And if the owner of the business is not willing to do that, then we are not afraid to restructure and own the company ourselves. That is never what we want to do; it is never the plan. But we have the expertise and the team in place to own these companies, to be patient with them, to provide additional capital, and to come out the other side. Over our history, we have generated an enormous amount of gains by doing that. Just this year, we posted a big gain on a portfolio company that was a mezzanine investment that we restructured and owned for ten years and posted the gain on it. So there are lots of examples like that over the course of time. It might be harder work and might take more involvement, but we absolutely have the expertise in place to do that. Brian McKenna: Okay, great. That is helpful. And then if you were to mark to market the portfolio today to reflect quarter-to-date trends, how much of the first-quarter markdowns would be reversed? Jim Miller: I am not sure we are in a position to answer that one at this point in time. I think that requires a whole valuation mark process—it is extremely extensive, as you can imagine. So that would be a difficult one to address as a one-off. Kort Schnabel: Yes. Our market does not move as fast as the liquid market does either, so really tricky to say. Brian McKenna: Yep. Thought I would give it a try. Thanks. Operator: Thank you. We will go next now to Kenneth Lee with RBC Capital Markets. Kenneth Lee: Hey, good afternoon, and thanks for taking my question. Just another one on the software loan side. It sounds like the private markets are still originating software loans. But for Ares in particular, I wonder if you could talk a little bit more about some of the more recently originated software loans. What sorts of economics and terms are you seeing? And also, roughly, what are the average LTVs that you are underwriting at? Thanks. Jim Miller: Yes, sure. I appreciate the question. There really have not been a lot. There are just a handful or less in the last few months of deals. Some of them were existing portfolio companies of ours where the sponsor may be looking for a little bit of incremental capital to do a tuck-in acquisition. There have not been any that have come across our transom here that are larger, kind of bellwether-type software names where we can really point to and say, “Here is where the market is.” Smaller deals get priced sometimes a little bit more indiscriminately if we have another lender who might just really want to own that name and can clear the deal. So I think it is a really hard question to answer. I guess I would probably say, the deals that we have seen clear—the spread and fee increase on those transactions—is a little bit wider than the 50 to 75 basis point average that we put out in our prepared remarks. These are higher-quality companies. It is not like if a software company has some kind of material question around AI risk, that type of company is out raising capital right now. So these are the higher-quality companies, and it is a little bit wider than the average is probably what I would say. Kenneth Lee: Got you. Very helpful there. And then one follow-up, if I may. Once again, just on the software side, broadly across the portfolio there, how do you think about potential downside protection for software investments there—especially protection that could potentially put a floor on recoveries? I am thinking about, for example, intangible assets, any sorts of IP. If you could just give us a little bit more color on that. Thanks. Jim Miller: Yes. Look, again, first of all, we are cash flow lenders at our core and always have been. Our underwriting theses are most of the time underpinned by a very high degree of recurring revenues and predictable cash flow conversion through lots of different cycles, as it pertains to software and technological cycles. As we think about downside protection here, I think we will just keep coming back to the fact that the vast majority of our companies—as we have been saying and as third parties have validated—have very high barriers that insulate them from technology and obsolescence risk. The retention rates of the revenues in these companies continue to be very, very high. The cash flow conversion is strong. The EBITDA growth is strong. And the loan-to-value, again, on our software book for our debt investments is 41%, even today after the markdowns we took on the equity values. So we rely on the significant amount of enterprise value cushion and the strategic value of these companies to lots of different acquirers—either strategic acquirers or private equity acquirers—for values that are well in excess of our debt if we needed to sell these companies to recover our principal. Maybe just one additional point. I do not know if this is what you were referencing, but we think we do a pretty good job with documentation. We obviously care a lot about the IP and protect it as part of our documentation. I think we do a better job in private markets than public markets do on that point. Kenneth Lee: Gotcha. No, that is very helpful. Thanks again. Operator: We will go next now to Sean-Paul Adams with B. Riley Securities. Sean-Paul Adams: Hi, good afternoon. While nonaccruals are still relatively within low levels, it seems like there were a couple of outsized markdowns totaling almost $100 million for the quarter—that was across just two names—that are not captured within the nonaccrual figure. I understand not wanting to delve into portfolio-specific names. However, if your headline nonaccrual exposure metrics are not capturing AI-based positions marked below $0.75 on the dollar, how are you trying to really express true exposure for mark-to-market risk in the next couple of quarters? Kort Schnabel: I was following you until the very end when the actual question came out there. I am not sure exactly the point of the question. I get it. The one thing I will say, and then maybe I will have you rephrase it, is obviously in volatile markets like we are in today, we see more dispersion of valuations and marks. We see what the broadly syndicated market is doing to a bunch of names in the software space, and so that is going to be reflected in our marks. We have to mark our portfolio based on where the comps and the market are saying these debt positions should be valued. That mark is independent of our analysis of whether the loan is covered by enterprise value and whether we deem the principal and interest collectible. And so there certainly could be, in a more volatile market, loan valuations that trend lower but where we still feel that the principal and interest are collectible because we are covered by enterprise value. My guess is that would apply to the names that you are citing—again, without getting into individual name discussions. I do not know if that was specifically where you were asking, but I want to make sure that point does come across clearly. Sean-Paul Adams: Right. And so to refine the question, if you are having a position with an exposure of $350 million at cost, and you are having a $50 million difference quarter over quarter—25% of the marks at debt—it is not calling out the full risk to that name. Kort Schnabel: It is valuing the loan at the level that the market today is pricing that loan at. So that is a fair value mark. It is reflected in our NAV, which—these markdowns this quarter—are why we saw NAV decline this quarter for the first time in a pretty long time here at Ares Capital. So it is reflected in the NAV and reflected in the marks. It is not reflected in the nonaccruals if we still deem we are covered by enterprise value. I think that is the point that you are making, and that is accurate. It will be reflected in the nonaccruals when we believe there is risk of impairment and that the full interest and principal are not collectible. Sean-Paul Adams: Okay, perfect. I appreciate the color. Thank you. Operator: We will go next now to Analyst with Barclays. Analyst: Hi, thanks for taking the question, and appreciate all the comments on funding on the call so far. Just wondering if you could talk a little bit more about the mix of funding. Just looking at the ratio of unsecured debt to total debt, it has been gradually declining over the past few quarters and ended March at about 59%. And obviously secured funding is always going to be cheaper for you, especially now given where BDC unsecured spreads are generally. I am wondering if you had a target for the ratio of unsecured debt to total debt or maybe even to total assets, and where we could expect that ratio to go over the next few quarters? Scott Lem: Yes, sure. Hey, thanks for the question. I think we certainly have run at fairly high levels of funded unsecured debt in the past. I think even at the current level you cite, it is still pretty healthy and relative to the rest of the sector. Certainly, early part of this year, post our deal, the spreads gapped out quite a bit in the unsecured market and were fairly unattractive. I would say the past few weeks have been very productive, so it certainly makes it a little better. But I think the point is we know we have a fair amount of liquidity on hand, and we like doing that on purpose to make sure we can be very opportunistic about our issuances. So yes, the way we look at it is if we had to do no issuance for the rest of the year and we know we have a maturity coming up, it still puts us at majority funded with unsecured. So, yes, probably our target is to make sure that the majority of our funded debt is unsecured. We do still have some room to go there. But it is certainly a more productive market than it has been. Analyst: Okay. Thanks very much. Operator: We will go next now to Casey Alexander with Compass Point. Casey Alexander: Good afternoon. I want a badge of honor for being the last question on the longest quarterly conference call in Ares Capital history. And I do have two. First one is, in the last six years, we have heard multiple periods where all of a sudden spreads widened out, and it looked like it was going to be durable and better terms and better documentation, and then almost immediately competition came in and slammed them right back to where they were. So why should we believe that this cycle is different than that and that wider spreads and better terms can be a little bit more durable? Kort Schnabel: Jim Miller and I can maybe tag team on that answer, Casey Alexander. I do not know that we are actually sitting here pounding our chests saying that anybody should expect it to be more durable than in past cycles. I think we are just saying we are seeing it widen. We are watching the factors as to what is creating the widening, which we talked about before. I think it is both flows within private credit and maybe risk premiums in the market. I think the other thing I should say is banks—bank behavior is also driving the widening, and we are seeing banks be less risk-on in terms of new commitments. We have seen the broadly syndicated market widen out as well in terms of their implied spreads and the pricing in that market. So there are lots of different things that are creating it. Every period is different. We did see wider spreads be pretty darn sustained when they started to widen out in mid-2022, and that lasted for eighteen to twenty-four months. We saw spreads peak out at 650 to 700 and fees were two to two and a half points, and that was pretty well sustained. If you are referring to last year, the tariff period, obviously we garnered some premium economics through that—right through the teeth of that period when everything was extremely uncertain. And then things changed immediately when our government decided to do their announcement, and things were right back on track. So it is really hard to predict, and I do not think we are actually predicting whether it is going to be sustained or not. I think time will tell. Casey Alexander: Okay. Thanks for that. My follow-on is Pluralsight, which you were involved in, and Medallia, which you are not involved in—two of the highest-profile sponsors within the space and two very large deals. I am just curious: internally, how has that impacted your thinking in terms of sponsor selection and also sizing of investments going forward? Kort Schnabel: I think we have good relationships with both of those sponsors. I would say on Pluralsight, the way that that deal resolved itself—the sponsor worked consensually with us to effectuate a restructuring and hand over the keys to the lender group. We were not the lead in that lender group. We did not lead those negotiations. We were a smaller holder. But they certainly behaved ultimately in the way that, obviously, we would have liked to see them support the company with capital, but they did work consensually with us. I do not think it is materially changing our view of whether we want to work with those sponsors or not. Not every deal is going to go according to plan, and we did not really—again—see any sort of nefarious behavior on the part of those sponsors. Casey Alexander: Thank you. Operator: We will go next now to Robert Dodd with Raymond James. Robert Dodd: Thank you for taking the question. A question on the management consultant—hiring them—and I apologize for the background noise; less about the output and more about the why. I mean, to your point, a year ago there was the tariff tantrum, etc., and you did not hire a consultant at that point to evaluate embedded tariff risk in the portfolio or anything like that. You did it in-house with your in-house expertise. So my question then is: it feels different this time. You have hired a consultant who might be agreeing with what you said, but was there a level of complexity increase and uncertainty about the capabilities of the in-house expertise, or what motivated the decision to bring in that third party when that has not typically been the pattern in the past when there has been some theme, be it tariffs or something else? Kort Schnabel: Yes. I love the question. So with tariffs, it is a math-based equation pretty much, and we were able to pretty quickly speak to all of our portfolio companies, ask them to break down their cost of goods sold—not all of our portfolio companies, but the ones that actually import products—and break down the cost of goods sold and do a quick analysis as to the impact based on various tariff rates and come up with an exposure. We put that number out with a clear explanation of how we did it, and people seemed satisfied and agreed with the analysis. By the way, then the tariff thing went away, like we said on the prior question. This is a much more complicated situation, it is becoming apparent to us, and it is not exactly numbers-based, is what I would say. Because the numbers continue to be very, very strong in the software portfolio, and yet the concern—really from the outside world, not from the inside world—continues to be present, even as we continue to talk about why we feel good about the software portfolio and the underwriting we have done. I will remind people a couple things. Two years ago, right around now, we had a public investor day in New York and invited anybody who wanted to show up, and we had a whole slide on AI risk and how it might impact the software business and how we felt good about our underwriting and how we have always underwritten against technology risk. That was two years ago—and that was not even the beginning of when we started thinking about that topic. As we said in the prepared remarks, it was the middle of last year that we started to think about bringing in a consultant because we just felt like as we kept talking about the underwriting we have done and the mitigants, the fact that it was not a math-based equation, and the fact that everybody was looking forward and not backward meant that we should probably bring in a third party to help us validate our opinions. Obviously, we feel good about our opinions, but like any prudent investment manager, we want to test our own thesis, and we want to figure out do we have some bias potentially because we are the ones that have been underwriting this portfolio, and we wanted to bring in a third party not only just to help satisfy the external world, but also to test our own thesis. We started interviewing those parties and decided on the consultant at the end of last year. We actually had in our prepared remarks in the October earnings call a lot of comments about AI. Again, that did not seem to satisfy people because in February it seemed like the world woke up and everybody thought all of a sudden there was going to be massive explosions in software and private credit portfolios. So I think just the continued concern by the external world, the lack of math-based formulas, and the desire to test our own thesis were the reasons why we went and did it this time. Hopefully it is helping give people a little more color around the situation. Jim Miller: And if you do not mind, I am just going to clarify and maybe adjust the response a little bit. We often engage third parties to help us evaluate transactions and sectors and white paper new spaces. We utilize third-party work from consultants like this as part of our diligence, as part of our ongoing review of portfolio companies, too. So that part of it is not new. I think the scale of this and maybe the disclosure or the outbound to the community is what is new here. But this is part of our work in a regular way, too. So it is a combination of the circumstances and this being good practice for us—and we do it often. Robert Dodd: Got it. Thank you. As a kind of follow-up—sort of related—you said the medium-risk assets have about a 2.4-year maturity left. From the review, did you get a takeaway on what is the timeline for these AI risks if they happen? If a medium business does get impacted and it is in the next nine months, then the maturity being a year plus further out is one thing. If it is a five-year horizon, then most of these assets are going to be matured and possibly gone before it ever becomes an issue. So can you give us any color on what the outputs were on where the maturities are versus what time horizon the risk actually really exists on? Kort Schnabel: Yes, it is a good question, Robert Dodd. The more facts we disclose, the more questions come up—every time. There was not really a strong part of the study or conclusion that delved into the amount of time that it would take, and I am sure obviously that is very company specific and not something that can necessarily be calculated. Again, this is a very complex topic, and I think it is a great question, but not something that I am really in a position to answer other than to say that the consultant did report—and I already said it once, but I will say it again—the medium-risk companies in our portfolio do have ample time to execute on their own AI strategy in order to avoid being disrupted. So that was the specific commentary, but it did not really talk about the actual specific length of time. Robert Dodd: Got it. Thank you. Operator: Thank you. And ladies and gentlemen, this does conclude our question and answer session. I would like to turn the conference back over to Kort Schnabel for any closing remarks. Kort Schnabel: Great. No closing remarks. Thanks, everybody, for joining today and for your support and engagement, and we look forward to connecting with you on our next quarterly call. Operator: Thank you, Mr. Schnabel. Ladies and gentlemen, this concludes our conference call for today. If you missed any part of today's call, a replay of the call will be available approximately one hour after the end of today's call through 05/28/2026 at 5 PM Eastern Time. You can access the replay for domestic callers by dialing 1-807-276-1189 and international callers, +1 (402) 220-2671. An archived replay will also be available on a webcast link located on the homepage of the Investor Resources section of Ares Capital Corporation’s website. Again, thanks for joining us, everyone, and we wish you all a great day. Operator: Goodbye.
Operator: Good day, and welcome to the Solaris Quarter 1 2026 Earnings Teleconference and Webcast. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference to Yvonne Fletcher, Senior Vice President of Finance and Investor Relations. Please go ahead. Yvonne Fletcher: Thank you, operator. Good morning, and welcome to the Solaris First Quarter 2026 Earnings Conference Call. Joining us today are our Chairman and Co-CEO, Bill Zartler; our Co-CEO and Director, Amanda Brock; our President, Kyle Ramachandran; and our CFO, Steve Tompsett. Before we begin, I'd like to remind you that some of the statements we will make today are forward-looking and reflect a number of known and unknown risks. Please refer to our press release issued yesterday, along with other recent public filings with the Securities and Exchange Commission that outline those risks. I would like to point out that our earnings release and today's conference call will contain discussion of non-GAAP financial measures. The presentation of this additional information should not be considered in isolation or as a substitute for results prepared in accordance with GAAP. Reconciliations to comparable GAAP measures are available in our earnings release, which is posted in the News section on our website. Additionally, we encourage you to refer to our earnings supplement slide deck, which was published last night on the Investor Relations section of our website under Events and Presentations. I'll now turn the call over to our Chairman and Co-CEO, Bill Zartler. William Zartler: Thank you, Yvonne, and thank you, everyone, for joining us this morning. Solaris is off to an exceptional start in 2026. We are consistently executing across our current operations, successfully advancing our long-term growth strategy and growing our long-term business base. In power, we added 2 significant long-term contracts with 2 investment-grade global technology companies for over 1 gigawatt of contracted power generation capacity and importantly, associated balance of plant equipment. We also closed 2 strategic transactions, which expanded our generation capacity over 40% to 3.1 gigawatts. We are now operating, constructing in the design and planning stage for multiple large behind-the-meter power projects for 3 distinct large technology companies for several different data centers. Building on our proven capabilities, this progress continues to confirm Solaris' strategy and leading project expertise. We also see a clear path to significantly grow our business further. While we focus on near-term execution, we are concurrently expanding our contracted power services scope to support the future growth of our high-quality customer base. We also continue to have active discussions for new projects with both current and new customers. We expect these diversifying and expanding relationships to result in meaningful incremental returns for Solaris. As we've now shown repeatedly, we will secure expansion generation capacity once we have visibility and confidence in contracting incremental capacity on a long-term basis. While we've seen that negotiating these initial complex commercial contracts can take an extended period of time to close, we are encouraged by the numerous additional growth opportunities we see with our current customers as well as the general alignment toward a more standard contractual arrangement. We're anticipating going forward that these additional opportunities will be more streamlined to contract. The broader power market continues to reinforce and support our strategy. The tailwinds we've been describing over the past several quarters remain the same and several have strengthened. Grid interconnection delays have continued to expand, which given the market's focus on speed to compute has accelerated adoption of long-term behind-the-meter power solutions. Electricity affordability for residential grid customers remains at the forefront of every politician and community leaders' minds, which reinforces the need for bring your own power solutions like ours and in some cases, is even essential to many communities. There is no question that behind-the-meter power solutions will play a significant role in the long-term powering of data centers and other large industrial power loads. Solaris' proven ability to deploy rapidly and compliantly, fully behind the meter in island mode if needed, with the optionality of providing a cost-effective reliability-enhancing complement to the grid continues to be a real differentiator. Our progress is a result of a power strategy that's not only working but accelerating our growth, executed by a seasoned team that knows how to deliver. We've been clear about our power strategy, build a diversified integrated power services and equipment company that can deliver what the market and our customers need, delivering turnkey solutions from the molecule to the electron, while also ensuring that our earnings stream is growing at attractive returns with improving long-term visibility. With approximately 3.1 gigawatts of secured power generation capacity, a growing exceptional customer base and our demonstrated capability to deliver comprehensive behind-the-meter solutions to the industry where access to power is recognized as a key differentiator. We are well positioned to see continued growth from here. With that, I'll turn it over to Kyle to walk through our commercial progress and strategic acquisition initiatives. Kyle Ramachandran: Thank you, Bill, and good morning, everyone. As Bill pointed out, we've had incredible commercial success over the past couple of months. We now have over 2 gigawatts of power generation under long-term contracts with 3 different leading technology companies. Over half of that capacity was contracted in just the last 2 months with contract terms that have extended to 10 to 15 years. We announced our most recent long-term contract last night directly with an investment-grade global technology company in which we will provide over 600 megawatts of generation with balance of plant for an initial 10-year term with an option to extend for an additional 5 years. We expect energization under this contract to begin ramping in late 2026. This most recent contract is in addition to the over 500-megawatt contract we announced in early February and the 900-megawatt Stateline joint venture that is currently under development. These customers selected Solaris as a trusted long-term partner because of our proven capabilities and the team we've built, both organically and inorganically. We have a history of reliable execution demonstrated across multiple at-scale deployments, and these partnerships reinforce our reputation as a leader in this rapidly growing market. As Amanda will describe, these relationships are also expanding in scope well beyond generation, which further deepens our integration with customers and enhances the return profile of our contracted base over time. We've also continued to move decisively on the supply side to address the challenge we've been direct about. Demand for our solutions continues to outpace our committed and on-order capacity. On March 16, we closed 2 highly strategic transactions, which together add approximately 900 megawatts of new natural gas fuel turbine capacity. The first was the acquisition of Genco Power Solutions, which will contribute 400 megawatts of incremental capacity between 2026 and 2028, including approximately 100 megawatts of currently operated and contracted capacity. The second was the purchase of 30 turbine delivery slots, providing approximately 500 megawatts of incremental capacity between early 2027 and 2029. Securing these near-term deliveries puts us in a position to serve customers on the accelerated time lines that they need. Both acquisitions also importantly meaningfully diversify our equipment supplier base as we develop relationships with multiple OEMs. As we grow toward and beyond 3,100 megawatts, working with multiple OEMs increases our operational flexibility, reduces exposure to any single supply chain and gives us more options to configure capacity for varying customer needs. Outside of Power, our Logistics Solutions segment continues to perform well. Both our execution and demand for our services remained strong during the first quarter, and this momentum continues in the second quarter. Demand for our top fill equipment now exceeds our deployable supply, and our forward-looking calendar is also equally tight. This business line continues to generate tremendous cash that we are reinvesting into the company. In summary, Q1 2026 was a quarter of successful execution, commercially, operationally and financially. Our results, combined with our continued strategic efforts building and diversifying our capabilities positions Solaris extremely well for further growth through the remainder of 2026 and beyond. With that, I'll turn it over to Amanda. Amanda Brock: Thank you, Bill and Kyle, and good morning all. So building on our significant momentum, we want to share with you more about how we are anticipating market needs and leading with new initiatives. We're clearly delivering on our strategy to date, but as important as how we're innovating and looking to the longer term and evolving our business. Last quarter, we publicly announced our molecule to electron approach in response to a growing market need. Large technology companies are building out compute infrastructure at a speed and scale that creates many challenges, one of the most significant of which is power infrastructure. This includes not only generation capacity, but the power-related distribution, conditioning, storage and management capabilities as well as the equipment needed to supply fuel and minimize emissions. It became clear that our customers increasingly value a turnkey and rapidly deployable solution. Anticipating this need for a turnkey solution, we've added additional skills and strength to our core team with deep domain knowledge in these areas of expertise as well as making initial key bolt-on acquisitions like Solaris power distribution services. With these enhanced capabilities, we're in a unique position to deliver more than just generation in a time and capital-efficient manner, but we're adding significant value with enhanced project returns. Our most recent 600-plus megawatt agreement announced last night confirms our strategy and approach, which includes greater project scope covering balance of plant and additional services. In addition to generation, we will be developing and operating last-mile gas delivery as well as natural gas fuel generation assets and the associated distribution storage and balance of plant infrastructure. This contract's broader scope means more capital deployed per site, closer integration with the customers' infrastructure and depending on the capabilities we deliver, enhanced returns over the contracted period. It also means that contractual relationships become more difficult to replicate and are more durable over time. We now have the capability to deploy at a speed and reliability level that the grid and traditional procurement channels will have difficulty matching. The demand for a turnkey integrated power solution extends well beyond the single agreement. Examples of our growing platform include: one, we're in advanced negotiations on adding enhanced scope as well as increased generation capacity to the long-term power contract we recently signed in February. We found that as customers evaluate specific site infrastructure requirements, the size and scope of our relationship and what we will be responsible for delivering to a project is growing. Two, we are currently delivering balance of plant equipment and services at multiple existing data center and compute sites where we don't provide the generation and even where the generation source may be the grid. We believe this increased traction is a result of our distribution capabilities and proprietary approach to power and power management. Three, while this is not part of our core offerings, we are being approached to provide consulting services to projects facing power challenges. These are customers to whom we may not provide power, but they come to us because of our technical depth, which is now recognized across the market. And lastly, four, we are very excited that we've recently been asked by one of our large technology customers to participate in a pilot research program related to their development of mobile distributed compute, where we are helping to design and provide expertise for balance of plant and which could also eventually include generation. These are just several examples of opportunities that are incremental to our contracted generation base, and each one is enabled by the capabilities we've assembled over the past 2 years, the engineering, project management and manufacturing teams that we've grown organically and the distribution and control expertise we've acquired and continue to build on. Our team remains hard at work identifying and continuing to develop proprietary equipment, software, processes and services to enhance the rapid deployment and functionality of our offering and the long-term solutions we can provide to the industry. So as we look forward, expect us to continue to innovate, investing in and growing our capabilities. The broader our capability set, the more we can do for our customers and the more deeply embedded we become in their infrastructure and the better returns we will earn under long-term contracts. And the market need for power is not going away. This is the exciting long-term value proposition for Solaris, and we are confident in our ability to execute and continue to grow. I'll now turn the call over to Steve for our financial review. Stephan Tompsett: Thank you, Bill, Amanda and Kyle, and good morning, everyone. I'll begin with a review of our first quarter 2026 results. We generated revenue of $196 million and adjusted EBITDA of $84 million in the first quarter, coming in 22% higher sequentially and 79% higher year-over-year. These results reflect the operational momentum Bill and team described and it's a strong foundation for what we expect to be a significant step-up in earnings and cash flow over the coming years. In Power Solutions, we operated more than 900 megawatts during the quarter and adjusted EBITDA increased more than 30% sequentially to $72 million, driven by growth in revenue from both owned assets and third-party leased capacity. In Logistics, we averaged 104 fully utilized systems and segment adjusted EBITDA was approximately $23 million, a 2% increase over the fourth quarter of 2025. Turning to our updated earnings guidance. For the second quarter, we're increasing total adjusted EBITDA guidance by 10% to $83 million to $93 million, reflecting our confidence in near-term execution. We're providing initial third quarter guidance of $80 million to $95 million, which reflects shifting power from temporary to permanent at the Stateline JV project and deliveries of new equipment in the second half of 2026 that are contracted and will begin earning revenue January 1, 2027. Looking beyond the next couple of quarters, the over 2 gigawatts of contracted capacity we have in place provide line of sight into earnings and cash flow for the next 10 to 15 years, and we are confident that we will see our contracted capacity ramp as incremental opportunities are finalized. In our presentation, we lay out a scenario where total company adjusted EBITDA pro forma for all 3,100 megawatts delivered and operating could well exceed $1 billion annually. As the scope expansion opportunity that Amanda described continues to materialize, we see upside to that amount. To put it in more concrete terms, any incremental capital we deploy for additional assets per site would be underwritten at returns consistent with our existing framework. That incremental deployment would layer directly into the baseline EBITDA I just described. This visibility and significant earnings growth from leading investment-grade customers underpins how we think about capital allocation, credit capacity and the balance sheet going forward. In March, we closed a $300 million credit facility, which we subsequently upsized to allow up to $200 million in additional borrowings, giving us meaningful near-term liquidity. With more than $1 billion of additional identified capital to be deployed in 2026 and 2027, we are evaluating funding alternatives, which would allow us to execute our growth plan in an accretive manner and expect to provide further updates in the very near future. As we look forward, we are positioning Solaris to capitalize on an unprecedented power growth opportunity, a contracted earnings profile that continues to improve, a customer base making decade-long commitments and an expanding scope of opportunities. I'm excited to be part of the team here, and I'm looking forward to helping the team execute on these plans. With that, we'd be happy to take your questions. Operator: [Operator Instructions] The first question comes from David Arcaro with Morgan Stanley. David Arcaro: Well, congratulations on another contract here. I was wondering, I guess, the time to contracting seems to have accelerated in terms of your activity. I guess -- I'm wondering if that's what you're seeing? Has the turnaround time to securing new customers gotten more urgent? How have those discussions changed in terms of the speed of execution? William Zartler: Well, these have been baking for a while now. So they've taken a long time to get across the finish line to start with. Obviously, when they're closed, it feels really good to have them done. And I think to the point we made on that is once you've agreed to general standard terms, I mean, this is an industry that this wasn't a conscious decision for them to want to do this. They've been forced into contracting for power in ways like this. So we're walking through that and working closely with them to come up with a way that's a win-win for both has really been important. And it takes a while to get there. And once you're there, it kind of makes the evolution and growth of the relationship even easier and better going forward. David Arcaro: Yes. Got it. No, that makes sense. And I was also curious on the balance of plant business model. From here, I'm wondering, do you plan to pursue that as a separate offering? Or do you aim to, in most cases, combine it with generation? And curious if you could touch on maybe how much you've deployed in terms of the balance of plant, the consulting services that you mentioned in terms of that offering? William Zartler: We're not going to get into numbers, but I do -- we see opportunities where we are using our expertise around balance of plant to put that to work where we are not doing generation. And I think that plays into the ability to handle multiple sources of generation as that evolves. Right now, our focus has been on the gas turbine supply of generation capacity, and we're integrating the mix of that. I think going forward, as we mentioned in the call, they're looking for a turnkey solution and us providing everything from gas through the delivery of the electron into the building at the right voltage in the right way, whether it's a DC or an AC in the building. All of that is something that we can put into the mix and handle all that. So I think it will be a mixture. I think our ideal location would be where we do it all and manage the whole pod. And I think that does drive kind of capital per megawatt up and driving us to really the metric of return on capital is our focus, not really on per megawatt that we're delivering. And so it is a mixture. I think we're seeing all of it, and we'll continue to perform all of it. Amanda Brock: David, what we're excited about is in the conversations that we've had and the contracts that we have closed to date, during those negotiations, as people understood what our capability was, their desire for that turnkey solution and increasing what they wanted us to deliver to the project was meaningful. And in the conversations that we are still having for future opportunities, we are seeing that same trend. As Bill said, turnkey solution, we want you to do more. And we certainly have proven that we can deploy quickly, that we can generate the power needed. And beyond that now with the capabilities we've assembled, we do see that as a trend. But as Bill said, we have the ability to do just generation, the ability to do it all or in the cases that we've also laid out, the ability to just do projects where it's just distribution and doesn't include generation. It's a great platform for us to be offering. Operator: The next question comes from Derek Podhaizer with Piper Sandler. Derek Podhaizer: I just want to expand on David's question. Just you talked about the general alignment towards a more standard contractual arrangement, more streamlined to contract. Could you just provide maybe some further detail on these comments and how we should think about you getting these power contracts over the finish line more efficiently moving forward? William Zartler: Well, I mean, there's a lot of devil in detail on contracts, and we have built our businesses over the last 30 years around ensuring that we develop the right risk profile for us and the right delivery for the customer. And that's -- there's a lot of work that goes into that on both sides to ensure that both sides get what they need. I can say with assuredness that we have signed contracts that we believe don't have company ending liabilities in them, and I think they're very acceptable as we've fought hard for those positions and our customers have fought hard for other sides of that. But I think we've developed a standard -- I mean when you're developing new kind of lines of businesses and they don't really have a standard contract developed for the industry, and we saw this in the water side. We saw this in the sand silo business that we're forging new ground and developing the right contractual underpinning really does establish us as a leader and builds a relationship with the customers on what the profile of this business should look like for all. Kyle Ramachandran: And I think one addition to that is through this process, I think we've really established tremendous trust. Our track record provides obviously credibility internally in these organizations, and we've been there, done that in terms of providing this kind of resiliency. So I think not only have the terms come to a point where we've got a good form to move forward, but there's also over the course of those discussions, we've really established ourselves internally in organizations that don't have necessarily a long track record of doing these types of applications to support their compute needs. And so this is new ground for them, but I think we've demonstrated the credibility that's required to get them comfortable. Amanda Brock: It's been helpful to refer to the uptime that we have had at projects where we're operating, and it makes it easier as a consequence to negotiate your uptime requirements and new contracts. You can actually point to actual operations. Derrick Whitfield: Right, right. That's very helpful. So just looking at your megawatts, counting them up between the 3 hyperscaler contracts, some it's still in the energy patch. It seems like you had about a gigawatt of available capacity. How should we think about that as you deploy those remaining megawatts, whether that's expanding your current contract scope with one of the 3 customers or potentially going after customer #4? William Zartler: I think it's going to be maybe a combination of all the above. Operator: The next question comes from Dave Anderson with Barclays. John Anderson: Just coming back to the balance of plant side of your business. How much of that 2 gigawatts plus you have under contract includes balance of plant? And previously, you've talked about a potential 20% to 50% uplift from EBITDA from balance of plant. It looks like you're assuming in the presentation kind of the low end of that guidance. So how do you get to the high end? Does it fluctuate depending on the capabilities delivered? Does that increase over time if you add storage? Just some more color on how that potentially works over the life of the contract. Kyle Ramachandran: Yes. I think, Dave, the 20% to 50% is still the right way to think about it. And you're correct. What we've alluded to in the updated numbers is, I'll say, on the lower end of that. And I think that speaks to the conservative nature of how we provide guidance. What we are articulating here is what is actually under contract signed to date. And what we have in the slide deck as well as an outline of another $800 million to $1 billion of additional CapEx that we have very good line of sight of that getting contracted at $160 million to $200 million of incremental EBITDA. So we haven't put it in as the -- I think it's $875 million to $925 million is sort of the outlook, if you will, that is excluded from that. But what we're articulating there is we don't have anything signed on that expansion beyond the current piece, but very good line of sight, just like we've done it on the generation side. So you're right in terms of backing into the lower end of the range based on what has been signed in the last couple of weeks, but we feel very good about the visibility that we have to expand that beyond that lower end of the range based on the visibility that we have. And yes, the final point is different customers have different needs and different approaches in terms of how they want to capitalize this as well. And so some of the customers like in the Stateline instance, we're only doing generation. And as we look at the other 2 contracts, there's some shaping depending on the location and the customers as to what they want. But to be very clear, the generation itself requires all the balance of plant to make it all work. So we're either buying it, capitalizing it and embedding it in the rate or the customer is doing it. And so it just depends on kind of what their framework looks like. Amanda Brock: The last 2 contracts include balance of plant. John Anderson: Okay. Great. And if I could also just ask a non-power question, maybe give a little love just how the business doesn't -- we don't hear a lot about outlook has obviously changed quite a bit now over the next 12 months. A lot of talk about North America E&P is picking up, oil prices structurally higher. How are you thinking about this business now strategically? Is this something you want to grow into? Are you considering divesting it? Or is this just kind of a nice cash flow stream that should really build over the next coming quarters and potentially years? William Zartler: Yes. Right now, it's a great business. It doesn't feel like time to monetize it. We continue to see customer growth and wins in that business. And the market in North America, as you mentioned, feels like we're on a bit of an upswing. It may not be a rapid upswing, which is actually the better kind of slow roll into growing our production in North America is better than the spiky reactions. And so I think that the capital that's there in our customer base is very strong. And I think at this point, it's a great business for us to hold on to and evaluate as we go along. The cash is irreplaceable in a lot of ways today. And so we're enjoying that. And I think there's surprisingly been a significant number of engineering and operational synergies across the business lines that are underappreciated. The notion that we are extremely quick to solve problems on the oilfield side of it, extremely quick to be able to mobilize and demob. All of those embedded skill sets and engineering talents have applied very, very well into the turbine industry as we and customers expect speed and want speed and speed wins and speed is important. That's something that really ports over from the oilfield side of this very, very well in the culture and in the team. Operator: The next question comes from Derrick Whitfield with Texas Capital. Derrick Whitfield: First, certainly, congrats to you guys on your commercial success to date. It seems that your execution and balance of plant expertise is increasingly driving success for you. Maybe focusing on balance of plant, how should we think about how that could further evolve from the standpoint of your competitive offering beyond the typical transformer switch gears, cables, et cetera? William Zartler: Well, I think it evolves a little bit on the life cycle potentially. I mean, obviously, with the growing installed base of smaller turbines, the repair and maintenance function that we grow alongside of this is really important, and we're working hard to develop our own protocols and our own internal skills and capabilities to ensure that as these things, they're going to have mechanical -- the mechanical things, and that means somebody is going to have to repair them from time to time. And so as we build up that skill set, find training, labor is a challenge, building up our own labor training force across the board is really going to be an important element to how we grow. From a balance of plant perspective, I think we have -- at this point, we're not going into the building, and that's not an area where we will play. But everything from the building to ensuring that the gas is delivered and even if we need to and get a return on, build small pipes into the facility for making sure that the gas is delivered in the way we need it and then all the pressure control systems on top of that. So it's a pretty diverse offering, and we're thinking about the life cycle of this business as well, knowing that you're building something that's here going to be there for 10 to 15 to 20 years, you need to be able to take care of it. Derrick Whitfield: Great. And as my follow-up, and this is maybe for Amanda. Regarding the pilot research program with one of your clients for the development of mobile distributed compute, could you speak to how this came together and potentially the upside from this development as you see it today? Amanda Brock: We've obviously been working with that particular technology company. And when you become embedded in a company and they understand what your capabilities are, different teams get introduced to you. And that's exactly what happened here. We were introduced to another team that understood that we had distribution and design capabilities. They asked us to look at a particular design they had for modular compute. We looked at it. We came up with some changes. It was an aha moment for them, and they said, "Great, could you please work with us on this project?" So it's really a function of being embedded with a customer. We keep using that word. But once you are working with the customer and they see your capabilities, you get greater traction across the various departments and teams in that customer's company. Operator: Our next question comes from Bobby Brooks with Northland Capital Markets. Robert Brooks: I was just curious first to hear on the customer conversations. Just over the past 9 months, have more potential customers entered the discussion? Or have the discussions just progressed to negotiations over that time from mostly the same group of folks that you were talking to, say, 9 months ago? William Zartler: I think that there are more customers really figuring out that the behind-the-meter strategy is going to be a very important part of their power supply for their data use. And so I think we have seen more direct customers. We've tried to focus on the end user. They're faced with quite an array of decisions on where to go put their data center and who to have build that part of it. And we've tried to be supportive of the ultimate end customer and focus on we'll put the power where you think you need it, when you need it and allow that dynamic to be ruled and it's been quite a dynamic. The big data users have had selection challenges in terms of where you put these data centers and the pushback from the public environment as well as the drive to provide your power with this has really led them to the final conclusion that we've kind of seen is that it makes sense to bring this power along with you and pair it up with the right sites. Robert Brooks: Really appreciate that. And it was awesome seeing you secure another 900 megawatts in the quarter, and some of those were buying queues in the slot, right? And so my question is, do you see more opportunities to do that? I ask that because it's my understanding there is a decent amount of what I'll call speculators in the queue of turbine backlog that thought they could just kind of buy turbines and be a mini SEI. But they're now realizing that how much technical expertise is needed on the service side and that customers aren't interested in someone just dropping gensets off without any of the service capabilities or the balance of plant power stuff that you've been touching on earlier. So I think there's more opportunities for you to buy those delivery slots that are more near term, but maybe I'm off base. So I just was curious to hear your thoughts. William Zartler: Well, Bobby, you're hired as a sales guy. That's exactly what -- I mean, I think the notion that you could get in queue and buy all this stuff and be prepared to go put it to work as a powered land guy or as a data center developer. It's not that simple and developing and proving and running a couple of sites now and developing how this goes really will matter. And I think that cleaning out, if you will, of the queue, I mean, that's exactly what we did in one case. And in some cases, it's not necessarily the fault of the person that bought the engines, they may end up with some sort of idea that you could put this in an area that the local folks were not going to let you put a data center. So we've seen some backlash publicly about where the data centers can go and where they can't go. And so some of that is turning power back on the market. And yes, we're positioned to be able to take that power on and put it to work in the time frames. And so I think that, that really goes to ensuring that we have all the balance of plant stuff with it, right? As Kyle mentioned, the generators is just a generator, you got to have all the other kit with it and that kit has some lead times and some expertise associated with it as well. So ensuring that what we ultimately deliver is a power electron to a data center requires a lot more than just the generation. And I think we're prepared to take advantage of that and then scoop up opportunistically where we see things coming up earlier in the queue that the customers are very interested in. Kyle Ramachandran: The real blue sky there is, as we've alluded to this morning, we are now partnered with 3 of the major leaders in this field that puts us in a position to put that incremental capacity to work very quickly with groups that we're already working with. Operator: Our next question comes from Patrick [indiscernible] with Stifel. Stephen Gengaro: It's Pat on for Stephen Gengaro. Shifting to more near term here. When we think about the third quarter guide, is there any color you can give about the power deployments there and mix of third-party assets? And then any insights into deployment ramp into 4Q? William Zartler: I'll make a couple of comments. One, we're building this business for 2030, 2029, and the quarterly ramp-up here has been a pretty steady and measured rate with a lot of mixed dynamics over the course of last year. And I think we're going to continue to see that over the next several quarters as we ramp up. I think our -- where expectations in the third quarter are, I think that the market may have gotten a little exuberant about how quick things are rolling out. I think we're measured in our approach and have been generally conservative, but our long-term targets are there. The timing at which stuff gets put together, whether it's in the first month in the quarter or the last month in the quarter, swings the number still more meaningful than it should. As we grow into it, it won't. But we're in that growth phase that plus or minus a couple of months does swing quarter-on-quarter numbers, which is really not our focus. Our focus is ensuring the long-term delivery of the numbers that we forecast. Stephen Gengaro: Right. Yes. Okay. And then for the 500-megawatt contract, what sort of capacity should we think about this starting at beginning in 2027? And then just curious, like for the turbine delivery slots, are the prices and delivery dates sort of fixed there? Amanda Brock: On the turbine delivery slots, the prices are fixed. Delivery dates, we are -- we have an opportunity to move some up which we are working on right now. So we -- and again, as Kyle said in his prepared remarks, we've diversified and derisked some of that supply chain by working with multiple OEMs. So we feel pretty good about our turbine deliveries when to expect them and certainly price is fixed. Kyle, on the OEM. Kyle Ramachandran: Yes. And all the 500, they all go under contract at the beginning of the year, but there is a ramping of actual deployment based on the ramp in the data center. So it will ramp throughout the course of '27 of actual spinning turbines, but they all go under rent under the dry lease convention that we alluded to when the contract was put in place. And then as they get deployed and start operating the sort of wet lease convention, including the equivalent of a fired hour charge comes in. Operator: Our next question comes from Jerry Revich with Wells Fargo. Jerry Revich: This is Kevin Uherek on for Jerry Revich. Just had a quick question on the quarter. Power Solutions revenue and EBITDA per megawatt both increased on a sequential basis from 4Q. Can you just walk through the moving pieces? William Zartler: We had more equipment that we rented more of. I'm not sure we've -- the revenue was up... Jerry Revich: On a per megawatt basis sequentially. Kyle Ramachandran: Yes, there was some mix impact there and some of the pieces of the new contracts that came in. William Zartler: Yes. And if you have a -- so using that per megawatt metric, as we mentioned earlier, if there is pure distribution that's being rented and it doesn't have a megawatt of generation capacity against it, that's going to show an infinite return on the megawatt. So we're really focused on return on capital and earnings. So yes, the mix shifts around there is going to move that metric around a little bit. Jerry Revich: Understood. And then when we think about the capacity additions pipeline, how has that opportunity funnel changed, stayed the same versus the prior period? Amanda Brock: In terms of the megawatts that we have available, I think as we've indicated, we are in detailed discussions with a number of parties. And I think Bill answered some of them are existing customers that we have signed up with and some are new. So yes, there is a robust pipeline. We're very happy to be in this position where we have got additional capacity to put to work. And if the past is an indication of the future, this is going to be another great outlook when we put this to work. Operator: The next question comes from Jeff LeBlanc with TPH. Jeffrey LeBlanc: I just had a quick one. With respect to the enhanced scope, how should we think about the lead times of the equipment embedded in your active pipeline? Kyle Ramachandran: They're inside of the dates of the turbines, generally speaking, at the voltages that we're operating at. So the turbines and quite frankly, the SCRs continue to be the long lead item in the scope. But as we're developing these projects with customers, we are sequencing the timing of placing purchase orders for all the long leads to ensure that we can -- to meet the energization schedule the customers have. But in general, the balance of plant where we are is still inside of where the turbines SCRs are. Operator: The next question comes from Scott Gruber with Citigroup. Scott Gruber: So last call, you discussed about a 20% to 50% uplift on the invested capital on these integrated projects. I want to double check that the baseline for that uplift is against the $1.1 million per megawatt that's kind of been the blended average. And more importantly, kind of how do we think about the return profile on the turnkey projects with greater scope? Just some color on how the payback evolves, if at all, with greater scope would be great. Kyle Ramachandran: Well, I think broadly speaking, Scott, the price of power is going up. OEM prices are going up. There's a recent big project announced by the White House in Ohio, and that's penciling out at roughly $3,500 per kilowatt as far as upfront capital. So our installed base and even on an incremental basis is very attractive relative to what the larger scale, longer time line kind of opportunities are. So from a return standpoint, we still look at north of 20% unlevered returns as sort of our target. And I think with respect to the incremental megawatt going on to the grid, we are still very attractive to the customers. So I think there will be puts and takes with respect to our incremental capital costs as OEM prices continue to go up, but there is a recognition within the customer base that, that is just the cost of doing business at this point. Scott Gruber: Yes. I appreciate that. And then as you push forward with these integrated solutions and you're now building diversity into your data center book of business, which is great to see. How do you think about the smaller oil and gas deals or any type of smaller deals in other verticals? You get end market diversity with those contracts, but you're locking in capacity on shorter-term contracts with fewer calories attached. But do you start to tilt away from those smaller kind of nonintegrated projects? Or do you still like that diversity in the book? William Zartler: We love all of our children, Scott. No, I think the shorter-term contracts are going to be priced that way as well. So I think that the portfolio will have a mixture of some shorter term, longer term and a little bit of open capacity for spot work here and there from emergencies and other places where you are going to get tremendous returns on capital. And so I think our business is going to be heavily weighted towards from a magnitude perspective, long-term contracts with data centers or large industrial loads. And there'll be a small portion of that, that's a little bit more spot in short term that should see more attractive returns. Operator: The next question comes from Jeff Bellman with Daniel Energy Partners. Jeffrey Bellman: So you've laid out how you're broadening into a much more integrated power platform. But I'm curious, as customers move towards these gigawatt and larger campuses, what's the hardest part of scaling your model? And I'm not asking for any specifics, but how do you decide what to build organically inside Solaris or outsource or partner with other providers? William Zartler: Well, one of the reasons we bought the distribution business was to have that in-house. And clearly, we're not an OEM on transformers and switchgear and the things. So we are doing some of our own assembly work and e-house building and some construction things. And so I think it is a situation dependent on where we need to accelerate. We've made an investment in an SCR manufacturing business earlier this year and see that as very strategic and building our relationship on that side as those are a bottleneck as well as the catalysts associated with the SCR. So I think we look at the set of equipment out there, recognize where we've got strength and advantages, recognize that where we don't and use partner up in areas where they'll really be helpful to us and we'll be helpful to them in putting it all to work. So I think it's -- there's not really one size fits all here. And obviously, the bigger they are, the larger the footprint, the larger the people needs to do all the installation work and how we partner with various engineering firms and various other subcontractors to make it all work is already part of what we're doing on a regular basis. Kyle Ramachandran: I think the overall sort of incremental generation source is evolving as well. And if we look at where we started, we were deploying 20 to 35.5 megawatt units on a site and now the incremental unit is roughly 16.5 megawatts. And as the data centers themselves get larger, we can look at the shaping of the fleet is potentially evolving to include some larger units. We've got the 38-megawatt units going out to a data center in 2026. And so that shaping, I think, will also continue to evolve. Operator: The next question comes from Don Crist with Johnson Rice. Donald Crist: Just one question for me on the JV. As it builds out and starts to generate more revenue, what is the source or what is the use of that capital that's going to come back to the JV? Is it to pay down debt? Or will you use that for cash flow to support the rest of the business? Just where is that cash flow going to go initially at least? Kyle Ramachandran: Yes, Don, there's debt servicing requirements down at the JV, interest and amortization. But beyond that, both ourselves and our partner in the JV, the reason that structure was put in place was to create the ability to distribute cash out of it. And so once the requirements on the debt facility with respect to interest and amortization are satisfied, all the cash is available to be distributed up to both Solaris and our partner. And so that will be available cash to continue to grow the business as all other sources of cash for us. Donald Crist: Okay. So that can offset some of the CapEx requirements you may have in other places? Kyle Ramachandran: Yes. Operator: This concludes our question-and-answer session. I would like to turn the conference back over to Bill Zartler for any closing remarks. William Zartler: Thank you all for joining us today. Our first quarter demonstrated once again that our strategy is working. Our team is executing and the company is growing quickly. We're building the company we described, a vertically integrated behind-the-meter power business from molecule to electron, serving the data center and industrial market at scale. It's rewarding to see the milestones we're exceeding and progress we're making. A sincere thank you to all our employees, customers and partners. Your dedication and trust are the foundation of everything we're building. We look forward to sharing our continued progress over the next quarter. Thanks again, and have a great day. Operator: The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
Operator: Good day, and thank you for standing by. Welcome to the CECO Environmental First Quarter 2026 Earnings Call. [Operator Instructions] Please be advised that today's conference is being recorded. [Operator Instructions] I would now like to hand the conference over to your speaker today, Marcio Pinto, Vice President of Corporate Integration and Investor Relations. Marcio Pinto: Thank you, Josh, and thank you for joining us today on the CECO Environmental First Quarter 2026 Earnings Call. On the call with me today is Todd Gleason, Chief Executive Officer; and Peter Johansson, Chief Financial Officer. As a reminder, we're covering CECO Environmental's first quarter 2026 earnings results on a stand-alone basis. This quarter's webcast, earnings release and presentation, which include relevant disclosures and non-GAAP reconciliations are available on our website. Today's discussion includes forward-looking statements that are subject to risks and uncertainties, including the ones described in our SEC filings, as we have noted in our presentation legal disclosures. As always, we will leave time at the end of the call for analyst questions. And with that, I'll turn the call over to Todd Todd Gleason: . Thanks, Marcio, and good day, everyone. We are off to a strong start to 2026, and I look forward to sharing our progress. As always, I would like to thank Team CECO for your ongoing commitment to deliver for our customers and, of course, driving such strong results. Please turn to Slide #4, and let's discuss some of the key takeaways. Starting on the left side of the slide, we delivered another strong quarter with numerous financial records, headlined by tremendous orders, which increased our backlog to new levels. Revenue and EBITDA results were solidly in line with our expectations and position us nicely for the full year with strong continued momentum. Speaking of momentum, we don't just expect our second quarter to set new records for orders. We know it. The month of April alone is already higher than the record we just set in Q1. I will expand on this more in a few minutes. Even with the backdrop of uncertainty related to the Iran war and modestly higher inflation, we are raising our full year 2026 outlook, not inclusive of Thermon. Our growth trajectory remains robust, and we have nice visibility to our revenue and margin profile in our record backlog as well as larger-than-ever sales pipeline. This is our second guidance raise this year, and we are pleased to highlight our continued high performance. On the right side of the slide, we note the continued progress we are making with respect to the Thermon transaction. We remain on track for a Q2 close, and our current expectation is sometime in early June. Representatives from each company are working together on integration items and preparing for post-closing activities. We remain highly confident in the $40 million cost synergies we previously outlined, and we are evaluating additional opportunities as well as attractive commercial synergies. The combination is bolstered by each company's strong momentum and continued growth outlook. The combination into CECO Environmental will create a leading diversified global industrial company, and we are very excited to demonstrate the power of this combination. Additionally, over the past number of weeks, I've had the chance to meet hundreds of Thermon employees. The Thermon operating culture is very similar to how our businesses and operational teams function. And similar to CECO, I am incredibly impressed by their energy, their passion and market knowledge. Across the board, Thermon is a great company and will make for a very powerful combination. Now please turn to Slide #5, and let's review financials in a little bit more detail. This summary slide captures the main highlights for our first quarter, record backlog, record orders, strong revenue delivery and accelerating earnings. Our backlog is at its highest level ever, now over $1 billion, up almost 72% year-over-year. Revenue growth of 17% and adjusted EBITDA growth of 46% speak to our high-performance results. Our sales pipeline has grown to over $7 billion, which is the outcome of focused investments to best position our portfolio, the addition of diversified talent, the introduction of new commercial programs, our expanded global reach and our passion to advance market-leading engineered solutions. Now please turn to Slide #6. In the quarter, we continued our bookings momentum with orders of $449 million, an increase of 97%. To put that in perspective, we booked $221 million more in orders this year than we did in Q1 last year. That $221 million would have been a record on its own about a year ago. And when I joined CECO in 2020, we were averaging about $90 million a quarter. We have come a long way since then, and I believe we're just getting started. Speaking of just getting started, while the power super cycle has been in the headlines for over a year, CECO's participation is starting to hit its stride and gain further momentum. In the first quarter, we had several very nice orders servicing this power generation market. We are also seeing strong activity in natural gas infrastructure, semiconductor sectors, electronics in general, industrial water and U.S. industrial reshoring. We believe these markets remain attractive for the medium to longer term. And don't just take my word for it. As the right side of the slide highlights, and as I already mentioned, in April alone, we already booked over $400 million in new orders. That's almost $200 million more than we booked in all of Q2 2025, which at the time was a record. Yes, our April bookings alone is already larger than our just announced first quarter record of $449 million. Included in this April number is our largest ever order. This one in the range of $300 million, which also serves the natural gas power generation market as we provide advanced emissions and noise abatement solutions. These are exciting times at CECO. And with our growing pipeline, we are bullish for our full year orders and backlog, which we believe will drive strong double-digit sales for a very sustainable period. And before I hand it over to Peter, let's move to Slide #7. To be brief, we are raising our full year 2026 guidance again. Our updated revenue outlook now expects sales to be between $940 million and $1 billion. It is exciting for us to highlight an outlook that includes sales of $1 billion for the first time ever. The midpoint of our revenue guidance now calls for organic sales to grow approximately 25% for the full year. We are also increasing our adjusted EBITDA outlook to $120 million to $140 million. The midpoint of this outlook calls for an approximate 44% EBITDA growth and 170 basis points of margin expansion for the full year. We continue to grow -- excuse me, we continue to invest in growth while delivering sustainable margin expansion and utilizing the results of nice volume leverage. And with the recent implementation of 80/20, coupled with our ongoing excellent operating excellence programs, we are making meaningful progress and expect more margin expansion ahead. I will now hand it over to Peter, who will go into more detail on our financial results. Peter? Peter Johansson: Thank you, Todd. Good day, everyone. Thank you for joining Todd and I for CECO's First Quarter 2026 Earnings Call this morning. Please turn to Slide #9, and I will provide more color on CECO's financial results for the quarter. CECO started 2026 with very strong results on most of our key metrics, continuing the momentum we built throughout 2025. We finished the first quarter with a record backlog of $1.035 billion, up 72% versus prior year and 31%, equivalent to $242 million sequentially. Backlog has now increased for 11 consecutive quarters and has surged upwards in the most recent 6 quarters, each delivering greater than $200 million in orders across a wide and highly diversified range of end markets, including power generation, liquefied natural gas, midstream gas transport and treatment, hydrocarbon processing, semiconductor and electronics and industrial water applications. First quarter orders were $449 million, a company record, representing a 97% increase over the prior year period or a book-to-bill of approximately 2.2. On a trailing 12-month basis, bookings reached $1.286 billion, a 71% increase over the prior trailing 12-month period, representing a book-to-bill of nearly 1.6. Revenue in the first quarter was $206 million, an increase of 17% year-over-year, reflecting a strong start to the year following CECO's record revenue quarter in the fourth quarter of 2025, which delivered $215 million. Revenue in the quarter overcame headwinds from the sale of the Global Pump Solutions business, which represented $14 million of revenue in the first quarter of 2025, a sale which closed at the quarter's end last year. On a TTM basis, revenue was $804 million, a record for any 12-month period in company history, up 32% or $195 million. Quarter 1 is typically CECO's seasonally smallest revenue quarter in the year. And with our growing backlog and strong opportunity pipeline, we are confident to deliver sequential revenue increases throughout 2026. Gross profit for the quarter and for the trailing 12 months increased 3% and 27%, respectively, on higher volumes. Margins, however, did experience contraction in quarter 1, which was anticipated given last year's sale of the higher-margin but nonstrategic global pump business, combined with the revenue timing of lower-margin jobs booked in early 2025. We expect margins to improve in the second quarter and trend back towards our target gross profit margin level of 34% or greater as we progress throughout the year on improving volume mix dynamics on more recently booked large projects and new projects with faster revenue recognition profiles and improved cost cases. Adjusted EBITDA was $20.4 million in the quarter, an increase of 46% versus prior year for a margin of approximately 10%, a nearly 200 basis point improvement over prior year. First quarter adjusted EBITDA far surpassed any prior Q1 in company history. For the trailing 12-month period, adjusted EBITDA was $96.7 million, representing a margin of 12%, an increase of nearly 160 basis points, continuing the consistent trend of margin expansion toward our long-term goal of mid-teens adjusted EBITDA margin. A large part of the improvement came from lower operating G&A expenses as volume from large projects starts to be realized and the initial benefits from our Wave 1 80/20 projects. Corporate G&A spending was lower, reflecting the benefits from cost management actions taken in the middle of 2025. Please now turn to Page 10 for a quick look at how backlog is trending. Backlog growth continues to accelerate on a sequential basis with a book-to-bill in the quarter of approximately 2.2x, resulting in a record for any quarter ending backlog. Backlog, which reflects future sales has now increased nearly fivefold since the end of 2021. This sustained strong orders performance when combined with our continued success in converting our growing $7 billion opportunity pipeline to new orders, underpins our 25% plus top line organic revenue growth for 2026. Orders in the quarter benefited from strong activity in natural gas power generation and industrial water applications, and this trend has continued into early second quarter. And we now expect to deliver another record quarter that will drive our backlog level even higher. Now please turn to Page 11 for a look at adjusted EBITDA and margin trends. With the delivery in quarter 1 of $20.4 million of adjusted EBITDA, the trailing 12-month period has reached $96.7 million of adjusted EBITDA and a 12% margin, both company records. We have expanded our TTM adjusted EBITDA margin steadily since 2022, a trend that we expect to continue throughout 2026 as we continue to target reaching a mid-teens adjusted EBITDA margin for stand-alone CECO. And we expect to cross the $100 million level for adjusted EBITDA very shortly. SG&A spending was down 14% or $7.5 million in the quarter on a year-over-year basis, reflecting an 800 basis point improvement as a percentage of revenue. This result overcame increased spending on seasonal items, including the payment of cash bonuses and sales incentives on our growing order base. For the remainder of 2026, we will continue to utilize the resources of our newly formed business transformation office and operating excellence teams to extend the deployment of our 80/20 strategy across more of CECO and to deliver incremental material sourcing and project execution benefits. Now please turn with me to Slide 12 for an update on cash flow and indebtedness. Quarter 1 cash flow for CECO is seasonally down to start the year, and this year was no exception. In the first quarter, we consumed approximately $16 million of cash, in line with 2025 on lower sales and order activity. Working capital was a headwind in the quarter as contract assets and customer AR grew while we executed against our growing backlog and issued substantial billings for milestones achieved in the quarter that we expect to collect in the second quarter. We also incurred material costs and cash expenses related to the Thermon transaction. Cash flow would have been in positive territory, except for a customer payment of nearly $20 million that was delayed but already received here early in the second quarter. We expect cash flow in the second quarter to revert back to a positive state, benefiting from billings in the first quarter, and we've already begun receiving large cash payments in April. Capital expenditure in the quarter was largely driven by our ongoing ERP implementation initiative, which we expect to be essentially completed by the end of 2026. Gross debt at the end of the first quarter increased by approximately $43 million from year-end 2025 as we used our revolver facility to finance the growth in working capital and expenses related to the Thermon transaction. Net debt increased by $31 million as our quarter ending cash balances grew by approximately $12.5 million, resulting in a comfortable quarter end leverage ratio of 2.3x, a modest increase of 1/10 of a turn from year-end 2025 as our leverage ratio also benefited from the increase in our trailing 12-month adjusted EBITDA delivery. During the quarter, we amended our credit agreement to increase financial capacity and liquidity and to improve certain covenants in support of CECO's continued strategic investments in organic growth and our programmatic acquisition strategy. We have now up to $975 million in committed funds on our amended credit agreement comprised of $740 million of revolver capacity and $235 million in a delayed draw term loan. With a Q1 ending 2026 gross debt of $252 million, we have $723 million in additional capacity to fund the cash portion of the Thermon acquisition and to use for further organic growth investments and working capital needs post closing. That concludes my review of CECO's first quarter financial results. I will now pass it back to Todd for wrap-up and final remarks. Todd Gleason: Thanks, Peter. Before I close, I want to share some additional thoughts and updates on the Thermon acquisition, a historic transaction for CECO and a major step forward in our strategic transformation. Please turn to Slide 14. The addition of Thermon will meaningfully extend CECO's leadership in industrial, environmental and engineered solutions by adding Thermon's established position in process heating, heat tracing and temperature management, creating a world-class industrial solutions platform with robust multiyear growth trajectory and a very strong and stable financial profile. This combination brings together 2 highly complementary businesses, creating opportunities to accelerate growth and expand accretive capital deployment. Bruce Thames, Thermon's CEO and I are aligned in our enthusiasm for the future of the combined company and our respective teams. We expect the combination of CECO and Thermon will create a stronger enterprise, one that is well positioned to be a Rule of 30 or Rule of 40 company. By driving strong double-digit growth and producing enhanced operating margins, we believe we can achieve these levels and sustain very high performance. With our healthy balance sheet and robust free cash flow generation, we can accelerate shareholder value creation across a range of options. I'm excited to continue to lead the combined company with an estimated $1.5 billion in current run rate sales and with tremendous growth and synergy opportunities to take this much higher. I look forward to welcoming key additions across the leadership team as well as Board of Directors. We have a lot to do. We have a lot of value to create. Now moving to Slide 15. Before we open up the call to questions, we'll conclude with this. CECO is very well positioned for today, very well positioned for tomorrow, and we believe our sustainable operating model makes us uniquely positioned for the long term. The combination with Thermon bolsters our portfolio with additional injection of leading businesses and great talent. More to come as we work towards a Q2 transaction close. Extremely proud of our team and all they do to serve our global customers. The first quarter is just another indication of our fantastic leadership and balance. With 97% orders growth and 17% revenue growth, we continue to demonstrate our investments pay off as we add installed base and advance our market positions. And finally, while this might be the final quarter as CECO stand-alone ahead of the combination with Thermon, we are once again pleased to raise our full year guidance. The visibility we have in our strong backlog and robust sales pipeline is truly unique and gives us a lot of confidence in the year ahead and years to come. We'll now open the line to questions. Operator? Operator: [Operator Instructions] And our first question comes from Aaron Spychalla with Craig-Hallum Capital Group. Aaron Spychalla: Maybe first for me, good to see the pipeline grow to $7 billion plus even with the strong activity. Can you maybe talk about the drivers of that? And then on Power Gen specifically, last quarter, you talked about a $1 billion to $2 billion kind of medium-term pipeline with visibility beyond that. Can you just maybe give an update there? It really seems like order sizes are starting to pick up. Maybe touch on just delivery time lines of some of these orders and then the supply chain ability to kind of meet everything that seems to be really accelerating for you. Todd Gleason: Yes. Thanks, Aaron. So the $7 billion, it's actually about $7.3 billion, I think Peter would say, of sales pipeline. Just to remind you and I guess, the audience, the way we calculate our sales pipeline is actual job pursuits, order pursuits opportunities that we see booking in the next 1 year to 2 years. We kind of average it at around 18 months, but some of the projects might be a little further out. So we don't include things that are beyond that. And then obviously, they work through the funnel to a win-loss opportunity in the current quarter. And so we've been growing the sales pipeline steadily through a range of investments as well as geographic reach and how our markets have been performing, which have been growing for the last few years. When I joined CECO in 2020, our sales pipeline was closer to $1 billion, $1.5 billion. So to be at $7 billion, I think, really speaks to this intentional expansion of how we look at our markets geographically, how we look at our markets industrially, and that's going to continue. Look, we've been pretty consistent. The -- to get that sales pipeline to greater than $7 billion, the investments are required, the expansion into new markets organically and inorganically is required. And we benefited from those investments. But look, we're also certainly benefiting from the tides rising in some of our most important markets. Natural gas power, natural gas infrastructure. So power generation writ large is a headline that everyone sees. That's been a significant driver and has certainly probably added about $1 billion to our pipeline over the last few years alone. And not all of that's in our $7 billion, where we're seeing more that we just haven't put in yet because it's a little further out, but we're in conversations about how that power generation market is expanding. And then we have ebbs and flows. We have some markets that 1 year are fantastic, but then they pull back a little bit the next year. This year, we're looking at still continued strong growth in all things, electrification and digitization. And Thermon has a very large focus themselves on digitization as well as decarbonization, which ties into the electrification theme. So we're very unified and thematic focused on where we see the market. Semiconductor expansion is sort of ripping at the moment as well, and we're well positioned for that in industrial air specifically. Industrial water is a market that we've been investing to expand into, and that might be approaching $1 billion of our pipeline now, where a few years ago, it was very little. So we continue to see just very strong themes across the reshoring U.S. market of industrial, all things digitization and electrification. Semiconductor, like I said, is certainly growing. And then look, I think we're just hitting our stride on some of the larger power projects as it relates to emissions and noise abatement and heat management and gas separation. So look, these are big markets that continue to want to get larger, and we're just participating very nicely in them. Aaron Spychalla: All right. And then maybe just -- I mean, as these are substantial backlog and pipeline, just comfort with the supply chain and just ability to meet everything? Todd Gleason: I think that's been one of our more important investments, Aaron, also that we probably don't highlight enough or as much. In order for us to secure some of these larger orders, including jobs that we've won over the last few years and certainly even over the last few quarters, you don't do so without a great supply chain and great partners and a series of redundant capabilities in fabrication and in supply chain. And so we've invested in our teams and our capabilities. Dan Berman and his team at sort of the corporate operating excellence group is continuing to go out and look for sourcing savings and additional sort of redundant supply chain capabilities and really do a great job with logistics and quality. And then across all of our businesses in our Thermal Acoustics and emissions management all the way through, they're constantly out validating new supply chain partners in North America, in East Asia, Southeast Asia, the Middle East, et cetera, India. And so we have a lot of visibility to our supply chain, which gives our customers more confidence in us maybe than in some of the competition because we've invested heavily in that effort. And so look, I think it's a really important question. We have nice visibility to our ability to secure the materials. Certainly, there's inflation out there. We do as smart a job, I feel is out there to aggressively prebuy or to lock in rates. And sometimes that prebuy shows up sort of negatively in our cash flows, but it's the right transaction for us because it protects margins for the long term. And so look, it's -- I would give Peter and the team in finance. Like I mentioned, the Dan Berman and his team, Martin and Tim Shhippey and their teams in our businesses, I could rattle off a dozen names where our project managers are working closely with our supply chain managers. But we're getting out ahead of this. We did this a year ago. We did this 6 months ago. Again, we could probably continue to sort of geek out on this topic, to be honest with you, because this is one of our major muscles as a company is the supply chain visibility. Aaron Spychalla: Good to hear. And then maybe last for me, just on the Middle East business. Can you kind of talk about impact there that you might be seeing or not? And then just any thoughts on timing for some of the larger water opportunities that you've been targeting there? Todd Gleason: Yes. Look, it's obviously an uncertain time and market in the Middle East. There have been certainly some impact to how our teams can travel and navigate and work on certain projects in the region. We don't have a tremendous amount of projects that were tied to our '26 performance that are in the region. We do have some very attractive programs in our pipeline that have been paused a bit until probably the second half of this year. We're opportunistic in thinking that this conflict can be managed in that period of time. But in our guidance, we have already accounted for any of those impacts. Obviously, our first quarter orders of $450-ish million. Our second quarter is already at $460 million. We're not even through April yet, speaks to the strength of our markets even with some pauses that are happening. in the Middle East with respect to some of these larger projects that we're -- that we still feel well positioned for. There will be a rebuild in the region to some extent when it all starts to, we think, stabilize. And there's uncertainty. Right now, we're navigating that uncertainty, and we'll keep everyone posted on sort of what -- just like the rest of our peers in the market on what we're seeing. But we feel comfortable with our guidance and our outlook. And by the way, we look forward to being at your conference, Aaron. Operator: Our next question comes from Gerard Sweeney with ROTH Capital. Gerard Sweeney: So a question on the power side. Obviously, it's great. I'm just curious, when do you get brought into some of these projects? So what I'm looking at is some of the turbine manufacturers saying they're sold out to 2029, et cetera. But if you're brought into the projects later in the cycle, that actually gives you visibility out to 2030, 2031 plus. I'm just curious as to how that all plays out. Peter Johansson: Jerry, we begin work with our large gas turbine customers, the engineering firms and the OEMs years before we receive an order. We're today receiving negotiating, working through technical configuration questions for orders that will deliver in 2029 and 2030. We essentially are done for the 2027 and 2028 installs. Now we're working on '29, '30 and beyond. So we're 3, 4 years [indiscernible] ahead of -- we have visibility. Now the interesting sideline to that is the repowering activity, which is taking an existing facility and updating it and upgrading it. That is something that happens much faster. It can happen in months generally not more than a 12-month conversion. That is not something that we typically are involved in years in advance. That happens really quickly. I would say Entergy is going through a program of updating every single one of their combined cycle plants. That was a unique case where we actually had a 3-year MSA in place to support them over an extended period of time, but that's a rare instance. Gerard Sweeney: Got it. Okay. And then obviously, you talked a little bit about margins, 80/20, et cetera. But even on the power side, hearing that some of the project pricing is going up. That pricing doesn't always flow through to margins, obviously, for inflation and other reasons. But obviously, lots of demand. How much does pricing play into maybe your margins -- margin expansion? Or is it more just keeping it steady with inflation and other aspects? Peter Johansson: Price for us is a lever to increase margins. We work with our large customers to ensure that we're capturing the most value on the project that we can. As it relates to natural gas power generation and the duration of the projects themselves, we include estimates in our pricing, in our cost case that accommodate or assume some level of inflation. We also have in our contracts with our customers, escalators that if we have in excess of inflation, we can return back to that client and ask for recovery. There are 2 commodities today that are probably most impacted, and we do a very good job of managing through that. And that is the catalyst, which is utilized in emissions treatment applications and specialty steels. Operator: Our next question comes from Rob Brown with Lake Street Capital Markets. Robert Brown: Congrats on the strong quarter. I guess just wanted to dig in a little more on the industrial water side. You noted that as an increasing pipeline strength. Is that a -- I guess, to what degree is that a market kind of trend versus just your expansion in that market and activity? And how do you see that playing out? Peter Johansson: We -- it's probably more our participation and entrance into the market. That said, I do -- we do see that there's a lot of investment in infrastructure, industrial water expansion in various geographies. I don't know that it's certainly a better market than potentially a few years ago. And we're not in a position, much like maybe Veolia might be able to say something about a 10-year trend. We're relatively new, although a number of us have decades of exposure and experience with water. It's not always on this industrial water side that we're talking about. And so look, our -- the businesses like Kemco and others that we've acquired, I think they'd say it's a healthy market right now and that they like -- they feel good about their organic growth and our organic growth in those businesses we've acquired. But it's really our entrance into some of the larger industrial water, produced water, water treatment side, where we can now do sort of very medium to large-scale complex skid solutions. And it's that investment for us to enter into that market that we feel that there's the opportunity. So we're confident it's growing. I wouldn't want to make a market call on that. I don't feel like we have the data to support how we would view this market over a long term. But we do see a lot of new investment in various geographies. Todd Gleason: Rob, there's two core trends that drive a lot of the demand in industrial water. The first is water scarcity. Water scarcity drives water providers, particularly to raise the water tariffs on industry, thinking they're a lot less susceptible or a lot more elastic to price increases. And as industry is experiencing those price increases on water, they're looking to do two things, cut down on the water they use and reuse as much as possible. It's the reuse trend that we're benefiting from as well as working with them to design less thirsty solutions in their processing applications. So we see 2 opportunities on industry that benefit us. And we do a lot of work in what you might call water scarce regions, North Africa, the Middle East, Southeast Asia, which are in even greater need of being more rational in their use of water. Robert Brown: Okay. Great. And then on the commercial synergies that you had -- I guess, as you've gotten into the Thermon acquisition work, have you -- what's sort of your sense of the commercial synergies? Are you feeling more confident there? And I guess just talk about commercial synergy opportunities you see? Todd Gleason: Yes. We're certainly very confident that there's attractive commercial synergies. We really haven't put a number around it yet, Rob. We want to wait until we have combined with Thermon. Our teams that are working on this, both formally on the integration to start to really put together a detailed program to assess and consolidate what a commercial synergy could look like. They're just getting started, and I wouldn't want to front-run the process a little bit. And then separately, we are now identifying already products that when we go out to bid on some of our projects that include heat trace, include immersion heaters, include other controls and other sort of solutions that Thermon is a leader in and has a very attractive both solution and product offering. Now we can certainly think about in the future once we're combined, incorporating a joint sales effort. We can't do that right now, obviously, but we can certainly start to assess and get proposals from Thermon where we may have not done so before as a supplier, and we've already started those activities where we've won some large projects that include some of their products, and we've reached out, and we've received separate proposals to now bring Thermon into the approved vendor process and approved bid process. So we're already seeing the millions of dollars of opportunity because there's -- we're an industrial company, they're an industrial company and our solutions and their solutions are often found in the exact same footprint of the same projects around the world. So there's going to be no shortage of opportunities for us here, Rob. If I were to say, can the combination add a couple of points of organic growth? I believe so, yes. We just want to provide the market, you and others with a more detailed analysis of what that looks like after we've combined and started to issue combined company outlook guidance and updates on our cost synergies as well as what we will introduce as updates on our commercial synergies. And until we really have that analysis done, I don't want to put a number around it. But it's -- we're growing -- there's no shortage of confidence and our teams are enjoying getting to know each other, including when we see each other at certain industrial conferences, I know our teams against each other at the Boiler conference, for example, and quite enjoyed comparing notes on the industry and how we can work together in the future. So there has already been a lot of gelling of ideas and thoughts. And when we combine, we'll have a much better answer for this question, but it's a positive number. Operator: Our next question comes from Bobby Brooks with Northland Capital Markets. Robert Brooks: Congrats on the fantastic quarter. So obviously, the power gen-related jobs have been fantastic. But I was just curious to hear more broadly, where are the next 2 biggest areas of strength for current orders? And maybe any context or thoughts of how that would evolve going forward? And any perspective of how that's evolved over the past couple of quarters? Todd Gleason: I'll start with an answer of 1 or 2, and then I think Peter can either sort of provide more context on those or give his perspective. Look, we're in a very positive market-leading position across a diversified set of industrial categories. So the good news is I have more than one answer. But I would say, and we've already said that the sort of the digitization and electrification of things is such a powerful theme. I'll highlight semiconductor expansion and investments as no doubt, a very strong market. And so that for us is most, if not all, but mostly industrial air, where we have some exciting opportunities that are included in our backlog that we booked, but in our sales pipeline. So I'll say semiconductor, without hesitation, looks like a very good market for the future -- for the foreseeable future. And in our industrial air business, we like how we're positioned there. And certainly, recently, we've seen powerful earnings from Intel and others. So I think it speaks to -- we're not alone in our view of that market. Industrial water is the other one that while we are seeing certainly a little bit of pause in some geographic regions, mainly the Middle East, those projects aren't going to go away. And we're well positioned for those projects, and they're meaningful for us in the future. And that diversification is also meaningful. You've heard me say, Bobby, to you when we've spoken, but -- and so this has been over many, many quarters. As we look forward to CECO 2030, when we look forward to CECO 2030, we believe industrial water is a major piece of our portfolio, and we're getting after it. And the market is there for us. So while we're talking about power as we should, and we're talking about power generation and natural gas infrastructure, which we should, there are major themes that we're going to take advantage of, and we're well positioned to do so organically over the next few years. So those are the 2 that I'm most excited about in the moment is semiconductor and industrial water. I think Peter probably has a view of gas infrastructure and some other markets. I'll let him expand. Peter Johansson: The natural gas infrastructure whole value chain is also a very -- a market of strength globally. Natural gas is the transition fuel, and it looks like that transition is going to be longer than anyone anticipated. From wellhead to consumer, there's a lot of points along the way where CECO Technologies, including from our Peerless and Profire brands and Thermon themselves have large roles to play in ensuring that natural gas gets delivered in a clean, dry and energetic manner. It isn't a day that doesn't pass when there isn't a new project, new pipeline, new spur, new consumer project being announced or highlighted. And we stand with Peerless and 100 years of experience in that market as a principal and critical supplier to those customers. And as we look at other opportunities around the value chain and things we can do together as Thermon and SECO, that's an area of commercial opportunity we continue to explore and expect to find real benefits from. Todd Gleason: And you don't have a -- I don't -- I've only been in the industrial space for 30 years, so maybe I need a little more experience on this comment. But you don't have a 2.2 book-to-bill without a number of end markets that we've invested in to achieve that. And especially when last year's book-to-bill in the first quarter was extremely large. I remember off the top of my head, but whether it was a 1.3, 1.4 book-to-bill. So we're not talking about easy comps here. We showed it on the slide. Last year's first quarter was up 50%, 60%. This year's first quarter bookings is up 97%. -- mathematically, and you've got calculators to prove this out, that just means our future sales growth looks when I say double digits, it's a layup to be double digits when you have a book-to-bill of 2.2. And so it's not just power for us, it can't be just one market. It's a diversified -- and we have some markets that are still recovering a little bit. Automotive and Europe geographically are sort of still navigating through some difficult times. And so look, there's some industries and some markets that aren't attractive at the moment in terms of their growth, but we still like where they're going to come out. And when they come out, we'll be positioned for them. Robert Brooks: That's super helpful color. I really appreciate it, Peter and Todd. And then just kind of switching back to the merger and talking to some investors since the last print, I don't think folks appreciate enough how Thermon will extend the windows of conversations with customers that you currently are having and how they should also benefit from your own internal network that spans across those dozens of industrial end markets that they have been trying to break into. So just with that in mind, could you expand on this a little bit? Todd Gleason: So yes, thanks, Bobby. Look, whether the market understands it or not, our customers understand it. When I say the market, whether the investment community completely appreciates it, they're a leader. Bruce, Tom, the leadership team, the business leaders within Thermon, they have decades of understanding how to navigate and grow into diversified end markets. Thermon has done a very, very solid to a very tremendous job of diversification. And they do that because they're a leader. And they've done a great job of introducing new products, their controls capabilities, which helps them to secure more opportunities. Us leveraging that and their great relationships with their customers to bring us in to cut to the conversation is in front of us. Their introduction of medium voltage products is starting to gain traction. We have a lot of relationships with customers that we can introduce into that market of medium voltage. So they've invested in new products, and they're learning where the market opportunities are. We may have some of those relationships and market opportunities that we can just help accelerate. Our ability to understand supply chain alternatives is something that they can benefit from in terms of growth and how we've invested in international expansion where they want to invest in international expansion. So -- we have excess capacity. We have excess resources to go after and do more advanced, faster capabilities that they want to utilize and leverage. Their very attractive investment in their liquid load bank for data centers is an area that we can utilize and understand how they're breaking into a new market and where can we participate in those things. So again, when we talk about commercial synergies, you hit it on the relationship. When you're a leader in a space and you've got good relationships, you can introduce new solutions more sustainably because you already have a trust factor, you're already on the approved vendor list. You already have negotiated how you can get into that market with reference sites, et cetera. So there's already a comfort. And Thermon has done the same thing. So we're going to easily be able to understand that better when we're a combined company, but we're already excited about what we're hearing. Operator: Our next question comes from Jim Ricchiuti with Needham & Company. James Ricchiuti: Just in the interest of time, I just had one question. Just as you mentioned, probably the last quarter for stand-alone CECO. And given where we're starting the year with gross margins, it sounds like you're expecting fairly significant improvement as you go through the year, mix volume play a role. But can you talk a little bit about stand-alone CECO from a gross margin improvement as you go through the year? Can you maybe help us understand how we drive margins higher? Is it something you see in the backlog? Peter Johansson: Yes. There's 3 factors, Jim. There's -- when we talk about volume and mix, we're really referring to is the timing difference between when cost hits the income statement and when revenue is recognized. Upfront in a project as we're getting started, we realize a number of engineering expenses, work with our suppliers, setting up the programs and projects within the -- or the subprojects within a large project, but we recognize very little revenue. We start to start -- but the cost case is growing. And then as we get in second quarter, third quarter of a project, revenue recognition begins to accelerate. And so when you think about volume and mix, we had projects that we booked last year where we were doing work in the first quarter where we hadn't recognized all the benefits from the revenue. So that's one lift. Second lift will come from the margins of projects that we booked in the fourth quarter last year and the first quarter this year that are at higher margins. The second -- or the third impact, will be from the efforts we're making to continue to improve our G&A cost footprint and the efficiencies we're going to generate from continuing to integrate acquired entities. All of those activities will result in getting back on track and heading towards the 34% or greater target. Now it won't happen all in one quarter, but the full year outlook is near that target range. Thank you, Jim. What I would point out, though, Jim, I think it's the EBITDA delivery operationally is going to continue to improve from a margin standpoint, even with the large project volume and mix aspects, they come with little to no additional fixed cost. So the operating expenses, what I call operating G&A for those larger projects actually are accretive relative to the business that they're replacing or the business that came before it. And so that's an important component of looking at EBITDA growth and ultimately cash generation. Operator: Our next question comes from Joseph Giordano with TD Cowen. Christopher Grenga: This is Chris on for Joe. You had cited early benefits from 80/20. And I just was curious what specifically was in Wave 1, if you could discuss that and how we should expect benefits to kind of split along gross margin improvement versus SG&A leverage over the next few quarters? Peter Johansson: So 80/20 is a new concept at CECO. We began the implementation in the fourth quarter with our diagnosis and our work plan development. And we launched formally across two of our smaller businesses, both recently acquired. And they are now, I'd say, probably 1/4 of the way into their implementation. There's a number of different projects inside of each of those deployments. And we handle them in a separately by business. So about 10% of CECO's revenue today has been covered by our initial wave or call Wave 1. That will expand in this quarter -- has expanded this quarter and we'll be by end of the summer, somewhere around 20%, 25% of CECO revenue being touched by the 80/20 implementation across the company. That is something that we will accelerate as we develop our internal expertise and we develop subject matter experts internally that can carry the ball forward for us, and we'll grow that penetration across the portfolio by the end of this year, but certainly through 2027. The benefits have been split to date. Generally, they have come from the G&A side. We have had a little bit of gross profit improvement. But as we've looked at customer and product simplification and the zero-up aspects of what we're doing in 80/20 -- in the 80/20 toolbox, they're really focused on getting the organizations that are now deployed with 80/20 rightsized and focused on the priority customers and products. Christopher Grenga: Great. I appreciate that detail. And with the Section 232 expansion and revisions earlier this month applying to full customs value, is there -- or could you talk about any incremental margin or backlog sensitivity for CECO, especially on projects booked prior to that revision, net of any pass-through clauses or sourcing actions that you're taking there? Peter Johansson: We haven't identified any material impact from the change in the tariff posture. Our operating model is to source and fabricate and deliver in region to avoid a majority of any cross-border flows. Very little comes across the border that's tariff. So for instance, if we're delivering to clients in Asia, our suppliers and our fabrication activities go on in Asia. Same in the Middle East and India, same in Europe. In North America, we work with Canadian suppliers. But for the most part, the clear majority of those goods across the border are covered under USMCA exemptions. Operator: I would now like to turn the call back over to Todd Gleason for any closing remarks. Todd Gleason: Thanks. Well, thanks for the questions and the interest in our information today. Again, thanks to our global teams that are delivering incredible value to our customers as we continue to protect people, protect the environment and protect our customers' investment in their industrial equipment. We look forward to being active at a handful of investor conferences in the second quarter as well as speaking with some of you today and over the next few weeks with respect to our results. I couldn't be more excited about the pending combination with the great team and organization that is Thermon, and we will keep everyone updated on that as we go forward. And with that, we'll go ahead and close today's call. Thank you. Operator: Thank you. This concludes the conference. Thank you for your participation. You may now disconnect.
Operator: Thank you, everyone, for joining the Ecolab Inc.'s First Quarter 2026 Earnings Release Call. At this time, all participants will be in listen-only mode. As a reminder, today's conference is being recorded. It is now my pleasure to introduce your host, Andy Hedberg, Vice President, Investor Relations. Andy Hedberg, you may now begin. Andy Hedberg: Thank you. Hello, everyone, and welcome to Ecolab Inc.'s first quarter conference call. With me today are Christophe Beck, Ecolab Inc.'s Chairman and CEO, and Scott Kirkland, our CFO. A discussion of our results, along with our earnings release and the slides referencing the quarter results, are available on Ecolab Inc.'s website at ecolab.com/investor. Please take a moment to read the cautionary statements in these materials, which state that this teleconference and the associated supplemental materials include estimates of future performance. These are forward-looking statements, and actual results could differ materially from those projected. Factors that could cause actual results to differ are described under the risk factors section in our most recent Form 10-Ks and our posted materials. Also, refer you to the supplemental diluted earnings per share information in the release. With that, I would like to turn the call over to Christophe Beck for his comments. Christophe Beck: Thank you so much, Andy, and welcome to everyone joining us today. We had a great quarter with accelerating momentum across our portfolio. And I know oil prices, energy, and supply are top of mind for most; it is not for me. In 2022, commodity costs were up 50% and our margins post-cycle went further up. Today, commodity costs are up 9%, and we have all the tools to address this within one quarter, done the right way for our customers. As I sit here today, I feel very good about the year, how we are managing a complex environment, and I feel even better about where we are going next. What matters most for me today is to keep the organization focused on growth, to supply our customers seamlessly anywhere around the world, and to support our teams, especially those operating in the Middle East. In a complex environment, our teams are staying very close to customers and supporting their operations without any single disruption, because what we do is almost always mission critical to them. And when something is mission critical to our customers, it becomes mission critical to us too. That means supplying reliably, solving problems quickly, and delivering the outcomes they count on. And it is working. We would never ever let the customer down. That commitment is what drives the consistency and the strength you see in our results. Now, turning to the first quarter, we delivered once again a very strong quarter with adjusted diluted EPS growth of 13%, right in the middle of our range. Momentum strengthened across the business as organic sales grew 4%, driven by continued strong value pricing of 3% and volume growth that accelerated to 1%. We expanded operating income margin, reflecting the disciplined execution across our global portfolio and the strength of our One Ecolab approach, which brings together service, expertise, and breakthrough technology at scale. Momentum continued to strengthen across the portfolio, led by our growth engines, which, by the way, have close to no exposure to energy costs. Global High Tech and Digital grew more than 20%, driven by strong demand tied to digital adoption and the ongoing AI wave. Life Sciences accelerated to 11% growth, led by bioprocessing, where sales more than doubled. We have been investing in talent, capabilities, capacity, and breakthrough innovation in this high-growth, high-margin business for quite some time. And today, these efforts are clearly paying off—and we are just getting started. We expect Life Sciences’ growth to continue its double-digit momentum and operating income margin to expand toward our 30% target over the next few years. And finally, Pest Elimination delivered a strong quarter with 7% growth, reflecting strong share gains from our One Ecolab growth initiative and, naturally, our new Pest Intelligence offering. Our core portfolio also performed very well. Institutional strengthened, with solid growth across restaurant and lodging customers, more than offsetting somewhat softer market trends. Specialty gained share with 9% growth, driven by innovation that helps customers optimize costs. Food & Beverage outperformed its end market again, growing 5%, supported by strong execution of our One Ecolab approach, and Light Water delivered steady growth too. We also made progress in smaller parts of the portfolio that have been a bit under pressure. Collectively, the performance in Paper and Heavy Water stabilized as we supported them with new business and innovation. Overall, our growth engines are accelerating, our core performance is strong, and businesses that had been under pressure are turning the corner. Together, this continues to shift our portfolio towards higher-margin, higher-growth end markets well aligned with our long-term strategy. We also delivered solid operating income margin expansion this quarter. Underlying gross margin was steady, as strong value pricing offset commodity cost inflation. Reported gross margin was slightly lower due to a short-term impact from recent M&A and higher commodity cost inflation. However, the M&A impact was favorable to our SG&A ratio and, as a result, largely neutral to our operating income margin. Underlying SG&A productivity improved meaningfully as we continue to scale our unique digital and AI-native capabilities, resulting in strong SG&A leverage year over year. As a result, organic operating income margins expanded by 70 basis points to 16.8%. We expect operating income margin expansion to improve in the second half of the year as pricing accelerates, and we remain very confident in delivering on our 20% operating income margin target by 2027. Looking ahead, the operating environment remains dynamic. But we are ready. We remain focused on growth opportunities while we keep managing a complex global environment. The conflict in the Middle East is one example. It has driven sharply higher global energy costs, creating additional pressure across the supply chain. And in moments like this, customers turn to us as their partner of choice to ensure secure supply, exceptional service, and solutions that help reduce operating costs. We take decisive actions to absorb cost pressures wherever we can. However, the magnitude of energy cost increases requires additional action to ensure reliable supply, which is why we quickly implemented an energy surcharge. This is an approach we have used successfully before, focused on delivering incremental total value for customers that exceeds the total price increase. We know it works for our customers, and we know it works for us. As a result, the second quarter will be a short transition period. Commodity costs are expected to increase high single digits starting in the second quarter, and we expect those costs to remain high through the end of the year. Surcharge benefits will build through the quarter following implementation on April 1. With this, higher commodity costs will impact second quarter EPS growth by a few percentage points. However, underlying performance remains on track and within the targeted 12% to 15% range. Importantly, we expect to already fully offset the dollar impact from higher commodity costs as we exit the second quarter, as pricing continues to accelerate and volumes continue to grow. We expect organic sales to increase 6% to 7% in the second half of the year, helping to stabilize our gross margin during that period. And that is net of OVIVO. Ex-OVIVO, gross margins would be up 70 to 80 basis points in the second half. In other words, we will be fully offsetting the significant rise in commodity costs and its impact on earnings and margins in just a few quarters. As a result, we expect EPS growth to strengthen in Q3 and Q4, resulting in unchanged full-year expectations. We therefore continue to anticipate adjusted diluted EPS growth of 12% to 15% this year, excluding short-term impact from the pending CoolIT acquisition. As discussed earlier, CoolIT financing and non-cash amortization are expected to have a short-term impact on adjusted EPS in the second half of the year. Following the close, the impact is expected to reduce quarterly EPS by approximately $0.20. Importantly, underlying EPS growth remains unchanged. Beyond the short-term impact this year, we expect EPS growth including CoolIT to accelerate back into the 12% to 15% range, as contributions from this high-growth, high-margin acquisition accelerate and amortization from the Nalco acquisition rolls off. What is even better, the impact of our growth engines on Ecolab Inc.'s global performance is accelerating as we scale them. This is especially true for Global High Tech, where AI is driving significant new demand for circular water management and high-performance cooling. By bringing CoolIT and OVIVO together with our Global High Tech water business, we are building a $1.5 billion powerhouse that will help fuel Ecolab Inc.'s next phase of growth and margin expansion. As AI accelerates the buildout of global digital infrastructure, customers are prioritizing uptime, cooling performance, and reliable water management while driving massive increases in compute power with lower energy use and near net-zero water footprint. Our circular water solutions deliver exactly that—from ultra-pure water to produce the most advanced chips, to 3D Trasar connected water to support power generation, and now direct-to-chip cooling to cool the chips. OVIVO expands our ultra-pure water and end-to-end microelectronics offering in a business expected to grow at a mid-teens rate this year, supported by a strong pipeline tied to fab expansions and increasing water circularity needs. Our pending acquisition of CoolIT builds on this momentum, adding a scaled direct-to-chip liquid cooling platform and positioning Global High Tech with an integrated, service-led cooling solution for high-density AI data centers. And here is more good news: CoolIT has shared with us that they are off to a very strong start in 2026, with first quarter sales growing well ahead of the 30%+ we discussed on the acquisition call. Demand for leading liquid cooling technologies continues to rapidly accelerate. Together, these two businesses have the potential to add a couple of points of high-margin organic sales growth to Ecolab Inc.'s total growth as they scale and capture more of this huge and fast-growing high-tech market. In closing, we delivered a strong quarter with accelerating top-line momentum, continued margin expansion, and double-digit EPS growth in a complex environment. Our near-term outlook is strong and consistent. Growth momentum continues to build. Our portfolio is shifting towards higher-margin, higher-growth markets and is much less exposed to energy cost. Our team is executing at a very high level. We are well positioned to deliver another year of strong performance in 2026. We remain confident in the long-term trajectory we built in. Thank you for your continued trust and your investments in Ecolab Inc. I will now turn it back to Andy for Q&A. This concludes our formal remarks. Operator, would you please begin the question-and-answer period? Operator: Thank you. We will now open the call for questions. We ask that you please limit yourself to one question so that others will have a chance to participate. If you have additional questions, you may rejoin the Q&A queue. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you would like to remove your question from the queue. If participants are using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. Thank you. Our first question is from the line of Tim Mulrooney with William Blair. Please proceed with your question. Analyst: This is Sam Kotswurman on for Tim. Thanks for taking our question here. In your outlook, I think you shared you expected gross margins to stabilize in the second half, which is quicker than I think investors may have been expecting. I imagine that is because of the decision to implement your surcharge pricing pretty quickly when this conflict started. But can you help us understand how this fits into your goal of reaching a 20% operating income margin in 2027, including the impact that the CoolIT system acquisition will have? Christophe Beck: Thank you, Sam. As mentioned before, I know most of you have these energy costs and oil prices top of mind. For me, that is not the case because we have been here before, and we have learned to master this very well. As a reminder, commodity costs in 2022 were up 50%, and as you remember, margins went further up post-cycle. Here, we are talking 9% up as we see it in Q2, and we are expecting such to stay high till the end of the year at least. I am expecting that six to twelve months. We are expecting in Q2 to get the dollars back as we exit Q2, and then, as you said, to get gross margin to stabilize in the second half including OVIVO. If you exclude OVIVO, as mentioned, gross margin would be up 70 to 80 basis points, which is our traditional run rate, which is in line with our model. So operating income margin will be even better because SG&A is going to keep improving during that time. When I am looking at the math of pricing and DPC and commodity cost, basically, as you know, 30% of our DPC is roughly impacted by energy cost while growing 9%. That is the gross impact of inflation out there, while it is 2.5% that we need to compensate, and that is why your 5% to 6% pricing in the second half brings us to a place where margins are stabilized at the minimum, and that is obviously including OVIVO as well. Underlying, we improve even further. But as mentioned before, my priority is making sure that the organization stays focused on growth, which means perfecting our core businesses and building our new growth engines on High Tech, Life Science, Pest Intelligence, and Digital, which today or tomorrow with CoolIT would represent 20%+ of our company, which is really good news because these are high-growth businesses in very natural growth industries, high margins, and have low to no dependency on energy cost supply as well. If I put it all together, a second half that is going to be so-so to good in gross margin, SG&A that is going to be favorable, means a stronger operating income and EPS delivery. If I look at 2027, including CoolIT and including as well the roll-off of the Nalco acquisition amortization, my objective for 2027—very early to talk about a year from now—is that we have a really good chance to be within our 5% to 7% top-line growth and, for sure, to get to the 12% to 15% earnings-per-share growth in a pretty solid way. Operator: The next question is from the line of Manav Patnaik with Barclays. Please proceed with your question. Analyst: This is Ronen Kennedy on for Manav. Thank you for taking my question. Christophe, could you please help us understand the base macro scenario embedded in the guide? Does it assume a broadly stable demand environment with modest improvement, or does it contemplate an already cautious customer posture given the higher energy cost, geopolitical uncertainty, etc.? And given the backdrop and your comments regarding not necessarily having the higher energy costs and oil prices top of mind, is there a macro sensitivity, or is it just a function of your internal execution levers like pricing, productivity, and mix? Christophe Beck: It is 90% execution. We live on the same planet as everybody else, obviously, but that is why our assumptions are pretty conservative with this 9% commodity inflation in the quarter and expecting it is going to stay till the end of the year and probably into next year as well. From a demand perspective, we are expecting 1% volume growth in the second half. Q2 is always a little bit harder to define in detail as it is a transition quarter, but I look at the second half and feel good about the 1% growth. This is our assumption; this is not my plan. We want to accelerate both volume growth and pricing, so in that range of 5% to 6%, as I mentioned before, you end up with 6% to 7% top-line growth for the second half. That is the assumption for pricing and the assumption of 9% on commodity cost as well, and adding this 1% volume. There might be some pluses and minuses in terms of demand around the world, but for me, controlling what we can control, the fact that our growth engines are doing really well—collectively, they are growing 12% at high margins—our new business is at record levels as well. I feel really good about that. Our core business is in very strong and steady growth performance, and our underperformance areas have stabilized—Paper and Heavy Industries as well. Bring it all together, between our assumptions and controlling what we can control, by focusing on growth and managing performance at the same time, we end up in a place where the second half is a little bit better than we even thought a few months ago. I feel good about where we are going. Operator: The next question is from the line of Ashish Sabadra with RBC. Please proceed with your question. Ashish Sabdra: Thanks for taking my question. Very strong growth in High Tech, 20%+. You talked about CoolIT also growing really above that 30% growth in Q1. I was wondering if you could also talk about OVIVO—how that is tracking compared to your expectation? If you could talk about the cross-sell opportunities of OVIVO with core offerings in High Tech, and also as you are thinking about cross-selling once the CoolIT acquisition closes? Thanks. Christophe Beck: Thank you, Ashish. Global High Tech is going to become, most probably, our strongest growth engine in the near to long-term future. Together with Life Sciences, we have two amazing growth engines for the future of our company, really focused on industries that are growth industries, high-margin industries, and very little dependent on any energy impact at the same time. It is a combination of sweet spots that I really like. In High Tech, when you bring everything together—our legacy business, OVIVO, CoolIT—you get to a business of $1.5 billion that is growing 20% to 25% or more at high margin. We are exactly where we wanted to be strategically: we want to be the partner of the industry to help them produce better outcome chips or data compute with low to no water usage, which is a big issue for most of those industries socially as well around fabs or data centers. This is exactly what we are doing. With OVIVO, in microelectronics, we will move from 5% water recycling to north of 95%. It is absolutely game changing for fabs. Keep in mind, by 2030, 17 new fabs are going to be opened—that is roughly one a month—and OVIVO has the most advanced technology to recycle water at ultra-pure levels. Something that is really interesting with OVIVO is that the quality of the ultra-pure water has a direct impact on the yield of the chips manufactured, which is game changing for the microelectronics industry—great for chip performance and yields, and at the same time, reducing by 95% the net water usage. On the other hand, CoolIT—you're all familiar with the uproar around data centers and water impact— with our end-to-end technology that we are going to bring to the market, data centers are going to have the water footprint of a large car wash. Humans in the data center use more water than the data center itself—just to showcase a bit of the power of that technology. It is the first time in my career that I see on both fronts customers coming to us because they know there is not enough capacity to supply everyone, and we have the two best technologies for microelectronics and data centers. Customers want to jump the queue in order to gain share in their own industry. CoolIT, as mentioned, first quarter of the year well north of the 30% that we were planning—it is a very good problem to have. I think it is going to be a great story for all of us, and OVIVO will be in the mid-teens type of growth. It is a longer-cycle business—building fabs takes more time than building data centers—but the backlog at OVIVO is way higher than what we had thought because of all the reasons I mentioned. I think we bet exactly on the right things that will pay off short and long term. Operator: Our next question is from the line of John McNulty with BMO Capital Markets. Please proceed with your question. John McNulty: Maybe just shifting tack to One Ecolab. Sales growth, you called out noticeably above the core. Can you highlight how much better it was than the core? And do you have any ways to further accelerate the program now that you have been running on this program for a couple of years now? Christophe Beck: Yeah, John. It has been a bit less than two years, but it has been a very good story. The most obvious outcomes are, on one hand, Food & Beverage United, where we are bringing food safety, hygiene, and water together. You see the results—F&B has been very strong, 5% growth in a major multibillion business in an industry that is not growing. Consumer goods are not exactly growing fast at the moment. F&B United has been North America only so far; we are expanding around the world, and that will extend the impact on that very promising business. Second is our largest customers—our top 35 (top 20 and emerging 15)—those are growing quite a bit faster than the average of the company because of One Ecolab. And last but not least, technology—we are at the forefront of any industry in how we are using it. Our savings in performance have been remarkable while keeping our teams confident that we will focus most of our attention on growth while we drive performance at the same time. Early on the journey, but we see the pace picking up, which is exactly what we wanted in a complex global environment. Operator: Our next question is from the line of David Begleiter with Deutsche Bank. Please proceed with your question. David Begleiter: Christophe, on CoolIT, can you help us with the $0.20 of dilution in Q4? And what is your expectation or forecast for dilution in 2027 from CoolIT? Thank you. Christophe Beck: Thank you, David. Let me pass it to Scott, and by the way, it is $0.20 per quarter in the second half, as we described in the release and on the acquisition call, and it is going to neutralize in 2027. Scott? Scott Kirkland: Hey, David. As we talked about about a month ago when we had the CoolIT call and as Christophe said, the $0.20 per quarter this year—again, because the close date is not known exactly yet—so the per-quarter impact will depend on the close. Excluding CoolIT this year, we are going to deliver the 12% to 15% as Christophe talked about. Then there is the $0.20 reduction this year. As we think about 2027, the roll-off of the Nalco non-cash amortization really offsets the incremental non-cash amortization from CoolIT. That is why we feel very good next year about staying in that 12% to 15% range from an EPS growth perspective. Christophe Beck: Which adds to the top line, which is why we did those two investments, by the way. OVIVO and CoolIT are both going better than expected; they are adding a couple of points on the top line as well. It is an acceleration on the top line aiming at this 5% to 7% for the overall company and strengthening the 12% to 15% earnings-per-share growth as we enter next year. These are the objectives that I have and that we build towards. So far, things are going really well on both fronts. Operator: Our next question comes from the line of Seth Weber with BNP Paribas. Please proceed with your question. Seth Weber: Hi, guys. Good afternoon. Wanted to ask about the Life Sciences business, the strength in the organic growth. Is this the step change that we have been waiting for? I think, Christophe, you mentioned that double digits is in the near-term foreseeable future, but can you help us contextualize how this business is going to react once the new capacity comes online? And what type of operating leverage should we expect to see in the intermediate term in this business? I know you have the 30% number long term, but if you are growing double digits, how much leverage can we see on the margin side there? Thank you. Christophe Beck: Thank you, Seth. The short answer is yes—this is the performance that we were looking for and have been building towards. I am very pleased with what the team has done internally—getting capacity, quality, systems, platform R&D—everything together to get Life Sciences to the performance we planned. It was 11% in the first quarter. We are building a double-digit growth business all-in—this is where we are and where we will stay—and the idea is to grow even faster with operating income leverage getting close to 30%. I want to keep investing behind that business, so in the short to mid-term, we might be in the mid-20s as we keep building, like the plant that we are going to open in the second half of the year, which will unleash even more capacity. I have no doubt we will get to 30% because it is all impacted by investments. As a reminder, our bioprocessing business, which is the core of our business, grew north of 100% in the first quarter. This is very encouraging. It is not going to be every quarter the same, but the steady growth will be very strong. We need more capacity—a good problem to have. We are the fastest-growing business in the Life Sciences industry right now, and I think we will stay that way with a smaller, agile, innovative team. I am very happy with what the Life Sciences team has done. Operator: Our next question is from the line of Chris Parkinson with Wolfe Research. Please proceed with your question. Chris Parkinson: Chris here—obviously there is a lot going on in terms of raw materials over the next two quarters. But in terms of your 2027 CMD margin targets, it seems like you are well ahead in certain cases, and in line in others. Could you walk us through the intermediate to longer-term puts and takes of those targets and specifically how you are thinking about any newer dynamics across Institutional markets as well as the impending ramp of Life Sciences? Thank you. Christophe Beck: Thank you, Chris. I feel really good with where we are heading, but let me have Scott answer that question first, and I will build on it. Scott Kirkland: Thanks, Chris. As Christophe said, we are very confident in the margin expansion we are delivering and the path to 20%. Over the last few years, we have delivered north of 500 basis points of operating income margin expansion and feel very good about delivering 19% this year—that is 100 basis points year on year—and then there is 100 basis points left to get to 20% next year, which we feel very good about. As Christophe said, the surcharge is going well, Q2 will be a transition quarter, and we feel very good about the second half gross margin. In addition, as part of that confidence, we talked about the business mix where higher-growth, higher-margin businesses—Global High Tech, Life Sciences, Pest, Digital—are also supporting that confidence in 20% by 2027 and in our longer-term algorithm of 100 to 150 basis points per year through 2027. Christophe Beck: To build on that, as I have shared many times, I am really focused on beyond the 20%. For me, 20% is a given next year. Institutional Specialty is already north of 20%. Life Sciences, underlying, is north of 20% as well before the investments we are making. Pest Elimination is north of 20%. Most of Water is as well. We know exactly how to get north of 20%. The question is: what is next? I will share with you as soon as I have a clear, solid view, but it is going to be quite a bit north of 20%. When you think about OVIVO and CoolIT joining us, that is on top, with businesses growing really fast at very good margin. I feel really good about 20% for next year—90% of my focus is on what is next post-20% to keep growing company margins. Operator: Our next question is from the line of Vincent Andrews with Morgan Stanley. Please proceed with your question. Vincent Andrews: I wanted to talk more about Global Water and the margins. In the quarter, there were three dynamics going on: the OVIVO acquisition; you called out some raw material inflation, which I suspect hit you pretty hard in March, which you obviously could not price right away for; and then the stabilization of the headwind of the softer sales in Heavy Water and Paper. But you called out an upper single-digit operating income growth decline, which I would have thought would have helped the percentage margin. Maybe you could unpack the margin performance in Global Water, the decline, and how those three different buckets contributed to it, and how we should think about it over the next couple of quarters? Thank you. Christophe Beck: I will pass it to Scott, but generally here overall Water was flat in terms of operating income growth—down roughly 0.5% in Q1. If you exclude Paper and Heavy Water, Water has been growing top line mid-single digits and operating income high single digits. Generally, Water is doing really well, excluding Paper and Heavy. We are working on these two, but honestly most of my focus is on the growth part of Water. The combination of Most of Water getting better through higher-growth, higher-margin businesses like Global High Tech will get us to a much better place very soon, and at the same time, getting the underperformance in Paper and Heavy Water stabilized and improving. We have reached the bottom for these two businesses. The combination of both will lead to good results for the second half in Water. I am not worried in Water. Scott, anything you would like to add? Scott Kirkland: The only thing I would mention as well is on OVIVO. As we talked about for total company, there is a geographic mix between gross margin and SG&A, but not a material impact to operating income margin. There is a little bit of that geography in the Water business as well. As Christophe said, we feel good about the business; the operating income growth excluding Paper and Heavy is very good, and we expect Water operating income to aggressively accelerate throughout the year. Operator: Our next question is from the line of Patrick Cunningham with Citibank. Please proceed with your question. Patrick Cunningham: The Specialty division within I&S—pretty impressive organic growth. In an environment where you see weaker foot traffic and a consumer highly sensitive to wage inflation, is most of your growth coming from deeper penetration of digital suites and productivity tools versus traditional chemical volume at this point? Christophe Beck: Patrick, the short answer is yes. It is mostly focused on solutions that help customers get the job done at a lower cost because they use less labor and fewer natural resources—energy and water—and it is working very well. When we think about the One Ecolab approach, we have a great example in F&B United, and we have a great example in Specialty. It is a business of standard at scale and performance at scale. The way the team is approaching large quick-serve and fast-food companies is to help them understand where the best performance is—what is the best restaurant in terms of guest satisfaction, cost, and environmental impact—and to scale those solutions across the system around the world. Those customers are used to and welcome that approach. They are mostly franchised, so we have the opportunity to influence every unit anywhere around the world the same way. This is a huge upside for those customers, and you see it in the results—growing 9% at the type of margins we have in this business is quite remarkable. Last, the beauty of the Institutional Specialty business is that wherever the consumer goes based on economic development, we will capture them somewhere. It can be a luxury restaurant, mid-scale, or quick-serve—we are there. Margins are very similar. We are extremely well positioned wherever the consumer eats because people are going to keep eating. If they do not go out, they buy from food retail, which is doing really well, explaining why Institutional Specialty is such a steady, stable, strong business with high margin: it is a great offering for customers to drive their own performance around the world, and for us, it drives huge stability and consistency. Operator: Our next question is from the line of Shlomo Rosenbaum with Stifel. Please proceed with your question. Shlomo Rosenbaum: Christophe, I was hoping to get a little more detail on what you meant that Paper and the basic industries are turning the corner. Is the growth getting better? Is it that you have not seen any more paper mills closing? What is going on with the metals side of it? Are we going to see those businesses get to flat this year? Give us a little color because the other parts of the business are already running in the range you want, and these are the ones pulling you down below that range. Christophe Beck: The whole company—if you exclude these two—is growing 5%+ top line, so we are in a very good place. Water is also in that range with good volume growth as well. But like any company, there are a couple of kids that need special care because they are in older industries that are growing less fast. The short answer is they have stabilized. We have not been impacted by closures anymore in the last three to six months, which is hard to mitigate because when a factory closes, there is not much you can do. We see stabilization. If it gets slightly positive in the second half, we will be fine. This is what the team is heading toward; I feel pretty good we will get there. To be very honest, this is not where I spend my time. I spend my time on the 80% of the company that is doing extremely well, building those new engines at the same time. I want to be absolutely growth-focused, driving operating income leverage while we manage those businesses that are struggling a bit more. As I look at the second half, I feel these two are going to get to more positive territory. Also, they have good margins—not great—but pretty good. They are not destroying value for the company, which is most important. So 80% doing great, north of 5% top line without these two. With these two doing better, it will help the overall performance continue in the second half and in 2027. Operator: The next question is from the line of John Roberts with Mizuho. Please proceed with your question. John Roberts: Thank you. Is your inflation higher on raw materials, or is it higher on your CapEx? Because you purchase a lot of equipment that has metals and plastics contained in it. Christophe Beck: John, it is mostly on the commodity raw material side of things. Logistics as well, because logistics costs are going up—shortage of drivers, fuel costs—traditional stuff we are used to. On what you call CapEx, which is more technology equipment, there is some inflation, but nothing dramatic. It is not energy-related. Nothing to see there. Operator: Next question is from the line of Jeff Zekauskas with JPMorgan. Please proceed with your question. Jeffrey John Zekauskas: Thanks very much. Christophe, you said that CoolIT is growing a lot faster than 30%. Is it growing 50% or 70% or 60%—can you quantify that? And secondly, when you think about competing in the data center markets in direct-to-chip technology, does the competition emphasize water treatment chemistry, or is their direction more equipment-based? How do you see your competitive status and offering water treatment technology in the direct-to-chip area? Christophe Beck: Jeff, great question. Actually, the true growth—you have not even mentioned it in the numbers you listed; it is even higher. To be honest, it is close to the triple-digit range, which is pretty cool. But I want to also mention we have not closed that acquisition—just to be clear—we need the regulatory approvals. It feels good so far that it should happen sometime in the third quarter, depending on us. Exceptional performance from those guys. I have met many customers—customers want what CoolIT does more than anything. You are familiar with a few others out there; they are doing well—one starting with a “V” is performing nicely and has a good backlog. This is the case for CoolIT as well. Generally, great growth trajectory. It is not going to be a straight line to heaven forever; we will see how that goes. The biggest challenge we have is to build enough capacity to feed the growth—great problem to have. First time we see customers trying to jump the line to get services from what CoolIT can provide. On the second part of your question: as you know, I do not really care whether products are industry-based or technology-based or service-based or digital-based. What we are offering to data centers is ultimately higher uptime at lower water usage and better power performance. This is the outcome we promise. The fact that we can go from low to zero net water usage is game changing. You are familiar with the uproar around data centers and water usage; what we do solves that problem—this is a big deal for the hyperscalers—while enabling more advanced chips that require direct-to-chip cooling. We are exploring various models; they are all recurring in a typical Ecolab Inc. manner. That is the way we scope the business as we get together with our services, 3D Trasar optimization of water and power cooling, coolant—which is by design a recurring product—and all the technology that comes with it. Every time a new generation of chips comes in, you change systems for direct-to-chip cooling: new cold plates, new coolant, and as power demands go up, you change the CDUs as well. It is inherently a recurring business. Operator: The next question is from the line of Matthew DeYoe with Bank of America. Please proceed with your question. Matthew DeYoe: Christophe, thank you, and thanks for addressing that. One of the concerns we hear from investors on the CoolIT deal is it does not feel like a consumables business. Two to backfill on this. One, the $0.20 per-share dilution per quarter—is that math based on the 30% sales growth that you had been laying out there, or is that reflective of the near 100% sales growth that it is currently looking at, or does that matter over the near term? And then how R&D-intensive do you expect CoolIT to be? Presumably, the technology changeover could be pretty rapid, and cold plates and things like that are not really a core competency of Ecolab Inc. I know you have 3D Trasar, but maybe not so much this architecture and infrastructure stuff. Christophe Beck: A few things, Matt, and then I will pass it to Scott. Generally, the base case is the 30%+ growth we talked about—that is the base assumption and what we knew back then. Anything better will help us, obviously. On R&D and knowledge, I would like to remind you it is a water business because direct-to-chip cooling—the next technology—is to get towards water. Even the coolants we offer today are not water-based, but water-based are the best heat transfer coolant we can imagine. Then you get all the challenges to work with water: scaling, fouling, corrosion, especially at lukewarm temperatures for the latest chips. This is a business and technology we have mastered for a very long time—mastering water at higher temperatures, mastering heat transfer. We are the leading cooling company. For 80 years, we know thermal management really well. We have a lot of R&D here. CoolIT is super strong in R&D as well. Add the 3D Trasar technology that we will bring together—CoolIT plus 3D Trasar technology becomes the new Ecolab Inc. offering for customers the moment we close. It is going to be game changing for customers. I feel really good in terms of R&D and expertise. It is a typical one-plus-one-equals-three, which is exactly where we wanted to be. It is a water business, removing heat, which is what we have done for 80 years in other industries and now in this new industry. Scott, do you want to add anything on the EPS impact? Scott Kirkland: One thing I would say, Matt, on EPS is we think this is a very high-growth, high-margin business, and that 30% sales growth is over the next few to several years. In the earlier years, with that averaging, it will grow faster. We like what we see; we see growth accelerating. I still think that $0.20 is a good base case to have once we close, per quarter, and then we will adjust from there once we get hold of the asset for the second half of this year. It gets neutralized in 2027 because of the Nalco amortization rolling off at the same time—almost perfect timing. Operator: The next question is from the line of Mike Harrison with Seaport Research. Please proceed with your question. Mike Harrison: Hi. Good afternoon. Hoping I could ask a question on the Pest business. In terms of the digital and smart connected traps that you are rolling out, can you give us a sense of what percentage of customer locations are using those new traps? Maybe give a little more color on the timing of that rollout, and when you might expect to see margin benefits as you get better efficiency from your sales and service force with those new traps. Christophe Beck: Thanks for that question, Mike. I love that business, and I love it even more moving towards Pest Intelligence. We have roughly 700 thousand smart devices implemented so far. As you know, it has been driven by the largest retailer in the world with whom we developed that proposition. It is working extremely well—resulting in close to 99% pest-free environments with much better service because 95% of the time we were spending in the past checking empty traps is now transformed into value-add, which means selling more new accounts. The plan we have is that in the next three to four years, the whole Pest Elimination business is going to be a Pest Intelligence business. It is not a straight line—we have to make sure everything works well. We are going to reach probably 1 million connected devices by the end of this year and keep ramping up in the next few years. That will impact growth, retention, and performance for our customers, and yes, it will impact our margins. So far, it is working really well. We have a great team and customers are thrilled. Operator: Our next question is from the line of Laurence Alexander with Jefferies. Please proceed with your question. Laurence Alexander: Afternoon. As you think about the surcharges and the pricing traction you have, and how that has changed over the years, is your percentage value capture across your portfolio increasing, or is it a matter of delivering more value while capturing the same percentage? And as you think about those dynamics, are the newer businesses where you prefer to focus your time right now—do they have a higher value capture level relative to the value created for the customer than some of the older legacy Ecolab Inc. businesses? Christophe Beck: Laurence, it is something we perfected over the past four to five years. We always do it in a way that is beneficial to our customers. We make sure that the total value delivered to our customers is north of what we are capturing in price. Not every business is created equal—biotech manufacturer versus Pest Intelligence in a retailer versus Food & Beverage for a brewery—it is very different, and we do it thoughtfully. Over the last five years, we have not lost customers doing it. Margins went up, retention remained strong. When we talk about the surcharge, it provides a framework for our teams and our customers to understand where we are going. In some places around the world, you have more; in others, less. In some businesses, it goes straight to structural pricing. It is working really well. As I said earlier, this is something we master really well. I am not worried about it. This is an execution play. Our teams are doing it the right way, and we are going to be fine. We will keep sharing our progress, but so far it is going really well. Operator: Our next question is from the line of Andy Wittmann with Baird. Please proceed with your question. Andy Wittmann: Great. Thanks for taking my question. It seems like the achievement of the energy surcharges will be important for the second half ramp. Given that, Christophe, as you look at the total customers that you expect to approach with the energy surcharge versus how many you have approached today and who are aware this is coming, can you help us understand what percentage have been approached and are aware, and how many are still to go for the balance of the year to achieve your ultimate target? Christophe Beck: Thank you, Andy. Everyone is impacted—no exception. It is 100% of our customers, 100% of our businesses, and 100% of the countries we operate in. It is not an easy task—we have operations in 172 countries and 40 different industries—but it is the third time we are doing it. We started April 1, so it is a few weeks back; it is progressing very well. The mechanics are there, the systems are there, the tracking is there. I know every week where we are on pricing overall. That is why I feel good with the progress. The objective is to be mostly done by late Q2, early Q3, while we keep building on structural price. Ultimately, all the surcharge is going to be converted to structural as quickly as we can, and in some businesses, it goes straight to structural—Institutional being one of them. The mechanics are there; we can go faster and with more confidence than in the past because, maybe unfortunately, we have become really good at it. Operator: Our next question is from the line of Jason Haas with Wells Fargo. Please proceed with your question. Jason Haas: Was curious if the conflict in the Middle East has had any impact on any of your end markets in terms of hitting your customers' confidence in any segment? Thanks. Christophe Beck: Yes, but the Middle East is a pretty small business for us—it is a few hundred million. It is critical for the customers there, and that is why we take it very seriously—do not let any customer down. There is no customer location that we have left; we are there helping them, especially in difficult times. Some units were closed for reasons we are familiar with. It is immaterial, and we want to do things the right way for our customers and teams. Our customers trust us to be with them. Most importantly, our competition has a very hard time supplying and serving those customers—great opportunity for us to gain share. It might impact slightly our volume growth in Q2. Honestly, I do not care because it will help us in the second half as we build new shares in the Middle East. Q2 is a transition quarter, but customers love that we share in the toughest times. It is working well. I am proud of what the team is doing there, and it always pays back after those phases are behind us. Operator: The next question is from the line of Josh Spector with UBS. Please proceed with your question. Josh Spector: Good afternoon. Thanks for squeezing me in. I unfortunately am going to continue to ask on the price-cost side. It is a little odd to me that you are talking about high single-digit raw inflation in 2Q—that is coming quicker than I would have anticipated—and then you are not really saying that it is going to increase through the rest of the year, which most other companies are expecting. What is different or unique there? And, two, your ability to ratchet up that surcharge automatically if inflation goes to mid-teens from the high single digits—is that baked in, or is that something that has to be retriggered by you? Thanks. Christophe Beck: We buy a lot of products—over 10 thousand—so the basket is very broad and pretty stable. The increase started in February, impacting the second quarter because of inventory timing. We expect 8% to 9% commodity cost increase in the second quarter. I am not thinking it is going down. I think it is going to be flat to up, to your point. We are accounting for that. We can manage it in how we buy, how we save cost, and most importantly how we price. It is impacting about a third of our commodities—not everything. We are pretty well insulated. In the extreme case where things change completely, we will go to the next level of energy surcharge. We did it in the past; we know exactly how to do it. Our customers are familiar with those discussions. This is not something I spend a lot of time on. Our teams master it extremely well; they have had the opportunity to do it a few times with our customers. Do not forget that we are providing more cost-savings value to our customers' operations than what we are asking them to pay in price. That is why surcharges get into structural price and why customers stay with us. This is not high on my priority list because I know it works, customers are familiar with it, and we will master it whatever happens in the market. Eighty percent of my focus is to grow the company while we manage that and many other things happening in the world at the same time—this is just one of them. Operator: The next question is from the line of Kevin McCarthy with Vertical Research Partners. Please proceed with your question. Kevin McCarthy: Yes, thank you for taking my question, and good afternoon. Christophe, I would appreciate your updated thoughts on the subject of SG&A leverage. It looks like you were able to decrease your ratio of SG&A to sales by 130 basis points in March. Is that a reasonable trajectory to think about for the next several quarters? Maybe you could provide some updated thoughts on what you are doing productivity-wise and the effect of acquisitions on that ratio as we model the company going forward. Christophe Beck: Thank you, Kevin. I will pass it to Scott. As I said before, the whole price/surcharge/delivered product cost topic is not high on my agenda, and SG&A leverage is not high on my agenda either. Not because it does not matter, but because it is very well mastered. We know how to manage price and DPC. We know how to manage SG&A through technology. We are clearly at the forefront of AI in our organization, and it is delivering great results. These two things are well mastered while we focus on growth. Scott, color on SG&A? Scott Kirkland: Thanks, Kevin. Really good productivity on SG&A in Q1—down 130 basis points. We are getting the benefit of One Ecolab, and we are launching digital and AI programs. There is some shift, as I mentioned before, between gross margin and SG&A from M&A—primarily OVIVO. In the first quarter, that accounted for 20 to 30 basis points, but still driving 100 basis points underlying, which is above our long-term target for leverage of 25 to 50 basis points. On a full-year basis, I expect SG&A leverage to be around 80 basis points, including some benefit from OVIVO because of the geography between gross margin and SG&A, but the underlying is above our long-term 25 to 50 basis point target because of fast sales growth and great productivity. Over the long term, we still feel very good about that 25 to 50 basis points. Operator: Our final question is from the line of Scott Schneeberger with Oppenheimer. Please proceed with your question. Scott Schneeberger: I am going to touch on Light Water. You saw some solid sales in the first quarter, expecting that again in the second quarter. Do you expect transportation and green energy, which were cited, to remain the primary drivers going forward? What is driving those verticals? Is it just a few large projects, or is it a structural formation that is being created here? Christophe Beck: Light Water is doing quite well. Transportation is one of them. What we do for them is ultimately better paint while using much less water and creating much less waste. It is a great offering for the most advanced car manufacturers around the world. They like the idea of better products at a lower impact and lower cost. This is something we have built over the last two years. It is working really well with great technology. The Korean manufacturers in solar panels—totally different industry but interesting—are close to semiconductor-type manufacturing. This is something we mastered quite well in some places around the world, and it is growing nicely. The last part in Light Water is what we call Institutional Water—hotels and public buildings, office buildings—air conditioning water management, Legionnaires’ disease management—and those are working well. We used to be more in that business going one unit by one unit. Now we are working with large real estate companies around the world and facility management companies because they like a standard performance implemented anywhere around the world that drives cost down and environmental impact down at the same time. I like what I am seeing in Light Water; performance keeps getting better and is going to keep improving as we move forward into the year, which is a really good story. Since it was the last question, just to wrap up and recap a few things: we had a very good start of the year with strong momentum driven by what we like the most, which is growth. That is exactly where we want to be in a world that is quite complicated. Our new engines are doing extremely well—High Tech and Life Sciences are driving growth dramatically, in good ways, at high margin, with very low impact from energy costs. I have full confidence in our team in managing margins—both the price/DPC equation and SG&A. These are not priorities to me as the CEO because I can count on the team to deliver as they always have. I feel really good that 2026 is going to be a great year for the company—both top line and bottom line. Looking ahead, the new engines we have with CoolIT and OVIVO—top line and bottom line performance—are putting us in a very unique position to serve this industry; the same with Life Sciences. That is why I think 2027 is going to be an even better year for us—a strong 2026 and an even stronger 2027—which is what I have been committing to you for quite a while. Every single year, we want to make progress toward that ambition, and we are getting there as we enter next year. I feel really good and even better about where we are going. Thank you so much for attending the call today, and I will pass it back to Andy. Andy Hedberg: Great. Thanks, Christophe. That wraps up our first quarter conference call. This conference call and the associated discussion slides will be available for replay on our website. Thanks for your time and participation. Hope everyone has a great rest of your day. Operator: This concludes today's conference. You may disconnect your lines at this time. Have a wonderful day.
Operator: Ladies and gentlemen, thank you for joining us and welcome to Kilroy Realty Corporation Q1 2026 earnings conference call. After today's prepared remarks, we will host a question and answer session. If you would like to ask a question, please press star 1 to raise your hand. To withdraw your question, please press star 1 again. We will now hand the conference over to Douglas Bettisworth, vice president of corporate finance. Douglas, please go ahead. Douglas Bettisworth: Good morning, everyone. Thank you for joining us. On the call with me today are Angela Aman, Jeffrey Kuehling, and Eliott Trencher. In addition, Justin Smart and Robert Paratte will be available for Q&A. Please note that some of the information we will be discussing during this call is forward looking in nature. Please refer to our supplemental package for a statement regarding the forward looking information on this call and the supplemental. This call is being webcast live on our website and will be available for replay. Our earnings release and supplemental package have been filed on a Form 8-K with the SEC, and both are also available on our website. Angela will start the call with a strategic overview and quarterly highlights, Eliott will provide an update on our recent transaction activity, and Jeffrey will discuss our financial results and provide you with our updated 2026 guidance. Then we will be happy to take your questions. Angela? Angela Aman: Thanks, Doug. And thank you all for joining us today. Over the last several quarters, fundamentals across our West Coast markets have meaningfully improved. As return-to-office momentum has intensified, space rationalizations by large users have abated, and the artificial intelligence ecosystem has created considerable new business formation and growth, all contributing to a resurgence in space requirements from rapidly scaling new companies and well-established players alike. Recent tenant behavior, both within our portfolio and across the markets in which we operate, points to a constructive dynamic around technological change with companies seeking to utilize AI to enhance their growth and augment their talented team, rather than automating simply to manage costs. Against this backdrop, our team's disciplined execution drove our strongest first quarter leasing results since 2017, with total productivity of approximately 568 thousand square feet, more than double our first quarter performance last year, positioning us to increase our full-year average occupancy guidance by 25 basis points at the midpoint. Importantly, leases signed but not yet commenced now represent nearly $78 million of contractually obligated annualized base rent to be realized over the coming years, providing significant visibility on future growth. To hit on a few highlights across our regions, in San Francisco, the epicenter of the AI innovation ecosystem, market conditions continue to tighten, as first quarter leasing exceeded 3 million square feet, more than 10% above pre-pandemic quarterly averages, resulting in the third consecutive positive quarter of net absorption and positioning us well to capitalize on broad-based demand across our Bay Area portfolio. In the San Francisco CBD, we have seen significant momentum at our assets in the South of Market, or SoMa, submarket. At 201 Third, our lease rate improved from 26% at year-end 2024 to over 80% this quarter. We have successfully captured demand from a wide range of growing tenants, including both larger format users such as Tubi and Harvey AI, and a variety of smaller format users. As you may recall, in 2025, Harvey AI leased 93 thousand square feet at 201 Third, before signing a 62 thousand square foot expansion this quarter, with occupancy occurring in April 2026, just one month following lease execution. This significant expansion occurring within one year of the original lease execution speaks to both the impressive growth trajectories we are seeing for a number of rapidly scaling AI companies and also to the discipline that they have generally employed with respect to their real estate decisions, taking space only when necessitated by the current needs of the business. In addition, our team has captured outsized market share at 201 Third through the deployment of a creative and disciplined spec suites program, with all five of our recently constructed spec suites leased by completion. We are also thrilled to be experiencing strong demand across other core Bay Area submarkets. At Crossing 900 in Downtown Redwood City, we completed a 27 thousand square foot direct lease with a current subtenant during the quarter, generating an increase in cash base rent of more than 40%, underscoring the depth of demand for high quality, well-located space in this transit-oriented, walkable, and well-amenitized submarket. In Seattle, the strength we have seen in Bellevue over the last several years continues, optimally positioning space we recently recaptured for near-term releasing and rent upside. In addition, the momentum we discussed last quarter in the Denny Regrade submarket further accelerated, benefiting our recently repositioned project, West 8th. Following approximately 74 thousand square feet of new lease executions at West 8th in the fourth quarter of last year, we are pleased to announce an additional 76 thousand square feet of new leases signed at the project year to date, including a 43 thousand square foot lease with General Motors signed in the first quarter and a 33 thousand square foot lease with SoFi, signed in the first few days of the second quarter. With additional tenant discussions underway, we have good visibility into the future pipeline, reflecting the strength and competitiveness of this asset as the recent renovations and enhanced amenity offerings continue to resonate with tenants and position the property to capture a meaningful share of growing market demand. In Los Angeles, leasing activity within our portfolio has improved meaningfully over the last year, with trailing twelve-month productivity up approximately 66%, reflecting both a continued gradual improvement in the overall market and the significant portfolio repositioning work that we have done in LA over the last two years. Of particular note within the region, Arrow in Long Beach is seeing a pickup in tour activity, as the local market begins to experience a resurgence in defense and aerospace requirements. Blackwelder in Culver City is seeing an acceleration in activity from a wide variety of users, including technology and AI companies. And Maple Plaza, a recent acquisition in Beverly Hills, is continuing to experience strong, broad-based demand from the financial services and media and entertainment sectors, notably surpassing our original expectations. In life sciences, KOP2 continues to outperform the broader South San Francisco market, as the project's purpose-built life science space and top-tier amenitization offerings resonate with decision makers who are showing a higher propensity to execute than they have at any time over the last several years. Subsequent to quarter end, we executed a 38 thousand square foot lease with Olema Pharmaceuticals, bringing the project to 49% leased. The future pipeline remains robust as we evaluate opportunities to complete the remaining lease-up of our multi-tenant building while also engaging with several large-format users for the remaining full-building opportunity, which represents the most compelling offering within KOP phase two, featuring premium views and the most prominent location within the project. Turning to capital allocation, during the first quarter, we continued to raise attractively priced capital through dispositions of non-core and non-strategic assets, with a long-term goal of enhancing the durability and growth profile of the company's cash flow stream. During the period, we sold two office properties, Kilroy Sabre Springs and Del Mar Tech Center, both in San Diego, for aggregate gross proceeds of $146 million. In both cases, these assets benefited from the consistent demand we have seen across markets from owner-users for well-located, high-quality real estate, driving a highly efficient execution for our shareholders. Subsequent to quarter end, we closed on the sale of our two Hollywood residential assets, Columbia Square Living and Jardine, for aggregate gross proceeds of $[inaudible], resulting in year-to-date operating property dispositions of approximately $350 million, exceeding our original full-year goal. Residential sales followed the implementation of a holistic asset management strategy for our residential portfolio through which we recognized significant margin expansion, resulting in a materially better valuation at the time of disposition. Following the transaction, our residential exposure is now limited to One Paseo Living, which we view as a core long-term holding given the asset's significant synergies with the retail and office components of the broader One Paseo campus, where we continue to achieve record-setting commercial rents. With proceeds from our first quarter dispositions, we elected to opportunistically capitalize on recent capital markets volatility, repurchasing approximately $73 million of stock at an average price of $30.80 per share. And in April, we fully redeemed the $50 million tranche of private placement notes scheduled to mature in July. Looking forward, we will continue to explore opportunities to harvest attractively priced capital from our existing portfolio while exploring the full range of redeployment alternatives available to us. In last night's release, we also announced the formation of a joint venture to develop a premier, substantially pre-leased Class A office asset in Downtown Redwood City, one of the strongest submarkets in the entire Kilroy Realty Corporation portfolio. This complex transaction was a long time in the making, requiring substantial effort and coordination across our platform, with our partner and with the project's anchor tenant. 1900 Broadway, which is fully entitled for a 250 thousand square foot office project, is located just blocks from Kilroy Realty Corporation’s highly successful Crossing 900 asset, which has remained 100% leased since delivery in 2015. Over time, we have consistently captured meaningful rent growth at Crossing 900, releasing over 80 thousand square feet since 2023, with cash rent spreads up nearly 60%. Concurrently with closing on the venture, we executed a 20-year lease with a top-tier global law firm for 145 thousand square feet, representing approximately 60% of the building, at the highest rates ever realized in the Kilroy Realty Corporation portfolio. Since closing, we have experienced strong inbound interest from a wide range of high-quality tenants, and we look forward to updating you on our progress as the project advances. Eliott will cover project costs, estimated returns, and timing in a few moments, but I would note that substantially all of our equity investment in this project has been prefunded through the land parcel sales that are currently under contract. Before turning the call over, I want to provide a few comments on the Flower Mart project. As Jeffrey will touch on in a moment, we have revised our expense capitalization assumptions for Flower Mart to reflect continued capitalization through the fourth quarter of this year. As we previously stated, we are working with the City of San Francisco to redesign and reimagine the Flower Mart project while maintaining and building upon our current approvals. In addition to seeking flexibility to develop a broader mix of uses, we are also looking to amend the existing development agreement and create a special use district to provide relief from certain planning code requirements, the specifics of which are still under discussion. The city, which has been a constructive and valued partner in this process, has suggested an alternative approach to analyzing and documenting the changes in the special use district, which we believe will ultimately increase our long-term flexibility and optionality, though the alternative approval process will take additional time. We now expect the process to be completed late in the fourth quarter and would assume that expense capitalization ceases at that time. We are highly convicted that the path we are pursuing at the Flower Mart will result in the best possible outcome for shareholders, and as always, we will continue to update you as the process unfolds. In conclusion, I want to thank the entire Kilroy Realty Corporation team for an incredibly busy quarter across nearly every facet of our business. Your efforts are creating meaningful value for all of our stakeholders, and I am grateful for your continued energy and enthusiasm. Eliott? Eliott Trencher: Thanks, Angela. Over the last several months, the capital markets have demonstrated continued momentum as buyers recognize the inflection in fundamentals and the positive impact AI is having on our market. As a result, transaction size is increasing and asset quality is improving. For example, the Transamerica Pyramid in San Francisco recently traded for $1.05 thousand per square foot, the first time an institutional property has eclipsed the $1 thousand a foot level in that market since 2022. Kilroy Realty Corporation continues to be an active seller, and during the quarter, we closed on $146 million comprised of the previously announced Kilroy Sabre Springs at $125 million and Del Mar Tech Center sold in March for $21 million. Del Mar Tech Center is a 40 thousand square foot building in the Del Mar submarket of San Diego, and at the time of sale, the building was roughly 50% leased with a weighted average remaining lease term of one year. We remain big believers in Del Mar Heights and are still the largest owner in the submarket, but selling this property made economic sense. Additionally, last week, we closed on the sale of our two residential towers in Hollywood for $[inaudible]. As many of you know, these towers were developed by Kilroy Realty Corporation as part of our Columbia Square and On Vine projects, and the layout of the campuses allows the residential to be separate and distinct from the neighboring office properties. We determined these buildings would be good sales candidates given the lack of synergies with the office as well as the depth of demand for high-quality apartments. Before bringing the properties to market, we spent time ensuring the operations and structure were optimized to facilitate a sale and maximize proceeds. The cap rate on all sales announced year to date averages in the mid-single digits. As a reminder, in addition to the operating property sales, we have $165 million of land sales under contract, with roughly half expected to close late this year or early next year. We continue to evaluate additional opportunities to sell or repurpose non-strategic land. Turning to acquisitions, as Angela mentioned, we closed on a joint venture to develop 1900 Broadway, a 250 thousand square foot project in Downtown Redwood City that is already roughly 60% pre-leased. 1900 Broadway is adjacent to Downtown Redwood City’s restaurant row, making it one of the most walkable and amenitized properties in the area and worthy of premium rents. Kilroy Realty Corporation was uniquely positioned to take advantage of this off-market opportunity given our deep market insight, strong local relationships, and proven development acumen. These factors gave our partner, Lane Partners, and our anchor tenant, Cooley, confidence in our ability to bring this deal together. We intend to break ground next year, and Cooley is expected to take occupancy in early 2030. The total anticipated cost for the project is $330 million to $350 million, of which our share will be 97% upon completion. Stabilized yields are expected to be in the low to mid-9% range. Before turning the call over to Jeffrey, I think it would be beneficial to summarize the substantial disposition progress we have made over the last two and a half years. As private capital returned to the office sector, Kilroy Realty Corporation meaningfully ramped up sales efforts with a total of roughly $980 million of land and operating properties completed or under contract. We have talked about individual transactions in detail on prior calls, but in total, this demonstrates the private market is open and functional and can be a source of attractively priced capital if executed thoughtfully. We elected to redeploy a portion of the sales proceeds into four high-caliber infill, amenitized, multi-tenant investments totaling roughly $765 million, which includes the full cost of building out 1900 Broadway. This capital recycling gives us a more diversified and sustainable cash flow stream while also making the portfolio more amenitized, walkable, and supply constrained. As a result of being a net seller of roughly $215 million, we were able to use a portion of the savings to pay down debt and opportunistically repurchase stock. We are proud of the progress made to date and intend to keep making the next best capital allocation decision one step at a time. With that, I will turn the call over to Jeffrey. Jeffrey Kuehling: Thanks, Eliott. Before turning to results, I want to highlight two disclosure enhancements this quarter aimed at providing investors with better visibility into leasing performance and how executed activity translates into future results. First, we have added a leasing spread calculation focused on space vacant for less than 12 months. This aligns with how most of our peers present spreads and better isolates true mark-to-market activity; our historical calculation remains unchanged and is presented alongside the new metric. Second, we have expanded our disclosure regarding signed but not commenced leases, which currently totals over 1 million square feet and nearly $78 million of contractually obligated annualized base rent. This disclosure highlights the embedded growth already in place and provides greater visibility into the forward trajectory of the operating platform. Turning to our financial results, FFO for the first quarter was $0.91 per diluted share. With respect to occupancy, as a reminder, KOP2 entered the stabilized pool during the quarter, impacting reported portfolio metrics. As a result, portfolio occupancy ended the quarter at 77.6%. Excluding KOP2, first quarter occupancy would have been 81.5%, down only 10 basis points despite our previously communicated first quarter move-outs. The dispositions of Kilroy Sabre Springs and Del Mar Tech Center completed during the quarter had no impact on overall reported occupancy. Cash same property NOI increased 1.8% in the first quarter, driven by lower bad debt expense and contributions from net expense settlements, restoration fee income, and other property income. These positive impacts were partially offset by detraction from base rent despite a marginal increase in overall occupancy, reflecting free rent periods from certain new tenants in the portfolio. On the leasing front, activity during the quarter resulted in GAAP spreads of negative 10.6% and cash spreads of negative 16.8%. Those spreads were driven primarily by two leases in San Francisco, both of which involved space that was vacant for longer than 12 months. Importantly, these were capital-light transactions that generated attractive net effective rent outcomes. These two leases were partially offset in the quarter’s reported spreads by the lease Angela previously mentioned at Crossing 900 in Redwood City, which not only generated the highest net effective rent of the quarter in our operating portfolio, but also delivered significant positive cash and GAAP releasing spreads. Leasing on space vacant for less than 12 months performed well, generating positive GAAP spreads of 19.2% and cash spreads of 5.2%. Turning to guidance, last night we increased our 2026 FFO guidance by $0.21 at the midpoint with a new FFO range of $3.49 to $3.63 per diluted share, reflecting improvement in our core portfolio and platform operations and updated timing assumptions on Flower Mart expense capitalization. With respect to Flower Mart, as Angela discussed, we are now assuming that expense capitalization will cease late in the fourth quarter. At that point, a little less than $1 million of quarterly operating expenses and real estate taxes along with $7 million of quarterly capitalized interest will begin impacting earnings. This change increased guidance by approximately $15 million to $16 million, or $0.14 per share, and it was reflected in the capitalized interest in development guidance provided last night. Cash same property NOI growth is now expected to range from 25 to 125 basis points, representing a 150 basis point increase at the midpoint from our prior range. This increase is driven by two factors. First, in April, we received a $5.9 million settlement related to the 23andMe bankruptcy, which fully resolves our economic interest in that process and contributes approximately 90 basis points to NOI growth. Second, strengthening fundamentals in our core operations, driven primarily by improving net expenses and increased average occupancy, contribute an additional 60 basis points to growth. We also raised the top end of our operating asset dispositions guidance range to reflect our progress to date. We moved decisively, closing dispositions earlier than anticipated and recycling capital into compelling investment opportunities, including $73 million of opportunistic share repurchases and prudent debt repayment. Looking ahead, and as Angela and Eliott noted, we will continue to take a balanced, disciplined approach to capital allocation, seeking opportunities to create value for shareholders while prioritizing balance sheet strength and financial flexibility. With that, we are happy to answer your questions. Operator: Thank you. We will now open the call for questions. Please limit yourself to one question and one follow-up. If you would like to ask a question, please press star 1 to raise your hand. To withdraw your question, please press star 1 again. We ask that you pick up your handset when asking a question to allow for optimum sound quality. And if you are muted locally, please remember to unmute your device. Please stand by while we compile the Q&A roster. Your first question comes from the line of Manas Ebek from Evercore ISI. Your line is open. Please go ahead. Manas Ebek: Perfect. Thank you. And just wanted to say thanks, in the beginning, for the additional disclosures in the supplemental. It has been very helpful. My question was for Los Angeles and San Diego to see if you could maybe elaborate a little bit further on the leasing demand that you see there and how far along we are here on the recovery. Obviously, we understand, and it is great to see how positive San Francisco has responded recently. Robert Paratte: Hi, Manas. I will continue on the theme that Angela mentioned. Across the entire company portfolio, we are seeing an increase in activity, including tours, proposals, and done deals, and Los Angeles is no exception. In Q1, we signed 24 deals in LA, and we are seeing quite a bit of activity at our Long Beach project and Maple Plaza, and we are starting to see a pickup in activity at Westside Media Center on the West Side of LA and one of our other assets here. Our pipeline continues to grow in the LA market. Following on the 24 deals I mentioned, we have more deals that are in the pipeline and leases actually, but we are not going to quantify all that until they are done. It is improving, and again, I would say this across our entire portfolio: we are seeing a continued flight to quality. It is a world of haves and have-nots, so the recovery is not the same for all owners or all properties, and we are benefiting from having these high-quality assets in LA, San Diego, etc. At Nautilus, which I will really focus on because that is our newest acquisition, we had 400 thousand square feet of tours since January 1. We have several tenants that are looking to grow in the project, and we continue to entertain tours and the other normal activity that goes with leasing, and we could not be happier with that. The amenities are really showing well now. Now that it is spring, everything looks great at the site, so very happy with that. At Kilroy Center Del Mar, we are seeing an exceptional amount of activity. Our spec suite program there is really paying off as it is in other markets like Austin, and we are going to continue on that front, being very strategic in bringing spec suites to market but providing what the market wants. Operator: Thank you for your question. Your next question comes from the line of Anthony Paolone from JPMorgan. Anthony, your line is now open. Anthony Paolone: Great. Thank you. My first question is on 1900 Broadway and wondering if you could talk about the expected yield you expect to make on that and where rents need to be for the unleased space to achieve it? Eliott Trencher: Tony, in my prepared remarks, I mentioned that we are expecting stabilized yields in the low to mid-9% range. We have leased 60% of the building and have a good rent comp for where market rents are, so if we replicate that, we will be in really good shape. Angela Aman: I would also emphasize, as we have discussed about 1900 Broadway, it is really just a few blocks away from our Crossing 900 asset, where we have leased 80 thousand square feet over the last couple of years at rents that are up on average 60%. We have a lot of data points in the market in addition to the Cooley lease that point us to where rents should be in this market. As Eliott mentioned in his prepared remarks, 1900 Broadway is adjacent to restaurant row in this submarket, so it is highly walkable, highly amenitized, and really should command premium rents as we saw in the transaction that has already been executed. We are excited about having additional supply to lease in what has been and continues to be one of the strongest submarkets in the entire Kilroy Realty Corporation portfolio. Anthony Paolone: Okay. Thanks for that. And then just maybe I missed this, did you give a cap rate on the two resi sales? Eliott Trencher: We gave cap rates for all the sales that we have done to date, which were in the mid-single digits. The resi sales were around the 4% range. Operator: Thank you for your question. Your next question comes from the line of John Kim from BMO Capital Markets. John, your line is now open. John Kim: Thank you, and thanks for the new disclosure. On the signed leases not commenced, I was wondering what was driving most of the leases, 86% to net leases. I know that KOP2 is a big part of that, but assuming 1900 Broadway is as well, it would suggest the yield on that could be closer to 13% versus 9%. I am wondering if I have my math right and if there is any conservatism in that number. Angela Aman: There is not much to point to in terms of why the population of signed but not commenced is skewed so much to net leases. It really is just a mix issue and the properties and markets that make up the signed but not occupied pool at this point in time. On the yield, I would just reiterate what Eliott mentioned in his prepared remarks and in response to the last question: stabilized yield on this project, we think, is in the low to mid-9% range. We think it is very compelling. There is going to be good growth at this project over time as well, again in one of the strongest submarkets in the Kilroy Realty Corporation portfolio, so we feel like the development upside here is worth what is a relatively small amount of leasing still to complete at this project. John Kim: Okay. And at Flower Mart, I know you talked about extending the capitalized interest. What is the possibility that you keep development going forward? I know that you are committed to One Paseo, and this looks like this could be another mixed-use development with a big multifamily component. Just wanted your latest thoughts on the Flower Mart as far as keeping it as a development project. Angela Aman: We are watching the San Francisco market really closely as well as how things evolve in addition to where we are able to take the process we are going through right now in terms of design and entitlement flexibility and optionality. There is still a lot for us to sort out as we move through this process, and we have time as this process continues to unfold to watch what happens with both commercial and residential rents within the City of San Francisco. We are committed to making sure that whatever we do in terms of next steps in 2027 and beyond at the Flower Mart project maximizes value for shareholders. Prior to the pandemic, the company had a very strong plan to develop this on the commercial side. We are exploring a broader mix of uses that would allow us, as you mentioned, to add more residential into the project. We need to see how the market continues to evolve and what the project ultimately looks like to decide what the optimal execution path is. Maintaining a lot of flexibility and prioritizing optionality is a way to create additional economic value at the Flower Mart. Operator: Thank you for your question. Your next question comes from the line of Seth Bergey from Citi. Your line is now open. Seth Bergey: As you think about the revised disposition guidance, what would get you to the higher end? Are you just evaluating the depth of the buyer pool and any changes you have seen in terms of demand for assets? And then are there any submarkets you would look to exit within that revised disposition range? Eliott Trencher: The revised disposition range at the low end implies that we stop with what we have done to date, and then we have about $150 million at the high end of the range beyond what we have done. That clearly has some room to execute, and our approach is going to be consistent with what we have talked about in the past, which is if we can find compelling opportunities, then we are going to pursue them, and we wanted to reflect that with an adjustment to the disposition range. There is not a particular market or submarket that we are focused on exiting. We are really just looking for the way to maximize proceeds on good execution on assets that we think are going to be mispriced given our forward-looking view. Angela Aman: I would add to echo some of what Eliott mentioned in his prepared remarks: in addition to healthy demand that we have seen over the last couple of years, particularly from owner-users looking to acquire assets, we have really seen a resurgence in institutional demand and interest across our West Coast markets. Where there are opportunities, as Eliott just mentioned, to take advantage of that renewed demand for West Coast commercial assets, we want to make sure we allow ourselves enough room within the guidance range to be able to capitalize on that. Seth Bergey: And then I think in the prepared remarks, you mentioned AI and technology as a demand driver for some of the LA submarkets. Do you think LA will have a spillover effect from San Francisco and be a large component of recovering that market? Or how do you quantify the impact that AI can have on a market like Los Angeles? Angela Aman: We are not suggesting it is going to be a huge driver of demand in the LA market. We have certainly seen a lot more San Francisco-native or AI-native companies leasing space particularly in the Pacific Northwest, where there is a much larger resident talent pool in the tech sector. We have certainly seen the spillover benefits in that market. We are seeing some of it in the LA market. It is pretty concentrated in a few specific submarkets—Culver City in particular. It is interesting to note that we are seeing some of those tenants pop up. It is great from a marginal demand standpoint, but we are seeing much broader demand, even in markets such as Culver City, across different industry categories as well. Operator: Thank you for your question. Your next question comes from the line of Andrew Berger from Bank of America. Andrew, your line is now open. Andrew Berger: Sounds like the first quarter was a very strong quarter for leasing. Could you talk a bit about where the pipeline is today and if there is any way to quantify how big it is going forward? I think last quarter you said it was up about 65% year over year. Robert Paratte: Andrew, the change in San Francisco is so dramatic over the last 12 to 18 months that it is actually hard to pinpoint the pipeline because it continues to grow. To add some color to what Angela was talking about with the three consecutive quarters of positive absorption, there were 13 deals done in Q1 over 100 thousand square feet, and that is a very big number for the city. Another really important note is that 5 million square feet of availability has been absorbed since its peak in mid-2025, and that is very meaningful because that availability rate was really the headline that had everyone concerned. A third point that is really important is that these deals—both the 100 thousand square feet plus and other parts of that 3 million square feet—are expansionary, and that is also a very positive indicator. You look at our deal with Harvey, for example, where they took an additional 60 thousand square feet. The pipeline for us keeps growing. Our team has done a terrific job at 201 Third, as Angela pointed out. We are focused on 360 Third and 303 Second. We are talking to folks about 345 Brannan. So SoMa was the strongest submarket of the San Francisco market, and Kilroy Realty Corporation is a direct beneficiary of that because that is where all of our assets are. We are poised and ready to start executing, and things are looking really good; the momentum, not only for us but others in the market, is quite strong. Andrew Berger: And it sounds like speed to occupancy is becoming more important. Can you talk a little bit more about this? How much of the comments around speed to occupancy are related to AI-type tenants versus tenants more broadly? And you mentioned spec suites—can you talk a little bit more about which markets you are leaning into spec suites more and what type of results that is creating for your leasing teams? Robert Paratte: I will use the Olema example. They are in two different spaces in San Francisco. One was a space that was not current or modern enough for their needs. The other is a space where they got pushed out by an AI company, and so that created an immediate need for space, and we were ready to execute on that because they are taking a portion of our spec labs and to-be-built space. That is a very good example of what is happening. You either have rapidly growing AI companies that organically need space, or others are getting displaced by larger AI companies. One point I would raise about San Francisco is that the FIRE category was quite active in Q1—venture capital, banking, and finance. San Francisco is really hitting on all cylinders from both the traditional as well as technology front. In terms of our spec suites strategy, it is case by case and market by market. If we have a spec suite or two in a building and they have not leased, we are not going to build more until we have activity on that, and we have been really judicious about how we apply it. The markets where we have seen a lot of traction with spec suites are clearly San Francisco, Seattle, Austin, San Diego, and parts of LA. Angela Aman: It has been an interesting dynamic. At 201 Third, we built out five spec suites on one floor with some shared common space and a conference center, and having all five leased before we had completed construction was really telling in terms of where demand is, particularly in the submarket with earlier-stage companies and the degree to which they are prioritizing speed to occupancy. In markets like Austin, as Rob mentioned, we have seen a similar dynamic over a longer period of time, where every time we begin building out the spec suites, we have a different level of interest than we had from pure shell conditions. We have tried to be thoughtful and disciplined about how we are building out spec suites, both to make sure we do not get over our skis on specific sizes as market demand may shift and to make sure that we have inventory at these projects at all times. As they get leased up or as we see incremental interest, we are prepared and willing to lean in and replicate success from earlier phases of the spec suite program. Across most of our markets, it has been highly effective and has driven both a higher lease rate and faster occupancy commencements over the last couple of years. Operator: Thank you for your question. Your next question comes from the line of Nicholas Yulico from Scotiabank. Nicholas, your line is now open. Nicholas Yulico: Thanks. I had a couple questions on specific buildings. In terms of West 8th, I know you have had a lot of leasing traction there. Can you talk a little bit more about the dynamic of taking market share in Seattle versus pulling tenants that are maybe looking at Seattle and Bellevue? And then secondly, on 360 Third, San Francisco, I think you have an expiration there, a little over 100 thousand square feet this year. If you could talk about the traction on that and remind us when that expiration is. Robert Paratte: On West 8th, two factors are in play in terms of the absorption we have done. Both SoFi and General Motors are new to market. What really played into that is the renovation that we did at West 8th and the traction that we have built with Databricks and other tenants in the market. This part of town, Denny Regrade, right on the edge of the traditional CBD, is where people want to be. It is where the talent is either living or very close by, and it has the type of amenities tenants want. That is causing that absorption and what we are able to capitalize on. In Bellevue, we expect to see, but we have not yet seen, a direct correlation between higher rates in Bellevue and more absorption in Seattle. Most tenants are pretty focused on being in one or the other, but over time we may see some tenants flow from Bellevue to Seattle. At 360 Third, we do have that expiration coming up. We have been marketing the space. We have had conversations with larger tenants over 100 thousand square feet and others around 50 thousand square feet. We are focused on the asset. The proximity of 360 Third between the Bay Bridge and BART and Muni is really strategic for a lot of companies—that is why it did well in the past, and we expect the same going forward. Jeffrey Kuehling: Nick, just to clarify, the 360 Third expiration is a little over 100 thousand square feet in Q2. Nicholas Yulico: Okay, thanks. And that is a known vacate? Jeffrey Kuehling: Yes. Nicholas Yulico: Okay. Thank you. And then just a question on DIRECTV. Any latest thoughts there on a renewal possibility? If it is not a renewal, I think you were contemplating some other uses for the asset or a potential sale. Any thoughts there? Robert Paratte: I do not want to give too much color, but DIRECTV is a possibility. We have some other activity. The project is really well amenitized with terrific outdoor spaces and landscaping, and we have been pushing the marketing of that. We do have some conversations going on. Angela Aman: Remember, it is only a little less than 50 thousand square feet in the 2026 expiration pool. A larger portion of that lease does not expire until 2027, so we have time to work through that. Operator: Thank you for your question. Your next question comes from the line of Blaine Heck from Wells Fargo. Blaine, your line is now open. Blaine Heck: Thanks. I was hoping you could talk more specifically about the forward leasing pipeline at KOP2. How much of the demand is for spec suites versus larger spaces? Anything you could tell us about tenant profiles, and whether the mid-5% yield forecast is still intact? Robert Paratte: The pipeline is similar to what we executed on in Q4 and Q1—basically life science focused, primarily and almost exclusively. The tenant ranges in size down in South San Francisco right now: the bulk are probably 10 thousand to 50 thousand square feet—that is probably 50% of the demand in the market—and there are quite a few. There are over four requirements over 100 thousand square feet in the market, and there are some significantly above 100 thousand square feet. As Angela alluded to, we are working on filling the rest of Building F, which is our multi-tenant building, and we are in conversations on the vacant building, which is the most prominent of the three buildings on the campus and really has terrific signage opportunities and prominence for tenants that want that. Angela Aman: We confirm the yield expectations we shared last quarter in the mid-5% range. Those are still fully intact. Blaine Heck: Great. Thank you both. Then switching gears to capital allocation, can you give us an update on your thoughts on share repurchases going forward, just given where the stock is trading? How do you think about their attractiveness relative to acquisitions or development? Angela Aman: What we have demonstrated over the last couple quarters is a desire to make sure that as we think about capital allocation, we are prioritizing balance sheet strength and flexibility and employing a balanced approach. You have seen us be active on acquisitions going back several quarters. You saw us this quarter pair operating property disposition proceeds realized during the quarter with debt repayment for a balanced approach and execute share repurchases, just like we told you we would, in a leverage-neutral or deleveraging way. We continue to see good value in the stock. We also appreciate the significant capital markets volatility, especially in our sector, and we want to keep enough financial flexibility to step in when we see periods of significant dislocation. As discussed earlier, we increased operating property disposition guidance. The land sale proceeds we have already announced are earmarked for 1900 Broadway and that is effectively fully funded from an equity standpoint. Additional operating property disposition proceeds will be available for balanced redeployment based on how we see the full set of alternatives at that point in time. Operator: Thank you for your question. Your next question comes from the line of Brendan Lynch from Barclays. Your line is now open. Brendan Lynch: Thank you for taking my questions. You have managed our expectations on churn this year. Maybe you could give us your current expectations on the retention rate for the remaining 740 thousand square feet that are set to expire. Angela Aman: Going back a couple of quarters, when that pool was larger—probably around 1 million square feet—we expected the vast majority of those lease expirations would be move-outs. If you go back two years and look at what was in totality in the 2026 pool, which was about 2 million square feet, we did successfully renew a number of those spaces early during 2025. The blended retention rate on that initial almost 2 million square foot pool of 2026 expirations was about 40%, maybe a bit better than 40%, relatively in line with historical pre-pandemic averages. That said, when we look at the lease expiration schedule right now for 2026, there are a few opportunities to work through some renewals, but they are reasonably limited. From a reported retention standpoint, you will also begin to see us renewing early some of the 2027 expiration pool, so it is harder to tell you exactly in any given quarter what the reported retention rate will look like. For modeling, the bulk of the 2026 remaining expirations will be move-outs. Brendan Lynch: Thank you. And are you still anticipating that occupancy troughs in the second quarter? Angela Aman: Yes. Given the pace of move-outs—you can see that on the lease expiration page—Q2 is by far our biggest move-out quarter during 2026. That is our current expectation. Operator: Thank you for your question. Your next question comes from the line of Upal Rana from KeyBanc Capital Markets. Your line is now open. Upal Rana: Thank you. On dispositions, do you anticipate elevated dispositions or being a net seller to continue into 2027? Or will 2026 be the bulk or the tail end of it? Eliott Trencher: It is a little too early to talk about 2027. The way we have approached dispositions to date is to be flexible and dynamic, look at what the market is telling us, take those signals, and do what we think is in the best interest of shareholders. We gave guidance on what we thought dispositions would be to date in 2026. We executed beyond that and we are adjusting, and we will continue to take that approach. To the extent that we still see appealing opportunities, we will continue to sell, and if not, we will not. Angela Aman: That is the right way to frame it. This has been an opportunistic exercise. I would not frame it as how much we have to sell. Especially when you think about what we did during the quarter and what we announced last night in terms of the residential sales—those were have-to-sell transactions only in the sense that there was a real opportunity to raise very attractively priced capital on behalf of our shareholders, and we took advantage of that. We will continue to be opportunistic as we evaluate the disposition pool, prioritizing balance sheet strength and flexibility and making the company’s cash flow stream more durable and faster growing over the medium to longer term. Upal Rana: Great, that was helpful. And then, Angela, you mentioned Maple Plaza seeing strong, broad-based demand. Could you provide more detail there and any update you could provide on Beverly Hills broadly? Angela Aman: We have seen great traction there overall. The lease-up and our retention experience with respect to some tenants we had originally underwritten to vacate has been much better than we expected. Demand is from a broader mix—media and entertainment, financial services, professional services—not overly tied to any one sector. We are encouraged about the momentum we are seeing there and the long-term potential for Beverly Hills overall. Eliott Trencher: On the capital side, all that we have seen in the market since we acquired has reaffirmed that capital really wants to be in Beverly Hills. We have seen a wide array of capital focused on Beverly Hills, and we feel really good about when we bought the building. Robert Paratte: We are really happy with the leasing momentum we have. We are leading the market right now at Maple Plaza. There is a lot of media, private wealth, and financial services demand, as Angela pointed out. In cases like Maple and at 201 Third, you start building momentum in leasing and that attracts other activity. We have worked hard since taking the project over to improve the lobbies and landscaping, and it is showing well. We are really happy with the rental rates; based on underwriting, we are exceeding underwriting in all cases. Operator: Thank you for your question. Your next question comes from the line of Tom Catherwood from BTIG. Your line is now open. Tom Catherwood: Thank you. Maybe, Rob, starting with you: from a lease strategy perspective, over the last year or so, you have put some tenants into shorter-term leases with the hope that some could grow into more space or convert into longer-term leases. For some of the demand that you are talking about today, are some of those shorter-term leases actually converting longer term? Robert Paratte: Some are, but a lot of it is also a trend in the market as tenants are willing to commit with conviction—meaning longer-term leases. In the case of Olema, it is a longer-term lease, and in some other cases, it is a short-term deal that we have extended. We are hitting it on both fronts. Angela Aman: Specifically in the San Francisco CBD, where we have talked about this trend being most pronounced, the execution with Harvey this quarter underscores why we thought it made sense to do that original deal last year. It was a shorter-term deal with very little capital spend, reusing existing improvements left over by the prior tenant—very positive NER but shorter term. The reason they wanted flexibility was not that they wanted out at the end of the term; they did not know their full space requirements and wanted flexibility to meet growth objectives. Where we have worked with tenants and gone a little shorter term, it has been with a view to accommodating their future growth. The Harvey example—leasing 93 thousand square feet last year and another 62 thousand square feet this quarter—speaks to why that strategy in certain submarkets and for certain tenants has been highly effective. Tom Catherwood: Perfect, that was exactly what I was looking for. And then, Angela, as you work through a revised program for the Flower Mart, is there a potential outcome where capitalization carries beyond December, or is that more of a hard stop? Angela Aman: At this moment in time, we feel that is a pretty hard stop, with a view to finishing the revised design and entitlement process with the city—getting to the point where we have more flexibility around the mix of uses and greater ability to phase the project. Once we complete that, we are waiting for demand to be sufficient in the market at rents that will justify new construction. Right now, we think there is a gap that would necessitate us stopping capitalization probably late in the fourth quarter of this year. We are watching the San Francisco market closely. There are very few large contiguous blocks of high-quality space remaining available. It is a low probability, but not a 0% probability, that there is something demand-driven and actionable as we get into 2027. Right now, I would say it is a low probability, but not 0%. Operator: Thank you for your question. Your next question comes from the line of Caitlin Burrows with Goldman Sachs. Your line is now open. Caitlin Burrows: Maybe just a follow-up on Flower Mart. If you were to stop capitalizing in 2026, put a pause on the project, and then resume whether it is six months or multiple years later, would full capitalization come back, or would you then start capitalizing on the incremental spend? Jeffrey Kuehling: In the event that we do have a great outcome where we can start capitalizing in the near future, it would be on the full accrued balance. It would not be just the marginal spend. It would be the same rate that you are seeing today. Caitlin Burrows: Got it. And then maybe back to the leasing pipeline today versus a quarter ago. Do you think the leasing pace of over 550 thousand square feet is sustainable, or what is required to meet the low versus high end of the occupancy guidance this year? Robert Paratte: I would love to be in the prediction business, but I can just tell you that the demand we are seeing is real, and all of our teams are busy. I could not be happier with our whole leasing team and the people that support them in getting these things executed. We are really busy, and more to come. Operator: Thank you for your question. Your next question comes from the line of Dylan Burzinski from Green Street. Your line is now open. Dylan Burzinski: Hey, thanks. Not to ask you another question geared toward predicting anything, but going to do so anyway. Things continue to be firing on all cylinders in San Francisco. Do you have any sense for how far behind LA and then the Seattle CBD is relative to what you are seeing in San Francisco and the broader Bay Area? Angela Aman: In the Pacific Northwest, Bellevue has been very strong for the last couple of years. Availability has continued to compress and rents have performed very well. That market feels very tight right now. Over the last couple of quarters, our assets in Seattle—not in the downtown core but in Denny Regrade/South Lake Union—have definitely seen increased momentum. With roughly 150 thousand square feet signed over the last couple of quarters, we feel like there is a lot more momentum in Seattle, from very high-quality tenants and a broader mix of uses. LA feels like it is gradually improving, and I would candidly admit that improvement is gradual. The improvement in our pipeline and executed productivity has been due to both that gradual market improvement and the significant portfolio reallocation work we have done within LA over the last couple of years. Our portfolio is better positioned to capture what has been a slowly improving market in LA. There are pockets performing better—Arrow in Long Beach benefiting from a resurgence in defense and aerospace up through the South Bay, including El Segundo. LA will be a broader aggregation of industries moving in the right direction, and we are cautiously optimistic, but it will be a step behind. Dylan Burzinski: That is incredibly helpful detail, Angela. I appreciate it. One more: as you look at lease expirations next year, I think they are largely Q1-weighted if we exclude the DIRECTV lease expiration in 2027, which sounds like it is in flux. As you reach out and get a sense for renewal possibility for next year, are tenants more receptive than they were coming into 2026 and 2025? Angela Aman: We have a couple of things going for us in 2027. It is a considerably smaller expiration year than 2026 was a year ago. The largest expiration next year is AT&T/DIRECTV, which is a fourth quarter expiration. Outside of that, the pool is very granular—nothing above 100 thousand square feet and only one lease between 50 thousand and 100 thousand square feet. We are beginning some of those conversations. We have expirations happening in some pretty strong markets where we are already having conversations either about renewal or significant interest from potential backfill tenants. We need to keep our heads down and execute as it relates to the 2027 pool. The overall size and granularity of that pool outside of AT&T/DIRECTV is encouraging. Operator: Thank you for your question. Your next question comes from the line of Michael Carroll from RBC Capital Markets. Your line is now open. Michael Carroll: Thanks. I wanted to circle back on Rob’s comments regarding the leasing pipeline. Has that pipeline continued to build and grow? Is it bigger today than it was at the beginning of 2025? Robert Paratte: Absolutely. It continued to grow throughout 2025, and the pipeline is increasing now. There is a pending transaction that is relatively significant that is going to happen in SoMa probably in Q2—not with us—but it is another indication that the market is thriving and SoMa is on a tear right now. The real upswing started mid-2025 and picked up steam for the rest of the year and into Q1. Michael Carroll: And is the volatility that you are highlighting mainly driven by the San Francisco market? Are tenants getting taken out of the pipeline because they are leasing space, or are tenants delaying decisions or finding it hard to quantify their space needs? Robert Paratte: On the positive end, it is hard to pinpoint because literally every week there is new demand coming from tenants. Angela Aman: And significant demand—larger format tenants. The size of the pipeline is up materially year over year, and we have also seen an increase in average size requirements, with more tenants between 50 thousand and 100 thousand square feet. You have seen that in the execution stats as well. The pipeline being marginally up over the last quarter or two while we have had substantial executions is a really good sign. Robert Paratte: The last thing I would say, Michael, is that rolling twelve-month leasing totals have returned to historical averages in San Francisco—about 9 million square feet. That gives you more color on the pipeline. Operator: Thank you for your question. Your next question comes from the line of Peter Abramowitz from Deutsche Bank. Your line is now open. Peter Abramowitz: Thank you. Most of my questions have been asked, but one on software tenants in the portfolio and potential tenants. Could you give some color on the tone of conversations with software tenants these days, particularly in the Bay Area? It seems so far this year that the equity markets are pricing these companies as if there is an existential threat to their business. What is the tone of conversations with them, and have there been any meaningful additions to the sublease market from that portion of the portfolio? Angela Aman: Going back several years to the height of the pandemic, software was a category where we saw some of the largest blocks of sublease space. Thankfully, many of those blocks have been spoken for. While it might look one way on the lease expiration schedule, we have a much more granular tenancy within some of that space and tenants that we believe—especially in San Francisco—have a high likelihood of renewing or going direct with us down the road. A lot of that headline impact has already been felt in the portfolio and was felt several years ago. That space was successfully re-leased in many circumstances. I am not aware of any conversation we have had in the last six months where the tone from those tenants has changed in any material way. Robert Paratte: I agree. We have software companies we are talking to that need more space. The news is national, but on the ground we are not seeing pullbacks—rather increased demand. Operator: Thank you for your questions. There are no further questions at this time, and this concludes today’s call. Thank you for attending. You may now disconnect.
Operator: Good morning, and welcome to the Stepan Company First Quarter 2026 Earnings Conference Call. [Operator Instructions] As a reminder, this call is being recorded on Tuesday, April 28, 2026. It is now my pleasure to turn the call over to Mr. Ruben Velasquez, Vice President and Chief Financial Officer of Stepan Company. Mr. Velasquez, please go ahead. Ruben Velasquez: Thanks, Victor. Good morning, and thank you for joining Stepan Company's First Quarter 2026 Financial Review. Before we begin, please note that information in this conference call contains forward-looking statements, which are not historical facts. These statements involve risks and uncertainties that could cause actual results to differ materially, including, but not limited to, prospects for our foreign operations, global and regional economic conditions and factors detailed in our Securities and Exchange Commission filings. In addition, this conference call will include discussions of adjusted net income, adjusted EBITDA and free cash flow, which are non-GAAP measures. We provide reconciliations to the comparable GAAP measures in the earnings presentation and press release, which we have made available at www.stepan.com under the Investors section of our website. Whether you are joining us online or over the phone, we encourage you to review the investor slide presentation. We make these slides available at approximately the same time as when the earnings release is issued, and we hope that you find the information as perspectives contained therein helpful. With that, I would like to turn the call over to Mr. Luis Rojo, our President and Chief Executive Officer. Luis Rojo: Thank you, Ruben. Good morning, and thank you all for joining us today to discuss our first quarter 2026 results. I plan to share highlights of the quarter's performance and provide an update on our key strategic priorities, while Ruben will provide additional details on our financial results. Before reviewing the quarter, I want to recognize our teams around the world for their continued commitment to safety and operational excellence. Safety remains our top priority and the foundation for everything we do at Stepan. That focus was evident as we delivered the strongest safety performance on record during the first quarter of this year. Congratulations, team. Q1 2026 was an important quarter of execution for Stepan. We advanced our footprint and asset base optimization efforts, delivered net sales growth in a challenging macro environment and continue to generate a strong volume growth across our strategic end markets. Organic net sales were up 4% year-over-year. Organic volume was flat with double-digit growth in Crop Productivity, Oilfield, Industrial Cleaning and in our Tier 2, Tier 3 customer base. This was offset by continued soft demand in European Polymers. Adjusted EBITDA was $50 million, down 14% versus the prior year, reflecting lower Surfactant results due to lower absorption and production timing issues in Asia, competitive pressures in Mexico, the impact of the U.S. cold snap and continued pressures from elevated oleochemical input costs. Polymers delivered an 8% increase in adjusted EBITDA, driven by 5% volume growth in North America and global margin improvement, which was partially offset by continued softness in Europe. Specialty Products delivered volume growth of 30%, reflecting a strong demand and new business with our MCT product line. EBITDA was slightly down due to product mix and lag on raw material prices. We continue to execute Project Catalyst safely on time and on budget. These actions demonstrate our disciplined approach to cost optimization while ensuring we maintain the capabilities needed to serve our customers and deliver balanced growth across our higher value end markets. We remain committed to a balanced approach with capital allocation. During the first quarter, the company paid $8.9 million in dividends to shareholders. Consistent with our long-standing commitment to shareholder returns, our Board of Directors declared a quarterly cash dividend of $0.395 per share. And last year, we increased our dividend for the 58th consecutive year. This track record underscored our confidence in Stepan cash flow durability and long-term outlook. With that, I will turn the call back to Ruben to walk you through the financial details for the quarter. Ruben Velasquez: Thank you, Luis. My comments will generally follow the slide presentation. As shared in our first quarter 2026 results release, reported net loss for the quarter was $41.4 million or $1.81 per diluted share versus reported net income of $19.7 million or $0.86 per diluted share in the prior year. The current year reported results include a $65.4 million pretax restructuring charge or $51.2 million after tax related to the previously announced closure of our Hillsborough, New Jersey site and the decommissioning of select assets at our Millsdale, Illinois and Stalybridge, United Kingdom facilities. The cash impact associated with this restructuring charge was less than $1 million during the quarter. Slide 3 summarizes our first quarter 2026 performance. Adjusted net income was $10.3 million or $0.45 per diluted share, down 47% versus adjusted net income of $19.3 million or $0.84 per diluted share in the first quarter of last year. The decrease in adjusted earnings was largely due to lower Surfactant earnings and higher interest expense. Consolidated EBITDA was $49.6 million compared to $57.5 million in the prior year, a 14% decrease. The decline was primarily due to Surfactant earnings driven by lower absorption and production timing differences in Asia, competitive pressures in Mexico, the severe cold snap in the U.S. and higher oleochemical raw material costs still working through our P&L. This was partially offset by strong polymers performance where adjusted EBITDA grew 8% versus the prior year. Cash from operations was $17 million for the quarter, and free cash flow was negative $14 million, driven by higher working capital requirements, which are typical during the first quarter of the year. We remain focused on deleveraging the balance sheet and maintaining our disciplined capital allocation. Slide 4 shows the total company pretax income bridge for Q1 2026 compared to Q1 2025. Because this is a pretax view, the figures shown reflect operating performance before the impact of income taxes. First quarter pretax income declined year-over-year, primarily driven by lower Surfactants operating income and lower capitalized interest income. These headwinds were partially offset by improved Polymers performance and favorable effective tax rate. Important to note, the higher interest expense reflects lower capitalized interest income associated with the start-up of our Pasadena, Texas site. Importantly, several of these drivers, including higher depreciation and the declining capitalized interest associated with Pasadena start-up had no cash impact compared to the first quarter of last year. Slide 5 shows the total company adjusted EBITDA bridge for the quarter compared to last year. Adjusted EBITDA was $49.6 million, down $8 million versus the prior year. I will cover each segment in more detail, but overall, Surfactants and Specialty Products were down, partially offset by Polymers growth. Unallocated corporate expenses were higher due to normal inflation. Turning to Surfactants on Slide 8. Net sales were $454 million, up 8% on an organic basis. Selling prices were up 2%, primarily due to the pass-through of higher raw material costs, improved product and customer mix as well as pricing actions. Organic volume was up 2%, driven by double-digit growth within the Crop Productivity, Industrial Cleaning and Oilfield end markets. We also grew double digits in our Tier 2 and Tier 3 customer segments. The Surfactant business achieved volume growth in all global regions, except Asia. Foreign currency translation positively impacted net sales by 5%. Surfactants adjusted EBITDA for the quarter decreased $7 million or 15% versus the prior year, driven by North America and Asia down $5.6 million. The majority of this decrease was due to lower absorption and production timing differences in Asia. This P&L impact has no effect on free cash flow and represents a onetime event that we expect to recover in future quarters. The cold snap in the U.S. and higher input costs complemented North America Asia EBITDA reduction. Latin America performance was negatively impacted by the competitive environment and high raw material prices in Mexico. Europe and Mercosur continue delivering solid performance anchored in our Crop Productivity franchise. Moving on to Slide 7. Polymer net sales were $130 million, an 11% decrease. Selling prices decreased 8%, primarily due to the pass-through of lower raw material costs and competitive pressures. Volume decreased 6% in the quarter. Volume in North America was up 5%, driven by Spray Foam and commodity Phthalic Anhydride growth. This was more than offset by a double-digit decline in Europe, driven by ongoing global macroeconomic uncertainty and a depressed construction market. Foreign currency translation positively impacted sales by 3% during the quarter. Polymer adjusted EBITDA increased 8% versus the prior year, primarily due to North America growing Spray Foam and commodity Phthalic Anhydride and global margin improvement. Specialty Products net sales were $21 million, a 24% increase versus 2025, primarily due to higher volume. Volume was up 30%, reflecting continued growth in our MCT product line. Specialty Products adjusted EBITDA decreased slightly due to product mix and the lag in raw material prices, which we expect to recover in future quarters. Now turning to Slide 8. Free cash flow generation remains a key focus across the organization. Cash from operations was $17 million in the first quarter and free cash flow was negative $14 million, reflecting typical first quarter working capital build. Capital expenditures were $31 million in Q1. Now turning to the balance sheet. We ended the quarter with a net debt of $511 million and a leverage ratio of 2.7x, which is lower than in Q1 2025. With that, I will turn the call back to Luis to discuss our strategic priorities and our progress on Project Catalyst. Luis Rojo: Thanks, Ruben. I will provide a brief update on our strategic priorities before turning to the progress we're making on Project Catalyst. Our strategy continues to be anchored in 4 key pillars: First, continue focusing on customer-centric innovation to drive top line growth. Second, our diversification strategy, which is accelerating growth in higher value end markets while extending our reach into the Tier 2, Tier 3 customer segment. Third, we remain committed to operational excellence across our supply chain operations with a continued emphasis on strengthening the reliability and resiliency of our manufacturing network, including ongoing improvements in our flagship Millsdale site. Finally, we're strengthening our financial position through a disciplined focus on free cash flow generation, deleveraging the balance sheet and prudent capital allocation. During the first quarter, we continued to see momentum in our strategic end markets. We delivered double-digit volume growth within our Crop Productivity, Oilfield, Tier 2 and Tier 3 and Industrial Cleaning businesses and delivered volume growth in all Surfactant regions except Asia. Polymers delivered strong volume growth in North America. Specialty Products grew volume by 30%, reinforcing the strategic value of our MCT product line. These results validate that our strategy is working and that our diversified portfolio continues to create value for customers and shareholders even in a challenging macro environment. We also continue to ramp up our Pasadena, Texas facility, which is a critical enabler for strategic growth in specialty alkoxylates. We continue to expect Pasadena to reach approximately 80% utilization on average in 2026 and full utilization in 2027, which will drive supply chain savings and support future volume growth. Let's move now to Slide 10. Turning to Project Catalyst. I'm pleased to share that we have measurable progress. As a reminder, Project Catalyst is a comprehensive plan designed to further optimize our asset base and create a more productive, agile and accountable organization to enable growth. The program is expected to deliver approximately $100 million in pretax savings over the next 2 years, with around 60% of the savings expected in 2026. We are on track to deliver the committed savings this year. Project Catalyst is not a short-term cost reduction program alone. It is a strategic transformation designed to enhance the competitiveness of our cost base while preserving customer service and growth flexibility. During the first quarter, we executed our plans to close our Hillsborough site and decommission selected assets at our Millsdale and Stalybridge facilities. While these decisions are never easy, they are the right actions to consolidate our network into more competitive and productive assets while responding to the structural changes and market demands we continue to see in the global commodity consumer end market. The program continues to be built around 3 core value levers. First, footprint optimization, which include the exit of underutilized or higher cost assets and improved utilization of our most competitive sites, including the ongoing ramp-up of Pasadena. Second, operational efficiency and cost optimization, including procurement savings and productivity improvement across our manufacturing and logistics network. Third, organizational effectiveness, where we are clarifying accountabilities and streamline decision-making and aligning resources more tightly to our growth priorities. Today, we announced that we have entered into an agreement to sell nonproductive assets, especially land at our Millsdale site for $30 million. These transactions align with our focus on strengthening the balance sheet. We expect the transaction to close in the fall of 2026 after all due diligence and regulatory items are clear. We continue to actively evaluate opportunities to further optimize our asset base, organizational structure and operating model. These include identifying additional ways to unlock value and monetize nonproductive assets. Looking ahead, we are executing a balanced strategy focused on top line growth, margin expansion and disciplined cost-out initiatives. While we continue to navigate a dynamic macro environment, and geopolitical environment, including a significant shock in the energy market, global tariffs, raw material volatility and uneven demand across our end markets, we remain confident in our path forward. With the continued execution of Project Catalyst, a strong momentum in our strategic end markets, the ramp-up of Pasadena and a disciplined approach to capital allocation, we believe we are well positioned to deliver adjusted EBITDA growth, generate positive free cash flow and deleverage the balance sheet in 2026. This concludes our prepared remarks. At this time, we would like to turn the call over for questions. Victor, please review the instructions for the questions portions of today's call. Operator: [Operator Instructions] Our first question will come from the line of Mike Harrison from Seaport Research Partners. Michael Harrison: I wanted to say congratulations to the team on the safety achievements there. That's very important. I wanted to maybe just start with a couple of questions about -- obviously, the Iran war is top of mind for investors right now. And I specifically wanted to understand what are you seeing in terms of raw material impact since the war began? Are you able to push through some higher pricing in response to higher raw material costs? And are there any situations in which you're encountering shortages or other difficulties in procurement? Luis Rojo: Great questions, Mike. Look, so of course, our raw materials depend a lot on the oil supply chain, and we are seeing escalation in raw material inflation. The good news is, as you know, we have a good process. We have a lot of pass-through contracts, and we have a disciplined process of increasing prices as well. And what I will say is that in most of the businesses, we have been very successful in passing through the price increases in line with the raw material inflation. So that's working through the system. We see the whole market going up. It's not only us, it's the whole market going up, which give us confidence that pricing will be sticky, more in some places than others, for sure. But in general, we feel pretty good. The other thing is, of course, raw material availability will continue to be a challenge because there are certain supply chains that are heavily impacted by the conflict in Iran, and there are some shortages in raw materials. The reality is that we could be growing faster than what we're growing now, but we don't have all the raw materials that we need. On the other hand, we have good contracts with our suppliers, everybody's hands on deck. And I think we're getting a good fair share of what is needed. So -- but of course, we will continue working with our supplier to ensure that we can grow faster in the current environment. Michael Harrison: All right. Well, you kind of addressed a little bit my second question, which is related more to the demand impacts of the Iran war across your 3 segments. It sounds like you're saying you could have grown a little bit faster if not for maybe some inability to get key raw materials or get supply. I'm curious, though, I would think that Stepan is relatively better positioned than some of your smaller or more regional competitors in terms of your ability to get inputs and get raw materials. So maybe just talk a little bit about how you're expecting -- obviously, consumer demand or consumer sentiment is a little bit weaker here. But are there situations where you might be able to pick up some market share because competitors simply don't have supply in certain product lines or certain regions? Luis Rojo: No, for sure, Mike. You are right that we have the scale to win, especially in Tier 2, Tier 3, which is a key segment that we keep focusing our resources. So what I would say is, yes, we have the opportunity to keep growing in those segments. The consumer is still resilient. The consumer is still spending, and we haven't seen any demand issues from the consumer side, and you have seen other companies reporting Q1 and still volumes and pricing and all of that is still pretty healthy. So we feel good about where we are right now. Of course, things are changing. Things are changing every week and every month. But I will say -- and a lot of people are not providing very long-term guidance because of the volatility and the uncertainty of the current situation. But when you think about things like Q2 where we have way more visibility, we feel pretty good about our plan and about our ability to grow in this environment. Michael Harrison: All right. Within the Surfactants business, particularly, you listed out a handful of issues that it sounds like were negative to earnings and to margins in the quarter. And I was hoping that you could provide a little bit more detail in terms of maybe helping to quantify these impacts and helping understand how those impacts are trending into the second quarter and the rest of the year. So you mentioned overhead -- higher overhead and some production timing issues in Asia. Is that something that was temporary in nature? Or is that something that's going to continue to be an issue for the rest of the year? Luis Rojo: No. Great question, Mike, and it's temporary, right? I mean we were clear that some of the items that we saw in Q1 are noncash and onetime in nature, right? For example, we had lower absorption, both in Asia and in North America, especially at the beginning of the quarter with the cold snap in the U.S. So we expect some of that to reverse in the future quarters. So if you think about it, we're happy -- not happy, we are -- I mean, we are okay with the 8% EBITDA growth in polymers. We should grow faster, but fine. The key issue in Q1 was the Surfactant business. And when you think about the $7 million reduction in EBITDA in the Surfactant business, you can think that we should be able to easily recover at least half of that in the following quarters with all the timing and production and all of that. So that's why we view this $50 million EBITDA as not representative of what is the true performance of the company. Michael Harrison: I guess just to finish up on that question about the Surfactants and the margin pressure. What about the competitive pressure in Mexico and the higher oleochemical costs? Is that something that should improve as the year goes on? Or is that something that could be a lingering headwind? Luis Rojo: Good point, Mike. And look, when you think about -- we talk a lot about CNO in the last few quarters because the reality was that the delta between CNO and PKO, we talk a lot about that in the last few quarters, right, was significant, was something unprecedented, right? CNO in the $3,000, while PKO was in the $2,000 per metric ton. The reality is that when you look at the situation now, they are similar, right? And that incentivize and that helps the whole pricing environment. So what I will say is we still have some of the high CNO raw materials in our P&L going through our P&L. But the reality is that with all the pricing that we're executing now is going to be more sticky because of the relationship between CNO and PKO. So that should help the margin improvement in the Surfactant business in Q2 and going forward. Michael Harrison: All right. And then last question I had is just on the Polymers business. Just curious for a better understanding of what drove the margin improvement there. I know you're calling out some spray foam volume, and I'm curious if that's something that's contributing to better margin and better mix there. And really just trying to get a sense of whether we should expect continued margin expansion year-over-year in that Polymers business as the year goes on. Luis Rojo: No. Look, our Polymers business is heavily influenced by the base that we had in Q1 2025, right? When you think about -- and you clearly see it in the bridge, right, how our European business is under pressure because construction demand is very soft with everything that is going on in Europe. And then North America improved, but from a very low base, I will say. So again, it's decent EBITDA margins. It's not the EBITDA margins that we deserve, but we improved in North America versus a very low base in Q1 2025. And as you rightly said, I mean, a lot of growth in a strategic priority for us, which is spray foam. We have talked about that, and we're growing significantly in that space because really the lamination market is more flattish with construction still weak and high interest rate and all of that. So we are not expecting the lamination market to be significantly up this year. None of our customers are projecting that. But we are still improving our business in spray foam, in PA and making sure that we come out of this crisis in Europe a little bit stronger in the second half. Operator: Our next question will come from the line of Dave Storms from Stonegate. David Storms: You mentioned in your prepared remarks that you're seeing growth in Tier 2, 3 customers in Surfactants. Just curious as to maybe what's working here? How sustainable is it? And maybe what's the outlook for that going forward? Luis Rojo: Look, as we have talked, I mean, we continue to invest in this customer base is a strategic effort for us. We provide not only a product, but we provide a service. We help them formulate their products. We help them solve their challenges on the formulation side. And the reality is that there are a lot of categories where private label are growing share and some of the value brands are winning versus the branded brands. And that's that dynamic specifically for the U.S. now that I'm talking. But we believe in the current high inflation, high gas prices and all of that, the relevance and the growth potential on some of those Tier 2, Tier 3 brands are going to still there, and we are helping them to achieve their targets. So it's a strong business. We're growing double digits. And as I said, it is more than a product. We have other elements that help us win in that space. David Storms: Very helpful. Another one for me. And I know we spent a decent amount of time already talking about the Iran war, but just trying to get my arms around maybe any impacts that might have on ag specifically. I know this time of year is when we start thinking about that a little more. Are you seeing any significant second order effects from the Iran war as it pertains to the ag line? Luis Rojo: Not really. So as we said in our remarks, I mean, we're growing double digits in Crop Productivity, continues to be one of our key strategic areas. And we don't see any impact. Now of course, the planting season, for example, in the U.S. is mostly done and executed and everything that we had to sell, we sold it for the planting season. So we need to see how things evolve for 2027. But for example, Brazil, which the season starts now is going well. We had great results in Mercosur. So far, we continue to see strong growth and our innovation program, our new product launches with the big ag companies is working and is delivering the growth -- I mean, very strong growth, double digit is very strong in this space. David Storms: Understood. And maybe one more for me. Great to see that Project Catalyst is still on track. And I know you gave us a nice breakdown of maybe the cadence for 2026 versus 2027. Are there any nuances that we should be aware of on a quarterly cadence or maybe it's more just a linear step-up as we go through the year? Any thoughts there? Luis Rojo: No, great question, Dave, because the reality is that we're going to start to see the majority of the savings of the Catalyst project now in Q2, right? So we made the tough decisions on the footprint side, and we executed all of them basically at the end of March, beginning of April. So you are going to see the majority of the savings ramping up in Q2 versus Q1. So we feel good about Q2 because, again, a lot of the Catalyst savings start now. And as you know, the 60%, we were very clear that the 60% that we're delivering this year, some of that is to cover inflationary pressures and all of that, but the majority of the savings start now. Operator: Our next question will come from the line of David Silver from Freedom Capital Markets. David Silver: I did want to follow up on some of Mike's earlier questions. Maybe I would like to focus on the demand side. So apart from the very near-term kind of Persian Gulf-related issues, the consumer generally has been under some pressure. And from your order book, could you maybe just talk about the health or the trend in demand for your traditional book of business? In other words, you've invested a lot in upgrading your product mix, 1,4-dioxane-free, et cetera. Are you seeing the uptake on those products that you anticipated? Or are we seeing, on the other hand, maybe a trading down phenomenon from cost-conscious consumers. So maybe just how you're looking at the demand side for your traditional portfolio of products and particularly for the value-added component of your business mix? Are you seeing the expected demand? Or are things going to be deferred maybe until after geopolitical issues settle down? Luis Rojo: No, great questions, David. Look, as we said, one, the consumer is still resilient. So the consumer is still spending money. All the data that you see in all our categories, the consumer is still spending the data. Now we have seen some trade down, right? That's why I made the comment that in some of the -- in some categories, we see private label growing a little bit faster than branded products, but that's actually okay for us. I mean, we -- again, we serve a lot of the Tier 2, Tier 3 consumers. We serve a lot of value businesses as well. And we don't see this as a negative for Stepan Company. The reality is that the consumer will continue to make choices. And when you think about that relationship between branded products and private label, there is still a big opportunity for the private label and lower-priced brands to grow. That's the reality in many of our categories. So I feel good about what we see out there because, again, the consumer is making some choices, but it's not something radical. And at the end, it is not hurting Stepan portfolio. David Silver: Okay. I did want to hone in on one of your more modest portions of your business, but one with growth. So there was a question about your ag business, but I would like to ask you about Surfactants or whatnot for Oilfield. So if anything, I mean, my sense is that there should be a very strong demand outlook for that portion of your business, let's say, going forward, certainly domestically. Could you just maybe talk about your positioning there and what are the opportunities, let's say, over the medium term to benefit from what I believe is probably going to be a pretty strong level of demand for drilling activity and things where your Oilfield products might be positioned to participate? Luis Rojo: Yes, for sure. And that's why, David, we keep calling all of those are our strategic priorities, right? Crop Productivity, Oilfield, Tier 2, Tier 3, right? And then within Tier 2, Tier 3, it's not only the low 1,4, it's also sulfate-free with AOS and with other products that we have. So we have a broad portfolio that can complement the consumer piece. But going back to your question on Oilfield, yes, we feel good. I mean we're growing double digits. As you know, our oilfield business is not that big. So the opportunities for growth are still significant for us. And we are happy with the double-digit growth that we are delivering. And the reality is that the focus, for example, in the U.S., which is our biggest Oilfield business globally, at the end, it's not about more drilling, right? I mean you don't see more drilling, you don't see more fracking going on. But what you can see is the use of more surfactants to make sure that you improve the yield of the current well, right? So that's an ongoing dynamic because you need to make sure that the current wells are more productive. And for that, you need the right chemistry with the right surfactants to improve the productivity of the well. So again, we don't see more drilling or more wells or more fracking in the U.S. in terms of more or new ones, but we see let's get more out of what we have, and that's where we play a role. So we feel good about this business, and we will continue investing and growing in this business. And of course, there is a lot of import dynamic that in the current environment are tougher and that favor the people that have local production in the U.S. like us. David Silver: Right. Okay. And then one last one for me, and it would have to do with your capital spending projections for this year. So I am looking in the appendix and the midpoint of your 2026 forecast for CapEx is $100 million. Can you remind me just what the sustaining portion of that might be? And then more to the point, where is Stepan devoting discretionary CapEx this year? In other words, beyond sustaining CapEx, where -- what's in the budget for this year? Where is that incremental CapEx going to be focused? Ruben Velasquez: David, yes, this is Ruben. Let me take that one. So yes, you're right. I mean we -- in the slides, we mentioned our range for CapEx, which is $105 million to $115 million. So we continue to invest in CapEx. It's something that it's a priority for the company. Of course, we are fully committed to make sure that our operations are operating safely. And then, of course, a lot of this CapEx is to make sure that our operations are well managed and that we have all of the resources and the facilities to operate in a safe way. A lot of this goes, of course, into our Surfactants operations and manufacturing. And we continue to invest in CapEx. So you have seen that in the last few years, we have been in the range of above $100 million, and we will continue to prioritize our investments into that. There is some of this CapEx that is towards growth, of course. But I would say a significant portion of it is targeting operating safely and making sure that we have the capabilities needed in our plants and in our supply chain. Luis Rojo: And let me add, David, as we have talked in the past, when you think about it, 75%, 80% is just for base reliability and infrastructure. We have growth, we have IT, we have other investments in our total CapEx forecast, and we will continue if we see the returns of those projects. But call it the normal CapEx for the company without any other major growth item is around $100 million or less. Operator: And this concludes the question-and-answer session. I would now like to turn it back over to Luis for closing remarks. Luis Rojo: Thank you very much for joining us on today's call. We appreciate your interest and ownership in Stepan Company. Have a great day. Operator: Thank you for your participation in today's conference. This does conclude the program. You may now disconnect. Everyone, have a great day.
Operator: Welcome to the Opera Limited First Quarter 2026 Earnings Call. [Operator Instructions] Please be advised that today's call is being recorded. [Operator Instructions] I would now like to turn the call over to your speaker today, Matt Wolfson, Head of Investor Relations. Please begin. Matthew Wolfson: Thank you for joining us. This morning, I am joined by our CEO, Song Lin; and our CFO, Frode Jacobsen. Before I hand over the call to Song Lin, I would like to remind you that some of the statements that we make today regarding our business, operations and financial performance may be considered forward-looking. Such statements are based on current expectations and assumptions that are subject to a number of risks and uncertainties. Actual results could differ materially as a result of various factors, including those set forth in today's earnings press release and in our most recent annual report on Form 20-F filed with the SEC. We undertake no obligations to update any forward-looking statement. During this call, we will present both IFRS and non-IFRS financial measures. A reconciliation of IFRS to non-IFRS measures is included in today's earnings press release. The earnings press release and an accompanying investor presentation are available on our Investor Relations website at investor.opera.com. Our comments will be on a year-over-year comparison unless we state otherwise. With that, let me turn the call over to our CEO, Song Lin, who will cover our first quarter operational highlights and strategy, and then Frode Jacobsen, who will discuss the details of our financials and expectations for the second quarter and full year. Song? Lin Song: Sure. Thank you, Matt, and good day, everyone. It's been less than 2 months since we reported our fourth quarter 2025 results with the trajectory for 2026 well ahead of internal expectations. And today, we announced that we surpassed even those recent forecasts. Q1 revenue exceeded the high end of our guidance range by $4 million and adjusted EBITDA exceeded the high end of our guidance range by $2 million. That translated to year-over-year revenue growth of 23% to $176 million with $42 million adjusted EBITDA or a 24% margin. It is also worth noting that revenue growth was comparable across advertising and query revenue and 24% and 23%, respectively, both contributing to an excellent starting position for the remainder of the year. On the advertising side, fourth quarter revenue was a new all-time high of $117 million. Our momentum and underlying growth was strong enough to more than offset seasonality. Our advertising partners run performance-based campaigns, so we would not see this level of growth if our partners were not also experiencing success. As a result, we are able to continue increasing our share of wallet with a continued focus on scaling our e-commerce partnerships. As an example, just 2 weeks ago, we were awarded Affiliate of the Year from AliExpress. And in late 2025, we received a similar recognition from Shopee, another key partner. We are humbled by the appreciation shown and operate Opera Ads with their continued success as our North Star. Our partners appreciate the 3 core pillars of Opera Ads. First is a unified media technology ecosystem that combines our own ad inventory augmented with the wider programmatic landscape and advanced targeting algorithms to deliver hyper relevant placements and the precise moment of user intent. Second is consistent execution that delivers daily volume without sacrificing quality. And finally, a deep collaborative alignment that fosters a transparent, closely aligned working relationship with our partners. Working with such global partners will translate demonstrated performance in active markets to continued regional expansion. And while e-commerce opportunities will only increase as the year progresses, I'm also excited about taking our learnings from that vertical and applying it more broadly. For example, as we enter the travel heavy second and third quarters, we see a clear potential to establish Opera Ads as a source of well-targeted audiences for the travel industry. All in all, there is no shortage of opportunity and it's all about execution to deliver the best results for our partners. Within the 23% growth of query revenue, search revenue growth continued expanding and reached 14% in the quarter, a level we have not seen since 2024. The remainder of query growth was driven by non-search query revenue, which continues to be multiple times larger than the year ago quarter with underlying growth also offsetting seasonality. In total, query revenue was $58 million in the fourth quarter and representing 33% of our revenue. As we've discussed before, the AI age comes with completely new monetization potentials for our browsers, both from conversation with the native Opera AI assistant and as it relates to the back-end understanding of a user's intentions, presenting relevant products and services natively in the user interface. The browser is unlike any other app. It's a gateway to almost every service available online. And as the browser gets smarter, the user can more efficiently act on their intentions. For example, if the user starts formulating a query in the URL bar, the browser can understand the intention and expand the interface to present relevant destinations or if a user was interrupted during a session, the browser can organize that history and enable a seamless continuation later on. In fact, AI unlocks both advertising and query revenue opportunities for us. On the advertising side, deep learning and agentic AI are leading to greater optimization and better targeting of user intent, resulting in greater conversion rates for our advertising partners. On the query side, we are witnessing an evolution in search. Historically, search has been limited to the keywords users are searching for. But over the past few years, we have seen it transform from simple keywords to more complex and longer question-based queries and more recently to chat conversations. As a browser with control of the URL bar and omnibox, we are well positioned as an entry node to search and AI chats. As these more complex searches and conversations begin to be monetized, we are in an excellent position to benefit. Now turning to our products and recent innovations, [indiscernible] on the key topic of AI potentials for the browser. We recently introduced Browser Connector available both in our subscription-based agentic browser, Opera Neon and in our mainstream browsers, Opera One and GX. Browser Connector allows users to plug their favorite AI tools directly into their live browser sessions via a protocol known as MCP, providing the AI platform of their choice with full real-time context of open tabs and active content. Think of this as bring your own AI. The MCP protocol is the open standard that enables a secure connection between the browser host and AI models, giving users the freedom to choose their preferred combination of browser and AI back end. With Browser Connector, the user no longer needs to act as the personal secretary of their own online AI tools, copy and pasting links and context. Instead, the browser enables the AI of choice to access and re-page content, understand open tabs and even take screen shots to analyze images of graphs. Beyond the technical upgrade, Browser Connector reinforces Opera's long-standing advocacy for user choice over ecosystem lock-in. Product innovation translates to user appreciation and increased usage of our browsers, which again translates to revenue tailwinds. Looking at key Western markets, we see users who engage with AI within our browsers, spend over an hour more per day in the browser and even perform 50% more traditional searches than comparable users who are not yet engaging AI, all of which directly contributes to ARPU growth. Our broad approach to monetization puts us in a differentiated position as most companies that are monetizing AI today are either chip and compute providers or those relying exclusively on subscriptions and usage-based models. In terms of our user base, we added 4 million users during the fourth quarter, bringing our total monthly average users to 288 million. We added 400,000 Western users on top of the seasonally strong fourth quarter and we benefited from both continued Android adoption and PC platform growth and 1 million new Opera GX users globally. In total, our annualized ARPU was $2.43, a 25% increase year-over-year. The final topic I would like to discuss is MiniPay, our noncustodial stablecoin wallet with deep ecosystem roots. MiniPay is the leading stablecoin wallet in Africa, appreciated for its technical ease and seamless integrations. We see great opportunities and real life benefits with access to stablecoins, both within emerging markets and as a global payment framework. Just last week, we announced a USD 1 million incentive for local developers of mini apps that take advantage of the transaction opportunities of MiniPay and we are using our on the ground presence in Africa and Latin America to provide in-person support. This supports the continued expansion of mini apps available in MiniPay, covering a broad range of services from finance, shopping, entertainment and utility tools. MiniPay has now activated over 15 million wallets and processed over 430 million total transactions. With that, I would like to turn the call over to Frode Jacobsen, our CFO, to discuss our financial results, guidance and capital allocation in greater detail. Frode? Frode Jacobsen: Thanks, Song. As Song Lin mentioned, we are very pleased with the start of 2026 and the trajectory we are on now well into the second quarter. Yet again, we overperformed our estimates and delivered an incremental $4 million of revenue on top of the guidance range with over 50% conversion to incremental adjusted EBITDA. This level of outperformance is particularly impressive in the face of seasonal headwinds following the holiday heavy fourth quarter. Instead of a seasonal dip, our underlying commercial momentum overpowered those trends and drove sequential advertising revenue higher in the first quarter. Q1 also marks our 20th consecutive quarter as a Rule of 40 company and we are well on track for 2026 to be the sixth consecutive year where we meet that high bar. In fact, our average annual revenue growth or CAGR stands at 21% over the past 10-year period, a feat few public companies achieve, even more so for companies that have been around for over 30 years like Opera. In these times, filled with innovation and opportunity, we continue to benefit from the resilience and agility of our business model, disciplined execution and our consistency in pairing rapid and organic growth with healthy profitability. Our outperformance continues to be broad-based with total revenue growth of 23% as opposed to the midpoint guidance of 19% growth. Within our total quarterly revenue of $176 million, advertising was $117 million or 67% of the total and query revenue was $58 million. Advertising revenue grew at 24% and the evolution of our search business into a broader query approach resulted in query revenue growth of 23%, a level we haven't seen since the post-COVID rebound in 2021 as we better monetize high-intent user actions across the browser interface. In terms of costs, I want to highlight the fact that we scaled the business beyond expectations while also improving gross margin by about 60 basis points versus the prior quarter. Cost of revenue items combined represented 36.8% of revenue, down from the 37.4% we saw in Q4 and according to margin expectations from our prior cost commentary. Also as expected, cash-based compensation ticked slightly down from the Q4 level to $21.5 million. Marketing spend came in just below what we had built into guidance at $38.5 million, while the [Technical Difficulty] of all other OpEx items, pre-adjusted EBITDA came in at $9 million or just above expectations, but still resulting in a slight net benefit. All in all, our continued cost discipline underpinned our adjusted EBITDA overperformance coming in at $42 million for the quarter [Technical Difficulty] or a 24% margin. Operating cash flow was also $42 million in the quarter, representing a 100% conversion of adjusted EBITDA as strong net collection more than offset the limited tax payments we incurred. Free cash flow from operations was $35.5 million or 85% of adjusted EBITDA. We continue to expect fluctuations quarter-to-quarter due to the size and timing of tax and bonus payments as well as other working capital movements, though I will reiterate my statement from last quarter that the full year conversion ratio of EBITDA to these cash flow metrics as achieved in 2025 continue to be reasonable expectations also for 2026. Turning to capital allocation and return of cash to our shareholders, where we combine a recurring dividend program of $0.80 per year with our recently launched $300 million buyback program. The dividend is paid out semiannually with $0.40 or $36 million paid out in January. In terms of the buyback, we repurchased 1.14 million shares in March for a total spend of $17 million pro rata distributed between public buybacks and repurchases from our majority shareholder at the same price per share, $14.88. This reduced the total number of shares outstanding as of 31st March to 89.55 million. You'll see $12.8 million of the spend in our Q1 cash flow with the settlement of the remaining $4.1 million taking place in Q2. Now turning to our guidance. In terms of our full year outlook, our solid start to the year allows us to raise revenue guidance to $727 million to $740 million or 18% to 20% growth for the year as a whole. With that, we are raising the low end of guidance by $7 million and the high end by $5 million from the range we provided just 2 months ago, adding about 1 percentage point of growth to our expectations. Still, in line with our guidance logic, this range continues to allow for later upside potential in the second half of the year. We let just over 40% of the incremental revenue flow through to our adjusted EBITDA guidance and update our annual range to become $170 million to $174 million or a 23.4% margin at the midpoint. That means that our prior high end of the range has now become the midpoint. For the second quarter, we guide revenue of $176 million to $178 million or 23% to 25% growth. The quarter is already well underway and both our operational and commercial performance supports the nice step-up versus prior implicit expectations. We guide adjusted EBITDA of $40 million to $42 million, representing a 23.2% margin and 28% adjusted EBITDA growth at the midpoint. In terms of costs, we then implicitly guide to a full year OpEx base pre-adjusted EBITDA of $562 million at the midpoint, of which $136 million in Q2. We continue to expect cost of revenue items combined to represent about 38% of revenue for the year, with midyear coming in around the annual average before we go slightly higher in Q4 with its seasonal advertising peak. As discussed before, Opera Ads has a different gross margin profile compared to our O&O revenue streams, resulting in a greater cost of revenue component in our overall results even as our Opera Ads gross margin is ticking up. Apart from the business mix effect, we continue to see the Opera Ads gross margin expanding as the platform scales and our optimization algorithms evolve in addition to benefiting from low marketing costs and limited OpEx base. Cash-based compensation expense is expected to grow just above 10% for the year as a whole, which is slightly lower than our earlier expectation of growth in the low teens. We expect costs to increase modestly in Q2 with annual salary adjustments effective as of April. Post Q2, compensation cost is expected to show smaller movements quarter-to-quarter. Full year marketing costs remains expected to grow by about 10% from the 2025 level with Q2 costs quite similar to Q1, followed by a slightly higher spend level in the later quarters. In sum, cash-based compensation and marketing will then decline from representing 36% of revenue in 2025 to representing about 33% of revenue in 2026. For all other OpEx items, pre-adjusted EBITDA, we increased our full year estimate to represent just over 20% growth year-over-year, up from our earlier expectation at about 15% growth. This is explained by hosting costs and the effects of our rapid business scaling, increased AI usage and pricing impact of constrained supply, while other items included in the total remained stable overall. We expect the cost category to increase quite linearly as the year progresses. In sum, while we continue to focus on building scale over accelerating margin expansion, as we refresh our estimates, we see a slight further widening of the gap between revenue and cost growth, allowing us to lift our adjusted EBITDA margin by about 15 basis points at the midpoint of full year guidance 2 months after providing the first color on 2026. In light of our performance and outlook, we remain very pleased with having expanded shareholder returns beyond our recurring dividend program to also include our new buyback program. We repurchased 1.3% of shares outstanding in the program's first month at an attractive $14.88 per share, accelerating ROI upside for our shareholders. While it's only been a couple of months since our last release, we've been excited to share today's updates with you and look forward to keeping you posted on our progress. With that, I'll turn the call back over to the operator for your questions. Operator: [Operator Instructions] And we'll take our first question from Eric Sheridan with Goldman Sachs. Eric Sheridan: Wanted to know if we go a little bit deeper into the learnings you have to date with respect to the adoption of AI tools across your user base and when you look longer term, what do you see as the opportunity set either at the browser level or maybe even for the rise of agentic commerce behavior by users that could bode well for both user growth as well as monetization opportunities? Lin Song: Sure. So -- it's Song Lin here. I'll try to answer. So yes, so high level, I guess, number one, I would say that I think the -- more like we are always advocate for AI and that's also why we almost try to embed it in many of the aspects within the browser anyway. And as we also talked about in the script that we also have it, for instance, from the URL bar, Omnibar to, of course, also the offer AI assistant that you can engage from sidebar and then further on to allow you to use AI with their own subscription, bring your own AI. So that's consistent with our offerings. And I would almost say that, number one, in general, we see that once we provide it in the right context in the right moment, users are very happy about it. So that's why we -- I think we also talked about it briefly in the script that whoever use AI, we saw that they almost spend 1 hour more in, say, desktop browsers, which is already a very long hour spend compared with any other thing. And then they also typically search almost long time more, right, than the others or engage with AI in different ways. So I think in general, we are very positive about it because those basically transfer to better opportunity to capture user intent and also the monetization opportunities as follow-on. So I think that's, in general, where we see that why it's beneficial. And on the other end, though, I think maybe the only thing I will just say that we should, of course, never forget that in the end of the day, user is a first, right? So as Opera, for instance, we never try to push user to something without may not be what they want. So I think #1 priority should always be that you give what user want. And also, it's also equally important to be aware that, of course, it's not all about efficiency, for instance, because for many of the times, if users just want to kill time, they just want to enjoy what they do and we should also respect that. So I think that's what also we see that people in the longer term, whoever win will be, who respect user behavior, give them the AI and the right context and right time, helping them use their own stuff instead of giving something with the lock-in ecosystem, whatever that is. And I think that's what we see at least major growth of us, both for the use of all those AI features, but also for how we actually see quite a good growth of user base. And you can see that even though Q1 is actually traditionally almost a bit lower season, it's actually we have been done very well on the user base-wise. And we actually also see one of the highest growth of MAUs on desktop, for instance, likely as a result. So that's -- yes, more like that's some high-level figures. Operator: We'll move next to Naved Khan with B. Riley Securities. Naved Khan: So 2 questions from me. One is this metric you shared about users who engage with AI spend an hour more per day and you see 50% increase in searches. I'm curious what percentage of your base is engaging with the AI chat features that you currently have? And what are the levers that you control to drive this higher? And the second question I have is just on the Google renewal that's coming up at the end of the year. How are those conversations going? Are you confident about renewing it? Or just give us your thoughts there. Lin Song: So yes, it's only I think I also try to answer it. I captured the last question first, I think I'll just revert on that. So yes, I think for Google, I think we also talked about, I believe, 2 months ago in our Q4 release that we are very happy to be one of the first to sign with Google, the renewed, let's say, agreement for the year due to the DOJ requirement, right, with them in the U.S. So very happy. We are very happy. I think they're also very happy that we are one of the first partners to do that. And moving forward, we don't expect any surprises. We have very good dialogue with them. Hopefully, there will be also some interesting openings of new potentials that we can cooperate with Google, both on the search, but potentially on the AI side and a few other side. And yes, for the renewal, I think we typically have stand on the process of renewing with them by -- yes, more towards the second half of the year. I think we'll continue the right path on that trend and we'll provide an update when such is available. But for now, I think the cooperation is fantastic. And as you also see that we even have one of the highest growth of traditional search parties ever. So I think both sides are very happy. And hopefully, we can expand that partnership moving forward. Yes. And then I guess also super quickly comment a bit on your questions on AI, right? So yes, I guess in short, for now, we have not disclosed the exact AI usage percent. I think the reason is just because now there are so many touch points and entry points of AI that is almost a bit hard for us to define a particular entry well, what comes as the user use AI or not because that can happen both from Omnibar whenever there is a suggestion, which is, of course, we are always updating. So that's also why you see a good growth of query revenues. Most of them are actually resulted of the many of the AI features that we are trying to resonate. But of course, it's also possible for user to both access AI from the sidebar with Open AI. But with the latest introduced of browser with own AI, you can actually compute the browser by Browser Connector from your ChatGPT subscription inside the browser directly or from your cloud and other chatbots directly from a webpage. So I guess it will become harder for us to define particularly what content AI usage because I think that will be almost prolific that almost the majority -- I think we do expect majority of the interactions within the browser will encounter AI in one form or another. And I think our goal basically just to make sure that we are a browser choice. We are a standalone player, we give them all the options available. And hopefully, for instance, if you have a cloud-based subscription, our goal is just to make sure that Opera is the best place going to use and saying that if you have ChatGPT subscription, but you also want to use [indiscernible] sometimes, we should also be the go-to choice. So I think that's our aim and I think we are actually moving forward to that goal. Operator: We'll move next to Ron Josey with Citi. Ronald Josey: I wanted to ask a little bit more on search, specifically with query growth accelerating in the quarter. And Frode, I think you talked about the search evolves and your broader query approach overall. So talk to us about the evolution as search is -- we see accelerating query growth and specifically the tie between, call it, the new browser AI tools and engagement as search revenues growth and query grow, in fact, accelerate. So any insights on the evolution here would be super helpful. And then bigger picture, understood with guidance here, but any insights on the broader advertising environment would be very helpful. Are there any verticals to call out one way or the other? Frode Jacobsen: Ron, Frode here. I'll start. So I think in the first quarter, we saw the year-over-year search, like pure search revenue was growing at about 14% year-over-year, which was very strong and up from the growth that we saw in all the quarters in 2025. And then on top of that, we have the broadening of the category, including also the non-search query revenues that drove it up to 23% total overall. So I think we look at that category in an enthusiastic way because as these new tools evolve and as people can engage with the browser in new ways, we have more opportunities to direct people to the things they are looking for in native ways in the browser. Ronald Josey: And further to that, as engagement ramps, you talked about more opportunity direct. And then we heard in the call earlier, I think, Song, you talked about broader engagement for those who have adopted AI tools. I know we've talked about that on the Q&A section. But any insights on adoption of AI tools to the browser and the user base overall? Lin Song: Yes. So yes, it's Song Lin here. So I guess I'll just complement a bit on what Frode is saying that on -- I mean, as I said, I think now the way we see it, it's becoming really proliferating that like, for instance, if you just use Opera browser, you can go to ChatGPT by just using the Browser Connector, or you can benefit from there to control the Opera browser. And the same way that, let's say, if you type a regular URL, we will actually use AI to say that, oh, maybe this is Amazon tools -- product that you would like, right, it will pop up, either you click on, they will go through it. And same as the Booking.com is also a perfect example that now it actually works that way. So I would almost say that I think now we are basically coming to a stage where you could arguably say that majority of the user searches probably have AI involved in one form or the other. And I think we will see that will be the future moving forward. And I think the key is just -- as we also maybe mentioned a bit earlier that I think the key is just maybe find the right design and the combination that it should really facilitate users' browsing behaviors. I think maybe that's also something that people go to that. At the end of the day, it's always consumer first, is always end user first. It's very important that it's something facilitating. For instance, that's also why we provide this Browser Connector instead of pushing them to force them to use some particular Opera Ad tool, but actually they can use whatever existing tool they like. And I think that's a very important philosophy that we believe in. And we have to feel strongly that, that should be the direction of what a browser should do, right? As an independent player, user can choose whatever AI they like. It can be from existing big players. It can be even from open source if they choose. And then we just have to make sure that we provide this Browser Connector in MCP protocol that people can access and said great and then they can use whatever to control it. And I think we are basically in the best position to provide it. So maybe perhaps that's also why I would almost say that so far for the browser come up by the particular AI providers, I don't think there's too much acceptance of it. But rather, we actually see very nice growth -- actually we have the higher growth of our users, say, for desktop that we have not seen for years. So I think we are very encouraged by that. Operator: We'll take our next question from Jim Callahan with Piper Sandler. James Callahan: Interested on the comments on travel, rolling out the sort of performance-based product there. Would just be curious if -- how much of the pieces are in place to kind of roll that out? Or is that something that's kind of already in the model today? Frode Jacobsen: So I'll go in terms of the model. So our guidance is always quite bottom up estimates where we look at what we have today. And then we rather leave upside for things to scale better than what we built into guidance in the later parts of the year. And of course, travel is a big opportunity. It's very -- we can use our lessons from the e-commerce opportunity to scale into this vertical. It's also interesting seasonality-wise, but it has a different annual profile with sort of midyear travels, et cetera, whereas e-commerce and shopping tends to be or is definitely strongest around year-end and the holiday season. James Callahan: Okay. Got it. That is helpful. And then anything in terms of guidance for, I don't know, either 2Q or full year, just relative growth between query and advertising? Frode Jacobsen: We will be a bit careful to break it down into detail because it evolves as we evolve the opportunity, especially the non-search parts of query is relatively new. And then search as a whole is also quite market-based on top of how we move our user base. And then on the advertising side, of course, we have a baseline and we have a guidance and we also have opportunities that you just touched on. So we -- for now, I would say Q1 was very strong on the query overall. I think we don't need to continue a year-over-year growth of over 20% on a query basis to meet our guidance, but it's a bit too soon to discuss specifics for the better parts of the year. Operator: [Operator Instructions] We'll move next to Jacob Stephan with Lake Street Capital Markets. Jacob Stephan: Congrats on a nice quarter. Maybe just to start off for me, I'll ask on the MCP. This kind of positions you as kind of the central call point for several AI tools. But do you think that this kind of risks cannibalizing any of the Opera Neon subscriptions or economics? Or is this kind of a complementary funnel? Curious your thoughts here. Lin Song: Yes. So yes, that's a very good question. So as like -- yes, it's a very relevant question, right? So I guess, yes, we do have a choice, right? Like any given AI feature, which are quite interesting, we do have a choice of do we only give it to Opera Neon and hopefully, we will push more for subscription revenue? Or do we think that it's more relevant for the broader audience? And as a result, hopefully also attract more users in the generic Opera One or GX product, right? So -- but I think basically, as also demonstrated by our numbers, I think we are in a bit slightly luxury situation that we are not burning money like all those base model companies. We are quite profitable and we have good revenue. And also because our revenue model is because of advertisement, right, that we do not really have to rely on fixed subscription revenue. And then be aware that typically that subscription revenue is also -- if you are a traditional AI company, that subscription revenue also coupled heavily with burning token cost, which is almost many times not sustainable. So I would also say that in this particular case you asked, it's a bit easy simple decision because we see it, we saw that there's a great user feedback, people liked it and we calculated that it's economically much better to put it outside really just because remember, this is bring your own AI, right? So we don't even need to use our own tokens, this is tokens from ChatGPT or whatever based on what you already have. And so we don't really have any cost really whatsoever. But that if that causes a higher retention, how user search, how user use our browser because at the end of the day, if user have to use it inside the browser anyway that we would be able to capture all the intent and monetize if needed anyway. So this particular case is actually a very easy decision that it makes more sense to have it available on the general product and make money by regular browsers, which are already demonstrated to be very profitable anyway. I'm sure that there will be certain features may be tailored to particular vertical audiences that would only be available in Neon like many of the current Neon features is and those that will be more subscription-based. But yes, for the Browser Connector, it's an obvious choice that it's better to make it widely available. Jacob Stephan: Okay. Very helpful. Maybe just last one for me on MiniPay. Obviously, nice momentum there. At what point does this kind of become more of a P&L contributor versus just a strategic investment? Do you kind of -- I guess, looking longer term, what are your plans for MiniPay, OPay? Frode Jacobsen: Yes, I can comment a bit on MiniPay. So MiniPay is already meaningfully contributing. We generate about $20 million of revenue from the broader ecosystem around it. It is a very successful product, as you say, and it does allow people -- we've tailored it initially for emerging markets to have an easy way to access stablecoins and other blockchain types of assets. And we continue to think it has a huge potential ahead and can really scale. Still, this is one of those items that is quite early, still a bit early in terms of how big it can get and what the trajectory looks until that point. On OPay, which is a separate topic, that's a company that Opera founded back in 2017 and we have a 9.5% stake in that, that we carry on our balance sheet at about $300 million of book value. That company is by now operating completely independently from Opera and is advancing on its own. So while we're not operationally working together, we, of course, share a history and we're very proud to see how that company has scaled and is sort of working towards what we expect will ultimately be an IPO, which we think is also very positive for Opera because it would sort of immediately make visible the market value of that company and Opera's stake in it. Operator: We'll take our next question from Jonnathan Navarrete with TD Cowen. Jonnathan Navarrete: How are buybacks going 2Q so far? And how should we think about the phasing through the year? Frode Jacobsen: So I don't think we'll get into sort of talking ahead beyond sort of the historical period. But overall, we're, of course, very pleased to have that program in place. I guess it's the third or fourth time that we launched a buyback program and by far the biggest one that we have launched. I think we already are -- we reported our March trades essentially since the program became -- was launched in late Feb and we could start trading in March. And already, I think it can contribute to accelerating ROI for our shareholders as we take shares out of the denominator. And then sort of going ahead, I think we continue to be, as we've always been with buybacks, opportunistic and adjust the program to maximize the value that we can create. I think just the fact that we are in that position, we talked about it a bit on the last quarter as well, we are growing fast and we are self-funded in the sense that the business is generating very healthy cash flows. And our CapEx model that Song touched on, on the AI side is very limited compared to other companies that you would think about in that space. So we don't have like a massive investment need to drive our business. It's a software layer, it's a service and we -- that is what we are good at. So we don't want to compete in a hardware race. And that also means that the cash we generate, we can actually return it to shareholders. We like the recurring dividend and the buyback just helps us drive incremental upside. Jonnathan Navarrete: Great. And just one more question. There were some reports this morning that OpenAI missed some internal sales targets. And just wondering what could be the read-through, if any, for you guys? Frode Jacobsen: Hard... Lin Song: OpenAI? It's not open... Frode Jacobsen: I think -- okay, it's actually convenient that you asked the question immediately after my prior response because I think we do -- we are quite distinguished. If you think about companies that have an, let's say, AI opportunity, then of course, we have the major platforms like OpenAI, et cetera, but you also have Opera, right? And -- but we do it as a service in a browser. We don't try to compete against the big LLMs out there, whether it's ChatGPT or Gemini or Claude or any of the other ones. But we are very good at providing an interface for LLMs to exist very close to the user to control the browser, to take into account context of the user and to enable it to be as productive as possible, right? So for example, as we talked about with the Browser Connector, our own Open Opera AI in the browser, like as a human, you don't have to sit and be like the personal secretary of an AI model and copy paste links and text, right? You can just -- you can operate these tools in the browser with the context included. So I think comparing us to OpenAI in some ways, flattering that you ask. But at the same time, I think our cost and capital need structure is completely different. Lin Song: Yes. Maybe I'll just add, right, that I just -- I think in general, I think, hopefully, as we also demonstrated that like both Opera and the potential our users are already demonstrated to be very AI-savvy, I would say. Otherwise, it probably like -- unlike some other maybe old-fashioned browser companies, people who use AI tend -- whoever use Opera tends to be AI-savvy, they tend to be very interested. So I would almost say that I think, of course, 300 million MAU, that is a very attractive partners that we will want to grow AI is I think we must be a very attractive partners that they can work with. For instance, if you compare with many other, we call it similar big player like even Claude or X or whatever, I think I believe their MAU are in the range of almost 1/10 of our MAUs, right? I'm sure OpenAI has a bit more, but at least 300 million, there must be a very interested partnership opportunities. So I guess that will also be our -- hopefully, with the year moving on, we can see what can be done there. Operator: And it does appear that there are no further questions at this time. I would now like to hand the call back to Song Lin for any additional or closing remarks. Lin Song: Sure. So yes, I guess thank you to everyone for joining us today. 2026 is off, again, to a great start. Our continued momentum and truly exciting landscape has already resulted in a solid foundation for continued strength through the remainder of the year and well beyond. Have a good day, everyone. Operator: Thank you. This brings us to the end of today's meeting. We appreciate your time and participation. You may now disconnect.
Operator: Thank you for standing by, and welcome to the AllianceBernstein First Quarter 2026 Earnings Review. [Operator Instructions] As a reminder, this conference is being recorded and will be available for replay on our website shortly after the conclusion of this call. I would now like to turn the conference over to the host for this call, Head of Investor Relations for AB, Mr. Ioanis Jorgali. Please go ahead. Ioanis Jorgali: Good morning, everyone, and welcome to our first quarter 2026 earnings review. Today's conference call is being webcast and is accompanied by a slide presentation available in the Investor Relations section of our website at www.alliancebernstein.com. Joining us to discuss the company's quarterly results are Seth Bernstein, our Chief Executive Officer; and Tom Simeone, our Chief Financial Officer. Onur Erzan, our President, will join us for the question-and-answer session following our prepared remarks. Some of the information we'll present today is forward-looking and subject to certain SEC rules and regulations regarding disclosure. So I would like to point out the safe harbor language on Slide 2 of our presentation. You can also find our safe harbor language in the MD&A of our 10-Q, which we will file on Friday. We base our distribution to unitholders on our adjusted results, which we provide in addition to and not as a substitute for our GAAP results. Our standard GAAP reporting and a reconciliation of GAAP to adjusted results are in our presentation appendix, press release and our 10-Q. Under Regulation FD, management may only address questions of material nature from the investment community in a public forum, so please ask all such questions during this call. Now I'll turn it over to Seth. Seth Bernstein: Good morning, and thank you for joining us today. While the first quarter was marked by geopolitical tensions and elevated volatility, AB's results underscore the resilience of our platform and our diversified business mix. I want to start by highlighting the key themes that shaped this quarter listed on Slide 3. First, the proposed Equitable Corebridge merger will provide a step-function acceleration of our flywheel and meaningfully enhance AB's scale and growth outlook. The combined company will have over $350 billion of general account assets and generate $70 billion to $80 billion of new liabilities annually, positioning AB among the most strategically important players in the insurance asset management channel. Over time, we expect to manage at least $100 billion of general and separate account assets from Corebridge. We look forward to supporting our new partner in delivering better outcomes for their policyholders while we benefit from enhanced scale, improved earnings durability and increased capacity to invest for growth. We believe this announcement will further accelerate the momentum already evident across our insurance franchise. Today, we serve more than 90 third-party insurance clients with $58 billion of AUM, including $32 billion of general account assets. Deployments from recently announced strategic insurance partnerships are progressing ahead of schedule and are expanding beyond the initial mandates. We are well positioned to benefit as these partnerships continue to grow. Second, while we continue to drive inflows from secular growth engines like insurance, private markets and active ETFs, we had firm-wide active net outflows of approximately $6 billion in the first quarter, concentrated within a subset of active equity strategies. Active equity outflows of roughly $11 billion spanned across channels and reflect recent performance challenges as well as client allocation decisions. We also had taxable fixed income outflows of nearly $2 billion as positive institutional engagement was offset by retail redemptions concentrated in the Asia Pacific region. Turning to the positives. We generated over $3 billion of organic inflows in tax-exempt fixed income and alternatives multi-asset strategies, respectively. Our private market platform reached $85 billion in AUM, up 13% year-over-year, reflecting strong institutional momentum. At the same time, our SMA business stands at $63 billion, growing organically at 15% annualized rate in the first quarter. We continue to build on our technological edge and efficiency benefits for financial advisers, extending from a predominantly municipal-focused SMA offering to a broader multi-asset toolkit. We're seeing real traction in taxable fixed income SMAs highlighted by a recently funded $300 million mandate. AB has long been a market leader in tax-optimized fixed income SMAs, an area made increasingly scalable by recent advances in data science. Our active ETF lineup now encompasses 25 strategies with more than $16 billion in AUM, up over 150% year-over-year, with 8 of our ETFs surpassing $1 billion in AUM, including our 5-star rated disruptors ETF, ticker FWD. Our security of the future thematic portfolio has surpassed $4 billion in assets, nearly tripling from a year ago with $1.7 billion of inflows in the first quarter alone. While these offerings are currently smaller than some of our larger marquee services, they represent emerging durable growth engines that will reshape the composition of our AUM over time. Looking forward, our institutional channel is positioned for accelerating net flows in the second half of 2026, supported by the largest pipeline on record, surpassing $27 billion in AUM. Third, our distribution platform provides direct access to secularly growing channels, including ultra-high net worth, insurance asset management and defined contribution. Together, these account for more than 45% of firm-wide AUM and provide relative stability across market cycles. Bernstein Private Wealth ended the quarter with $155 billion in assets under management, and it contributes more than 1/3 of firm-wide revenues. Our insurance asset management business now manages approximately $120 billion of insurance general account assets across a growing roster of global partners. Our customized retirement business exceeds $100 billion in defined contribution assets, and we continue to innovate by incorporating a broader set of asset classes, including private markets and insurance solutions that provide guaranteed lifetime income. Overall, while this quarter's results reflect mixed dynamics and pressure from the challenging macro backdrop, we believe our broad product capabilities and differentiated distribution position AB well to generate organic growth over time. Slide 4 provides an overview of our financial results, and Tom will walk through these in greater detail later. Turning to Slide 5. I'll review our investment performance, starting with fixed income. Global bond markets posted modestly negative returns in the first quarter as heightened geopolitical tension, rising energy prices and shifting policy expectations pushed yields higher across most developed markets. Credit markets were mixed. Investment-grade and high-yield corporates posted modest declines overall with U.S. corporates outperforming Eurozone peers, while securitized assets proved resilient. The Bloomberg U.S. Aggregate Index was roughly flat, outperforming the global aggregate, which returned negative 1.1% in the quarter. Our American Income and Global High Yield products both underperformed their respective benchmarks in the first quarter. Yield curve positioning and allocation to emerging markets detracted from AIP's relative returns, while GHY was similarly affected by European high-yield exposure and EM corporates. Notwithstanding near-term headwinds, our fixed income platform continues to perform well over longer measurement periods. More than half of our assets outperformed over the 1-year period, while 80% outperformed over 3 years and 64% over 5 years. Turning to equities. U.S. equity markets were hurt in the first quarter of 2026 with the S&P 500 returning negative 4.3%. The quarter began constructively but reversed with the emergence of credit concerns, AI-related disintermediation risks and escalating geopolitical tensions. Despite some early signs of improvement in year-to-date relative performance, our track records remain pressured and below our expectations. 23% of assets under management outperformed over the 1 year, 24% over 3 years and 44% over 5 years. This primarily reflects the outsized impact of our larger U.S.-oriented growth strategies that have underperformed this quality growth derated in recent quarters. However, our equity platform is intentionally diversified across styles and geographies, avoiding overreliance on any single market regime. International and emerging market strategies with a smaller AUM base continue to perform well. In fact, we have more than 25 strategies with nearly $40 billion of AUM that are outperforming their respective benchmarks or composites over both the 3- and 5-year periods with 8 out of the 10 largest among them being international or global strategies. As market breadth began to improve entering 2026, a growing share of our growth, value, core and thematic strategies delivered stronger relative results. Looking ahead, we believe a more balanced earnings environment and continued economic stability could favor international and value-oriented strategies, while lower tracking error portfolios may provide clients with more consistent participation across shifting market leadership. Turning to Slide 6, I'll discuss our retail highlights. Retail gross sales rose sequentially and surpassed $23 billion for the first time in 4 quarters. However, the channel recorded net outflows of nearly $6 billion in the first quarter, reflecting elevated redemptions. Active equity and taxable fixed income each exceeded $4 billion in outflows, driven primarily by redemptions from select marquee U.S. services in Asia Pacific as relative value and capital flows have shifted toward neighboring and domestic markets. Passive equities and passive fixed income also posted outflows. These headwinds were partially offset by more than $3 billion of tax-exempt inflows and nearly $1 billion of alternatives and multi-asset inflows, continuing their durable organic growth trajectories. Our retail muni SMA platform has consecutively positive quarterly inflows for more than 3 years, a testament to the compounding strength of our market-leading capabilities. We are well positioned as the bond reallocation trend continues to unfold, particularly as we extend our success into tax-aware SMAs. Moving to Slide 7, I'll cover our institutional channel. Institutional gross sales also increased both sequentially and year-over-year. However, the channel had roughly $2 billion of net outflows, primarily driven by more than $5 billion in active equity outflows. Despite some short-term headwinds from insurance hedging activity, the channel recorded over $2 billion of inflows in taxable fixed income, reflecting broadly improved institutional appetite. Alternatives multi-asset also saw positive inflows for the fifth consecutive quarter, supported by deployments in private markets and fundings of defined contribution plans. Institutional engagement across private credit has persisted with nearly $1 billion of deployments on the back of improved terms and widening spreads. This includes direct lending, where ABPCI recently secured a $0.5 billion third-party institutional mandate reflected on our pipeline. Furthermore, our pipeline has reached a record high $27.5 billion in assets under management, supported by $9 billion in new commitments. This growth reflects expansion of our recently announced insurance partnerships to include additional mandates. It also includes an increase in Equitable's commercial mortgage loan commitments to $12 billion, up from the previously announced $10 billion. The pipeline fee rate declined slightly to 19 basis points, primarily due to the addition of sizable fixed income and passive equity mandates. Excluding roughly $5 billion in passive mandates included in the pipeline, the fee rate for active AUM stands at 23 basis points. Next on Slide 8, I'll cover Private Wealth. Quarterly gross sales continue to set new records at Bernstein Private Wealth with the channel registering its third consecutive quarter of organic growth. Inflows grew nearly 2% annualized, while net new client assets rose 5% annualized in the first quarter. Redemption requests for private credit products that offer periodic liquidity stayed well below our 2.5% quarterly cap. This is a testament to the combined strength of our highly specialized adviser sales force, coupled with ABPCI's strong investment track record built on a decade-long partnership since Bernstein was among the pioneers that distributed direct lending as an asset class. I'm particularly proud of the differentiated client service we offer in alternatives, reinforced by the seamless collaboration between our homegrown distribution and investment teams, a defining advantage for AllianceBernstein. Adviser headcount is tracking ahead of our 5% annual growth target. We believe our platform offers exceptional support and training that drives industry-leading adviser productivity, tracking both experienced and emerging talent. As we continue to invest in adviser headcount growth and productivity, including integrating Generative AI capabilities into daily adviser workflows, we anticipate continuous client experience improvement along with more targeted and effective prospecting. Adviser headcount remains a key area of focused investment and a critical lever for long-term growth within the channel. I will close with Slides 9 and 10, which highlight the momentum of our private markets platform and the opportunities from the Equitable Corebridge merger. In partnership with Equitable, we have scaled our private markets platform to $85 billion in fee-paying and fee-eligible AUM, anchored primarily in credit-oriented strategies, including direct lending, asset-based finance, commercial real estate debt and investment-grade and corporate structured private placements. Equitable's $20 billion permanent capital commitment now fully deployed and exceeding the original commitment has been a critical catalyst, accelerating our expansion in private markets while strengthening our ability to seed and scale higher fee strategies. Our collaboration continues to deepen and evolve, progressing across residential mortgage solutions, structured private placements and most recently, commercial mortgage loans. Each initiative builds incremental scale while broadening the applicability of our capabilities across third-party insurance and other institutional client channel. Our goal is to serve a diverse base of retail, institutional and insurance clients across a wide range of risk return objectives. The proposed Equitable Corebridge merger amplifies this flywheel. With a combined general account asset base exceeding $350 billion and a broader liability profile, the merged company will be one of the largest players in the industry, creating significant opportunities for AB. Importantly, the strategies developed for Equitable are not bespoke or stand-alone solutions. They form the commercial foundation from which we serve a growing universe of third-party insurance and institutional clients worldwide. Amplifying the flywheel with the inclusion of Corebridge is a defining moment in AB's evolution, not simply additive to our existing asset base, but potentially transformative in its impact on scale, earnings, durability and long-term strategic positioning. With a proven operating model, a powerful strategic partner and a focused growth strategy, we're well positioned to achieve our $90 billion to $100 billion private markets AUM target by 2027 and extend our growth trajectory beyond that milestone. With that, I will pass it on to Tom to discuss our financial results. Thomas Simeone: Thank you, Seth. Good morning, everyone, and thank you for joining our call. Adjusted earnings for the first quarter of 2026 were $0.83 per unit, representing a 4% increase year-over-year. Distributions grew uniformly with EPU as we distribute 100% of our adjusted earnings to unitholders. On Slide 11, we present our adjusted results, which exclude certain items not considered part of our core operating business. For a detailed reconciliation of GAAP and adjusted financials, please refer to our presentation appendix or our 10-Q. In the first quarter, net revenues reached $871 million, representing a 4% increase year-over-year. Base fees grew 5% year-over-year, reflecting 8% higher average AUM, partially offset by a lower firm-wide fee rate due to the mix shift. Performance fees totaled approximately $23 million, down $16 million year-over-year, reflecting lower realizations from private market strategies. Our full year private markets performance fee outlook remains unchanged at $70 million to $80 million. Importantly, we are increasing our full year combined performance fee outlook to $95 million to $115 million, reflecting stronger-than-expected contributions from public market strategies. I will cover this in more detail shortly. Dividend and interest revenue, along with broker-dealer-related interest expense declined year-over-year, reflecting lower cash and margin balances within private wealth. Investment losses totaled $5 million, largely attributable to hedging costs associated with seed-like investments. Other revenues totaled $20 million, up $6 million versus prior year's quarter, driven primarily by higher shareholder servicing fees and mutual fund reimbursements. Turning to expenses. First quarter total operating expenses were $580 million, up 4% year-over-year, driven by a 4% increase in compensation expense and a 5% increase in noncompensation expenses. Total compensation and benefits rose 4% year-over-year with a compensation ratio of 48.5% of adjusted net revenues, consistent with last year's accrual rate. We expect to continue accruing at 40.5% compensation to net revenue ratio in the second quarter while remaining mindful of market volatility and potential adjustments in the second half of the year as conditions evolve. Promotion and servicing expenses increased by $1 million, while G&A expenses increased by $6 million or 5% year-over-year, reflecting normalization from relatively depressed levels in the first quarter of last year. For full year 2026, we continue to expect non-compensation expenses to range between $625 million and $650 million. This outlook reflects normalization in promotion and G&A expenses, along with discretionary investments in technology and the operational build-out for new strategies. Promotion and servicing expenses are expected to represent 20% to 30% of non-compensation expense, while G&A comprising the remaining 70% to 80%. We are making steady progress integrating the new commercial mortgage loans platform. Importantly, Equitable has increased its long-duration general account mandate to $12 billion from $10 billion with onboarding in the second half of the year and the assets producing a high single-digit fee rate. Interest expense on borrowings was flat compared with the prior year. ABLP's effective tax rate was 5.6% in the first quarter of 2026, which reflects a favorable mix of earnings. We continue to forecast ABLP's effective tax rate in 2026 to be between 6% and 7%. Our operating income of $291 million is up 3% versus the prior year, slightly below the growth in revenues and operating expenses. Our adjusted operating margin was 33.4% in the first quarter, down 30 basis points year-over-year due to investments in the business. These investments include technology initiatives, the onboarding of new investment teams and increasing financial adviser headcount. Importantly, margins remain at the high end of our Investor Day target range of 30% to 35%, which we had expected to achieve by 2027. As markets normalize, we expect improved operating leverage to support stronger flow-through from existing services, reinforcing our ability to balance reinvestment with profitability. In the first quarter, our firm-wide fee rate was 38.1 basis points, reflecting a negative mix shift in AUM. As we've noted previously, the fee rate remains highly mix dependent and several factors weighed on the rate relative to the prior year. In retail active equities, average AUM declined to 18.7% of firm-wide AUM from 20% a year ago as market appreciation was largely offset by outflows. In fixed income, elevated rates and FX volatility pressured taxable fixed income AUM with outflows concentrated in higher fee strategies such as American Income and Global High Yield, while inflows were primarily driven by lower fee municipal SMAs. Finally, turning to Slide 12 and our outlook. We now expect total performance fees for fiscal year 2026 of $95 million to $115 million, up from our prior range of $80 million to $100 million with additional potential upside dependent on market conditions. This reflects an increase in our public markets performance fee outlook to $25 million to $35 million, driven by first quarter realizations from our alpha-generating international small-cap strategy. Our private markets performance fee outlook remains unchanged at $70 million to $80 million despite a light first quarter driven by prudent proactive markdowns concentrated in software and tech services exposures. Note that these markdowns were not driven by credit events. And even if realized, they would be within our assumed annual loss framework. As a long-term buy-and-hold investor, ABPCI fully expects to realize value recovery across all creditworthy borrowers over time. It is important to note that the rate outlook and wider spread environment is supportive of forward-looking returns. All other guided items remain unchanged from last quarter. Looking ahead, we are encouraged by our institutional outlook, supported by a record pipeline of $27.5 billion, including public market mandates expected to fund next quarter and private markets mandates expected to fund by year-end, most notably the increased $12 billion commercial mortgage loan mandate from Equitable. We expect continued inflows across secular growth areas, including private wealth, SMAs, ETFs and private alternatives. Taken together, we have meaningfully strengthened our business mix and positioned the firm for the future by leaning into areas of structural growth while addressing areas of pressure with discipline. We look ahead with optimism, confident in what we believe to be a position of strength. With that, operator, please open the line for questions. Operator: [Operator Instructions] We'll take our first question from Craig Siegenthaler at Bank of America. Craig Siegenthaler: My question is on the Equitable Corebridge merger and your expectation to manage $100 billion of incremental AUM over time. So in terms of general account assets for the NewCo, what percent of total GA assets do you assume you're going to manage? And is the current GA level at Equitable in the $70 billion range now, plus I think there's $17 billion on the side of private market initiatives still. I just want to kind of refresher on all the numbers. Onur Erzan: Craig, Onur, let me take that question. Obviously, the Corebridge Equitable merger is a very exciting development for us. As it was announced at the March 26 call, we expect at least $100 billion over time from both GA and separate account assets. Obviously, it's very early days since that announcement, and that deal is most likely going to take another 9 months or so to close roughly by year-end or fourth quarter. And hence, it will take us time to really do the bottom-up buildup of that $100 billion between GA and separate accounts. And in terms of funding of the assets, given the deal will likely close end of '26, it's going to be more '27 and beyond in terms of the new AUM coming to AB. So on one hand, we are super excited. On the other hand, we recognize it's going to take a few quarters to materialize those opportunities given the deal time line. In terms of the GA buildup, we're not dependent on only Equitable or Corebridge. As you have seen in our slides, our GA assets from third-party clients grew by 28%. If you look at our pipeline, we had significant momentum in the pipeline. So for instance, we added a $3.5 billion CLO opportunity to our pipeline as an example. And we have a lot of other pipeline opportunities, which makes up 8% of our pipeline fees coming primarily from insurance clients. So overall, we are very excited about the trajectory in GA, both for proprietary as well as third-party clients. Craig Siegenthaler: Just as a follow-up, as you look at that $100 billion, what is the expected mix of public corporate or government debt that has CUSIPs versus private assets that are originated by your proprietary private markets businesses? Onur Erzan: Again, we don't have an exact bottom-up buildup yet that is in works. Our estimate is, given this includes the separate account business, which tends to be more publics. And given some of the assets from the GA will be coming from the fixed income book, I think it's going to skew heavily towards the publics versus private in terms of day 1 opportunity, if you will. But over time, if you think about this balance sheet, it's going to be one of the largest U.S. retirement companies and it will originate annuities across RILAs, fixed annuities, variable annuities, et cetera. That means your general account assets will grow materially. And a portion of that new flow, if you will, will make its way to private, and we're going to be a strong beneficiary of that growth. So you shouldn't only look at it in terms of what is mappable on day 1. You should look at it as what is the expectation on a go-forward basis given the new Equitable will be double the size of the origination and the assets at the minimum. Craig Siegenthaler: And congrats on the $100 billion of future wins. Onur Erzan: Thank you. Operator: We'll move next to Alex Blostein at Goldman Sachs. Alexander Blostein: I was hoping you guys could expand on what you're seeing in the institutional private credit market. Obviously, lots of volatility on the retail side. You guys don't have a ton of exposure there. But as you think about both opportunities and risks that are in the market today, how are you approaching that channel? Onur Erzan: Thanks, Alex. Let me take that question as well. We continue to see strong momentum in our institutional business for private credits. To underline your comment, yes, you're right. We don't have a significant exposure on the retail side, but we're also very pleased with what we have seen on the retail and private wealth side of private credits. If you look at our BDC, our redemption rate has been less than 2%. So that's much lower than what we have seen from our competitors. That speaks to the strength of our integrated asset and wealth management franchise. Proximity to the client helps us maintain lower redemption rates in these retail vehicles, partly in our private wealth channel. If you look at our private alts cap raise in private wealth, actually, it grew from [ '25 ]. Our first quarter fund raise in the '26 versus '25 for private wealth was more than 30% higher. So definitely, we also continue to see momentum across private equity and private credit in our private wealth business, which admittedly skews more high net worth and ultra-high net worth. And on the institutional side, to get to your core question, as I mentioned, we continue to add significant mandates to our pipeline. As Seth also mentioned in his opening remarks, we are seeing more accelerated and expanded benefits from some of the strategic partnerships we announced around the third-party insurance, and that remains the largest driver of our new pipeline. It's broad-based. It includes both asset-backed ABF-type of mandate as well as fund financing like NAV finance and real estate debt. And furthermore, we had several new mandates outside the insurance in core institution as well. So net-net, broad-based momentum skews heavier towards insurance, but seeing strength in noninsurance institutional as well. The implication is we're going to be comfortably hitting and exceeding our private markets AUM goal of $90 billion to $100 billion. Alexander Blostein: Great. And a follow-up for me. I was hoping to touch on the fee rate dynamics, both in the quarter, but really more importantly, looking further out. A couple of dynamics at play. Obviously, you mentioned that the active equity performance has been challenged, and we've seen that show up in retail flows, which are obviously higher fee rate, a bit mixed on the retail fixed income for now as well, but some wins on the institutional side of things, you mentioned private credit. So when you put it together, how does the evolution of the fee rate likely to look over the next couple of quarters? Thomas Simeone: Alex, it's Tom. We generally don't provide fee rate guidance, but we do prioritize sustainable organic growth and long-term profitability over focusing solely on the fee rate. Looking forward, we expect the fee rate trajectory to continue to reflect the mix of organic growth and market movements, which have been supportive in early 2Q. Operator: Next, we'll move to Bill Katz at TD Cowen. William Katz: Just coming back to the expense outlook for a moment. It was in fact how do you interpret the slide with the initial take this morning. So you're keeping your expense non-op growth relatively stable. If I look at the first quarter, I think you're run rating well below the low end of the guide. How do we think about maybe the pacing to the spend as the year unfolds? And what kind of flexibility do you have if the markets remain volatile? Thomas Simeone: There's some seasonality in there. This happens from time to time. I would continue to stick with our guide at $625 million to $650 million. And then maybe just divide it up less what we have in there for 1Q so far. And as far as some flex, you may recall last year, we did have a lot of flex. We actually flexed down quite a bit because our business decelerated due to all the market volatility. So we do have flexibility that we can pull on this year if needed, but we did want to let the advisers get in front of some clients and attend some firm meetings that were withheld last year. William Katz: Okay. That's helpful. This is a follow-up. Maybe stepping back, talk about wealth management, very durable asset for you guys. A lot of cross currents in the industry at large. I wonder if you could talk a little bit about maybe -- and I appreciate you're also at the upper end of the market, so maybe not quite as intense as some of the key players that I think you're comped up against. That being said, I wonder if you could talk a little bit about maybe the competition for financial advisers, what the market dynamic has been in terms of industry churn? And then sort of curious, there's a lot of sort of anxiety around Agentic AI. I was wondering if you could maybe click down a layer and sort of talk about where you're leveraging that and where some of the risks might be prospectively? Onur Erzan: Thanks. Let me break that into 2 questions. One, talent market dynamics, how are you feeling about that? And second, come back to Agentic AI and impact on the business. On the talent side, we feel pretty good. We are well immune from the high churn that some of our competitors are facing. Ultimately, our retention rate for our senior advisers, which drive a majority of our flows and the ones that helped us achieve the record productivity this quarter have remained loyal. Again, our attrition rate remains very low depending on the year. It tends to be low single digits. And if you look at our recruiting, as you have seen, we added -- we added roughly 14 advisers, and that means our adviser headcount is up roughly by 5% in the first quarter. So we remain on track in terms of our ability to add talent. So feeling good about that. I mean, ultimately, we are not complacent. We'll continue to pay competitively for talent. And we'll continue to make our platform a preferred platform for existing and new talent based on our investment expertise, the tools that we provide like tax management as well as investments in technology. In terms of the segue to Agentic AI, given we are more on the high net worth plus side of things, we tend to deal with more complex client situations. Our highest growth part of our business, our ultra-high net worth business grows at 4x as fast as the rest of the business. So that creates, in my opinion, some moats in terms of the technology disruption because we deal with a lot of complex tax issues. We deal with a lot of complex global family issues. Some of the value add is also in value-added services, not the standard asset allocation and/or basic tax mitigation strategies. So that is the bigger picture. In terms of how we are taking advantage of AI, it's in several different areas. We are definitely using it much more for client meeting preparation, like using our CRM system to be better prepared for client engagements and hopefully using that to drive more growth from those conversations, driving share of wallet. We are definitely using it to create efficiencies in the way we manage our business, particularly the client servicing side. Actually, if you look at our client service associates onshore, that has been relatively flat, although we have been adding advisers, new clients as well as growing organically. So some of that servicing efficiencies are driven by the usage of technology and client servicing. One example would be how we deal with RFPs. We use technology and AI heavily in that. And then finally, in more client acquisition, we are using much more advanced lead generation technologies, and we are getting into much more AI-driven marketing to drive new growth. So all in all, it cuts across servicing and efficiencies, effectiveness in client conversations as well as new client acquisition. That said, I cannot put a number on it yet. Probably, I'm in the same ZIP code with my colleagues in wealth management. I mean, again, there are a lot of good things happening, but still the early innings of AI. Although we see the benefits, it has not translated into very concrete financial impact yet, but that's yet to come. Operator: We'll move next to John Dunn at Evercore ISI. John Dunn: Maybe just staying on private wealth for a second. I know there's seasonality in the second quarter and then you mentioned private wealth demand. But could you remind us about maybe seasonality for the rest of the year, maybe shifting product demand and then the temperature of like the channel's appetite to put money to work? Onur Erzan: Yes, sure. Yes, seasonality, John, definitely is something to be mindful of. Obviously, April is a tax month. So we tend to have a soft April in general in terms of flows because a lot of our clients pay taxes. And it happens every year. In terms of the client demand, even though obviously, there are heightened risks in terms of macro, the war in the Middle East, oil prices, this and that, our high net worth and ultra-high net worth clients remain very engaged. Actually, it has been relatively robust in terms of risk taking. We have not seen them go to the sidelines. As a result, we remain excited about the fundraising and growth. Again, as you have seen in Q1, we had very high sales relative to the previous 8 quarters. So we've definitely seen a momentum in sales, and we are not seeing a major slowdown yet. The 2 words of caution would be: number one, obviously, if the Middle East situation gets worse, if the conflict gets longer, et cetera, et cetera, I mean those all have impact on consumer sentiment and high net worth and ultra-high net worth clients will not be immune to that. So that can -- that's definitely a risk that we are monitoring. And then secondly, given some of the volatility and some of the software headlines, et cetera, some of the M&A activity has slowed down. When M&A slows down, it also slows down exits for entrepreneurs and the liquidity events of business sales, IPOs, et cetera. And that has an impact on our business. So if that slowdown again, extends because of the macro environment, that might slow our business down. But we're not going to be alone in that. We're not going to be an outlier. It's a little bit of a market beta, if you will. Seth Bernstein: John, I would just add that the resilience in the private client group is echoed I think, more broadly in the business. And given the volatility we've seen, it's kind of amazing markets are where they are, and we continue to see people exploring committing money to longer-term opportunities. So look, there are a lot of potential drawdowns arising given the volatility in the macro market, but we're pretty pleased with progress to date. John Dunn: Got it. And then maybe could you just walk through some of the factors like outside of investment performance that could get high-yield fixed income funds distributed in Asia back to being less of a headwind? Seth Bernstein: Yes. We are -- reopening our Global High Yield strategy in Taiwan. We've gotten regulatory approval, which is what stopped us. And so we're optimistic that we'll see incremental flows from there. We continue to see appetite for fixed income, but it's been more competitive and the alternative opportunities, particularly locally have been stronger. However, the dollar remains fairly strong. I'm hopeful we'll see some recovery along with performance. I don't know, Onur, if you have anything more to add. Onur Erzan: Yes. I think those are the main points. I mean the only other minor I would add to that is our ETF platform continues to build momentum as well. If you look at the monthly run rate, domestically, we are basically getting close to $0.5 billion net flows per month. So definitely a very healthy growth rate for our ETFs, which are across asset classes, including fixed income. And then we are expanding that momentum into international. We launched 2 ETFs, fixed income ETFs in Taiwan. We launched several UCITS ETFs in Europe this week in fixed income. So as a result, you will see us tapping into new markets outside our traditional intermediary channel using the ETFs. So it's going to take, again, a few quarters to build momentum in those new products, but we are seeding the ground for future growth in new products as well. Operator: Next we'll go to Dan Fannon at Jefferies. Daniel Fannon: So one more just on the private wealth side and tracking above the 5% adviser growth target. And so I was curious if you could just give a little bit of a framework or profile of the adviser that's joining your platform? I know you generally aren't paying the same levels of transition assistance or other things, but curious about the profile? And then how you anticipate those to ramp as they integrate into your platform over time? Onur Erzan: Sure. Great question. Yes, you're absolutely right. We typically have a bias towards more new to industry internal promotes as well as mid-career switches from other careers as our historical recruiting model. We have not done major recruiting in book takeovers, if you will. And as a result, our cost of talent acquisition seems to be much lower than what we see from some of the competitors. That being said, as we look at the talent mix, we are open to adding some experienced advisers, some of which might have books. So as we think about the rest of the year and the broader pie, I mean, I would say probably 75% would fit into the more traditional profile and then roughly 1/4 would be more on the experience side, some of which might have existing transferable assets. So that's how I think about the adviser mix. And in terms of the year-end adviser kind of numbers that we are targeting, probably given we have been intentionally fast in terms of adding new advisers early in the year, it's going to be slower in the rest of the year by our recruiting plan, but we probably would end a couple of percentage points higher than what we exited this quarter on a net basis. So that would be a rough number that we are targeting. Again, we are -- these are, I would say, directional targets. Ultimately, we flex up and down based on the talent we are seeing. Finally, in terms of how much time does it take for a new adviser to ramp up, et cetera. We have specific initiatives to get the advisers to full productivity over a shorter period of time. We have dedicated teams that are focused on it. But typically, it takes 4 years or so for an adviser to be breakeven if it's a completely new-to-industry kind of adviser. And then you see that adviser to peak probably within 5 to 10 years. So that's sort of a typical profile for new-to-industry kind of fresh talent, if you will. Daniel Fannon: Great. And then just a follow-up on the pipeline. obviously, record levels, and I think you gave some context around the funding of that. But could you talk more broadly about momentum as you think about the institutional channel and kind of sales activity and kind of product mix in context of that outside of what is actually in the pipeline today? Onur Erzan: Yes, sure. And if you think about our average deployment for the pipeline, we are currently running at 9 months. So the good news is the record pipeline will be deployed relatively quickly. So that's good news because that pipeline runs through fee-generating sales based on that. In terms of new opportunities, we touched on Corebridge Equitable, the $100 billion. So that definitely is quite a sizable opportunity ahead of us in '27 and beyond. In terms of other areas, a couple of things I would highlight. One, again, the broadening of the third-party insurance franchise. So we really have good momentum there. We continue to add new relationships, and I expect more there, both on the general account side with private credit and fixed income, but also on the separate account side with equities and multi-assets. And then in terms of the other broader institutional markets, we are definitely seeing some momentum in Asia Pacific. Some of our more quantitatively oriented strategies have found good demand there and definitely expecting more opportunities materializing across our systematic platform globally, but also specifically in Asia, given they are pretty big buyers of systematic strategies, particularly equities. Operator: And next, we'll move to Benjamin Budish at Barclays. Mason Fleming: This is Mason on for Ben. I just wanted to ask more about your ETF business. Can you talk more about the current distribution footprint outside of your wealth platform? And if possible, can you share any color about the current economic arrangements with distributors? And how they may be changing at all? Onur Erzan: Yes, for sure. In terms of our ETF franchise, you're absolutely right. It cut across our proprietary wealth channel as well as our third-party distribution. The third-party side has been growing at a faster rate, but from a smaller base. As you would expect, as we launched the ETF business starting back in 2022, we first leaned into our private wealth channel and then use that original foundation to scale into third party domestically and then overseas. On the third-party side of things, we are definitely seeing momentum. We onboarded our ETFs to multiple new platforms, wirehouses, regional broker-dealers, independents, et cetera. In terms of the total sales mix, we tend to have a very small, immaterial almost distribution through the direct platform. So think about the Fidelity, the Schwabs of the world, the direct-to-consumer part of those businesses. So as a result, our dependence on those funds, supermarkets, et cetera, is much lower than some of the other ETF providers that has large ETF franchises, particularly in passive. So I would say our third-party distribution cost is not materially impacted by what's happening with some of those platforms. Operator: And we'll take a follow-up question from Bill Katz at TD Cowen. William Katz: Just coming back to performance fees, thank you for the updated guidance. Can we unpack the incremental pickup in the public side? How much of that is just due to maybe market positioning versus anything going on the hedge fund side and anything related to maybe the shuttering of a relatively sizable hedge fund you announced? And then on the operating expense side, just coming back to that for a moment, it looks like it's up about 6% on the midpoint year-on-year. As we look out into 2027, would you anticipate any kind of deceleration of the core expense growth? Or would that likely stay the same just given the myriad of different growth vectors out there? Thomas Simeone: I mean, generally, it would stay the same, speaking from the operating expense side first. We generally haven't offered any next year's information this early on. But it would generally be flat. There's nothing on the horizon that I'm aware of to offer any additional color on the expenses. As far as the performance fees, no, the changes in performance fees [ aren't ] impacted by the closure of Arya that we announced recently. And then what's driving the publics is our international SMID product in 1Q versus last year. Operator: And there are no further questions at this time. Mr. Jorgali, I'll turn the call back over to you. Ioanis Jorgali: Thank you very much, Audra, and thank you, everyone, for joining our call. I hope you have a great day, and please reach out if you have any questions. Operator: And this concludes today's conference call. Thank you for your participation. You may now disconnect.