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perator: Good morning, and welcome to the Hilton First Quarter 2026 Earnings Conference Call. [Operator Instructions]. Please note this event is being recorded. I would now like to turn the conference over to Mr. Charlie Ruehr, Vice President, Corporate Finance and Investor Relations. You may begin. Charlie Ruehr: Thank you, Chuck. Welcome to Hilton's First Quarter 2026 Earnings Call. Before we begin, we would like to remind you that our discussion this morning will include forward-looking statements. Actual results could differ materially from those indicated in the forward-looking statements, and forward-looking statements made today speak only to our expectations as of today. We undertake no obligation to [Audio Gap] financial measures discussed in today's call in our earnings press release and on our website at ir.hilton.com. This morning, Chris Nassetta, our President and Chief Executive Officer, will provide an overview of the current operating environment and the company's outlook. Kevin Jacobs, our Executive Vice President and Chief Financial Officer, will then review our first quarter results and discuss our expectations for the year. Following the remarks, we will be happy to take your questions. With that, I'm pleased to turn the call over to Chris. Christopher Nassetta: Thanks, Charlie, and good morning, everyone. We certainly appreciate you joining us today. Before we begin, I'd like to acknowledge all those impacted by the Middle East conflict, and I'd like to thank our team members who adapted very quickly and continue to provide extraordinary hospitality during this difficult time. We remain hopeful for a swift resolution. Turning to results. We're pleased to report a great first quarter during which strong RevPAR and net unit growth drove top and bottom line results above the high end of our guidance. Performance was driven by strengthening underlying demand trends along with ongoing System-wide share gains. Our industry-leading brands, strong commercial engines and powerful partnerships continue to differentiate us from the competition, while a culture of innovation fuels additional growth opportunities. All of this, coupled with our asset-light fee-based business model, positions us to continue producing significant free cash flow and driving meaningful shareholder returns. In the quarter, we returned more than $860 million to shareholders and we remain on track to return approximately $3.5 billion for the full year. For the first quarter, System-wide RevPAR increased 3.6% year-over-year, driven by broad growth across all chain scales, brands and segments, as well as sequential monthly improvement throughout the quarter in the U.S. In the quarter, business transient RevPAR was up 2.7%, representing a 4-point step-up in demand from the fourth quarter when adjusting for day of week and holiday shifts driven by improving midweek demand across all chain scales. Leisure transient RevPAR was up 3.5%, driven by concentrated spring brake demand that enabled strong rate growth. [indiscernible] was up 4.3%, driven by growth in company meeting and convention demand. We continue to see healthy underlying momentum for group supported by strong growth in corporate lead volumes. As we look ahead to the second quarter, we remain encouraged by a continuation of demand trends that we've been observing since late 2025 and now through April, but we do expect some headwinds related to the Middle East. For the full year, we expect improving performance in the lower and mid chain scales with RevPAR strength continuing to move downstream from luxury and upper upscale toward a more balanced convergence demand shape or what I have been calling a C-shaped economy. This trend should be most evident in the U.S., where supportive tax and regulatory policy, expected lower interest rates, increased private sector investment in AI and the AI complex and ongoing public infrastructure spending are benefiting the middle and lower income consumer and driving broader demand growth. As a result, for the full year, our System-wide RevPAR growth expectations are now 2% to 3%, factoring in a range of scenarios for the Middle East conflict and recovery. For the year, we continue to expect group to lead, followed by business and leisure transient. Turning to development. During the first quarter, we opened 131 hotels totaling over 16,000 rooms representing our second strongest, first quarter for hotel openings in our history. Our Luxury and Lifestyle brands continue to expand around the world, comprising 20% of total openings in the quarter. Earlier this month, in Morocco, we proudly opened the Waldorf Astoria Rabat Sale kicking off 2026 with another key addition to the Waldorf Astoria portfolio, which now includes 40 trading hotels worldwide with more than 30 in the pipeline. Additional Marquee Waldorf openings in 2026 will include the Waldorf Astoria Admiralty Arch in London and the Waldorf Astoria Kualalampur in Malaysia. Within Lifestyle, our Curio Collection recently surpassed 200 trading hotels with notable openings in the quarter, including the newly built Monarch San Antonio and the converted hotel here on Alexandria, Old Town Virginia. We also expanded our Lifestyle footprint globally with the debut of Motto in Brazil. In Europe, this week, we will open a Home2 Suites in Dublin, Ireland, which marked the European debut our Home2 Suites brand, one of our strongest performing brands in the portfolio with more than 800 hotels open and over 750 in development. This positions this brand for extended rapid growth and allows us to capture even more demand from this important region. Conversions represented 36% of openings for the quarter across 10 brands and dozens of countries, ranging from flagship Hilton openings in Malaysia, Vietnam and Thailand, The Spark openings in France, Canada and the U.S. Following our Apartment Collection by Hilton brand announcement earlier this year, we now have our first 2 converted properties in Atlanta and Salt Lake City, accepting bookings for this summer. Conversions overall are expected to be up on a nominal basis in 2026 across every region, demonstrating the performance our system delivers to owners. Despite the current macro uncertainty, signings and starts continue to have momentum. During the quarter, we announced multiple new signings across geographies including 4 new brand signings in Turkey, 2 LXR signings in Japan, the debut of Motto in Australia and France and the debut of Tapestry in Germany. In India, we signed a strategic agreement with Royal Orchard Hotel to open 125 Hampton Hotels in the market, which puts us on track to exceed 400 hotels in the market in the coming years and reaffirms our commitment to expanding in this key emerging economy. We continue to build out our presence in the fast-growing and expansive region of APAC ex China, where approvals, openings and new development construction starts were all up double-digits in the first quarter. Globally, we now expect new development construction starts to be up over 20% for the year with the strongest growth in the U.S. and EMEA, signaling continued developer confidence and a strong desire to have hotels open in conjunction with a rebounding RevPAR environment. Our pipeline now stands at a record 527,000 rooms and includes brand [indiscernible] in more than 25 new countries with Hilton representing only 5.5% of global hotel supply and over 20% of rooms under construction, we have tremendous opportunity to grow our market share from here. As we look ahead, we expect that our robust global pipeline strength in conversions, construction start momentum and industry-leading brand premiums will support sustained net unit growth of between 6% to 7% for the full year even with the current geopolitical uncertainty. Innovation across our entire business is a core competency, and when deploying new technology, we're focused on broad impactful use cases to enhance the guest experience, deliver value to owners and empower team members. As we advance our strategy, we're leveraging AI to embrace, the new ways customers are discovering and engaging with our brands, working with leading partners, including Google, ChatGPT and Anthropic, all while remaining focused on strengthening direct loyalty-driven relationships and maintaining discipline in how we manage distribution. Building on this, earlier this quarter, we deployed an Anthropic-powered platform for customers to dream and shop called the Hilton AI Planner, this LLM powered tool combines our incredibly rich property content with vast information about local venues and activities to allow customers to search for and tailor an experience that is unique to their interest. The AI Planner enables guests to spend more time dreaming within our native environment which should drive incremental demand across our portfolio as customers book with us more often and more quickly. We're just getting started on how technology can customize the customer experience, and the Hilton AI Planner is one great example of how we are delivering our signature Hilton Hospitality and enhancing the Dream Shop Book and stay guest journey. During the quarter, we were proud to once again be recognized as the top-rated hospitality company by -- on the Fortune and Great Place to Work list of the 100 best companies to work for in the United States, marking our 11th consecutive year earning this distinction. We also continue to be recognized for our world-class culture globally, receiving Great Place to Work honors in 17 countries, including 7, #1 ranking. Overall, we are very encouraged by the strength of the demand environment across all our brands. We remain confident that our powerful network effect, industry-leading RevPAR premiums and fee-based capital-light business model will continue to drive strong operating performance, net unit growth and meaningful cash flow, enabling us to return an increasing amount of capital to shareholders. Now I'll turn the call over to Kevin to give you a few more details on the quarter and expectations for the full year. Kevin Jacobs: Thanks, Chris, and good morning, everyone. During the quarter, System-wide RevPAR increased 3.6% versus the prior year on a comparable and currency-neutral basis. Growth was driven by broad growth across all chain scales, brands and segments as well as sequential improvement throughout the quarter in the U.S. Adjusted EBITDA was $901 million in the first quarter, up 13% year-over-year and exceeding the high end of our guidance range. Out-performance was predominantly driven by better-than-expected System-wide RevPAR growth. Management and franchise fees grew 10.4% year-over-year. For the quarter, diluted earnings per share adjusted for special items was $2.01. Turning to our regional performance. First quarter comparable U.S. RevPAR increased 3.4% driven by group growth trends continuing from the prior quarter, broad business travel strength and leisure demand from a concentrated spring break. For full year 2026, we expect U.S. RevPAR growth to be at the high end or above System-wide guidance. The Americas outside the U.S., first quarter RevPAR increased 4.4% year-over-year, driven by strong demand across all segments and continued strength across the Caribbean and South America. For full year 2026, we expect RevPAR growth to be in the low to mid-single digits. Europe, RevPAR grew 6.9% year-over-year led by growth across all segments. Continental Europe's strength related to the Winter Olympics and other regional event-driven demand. For full year 2026, we expect RevPAR growth to be in the low to mid-single digits. In the Middle East and Africa region, RevPAR decreased 1.7% year-over-year as strong early quarter performance was offset by weakness following travel disruptions from the conflict across the Middle East. For full year 2026, we expect RevPAR to be down in the mid- to high teens as a result of the ongoing conflict in the region, and we expect the biggest impact to be on second quarter performance. In the Asia Pacific region, first quarter RevPAR was up 9.1% in APAC ex China, led by Australasia RevPAR growth and extended Chinese New Year and other regional events. RevPAR in China increased 1.3% in the quarter, driven by business segment recovery, but offset by continued pressure in group from softer convention and company meetings activity and leisure due to weaker inbound travel. For full year 2026, we expect RevPAR growth in Asia Pacific to be low single digits, with RevPAR flat in China. Turning to Development. As Chris mentioned, for the quarter, we grew [indiscernible] 6.3% and now have more than 527,000 rooms in our pipeline. We continue to have more rooms under construction than any other hotel company with approximately 1 in every 5 hotel rooms under construction globally slated to join the Hilton portfolio. We expect to deliver between 6% to 7% net unit growth for the full year. Moving to guidance for the second quarter, including the impact from the Middle East conflict, we expect System-wide RevPAR growth to be between 2% and 3%. We expect adjusted EBITDA to be between $1.015 billion and $1.035 billion and diluted EPS adjusted for special items to be between $2.18 and $2.24, both impacted by the significant Middle East RevPAR decline and several onetime and timing items that are unique to the second quarter year-over-year comparison. For the full year, we expect RevPAR growth of 2% to 3%, driven by strengthening underlying fundamentals across chain scales and segments and factoring for a range of scenarios for the Middle East. As a result, we expect adjusted EBITDA of between $4.02 billion and $4.06 billion and diluted EPS adjusted for special items of between $8.79 and $8.91. Please note that our guidance ranges do not incorporate future share repurchases. Moving on to capital return. We paid a cash dividend of $0.15 per share during the first quarter for a total of $35 million. Our Board also authorized a quarterly dividend of $0.15 per share for the second quarter. For 2026, we expect to return approximately $3.5 billion to shareholders in the form of buybacks and dividends. Further details on our first quarter results can be found in the earnings release we issued earlier this morning. This completes our prepared remarks. We would now like to open the line for any questions you may have. We would like to speak with as many of you as possible, so we ask that you limit yourself to one question. Chuck, can we have our first question, please? Operator: Our first question will come from Shaun Kelley with Bank of America. Shaun Kelley: Chris, obviously, a big notable change in the U.S. demand dynamics. So hoping you could just unpack that a little bit for us. Our math gets us to probably nearly a 200 basis point increase in your outlook from where you were at the beginning of the year. So could you just walk us through that and maybe elaborate a little bit on your comment around C-shaped economy? Are you actually seeing some evidence of that convergence as we get here into April? Or what gives you that confidence to kind of make that statement? What are you seeing that's getting you excited about the business? Christopher Nassetta: Thanks, Shaun. I think that's a great way to start with the Q&A because it's the biggest question out there. If you go back, I can have team fact check me, but if you go back to like midyear last year, I was very much of the mind that I saw, if you lifted up above a lot of noise that there were some really good fundamental things happening from a macro point of view in the U.S. economy that, to my mind, sort of had to eventually translate into higher growth rates. Now I will admit that certainly in the third quarter, as we reported, while I said that, I also said we're not seeing the green shoots or a whole lot of evidence of that yet. But then again, Mike (sic) [ Shaun ], if nothing I've been consistent, in the fourth quarter, I repeated in my view that we were -- that we had to start to see what I sort of made up on my own instead of a K, a C economy where you see convergence of the lower end, the middle class, mid-price segments in our industry moving up. And in the fourth quarter, we started to see a little bit of evidence of that. Now I would say that were in the first quarter and looking into Q2, where we have part of the quarter behind us, obviously, in the sense of April, we have very good sight lines into May, we're seeing it, right? And we're seeing what to me was inevitably on its way, but it takes time for these things to sort of deep into the economy. So I said it in my prepared comments and at the risk of taking too much time here, but I do think it's the most important question and answer, what's driving it? Well, I think what's driving it is a number of very big picture things that are going on. One, forget for the moment the spike in energy prices and oil because of the War in Iran and, I mean, broadly, structurally, particularly in housing, you have inflation coming down. And as a result, broadly, again, not in this exact amount, broadly, rates have come down. And I think there -- next you can debate how fast when second half of this year, first half of next year. But I think there's a broad understanding that particularly if we get the Middle East stuff sort of settled down, you're going to be in a lower inflationary environment, and it will allow the Fed to continue to bring rates down to stimulate the real economy, which is what they're trying to do. Here in, obviously, one of the most deregulatory environments in, what I can remember in modern history. And that means financial services, energy, you name it across the spectrum that you have a broad regulatory deregulatory regime. And that -- in addition to that, in the backdrop, because of the bill that was passed last year, you are in a multiyear position where you have very, very business-friendly tax attributes, right? And that's very hard to get done. It's certainly not going to get undone during this administration. And let's be honest, when you look at it historically it takes a lot even with change of administration to get that kind of sweeping tax policy change. So I think you have a number of years in running room and favorable tax policy. And then like I'll state the obvious. You have a lot of investing going on in America. Where is that investing? Obviously, AI, all the AI companies, the whole AI complex around it, data centers, energy, it's like one of the -- it's like great race. People are spending money like crazy in and around that. You have infrastructure, which I've talked about for a number of quarters, buying your infrastructure bill, $1.6 trillion, very little of which percentage wise has been spent. The CHIPS Act to reshore critical manufacturing. Again, $800 billion, very little of that is spent. Why? Because it takes time to get these things like land, permits, build. So these things, they take a number of years to sort of seep into the system. But I think you're starting to see it. The best evidence of that, if you go back and there's -- the correlation sort of got obtuse or broken apart during COVID like a lot of things. But for a long spans of time, the highest correlation, 95%-plus over a very long span of time. The correlation and demand growth of the hotel rooms has been growth in RFI, nonresidential fixed investment. Sort of like we've lived in crazy ville, post-COVID where you have all the swirling stuff going on, hard to understand. But to me, over the long term, that is exactly what is going to drive the business. And that's exactly what's going to drive the mid-market of the business, all that investing in nonresidential fixed investment that takes the middle class getting in the game. And if you look at those numbers, they've been moving up and they're perennially bad at forecasting an RFI from my experience. But the actual numbers being reported are moving up. And my guess is the next several years, they're going to keep moving up. And as they do, you're going to see this convergence. With all of those things going on, you're going to see this convergence. By the way, if that's not enough, I mean I know it's a whole different topic of displacement and everything that goes with AI, but AI is also going to provide one of the greatest productivity booms. I mean, it's going to be equal to or bigger than the Internet productivity boom, and yes, there are people, there's winners, there's looser's, need to retrain and shift and re-skill people, all of that stuff, we won't get into today with the limits of time, but there is no world where economically, it's not advantageous to have productivity gains. Like there is no world, there is no time in American history where big productivity gains weren't matched with big economic growth. So I sort of put all that together, and I feel like, okay, it's happening, like I want it to keep happening. We don't -- I want to be thoughtful about like we're talking about a little bit of fourth quarter and the first quarter and now looking into the second quarter. And I don't want to overcook it, but all of those things I've been thinking, I think, are happening, and I think it's now showing up in our business, and it makes me feel good that we could be in a time frame, honestly, where -- I love it when we're sitting around at this very table every week talking about performance. And every time we talk, it's getting better, right? And that's what's been happening for a while, for weeks and weeks. It's getting better. Like -- so as we look further out in the year with the visibility we have here in the U.S., it feels better. So reality is we gave guidance to the Middle East. I'll leave that to somebody else to ask, creates some uncertainty, but I think you can make an argument that we are being reasonably conservative with our full year guidance. Operator: Next question will come from Dan Politzer with JPMorgan. Daniel Politzer: I suppose I'll take the bait on the Middle East there. Can you just remind us what the exposure in terms of EBITDA or fees across your businesses there? And how do you think about the Middle East dynamic and disruption there flowing through to the other regions of your business throughout the course of the year and impacts the U.S. outbound travel? Christopher Nassetta: Sure. Middle East is about 3% of the business. So you'd say, "All right, it was not that bigger part of the business." But like Q2, you see that is impacted by a few things, some onetime stuff that Kevin mentioned from last year, but it's also impacted by the Middle East. I mean the Middle East for Q2, which is when we think it will probably be most dramatically impacted. If it's 3%, it could be down 50% or something like that. You guys could do the math. That could be 1.5 points on System-wide. So whatever guidance we gave you, if the Middle East we're doing what it normally does. It wouldn't be -- which had been running in the high single digits, low double digits now for a quarter minus 50% you flipped that around it in Q2, you would be above where you were in Q1. So even though it is a small percentage of 3%, when you get in very large numbers, small percentage of a large number becomes a decent-sized number. Having said that, we are already -- I mean I don't know where this is all going to play out. I'm looking down outside my window to Washington. We'll see. I don't know. I suspect there will be an off-ramp eventually just given a lot of things, politically and otherwise in the not-too-distant future. Things have already settled down a bit. I mean we are already starting to see, again, in my weekly around this table, when I'm getting reports, certain markets within the Middle East that are some of our bigger markets are starting to sort of stabilize and move up. I mean, they're still quite impacted, but they're getting better. And so what we tried to do in our guidance was, again, on the margin, be a bit conservative and thinking about a range, like in the first quarter, we think it was probably 30 or 40 bps something like that. And in Q2, I just gave you the metric, it's probably 1.5 points. For the full year, it's probably 0.5 point to 1 point impact depending on what you think the trajectory will be. And at the lower end of that range and thus at the lower end of our overall guidance range, I think what we've assumed is it stays pretty bad and that there is, in fact, some knock-on impact to your question. There's some knock-on impact on other markets. We've seen a little bit of that, a little bit in India, particularly Bangalore, a little bit in the Seychelles and Maldives because of transit through Dubai, but not a lot of knock-on impact, but we've assumed if it stays really bad, there'll be a little bit more. And then obviously, on the upside that you continue to things stabilize and you continue to have recovery but not necessarily a super v-shaped recovery just sort of grinding back up through the rest of the year. So again, my experience, I'm sad to say I've been doing this long enough. I've had to live through stuff like wars and pandemics and like whatever else it feels like. And so I feel like in this moment, we're trying to be responsible with you all in telling you we're giving you a range of outcomes that we think are rational, if anything, probably on the conservative side as they should be. In terms of -- I mentioned it on the development side, only about 2% of our deliveries for the year are coming out of the Middle East. But those are important deliveries. We do think things will slow down a little bit there. It's so early in the year. We don't know. And so again, that's why we I think -- but for that, we probably would have been telling you we're in the upper half of our 6% to 7% range. But because of the Middle East and potential for supply chain knock-on in other parts of the world, we feel like keeping the range where it was, was more appropriate. Again, I mean, you could say we're being too conservative, whatever, but I mean war is war. There's a lot of possible outcomes. We've tried to frame it around those and be thoughtful about it. Operator: Your next question will come from Stephen Grambling with Morgan Stanley. Stephen Grambling: I appreciate all the color on the macro. As we look at some of the actions outside of RevPAR, particularly the launch of the Select brands. Can you elaborate on how this compares to a typical brand agreement? And what are some of the guardrails for what brands you'd be willing to include going forward? And if I can just sneak one more that's related on, does this launch change the way you think about either the marketing or system funds allocations or even M&A? Christopher Nassetta: No, to the last part of that. Let me -- but so I'll answer that. That doesn't change any of that. I mean the way to think about Select is like anything we bring into the system, the first step is quality, does it add to our network effect? Is it is it a swim lane or a brand that we think our customers want, that has the quality that we have promised to give our customers and then we think it will create a benefit strengthening to our network effect. That's always the first filter. So we -- if it doesn't meet the criteria of like we already have something on top of it or we don't like the quality. We're not doing it. And by the way, we've had dozens of opportunities in Select that you don't know about because we haven't done them. This is -- we've done one. I suspect there will be others. I don't know how many they'll be because we're super stringent on what we would do. And so the way to think about it, and the hotels a great example is like. It's a great smaller brand. They've struggled to really -- customers love it. The quality is good, and they have a real following, but they've had a real problem without having global scale and all the network effect that we have and the ability to invest in technology and all those things at the level we do to sort of make it work the way they wanted to work. And so -- that was a unique opportunity for us to say, we love it. Our customers, we did a lot of work. We think our customers like it, will resonate well. The quality is good. And importantly, we're entering the agreement with, that is consistent with the way we would approach any franchise agreement. This is a franchise relationship with them. We are getting -- and if you look at the -- I know there's been a lot of noise out there, but if you -- there's a ramp involved like a lot of our larger multiunit franchise deals. But if you look at a run rate basis, this is very consistent in how we charge for license fees, system fees, all of that, and it is on a fee per room basis, very consistent with the product in that category. And so the difference is it's just a little unique brand. And so like -- could you do it somewhere else? Yes, you could say like what's [indiscernible] that and like doing it as a tap or whatever. Well, Hotel is a good example. It's unique. It doesn't fit in TAP for Curio. It's its own thing. And so we didn't want to try and like we want to have we don't want to have cognitive dissidence with our customers as we bring things into the system, and we like the brand. We wanted it to stand on its own, but we want to do it in the right way. We want to get paid paid for the effort and we want it to be something our customers really think enhances the broader system. And so there'll be others. I'm sure we're working on a bunch of others, but I said like turndown ratio is very, very high. Obviously, the appetite for folks that have small brands, I think, is quite high in an environment where we have this much scale and the ability how we work with all the intermediaries, the dollars we can invest in our commercial engines and technology. It's -- I think we have a real competitive advantage. That's why the average market share of our brands is so high and much higher than our competitors. And so increasingly, little micro brands around the world, I think not all of them, but some are figuring that out. And we've been talking to a bunch of them. Do I suspect some others will come into the fold over time, but we'll be hyper disciplined about it. Again, quality the brand works, fits in our ecosystem, and we get the fees per room are good. And we get paid for the efforts. Operator: The next question will come from Lizzie Dove with Goldman Sachs. Elizabeth Dove: I wanted to go back to the AI and kind of technology side of things. Obviously, things are moving very, very quickly. You mentioned you launched the Hilton AI Planner. But I guess just now another quarter into things, how do you think about what the kind of real opportunity set here is, long term, both obviously on the OpEx side of things internally, but then as you think kind of bigger picture externally from the distribution side of things also? Christopher Nassetta: Yes. I mean we talked about this, I think, at fairly good length on the last call and it's obviously an important question. And given the amount of time we're spending on it and everybody is, it would be fair to say it's worth addressing. I would say you're right, a lot of effort going into it by everybody certainly by us. Things are moving very quickly. I would say as every day goes by, we're learning and iterating and thinking and doing different things and working with different partners in different ways. And I think the opportunity gets more not less interesting I know that's what you'd expect me to say, but I believe it to be true. I think the three buckets of how we think about it, haven't really changed. I think we think about this as a means to create -- to use our scale as a weapon and creating efficiency, which we think can translate into being more efficient at how we go to market and how we deliver for our owner community and more effective. And yes, that could benefit our P&L, too, but really, the largest part of our system cost really relates to the part of the system we manage on behalf of owners. So every time we can be more effective and more efficient in the world, it can translate into benefits for our owner community who need it and want it and deserve it. Our project Rise this year was in part enabled by work that we're doing in this bucket, if you will. And so I'd say we're early days, and I think you have huge opportunities to think about systems and processes across what is a very big global company, to continue to garner efficiencies but most importantly, to be much more effective, be able to move quicker, add hotels, ramp them quicker just because we take great systems but antiquated systems, and we hyper modernize those. In the second bucket, you heard me mention, we're working with a bunch of the folks out there, Gemini and OpenAI, we're going to be opening our app within their environment in the next couple of weeks, talked about our AI Planner in our environment that we did with Anthropic and Claude. We're working with everybody, and while it's moving fast, there's a long way to go. And so I do increasingly feel really good about what the opportunities for us are. I mean if you think about it at a high level, if you look at the quality using the U.S. market as an example, if you look at the quality hotel market in the United States, we're over 25% of the market. I think that puts us in -- and we are the only ones with that 25% of the market that can control rate inventory availability, period, end of story, nobody can get it, unless we give it to them. In a world where you have a more competitive environment, there are a bunch of debates who's going to win, who's going to lose. That's not for us to judge. I think they're probably going to be more -- there's going to be more than one winner. That's why we're working with everybody. But we realize the asset we have in the system and the control of the system, given our scale is really valuable that effectively, people really do need us if you're going to have -- you can't be missing 25% or 30% of the quality inventory in the U.S. and have something that's a real full offering. And so I like where we sit. It's complicated. It's fast moving, there's risks, but we're approaching it very much in the form of a partnership with all of the counterparties that are developing these technologies. We want to show up with all of them. And in the end, I do believe as a result of the great work they're doing and a result of discipline on our side, that there's real opportunities to create more efficient, more effective distribution. They sort of just has to be if we're smart about it, and we intend to be. And then the last bucket AI Planner is, in fact, part of it. And if you think about when we have a stay experience people are with us, your customers, we have all sorts of opportunities to like equip our team members now with all the information we have with technology in the palm of their hands to deal with problems to customize the experience. And we're testing and learning in the stay experience with really cool things that really revolutionize the stay. But we also, a lot of the engagement we have with our customers is digital. Think about when they're dreaming, booking, planning, post-day. And so -- and they're not with us. And so that's about trying to make sure that the approach we have digitally with folks is utilizing all the best thinking and technology to create a very engaging experience so that, yes, when they're with us, they have the best day experience in the business, and that's why they want to come back -- but when they're not with us and these other steps of the customer journey, they feel equally good about our ability to give -- to satisfy their needs and to customize at mass scale. And so again, all this stuff, I mean, we're doing things. We talked about it, you can go play with the AI, the Hilton AI Planner or Stay Planner, it's early days, but we're doing super important foundational work. And the last thing I'd say is our tech stack and it's not by happenstance is very advanced. So many years ago, COVID, like turned it to a time war, but pre-COVID, so probably 8 or 9 years ago, we made the decision to really completely blow up all our legacy architecture and make sure that our core systems and otherwise were cloud-based open source, micro services driven, which means totally modern tech stack that has like incredible agility and agility and the ability to have control. So it's a system built on certain elements of table stake sort of technology, it might build off an existing platform. But where we customize and modify it, it's things we own and control. And so it gives us, we think, a really unique ability to be agile and do things for customers that are going to be unique that others that are going to be with monolithic providers can't do. And so that was a very purposeful decision to my tech team. They're extraordinary and leading that effort over a bunch of years. And I would say it just puts us in a really good position in the world we live in, where AI is coming and you have all this opportunity. But if you don't have the flexibility and agility of a tech stack, it doesn't really matter because sort of like the machine stops. So that I'll leave it at that. We could talk AI all day, and we do around here, talk about it a heck of a lot, but that's probably enough for today. Operator: Your next question will come from Steve Pizzella with Deutsche Bank. Steven Pizzella: Just wanted to follow up on the expectation for conversion to be up in 2026 across every region. Do you think this is a new normal for conversions moving forward? Or will we revert back to a more normalized conversion level versus new construction mix? And is there anything to think about from a fee perspective, longer term, if conversions continue to be a greater portion of the fee mix moving forward? Christopher Nassetta: I don't think there's any material impact on the fee side of it. So answering that first. I -- this year, we're going to tick up, as I said, last year, we were like 36%. Current forecasts are we're trending a bit above that, probably 38% to 40% in the latest numbers. I mean there's a lot of moving parts under the year, for the year. But we think we think it's going to be up modestly. I actually -- I think the math of it is such that on an absolute basis, I don't think you're going to see a big drop off, in conversions. As a percentage of [ nug ], I do think you will see it moderate over time, but that's because you've been in a world where construction starts haven't really gotten back to pre-COVID levels. And that will happen and is happening. It probably happens this year. And as you start to have that happen over the next 2 or 3 years, and new construction grows in an absolute sense, I think the percentage will decline. I don't think it will ever go back down. I mean, we peaked during the -- great recession in the low 40s. We're sort of back there now. It went as low as the high teens. I don't think we're going to be in a world where it's high teens. I mean when it was high teens, let's be honest, we had 1 brand, 1.5 brands sort of like Hilton and DoubleTree when it went. Now we've got a dozen brands that are really a dozen or more brands that are really good candidates for conversion. So I think you're probably sort of permanently in the 30% to 40% range. I'm making that up. But I mean, directionally, if you did the math on new starts, I think you're sort of permanently in that range. Operator: The next question will come from David Katz with Jefferies. David Katz: Thanks for taking my question. I know you said you'd like to sort of leave the AI discussion right where it is. But I wanted to ask something just a little more industry level, if that's okay, which is -- it's obvious that you're making great progress in working at terrific speed. Outside the industry, not talking about competitors or peers, right, there is sort of an independent track that's going on, and there's also an OTA environment that's also, I assume, moving as fast as they can. How do you envision those dynamics sort of playing out? And do we evolve into kind of a different industry landscape in that regard? Or are you just running your race and luckily not paying a ton of attention to what they're doing? Christopher Nassetta: No, no. We, of course, are paying a lot of attention to what everybody is doing. I I do think on the margin, it will look a lot like it does over the next 5 years from now, it will look like -- a lot like it does today or it has looked. I think on the margin, though, if we do our job, I think AI allows us, as I said, that be more efficient and more effective. What we did that is, code for continuing to build more direct lines to our customers. I mean that's where we have a terrific relationship with the OTAs, and we do a certain segment of our business with them. And I suspect we will for a very, very long time. But I think our ability -- our control of our inventory, our ability to customize the experience in unique ways, it being a more competitive environment where there isn't just one winner in search probably when it's all said and done. I think that puts us in a position where we -- it gives us an advantage relative to what we've had to continuing to build more direct business. Now 80% plus of our business is already direct. So we've had a fair amount of success in doing that. But I think on the margin, it helps in that regard. But I go back to where I started. I don't see that the whole system changes in a material way anytime soon. Operator: Your next question will come from Robin Farley with UBS. Robin Farley: My question is not about AI. Just looking at results, fantastic results, and I think that full year RevPAR rates higher than the market was expecting. I am curious, last quarter, you had a slide that showed that 100 basis point raise in RevPAR would be 100 basis point raise in EBITDA. And it looks like it's maybe sort of more like a 50 basis points raise in EBITDA. Your G&A didn't change. Just anything else you would call out in that sort of flow through to EBITDA from the race? Kevin Jacobs: No, Robin, I think -- look, I think the rule of thumb we would use and maybe the 100 basis points was a little bit of rounding and I think we've actually updated that more recently. The rule of thumb we do is about $25 million or $30 million of EBITDA per point. And so we raised our guidance -- our RevPAR guidance by 1 full point. So if you think about that as being typically $25 million to $30 million, the things that are going on there is you just have the impact of the Middle East with a little bit of IMF and a little bit of FX, which caused us to raise the midpoint by [ 20 ] instead of, call it, [ 25 ] at the low end of the range. So that's the way to think about it, and it's not more [indiscernible] than that. Operator: The next question from Brandt Montour with Barclays. Brandt Montour: So back to demand, you sound really good on group business. That was that was sort of the downside surprise for the industry last year, obviously, with tariffs. And just sort of curious, when you think -- when you look out and expect group to total lead, are you actually seeing in the year, for the year group bookings materialize better than planned? Or is it really just sort of easy comps that give you that confidence? Christopher Nassetta: No. I mean we're seeing real lead volumes and bookings in line with the forecasting we have. And atmospherically in the discussions that our sales folks are having broadly about sentiment in that space and the corporate space, for that matter, are much better, quite good. So they get -- I think, listen, people are feeling better when they're spending more -- they need to move more, they need to aggregate people more, and we're seeing it show up. The booking position supports it, the leads more than support it. Operator: Next question will come from Trey Bowers with Wells Fargo. Raymond Bowers: Just getting back to [ NUG ], to the extent that the disruption in the Middle East might might cause some impact on 6% to 7% growth this year. Is that just some of the either conversions or new builds kind of fall out of the system or the expectation of you were not at the high end of that range for this year. Would most of that fall into 2027? Christopher Nassetta: It's just timing. We don't -- we're not concerned that anything is falling out of the pipeline, or conversion opportunities are drying up. It's just like there's a lot going on over there and some people have slowed construction, they've slowed decision-making on conversion deals that we're working on. So I don't think we feel like any of it really ultimately falls away. I think it's a question of when it gets done. And it's early to say. By the way my team says -- our team says it's picking up by the day, like Saudi Arabia, sort of isn't missing a beat, UAE, a little bit more disrupted, Kuwait, Qatar, much more so because the issues there have been more dramatic. So really, -- it's not like one monolithic area. It's country by country. And so we're watching it carefully. But I think it's -- I don't think these are things that like disappear. I think it's just a function of -- it may push a quarter or 2. Operator: The next question will come from Duane Pfennigwerth with Evercore ISI. Duane Pfennigwerth: Just to stick on that theme. As you think about your share of rooms versus much larger share of rooms under construction. What markets do you feel like that disconnect opportunity is biggest? Basically, what geographies offer the best share gain opportunity as you look out maybe over the next 5 years? Christopher Nassetta: Well, there are a lot of them, I would say -- I mean, where we have what we call inside the company's springboard work, which is where we see sort of the disconnect in terms of demand for our products and what is a relatively low existing base of hotels. So I would say India being first and foremost, I mean we think easily, it's a 10x or 20x sort of opportunity. We have whatever, 40 hotels in India. I mean with the deals like when we announced today, we sort of have 400 in and around the pipeline or under development. So India is definitely one. Southeast Asia is another where we have a big presence, but we think the opportunity is to be 3x or 4x the size that we have. [ Cala ], the broader [ Cala ] environment. We've got a big presence of 300 hotels, but we think we could be easily 2x or 3x that size. KSA, we have 25, 30 hotels. We think we can easily be 4x to 5x that, probably even more as well as other parts of the Middle East. Obviously, the Middle East, we just talked about, there's some challenges, but in part because I'm always an optimist, but I do think one way or another, this will settle down, and there's a lot of momentum underlying travel and tourism in the Middle East that I think will pick up pretty quickly when you get to the other side of this conflict. So I mean -- and I shouldn't forget Africa, where a huge population, what is -- we've been there for many, many decades, but have a relatively small base and a huge opportunity. And so yes, the reality is we've got 27 brands. And if you look at the average number of brands that's deployed in any market, I think it's like 4 brands with 27. So even where we have more density, there's a tremendous amount of network yet to build and thus growth and then the markets I just covered, I would argue and almost all of them other than maybe [ Cala ] where we have 300 hotels. The others were in sort of our nascent stages. The brand is well known. We performed really well. We've had a presence in a long time. But relative to the populations and the demand base, we're just getting started. So that's why we get really excited when we think about -- I get the question, well, how long can you grow 6% or 7%? And my view is a long, long time, simply because the world is a big place, populations all over the world need to be served. They're all -- in most of the markets I just described, there way underserved relative to any of the other more mature markets. And yet our brands do well there. Customers recognize us, and it's an opportunity to really build a powerful network effect, in many of those places. Operator: Ladies and gentlemen, this concludes our question-and-answer session. I would like to turn the conference back over to Chris Nassetta for any additional or closing remarks. Please go ahead. Christopher Nassetta: Thanks, everybody. As always, we appreciate the time. As you can tell, there's a lot going on in the world. There's no question about, the Middle East is not helpful. But 75% of our business is still driven out of the U.S., and we have seen really nice uptick in performance driven by a really nice uptick in demand across all segments. We think that is sustainable as we look out for the rest of the year and beyond. And so notwithstanding everything going on in the world, we feel really good about our ability to drive top line, drive unit growth, obviously, the free cash flow that we need to drive and keep returning capital as a serial compounder. So we feel great about the business. Look forward to catching up with you after the second quarter to give you the update on everything going on. Operator: The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
Operator: Good day, and welcome to the Rithm Capital First Quarter 2026 Earnings Conference Call. Please -- please note this event is being recorded. I would now like to turn the conference over to Emily Hoke, Deputy General Counsel. Please go ahead. Emma Bolla: Thank you, and good morning, everyone. I'd like to thank you for joining us today for Rithm Capital's First Quarter 2026 Earnings Call. Joining me today are Michael Nierenberg, Chairman, CEO and President of Rithm Capital; Nick Santoro, Chief Financial Officer of Rithm Capital; and Baron Silverstein, President of NewRez. Throughout the call, we are going to reference the earnings supplement that was posted this morning to the Rithm Capital website, www.rhythmtap.com. If you've not already done so, I'd encourage you to download the presentation now. I would like to point out that certain statements made today will be forward-looking statements. These statements, by their nature, are uncertain and may differ materially from actual results. I encourage you to review the disclaimers in our press release and earnings supplement regarding forward-looking statements and to review the risk factors contained in our annual and quarterly reports filed with the SEC. In addition, we will be discussing some non-GAAP financial measures during today's call. Reconciliations of these measures to the most directly comparable GAAP measures can be found in our earnings supplement. With that, I'll turn the call over to Michael. Michael Nierenberg: Thanks, Emma, and good morning, everyone, and thanks for joining us. I'm going to open my remarks and go a little bit into the credit markets for a minute and then we'll get into the supplement, which has been posted online. Baron Silverstein will cover the mortgage company. Peter Brindley will cover Elior, which was formerly known as Paramount, we rebranded the real estate company last night, and we're excited about that, and Peter has a lot of great stuff to discuss. So for the company, another solid quarter for our company, demonstrating the power of the franchise. Activity levels across the board were robust. The firm, as we stand today, is extremely well positioned to take advantage of market dislocations as the combination of geopolitical risks and private credit headlines give us the opportunity to deploy more capital across the firm in both the ABF and credit space. As market participants pull back, this will play to our advantage. The majority of our capital in our asset management businesses with institutional partners. As a firm, the exposure we have to software remains low. It is important to note, we have not seen any notable DQs in our credit exposure across the firm. We do not see systemic risk in private credit. From our seat, this is a sentiment-driven dislocation that will play into our ability to look for opportunities in the credit space. When you look at direct lending, 80% of direct lending sits in institutional drawdown funds. Systemic risk care will be contained. Large BDC portfolio is present in software. While saying that, defaults in the largest BDC and sponsors sit below the 5-year historical average of 1.1%. While saying all this, what's the opportunity for Sculptor and Crestline, we're structured to take advantage of dislocations. It's that simple. While saying all of this, when we think about dislocations, markets have rebounded. S&P is at all-time highs. Securitization markets remain robust, and there's lots of demand everywhere for ABS products. During the quarter, we did $2 billion of securitization, and we see a consumer that remains healthy, particularly in our mortgage company as we look at the 4 million customers that we service. In our Paramount portfolio, which is, again, now called Delacour, leasing activities are excellent, and Peter will speak to that. New York City is now roughly 93% leased in San Francisco on fire as a result of the AI boom and the need for office. San Francisco saw the strongest quarter of activity since 2019 and before. Availability declined by 600 basis points year-over-year. On the Paramount portfolio, the team did a great job in '25. They leased approximately 1.75 million square feet, 76% or 75% of the activity was in New York City with the rest in St France. So before I go into the supplement, I want to lay out Rithm our companies and how to think about us. As everybody knows, we started the company in the spring of 2013 at Fortress we started with $1 billion of permitting capital. And since then, we've created the following: $8 billion of permanent capital all raised in the public market, $110 billion plus of assets $60 billion managed for third parties. That's our asset management business. We have a $50 billion balance sheet that not only supports our operating companies also supports our asset management business. We have 1 of the top 5 mortgage companies in the United States. We started that from scratch in 2018. We have 4 million customers, as I pointed out before. We own one of the top construction/residential transition lenders in the U.S. known as Genesis Capital. We're the fourth largest owner of office in New York City. And again, that's through the acquired Paramount Group, which once again was rebranded to core and we paid north of $6.5 billion of dividends. So what does all this mean? And where are we going? We'll continue to lead with performance, grow relationships with our LPs. Perform as expected and do all we can to increase our value prop for our public equity holders. You heard it before, and you'll hear it again that some of the parts in our view, is much greater than a whole. Now I'll refer to the supplement, which has been posted online. I'm going to start on Page 3. So when you look at the firm, we have really, what I would say, 5 core operating businesses or really Sculptor and Crestline, our 2 asset management divisions couldn't be more proud, I couldn't be more excited where we sit today with both of those very complementary strategies, different One is basin for worth, one is based in New York City, as you know, with global offices everywhere. Assets managed approximately $60 billion with more funds being raised daily. Eliqor, formerly known as Paramount, Class 8 owner-operator of offices in New York and San Francisco. Peter will talk to that business is doing great. NewRez, our mortgage company, again, number three, in total unit service in the United States, including the large money center banks and a top 5 U.S. mortgage lender. Baron will speak to that. And then Genesis Capital which is our residential transitional lender. It's also a large multifamily originator, and I'll speak to that in a little bit. and then you have Rithm, which is obviously in the investment portfolio and at the REIT level. Page 4 for the quarter, what I would say is, as expected, $0.51 per diluted share when you look at our $28.6 million in earnings, 17% return on equity. GAAP net income is always going to be noisy due to hedges moving in and out as we hedge up our MSR portfolios. $57.8 million of GAAP net income, $0.12 per diluted share and a 4% return on equity. Book value, we ended the quarter at $7 billion or $12.51 and -- when you think about it, we paid $0.25 in dividends, effectively, we've grown book value quarter-over-quarter net-net. And that's truly a testament to our team as we think about the macro strategy and the markets in general. Dividend yield, 10.5%, $0.25 per common share in cash and liquidity, we ended the quarter at approximately $1.3 billion. When you look at the quarter end review and we think about Rithm as and management, which is the so-called parent -- we deployed over $2 billion in corporate credit, ABF investments over and in ABF investments -- in the scope to Real Estate Fund V, they've committed $1 billion in the first quarter loan in 2026. Keep in mind, coming off a great successful fundraise of $4.6 billion on their latest fund. Great brand, great track record and a great business for us. Sculptor had gross inflows of $600 million, ending the quarter with $37 billion of -- when you look at Crestline, overall performance terrific, outperforming our initial underwriting, grew management fee revenue by 16% year-over-year in the first quarter of 26%, and we'll continue to grow that business as we see the opportunities in the credit space. Genesis Capital, when you look to the bottom left, best quarter in history Keep in mind on this business, we bought from Goldman in '22. At the time we bought this business, they were doing $1.7 billion of total loans for the entire year. So we did $1.6 billion in the first quarter. We added 118 new sponsors. P&L looks great and credit performance remains strong. We will not sacrifice production for credit, so we're on the same page. Newrez mortgage -- mortgage company servicing portfolio ended the quarter approximately $850 billion. That includes third-party funded volume of $15.5 billion, generated $274 million of pretax income with a 19% annualized operating ROE in the first quarter. And then on the investment portfolio, robust run our non-QM business. We originate quite a bit there in the mortgage company. We did $2 billion securitization. During the quarter, we invested $3 billion in different mortgage assets that includes non-QM and residential transition loans, and we also purchased $140 million of home improvement loans under our flow agreement with upgrade in the total purchase since Q3 to $667 million. When we are looking at the platform again [indiscernible] we're growing areas where we means will add teams, not businesses because we're extremely happy where we sit between Sculptor Crestline and now known as LCR as we grow our real estate presence. So when you look across the board, where everything in credit, where everything in the multi-strat business, on the real estate side, there's roughly $11 billion of AUM in the house. And in asset-based finance, I would expect us to grow that significantly with our third-party partners globally. When you look at the sculpture business on Page 8, again, we couldn't be more happy where we sit today. We're 2.5 years in total AUM $37 billion, most importantly, performance. We are going to lead with performance. We're not going to leave with AUM. We have a fundamental belief that you could only deploy so much capital into the markets when the markets give you the ability to create, what I would call, alpha or outsized returns. That's how we view the business. So while all of us want to grow AUM, we need to lead with performance first, going to be more proud of the team could have been more proud of the business and really excited where that business is going to go. Crestline, Arena Asset Management business, which we closed on in December of 25 and total AUM rough a little under $20 billion, a ton of investors across the platform. I was just in Tokyo 1.5 weeks ago meeting with both Crestline and Sculpture investors at a conference -- in Asia or in Tokyo, we have 15 different LPs invested in the -- in both the Crestline platform and the Sculptor platform. So real global brands the teams do a great job when you look at this business, we are well positioned to take advantage of any dislocations in the market today, investment performance. If you look to the bottom left side of the page, Capital Solutions, 13.5 net since '22, direct lending 12 and change net since '23. So overall performance is very good. I mentioned earlier about software, only 7% of invested assets are classified in software. As we look to Elicor, I'm going to turn it over to Peter, who will give you some color on the real estate business And then after that, I'll talk about Genesis and then Barenwill take the new risk portion. Peter? Unknown Executive: Thank you, Michael. Paramount Group, as Michael just now said, it's become Elior properties come on Page 11, a new name and a new identity but a continuation of the same commitment to operating Class A real estate in New York and San Francisco. This new chapter reflects our intention to leverage the operational strength of the Licor team and the financial strength of Rithm Capital to further enhance our trophy quality portfolio ensuring that we continue to outperform and attract the world's leading companies. Companies in both New York and San Francisco are choosing to elevate the quality of their real estate to enhance collaborative culture, energize their teams and drive productivity it is among the most pronounced trends in our 2 markets. The quality of our portfolio, coupled with our planned significant investments will ensure we continue to attract the most discerning companies across a variety of industries well into the future. This rebrand is an acknowledgment of the evolution of the workplace and signifies a renewed commitment to delivering a leading workplace experience. 1 where world-class amenities are integrated into our buildings, resulting in a best-in-class differentiated experience for our tenants. This is a story of continuity and acceleration. The Elicor properties team is energized and working hard to execute on our exciting plans. Turning to Page 12. Elicor property highlights. Elicor owns, manages and operates high-quality, centrally located Class A office properties in New York and San Francisco. The portfolio is managed by a senior leadership team with deep knowledge of our markets and a track record of success. Elicor is a vertically integrated platform with in-house expertise in all facets of the business, including leasing, asset management, acquisitions, property management, redevelopment and financing. Since the acquisition on December 19, 2025, we have identified operating efficiencies to increase our annual management company EBITDA by approximately $40 million. Elior's portfolio consists of 10 core assets totaling 9.9 million square feet. The core portfolio is currently 85.7% leased at share with an average in-place rent of $90 per square foot at share and a weighted average lease term of 8.4 years at share. Key highlights include leasing. Year-to-date, we have executed leases and have leases pending on more than 360,000 square feet across the New York and San Francisco portfolio with weighted average initial rent of $94.64 per square foot, 14.9% higher than our weighted average initial rent in 2025. Capital Markets, Rithm acquired the portfolio for $585 per square foot an increasingly attractive basis given the recent transaction activity in both New York and San Francisco. JV opportunities. Earlier this year, we launched a JV process on 1301 Avenue of the Americas a 100% leased Class A asset located in one of Midtown's best-performing core submarkets. Financing. Subsequent to quarter end, we closed a CMBS financing on 1325 Avenue of the Americas on a cash-neutral basis, extending the portfolio's current loan maturities while ensuring a well-laddered maturity profile. We also engaged on the refinancing of 31 West 52nd Street. Lastly, we are moving swiftly to execute on our growth-focused capital improvement strategy, which includes the repositioning and amortization of 4 key assets, 2 in New York and 2 in San Francisco, which we expect will drive significant rent growth and occupancy gains in 2026 and beyond. Turning to Page 13, Elicor Properties leasing highlights. As Michael mentioned, in 2025, we leased more than 1.7 million square feet, our highest annual total on record. A significant percentage of our 2025 leasing velocity occurred in New York, where we are currently over 92% leased at share and the balance in San Francisco. In 2026, a significant percentage of our leasing activity year-to-date, including both leases signed and leases pending, is occurring in San Francisco, predominantly with leading technology and entertainment companies as well as leading law firms. At quarter end, our New York core portfolio's leased occupancy was 92.1% at share, up 470 basis points year-over-year. initial rents in New York year-to-date on leases signed and leases pending is 4.2% higher compared to 2025 as leasing fundamentals continue to improve across the board in Midtown Manhattan. Our plan is to make significant improvements at both 1633 Broadway and 712 Fifth Avenue. 1633 Broadway is among Manhattan, one of Manhattan's largest buildings our intention is to transform the lobby, infuse a second floor amenity space with a signature bar and event venue, a 200-seat conferencing atrium on the 17th floor and Plaza and elevator upgrades. At 712 Fifth Avenue, we intend to create a hospitality-driven amenity offering commensurate with the trophy quality of the building, more details to come. At quarter end, our San Francisco core portfolio's leased occupancy was 59.1% at share, driven largely by a couple of known move asset, One Market Plaza and One Front Street within the past year. Year-to-date, we have approximately 280,000 square feet of leases executed or pending, which equates to approximately 70% of our San Francisco leasing velocity in 2025. The strengthening tailwinds in San Francisco, coupled with our growth-focused strategy will drive continued leasing velocity and occupancy gains in our San Francisco core assets this year. Our plan is to make significant improvements at both One Market Plaza and One Front Street. At One market, we are redesigning the atrium and the entire ground floor experience, infusing a state-of-the-art conferencing center, fitness facility, Atrium bar, 7-floor Skybar executive lounge and a rooftop deck. At One Front Street, we are totally reimagining the lobby with a cafe, a bar, restaurant, the second floor amenity space with a gym, conferencing a private lounge, and we will also be fully modernizing the elevator system in the building. We are moving quickly to execute on our key objectives and look forward to updating you on our progress. Michael Nierenberg: Thanks, Peter. By the way, a good sales pace by Peter for -- if anybody is looking for space. We've got a lot of really good stuff going on I'll now talk about Genesis. In my opening remarks, record quarter, $1.3 billion. What I would say is the business when you think about the noise coming out of the administration around build to rent and there was an article, I believe, in -- the Wall Street Journal that I read this morning that discusses how some of the builders are actually pulling back. And I think there's roughly $3.4 billion of commitments that are on hold as a result of some of the new proposed bills that are either being passed or have been passed as it relates to developers needing to not only build these units, but then having to sell them in 7 years. As a result of that, you are starting to see projects on hold. You're seeing the SFR market at a standstill. When you look at our business, the Genesis business today is roughly 35% to 40% multifamily origination. And I think what you're going to -- I know what you're going to see from us as we go forward, a lot more production in the multifamily space. We are going to grow that. At some point, we'd like to grow that around our asset management business. So we look forward to that. When you look at the business, it's been a great one for us. We expect to do something between call it, $6.5 billion and $7 billion of production this year. The P&L on that when we bought the business in '22 was -- I think it was, what, roughly $45 million to $50 million or something like that. This year, we should do something between $150 million and $175 million of EBITDA. So it's been a great business. But like I said, we won't sacrifice credit in leu of production. When you look at as we go here, there will be some opportunities, in our opinion, in the so-called RTL space. there'll be some opportunities in the housing market as we see some of the single-family rental operators get out. We have a very portfolio that we've been selling down to retail. We've got a couple of thousand homes there. But I do think there's going to be some dislocation there you're seeing in some of the equity prices and some of the larger institutional holders in that business. With that, I'm going to turn it over to Baron, who will talk about new res, we'll touch on the investment portfolio, and then we'll open it up for Q&A. Baron Silverstein: All right. Thank you, Michael. Good morning to everybody. Starting on Slide 18. New res had another great quarter. First quarter pretax income, excluding mark-to-market of approximately $274 million, which is up 10% quarter-over-quarter and delivering a 19% ROE for the quarter. The results were driven by our disciplined origination strategy higher servicing fees and despite interest rate volatility, higher recapture and lower amortization. And this performance continues to show the power of our platform and our ability to drive consistent earnings. On Slide 19, a just a quick highlight and just given the size and fragmented nature of the mortgage and home ownership market, we believe there is significant runway for scale technology-first operators like Newrez. Since the inception of our platform, we have grown our originations market share 8x and our servicing market share 6x, positioning us, as Michael said, as the third largest service run the fifth largest originator. And as we continue to deliver on our strategy of making home happen, we continue to grow with our client base overall. On Slide 20, we're highlighting our 2026 strategy with a focus on driving returns through revenue growth and a reduction in operating expenses. Our revenue growth is focused on maximizing overall customer lifetime value through the expansion of our partner base, continued product innovation and homeowner retention and that's shown in our consumer recapture rate and continued growth in our third-party servicing franchise. Our expense initiatives are laser-focused on harnessing technology to deliver operating leverage. Our cost per loan, which is already almost half of industry average, we project an additional 15% reduction from our current run rate. In executing on this growth up and spend down strategy is going to continue to deliver for our shareholders. Turning to Slide 21 in our originations business. Funded volume came in at $15.5 billion, which is up 31% year-over-year but lower than last quarter due to seasonal and interest rate factors. However, we continue to drive growth in our higher-margin direct origination channels, consumer direct and wholesale, which comprised 37% in Q1 '26, up 75% year-over-year. And while market competition continues to pressure gain on sale margins, we maintain pricing discipline, did not chase market share and margins were contained within our historical 4-quarter range. We also had a very busy quarter of new product launches. Quick flows refinance application or wholesale Express home equity offer streamlined title, cryptomortgage and medical malls. And most recently, our Freddie Mac Vantage score pilot demonstrating our shared commitment to responsibly expand access to home ownership and reduce cost to borrowers. On Slide 22, we continue to build on our proprietary AI functionality, which is an end-to-end intelligence system, enabling our originations platform, allowing us to capitalize on our operational efficiencies. Our partnership with HomeVision is ahead of schedule with our first codeveloped tools being implemented by the end of this quarter. All of these platform investments will continue to improve our operating leverage, driving further efficiencies in loans per FTE capacity and turn times. And finally, moving to Slides 22 and 23 regarding our market-leading servicing platform, we continue to grow our capital-light fee-based third-party servicing business with 5 new clients and $22 billion in new loan boarding. Our owned MSR portfolio continues to perform well as delinquencies remain stable quarter-over-quarter and the FHA delinquencies flattened as we normalize the impact of the new FHA modification guidelines. Regarding Valin, we're on track for the transition to their operating system in early 27 and the magnitude of these benefits are moving to an AI-native and modern servicing technology solution cannot be overstated. We expect to materially improve our processes and workflows, providing us a significant competitive advantage through our operating flexibility. And it will also be a significant benefit to any and all servicers who choose to move to Valid. Once we're fully operational, we're estimating total annual expense savings in excess of $65 million or a direct cost per loan reduction of 15% to $93. So I continue to believe our business is the best positioned as it ever has been, and I look forward to sharing the next chapter of the Newrez grow store. Back to you. Michael Nierenberg: Thanks, Baron. Just wrapping up here on the investment side, probably 1 of the more active quarters we've had in a while, quite frankly. As I pointed out earlier, we did for non-QM securitizations totaling $2 billion. The one thing I would say is this doesn't include some of the other things we're doing around certain funds that we've launched where we have flow products going in from some of our origination businesses, and we expect that to continue and to grow as we go forward here. During the quarter, $3 billion of investment, $1.4 billion in non-QM loans, $1.6 billion in RTL. I pointed out earlier about the upgrade flow agreement. How we purchase more loans in the quarter. So overall, investment activities remain what I would say, despite all the the headline risk and the noise robust. What you're going to see from the firm as we go forward, hopefully, real growth in the ABF business under the Sculptor brands and and some of the other and Crestline brands. And again, just staying quite frankly, true to our core knitting and where we can create an edge in the marketplace, that's where you're going to see us grow. But again, as we look forward, we're not going to sacrifice we're not going to sacrifice credit for AUM growth, and that's going to be our common theme. So with that, I'll turn it back to the operator, and then we can open up for some Q&A. Operator: [Operator Instructions]. The first question today comes from Crispin Love with Piper Sandler. Crispin Love: First, Michael, I appreciate your comments that you're not going to stack price credit for AUM growth. But can you just can you discuss the fundraising momentum in the asset management business and the outlook there, Sculpture and Crestline what you're seeing from institutions and then on the BDC private wealth side of those businesses, just all the noise out there? Michael Nierenberg: Sure. So what I would say on the I mentioned before, and this is a little bit of old news, the real estate group at scope to just raised $4.6 billion and probably one of the largest successful fundraises in the real estate space, I would say, in a long time. When we look at the core competencies, and this is where I'd like to think that we have an edge, whether it be a scope during you look at the overall track record and at what we've done at Rithm and then at Crestline, we're going to leverage the core competencies of what we do. So for example, when I look at the ABF space, we launched an evergreen fund in the third quarter, with one of our warehouse partners, which is performing extremely well. The -- and that's backed by some of the production stuff that we create, whether it be in Genesis or whether it be in Newrez. When you look at Sculpture's track record around ABF, it's -- quite frankly, it's unparalleled. We'll be out with new funds there. here in the short run. When you look at the credit performance overall as a firm and whether it be at Sculptor and/or Crestline, the credit performance has been very, very good. We don't see any real deterioration in any of the names that we actually hold within any of the funds. And I do think it's important to note when you look at the so-called noise in the private credit markets, a lot of that has been driven by retail. So while everybody wants these evergreen funds that -- where you theoretically have liquidity, we know when the world turns sideways or the markets get dislocated, there is no liquidity or very little liquidity. And I think one of -- I cited this this morning, in the documents, it says you could have 5% redemption. So when these products are marketed and it depends on who the underlying fund manager is. But when you look at the underlying markets and you have something that says in a document redemption limits, there's a reason that happens because if you think about it logically, if Mr. & Mrs. Smith want to take out $1 from their -- whether it be their BDC or their credit fund, and Mr. Mrs. Jones don't want to take out a dollar. Why should Mr. Mrs. Jones getpenalized because someone else needs liquidity and you have to liquidate a good position. That's why I think in a lot of these documents, you have these caps. Now while saying that, I think it's an education process. There's been a lot of stuff that's been distributed retail. The good news for us is we don't have a ton of stuff through retail. The bad news for us or actually, the good news for us is as we go forward, I think the market is learning. We don't think this -- as I pointed out in my opening comments, this is not systemic risk, and I think there's a huge opportunity for us. The other thing I would say is that it is very, very difficult to deploy the -- we're not going to be Blackstone or Apollo or 1 of the largest managers. We're going to grow, hopefully, and we're going to grow through performance. But when you look, it's very, very difficult to create alpha when you have to deploy the sheer amount of capital that a lot of the large asset managers have. Kudos to them, they built great businesses, but it's very, very difficult to deploy that kind of capital. As it relates to the BDCs, roughly, I think the numbers are 20% of the BDCs have software exposure. I pointed out in my earlier remarks, we haven't -- while the headline risk is dramatic. And if you go back to '21, when interest rates were 0, and you think about companies that were lent money at 20 times revenue, not EBITDA, revenue and now you have AI kind of taken a center stage, I think it's going to take time to play out. We don't really know how that's going to play out. As you think about the software industry, I think software that's mission-critical to businesses are going to be the winners. There's going to be a bunch of losers right now, when I look at our business, we feel really good. As we think of capital formation here at the firm, we're trying to simplify our business, Sculptor is going to be our asset management business. We have Crestline, which we closed, which is another division of asset management. They do different things. And now the teams are working together. And hopefully, we're going to raise a lot more capital. But again, that capital is going to be based on our ability to create alpha relative to the peer set that's out there in the marketplace. And that's what gets us excited. So I would say, armored and upward, and the business feels really, really good to us. There is noise that's going to create opportunity because when you think about the credit markets and you have a 5-year treasury, for example, at 4%, the high-yield index is 3.25%, 350 unlevered returns in that business are now 7.5%. Debt looks very, very attractive to us. And the last point I'll make and then turn it back to you is when you look, get its above equity. The S&P is at an all-time high, something is not adding up here. So we'll see how it all plays out. But we feel really, really good where we are from an asset management standpoint, where we're going with that division and how we're going to create more FRE and hopefully turn the tide on the overall valuation of our public equity. Crispin Love: Great. I appreciate all the color there. That's a good segue to my next question because just one pushback that I get from investors is that, that rhythm has become more complicated. You're definitely diversified but in a lot of areas, the results have been strong, but some investors may just move on to a simpler story. So first, what's the response to that? And then just second, what are the key ways that you're looking to simplify the business and the story overall to trade closer to that sum of the parts level. Michael Nierenberg: One is we need to grow our FRE in our asset management business. And that is a big focus, right? So with -- obviously, part of that will come with AUM growth. Part of that will come with synergies. And that really is going to be a driver. So as we create more FRE, the asset management business can then get separated from the broader REIT. So when you think about it, we have really 2 main divisions in our operating business. One is the mortgage company, which we again, another simplistic thing, everybody wants you to take it public. I'm not sure that it's the best time to do that. Obviously, you looked at 1 of our peer -- one of the pure mortgage companies, their stock, when you miss earnings and the stock goes down by in a day is no investor wants to be in that position. So you can simplify by taking the mortgage company public, breaking out the asset management business, you have Genesis, which is going to continue to grow. But what you're going to see in some of these businesses is more third-party relationships because the one thing that's different today than where we were a couple of years back is that the adoption of ABF as an asset class for third-party LPs has never been greater. And there's a reason for that, right? So you've seen a little bit of rotation at a private credit into what we'll call real assets. In the ABF space, you have assets that are kind of think about almost like hard assets where the cash flow is backed by these hard assets, or you're going to see more and more capital deployed there. But overall, like the REIT is still the REIT. If I had my [indiscernible], we paid out $6.6 billion of dividends over -- since we started the company in '13. 50 million shares, that's about $13 a share. You didn't pay out, I think, I don't have my calculator in my head, but I'll try. Anyway, if you think about that, $13 plus 10%, it gets you to a mid-20s stock price. I think part of the challenge is as we continue to maintain REIT status and pay this dividend, which we have no intention of changing right now, growing the asset management business has to be job 1, thinking about simplifying the mortgage company story and Baron and the team have done a great job there. But I think AI and I think Baron is a little bit shy about the amount of money that we're going to save there. But I do think the mortgage industry is going to change dramatically. So I think telling the story around the mortgage company, telling the story around the Asset Management division -- the REIT is not going anywhere. As you know, we just did the Paramount deal. We're going to bring in third-party relationships there. And it's really one of the things we're very focused on how do we grow earnings. Right? If we could grow in and create more growth businesses, that will help us because we have all the pieces we need at this point. But again, when I hear you, Crispin, part of the challenge is how do we simplify the story. But I think the bigger asset managers, I would argue, are not any more simple than we are. I'd argue they're more complicated. So I think as we continue to get lumped into the REIT space, people who think we're complicated. If we go into the asset management space, I think we'll be less complicated. Operator: Next question comes from Bose George with KBW. Bose George: Actually, on the -- switching to the mortgage side, your gain on sale margin on the wholesale and correspondent was down a little bit. retail was up. Was it mix doing some of that stuff? Or were there trends in the quarter that are worth calling out? Baron Silverstein: I do think it's -- it is a little bit of a mix. I also think there's some competitive pressures overall with respect to non-QM. I also think when you look at our performance in Q4, especially on the wholesale side, we definitely had a good quarter going into Q4, and I think we just basically normalized back to margins as to where we landed in Q1, in a lighter origination volume you would expect that things would normalize. Bose George: Okay. Great. That makes sense. And then just quarter-to-date, any changes in book value to call out? Nicola Santoro: No, Bose. We're essentially flat. Operator: The next question comes from Doug Harter with BTIG. Douglas Harter: Hoping you could talk a little bit more about Elicor and bringing in third-party capital just in kind of reducing the capital commitment down to kind of what you talked about at the time of the deal announcement. Michael Nierenberg: So we closed a deal on, I think, December 20 or December 19. So we're 1 quarter in. Peter, Peter alluded to it, we've created, I think, $40 million of savings in 3 months. So we're very proud of that. And the conversations we probably had, whether I tell you it's 100 or more LP discussions since we've acquired the portfolio. What I would say out and Peter mentioned, we're out with a potential JV partnership on 1301, we have a JV relationship with Blackstone on one market in San Francisco. We have a JV relationship with another party, Beacon on one of the other assets in San Francisco. We'll continue to either do JV relationships, which you'll see us quite frankly, create gains. But I think for now, it's really how do we operate the company I wouldn't be shocked if at some point, we bring it back out in the public markets. I think it's a little bit too soon to do that. That could be a real capital raise as we think about creating external management fees around certain things. So I think it's all TBD. But over the course of the next kind of 9 months or 8 months through the year, it's likely we'll do some JV relationships third-party LP relationships on the assets. Douglas Harter: Got it. And kind of given your view on commercial real estate, is it -- are you considering kind of deploying additional capital into your 2 target markets? Or is that mostly going to be through kind of the property enhancements you talked about? Michael Nierenberg: I think it's both. In the business and we've gotten asked this question in the past, why did we see this deal. When you have the ability to acquire what we think are great assets at cheap prices, you do it. And I think it's that simple on this portfolio, on Fifth Avenue and Sixth Avenue, great operating team who we've unleashed, quite frankly, today relative to where the company was positioned before we acquired the company. Peter and his team have done a great job. That's how you make the money. By keep assets at a very attractive value and these are quality assets. They're not mid-block, they're on the big avenue. So we're super pumped about this one. Operator: The next question comes from Marisa Lobo with UBS. Ameeta Lobo Nelson: Just moving to Genesis. Looking at construction loans are about 52% of that book. As tariffs are pushing up labor and material costs, are you seeing any stress on individual projects? Or how is underwriting change there? Michael Nierenberg: Our underwriting box is always pretty tight. I don't think that's any different than where we've been overall since we've acquired the company. I will tell you listen, I'm like everybody else, if you look at consumer sentiment, I'm a little bit nervous. I mean you go out and you buy a sandwich, it's $15. So you have to watch out for, I think, overall, the state of the consumer some of the noise out of D.C. makes it gets you a little bit concerned as you think about the so-called build-to-rent space. I think seeing the article in the journal this morning, I think, is a positive as the administration will like, hopefully, peel back some of those -- some of the thoughts that you have there. But overall credit, we're extremely diligent. The gentleman that runs that business for us is CleneroSmith, does a great job by background. He's a bank credit officer. So it's not just to grow volume, it's to grow volume in a meaningful way with a tight credit box. We do a lot of different things that I think a lot of the other folks in that space. and we'll maintain discipline around credit. The portfolio, I think, is 3% is the delinquency numbers. And when you think about the average advance rate they're typically well below the industry. So we feel really good about where we sit there right now. But there's been no real change. But from a risk standpoint and a discipline standpoint, there's been no deviation to grow origination in lieu of credit. Ameeta Lobo Nelson: And looking at the new origination yields of 9.5%, down from 10.1% in Q4 -- is this a function of a mix shift or tighter spreads in the market? Michael Nierenberg: So a little bit -- everything is a little bit more competitive, as I pointed out earlier, there's huge demand for ABF products. This is one of the things that falls within that bucket. While saying that, you have points in and points out and you got different types of fees. So overall, the unlevered yields are still, give or take, about 10% and when you look in the securitization markets or we put them into funds in securitization, you're looking at well into the double digits on a net-net basis. So we feel -- we love that business right now. Operator: The next question comes from Trevor Cranston with Citizens. Trevor Cranston: When you guys look at the proposed capital rule changes for banks, do you think that has any impact on their participation in the mortgage market or the servicing market? I guess, I was particularly curious about how you think that impacts the correspondent channel of Newrez. Michael Nierenberg: It should help the MBS market, quite frankly. You got the basis in and around 105 basis points I think the type we saw pre the conflict in the Middle East was about 90%. That was the type we get out to 125, 130. Historically being a mortgage bond trader myself. I think stuff seems fair to cheap here. I wouldn't be surprised that the banks come in. I think some of this depends on the ministry -- the new Treasury Secretary that's not Treasury Secretary, the new Fed share that's going to come in and wash when he gets selected. He's a little bit more of an inflation hawk, and we were talking last night about you have a massive deficit in the U.S. It's roughly $40 trillion. So they're going to have to continue issuing a lot of a lot of securities to fund that deficit. The question is, is that more in the front end and the back end, I think the other thing that probably some of the banks CIOs are thinking about is inflation. You saw this morning in the U.K. I'm looking at bond yields of north of 5%. You look today, the front end of the treasury markets in the 380s, 10-year treasuries is now 4.35%. So I think some of that will play into what the banks do. But overall, I would think with easier bank rules and the banks having a ton of cash from their deposits, you're going to see them come back into -- or they're in the mortgage market, but I think you'll see them acquiring more. On the servicing side, don't no. I mean honestly, I think it's -- they're -- one of the -- a couple of the money center banks already have been involved in that space for a while. I think that could continue we just have to be disciplined about how we originate loans and make sure we're not doing something for market share versus actually making the money to which was Baron's earlier comments. Trevor Cranston: Yes. Okay. That makes sense. And then you mentioned briefly the kind of decline in valuations in some of the public mortgage companies that are out there over the course of this year so far. Are you guys seeing any sort of M&A opportunity associated with that? Or are there any platforms you think that have maybe gotten cheaper that might make sense as a sort of add-on to the existing platform? Michael Nierenberg: Historically, our M&A around the mortgage company space has been where we think we could acquire cheap assets as part of the overall acquisition. When you look at the company today, we don't need anything new. So when you look, I think there's, give or take, 10,000 people, including contractors at the mortgage company, Baron and the team are focused on getting really efficient when you look at the adoption of AI and some of the partnerships that we've set up as a company. I don't we don't have any to buy another mortgage company. If there is a mortgage company that's out there that's cheap, there's not that many left, quite frankly. When you look [ Rocketick ] acquired Mr. Coupe, which we built at Fortress, we built new res. There's this is not that many out there that are independent now. You have United Wholesale, but overall, I think we don't need anything more. Operator: The next question comes from Kenneth Lee with RBC Capital Markets. Kenneth Lee: Just one on the Newrez side of the business and the potential benefits from AI and efficiency moves there. It looks as if in 2026 you could potentially expect some increased productivity around loan processing. Do you expect to see some of these benefits materialize over the next quarter or 2? Or is it mainly weighted towards the latter part of 2026. I just want to get a little bit more color around the benefits there. Baron Silverstein: Yes. On the origination side, right, we talked -- I talked a little bit about Home Vision and our partnership there. So that is going to be -- you're going to see those materials -- those benefits materialize coming into the second half of the year, right? Our initial product launch is ahead of schedule and our we hope to have those tools in place really going into the third quarter. Kenneth Lee: Got you. Very helpful there. And just one follow-up, if I may, just around the Crestline business and realizing that most of the clients that you're serving are from the institutional side. Wonder if you could just talk a little bit more about color you're seeing around institutional investor demand for direct lending. What are you hearing from clients more recently? Michael Nierenberg: It's interesting. When I was in Asia with Keith Williams, who runs Crestline, people -- there's still a lot of demand, what I would say, for direct lending. While saying that, I think that's more institutional based. You are seeing a little bit of rotation. Obviously, with headline risk, if you're a retail investor and you're not in the markets every day. I think if you could rotate out, that's probably some of the stuff that you'll see go on over the next quarter or so. But in general, we have all kinds of different funds in the market and capital formation continues. We have to lead with performance. If we're that heavily weighted to software and you sat down with an -- and you said, well, our software exposure is 20%, they may say like, I don't really want to do this. I would say that the background of Keith and the team at Crestline and they go back to 25 years of -- and a lot of the folks in that very direct -- same direct lending space, whether it be the folks at Sixth Street or there or at Crestline come out of the old Goldman model. So we feel really good about it, and I think you're going to see more capital being raised around direct lending and they'll continue to do that. Operator: The next question comes from Henry Coffey with Wedbush. Henry Coffey: The flip side to the complexity issue, and we all talked about that a lot, is that there's always 1 business that does well and another that maybe doesn't do so well. But combined, you always end up at a nice spot. Can you -- if you look at your different businesses, Michael, can you tell us who not to pick on anybody, but how do you rank in terms of who's really knocking it out of the park right now? And which businesses are facing legitimate headwinds? Michael Nierenberg: I would say -- and I don't want to sound like we're the -- I don't want to tell everybody we're always the best in everything. But overall, I think everything is performing extremely well. The real estate business, the Paramount or now known as Elicor portfolio is great. The team there. We're so excited to be working together with that team. Baron there's nobody in our organization that worked harder than Baron other than me. Baron works his tail off and Baron and his leadership team do a great job around the mortgage company. Clint and the Genesis team continue to put up great results in the asset management business, I think it's just getting started. We're at $60 billion now. And again, it's not an AUM rate, we have to perform. So when everybody asks, what else do we need or what's next? There's really nothing that's next unless we think we're going to create an edge in -- for our LP base and -- so I think and then the investment portfolio Rithm, Charles orentino and the team do a great, great job. So -- and we're all working together a long period of time. We love where we sit in the ecosystem, the -- if there's anything that kind of bothers us, it's the overall valuation of the so-called sum of the parts. But in general, I think all the businesses continue to perform really well. Henry Coffey: More pedantic. When you look at the P&L and the EAD calculation, is this pretty much the way the business is going to look with some improvements in efficiency. It's just sort of the new overhead level? Michael Nierenberg: No, I think we're always looking at overhead. We're always looking at ways to become more efficient. EAD needs to grow, and that will grow -- hopefully, grow as we -- as the asset management business grows and we get more efficient. But we're always looking at headcount, we're was looking at ways to become more efficient the mortgage company. I think the mortgage company does about $4.5 billion of revenue, something in that range. When you think about it, if we net give or take about $1 billion-ish, there's a lot of room to actually get more efficient there. And I think it's not just people wise, quite frankly, it's process-wise, it's processes. And I think you're going to see that with AI changing the mortgage industry. So we're excited about that. But in general, we look at everything. Asset management fees should grow over time as we continue to perform for our clients. Henry Coffey: $87 million in depreciation, is that the new run rate? Or is there some new extra items in there? Nicola Santoro: Henry, that's a little bit higher than the run rate. That includes both the indoor portfolio as well as loco. So as we sell down the indoor portfolio, you could expect that number to come to around $60 million, $65 million a quarter. Michael Nierenberg: And the indoor portfolio, just for everybody's netification, that's our single-family rental business. As I pointed out, we have a few thousand units or a couple of thousand units, and that continues to get sold down retail. Operator: This concludes our question-and-answer session. I would like to turn the conference back over for any closing remarks. Michael Nierenberg: Thanks for everybody dialing in. Thanks for your questions. Thanks for your support. We look forward to updating you on another quarter here in the near future. 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 welcome to the Centene Corporation's 2026 First Quarter Earnings Report. [Operator Instructions] Please also note today's event is being recorded. I'd now like to turn the conference over to Jennifer Gilligan, Senior Vice President, Investor Relations. Please go ahead. Jennifer Gilligan: Thank you, Rocco, and good morning, everyone. Thank you for joining us on our first quarter 2026 Earnings Results Conference Call. Sarah London, Chief Executive Officer; and Drew Asher, Executive Vice President and Chief Financial Officer of Centene, will host this morning's call, which also can be accessed through our website at centene.com. Any remarks that Centene may make about future expectations, plans and prospects constitute forward-looking statements for the purpose of the safe harbor provision under the Private Securities Litigation Reform Act of 1995. Specifically, our commentary on our full year 2026 outlook, including the drivers of such outlook, are forward-looking statements. Actual results may differ materially from those indicated by those forward-looking statements as a result of various important factors, including those discussed in our first quarter 2026 press release and other public SEC filings, which are available on the company's website under the Investors section. Centene anticipates that subsequent events and developments may cause its estimates to change. While the company may elect to update these forward-looking statements at some point in the future, we specifically disclaim any obligation to do so. I will also refer to certain non-GAAP measures. A reconciliation of these measures with the most directly comparable GAAP measures can be found in our first quarter 2026 press release. With that, I would like to turn the call over to our CEO, Sarah London. Sarah? Sarah London: Thanks, Jen, and thanks to everyone for joining us. This morning, we reported first quarter adjusted diluted EPS of $3.37, exceeding our previous expectations for the period. The strength of our first quarter performance enables us to increase our full year 2026 adjusted EPS outlook to greater than $3.40, up from our previous expectation of greater than $3. We are pleased to be off to a strong start this year as increased visibility and operational improvements are yielding positive momentum and lifting our overall financial performance. Results in the quarter included excellent progress within our Medicaid business as we continue to drive margin improvement through targeted and increasingly scaled initiatives to modernize and standardize processes to better manage medical cost trend. Our Medicare segment results were ahead of expectations with outperformance from both Medicare Advantage and PDP offerings. And finally, our commercial segment, the vast majority of which is made up of Marketplace performed in line with expectations on a pretax margin basis as a slightly higher-than-expected HBR in the period was offset by favorability in segment SG&A. As everyone knows, it is early. So while we are off to a great start, we are taking a prudent outlook for the balance of 2026 as we continue to gain visibility into key factors that will influence the remainder of the year. With that, let's dig into the results. Medicaid results in the quarter were ahead of our previous projection, outperforming our HBR expectation in the period. Within that, we experienced a flu season that was lighter than our original forecast and saw a slight utilization benefit from weather events. That said, we were pleased to also deliver solid fundamental outperformance in the quarter, thanks to continued focus and disciplined execution on trend management initiatives across the portfolio. [ Kavrell ] Health remains the largest driver of trend with other categories like home health and high-cost drugs continuing to be consistent contributors. That said, we are beginning to see pockets of deceleration across this cohort largely in line with our expectations for how trend would mature from 2025 into 2026. At the same time, we continue to strengthen and scale the multipronged trend program we deployed in the back half of 2024 and ramped significantly in the face of elevated trend in 2025. This includes standardizing best practices on utilization management across our markets, the addition and further expansion of successful clinical programs ongoing data-driven network optimization to ensure our members have access to the highest performing providers, advocacy around program reform with our state partners and increasingly aggressive efforts to stamp out fraud, waste and abuse. We've discussed here at some length the work we've done around ABA, but with the benefit of more than a year's worth of data under our belt, we are seeing stabilizing year-over-year ABA trends that we believe are a direct result of the actions we have taken to ensure appropriate high-quality care for ABA members across the country. We continue to strengthen our identification of outlier providers who exhibit suspect or fraudulent billing patterns. At the same time, we continue to advocate for the ability to more fully address fraud, waste and abuse in a standardized prevention-focused posture across Medicaid programs. We recently highlighted several potential reforms in response to an RFI from CMS, including allowing proactive payment suspensions, creating safe harbors and improving 2-way data sharing. We look forward to partnering with CMS in the states we serve to better protect taxpayer dollars and strengthen overall program integrity. Looking to the remainder of the year, our guidance assumes net trend, defined as medical costs net of these trends management initiatives, remains in the mid-4% range, and we continue to execute with the goal of outperforming that target. Rates are, of course, the other major contributor to our margin restoration agenda, and we continue to work closely with our state partners to ensure alignment between program revenue and member acuity. With respect to the full year outlook, we continue to track in line with our expectation for a composite rate yield of roughly 4.5%. Conversations with Medicaid departments remain constructive, and we continue to present refreshed data and in many instances, programmatic solutions for challenges our state partners are facing as they look to balance costs and benefits within the Medicaid program. It is still early, we are pleased with the momentum we are seeing across the Medicaid portfolio and we continue to see opportunity for advancement in 2026 and beyond. Our Medicare segment also delivered strong results in the quarter. Both Medicare Advantage and PDP exceeded expectations, producing an HBR of 84.9%, better than our previous forecast and contributing nicely to the first quarter adjusted EPS B. Medicare Advantage, we continue to strategically align our membership with our Medicaid footprint and made great progress on our path to positive earnings. While trend continues to be elevated versus historical baseline, it is so far consistent with what we planned for in our bids with slight favorability in Q1. Thanks to strong execution during both AEP and OEP, we are seeing a slightly more favorable membership mix and our decent membership is now at 40% of our overall portfolio. We are also seeing stronger year-over-year member retention, the continuation of a now multiyear theme, reinforcing the value of investments made over the last few years to redesign our sales and onboarding experience. This durable member base gives us the opportunity to deploy differentiated care models and drive both quality and health outcomes for members over the long term. Business also continues to make solid progress on our value-based care strategy. The team has built a disciplined, performance-driven model that is tightly integrated with network strategy, clinical execution and cost management. We have simplified our contract structure and focused the portfolio to a partner ecosystem that we believe can truly move the needle on quality and cost outcomes. We're also deploying innovative total cost of care models against high-cost specialties such as oncology, chronic kidney disease and behavioral health. These are part of a broader portfolio of initiatives designed to build critical momentum as we look to return the business to profitability. Our PDP business ended the quarter with just over 8.7 million members, thanks to the team's once again, thoughtful and data-driven approach to bid design and positioning. While it is still early, fundamental outperformance in the quarter was driven by slightly lower-than-assumed specialty drug trend, which gives us increased confidence in the trajectory of the business for the year. We are pleased that our Medicare members will have the opportunity to participate in the CMS Bridge program, and we support the goal of expanded GLP-1 access for more seniors. As the largest stand-alone Part D provider in the country, we've also been actively engaged in dialogue around the balance model and remain committed to partnering with the administration to leverage data, best practices and lessons learned from the Bridge program to position balance for success in the future. Looking ahead, we are encouraged that the finalized 2027 Medicare Advantage rates showed improvement compared to the advanced rate notice. While the final rate remains below observed medical cost trend, we continue to see a path to delivering breakeven financial results next year. Medicare Advantage and PDP programs play a vital role, providing access to care for millions of Americans, including some of the most vulnerable of our nation, and we look forward to working with the administration to identify new and important ways to fortify this program and strengthen the safety net overall. Finally, Marketplace. We ended the quarter with just under 3.6 million members, consistent with our previous commentary about post grace period membership. Metal tier distribution and age stayed consistent with patterns we reported on in early March with just under half of our members in silver, roughly 35% of members in Bronze and the remainder in Gold. Other member demographics like age and gender remain consistent with expectations and with recent years' results. Marketplace results were in line for the quarter with a slightly higher HBR offset by outperformance in SG&A. Within these results, the Q1 HBR was driven by higher than originally expected utilization isolated in our Silver tier membership, a dynamic we foreshadowed in early March. With the benefit of additional visibility, including the new March Wakely report and more complete claims experience, we now view this utilization as consistent with the acuity of the Silver members we enrolled, and we expect this membership to receive a meaningful risk adjustment offset as we look to the balance of the year. Let me talk about the additional insight we have gained since March. After last year's unexpected volatility, Centene committed to finding ways to create additional and earlier visibility into this market to support long-term stability. Last fall, we reached out to many of our peers, all of whom are receptive to submitting earlier data on membership demographics. Wakely, the independent actuarial firm that calculates interim risk transfer estimates for the market throughout the year, agreed to aggregate and publish that data at the end of March. As a result of that collaboration, the industry has more visibility than it has ever had at this time of the year about overall market dynamics. Having received this demographic data from almost all of our 29 markets, we are pleased to see that the market overall behaved in line to slightly favorable to our expectations despite 2026 being a year of unprecedented change. First, the overall market contracted as expected in a post APTCs environment. That said, market-by-market membership loss was in almost every market, less than we expected, which suggests that more healthy members stayed in the market in aggregate and that our pricing was appropriate relative to the overall market morbidity. Second, the Wakely data confirmed a meaningful market-wide shift from Silver members into Bronze and to a lesser degree, Gold, consistent with our expectations and with a directional shift in our own metal distribution. Finally, and perhaps most importantly, this data, when combined with our final Q1 paid membership and a full quarter's worth of claims experience, strongly supports the view that Ambetter retains Silver membership with higher acuity relative to the market and that this membership will ultimately receive a meaningful risk adjustment offset. Within our Silver tier, 75% of our members were renewals, giving us a high degree of visibility into year-over-year risk score capture. Through Q1, risk scores tracked closely in line with what we would expect given our claims experience in the period. Wakely data further allowed us to see a strong, consistent correlation between markets where we lost share due to price action and an increase in the overall acuity of our Silver population. Both of these data points strongly support the mix shift hypothesis. Looking to the rest of the year, we have taken what we believe to be a prudent posture relative to our forecast for the business, not reflecting the full suggested risk adjustment offset for this population within our new greater than $3.40 guidance. The June Wakely data, which consists of claims and risk score data across the market, will be key to allowing us to further refine this assumption. We continue to believe in our ability to deliver meaningful margin recovery in the Marketplace business and look forward to updating our full year view with the benefit of the June data. Stepping back, we are pleased that the disciplined execution this quarter yielded solid financial results. As we strengthen the fundamental operations of each of our businesses, we are increasingly well positioned to deliver tangible progress against our margin recovery goals. For this work, we announced an evolution of our leadership structure earlier this month. We are pleased that Dan Finke joined the organization to serve as our Group President, overseeing the Medicaid and Commercial businesses, and we were pleased to elevate Michael Carson to Group President, overseeing our Medicare PDP and Specialty businesses. Their collective experience will be instrumental as we continue to strengthen performance across the portfolio and deliver sustainable profitable growth. I'd like to close by calling out two additional bright spots from Q1. First is progress at Centene and the entire industry have made against our prior authorization commitments, including additional commitments announced last week that will make the prior authorization process faster, easier and less expensive. In our view, this work is not about self-regulating, it's about self disrupting. Industry leadership has worked closely together over the last 1.5 years, not because it is easy, but because it is the right thing to do for our members and for the health care system overall. I'd like to thank my peers for their awesome partnership and acknowledge the many team members at those organizations who, along with the CenTeam, are committed to transforming our systems and the system overall through an unprecedented level of collaboration and transparency. Finally, I'd like to close by congratulating the entire CenTeam for being named to the Forbes Best Employers for company culture list for the second year in a row, jumping more than 150 spots from our inaugural ranking last year into the top 50 employers in the country this year. While I'm pleased we delivered strong results in Q1, I'm even more pleased by how we delivered those results, collaborating as one CenTeam, living our values and behaviors and staying focused on our mission of transforming the health of the communities we serve one person at a time. With that, I'll turn it over to Drew to provide more details on the quarter. Andrew Asher: Thank you, Sarah. Today, we reported a strong first quarter, including $44.7 billion in premium and service revenue and adjusted diluted earnings per share of $3.37. This was just under $0.50 better than our expectations, largely driven by outperformance in Medicaid and Medicare segment HBRs. Our consolidated HBR was 87.3% for Q1. Starting with Medicaid, we ended Q1 with 12.4 million members, slightly down from year-end. More importantly, we demonstrated continued progress in the HBR with Q1 at 93.1%, an improvement of 50 basis points from the first quarter of 2025. As Sarah indicated, our slate of initiatives on both revenue and medical expense are bearing fruit as we continue to navigate an elevated behavioral health and high-cost drug environment. While we have a ways to go to get back to a reasonable Medicaid margin, this is the third consecutive quarter of progress toward that goal. We expect continued momentum as states reflect base trend in acuity data in rates and work with us to shape successful and sustainable programs. Medicare segment results were better than expected, including an HBR at 84.9%, demonstrating outperformance in both MA and PDP for Q1. Medicare Advantage, this gives us more confidence about the path to breakeven for 2027. And in PDP, it's always instructive to see how pharmacy trends start the year relative to expectations. To be clear, medical and pharmacy trends are still historically high in those businesses, though, were not as high as what we had built into our forecast as we actively manage cost and set bids accordingly. PDP high trends and high 2025 baseline cost, especially in specialty pharmacy will be factored into the 2027 bids. This, coupled with the mere mechanic of a risk model that's calibrated based upon pre IRA claims data and therefore, still insufficient to address non-low income trend, should push the direct subsidy up quite a bit again in 2027. In the meantime, we are pleased with the strong start to 2026 in both MA and PDP. Marketplace pretax earnings were on track in Q1 with a slightly higher-than-expected HBR in the quarter offset by strong SG&A management in the product. Consistent with what we told you at the March conference, our Silver metal tier members had higher than originally forecast gross medical cost in Q1 before any incremental 2026 risk adjustment benefit. We are very pleased with the early insights gained from the March Wakely data and reports. Sarah took you deeper into those observations, but suffice to say that the market size and share shifts when coupled with the metal tier distribution and our observed risk score trends are consistent with meaningful risk adjustment offsets for the higher Silver tier gross claims trends. In our current guidance, we have calibrated these factors in our membership distribution such that our forecasted year-end risk transfer assumption is for a slight receivable versus a prior payable forecast. Let me simplify all this in terms of guidance. We thought it would be prudent to embed in our current guidance a pretax margin for Marketplace around 3% for now, compared to our original forecast of approximately 4%. And as you heard from Sarah, this does not reflect the full potential risk adjustment offset suggested by the data we currently have as we await the June Wakely data. I'd also like to thank my industry peers for being receptive to this new Q1 process and recognizing an opportunity to gain visibility earlier in the year and most importantly, for timely submission of useful data to Wakely. This not only helps with 2026 forecasting, it will also give others earlier visibility of their potential risk transfer position when formulating 2027 pricing. One more thing on Marketplace. We ended the quarter with 3.58 million members right around where we told you we expected to be after navigating sign-ups, payments and effectuation. Consistent with our original guidance, we expect a little attrition throughout the remainder of the year, ending 2026, a little over 3 million members. Consolidated adjusted SG&A expense ratio was 7.6% in the first quarter compared to 7.9% last year, reflecting continued discipline and product mix. We ended the quarter with $437 million of cash available for general corporate use. During the first quarter of 2026, the company sold $1 billion of our stand-alone 2025 Part D risk share receivables and proceeds were used to repurchase $1 billion of senior notes that when coupled with strong Q1 earnings, resulted in a debt-to-cap ratio of 43.2%, down from 46.5% at year-end. Medical claims liability totaled $20.6 billion and represents 48 days in claims payable, an increase of 2 days as compared to the fourth quarter of 2025. As we look ahead, due to seasonal PDP sloping and the 2026 proportion of PDP to the total company, we would expect this faster completing business to drive down DCP a day or two as the year progresses. Cash flow provided by operations was $4.4 billion for Q1, primarily driven by strong net earnings, partial 2025 CMS PDP receivable sale and timing of other net payments and receipts. As we look to the rest of 2026, we are pleased to increase full year adjusted EPS guidance to greater than $3.40. Press release table, you can see we added $1 billion of premium revenue to our prior range, largely driven by Texas Medicaid. We expect overall Medicaid membership to be down about 6% from year-end to year-end. We continue to be on track and expect the Medicaid composite rate yield around 4.5%. We also adjusted our consolidated SG&A guidance range down by 10 basis points and added $50 million to expected investment income, and no change to our HBR full year range of 90.9% to 91.7%. One final topic, within finance, we are deploying advanced analytics and selective AI-enabled tools across forecasting, medical economics and payment integrity. Today, these capabilities are used as an independent validation layer alongside our traditional forecasting process, bringing more timely data into how we evaluate emerging medical trend. Also helping us identify fraud, waste and abnormal claims behavior earlier, supporting better prioritization of resources and more disciplined cost management on behalf of state and federal tax payers. We are pleased with a great start to 2026 and look forward to continuing to drive the margin recovery opportunity. Thank you for your interest in Centene and Rocco, we can open it up for questions. Operator: [Operator Instructions] And today's first question comes from Andrew Mok at Barclays. Andrew Mok: I wanted to follow up on the higher acuity in the ACA Silver tier. Can you help us understand why you believe you attracted that higher acuity cohort for this year? And it sounds like you're currently accruing for a partial risk adjustment offset and 3% pretax margins. If you did ultimately get the full risk adjustment offset, what sort of margin would that imply for the full ACA year? Sarah London: Yes, thanks, Andrew. So let me sort of take a step back and sort of anchor on the biggest thing that changed in 2026 for everybody, which is really the expiration of the enhanced APTCs, and thanks to the new Wakely report with earlier data, we can confirm that, that, as expected, drove a significant number of consumers out of the market. It also, as we've seen, as our peers have said and as the data confirms, drove a shift across the market from Silver membership into Bronze products as consumers looked for more affordable plants. And so as a result, the Silver tier remaining membership really follows the golden rule of risk pools that when it strengths, it becomes more and more bid. And so given our market size, our Silver footprint and, frankly, our intentional decision not to go as hard at Abram strategy, which we still very much stand by, we were positioned to retain and attract more Silver members who are now more acute in that overall post-APTC environment. Now important to note that in other insurance markets, the concept of adverse selection can be scary, but that's not actually the case in Marketplace because, as you know, the risk adjustment mechanism is specifically designed to counteract adverse selection. And often, it can actually be a profitable strategy to care for sicker members in this market. And that's really based on our view, with more than a decade of experience in the market. So as we think about the additional visibility that we have since March by virtue of the Wakely data, which has really confirmed that unlike last year, the market is behaving the way we would expect in a number of cases, actually favorable to our expectations, and then the additional quarter of claims experience for our paid membership where we're seeing those risk scores year-over-year track directly in line with the claims experience that we observed. That gives us confidence in the view that we have a higher acuity Silver membership that will attract and get a risk adjustment receivable. As you heard from both my remarks and Drew's, we have not accounted for the full range of what that receivable could be in the updated guidance, but that range does wrap around our original 4% target margin for 2026 in Marketplace and frankly, higher than that at the top end. And so we're -- bottom line, we believe that what we've incorporated into guidance is a prudent posture for now in advance of getting the June Wakely data, and we still feel very good about delivering meaningful margin improvement for the business in 2026. Operator: And our next question today comes from A.J. Rice at UBS. Albert Rice: So I think coming into the year, you basically in Medicaid, were forecasting a cost trend of about 4.5%, mid-4s and the rate updates being at 4.5%. It sounds like the rate updates are coming in consistent. The -- maybe the MLR and Medicaid is trending a little better. Is that primarily due to the flu and weather that you're calling out? Or are you seeing underlying performance improved there? And does that put you on a glide path if the trend is a little better versus the rate updates to get back to sort of a target margin for Medicaid next year? Sarah London: Yes, thanks, A.J. So you're right. We came into the year with an assumption of a flat HBR year-over-year and really, the idea that rate in that mid 4.5% will be matched by net trend, which is obviously overall trend netted against our medical cost initiatives of 4.5%. We obviously saw a better performance in Q1. A bigger piece of that was flu, a little bit of weather, but there was still fundamental solid outperformance on Medicaid HBR driven by the business. And that really is a result of that consistent sort of multi-tenet program that we've deployed over the last 1.5 years and pulling levers around network optimization, further scaling clinical programs, obviously, all the work we're doing around payment integrity and fraud, waste and abuse. We're also seeing increasing momentum from states around program changes and starting to see states even more receptive. We've called out a number of examples of those in the past, whether it be around formulary management or clarifying some of the benefits. We're now seeing states start to directly intervene on providers themselves around fraud, waste and abuse. And so those conversations are continuing to roll forward. So very pleased with the idea that part of the outperformance in Medicaid in the quarter was driven by delivering on the planned initiatives and also the fact that some of that pipeline of 2026 additional initiatives developed a little bit earlier than expected. Obviously, in the forecast for the rest of the year, we're not betting or counting on that outperformance to continue, but given sort of the fundamental drivers of that. It obviously leans positive. And that would mean that we would come in at HBR, call it, 15 or 20 basis points ahead of that 93.7%. As you heard me say before, I would be disappointed if we didn't beat 93.7% given where we stand today, I will reiterate that I will be disappointed if that's all we can do. As we look ahead to 2027, our goal is to continue to drive margin improvement forward. And we obviously have work requirements and a number of policy changes that we're looking ahead to. But as we are strengthening the core operations of the business, we are doing that with a mind to and a goal to continue to drive progressive margin improvement through 2027. Operator: And our next question today comes from Justin Lake at Wolfe Research. Justin Lake: Just a couple of follow-ups. One, you talked to the exchanges, and you talked to -- like you're talking to booking a receivable on risk adjustment, not just to the magnitude that you think it might actually come in. Is that true for the -- am I right there? And is that true for the whole book or just for the Silver's business? And then you gave us margins on Medicaid and exchanges, which we appreciate. Can you give us the same on Part D and Medicare Advantage in terms of margins, where you see them now versus coming into the year? Sarah London: Sure. So first, you are correct that we moved our position to expecting a slight receivable in Marketplace. That is across the whole book because it is, as you know, just important to remember that risk adjustment is agnostic of metal tier. And so it takes into account the relative acuity of the population that you enroll regardless of where they sit between Silver, Bronze and Gold. So that receivable accounts for the entire population. And again, we did not book the full amount that the data suggests with that range, both wrapping around our original target margin and outpacing that, frankly. And then in Medicare, again, we're not reflecting continued outperformance in quarters 2, 3 and 4 in either PDP or Medicare Advantage, but as Drew and I both talked to, the fundamental drivers of those make us feel very good about the trajectory of those businesses. And so that would suggest that both of those -- the segment margin for the full year would come in slightly better. Operator: Our next question today comes from Ann Hynes at Mizuho Securities. Ann Hynes: I want to focus on the balance sheet. It looks like that you paid off about $1 billion of senior notes that were due in 2027 by selling some receivables. And based on our calculation, you have another $1.2 billion due in 2027, and another $2.3 billion in 2028. So just for modeling purposes, should we assume that you'll have to refinance that at higher rates? Or do you hope to pay some of that debt down? Andrew Asher: Yes. Good question, Ann, thanks for paying attention to the balance sheet, like we do. So yes, we're acutely aware that we've got some maturities coming up in December 2027 and then the summer of '28. And so we would look to refinance those or maybe to your point, part of those at least a year out or so as we prepare for sort of rolling those into additional senior notes. So we're taking a look at our cash position and has improved quite a bit in the last 6 to 12 months, not just because of the PDP receivable sale. And we still have, as you can read in the last K and the Q, sort of the ability to sell more of that '25 receivable. But ultimately, we'll collect that, we think, no later than October from CMS. And then as we establish, let's say, a new receivable for the 2026 year, if that's where we end up in that position. then we'll think about that as well. So really pleased with the cash generation of the business. You saw that in the cash flow from operations this quarter. And we'll evaluate sort of continued modification of debt balances. As we think about the volatility of this business over the last couple of years and think about what's the right debt load for the company to open up other avenues for deployment of capital. Operator: And our next question today comes from John Stansel at JPMorgan. John Stansel: I want to talk about rate development in Medicaid. I know the CMS rate development guide kind of alludes to the idea of like the work requirements. And as we kind of enter the back half of this year, you're going to have states giving rate base that will have to contemplate or could contemplate work requirements impacting the acuity of the valuation. I guess, how are you thinking about those discussions when you go talk to states? And I know we've got Nebraska kicking up work requirements, I guess, what, on Friday. How have your state discussions gone as we start full some implementation of work requirements? Sarah London: Yes. Thanks for the question. So you are right that we've got Nebraska that's going to kick off earlier than others, although they're a 7-1 state. And really, they're the only state that has pulled forward into 2026 so far. But given that we operate in that state, I think that will be instructive. As we step into rate conversations this year, we are, as you noted, very conscious of the fact that some of those member months will carry into 2027. And depending at the rate and pace with which states roll out or implement the work requirements, and obviously, CMS has given them some flexibility around that, the need to incorporate any anticipated acuity shifts in those rates. And so we're absolutely bringing that forward into the conversation. As I said earlier, those conversations continue to be constructive. Just as we think about the kind of backward-looking experience, we are seeing more of 2025 data and frankly, the back half of 2024 data, which had that -- the major acuity shift from redeterminations in it. And then the trend that we saw in 2025 really make their way into the base period. And so that's supportive of having rates that match overall acuity and trend. And then very appreciative, as you mined out in the fine print, a really important set of guidance that CMS provided to states relative to when they come to seek certification on rates, being very explicit about how they have incorporated the impact of the OB3 and work requirements and what that might mean in terms of an acuity shift. So we think that is very helpful in terms of creating a level of consciousness and guardrail around that and sort of expectation management as those rates come up to CMS. There was also, I think, a really helpful set of guidance around the fact that in these kinds of instances, media rates and retros are also warranted. And so broadly, what I think we are seeing is the system flex the muscles that we built during the redetermination process. And so again, increasingly, actuaries not being hard tied to retro periods, but thinking about material program changes that may come and how they need to account for that. And then broadly, I would say that the flexibility that has been given to the states, the fact that this is on balance, a smaller, more focused population, we're seeing states actually get really precise a lot earlier in the process. I was talking to one state in particular that has already run their frailty definition on their population, has a very clear view of what the at-risk pool is, actually probably smaller than you would expect. And already thinking hard about, okay, what does that mean in terms of making sure that members who are eligible because they are correctly engaged or they are in that ex parte population get coverage and then how do we support the others to find opportunities. So all of that, I think, gives us confidence. Now it's certainly a policy change and there's implementation and therefore, there is likely to be some degree of risk pool impact. But I think the way it's being rolled out is much more thoughtful, much more informed by data, much more aligned relative to our work, the state's work, CMS's work. And so I think that makes us look at 2027 and 2028 as something that we feel confident that we can manage through. Operator: And our next question today comes from Erin Wright at Morgan Stanley. Erin Wilson Wright: Kind of more of a modeling question, but just the quarterly progression in terms of MLR and earnings from here. I know there's some moving pieces in unknowns and some assumptions you're making in Marketplace as well. But what is your guidance right now [indiscernible]? Or can you give us anything in terms of that quarterly cadence around MLR and earnings that we should be embedding in the model just given some of the maybe mismatch in terms of relative to your expectations this quarter and whether the Street wise, would like to get that right? Sarah London: Yes. Thanks, Erin. So overall, EPS progression follows the same arc that we described coming into the year, but I'll let Drew go into a little bit more detail and then click down into the specific lines of business. Andrew Asher: Yes, the EPS sloping, just like we said last quarter, we expect a step down in earnings from Q1 to Q2, still profitable. Q3 around breakeven and then Q4 at a loss position, given the seasonality of the business. And then maybe, Erin, more importantly, underneath that, what's driving that underlying sloping, in Medicaid, obviously, we had a good first quarter. We would expect Q2, Q3 HBRs to be higher than average and then Q1 and Q4 to be lower this year, lower than average. And then think about the traditional sloping of commercial businesses, including Marketplace, that's like a steady uptick of HBR throughout the year given the benefit plan designs and seasonality of deductibles. Medicare similarly, largely driven by PDP, so you can see a steady march of HBR increase throughout the year. The slope line should be tilted a little bit higher this year just because of the mathematical impact of PDP being a larger proportion of the Medicare segment. So think about that as you're modeling the Medicare segment, HBR throughout the rest of the year. And then SG&A, you go back multiyears, always the heaviest in Q4 given open enrollment and preparing for the 1/1 season. So that helps drive that -- us into a loss position for Q4. Operator: Our next question today comes from George Hill at Deutsche Bank. George Hill: And I've kind of an esoteric question, Sarah, which is as we think about your guys' initiatives in fraud, waste and abuse in particular, in ABA, as we've had conversations with like state representatives, when those issues get addressed, they tend to come out of the rate from a state perspective. So actually, fixing fraud, waste and abuse ends up being a headwind to rate from a state perspective. I want to know is that something that you guys see? And is that a headwind that you guys navigate? And would just love to understand how those conversations go on with your state counterparts. Sarah London: Yes, absolutely. So I think there are probably two components to that. So one is where we see excess use or fraudulent behavior. And unfortunately, we have seen a lot of that, both in terms of -- and I think we went into quite a bit of detail on this on the last call. But as an example, providers who were just prescribing the maximum number of hours every single week for every single patient. And so within that and then -- and frankly, sort of all the way down the continuum to more fraudulent behavior, that is a real opportunity to save taxpayer dollars and make sure that the fidelity of the rates that are in place for ABA are actually going to the right care. And then I think similarly, making sure that whether with units per utilizer or the number of utilizers are getting correctly prescribed the right therapy path and getting the right amount. So a lot of what we've been focusing on is what I would call sort of excess trend and then to your point, ultimately, if there is a tightening of the benefit design that would then allow for some degree of savings in rates. But I think we've got a ways to go before we get to that point. And it's really making sure that the state is paying for the right therapy for the right members at the right level. And that's all good, right? That is exactly what we want to have happen. But our focus has been in what we consider that kind of excess trend domain. And frankly, we're also seeing states, as I mentioned earlier, take more direct action and intervention on some of these suspect or fraudulent ABA providers, not even relying on the MCOs, but actually doing that directly because of an acknowledgment of, I think, the drag that, that is creating on the system overall. Operator: And our next question today comes from Stephen Baxter at Wells Fargo. Stephen Baxter: Actually, another balance sheet question. It looks like the net payable for risk adjustment is up by, I think, over $300 million sequentially versus year-end. And I think you're obviously not speaking to a receiver position. So is that just more about how you booked Q1 versus how you're now thinking about the rest of the year in terms of guidance? And then if we think about basically the range around the potential upside and downside on the risk adjustment change that you're discussing in the potential benefit if it fully comes to a point estimate, is it right to think that like the downside scenario, if you go back to the original assumption is similar in terms of order of magnitude? Andrew Asher: Yes, Stephen, no, an astute observation in the Q that we filed this morning. Yes, different thought process for what we actually book in the first quarter. And waiting to see, say, corroboration from the June Wakely data in terms of the accounting around that, which then think about our forecast, we forecast by year-end to be in that slight receivable position. So that's sort of the difference when you're evaluating that table in the Q. And then as Sarah said, in the range of upside and downside, yes, you're always thinking about -- and believe me, as we raised guidance in Q1, we're thinking about what could swing either way in all of our businesses and feel pretty good about what we think is a cautious prudent stance at a Marketplace margin around 3%, pretax embedded in current guidance. And as Sarah said, with the opportunity to the extent we get the corroboration that the data that we're seeing currently supports, then that would present some degree of upside to that current guidance. Sarah London: And I would just add, maybe specifically to sort of the downside scenario that again, emphasizing everything you said that we feel like we've anchored in a conservative point and that the downside would not be going back to where we started in terms of the meaningful payable assumption that went into the initial guidance for the year because I think that was maybe embedded in the question. Operator: And our next question today comes from Dave Windley at Jefferies. David Windley: I wanted to come back to the fraud, waste and abuse topic, and a follow-up to George's question. We've heard some consultants suggest that like fraud targets in state rate development can actually create, air quotes, a go get for the plans in terms of savings that you need within -- again, within the rate development. I wonder if you see any of that, Sarah. And then same topic, but in the Marketplace, I'm wondering what, if any, additional, I'll call them, generally program integrity measures you're expecting to be applicable in '27 that are not applicable in '26? Sarah London: Yes, thanks. So if I take a big step back on fraud, waste and abuse, we haven't -- I don't think we've explicitly seen the dynamic you're describing where states are kind of holding back on rate and saying, instead, you can make up the difference in fraud, waste and abuse. But frankly, I don't think we would be against that, right? The idea that states can -- would let us operate more fulsomely against our mandate, which is literally to preserve program integrity, there are a lot of places where I think we are handcuffed on a relative basis and where we could, I think, again, preserving all of the right benefits and the quality and the member experience preserve taxpayer dollars. And so that's a dialogue that I think we would be open to. And I think as states start to think about ways to make program changes that don't necessarily require more rate changes, that's a perfect example of one. And we feel like -- I mean, we've hit this a couple of times, but we feel like this is a place where we have really, really focused where we are applying the fact that we've got 30 states worth of data. We aggregate that data, not just to look at best practices, but frankly, to find fraudulent providers who hang out a shingle and then get kicked out of a program and show up in another state. And so we uniquely have an ability to get ahead of that. Drew talked about that in his remarks as well in terms of where we're deploying AI and some of those daily algorithms that we run. So again, I do think there is opportunity for program reform that doesn't necessarily create a rate headwind, but creates overall continued margin improvement opportunity and stronger program integrity for our state partners. And then relative to Marketplace, we are seeing a cleaner membership base as a result of the program integrity measures that went into place last year and those that rolled forward into this year. Obviously, some of those were stayed, and those are part of a court case that we estimate may see some resolution as we get through the summer, may not. And so it's possible that some of those roll forward then into 2027, and we're taking that into account as we think about 2027 pricing and what slight additional impact that may or may not have on the membership base and the risk pool as we roll forward. Andrew Asher: As I'm sure you're aware that we have a shortened open enrollment period for 2027, so we're preparing for that according to those rules. Operator: Our next question today comes from Kevin Fischbeck at Bank of America. Kevin Fischbeck: I wanted to dig in a little bit more to some of the comments about Medicaid. I guess you said that you were seeing pockets of deceleration in some areas of trends. So could you just talk a little bit about that a little bit more? But then also, what are you seeing around acuity? I guess there's been a lot of risk pool shifts on the Medicaid side and some of your competitors are talking about stabilization there. I would love to hear how you're thinking about how the risk pool has been trending the last few quarters? Sarah London: Absolutely. So we've talked about behavioral health, home health, high-cost drugs as three of sort of the top tier trend drivers for over a year now. And behavioral health has been and continues to be sort of the primary driver. of that. But we go deep and look at how we think trend is evolving in each of those areas, whether that be a PMPM impact, whether that be, as I mentioned earlier, sort of overall utilizers, units per utilizer depending on the domain that you're looking at. So as we look across that cohort, we are seeing some pockets of deceleration, particularly around sort of units per utilizer in the behavioral health space. I think that is probably partly an indicator of are state partners getting more sophisticated about defining the benefit and the provider community getting stronger in terms of articulating evidence-based guidelines. And obviously, that is in strong partnership with the work we're doing. ABA is a subset of that. And you heard me talk about the fact that we are seeing sort of more stabilization in that trend. Those trends are still elevated from past years, but we are seeing a year-over-year relative stabilization, again, in our view, a direct result of all of the work that we've done over the past year. So it's not necessarily some huge abatement. It's really sort of a trend lapse. We're not seeing the continued year-over-year steps that we've seen over the last couple of years, and we believe that a lot of the actions that we've taken are actually having an impact. And then from an acuity standpoint, we talked last year about overall trend, roughly 6.5%. Embedded in that was an assumption of continued attrition in the member base based on tightening redeterminations at the state level and that the corresponding acuity shift, I think it was 1 point, 1.5 points of membership a quarter, was embedded in that 6.5%. And so as we looked at 2026, similarly embedded in the net 4.5% trend assumption is an ongoing view of quarterly attrition for that redeterminations work and any risk pool shift that goes along with that. Operator: And our next question today comes from Lance Wilkes with Bernstein. Lance Wilkes: A couple of questions on Medicaid as well. Can you talk a little bit about kind of the net trend impact? And so really looking at kind of your utilization management, network management efforts? And what is the impact of those that kind of brings you from gross to net? And maybe within that, is there a component of state benefit design changes and maybe if you could quantify that? And then kind of rolling that forward, as you're looking in interacting with the states, what are they looking at from an RFP perspective and a pipeline perspective in terms of types of areas of focus, new business they might put out and/or how they're responding to the federal pressures they're seeing? Sarah London: Thanks. Let me sort of take those in reverse order. So it is after really the bolus of RFP catch-up that I feel like we saw in the post-COVID years, this 2026 is a little bit of a later year. We've got only a small number of larger states that are either in or planning an RFP process. In general, I would say that we're starting to see states better align the RFP process for different programs. And so Indiana, for example, is going to reprocure the entirety of their program all at once where they were historically on sort of an off-cycle schedule relative to the core program versus LTSS. And so that, I think, is a good thing in terms of opportunity for us because of the strength in the core program, the ability to actually expand membership through those processes. I think similarly, we're seeing states consider whether this is an opportunity to move additional higher acuity membership cohorts into managed care because they are looking at budget pressures as a result of OB3 and just overall economic pressure. And so having kind of that stable view of cost is this is an opportunity to think about what other populations they might roll into the RFP process. So we're tracking that very closely and feel like we're very well positioned for that. Relative to net trend, we haven't really quantified growth trend, but I do think that the levers that we've talked about pretty consistently around network, clinical programs, payment integrity, fraud, waste and abuse, all of that really drives us down to that net 4.5%. And again, as you saw in Q1, outperformance from that. We have a really strong pipeline of those initiatives as we think about the rest of the year, which gives us confidence in our ambition to outperform even sort of the current run rate. And as I mentioned, there are a number of places where states are leaning into program changes, again, not necessarily specific to rate impact, but thinking about where they can get clearer about benefit design and where they can allow the MCOs to apply our data-driven approach to finding the highest quality, lowest cost care and procuring that on behalf of the state in order to improve margin profile and ultimately give them a little bit of relief on the need to continue to drive rates up as the solution to the problem. Operator: And our next question comes from Sarah James at Cantor. Sarah James: If I put together the moving pieces on HBR total company withheld, Medicaid, Medicare, the rest of the year, Marketplace up 100 bps, it kind of implies that Medicare 1Q beat your expectations by about 370 bps. Is that the right way to think about it? Or did your consolidated HBR move within the range? And then I get that there's a program change between '25 and '26, but the implied slope on Part D and blended Medicare is significant. To me looks like it's 1,100 bps. So can you give us a little bit more detail on how your confidence that the slope will be so steep on Part D HBR? Andrew Asher: Yes, no, good questions. Let me take those in reverse order. Yes, you're right, the sloping of our Medicare segment HBR, should be steeper this year, but that's really a function of PDP being a higher proportion, a $25 billion of revenue or so of that segment. And we've got data going back to the inception of Part D in 2006 in terms of the impact of benefit changes and how to slope that. So I feel really good about our start to the year in PDP. And that parlays into your question about Medicare segment HBR as a whole. There was a beat. Certainly, we beat in Q1, not to the extent that you calculated but we're pleased with both Medicare Advantage and PDP contributing to the outperformance in Q1. And then as Sarah said, we sort of assumed that we revert back to our previous assumptions for Q3 -- Q2, Q3 and Q4, although obviously, we're going to continue to drive that -- both of those businesses to outperform even the current guidance. So hopefully, that helps with the context of the quarter. Operator: And our final question today comes from Scott Fidel at Goldman Sachs. Scott Fidel: I wanted to just ask maybe on Part D. And if you can drill a little bit more on the LAS versus the non-LAS and maybe first, just what the membership mix was at the end of the first quarter. And here, one thing we've been tracking has just been the sort of the variation in the specialty pharmacy sort of spending trends and utilization trends between utilization in LAS versus non-LAS since IRA and then how sort of the risk scores may get updated for that from CNS? And just curious as we sort of roll forward now into the first quarter, how much of that dynamic have you been seeing? Are you seeing some convergence between the two around those spending trends? Or is -- are they still pretty far divergent and then how the risk scores are sort of play underneath that? Andrew Asher: Yes. Good questions relative to our PDP business. So we're about 1/3 in our basic product, which is essentially the low-income subsidy, the LIS at about 1/3 and the enhanced product about 2/3 which is largely non-low income. And you're right, the motivations of the IRA and the applicability of maximum amount of pockets, we saw different behaviors in the non-low income population versus the low-income subsidy population that have always been essentially fully [indiscernible] protected. So those trends continue to be very high in not-low income. I mean essentially, members taking advantage of and quite frankly, pharma taking advantage also of that $2,000 maximum out of pocket. Now the good news is we saw that in 2025, we managed through that, still produced margin and pretax margin in the 3s, but then had that data to set bids and, quite frankly, set forecasts for 2026, assuming a continuation of a very high non-low income trend, especially in specialty pharmacy. And so that's reflected in our forecast. It was reflected in our bids. It's still a very high trend. We've been able to curtail it to some degree, but it's still a very high absolute number, just not as high as what we assumed in our forecast. So you're right on the model change, we proposed that the model accelerates the recognition of the impact of the IRA, especially on the non-low income population. That suggestion was not taken. It will naturally -- that data will naturally work its way into the risk model, but it won't for 2027. And that's why we think that direct subsidy is going to go up quite a bit again as we think about 2027. So good 2026 performance so far, and we're optimistic about continuing to deliver on PDP and believe that we're well prepared for 2027. Operator: And that concludes our question-and-answer session. I'd like to turn the conference back over to Sarah London for any closing remarks. Sarah London: Thanks, Rocco, and thank you all for joining us this morning and for your interest in Centene. We are out of the gate in 2026 with solid momentum, and we look forward to updating you on how the business progresses over the coming months. My Centene colleagues, thank you for setting the tone. I'm excited to see what we can deliver for our members, our customers and our shareholders this year and going forward. Thank you all. Operator: Thank you. That concludes today's conference call. We thank you all for attending today's presentation. You may now disconnect your lines, and have a wonderful day.
Operator: Good day, and welcome to the Smithfield Foods First Quarter 2026 Financial Results Conference Call. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Julie MacMedan, Vice President, Investor Relations. Please go ahead. Julie MacMedan: Thank you, operator, and good morning, everyone. Welcome to Smithfield's First Quarter 2026 Earnings Call. Earlier this morning, we announced our results. A copy of the release, along with today's presentation is available on our Investor Relations website. Today's presentation contains projections and other forward-looking statements that are being provided pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements include all comments reflecting our expectations, assumptions or beliefs about future events or performance that do not relate solely to historical periods. These statements are subject to risks and uncertainties that could cause actual results to differ materially from our expectations and projections. These risks and uncertainties include, but are not limited to, the factors identified in the release in our annual report on Form 10-K, our quarterly reports on Form 10-Q and our other filings with the Securities and Exchange Commission. The company undertakes no obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. Please refer to our legal disclaimer on Slide 2 of the presentation for additional information. Today's presentation will also include certain non-GAAP measures, including, but not limited to, adjusted operating profit and margin, adjusted net income, adjusted earnings per share and adjusted EBITDA. For a reconciliation of these and other non-GAAP measures to the corresponding GAAP measures please refer to our earnings press release and our slide presentation on our website. Finally, all references to retail volume and market share are based on [indiscernible] data. With me this morning are Shane Smith, President and CEO; Mark Hall, CFO; Steve France, President of Packaged Meats and Donavan Owens, President of North America Pork. With that, I will now turn the discussion over to Shane. Shane? Shane Smith: Thank you, Julie. Good morning, everyone. I am pleased to report record first quarter adjusted operating profit of $339 million and adjusted operating profit margin of 8.9%. Our outstanding results reflect disciplined execution of our long-term strategies, particularly in packaged meats, reinforcing the benefits of our vertically integrated model in a dynamic operating environment. Looking at profit by segment. Packaged Meats delivered operating profit of $275 million, up 4% versus the first quarter of 2025. Packaged meat sales of $2.1 billion increased by 6% compared to the first quarter of 2025. This was driven by volume growth of 3.5%, primarily reflecting the earlier Easter holiday. Excluding the impact of the earlier Easter timing, our volume was still up 1.3%. We also saw a 2.6% increase in average sales price related to higher raw material market prices and disciplined pricing across our portfolio. We reported Package meat segment operating profit margin of 12.8%, which was down modestly from last year driven primarily by the earlier Easter increase in the mix of holiday hams higher raw material input cost and continued consumer caution in the quarter. Fresh Pork reported operating profit of $78 million, with an operating profit margin of 3.9% [indiscernible] strategy. We have reduced the number of internally produced hogs, closed and exited underperforming farms and geographies and successfully lowered our cost structure through improved genetics, heart health and procurement and nutrition savings. Finally, our culture of continuous improvement drove meaningful cost savings during the first quarter. In addition to efficiencies within our segments, corporate expenses were down 11% versus last year. In short, we delivered record first quarter profit led by strong packaged meat segment performance and solid execution across the organization. Our financial position continues to be rock solid. We ended the quarter with liquidity of $3.7 billion and leverage of just 0.4x, providing significant flexibility to support our growth strategies and deliver shareholder value over the long term. Now turning to our outlook for fiscal 2026. We continue to navigate a challenging external environment with the Middle East conflict adding another layer of macro volatility. For us, that flows through higher freight packaging and agricultural input cost. Our experienced team is managing through the same way we have in past cycles. Pricing and mix disciplined spending, productivity initiatives, hedging and contract and procurement actions. The U.S. consumer continues to be cautious, and we are focused on delivering how you add new trend for families. As households make a dollar count, our portfolio of trusted brands provides affordable protein solutions without compromising on quality. Protein continues to resonate with consumers, given its nutritional benefits and versatility. And within the protein complex, port remains competitively positioned. Core Smithfield categories, including lunch meat, bacon, sausage and hot dogs offer accessible everyday protein options that [indiscernible] well with current value-oriented purchasing behavior. Against this backdrop, we believe staying focused on our 5 key strategies will help us grow sales and profitability in 2026 and over the long term. First, in packaged meats. We plan to continue to grow operating profit through ongoing product mix improvements, volume growth and innovation. Improving product mix remains a core margin expansion strategy. We are increasing the mix of higher margin value-added product categories and expanding unit velocity while reducing volume of lower-margin commodity type from categories. A great example of this is converting large holiday hams into products like our Prime Brush launch, which increases units and purchase occasions while expanding margins. [indiscernible] out to 2025, we saw strong momentum in these value-added categories, and that carried over into the first quarter of 2026. During the first quarter, we grew units and market share in our core higher-margin focus areas. For example, we grew units sold of cook dinner sausage by 9% in the quarter, gaining 0.8 points of unit share growth and drive sausage by 10%, gaining 1.1 points of unit share growth. We expect these higher margin categories to continue to deliver strong unit growth throughout 2026. We are capitalizing on the significant opportunity to drive volume growth and gain share across our portfolio. We participate in 25 key packaged meat subcategories in retail, 20 of which are valued over $1 billion. We are focused on driving volume growth through increased distribution and disciplined brand investment. During the first quarter, we increased branded volume share for the 25 categories in total by 16% and gained branded volume share growth of 0.4 points. A key contributor to growth was increased points of distribution, which was up a strong 5.5% versus last year. We also continue to invest in marketing and trade promotion for our brands. One of the top-performing categories was Package [indiscernible] Meat, which grew volume by 11.1%, while the industry was down 6.5%. This led to a more than 1 point increase in our packaged lunchmeat volume share. Smithfield Prime Fresh is one of our most important Packaged lunchmeat brands. We grew Prime Fresh volume by 26% with an 18% increase in points of distribution in the first quarter. Looking ahead, we see continued white space opportunities to grow volume and increase market share in our top 25 categories. As part of our broader growth strategy and in addition to trade promotions, we are increasing investment in television and digital advertising to build awareness and support the long-term growth of our national brands. ,Smithfield, Acreage and Nathan's [indiscernible]. We are also growing volume by delivering what consumers want. A key competitive advantage for Smithfield is our ability to offer a broad portfolio of quality branded products this spans multiple categories and price points. This portfolio strategy allows us to retain consumers within our brands as they trade up and down the value spectrum. Additionally, roughly 40% of our packaged meats retail site privately, which allows us to capture sales if consumers trade out of brands and [indiscernible] private label. Overall, the completion of branded and private label offerings enables us to forge multiyear strategic partnerships with our customers, supporting volume growth across our portfolio. That brings us to product innovation. We focus on introducing new flavors, convenient and easily prepared mills and pack sizes that range from snack sizes to family value offerings. Our new product pipeline for 2026 is robust with losses scheduled throughout the year. For example, in the first quarter, product innovation drove 12% year-over-year volume growth in Armour Dry sausage and more than 22% volume growth in Curl's refrigerated barbecue meats, supported by new snacking formats and globally inspired flavors. Our latest introduction in April was a new Smithfield premium for [indiscernible] lineup featuring 3 bold flavors, including the limited time [indiscernible] Beer broad. We look forward to sharing more new product innovations throughout the year. We've talked a lot about retail, the food service is also an important channel for packaged meats, representing roughly 30% of sales. During the first quarter, we increased food service channel sales by 4% with volume up 1%. Foodservice customers view us as a scaled, trusted provider of high-quality products that can deliver value-added solutions saving time and money. Innovation is a key advantage for us in the food service channel as evidenced by the introduction of 12 new limited time offers in the first quarter alone. Even as food away from home inflation remains elevated, our scale, innovation and value-added solutions are resonating with operators focused on driving traffic and margin. Moving to our second core growth strategy, growing fresh pork profitability. We are focused on maximizing the net realizable value across channels and continuing to improve operating efficiencies. We were executing our strategies to increase fresh pork operating profit in 2026 as follows: growing volume in the retail channel, emphasizing higher-margin value-added case-ready and marinated offerings, expanding adjacent channel opportunities such as pharmaceuticals and pet food. Increasing automation and driving plant efficiency, yield optimization and supply chain savings and optimizing harvest levels across our network, all while remaining agile in export markets. During the first quarter, we grew sales in the retail channel by 3%, with a 6% increase in sales of value-added case-ready and marinated items. We are driving growth in value-added pork through innovation like our February launch of Smithfield Half Longes, featuring several bold flavors while also delivering convenient package size for today's smaller households. In April, we launched our new Smithfield mill ready cuts platform. These slice marinated and premium forecasts delivered globally inspired flavors in minutes and are perfect for today's consumers who want convenience without compromising taste. In short, our new value-added offerings are helping drive mix and margin improvements by meeting the strong demand for nutritious protein at a great value relative to beef and by expanding pork's relevance across multiple cuisines and usage occasions. Like our packaged meat segment, our fresh pork segment is also focused on driving growth in the food service channel, and we can leverage synergies across these 2 segments to optimize our go-to-market strategy. During the first quarter, we grew fresh pork food service channel sales by 27%. This reflects increased sales of value-added categories as well as strong sales of reps, which are a great alternative to more expensive beef. From an adjacent channel standpoint, we are seeing continued interest in the pharmaceutical and pet food channels, and we are capitalizing on that interest. Across our fresh pork segment, our team has been nimble employing the next best sales strategy, maximizing net realizable value and seizing the opportunity of the relative value of pork. Now to our strategy to optimize hog production. We continue to progress toward a best-in-class cost structure in on production and have made great strides. During the first quarter of 2026, we delivered improved operating efficiency on our retained farms. That, coupled with favorable hog and seed markets helped increase operating profit to $4 million from $1 million a year ago. Going forward, our team remains dedicated to realizing additional efficiencies. Over the medium term, we continue to progress toward our goal of producing approximately 30% of Fresh [indiscernible] needs internally. We believe this will provide an optimal balance of assured supply and cost risk management, and we'll continue to improve earnings durability across the site. Across the whole company, we drive a culture of continuous improvement. We have a no stone left unturned approach each year looking for new ways to improve operating efficiency and reduce cost. We expect efficiency savings to again contribute to enhanced profitability in 2026. In our Packaged Meats and fresh pork processing plants, we see further opportunities to employ automation and improve process to increase yields and drive efficiency. For example, we continue to optimize our network by moving dry sausage production from smaller and older East Coast plants to our most technologically advanced and efficient facilities such as Nashville. Our new Sioux Falls processing plant will be the most modern, efficient and largest combined Fresh Pork and Packaged Meat processing plant in our network. We look forward to sharing more information once we have secured final approvals. Across the organization, we are deploying technology to improve efficiency, lower cost and redeploy talent to higher-value activities. And our continued investment in improving supply chain operations is helping us navigate some of the near-term inflation in transportation costs. Finally, we continue to evaluate opportunistic M&A to support our growth strategies. In January, we entered into an agreement to acquire one of our top national packaged meats brands, Nathan's Famous. Our anticipated time line to close the transaction is now in the second half of 2026 due to the impact of the partial government shutdown on statutory deadlines for the CFIUS review process. successfully closing the acquisition will secure our rights to the brand for the long term and we are looking forward to maximizing Nathan's Famous brand growth across the retail and food service channels. We will remain disciplined in evaluating additional complementary and synergistic M&A opportunities to bolster our organic growth. In summary, we delivered record first quarter results led by strength in packaged meats and consistent execution across our vertically integrated model. By continuing to execute our 5 growth strategies, we are successfully navigating a dynamic consumer and geopolitical environment to drive growth in 2026 and over the long term. With that, I will turn it over to Mark to review our financials in more detail. Mark Hall: Thank you, Shane, and good morning to everyone joining the call. As Shane stated, we're off to a strong start in 2026, building on a record year in 2025, and our strong balance sheet and cash flow give us the financial flexibility to invest in growth and competitive dividend and ultimately create value for our shareholders. Turning to the details of our first quarter results, starting with the consolidated results and then a review of our performance by segment. Consolidated sales in the first quarter were $3.8 billion, which was a 1% increase compared to the prior year. The increase was primarily driven by higher packaged meats and Mexico sales driven by strong volume growth which more than offset a $155 million headwind from nonrecurring hog production sales to our joint venture partners in the prior year. Excluding these onetime sales, consolidated sales increased 5% versus a year ago. We delivered record operating profit of $339 million, which was up 4% compared to adjusted operating profit of $326 million in the first quarter of 2025. Adjusted operating profit margin expanded by 30 basis points to 8.9% from 8.6% last year. First quarter 2026 adjusted net income was also a record $251 million, up 11% from $227 million in the first quarter of 2025. Adjusted diluted EPS of $0.64 per share increased 10% compared to $0.58 per share in the first quarter of 2025. Next, our first quarter segment results. Our Packaged Meats segment delivered first quarter operating profit of $275 million, up $9 million from last year and operating profit margin of 12.8%, this was down 30 basis points from last year, driven primarily by the earlier Easter this year, which increased the mix of holiday hams as well as higher raw material input costs and continued consumer caution during the quarter. First quarter packaged meat sales of $2.1 billion increased by 6% compared to the first quarter of 2025. Sales were driven by a volume growth of 3.5%, reflecting the earlier Easter holiday combined with a 2.6% increase in average sales price related to higher raw material market prices and disciplined pricing across our brand portfolio. Excluding seasonal holiday hand sales, packaged meats grew volume 1.3%, underscoring our ability to win in a challenged consumer spending environment. Turning to frac work. For the first quarter of we delivered operating profit of $78 million and an operating profit margin of 3.9%. This was down slightly from $82 million and 4% in the first quarter of 2025. In the first quarter, the industry market spread was favorable, up 7% versus the first quarter of 2025 with the CME lean hog price up 0.6% year-over-year and a 1.1% increase in the USDA cutoff. However, this favorable market spread was offset by lower production volume due to a temporary winter storm disruptions in our East Coast operations as well as lower gross margins driven by lower China export volumes year-over-year. We were able to partially offset these headwinds with our next best sales strategy, including more higher-margin value-added sales in the U.S. retail channel. Fresh Pork segment sales of $2 billion decreased 1% year-over-year. This was driven by volume down 2.6% due to the factors I mentioned, which was somewhat offset by an average sales price increase of 1.5%. Our average sales price increase was above the increase in the USDA cutout, reflecting the benefits of our next best sales strategy. Next, in hog production, we're pleased to report $4 million of profit for the first quarter of 2026, up from $1 million in the first quarter of 2025. This is down sequentially from the fourth quarter of last year, but in line with seasonal norms for hog production. Improved hog production segment profitability was driven by improved commodity dynamics including higher selling prices and lower feed costs and improved operating efficiency on our retained farms. First quarter 2026 hog production segment sales of $769 million decreased by 17% year-over-year, primarily reflecting the onetime initial sale of inventory to our external joint ventures last year in the amount of $155 million. While the average selling price for hogs increased 1%, we saw a 4% or 125,000 head decrease in the number of hogs marketed. Taking a look at our other segment, which includes our Mexico and Bioscience operations. Operating profit of 12 was down $3 million versus the prior year due primarily to softer sales and related losses in bioscience that were partially offset by increases in Mexico. Our corporate expenses came in $3 million or 11% below the prior year reflecting ongoing continuous improvement efforts. And that brings me to our strong balance sheet and financial position. At the end of the first quarter, our net debt to adjusted EBITDA ratio was 0.4x, well below our policy of less than 2x. Our liquidity at quarter end was $3.7 billion, including $1.4 billion in cash and cash equivalents. This is well above our policy threshold of $1 billion despite the first quarter historically being a high working capital period. Due to seasonality, operating cash flows in the first quarter of 2026 were a net outflow of $65 million compared to an outflow of $166 million last year. For the trailing 12 months, cash flows exceeded $1.1 billion. Capital expenditures in the quarter were $88 million compared to $79 million in the first quarter of 2025. More than 50% of our planned capital investments this year are to fund projects that will drive both top and bottom line growth. This consists primarily of various plant expansions automation and improvement projects as we continue to lower our manufacturing cost structure and better utilize labor. On April 21 of this year, we paid a quarterly dividend of $0.3125 per share reinforcing our commitment to return value to shareholders. We expect to pay $1.25 per share in annual dividends this year, subject to the Board's discretion. As we look to the remainder of 2026, we feel very good about the momentum we're carrying forward from a record 2025 and a strong start to 2026. Our teams are executing with discipline and urgency and we see clear opportunities to build on that performance as the year progresses. We're reaffirming the guidance we provided on March 24 and balancing our current view of demand and the macroeconomic challenges stemming from the conflict in the Middle East. There are clearly moving pieces, but our strategies are proven. Our team is resilient, and we've demonstrated time and again that we can navigate challenging market conditions. To do that, we'll stay focused on what we can control, which is operational discipline, strong commercial execution and rigorous cost management. We're proactively managing inflation and volatility across energy, freight, packaging and other key inputs. And importantly, we have multiple levers we can pull in the near term, including pricing mix, disciplined spending, productivity initiatives, hedging and contract and procurement actions to protect performance and keep us agile. Looking beyond the near term, our long-term value creation algorithm remains intact, and our strong balance sheet and liquidity position give us meaningful flexibility. We'll continue to prioritize investments that advance our strategy and will keep returning values to shareholders in line with our capital allocation framework. Taken together, we're confident in our ability to navigate uncertainty protect margins and deliver profit growth through the remainder of 2026. Now I'll ask the operator to open the call for Q&A. Operator? Operator: [Operator Instructions] The first question comes from Peter Galbo with Bank of America. Peter Galbo: Maybe to begin, Mark, I know you don't like to give kind of quarterly guidance, but obviously, you had a nice first quarter. reiterated the guide today. Maybe you can just help us a little bit with some of the phasing elements over the remainder of the year? Anything just to be kind of mindful of as we move into Q2 and over the balance of the year? Shane Smith: Peter, thanks for the question. As I said at the outset, we feel very good about the momentum that we're carrying forward from a record '25 and a strong start to '26. So it's all about execution. And really, we see a number of opportunities to build on the performance as the year progresses. But looking specifically at the second quarter, the macro environment and the consumer remain pressured, but we expect to deliver solid second quarter results. If you look at the segments individually, for packaged meats, we're looking for packaged meats to be broadly similar to the first quarter from an underlying performance standpoint. Year-over-year, I'd say that the comparison is tougher because of the holiday ham timing benefited the first quarter of this year. So that pull forward reduces the second quarter year-over-year profit cadence. On the cost side, we're seeing higher-than-expected input inflation versus last year, most notably for pitch meats in beef and Turkey, and that pressure in supply chain costs that is talked about. So as we discussed at the outset, freight and packaging are areas of focus with diesel volatility really pressuring transportation costs and lagging effect in terms of resin-based packaging, but we're actively mitigating that through price and mix productivity and yield gains and really [indiscernible] part of our DNA in terms of year-over-year cost savings. So I'd say separately on Packaged Meat, we're going to continue to invest in brand and marketing. So year-over-year, we'll be up in brand marketing. It's a targeted approach, and it's ROI driven because it really supports our value-add strategy and our long-term share in these competitive categories that we're in. So I'd say the packaged meats just continues to be resilient and again reaffirm the outlook for the full year based on the performance that we're seeing. In terms of fresh pork, and continue to see strong execution, although we're managing that volatile cost and market environment. But just as a reminder, seasonally, -- the second and third quarter are typically softer than the first and fourth quarters for fresh pork profitability. But I'd say, even with those dynamics and cost pressures, we still expect to export to be modestly up year-over-year, and it's really supported by continued strength in our domestic value-added business. So good performance from Dona and the team as we started the year and expect it to flow through. In terms of hog production, seasonally hog production is strongest in the second and third quarters. working for a strong second quarter, driven by favorable market fundamentals. So we're seeing higher hog prices and comparatively moderate draining costs. But it's also along with the improvements that we've made in our cost structure on the retained farm. So overall, we expect to deliver a solid second quarter and full year results and a number of levers we can pull to manage that volatility as the year progresses. Operator: The next question comes from the line of [indiscernible] Jordan with Goldman Sachs. Unknown Analyst: Just following up on that discussion, seeing if you could comment on the competitive environment you're seeing for packaged meats. How are you thinking about pricing and promotions as we go through the year given the consumer remains value focused. And I guess, at the end of the day, how much does being vertically integrated impact your ability to remain competitive within packaged meats as well? Steven France: [indiscernible], I'll start out by taking that question. So this is Steve Franch. So First, I'll make a few comments as far as Q1, and then I'll get into some of the promotional strategy for the question that you just asked. But when I thought how we started out Q1, our brands are certainly performing well. So in Q1, our branded business was up 1.6% versus last year, and that's compared to the industry that it was actually down 0.2%. So demand has been steady, and it's really coming from consumers who are choosing us because they know the high quality and consistency that they're going to get really every time they buy our product. So we're not trying to manufacture volume through heavy promotions. We've stayed focused on how we -- how our business continues to evolve, and we keep moving away from lower value commodity items and putting more emphasis on to value-added products, so things that we continue to talk about. So Prime fresh, any time favors effort smoked sausage and some of the items that Shane had mentioned in his opening comments. Now that shift didn't happen overnight, but it's been very consistent, and it really continues to show up in our results. So when we think about promotional strategies we're very focused on the quality merchandising. So really going into the quality versus unprobable quantity. So we do see some competitors increasing promoted volume through reduced price points, but that typically a short list, and it doesn't support the long-term health of a brand. So we continue to see improvement with our promoted volume really sold as feature and display, which is for us and for most people, it's really the most impactable promotional vehicle. So when I look at some of the performance from Q1, so our quality merchandising was actually up 2.3 points in Q1, and our promoted volume was up 2.5 points. So when I think about the category in total, the one thing that I think is worth mentioning is on the private label side. So from the industry standpoint, we are seeing an increase in private label share, but it's only in certain categories as retailers invest in their brands. Although I will point out that in Q1, private label volume for the industry declined in 13 categories versus last year. So we're starting to see a little bit of a shift when it comes to private label. It's also worth repeating that our branded volume was up 1.6%, surpassing the industry private label that was actually only up 1% in Q1. And I'll also add that our private label business remains very healthy with our volume up over 5% in Q1, and that's in our total business. So we know our private label business really provides us a key competitive advantage since many of our retailer partners are upscaling their private label offerings. And our participation in both branded and private label really helps us attract and the gain consumers as they move up and down that value spectrum. And that's where we can really manage the promotional strategy between working directly with our retail partners on the private label side of the business while also making sure we get the appropriate promotions to support our brand inside of the business. I would say that strategy is working because we saw share and volume increases, not only on the branded side but also on the private label side of our business in Q1. Shane Smith: And Lee, I think your last question was about vertical integration. Was that correct? Unknown Analyst: Yes. And how it overall supports the packaged meats business? Shane Smith: Yes. I can't emphasize enough the importance of the vertically integrated model now that it's working correctly. And I think you can just look to the past few quarters where, in total, we recorded record profit after record profit while not 1 segment within that has been an individual record. And I think that shows you that the model is working well. When we think about things that we see in volatile environments being profit migration across the different segments, what the model provides us is really a consistency in cash flows and earnings. Now I do think we still are a little overweight in hot production. We still have a goal to get down to 30% that we're working on now. But I think when you look at the hogs that feed into our fresh pork business and then the fresh port raw material that is feeding into the packaged meats business. The way the mall is working today, I think is -- I don't think you can overemphasize enough the importance of having all 3 legs of that stool. Operator: The next question comes from Megan Clap with Morgan Stanley. Megan Christine Alexander: Maybe continuing on [indiscernible] following up on Mark's commentary to Peter's question earlier, in terms of if we're looking for a similar outlook, performance in terms of packaging in the second quarter. It does put a bit more weight on the second half in terms of the embedded profit improvement in the Packaged Meats segment outlook, and understand we'll start to lap some of the higher raw material costs from last year, which should be helpful on the margin line. But at the same time, some of these newer cost pressures related to the Middle East could put in theory be building into the second half, and it does sound like you're confident in managing these costs. But just taking a step back, has anything changed versus go as it relates to kind of your confidence level and where comes in particular, could fall within the guidance range you outlined. Shane Smith: I would just follow -- I'll start and I'll kick it over to Steve. Again, you're spot on in terms of the near-term impacts. And so there's going to be a little bit of a lag and a little bit of pressure in the second quarter, and that's why the guide for the second quarter was what it is. But again, I think that the mitigation efforts and the levers that we are able to pull will turn us back to that growth trajectory that we're looking for in the second half of the year. We have strong strong volume growth, as Steve had pointed out. And again, with the cost containment ends that we have, we feel very good at the second half of the year for packaged meats. Steven France: Megan, this is Steve. So I'll add on a little bit to what Mark is saying. So I'll start off by saying really at a high level, nothing has changed as far as how we feel about the long-term outlook of our Packaged Meat business. Now in the near term, as Mark had already kind of talked through, the environment is still somewhat challenging from a consumer standpoint. So we are seeing households are being certainly cautious with their spending, and we continue to see value seeking behavior really across grocery and also the foodservice channel. So on the cost side, we do expect some really improvement versus last year in raw materials, as we've mentioned before, but we're not assuming a return to historical norms. Now in Q1, raw material costs were higher than last year by $94 million with was certainly a significant increase. So while we're now starting to move in the right direction on some of the raw material costs, the backdrop remains challenging, especially in the beef and also Turkey categories that Mark has mentioned. Our brand certainly had a solid performance in Q1, growing our volume and also share. And really, we plan to continue driving this growth and to support some of the exciting new items that you're going to see on retailer shelves and also the partnerships we have with some of our food service operators, but we do plan on increasing our A&P spend. And in Q1, that spend was up 23% year-over-year. And from a cost standpoint, it's worth noting, obviously, the recent CPI data has showed a meaningful move in energy what certainly matters for us, as Mark has talked about, because of the large impact on diesel and also the resins with packaging certainly has a big impact on the packaged meats business. Now with all that said, I would say given that backdrop and the geopolitical uncertainty, we are planning the business with an appropriate level of conservatism around packaging and also distribution costs. But despite those headwinds, we feel good about how we're positioned. Our portfolio is strong with the brands that we have and also the categories that we participate in. And we also have a meaningful private label business. And we believe that, that really gives us the ability to serve not only our customers but also consumers across all price points. And that flexibility certainly matters in an environment like we're in today, as shoppers move up and down that value spectrum, we're also able to really keep them within our portfolio. Now taking all that into consideration, as Mark had talked about, when you take into account the shift of Easter from where it fell last year in Q2 to Q1, we really look to have Q2 and Q1 look very similar from an overall profit standpoint. And based on a lot of things that Mark had talked about as far as cost mitigations and some of the levers that we have at our disposal, at this point, we're maintaining the call that we have for the outlook for the rest of the year, the $1.1 billion to $1.2 billion. Megan Christine Alexander: Okay. That's super helpful. And if I could just follow up more explicitly on transportation. You talked about near-term inflation and transportation costs. Steve, you just mentioned diesel and freight, in particular, our understanding was that you did own some of your own fleet. So could you just give us a little bit more color just in terms of your exposure, direct exposure to diesel and that your freight and how the contracts work in -- just in the context of, obviously, this is an ongoing and dynamic situation. So any color just kind of think about the next couple of months as things progress and what we should be watching and how that impacts your cost would be helpful. Shane Smith: Megan, this is Shane. I'll talk to that for a minute. So you're right, diesel cost is the biggest near-term impact for us. And we do use a variety of methods from percentage is our own company feet. We use outside fleet dedicated fleet, but we also have been working on Intermodal as well. The only thing I would tell you, as we think about the impact this year is we actually started the transportation network optimization actually back in 2024. And when you look at the miles we drive, we took about 1 million miles off the road between '25 versus '24. We also plan and have line of sight to another 1 million miles that we'll take off the road in '26 compared to '25. Now that was reactionary. It goes really to one of Mark's earlier point. So optimization across all of our network is really embedded in our DNA. So these were things that we were already working on prior to being here today. But again, we've done lane consolidation, adding intermodal. We still look at hedging opportunities for diesel where we can, driving fewer model. And then you couple that with the ability to increase volumes and decrease cost, we feel like we're going to be in a good position as we go through the remainder of this year are in a relatively good position as we go through the remainder of the year. And again, that's the medium-term impact. You look at the long short-term impacts, the medium term, and Mark talked to this is really on things like our resin-based packaging, where we have procurement strategies value engineering processes taking place right now. And then in the longer term, it's going to come down to corn and agricultural inputs and how that hits our production operations later in the year, which, as you know, and we've talked about on earlier calls, we have hedging strategies in place surrounding those input costs as well. So all those things combined, we've taken a really hard look at the guidance that we've given. And we really feel confident in our ability to execute against that this year. Operator: The next question comes from the line of Ben Theurer of Barclays. Benjamin Theurer: Shane, Mark, following up on just the last comment a little bit on the outlook, grain cost and it kind of like [indiscernible] this is going flow through hot production, et cetera, but also the need to potentially invest more in working capital. So we've seen a better improvement versus last year in terms of investments in working capital. So I just want to understand, within your hedging strategies and a little bit of that uptick on the feed cost, how we should think of, a, managing that cost? And then, b, would it potentially does to your cash from operations, just given what it might do to working capital. Shane Smith: Yes, Ben, you can look at the future strip and see how both corn and soybean mill are moving throughout the year, and you can see that they would change. For us, and as you know, we've talked about this before. Some of the initiatives we've taken around feed and grain procurement and haul production from using alternative ingredients, [indiscernible] by products, looking at ways we can use grain elevators across the country grain here really or get grant our hard production operations at a really affordable rate. But it also goes back to the overall and optimization we've done. So we're moving those inefficient farms. We're moving some underperforming geographies and really making sure that the KPIs, we have coming out of our atoms and things like [indiscernible] and PMS [indiscernible] are really at levels that help us absorb some of these changes as we see coming through. And again, you put all those things together, Ben, and it really, again, goes to our ability to look at the guidance that we've given in our production for the year and feel good about that guidance. Mark Hall: I would just add from a cash flow perspective, 2025 cash flows exceeded $1 billion. It was the second highest in our history. And it would have been by far the highest excluding the repayment of our $230 million AR securitization -- or excuse me, monetization. And the business continues to have strong cash flow generation, and it's really attributable to the changes that we've made in our business and the reform in the hog production side of the business and the stability of our cash flow from packaged meats. First quarter is seasonally a cash outflow period for us, and the first quarter of '26 outflows were about $65 million. That was down from an outflow of $66 million in the prior year, and that primarily reflects the earlier Easter this year. But again, as far as cash flow generation, we feel very good about where we're at, even with the potential enough of green costs made in the year. Operator: The next question comes from the line of Heather Jones with Heather Jones Research. Heather Jones: Related to the package needs raw material outlook -- raw material cost outlook. I was just wanted to talk about your confidence level related to those being lower year-on-year on the pork side. And I'm asking because there's been a lot of reports of disease in the industry, but also some underlying expansion. So just wondering how much visibility you have and if your confidence level as for the magnitude of year-on-year relief has changed any since, say, a month or so ago when you reported Q4? Steven France: Yes. Thank you for the question, Heather. So I would say for packaged meats on the cost side, the biggest concern that we have is really not on the pork side of the business. So it's easier for us to manage that. We have good visibility of where we're heading on the work side. But when you look at the beef side of the market and also poultry, I mean, that makes up a sizable piece of our business on packaged meats when you consider some of the products that we make that do have beef when you think about Nathan's hot dogs, smoke sausage and then some on the poultry side, when you think about some of the lunch leads we have and also the growth that we've seen in some of our launches like Prime Fresh. So we're doing certain things on those areas to be able to mitigate some of those costs as far as locking into certain contracts or partnering with certain suppliers. But on the pork side, I'll probably pass it over to Shane he can addrss that. Shane Smith: Yes, Heather. So you mentioned disease. We're hearing the same thing you are of higher disease [indiscernible] trade across the industry. The biggest piece of external information that we look at is the reports that come out of the University of Minnesota. Those most recent reports showed a higher incident rate of both PERS and PDP. But when you contrast that with what the USDA has put out, I think they were calling full production up about 1.4% for 2026, but it is down from about 2.5% in their previous report. So it's -- again, it's hard at this time of the year to have really clear visibility into what's out there. But we are hearing and seeing some of the same things that you're referring to. Heather Jones: Okay. And then on my follow-up was just -- so I wanted to talk about the opportunity for the U.S. with the ASF outbreak in Spain. And so far, we haven't seen really that big pickup in -- all right. I haven't seen it pickup in U.S. exports that would seem to have benefited from that. And I know there's been a big increase in exports out of Brazil. So I don't know if most of that increase is going there. So just how are you all thinking about that and the outlook for the rest of the year? And any help the U.S. might get from that? Donovan Owens: This is Donovan Owens. You're right. there has been some disruption with the ASF aspect coming out of Europe, but it has been largely thus far a nonevent in terms of seeing assess demand on domestic U.S. pork anyway. So I do agree. I think Brazil playing in that market quite somewhat and able to fill in the need there. But there's also, I would say, other areas that are seeing some expected pickups in pork, some capacity and supply that are able to fill in the need in primarily Asia. So right now, I would agree with your comments. I mean, it's not really impactful for the U.S. pork market at this point. Operator: The next question comes from the line of Max Gumport with BNP Pariba. Max Andrew Gumport: I was hoping with rising inflation, if you could discuss your view on consumer sentiment in the U.S. and then how that fits into your outlook for the year? And if you factor than any changes from what you were just expecting a over a month ago for the remainder of the year? Mark Hall: Max, it's Mark. Thanks for the question. Yes, from a consumer standpoint, protein remains a core part of the basket. And we manage, as you know, our portfolio to offer value across price points. So I mentioned our brand and marketing investments, they're really targeted and ROI driven. So it's about supporting loyalty and mix and our value-added strategy while pork continues to be a strong value proposition across the protein space. So at this point, we're not seeing a change that would require a material reset of our demand assumptions. But we obviously continue to watch that consumer behavior closely. Again, our portfolio is built to serve consumers across tiers. We have answers whether it's a mainstream stable all the way up to premium offerings. So we can adjust our mix as households trade within categories. So I think based on prior geopolitical disruptions and driving inflation, it's about the duration of it and the breadth of any such impact that's going to continue to drive inflation up. And that matters more than the short-term spot move. So we're planning for volatility and staying agile. Max Andrew Gumport: Great. And then just as a follow-up, there's been a lot of questions earlier on the call about various forms of inflation, whether it's hitting beef, turkey, whether it's your freight costs or diesel resin packaging, which you gave plenty of color on. I just wanted to make sure is the messaging that you are going to see these higher costs in 2016, your outlook for cost inflation in 2016 has gone up. But you're able to reaffirm the guide because you're also leveraging some of these mitigants that you've talked about as well. Just trying to get more clarity on your outlook for cost inflation for '26 has gone up over the last month or so since you reported 4Q? Mark Hall: Yes. As we discussed at the outset, we have a number of different levers that we can pull. So operationally, we're manning the exposure in the same way we do any volatile input environment. It's about disciplined pricing and mix. hedging where appropriate, as Shane mentioned, it's about procurement timing and contract management and really our ongoing productivity and cost savings initiatives to to help mitigate the impact of inflation. So I'd say, net-net, the situation as near-term input and logistics cost uncertainty, but it doesn't change how we run the business. And again, we have multiple levers to mitigate the impact. In the meantime, our focus remains on execution. It's about service to our customers, cost discipline and delivering against our commitments. So again, we feel good about where we're at with those mitigation strategies and our outlook for the year. Operator: The next question comes from the line of Saumya Jain with UBS. Saumya Jain: So how sustainable is the current outperformance in packaged meats versus fresh pork? Are you seeing more structural share gains or a cyclical trade down behavior? Shane Smith: [indiscernible], is your question about do we see trade down between packaged meats and fresh pork? Saumya Jain: Yes. Yes. Steven France: This is Steve. So I'll start and then I'll pass it over to Donovan. But I would say in total, we don't see a trade down at all. It's typically different consumers and somebody is going to buy fresh pork. They're going to buy fresh poks, they're going to buy a package. They're going to buy package. So a lot of consumers buy both. But they're not typically going to trade down from buying a fresh item and then buying certainly a package segment. So we don't see a lot of trade down. But as far as growth that we're seeing, I would say that sustained growth. So when you think about the overall performance that we saw in Q1, it was a solid performance from a branded standpoint. But also when we look at the strong private label business we have, we also grew the private label business, which both of those outperformed the rest of the industry. So the good thing is, and Donovan can talk a little bit about this, but the strength that we've seen in a package. There's a lot of collaboration between what we do on the package side of the business and also the fresh side of the business. So when you look at some of the categories on fresh, I think marinated is a great example where we participate in those sales calls are working together to promote those items. So a great example would be for -- if we do a family add of packaged items, we're going to incorporate some of those more value-added profitable fresh items some of the marinated strips that are new in the marketplace or marinated core, that's going to be incorporated in that same ad. So when you think about the strength and the success we've had on packaged meats, Fresh Pork is participating in that with a lot of the growth that they're seeing on some of the value-added products, and I'll pass it over to Donovan. Donovan Owens: Yes. Thanks, Steve, and I appreciate the question. But Steve is 100% right as our focus and our most important piece of the Fresh Pork strategy is to continue to grow our value-added footprint within our domestic retail channel. And we're leveraging that strong brand recognition and presence of our packaged meats portfolio that Steve just mentioned, to grow the share in our marinated and case-ready pork product lines. So just a few stats and Steve that Mitch talked about marinated there. In Q1, Marinated Pork volume was up 3.2%, while the industry was down 3.8%. And our case ready pork volume was up in the high single digits, increase year-over-year in Q1. And last but not least, as Shane mentioned in his opening about the success of our food service growth of 27%. All of that is tied together with our package strategy, go-to-market strategy for the Smithfield brand. So I don't think it's a trade necessarily but we're trying to leverage both of our segments here, so it's an and on. So you pick up fresh pork, you pick up Smithfield Fresh Pork along with the Smithfield Bacon. So that's kind of our strategy. Saumya Jain: Got it. And then how are you seeing retailers pushing for future private label penetration? And how would that affect your pricing power more in the long run? Carey Dubois: So I'll touch briefly on that. So obviously, it's -- private label is very important for the retailers, not only on the retail side business, but also on the food service side of the business, so they continue to look at different categories to get involved. So where they see growth in certain packaged categories, they're going to explore that as a potential to put in private label. At the same time, they're also looking at more premium type private label categories to get into them. When they do that, we actually see that as a benefit to us because of the capabilities that we have and our ability to produce high-level, high-quality private label products, and we can do it and provide them the volume that they're going to be needed for some of these categories. So as they get into these categories, we do see some success in private label. But as I mentioned in some of my earlier comments, this Q1 was pretty interesting because they were down in, I believe, it was like 13 categories they were down year-over-year in volume. So I would say that even though private label is very important, it doesn't always work in every category. And obviously, if it doesn't work in those categories, we certainly have our brands, but we've also shown our ability to participate with private label and drive success not only in our branded business, but also in our private label business in the exact same category. Shane Smith: All right. So thanks to everyone who joined our call today. We are off to a great start in 2026, and we believe we're well positioned to deliver long-term growth and increased value for our shareholders. And we look forward to updating you on our progress following our Q2 results. Thank you. Operator: Thank you. The conference has now concluded. Thank you for attending today's presentation. You may now disconnect. Thank you.
Operator: Good morning, ladies and gentlemen, and welcome to the Zimmer Biomet First Quarter 2026 Earnings Conference Call. [Operator Instructions]. As a reminder, this conference is being recorded today, April 28, 2026. Following today's presentation, there will be a question-and-answer session. [Operator Instructions]. I would now like to turn the conference over to David DeMartino, Senior Vice President, Investor Relations. Please go ahead. David DeMartino: Thank you, operator. Good morning, everyone. Welcome to Zimmer Biomet's First Quarter 2026 Earnings Conference Call. Joining me on today's call are Ivan Tornos, our Chairman, President and CEO; and Suky Upadhyay, our CFO, to be Finance Operations and Supply Chain. Before we get started, I'd like to remind you that our comments during this call will include forward-looking statements. Actual results may differ materially from those indicated by the forward-looking statements due to a variety of risks and uncertainties. For details this can involve these risks and uncertainties, in addition to the inherent limitations of such forward-looking statements, please refer to our SEC filings. Please note, we assume no obligation to update these forward-looking statements, even if actual results or future expectations change materially. Additionally, the discussions on this call will include certain non-GAAP financial measures, some of which are forward-looking non-GAAP financial measures. Reconciliation of these measures to most directly comparable GAAP financial measures and an explanation of our basis for calculating these measures is included within our first quarter earnings release, which can be found on our website, zimmerbiomet.com. With that, I'll turn the call over to Ivan. Ivan? Ivan Tornos: Good morning, everyone, and thank you for joining today's call. I would like to start, as I always do, by sharing my gratitude to our Zimmer Biomet team members around the world, your determination, your discipline and your dedication to customers and patients are what moves our business and our mission forward. We're off to a strong start to the year, strategically, operationally and financially, and that momentum is a direct reflection of the strength of our team the resilience of our business and the impact that we can have where we stay focused on innovating and executing for our customers. Once again, my sincere thanks to the Zimmer Biomet team members. . During my prepared remarks this morning, I'm going to cover 4 key areas. First, I'll start by summarizing our first quarter results. Second, I will provide an update on our U.S. go-to-market changes. Third, I will discuss our 2026 outlook. And then lastly, I'll briefly cover the progress that we continue to make across the 3 key strategic priorities of the company, those being people and culture, operational excellence and innovation and diversification. Starting with the first quarter results. I'm proud of how the team began the year, making strong progress to our 2026 sales growth commitments, EPS and free cash flow commitments. In the first quarter, we grew sales 2.9% on an organic constant currency basis at the upper end of our annual 2026 revenue guidance range. And we delivered adjusted EPS of $2.09, which was up 15% year-over-year. Notably, the first quarter saw a $0.20 benefit from tariff-related items relative to our expectations. As we get into the details of these results, unless otherwise noted, all statements on this call will be about the first quarter of 2026 high compared to the same period in 2025 and all commentary would be on a constant currency and adjusted operating basis. First quarter 2026 organic constant currency commentary excludes the impact from the Paragon 28 acquisition, which we closed in April of 2025. Looking at the first quarter results in more detail. Our U.S. business increased 3.2% and while international grew 2.5%. These results reflect healthy end markets, strong technology sales, which once again grew in strong double-digit rates and continued momentum from our recently launched new products. Importantly, this performance was against the backdrop of changes to our go-to-market strategies in both the U.S. and some designated international markets. U.S. knee growth of 2.2% in the quarter reflects a greater than 20% increase in partial knee cells driven by our Oxford Partial Cementless Knee, the only partial cementless knee on the market in the United States. This performance was partially offset by pressure in our legacy Toran Knee implants, such as NextGen and [indiscernible], which we continue to phase out as part of our brand rationalization strategy. International Knees grew 1.3% for the quarter. Our U.S. hip franchise grew 5% in the quarter as we are seeing increasing traction of our hip triple play of one which now represents nearly 40% of our U.S. Hips temps, OrthoGrid, or AI-based hem navigation platform, a HAMMR or surgical impact. International Hip sales increased by 1%. The -- while still early in its launch, we are seeing rapid adoption in Japan, the second largest market for Zimmer Biomet or for first of the warm iodine core hip implant, which is designed to help address the risk of very prosthetic joint infection after total joint replacement. Our technology and data, bone cement and surgical business grew nearly 12% in the quarter. Our strategy of offering a comprehensive suite of technology solutions is paying dividends. as we are seeing continued strong ROSA and TMINI sales across the board. To further this one-stop shop approach at the American Academy of Orthopedic Surgeons in March in New Orleans, we hosted technical evaluations of boss or fully autonomous AI-driven orthopedic robotic system, which we acquired via the Monogram acquisition. Surgeon feedback was overwhelmingly positive as the potential gains in safety, efficiency, ease of use, reproducibility and accuracy resonated very strongly with the customers that we engage. We recently completed enrollment in our 102-patient clinical study, we continue to expect U.S. approval and the launch of the semiautonomous version in early 2027, followed by the fully autonomous version in late 2027 or early 2028. In anticipation of the mBos launch, we're increasing the number of robotic clinical sales representatives targeting to hire over 200 by the end of 2027. Finally, SCP growth of 1.6% was once again led by our U.S. CMFT and Upper Extremities businesses, partially offset by continued challenges in restorative therapies and in our trauma business. Double-digit CMFT growth in the U.S. was driven by our external closure franchise which continues to perform very nicely above market per extremities increased upper single digits in the U.S. as both our OCF stemless shoulder and our Identity total shoulder platform continued to gain momentum. Moving on now to discuss the U.S. got market changes. In the U.S., the transition to a dedicated and specialized sales channel is progressing as planned. While the quarter did see some modest disruption, it was in line with our expectations. And importantly, we are seeing rapid increases in productivity in those territories that we have transitioned. We remain on track to complete the transition by the end of 2027. Internationally, the evolution of our go-to-market models, particularly in emerging markets, is ongoing and also is performing in accordance to the plan and the expectations that we have. While we did see an impact on growth in the quarter, this was very much accounted for internally. While our commercial changes are progressing as planned, given that it is still early in the year, we are maintaining our full year 2026 organic constant currency revenue growth guidance of 1% to 3%, with growth roughly consistent throughout the remainder of 2026. Instead of this, our assumption of up to 100 basis points of price erosion is unchanged. We continue to anticipate an approximate 50 basis points FX tailwind to full year revenue growth with the second quarter being a bit neutral at current rates and Paragon 28 to contribute around 100 basis points to reported sales growth in 2026 before being reflected in organic growth. As a result, our reported sales guidance also remains unchanged at 2.5% and to 4.5% for the full year. We now expect 2026 operating margins to be better than anticipated, down slightly less than 50 basis points from 2025, which still contemplates lower gross margins, dilution from the Paragon 28 acquisition and increased investments in our U.S. commercial channel. We anticipate operating margins in the second quarter of 2026 being down roughly 200 basis points from the second quarter of 2025. In the third quarter, operating margins being down around 50 basis points sequentially from the second quarter. Our guidance for interest expense, tax rate and end of year shares outstanding, which we continue to assume up to $750 million of share repurchases remains unchanged. Given these dynamics, we are raising both our EPS and free cash flow growth expectations for the year 2026. We now expect adjusted EPS to be $8.40 to $8.55 from the previous guide of $8.30 to $8.45. And we expect our free cash flow growth to be in the range of 9% to 11% versus the previous guide of 8% to 10%. As I said, all in, the year is off to a very strong start, and I could not be any prouder or excited about what the remainder of is going to bring to Zimmer Biomet. Turning now towards 3 key strategic priorities for the company, people and culture are being number one; operational excellence, number two; innovation and diversification number three. People and culture remain the key competitive differentiator for Zimmer Biomet. And we continue to focus on placing the right talent in the roles to advance our strategy. With that in mind, I'm very pleased to share that Dr. Jonathan [indiscernible] reknown surgeon from the hospital for special surgery has joined Zimmer Biomet as Chief Science Technology and Medical Affairs Officer reporting to me. In this role, Dr. [indiscernible] will lead the strategy, delivery and management of our global portfolio spanning AI-enabled robotics, software and data, smart implants and connected technologies while also overseeing or global medical education. On our second priority of operational excellence, we continue to make great strides in improving operating efficiency through expanding our manufacturing footprint into lower-cost geographies. In addition, we're making very meaningful progresses on reducing working capital by lowering our days of inventory on hand while at the same time accelerating a very robust SKU rationalization program. We expect these combined efforts to strengthen our industry-leading margins while meaningfully continue to improve our free cash flow conversion rates. On Pillar #3, from an innovation perspective, we recently committed to becoming the exclusive orthopedic investor in the mobility revolution fund, a musculoskeletal venture capital fund launched through our collaboration between Deerfield management and the Hospital for Special Surgery in New York City. This is going to give us the opportunity to invest in technology that has the potential to truly change the standard of care from AI data applications to cartilage repair solutions. Speaking of the latter, we're also teaming up with some of the world's leading researchers in this groundbreaking opportunity. It is inspiring to see how rapidly we're advancing our commitment to solving some of the key [indiscernible] orthopaedics whether it's awareness, safety, efficiency and outcomes today and in the future. Lastly, on diversification, our recent acquisitions are all seeing positive momentum. Paragon 28, first quarter growth accelerated around 200 basis points from the fourth quarter of 2025 and is trending back towards double-digit growth performance. OrthoGrid delivered its strongest quarter to date, with significant growth and accelerated adoption, solidifying OrthoGrid as a core driver of our digital ecosystem and interior hip triple play. Finally, with enrollment complete in the Monogram clinical study, we remain on track to bring this very exciting first-to-the-world technology to market. In conclusion, we are very proud of the progress that we're makeing so far in 2026. We continue to prioritize our go-to-market commercial transformation in the U.S., and we continue to focus on driving robust adoption of our new product innovation cycle. Before I turn the call over, I want to comment on the announcement that we made this morning regarding Suky's decision to leave Zimmer Biomet for a new opportunity in the biotechnology space. For nearly 7 years, Suky has been a value partner and disciplined operator, helping us in improving our WinGuard weighted average market growth rate profile through organic and inorganic portfolio optimization driving a top quartile margin profile for Zimmer Biomet, strengthening the balance sheet and significantly improving the free cash flow conversion and growth. I'm thankful for his leadership and contributions. And we think continued success in his next chapter. Above all, I'm thankful for his friendship, which I know will continue for many years to come. During this transition, Paul Stellato, our current Controller, Chief Accounting Officer and Head of Corporate FP&A, will serve as Interim Chief Financial Officer. Paul is a seasoned business leader bringing more than 20 years of financial and IR Investor Relations experience to the role. Since he joined Zimmer Biomet in 2022, Paul has been instrumental in translated our strategy into disciplined capital allocation, including our share repurchase program and recent acquisitions as well as leading the creation of global search services around the world. I'm extremely confident that he is the right leader at the right time, and I'm confident he will provide a steady direction and leadership as we continue to conduct a search for a successor, and I look forward to our continued partnership. With that, let me turn the call over to Suky. Thank you. Suketu Upadhyay: Thank you, Ivan, and good morning, everyone. I'm proud of what we've accomplished together over the past 7 years. I believe Zimmer Biomet has a clear strategy and meaningful opportunity ahead. I would also like to take a minute to thank the entire Zimmer Biomet organization for all of the hard work and dedication that you put into advancing our mission while delivering on the company's objectives. The dedication and resiliency are impressive. I wish you continued success. Now turning to the results. Reviewing the first quarter results, net sales were $2.087 billion, an increase of 9.3% on a reported basis. and 2.9%, excluding the impact of foreign currency and the Paragon 28 acquisition. Consolidated pricing was 40 basis points negative in the quarter, in line with our expectations. Growth in the quarter benefited from opportunistic end-of-quarter purchases above historical levels, continued momentum from our recently launched products, as Ivan noted, and strong robotic sales. Turning to our P&L. We reported GAAP diluted earnings per share of $1.22 compared to GAAP diluted earnings per share of $0.91 in the prior year quarter. Higher revenue and lower restructuring costs, the previously mentioned tariff benefit and lower share count were partially offset by modestly higher taxes in the quarter due to geographic mix. On an adjusted basis, we delivered diluted earnings per share of $2.09 compared to $1.81 in the prior year. This increase was driven by higher revenue, the aforementioned tariff benefit and a lower share count, which were partially offset by increased commercial investments. Adjusted gross margin was 73% and higher than the first quarter of 2025, driven by favorable mix and a benefit from tariffs. Notably, a portion of this tariff benefit included refunds that we had anticipated in the second half of the year. Adjusted operating margin was 27.3%. Adjusted net interest and nonoperating expenses were $71 million above the prior year driven by higher debt related to Paragon 28. Our adjusted effective tax rate was 18% and fully diluted shares outstanding were 195.8 million, down year-over-year due to $250 million of share repurchases in the first quarter. Now turning to cash and liquidity. Another strong quarter of cash generation with operating cash flows of $359 million and free cash flow of $246 million. We ended the quarter with approximately $424 million in cash and cash equivalents. As Ivan had covered the rest of year outlook, I would like to close by again thanking the entire ZB team for their hard work and dedication. And with that, I'll turn the call back over to David. David DeMartino: Thank you, Suky. Operator, let's open up for questions. [Operator Instructions]. Operator, please go ahead. Operator: We'll take our first question from Rick Wise with Stifel. Frederick Wise: Going to miss you, Suky. From my perspective, the year is off to a good start, you outperformed Ivan in the quarter, you beat sales, strong gross margin speeds. But just since I only have 1 question, but you didn't raise by overall by the beat, you left sales unchanged EPS less than the EPS beat. I appreciate you keep talking about being more balanced and tempered as you think about guidance. But it's the start of the year. Is there -- are you seeing anything in the business or the market or competitively or in your sales transition that prompts that conservatism beyond just again, your desire to stick with your tempered guidance. Ivan Tornos: Rick, thanks for the question. So as you highlighted, we had a very strong first quarter. And as I sit here looking at the next 3 quarters, the word that comes to mind is confident. I'm very confident that we're more in the right direction. We continue to see the sales force changes progressing as planned. We had some disruption in the quarter early in Q2, but everything is going in accordance to plan. We have a solid pipeline in technology. You saw the growth in technology, continue to see great momentum with new products. We've got a very robust list of new customer targeting strategies that are materializing. So from a revenue standpoint, I'm very confident that we are moving in the right direction. On EPS, we did raise -- maybe didn't raised by the entire bid. We're also investing in a variety of fronts, namely in the sales force and model changes. And we did raise free cash flow. So again, very solid first quarter everything move in the right direction. So why are we not raising our guidance now because it's early in the year. This is a year of transition. We said so. We are making fairly substantial changes in a variety of fronts, go-to-market models here in the U.S. some changes in emerging markets, namely China. We're making investments in innovation at a ball pace. We're hiring people. We're making talent changes. So we feel, even though the first quarter was very strong, it's probably prudent to wait, let's call it, 90 days and then have the conversation again. But again, I'll leave you with 1 word confident, very confident that we move in the right direction. Thank you for the question. Operator: We'll go next to Vijay Kumar with Evercore ISI. Vijay Kumar: Congrats on a nice print here. And Suky, I wish you the best. Maybe 1 sort of high level, Evan,Ivan, and you mentioned U.S. sales force transformation is on plan. Any -- you also made some interesting comments about you're seeing rapid increase in productivity in regions where you're seeing this transition. Any further details that you can share on other metrics that you're tracking perhaps, things like attrition rates, what percentage of sales force now dedicated or direct, if you will, in sort of on the similar line and any macro impact that we need to think of outside of the sales force reorg anything from Middle East . Ivan Tornos: Absolutely. So let me give you some of the key public metrics that we've been sharing. So at the beginning of the journey, early 2026, we mentioned that roughly 66%, so 2/3 of the U.S. sales force, roughly 2,500 people were 1099. At the end of Q1, the number is already slightly below 60%. And -- it's already roughly a 10% reduction on the number of 1099s. And obviously, that implies that these 1099s are now fully dedicated to Zimmer Biomet. So no longer they're doing Zimmer Biomet 1 or 2 other jobs. So a fairly significant decrease in the number of nondedicated individuals. We started the year with roughly 25% of the sales force being specialized. So 1 of every 4 reps carrying a dedicated sales back. Another number is approaching, if not exceeding 30%, 3-0. We loin, I believe and I spoke about this, Vijay, the top 6 independent distributors accounting for roughly 40% of sales. They're in extension of no less than 7 years with Biomet. So that was a fairly significant risk that we retired. Relative to turnover rates, we had a target of no more than 12% turnover given the changes and our turnover rate is in the single-digit range. So again, early in the year, only 9 days behind, but everything is progressing in accordance to plan. To the point that we're thinking that perhaps we could go a bit faster as we get into Q2, Q3 and the rest with the commitment is still being we're going to close the entire transformation by the end of 2027. I believe you had a second question or part 2 of the question. Anything else, any follow-ups there. Vijay Kumar: Just on the macro piece, Middle East, any impact? Ivan Tornos: Okay. Middle East. From a macro standpoint, obviously, like everybody else, we continue to monitor what's happening in the Middle East. Today, we have seen no material supply disruptions, a minor freight cost increase in the quarter that we're able to absorb. From a supply standpoint, most of our key products are dual source, if not 3 sources. We got at least 1 year of poly. So this is not something that we're concerned about. So we're not seeing any distribution challenges there. So again, so far, life is good. . And then from a sales impact standpoint, we didn't see any impact in the first quarter. So that's on the Middle East. And then you got a variety of other macro or deals that we're monitoring, but nothing that it was impactful in the quarter, and nothing that we see has been impactful in the second quarter and beyond. Thank you for the question, Vijay. Operator: We'll go next to Matthew Blackman with TD Cowen. . Mathew Blackman: You hear me okay? Ivan Tornos: Yes, we can. . Mathew Blackman: Great. Ivan, Vijay actually asked this, I think, in those list of questions, but I'm not sure that you touched on it. You did talk to seeing increasing productivity in some of the geographies where you're doing the sales force work. I was just hoping maybe you could expand a little bit on that, just maybe in general, talk to some to the extent that you're seeing any green shoots, let's call it, from the work that you've done maybe sort of in the latter part of 25 or maybe even early here in 2026. That's worth calling out that gives us confidence in the lift that you still have ahead of us -- ahead of you. Ivan Tornos: I appreciate the question, Matt. So we probably could spend an hour going through data points. As you can imagine, given the magnitude of the project, we're tracking all gaps of KPIs, but I'll give you maybe 3 or 4 reasons to believe. In the territories that we did switch from nondedicated to dedicated. So again, a 10% reduction, we've seen fairly dramatic improvements in productivity. Nationwide or average [indiscernible] around 7 cases our lead competitor is in the 16, 17 cases per week run in the territories where we made the switches already are in double-digit ranges for the number of cases. So that's pretty encouraging to see very quickly that improvement, no surprise. When you go from spending 2, 3 days, are we doing cases to 5 days, you can imagine the product that is going to increase. along with productivity increases we've seen sales improvement in those dedicated structures. Our average extremities shoulder number for the quarter was strong. that is directly correlated to the number of shoulder specialists that we have added, both in an inpatient HOPD structure as well as in ASC, and we continue to see great momentum in shoulder. So productivity is improving a number of cases. Sales is improving in those territories. The lower turnover rates that I was [indiscernible] to Vijay is mostly coming from some of these story changes, higher engagement once we come fully part of the company. So again, plenty of reasons to be in that we're in the right direction. . Operator: We'll go next to Robbie Marcus with JPMorgan. Robert Marcus: Suky, I'll add, I guess, my sadness and congratulations. You'll be missed. I wanted to follow up, IvanIvan, maybe on a couple of things you mentioned. And it really comes down to what is and what isn't maybe onetime in the quarter? It seems like there were some product discontinuations in these, maybe a little bit of end of quarter purchasing and then perhaps maybe some benefit in gross margin. Wondering if you could size any of those? Any other potentially onetime items in the quarter and how to think about that resolving over the rest of the year? . Ivan Tornos: Absolutely. Thank you, Robbie. So I'll touch on U.S. needs and what happened in the quarter? And then maybe Suky, you can comment on gross margins and how durable they are. So look, it was not the greatest quarter for U.S. knees, but it was definitely in alignment to our expectations. We knew we were going to be going through some of these changes related to the go-to-market transformation, and we accounted for those. So I would say the single largest reason why the USD number was no higher than the 2.2% is some of the changes that we made in the U.S. organization. We lost 2 accounts in the quarter, fairly large. We believe going to be able to recoup some of the business, but we'll see as we get into the rest of the year. There was a Kaiser strike in the West Coast where we had the highest share in knees. So while that was disrupted for everybody, it was more disruptive for us. . In my prepared remarks, Robbie, mentioned how we are moving from legacy brands. namely NexGen and Vanguard to making the transferring to a one new franchise, that being persona. And as we went through that, we saw some disruption. So I will tell you, probably mostly in line, except a couple of the accounts that we lost -- and that's the body. We got to do better, and we expect to do better than growing 2.2% in U.S. knees. Relative to quarter-end deals, all the staff, those are in line with what we typically do. It was not a significant onetime event. We do strategic purchases. We try to convert ASCs. There is demand in the market for bundled deals, we include technology, implants and whatnot, and we're going to continue to do those. Suky, do you want to comment on gross margin? Suketu Upadhyay: Robbie, on gross margin, we saw a very strong quarter. largely driven by the invalidation of the IEEPA tariffs, which contributed about $0.20 to results in the quarter. We were beyond that a little bit better on underlying performance as well. The way you should think about the gross margin line is of that $0.20 that we benefited in Q1, we had originally assumed about half of that would be credited in the second half. So that was a bit of a pull forward. And so the remainder of that $0.20 drops $0.10 to the bottom line and is largely the driver of the beat or the raise, I should say, on earnings per share. As you think about gross margin for the full year, we still expect it to be down modestly versus prior year at around 71%, give or take. And the way you should think about the cadence is that it's going to be roughly consistent for the remainder of the quarters. So again, underlying performance on gross margin is as expected. The biggest driver in Q1 was the invalidation of those tariffs. Operator: Our next question comes from Travis Steed from Bank of America. Travis Steed: Just to follow up a little bit on Robbie's question. I guess looking at the U.S. knees specifically, comps do get 400 basis points tougher in the back half. And so just how do we get confidence that in the kind of the back half acceleration in U.S. Knees? And I don't know if I heard correctly, was there -- did you say in the earlier question, you saw some disruption early in Q2. I don't know if that was an early Q1 misspeak or maybe I missed it wrong? Ivan Tornos: No, no. The disruption was on Q1, Travis. So when you look at the changes we made in the first quarter, I noted a reduction on nondedicated representatives there was some disruption. We did lose 2 fairly large accounts in the quarter. So no, I did not comment on disruption on the second quarter. Your main question, what gives us confidence that we're going to accelerate our net growth in the second half is the ramp-up of our new products is the fact that we continue to place and sell a lot of technology, 30% growth in technology in the first quarter, all in with the rest of surgery, bond cement is 12%, but the actual technology growth in the first quarter, and that's TMINI is 30%. So once you start growing technology at those rates, obviously, implants fall at some point. So the account conversions that we've seen in the technology sales, the changes we're making from a go-to-market standpoint, new product acceleration gives us confidence that the numbers should increase. Thank you, Travis. Thank you. Operator: We'll go next to Chris Pasquale from Nephron. Christopher Pasquale: It didn't come up in your prepared remarks, but 1 of your competitors have been dealing with an issue that impacted their ability to serve customers for a few weeks at the end of the quarter. doesn't appear to me at first glance like you benefited much from that dynamic. But could you just talk about what you've seen in the market and whether you think that has any implications for your business, either here in the first quarter or what you're expecting in . Ivan Tornos: Yours. First things first, it's very unfortunate that companies go through those dynamics. So I'll start with a No, we did not see any material impact. So we do not see the fact that we had a competitor going through such dynamic impacting our business in a meaningful way. . Operator: We'll go next to David Roman with Goldman Sachs. David Roman: Maybe we could unpack a little bit some of the trends outside the United States. I think this is the first quarter in quite some time that OUS growth has trailed the U.S. and likely trailed where end markets look to be performing. So could you maybe help us think through some of the factors influencing those geographies to the extent to which there might have been any type of intermittent disruption versus what might be a change in the trajectory of that franchise? Ivan Tornos: [indiscernible] you, David. So a couple of things. Number one, the comps in the first half for international are more difficult than the second half. So that's one part, and I would like to talk what comes, but it is definitely an element here. Secondly, we've made, as we announced at the end of 2025 and as we said in 2026 early in the year, we made and we're making some distributor changes in geographies such as emerging markets, Middle East and Europe and China primarily, where we have gone from a large network of distributors to having one, if not true partners. And that's obviously brought some disruption. And then thirdly, there were a couple of onetime events that have been orders in certain geographies internationally that didn't come or wait. But all of that said, the expectation is that we're going to be growing international mid-single digit in the second half of 2026. Thanks for the question, David. Operator: We'll go next to Larry Biegelsen with Wells Fargo. Larry Biegelsen: I guess for my 1 question, I'd love to hear about the rollout of Monogram. I know it's early, but it's an important product for you. So once you launch the semiautonomous system with Persona early next year, how should we think about the pace of the rollout? Will there be a limited launch initially at select centers and how that might impact ROSA. Just help us think about that, please. . Ivan Tornos: Larry, I love the fact that you always got a technology-related questions about the future of the company. So thank you for that. Very excited about Monogram. As I mentioned in my prepared remarks, we completed the clinical trial. So we are deeply focused now on the preparation of the 510(k) submission. And we continue to anticipate that we're going to be in a position to launch this new-to-world technology in early 2027. What should we expect of Monogram? If what we've proven is right, the fees remain there going to be launching the most efficient readout there in what we can do cases under 4 minutes procedure times. We believe that it's going to have the highest amount of safety given the enhanced surgical boundaries. We believe that it's going to really democratize orthopedic cases from a technology standpoint, very consistent when it comes to a procedure is very reproducible. The learning curve is very short. So it is easy to use. And then again, the level of accuracy we've seen with the robot is like nothing that I've seen in my many years dealing with technology. So we believe we got a bulk platform that can get scale up fairly rapidly. And to that point, we are going to invest to make sure that's the case. So we are hiring north of 200 sales reps behind the launch of Monogram in addition to the many reps that already got in the field. We are investing heavily on clinical evidence. We recently announced that we hired Dr. Jonathan [indiscernible], who happens to be 1 of the world's global key opinion leaders when it comes to technology, some of who's actually been an entrepreneur as well. We're also investing in rethinking or rather thinking, not just the clinical strategy, but also the economic strategy. So I can spend an hour talking about it, but I will say this is going to be a very bold launch, one that we're prepared already as we speak. What's going to happen with ROSA. We are committed to having a suite of technology solutions. So ROSA with TMINI was recently launched. One of the reasons why technology is growing 30%. We're going to keep that. It is the #1 robot outside of the U.S. where CT scan is not CT scanning. It's not the preference. We love what we're seeing with our partnership with Finsurgical and TMINI. So we strongly believe that the combination of Monogram plus ROSA plus TMINI, it's going to give us a competitive advantage. Very excited about Monogram. Thanks for the question. Operator: We'll go next to Matt Taylor with Jefferies. Matthew Taylor: I actually wanted to ask a final question about the tariff impact you saw the benefit here in Q1. I guess what are you assuming for the rest of the year with regards to EPA tariffs or tariffs in general? And what do you think could happen with the 232 investigation. Just asking a curiosity more than anything else. Suketu Upadhyay: Yes. Matt, good to talk to you. So we are assuming that the 122 tariffs remain intact for -- into the second half of the year. we are assuming that the EPA remain invalidated. And therefore, we took the benefit of that $0.20 in the first quarter, as I mentioned. And moving forward on the 232, I think it's still evolving and dynamic and no material updates at this point, but the overall situation remains fluid, and we'll keep you posted as things unfold. . Ivan Tornos: I'll just add Matt, quickly. On the 232, the validation we're getting from our IT sources is that it's not going to impact those companies that operate under the Nairobi protocol. So we're feeling pretty confident that we've got a pathway to mitigate that. Thank you. . Operator: Our next question comes from the line of Richard Newitter with Truist Securities. . Richard Newitter: One of the innovations that feels most innovative for you guys that's exclusively in your hands. It's the Canary smart implant that's embedded in Persona IQ. But just noticed it doesn't get a ton of airtime even on this call. And I know you had some positive clinical trial updates at AAOS for this technology. It seems like there's potential to generate real savings to the system here, better patient management post surgery. I know in the most recent CMS inpatient rule proposal, the CCJR is extending some of those initiatives that would seem to lend themselves in favor of a technology like this. I'd just love to hear kind of where you are on this particular product subsegment? Why we're not hearing about it more? How and if this can be leveraged as a more meaningful differentiator moving '26 into '27? Ivan Tornos: A lot of the question, Richard. Thank you. Look, early on, probably, we talked too much about Persona IQ without having the data. Now we're taking a different approach. We're going to get all the data. we're going to get everything validated, and they want to talk about it. I will tell you, overall, everything is tracking in accordance with expectations. As you mentioned, we did publish some very robust data on what Persona IQ brings in terms of lowering cost, improving outcomes, et cetera, et cetera. So that was published, I think it was 4 to 6 weeks ago. I've seen with some of the changes around IPPS and the CJR expansion, this is the kind of product that can make a robust impact. There is an increase on DRGs or expenditures, as you say, with DRGs, 469, 470 for those companies that perform better. So now we will be in possession of the implant that can, in an objective way, track whether our implant is performing better. So companies that have connected data before, during and after the procedure. Companies that can being objective data around outcomes, promo whatnot, and they can validate that can reduce the cost of care I believe they're going to be meaningfully rewarded. So we continue to invest in a variety of fronts to make sure that we are the company that can validate all of the above. So committed to the space, the technology, and we like what we see. Operator: We'll go next to Caitlin Roberts with Canaccord Genuity. Caitlin Cronin: Just to touch on ROSA shoulder. Any updated color on the launch and when will move to a broader launch? Ivan Tornos: Thanks for the question. We are now fully on the full market release. I was actually done in Florida, where we've been demo in the technology. The feedback continues to be very strong. It is surgeon center. So we're not launching a technology that only certain surgeons can use. So if you are an anatomic or reversed type of surgeon case technique you can use ROSA Shoulder for both types of surgery. We are getting really solid data around the accuracy of the platform. So we can robotically do surgeries that impact the land as well as the humoral, -- so we can do both the gleno and human resection. It is extremely efficient. We already are actively working on version 2 that's even more efficient than the first generation of ROSA Shoulder and it is fully integrated to the rest of the ROSA ecosystem. So again, another example going back to the question that Rich had of collecting data before doing after surgery with ROSA Shoulder and being able to engage in proms, conversations, outcomes and whatnot. So again, we move from limited market release to full market release, and we're going to scale up the number of units that we're going to be deploying in the U.S. and other markets. Thank you, Caitlin. Operator: We'll go next to Matt Miksic with Barclays. Matthew Miksic: Follow-up on Paragon. You mentioned some acceleration there. If you could talk about what's driving that and whether you expect to maybe exit the year on double digits? And how we should think about the time line for another potentially paradigm like strategic investments? . Ivan Tornos: Thanks, Pat. So we actually -- the first quarter almost a double digit when it comes to Paragon 28. And early in the second quarter, we are in the teens. So the growth is accelerating. We also saw a 200 basis point sequential increase from Q4 of 2025 to Q1. And to answer your question succemely, what's driving this is focus. We live in Albert and the Timalon. They're getting robust investments behind the platform. The launching products at a rapid pig the hiring reps in a variety of fronts. So focus is what's driving the growth here. And we expect to exceed 2026 strongly in the double-digit growth. In terms so when are we ready to do the next deal. Look, we've got a lot going on here. We are changing the go-to-market model here in the U.S., integrating Paragon about to launch Monogram, which is going to be very disruptive and it's required a lot of focus. And then we've got another deal called [indiscernible] also doing really well that we're integrating. So we're going to pause. We're going to continue to do buybacks. And at the right time, we'll execute on a deal similar to Paragon, which I think is prone to be very solid for Zimmer Biomet. Thanks for the question, Matt. Operator: We'll go next to Steve Lichtman with William Blair. Steven Lichtman: Suky, all the best to you. Ivan, where do you think we are at on underlying hip and knee market growth? Are there any incremental headwinds to market growth in the U.S. that you're seeing on elective procedures or willingness of your hospital customers to purchase bigger ticket items like ROSA? . Ivan Tornos: We continue to track the market growth rates and it's very solid. We pick the overall recon market to be growing north of 4%, not 4.5%. So obviously, we got to do better in Knees. We are where we need to be, but we're going to accelerate in hips. We've not seen any material impacts. I get the question around what's happening with Medicaid, ACA and whatnot, we track cost of data. First of all, Medicaid is low single digit for us. So said differently, I think it's about 1% of our revenue comes from Medicaid, less than that. And then in terms of ACA, is less than 12% of our cases. . We track the top 10 accounts in the U.S. to 10 accounts being hospitals like Mayo, Cleveland, HSSC New York and Other. We continue to see waiting lease being fairly long. So I would say the market is 4%, 4.5% durable. Pricing dynamics continue to be where they need to be. So we had a quarter of 40 basis points of price erosion overall, in line with our expectations. So we don't see anything from a market perspective that we're concerned about. Thank you. Operator: We'll go next to Jeff Johnson with Baird. Jeffrey Johnson: Suky, best of luck. Ivan, maybe on the sales transition. I know we covered a lot of this last quarter, but I just want to make sure I'm understanding a couple of things. we've heard in some conversations. I think some of your reps that were not 100% dedicated, you're kind of truing up and giving them guarantees this year. That extra stub that you may be guaranteeing some of those reps. Are you excluding those costs from non-GAAP EPS and margins, just I think about how to set my model up for next year or this year and next year? And then secondly, in some of those conversations, we've heard if those guys were trued up and given a guarantee this year, it might be more next year they think about, do they stay or not without that guarantee. So -- how are you thinking about the disruptions from the sales transition? Is that more of a 26% impact? Could some of that continue into '27? Just wondering how you think kind of these disruptions gate out between this year and next year? Ivan Tornos: Thank you, Jeff. Look, we go through sales force changes in a variety of ways and magnitudes often. So this is not something we exclude. So going back to why OpEx is slightly higher and what is the EPS going. We're investing in making sure that this works out. So that's number one. We have offered 2-year guarantees that are backed up from a revenue standpoint, in some cases, 3-year guarantees. But I would tell you, Jeff, the single largest guarantee that you can offer a sales rep is to let him or her now that it is going to be a long-term future for the employee. So money may cover 2 to 3 years. But when you have technology that you're launching like Monogram, when you have the full [indiscernible] in Orthopaedics you're making the investments that we're making, most reps see this as the place to be for the next 2 years. We can also with jobs every other year. Money is not going to keep you there. But having the feature that they feel they have a Zimmer Biomet was keeping them here. . So I will tell you in my conversations we sold reps all over the U.S., and I'm spending 70% of my time on the road visiting every single territory. That's what we hear. -- if you give me a bank that is robust, if you made me part of something that is going to be great for the long term. money matters in the short term, but my career is probably more important. Thank you, Jeff. Operator: We'll go next to Matthew O'Brien with Piper Sandler. Matthew O'Brien: And Suky, best wishes in your future endeavors. Just on the pricing side, Ivan, you mentioned down 40 bps in Q1, but I think you said you're sticking with the down 100 for the year. I guess why stick with the 100 bps should we expect things to get progressively worse throughout the course of the year and then exit the year down even more than 100 basis points and kind of continue forward at a higher rate than we've seen historically? Or are you just still going to be still trying to build in some conservatism with that metric here this year and then going forward? . Ivan Tornos: Well, first of all, that is the range that we've been given for a while, flat to 100 basis points. In '25, we did better than that. There were a couple of onetime events in international markets. As we enter 2026, we guided flat to 100. We closed the first quarter, but it's a similar answer to revenue and other elements of the guidance. We're going to wait and see there are macro events happening. There are changes in a variety of international markets. There is competitive pressure here in the U.S. So we're going to wait and see. We like where we are at the end of the first quarter. We'll update you on pricing again in the August call. Thank you. Operator: This concludes the question-and-answer portion of today's call. I would like to turn the call over to back over to Ivan Tornos for any closing remarks. Ivan Tornos: Sure. I want to thank everybody for joining the call today. And most importantly, I want to thank the Zimmer Biomet team for the strong execution in the first quarter. I give you 1 word confidence. We -- I am very confident we were in the right direction, not just into 2026, but most importantly, how we are making the company future proof when it comes to the strategy that we have how we think about operating the company for the future and the commitments that we're making. I would like Suky, my friends okay here to close the call, given the fact that this is going to be the last time that he represents Zimmer Biomet as the CFO. So Suky? Suketu Upadhyay: Yes. Thanks, Ivan. So I've learned and taken a lot of away from you over our 7 years together. And the 1 thing that's most impactful is your approach to gratitude. So I'll start there. I'd like to thank you, the ZB team, the Board and all of our many partners for an amazing 7 years. We've accomplished a lot in a really tough environment. But Ivan, we've built a strong foundation from which to grow. -- and I'm confident that under your leadership and with the team's execution, you will take ZB to the next up. I wish you all the success and I'll be shining from the sidelines. Ivan Tornos: I'm going to miss you. Thank you. Thanks, everybody. Bye-bye. . Operator: This concludes today's call. Thank you for your participation. You may now disconnect.
perator: Thank you for standing by. My name is Rebecca, and I will be your conference operator today. At this time, I would like to welcome everyone to the Herc Holdings Inc. First Quarter 2026 Earnings Call and webcast. [Operator Instructions] I will now turn the call over to Leslie Hunziker, Head of Investor Relations. Please go ahead. Leslie Hunziker: Thank you, operator, and good morning, everyone. Today, we're reviewing our first quarter 2026 results with comments on operations and our financials, including our view of the industry and our strategic outlook. The prepared remarks will be followed by Q&A. Let me remind you that today's call will include forward-looking statements. These statements are based on the environment as we see it today and are subject to risks and uncertainties that could cause actual results to differ materially from our expectations and projections. These risks and uncertainties include, but are not limited to, the factors identified in the press release, our Form 10-Q and in our most recent annual report on Form 10-K as well as other filings with the SEC. In addition, we'll be discussing non-GAAP information that we believe is useful in evaluating the company's operating performance. Reconciliations to these non-GAAP measures to the closest GAAP equivalent can be found in the conference call materials. Finally, please mark your calendars to join our second quarter management meetings at the Bank of America Industrials Conference in New York on May 12, the KeyBanc Industrials and Basic Materials Conference in Boston on May 27 and the Wells Fargo Industrials Conference in Chicago on [indiscernible]. This morning, I'm joined by Larry Silber, Chief Executive Officer; Aaron Birnbaum, President; and Mark Humphrey, Senior Vice President and Chief Financial Officer. I'll now turn the call over to Larry. Lawrence Silber: Thank you, Leslie, and good morning, everyone. I'm pleased to report that with the completion of our branch optimization program, the integration of H&E Equipment Services the largest acquisition in our industry is now complete. Integration was an enormous undertaking, and I could not be prouder of this team and the strength of our culture is what dismay confidence and what comes next. For the third consecutive year, Herc Rentals has earned a Great Place to Work certification based on independent employee survey results. What makes this recognition especially meaningful this year is the context. Large acquisitions are disruptive by nature. We brought approximately 2,500 new employees into the Herc family, people facing new systems, new processes and a new way of doing things. Based on the survey feedback, our new colleagues recognized our strong culture through change management support, per mentoring and the extensive training and tools they received throughout the integration. And now they recognize the opportunity in front of them. With integration behind us, our focus shifts fully and decisively to leveraging our new scale to drive growth and efficiencies through execution. We have a larger platform, a stronger team and a broader set of capabilities than at any point in our history. The work ahead is about unlocking the full potential of our platform, winning more business, serving customers better and delivering stronger returns for our shareholders. Now turning to Slide #5. With a 30% larger branch network, we are optimizing fleet mix by market, driving network density and capturing the operating efficiency that come with scale, lead efficiency, employee productivity and margin improvement are the goals. Second, we are enhancing our fleet mix and Specialty Solutions as a standout area of focus. Double-digit specialty revenue growth in the quarter reflects targeted fleet investments, 25% more specialty locations and strong demand for mega projects cross-selling and the continued structural shift from equipment ownership to rental. Third, we are advancing our industry-leading digital capability through control by Herc Rentals. Advanced technology features from fleet utilization insights and equipment location tracking to our patented mobile access controls and remote operations gives customers the tools to run safer, more efficient job sites. And our e-commerce platform continues to gain traction, delivering a seamless omnichannel experience with 24/7 self-service and personalized interactions. E-commerce revenue reached an all-time record high in the first quarter a clear signal that our customers value the flexibility to do business with us however and whenever it works best for them. As always, we lead through continuous improvement with our E3 operating systems built on a foundation of standardized processes, superior customer experiences and a relentless focus on execution across our expanded network. And finally, as prudent stewards of capital, we invest responsibly. We took on incremental debt to acquire H&E a deliberate decision to accelerate our scale and long-term earnings power. We expect to return to the top of our targeted 2 to 3x leverage ratio by year-end 2027. Our path to deleveraging is clear. As we capture the full run rate of our synergy targets, EBITDA growth, free cash flow build and leverage comes down. Now let me turn it over to Aaron to talk about our operational performance. Aaron? Aaron Birnbaum: Thanks, Larry, and good morning, everyone. With the integration behind us and our foundation set, this is the moment our team has been working toward. Investments we've made in people, fleet systems and culture are now fully in place. What you'll see from our operations team in 2026 is a relentless focus on putting all of it to work. We are executing with the larger network, a stronger bench and a sharp percent of where the opportunities are. The work ahead is straightforward, win business, serve customers exceptionally well and drive the performance this platform is built to deliver. In everything we do, every efficiency we drive every customer we serve every dollar of performance we deliver starts with one nonnegotiable. The safety of our people and our customers. From the job site training we provide to the safe, well-maintained equipment we put in their hands, safety is how we show up every day. So let me start there. On Slide 7, our major internal safety program focuses on perfect days, and we strive to 100% perfect days throughout the organization. In the first quarter, on a branch-by-branch measurement, all of our operations achieved over 96% of days as perfect. Also notable, our total reportable incident rate remains better than the industry's benchmark of 1.0, reflecting our high standards and commitment to the safety of our people and our customers. Our safety foundation is what makes everything else possible. On Slide 8, you can see that what we're building on that foundation starts with one of our most important assets, our fleet. At $9.4 billion in original equipment costs, fleet is both our largest investment and our primary revenue growth engine. We entered 2026 with pro forma fleet down nearly 2% by design. The integration priority was alignment, the right equipment in the right markets with the right mix, and we achieved that. By the end of the first quarter, average OEC was down approximately 1% on a pro forma basis versus last year, consistent with our focus on utilization improvement. While fleet expenditures were up 78% on a pro forma basis, this reflects a return to normal seasonal buying levels after deliberately reduced purchases in early 2025, when we're preparing to bring in the acquired H&E fleet in the second quarter. Our Q1 '26 investments of $183 million are directed toward growth opportunities and supporting our new specialty locations as they ramp up and be again contributing to revenue synergies. Fleet disposals at OEC were 20% higher year-over-year, reflecting life cycle rotation and ongoing mix adjustments. For the $281 million of disposals in the first quarter realized proceeds were 49% of OEC, up from 45% in Q1 2025, reflecting a healthy [indiscernible] across almost every category as well as our focused selling into the higher return wholesale and retail channels. As you know, the first quarter is our seasonally slowest demand period. Having strong fleet alignment right now before the seasonal ramp is critical. Disciplined fleet management and our sales team is executing with increasing effectiveness across the combined network, drove sequential monthly improvement in time and dollar utilization and employee productivity throughout the quarter. As utilization tightens into the peak season, we expect that discipline to translate directly into revenue growth and further improvement in fleet efficiency in the second half of the year. Turning to Slide 9. We will gain better visibility into seasonal trends over the next month or so, but today, the bifurcated markets remain relatively consistent with what we have seen over the past year. In the local market conditions remained stable overall. Government, infrastructure, MRO and institutional construction demand are offsetting the still moderate commercial sector, consistent with what we expected coming into the year. On the national account side, large-scale project funding remains strong. Mega project activity is centered around manufacturing, LNG, renewables and the continued surge in data center development. We are winning our targeted 10% to 15% share of these opportunities with new projects coming online and current projects still in ramp-up phase. Mega project activity was notably strong in the first quarter with project ramp-ups accelerating earlier than is typical for our seasonally slowest period, activity that was built into the full year guidance we provided just 2 months ago. In the first quarter, local accounts represented 47% of rental revenue compared with 53% of national accounts. As we have said, our long-term target is 60% local and 40% national on [indiscernible] for both growth and resiliency. The national weighing we are seeing today reflects the strength of our national accounts and mega project activity, and we expect the local mix to improve as the seasonal ramp build and eventually as local demand recovers. Turning to Slide 10. Diversification is an important strategy for fostering sustainable growth and navigating economic cycles. As Herc diversified into new end markets, geographies and products and services over the last decade, we have reduced our reliance on any single industry or customer. We have become more resilient to downturns and more adaptable to emerging opportunities from mega project development and the continued surgeon data centers to technology advancements that support customer productivity and the secular shift from equipment ownership to rental. With our expanded scale, we are better positioned than at any point in our history to capitalize on this breadth of opportunity and to find growth even as individual markets ebb and flow. And the opportunity across end markets isn't just broad, it's deep. Turning to Slide 11. Let's look at what the data tells us about the forward pipeline driving demand across our customer base. Here, you can see that despite the uncertainty of broader markets, whether around interest rates, freight policy or general economic sentiment, the fundamental drivers of our business remain intact. Industrial spending and nonresidential construction starts continue to show meaningful opportunity for growth built on a foundation of project development and infrastructure investment. Of course, there are some overlap across these 4 data sets but no matter how you look at it, for companies with the safety record, scale, product breadth, technologies and capabilities to serve customers of the local, regional and national level. the opportunity for growth remains significant, and we believe Herc is well positioned to capture it. Turning to Slide 12. This is where we are in our near-term journey, and I want to be clear against our 2026 plan. We are exactly where we expected to be. The integration work is behind us, but we have now a 30% larger business, more fleet, more locations, more specialty capabilities and a larger maturing sales force. That's the foundation. In the first half of 2026 is about converting that foundation into performance, tightening utilization as we move into the seasonal peak and sharpening sales effectiveness across the combined network, and we have seen that start to play out. First, fleet efficiency. After working through the integration and fleet optimization process, we saw sequential improvement in Herc supply and demand alignment through the quarter, something we have been building towards since last summer's acquisition. That's not a small thing. And while mega project demand provided a tailwind, even in our seasonally slowest first quarter, we are still early in the ramp of our specialty locations and sales force maturation, which is why Q1 played out right in line with our plan. It tells us that we move into the seasonally stronger second quarter, we have the right fleet and the right markets ready to work. In consuming all that improvement plan in Q2 is what gives us confidence in the utilization trajectory in the back half. Second, our specialty locations. The branch optimization program added 25% more specialty locations opening Q4 2025 and Q1 2026. These locations are now staffed, fleeted and gaining momentum. New locations take time to mature and that maturation curve is playing out as we modeled. By Q3 and Q4, those locations will more meaningfully contribute to revenue and margin growth. If we get the first half right in the second half follows, revenue growth accelerates our fixed cost base works in our favor and margin improvement becomes increasingly visible. That's the progression we have mapped out. First half builds the foundation, second half delivers the growth. It's also the flywheel into 2027. Higher revenue, expanding margins and increasingly apparent deleveraging as synergy capture compounds. That's the path and we're on it. Now Mark will go through the details. Mark? W. Humphrey: Thanks, Aaron, and good morning, everyone. I'm starting on Slide 14 with a summary of our key financial metrics. For the first quarter, on a GAAP basis, equipment rental revenue was up approximately 33% year-over-year. driven by the acquisition of H&E. On a pro forma basis, rental revenue declined 3%, representing a meaningful sequential improvement from the fourth quarter. To put that into context, the acquired business was experiencing revenue pressure prior to close, a trend we've been actively working to reverse through fleet optimization, sales force training and network alignment. And while mega project tailwinds and specialty execution benefited us in Q1, the inflection of the combined platform into revenue growth is a second half event consistent with our plan. Adjusted EBITDA increased 33% compared with last year's first quarter, benefiting from the higher equipment rental revenue as well as 31% more used equipment sales. Adjusted EBITDA on a pro forma basis was down approximately 5%. The increase in used equipment sales, which have a lower margin than the rental business, impacted the adjusted EBITDA margin. Also affecting margin was the static demand in the local market and the impact from the lower-margin acquired business. EBITDA, which excludes used equipment sales, was up 30% during the first quarter. EBITDA margin was 40%, impacted year-over-year by the lower-margin acquired business. The path to margin improvement is clear. Rental revenue synergy contributions in the second half a shift toward a higher margin product mix, full realization of cost synergies and improved variable cost management at scale. We expect margins to continue to improve from here, especially as those drivers take hold in Q3 and Q4. Our net loss in the first quarter included $5 million of transaction costs primarily related to the H&E acquisition. On an adjusted basis, net income was $7 million. On Slide 15, you can see we generated $94 million of free cash flow for the first quarter. Our current pro forma leverage ratio is 3.96x which is in line with our expectations as H&E's stronger 2025 quarters roll out of the trailing 12-month calculation. The ratio will remain relatively consistent through the year before improving meaningfully at year-end when revenue synergies drive EBITDA growth in Q3 and Q4 and capital expenditures, which ramp in Q2 and Q3 to support the seasonal peak and new specialty locations began to provide greater EBITDA contribution. Leverage improvement is a year-end story, and we're managing to it deliberately. We still expect to return to the top of our target range of 2 to 3x by year-end 2027 as revenue and cost synergies and drive higher EBITDA flow-through. Turning to Slide 16. We are affirming our full year 2026 guidance across all metrics. Q1 came in as expected, rental revenue growth of 33% and on an actual basis reflects the contribution of the combined platform. Adjusted EBITDA margin held at 39.3%, consistent with last year despite the integration work that was still underway. The operational proof points Aaron walked you through, sequential monthly improvement in fleet efficiency and dollar utilization, specialty location maturation, sales force momentum are the leading indicators that give us confidence in the back half acceleration embedded in our guide. On synergies, cost synergies are running ahead of expectations and we remain on track to secure an incremental $90 million this year to fully realize the $125 million target by year-end. Revenue synergies are back-half weighted and the $100 million to $120 million incremental target for 2026 is intact. The guide assumes the business performs, as Aaron described. First half sets the foundation. Second half delivers the growth. Q1 is consistent with that plan. Now let's open it up for questions. Operator? Operator: [Operator Instructions] Your first question comes from the line of Rob Wertheimer with Melius Research. Robert Wertheimer: Your Slide 11 puts together a bunch of the different kind of ways to look at the end market, and you mentioned and there's others that are conflicting, let's say,-- but if you look at the top right, that mega project chart is a lot of money kind of flowing down the pike. And what I'd like to ask is whether that step-up in '25, whether you saw that in customer conversations, et cetera, whether you see it today because actually $300 billion in starts or whatever and a $900 billion market a lot. I want to ground truth the data that are sometimes ambiguous. Aaron Birnbaum: Yes, Rob, it's Aaron. I'll take that one. So it's really both. When you build relationships with large general contractors, our national accounts, they guide you to what's coming down the pipeline. And often, you bid on a project and they let you know that you've been awarded it, and it's going to start or they've negotiated a contract and they want to bring you in as their trusted supplier. So that's one mechanism. But there's a lot of data around it. [indiscernible] provides a lot of preview into what's coming. Now the pipeline of planned projects is pretty deep. I think we mentioned it's in the trillions of dollars. But it's really one that starts when they change from planning to start is when that data starts hitting a slide that we showed you there. And if you just look at 2026, April, May, June, July, August, September, you can see a lot more starts happening all across the board. So infrastructure, wastewater or bridges, rose, but also these big mega projects that you see coming out, a lot of renewables, you see obviously, a lot of data center activity and other projects. So you have to -- you get it from both ways. So you can use both data sets to kind of guide your fleet planning and where your year is going to go. Robert Wertheimer: And to you, that feels like better times ahead in the back half as these things ramp, I mean the time line feels great? Aaron Birnbaum: As you can see, there's more starts happening. Now these -- they don't all start when they say they're going to start, right? Sometimes you've heard us talk that sometimes they start 6 months away. But it is building. And once these projects do start to last for 2 or 3 years, as you know. So they're already in our plan for the -- as we go through Q1 into Q2 and then the balance of the year. So we like where it is right now, but it's exactly the way we kind of planned out our year. Operator: Your next question comes from the line of Mig Dobre with Baird. Mircea Dobre: I guess where I would like to start is with maybe a bit of a spotlight on your dollar utilization. At least to me, it's looking like this metric came in a little bit better than what we normally see sequentially from a seasonal standpoint. So I'm wondering if you can comment on that. Is it an indication of sort of activity itself and better fleet utilization or just the fact that maybe in Q4, we had a relatively easy comparison. And related to all of this, how would you advise us to think about the remainder of the year? How do we think about the seasonal ramp into Q2 and Q3 from here and out? Unknown Executive: Yes, great question. And I think, quite honestly, Mig, I would take the revenue conversation, the dollar conversation and the margin conversation all in the same direction. As Aaron mentioned, right, we saw fleet efficiency gains in the first quarter, which then sort of built through the dollar utilization, it improved sequentially as we walked our way through the quarter. We spent the last 10 months, optimizing our fleet and optimizing branches, putting new specialty locations in. And so I would tell you that first quarter sort of plays the way that we thought it was going to play. But as you roll that forward, there's an inflection point inside of Q2. And once we hit that inflection point inside of Q2, then I think you'll see dollar revenue and margin expansion as we work our way through the back half of the year. Mircea Dobre: And maybe my follow-up on this. And I appreciate the sort of directional commentary. But if I'm thinking about normal seasonality here, right, is there reason to think, based on everything that you have that you're going on operationally that the improvement in dollar utilization can actually exceed that normal seasonality. And maybe you can put a finer point on how you think about the time utilization component of it, right, efficiency in your asset base relative to what's happening with maybe pricing or rates more broadly in the market. Unknown Executive: Yes. I think that sort of normal isn't really this year. The reality is, is that we had a hole to climb out of entering this year, sort of down as we exited 4Q. And so there's a big efficiency play that we needed to see collectively as a business before investing growth CapEx into the business in the May, June, July time frame. And so I would tell you it's playing out the way that we thought it would. Now granted, it's early. May and June will be a much larger tell to sort of how the rest in the balance of the year plays out. But I think we're not necessarily looking at this as normal or abnormal. We just know where we have to go to get the fleet back to a healthy and efficient level. Operator: Your next question comes from the line of Jerry Revich with Wells Fargo Securities. Jerry Revich: I'm wondering if we could just talk about overall pricing that you're seeing in the market? So an oversupply of aerials of particular pricing is pretty tough. Can we just talk about -- are we optimistic that pricing can outpace inflation this year? And as positively surprised by the realization and use values for you folks this quarter, it sounds like supply demand is improving. Can we just unpack that, please? Unknown Executive: Yes. I mean I'll unpack it to the level that I can. We don't comment specifically on price. But I would say that we are encouraged by the fundamentals that we're seeing in the industry. The fleet in and fleet on dynamics are good, particularly as we sort of exit and I think that the market is being both rational and constructive. And so we look forward to taking advantage of such marketplace. Jerry Revich: Super. I appreciate it. And then just to shift gears a little bit here. In terms of the performance of legacy H&E branches versus Herc, obviously, legacy her pricing and time you based on historical stats has been significantly higher. Has that gap closed at all, where are we in the process of driving the H&E branch performance towards legacy or performance today versus 12 months ago versus where we see it 12 to 18 months out? Unknown Executive: Yes. I mean I think thankfully, Jerry, I can't really answer that question for you, and that was part of this integration was to integrate this business in such that there is no longer an H&E or Herc, right? And so I think if I could still answer that question, then I would say we probably haven't done our job. And so I think collectively, Q1 sort of played out the way that we planned Q1 to play out, and that's probably about as deep as I can go in terms of insights between H&E and Herc. Jerry Revich: Super. And lastly, I know you said in your prepared remarks that the quarter dollar was in line with your expectations. It was better than I think a lot of us had modeled when we saw the industry data, it looked like pricing accelerated in March, and it looks like it inflected as well. I know you don't want to provide a ton of color, but can you just comment on demand cadence over the course of the quarter? And any other color you're willing to share on that point? Unknown Executive: Yes. I think from our vantage point, right, I mean, we are anticipating, Jerry, in an inflection point sometime inside of Q2. And then I think from that point forward, you should see growth/improvement depending upon which line item you're looking at dollar utilization improvement, revenue growth and margin expansion as you sort of inflect out of Q2 and into the back half of the year. Operator: Your next question comes from the line of Kyle Menges with Citigroup. Kyle Menges: You had mentioned that pro forma fleet is down a little bit and by design, I would love to hear you unpack that a little bit and then just how you're thinking about pro forma fleet growth for the full year and maybe bifurcating between gen rent and specialty? . Unknown Executive: Yes. I mean, we walked into the year, as Aaron said, almost 2 points down. fleet on a pro forma basis. I think as you exit Q1, you're still down a point, give or take. And so that, again, was part of the plan. And so I think as you start then taking sort of the guided CapEx from a gross perspective and the guided sort of dispositions, you can sort of play that through. I would tell you that the expectation is we'll probably load that gross CapEx number into the business in between the back half of Q2 and Q3. So that should give you sort of the meaningful data points that you need to model. Aaron Birnbaum: I would add to, Mark, that as CapEx goes through the year, we'll be over-indexed to our specialty fleet to feed our branch optimization, our shift to grow the specialty side get back closer to what it was pre-acquisition. Kyle Menges: Helpful. And I know you've expanded the specialty locations quite a bit and working on cross-selling, which understandably the cross-sell is expected to be a bit back half weighted. So It'd just be helpful to hear about what the learning curve has been as you roll out specialty and more SKUs across the H&E network and just the visibility you feel like you have to actually hitting the revenue synergy targets as you get into the second half? Aaron Birnbaum: Yes. I would say that our revenue synergy for 2026, we're on the plan where we need to be as we exited Q1 and as we look towards the rest of the year, where we expect it to be for all of our revenue synergies as it relates to cross-selling. It's cross-selling with the specialty business is really a 2-front exercise you got a bigger sales force. You got to make him comfortable with asking those types of questions of their customers. They don't have to be experts at the specialty products. We have experts on the sales side that support them, and that's where the cross-selling goes hand-in-hand. But when you have a large customer base and we did a large acquisition and those customers weren't used to specialty products to the extent that Herc Rentals had. So that's where the cross-selling goes on those tens of thousands of customers introducing specialty solutions to them with the sales force that we onboarded from the H&E acquisition. So it's really 2 parts, but a lot of relationship building internally and we've been doing it for 9 months, and we like where we are right now, and we feel real comfortable about what we're going to get done in this arena, Q2, 3 and 4. Operator: Your next question comes from the line of Ken Newman with KeyBanc Capital Markets. Kenneth Newman: Mark, maybe -- sorry if I missed this, but just going back to the cost synergies. I think you said that it was running ahead of schedule. Can you just maybe help us quantify how much you were able to capture this quarter? And just help us think about the revenue synergy capture progress through the rest of the year? W. Humphrey: Yes. The intent of that comment was that the $125 million or the incremental $90 million will lay into 2026, which was ahead of the originally scheduled sort of synergy lay that was supposed to come in over a couple of years. So that was the intent there, and I appreciate you asking that question. It's relatively ratable. I would say slightly, slightly back half loaded, but it's coming in reasonably ratably over the 4 quarters, Ken. Kenneth Newman: Understood. Okay. That's helpful. And then for a follow-up, I think we've been hearing some rumblings on improving oil and gas markets here in the states. I know H&E used to play a much larger role in those end markets. Curious if you could just maybe help us understand what the exposure to oil and gas is today with the H&E fleet? And how you think about that opportunity and whether you're seeing that kind of pop up as potential starts opportunities in the next, call it, 12 to 24 months? Aaron Birnbaum: Yes. A few points on that, Ken. First, our oil and gas mix of our business is less than 10%, all right, before the acquisition and after when you got $9 a barrel oil, you're going to have some surge in the upstream and some surge in the downstream. The downstream guys actually produce and make more margin. H&E had relationships with -- since they had a big footprint along the Gulf. They had a lot of relationships with contractors that were industrial contractors. They might have worked in all facets of the industrial complex, not just oil and gas, but it might have been the chemical complex. They didn't really have downstream contracts, so there were long-term contracts that we picked up with the acquisition. So our part of our business is still below 10%. However, we made relationships with a lot of healthy H&E contractors to work in that space, as I mentioned. So with night oil, there's probably going to be a increased activity in the Permian Basin in Texas and down the ship channel. So we're well positioned for that. But our position in oil and gas didn't increase because of the acquisition. We like to think diversified. So we like where we're at. Operator: Your next question comes from the line of Tami Zakaria with JPMorgan. Tami Zakaria: Congrats on the wonderful results. First question on fuel costs, that has been rising nationwide. Could you just remind us how you manage that with in terms of your own costs and how you pass it on to customers and whether there's any lag? And also, was the hedging difference for legacy Herc versus H&E? So any color would be helpful. Aaron Birnbaum: Yes. The price of oil rising nearly $100. That's something that the business has to really focus on. We take the input of the price of fuel of 3 different ways: one, into our internal vehicle service vehicles that we use to conduct our business. Second way is refueling of rental equipment. And the third way is the logistics of our delivery apparatus to deliver equipment and pick up equipment all day long. So the first wave just our own assigned vehicles, there's not a much bunched buy better, right? By the gasoline at a favorable price point. The second piece is we do charge a fee to our customers if we have to refill the equipment when they rent it. So we give them the option, hey, bring it back full, no charge, bring him back less than full, there is a charge. So we have a fee for that. And then the logistics piece is the more complicated one because you have a lot of transactions happening every day across the entire network and we recover that by the delivery fee we charge from picking up and delivering. And also there's a surcharge that's indexed that allows us to move with the price of oil per barrel as it moves through all cycles and all times and events macro geopolitically. Tami Zakaria: Understood. That's very helpful. A similar question regarding freight rates, which have also been rising Again, could you remind us if that is a risk you hedge, if you have long-term contracts with third-party haulers or more real-time rates that you pay? Aaron Birnbaum: Yes, we have a robust long haul process when we have to broker third-party freight. So we have a robust process there, and we built that over the last 3 years, and we know that we get a favorable price point compared to the market any day of the week. So whether the price of oil is at $60 or $100 per barrel, we're getting a favorable price point as the price for bill goes up, you just can't avoid those costs. You try to pass on as much as you possibly can and try to anticipate how long it will last for. Operator: Your next question comes from the line of Steven Ramsey with Thompson Research Group. Steven Ramsey: From a high level, I was wondering if you could parse the specialty performance a bit. Clearly, it was strong. But maybe if you could talk about specialty, excluding mega projects and if it's outpacing the local markets, and maybe specialty on a same-store basis when you exclude the new branches, just different ways of the strength of specialty in the quarter and as you look forward? . Unknown Executive: Yes, Steven, we don't break it out in that kind of detail nor would we just -- because it's -- then you get into sort of segmentation, and we don't do that. But generally, the specialty business has been performing well. We saw double-digit growth in the quarter. We expect to continue to see that as it services all facets of our business. The mega project business, our national account and big industrial contracts as well as the local market activity where we're penetrating on a greater basis as a result of our increased location count into that. So specialty will continue to grow. We're excited on it, but we can't and won't break out individual areas. Steven Ramsey: Okay. Understood. That's helpful. And then on disposals going through retail and wholesale, clearly, a good story there. Can you talk about maybe on an innings basis or however it makes sense where you expect to be in '26 versus the prior year and where you hit maturity on that this year? Or is that something beyond? Unknown Executive: Maturity related to what, Steven? Just in terms of where the fleet sits as we exit the year? Steven Ramsey: More the fleet disposals that go through the higher-margin channels. Unknown Executive: I got you. I got you. Yes, I mean, we've -- this has been a couple of year journey, right? Like we've been trying to flex these retail wholesale muscles and Q1 was a really good example of that, and it was approaching sort of 70% into the retail wholesale channel. That's a sweet spot for us. That's where we'd like to be. And I think Q1, Q4 will be your heavy disposal quarters, Q2 and Q3 will be a little more moderated. So I would anticipate that that's our control and we'll probably sort of remain in or around as we sort of walk through the year. Operator: Your final question comes the line of Neil Tyler with Rothchild & Company Redburn. Neil Tyler: Just wanted to ask you guys about the sort of different sort of flow-through dynamics in the second half associated with things like the ramp-up in mega projects, which might potentially, I guess, hold margins back a bit and the specialty growth because that seems -- those 2 in combination seem to be contributing a larger proportion of your anticipated sort of demand upside in the back half. So can you sort of maybe help me think about how you're thinking about those factors playing through on margin overall and flow-through and underlying that? What's happening? Unknown Executive: Yes. Sure, Neil. I think as I said earlier, right, we are anticipating margin expansion inside of Q3 and Q4. And so if you sort of look back to where margin was last year, Q3 and Q4 within this 45%, 46% sort of range from a rental EBITDA perspective. And so therefore, if I'm anticipating margin expansion in that incremental margin will certainly be greater than last year's 45% or 46%. And so I can't get too terribly pointed there, but we are anticipating margin expansion as sort of all of these initiatives come together and fuel revenue growth in the back half. Operator: I will now turn the call back over to Leslie Hunziker for closing remarks. Leslie Hunziker: Thank you for joining us on the call today. We look forward to updating you on our progress in the quarters to come. Of course, if you have any questions, please don't hesitate to reach out to us. Have a great day. Operator: Ladies and gentlemen, that concludes today's call. Thank you all for joining. You may now disconnect.
Operator: Good morning. My name is Matthew, and I will be your facilitator today. I'd like to welcome everyone to the UPS First Quarter 2026 Earnings Conference Call. [Operator Instructions] It is now my pleasure to turn the floor over to your host, Mr. PJ Guido, Investor Relations Officer. Sir, the floor is yours. PJ Guido: Good morning, and welcome to the UPS First Quarter 2026 Earnings Call. Joining me today are Carol Tome, our CEO; Brian Dykes, our CFO; and a few additional members of our executive leadership team. Before we begin, I want to remind you that some of the comments we'll make today are forward-looking statements and address our expectations for the future performance or operating results of our company. These statements are subject to risks and uncertainties which are described in our 2025 Form 10-K and other reports we file with or furnished to the Securities and Exchange Commission. These reports, when filed, are available on the UPS Investor Relations website and from the SEC. Unless stated otherwise, our discussion refers to adjusted results. For the first quarter of 2026, GAAP results include after-tax transformation charges of $42 million or $0.05 per diluted share. A reconciliation of non-GAAP adjusted amounts to GAAP financial results is available in today's webcast materials. These materials are also available on the UPS Investor Relations website. Following our prepared remarks, we will take questions from those joining us via the teleconference. [Operator Instructions] And now I'll turn the call over to Carol. Carol Tomé: Thank you, PJ, and good morning. Let me start by saying how incredibly proud I am of UPSers around the world. This past quarter brought significant external challenges from volatile global markets to rising fuel costs. Even so, our team stayed focused, pushed our transformation forward, and upheld the exceptional service our customers rely on. The first quarter of 2026 marked a critical transition period for our company, one in which we needed to flawlessly execute several major strategic actions, and we delivered. First, we further reduced nonnutritive Amazon volume by an average of 500,000 pieces per day and closed 23 additional buildings. Second, under our new agreement, we shifted a portion of our Ground Saver volume back to the USPS for last mile delivery. Third, we launched a voluntary driver buyout program we called Driver Choice, through which we will reduce roughly 7,500 full-time driver positions. Interest in the program was extremely strong and ultimately exceeded our expectations. Based on these actions and more, we are firmly on track to achieve our $3 billion cost-out target for the year. Further, we began scaling back leased aircraft as we retired our MD11 fleet and took delivery of new 767s, and we continue to capitalize on trade lane ships resulting from last year's trade policy changes. It's a dynamic environment. But even against that backdrop, our underlying business performed exceptionally well. In the first quarter, consolidated revenue reached $21.2 billion, with consolidated operating profit of $1.3 billion and an operating margin of 6.2%. Across our segments, performance was strong. In the U.S., revenue quality remained high with revenue per piece up 6.5% compared to the same period last year. Our international business delivered solid top line momentum, growing revenue by $167 million or 3.8% year-over-year and our Supply Chain Solutions businesses more than doubled operating profit versus last year. Our results were considerably better than our financial plan and targets. But it's worthwhile calling out that while we planned for it, our first quarter performance deviated from seasonal norms due to certain cost pressures that Brian will detail. These pressures are largely behind us. We expect to return to consolidated revenue and operating profit growth and expand operating margin in the second quarter of this year. Last year, we launched the most extensive U.S. network reconfiguration in our company history by targeting a 50% reduction in the volume we deliver for Amazon by June of 2026. With roughly 2 months to go, we are comfortably in the home stretch of this initiative. Our actions are moving us toward a more profitable U.S. small package business with the back half of 2026 expected to be the inflection point. With that as context, let me outline our priorities and how we intend to deliver revenue growth and margin improvement going forward. Our #1 priority is to move the right packages and the right mix of volume through our network. The market has changed, and we're adapting to it. We're overturning the old industry assumption that scale alone drives profitability. Instead, we're focused on premium segments like SMB, B2B and complex health care. Our strategy is working. We're seeing favorable mix improvements with SMB and B2B volume, representing a larger share of total U.S. volume and premium customer wins are driving meaningful revenue per piece growth. How are we winning? We're winning through innovative and differentiated capabilities like RFID labeling at customer locations, end-to-end cold chain solutions, RoTE for same-day and big and bulky deliveries, happy returns for boxless labelless returns and much more. And that's only a part of our growth story because we're also doing a better job of retaining and growing our existing customers. In the U.S., we saw a meaningful reduction in churn through the first quarter. Our customer-first strategy focuses on what matters most and that speed, ease and reliability. And while we're discussing capabilities, let me say like that, our digital access program. DAP gives us access to over 8 million SMBs and in the first quarter, we generated $1.2 billion in global DAP revenue, marking the second quarter in a row of delivering GAAP revenue over $1 billion. As we drive revenue growth, we'll also drive profit growth with margin improvement coming from higher productivity. We already run the industry's most efficient integrated network and with expanded automation and robotic deployments, we will make the network even more productive and adaptable. That added agility will create the strategic capacity we need to fuel premium volume growth over the long term. Growing premium volume is not just a U.S. strategy. It's a global strategy. In International, we're speeding up our ground network in Europe to win premium commercial volume. And in Asia, we recently opened a major expansion of our Incheon airport hub in South Korea. And in Taiwan, we opened our largest and most advanced logistics center in the region. We're speeding up our services across Asia Pacific as well as to, and from Europe further enabling global supply chains, particularly in the manufacturing, high tech and health care sectors, all premium sectors. Speaking of health care, it remains a top priority growth engine for UPS. We built a world-class, end-to-end logistics network to handle the most complex time- and temperature-sensitive health care products. And these capabilities are enabling us to win. In fact, our global health care portfolio has gained market share every year since 2021. And in the first quarter of this year, we generated our first $3 billion health care revenue quarter ever, with all 3 of our segments delivering year-over-year revenue growth. As I wrap up, we've now had 3 quarters in a row of performance exceeding our expectations. As we look to the balance of the year, there are a few external factors that we are watching that could impact demand especially higher fuel costs stemming from the conflict in the Middle East and U.S. consumer confidence, which is at historic lows. But these external pressures won't deter us. As we reach the finish line on our Amazon glide down and complete our network reconfiguration, costs will continue to come out. Premium volume will continue to strengthen and we will return to revenue and profit growth with higher operating margins and stronger returns on invested capital. Today, we are reaffirming 2026 consolidated financial goals. For the year, we expect to generate consolidated revenue of approximately $89.7 billion, and a consolidated operating margin of approximately 9.6%. So with that, thank you for listening. And now I'll turn the call over to Brian. Brian Dykes: Thank you, Carol, and good morning, everyone. This morning, I'll cover our first quarter results. Then I'll give an update on the Amazon glide down and our network reconfiguration and cost-out efforts. I'll wrap up with our financial outlook for the remainder of 2026. Moving to our results. Execution across our business was strong with results coming in above our expectations. Starting with our consolidated performance. In the first quarter, revenue was $21.2 billion, and operating profit was $1.3 billion. Consolidated operating margin was 6.2% and diluted earnings per share were $1.07. Now moving to our segment performance. U.S. domestic remained focused on revenue quality while executing our Amazon glide down and network reconfiguration initiatives. These strategic actions drove SMB average daily volume growth and strong year-over-year revenue per piece growth. For the quarter, total U.S. average daily volume was down 8% versus the first quarter of last year. Nearly 2/3 of the decline came from the glidedown of Amazon volume and our deliberate actions to remove lower-yielding e-commerce volume from our network. Total air average daily volume was down 8.9% year-over-year including the guide down of Amazon volume. Ground average daily volume was down 7.9% compared to the first quarter of 2025. Moving to customer mix. SMB average daily volume increased 1.6% year-over-year, driven by high-tech, health care and automotive customers. In the first quarter, SMBs made up 34.5% of total U.S. volume marking the highest SMB penetration in our history. Looking at B2B, while average daily volume was down 5.1% year-over-year, it represented 45.2% of our total U.S. volume which was a 140 basis point improvement versus the first quarter of last year and was our highest first quarter B2B penetration in 6 years. Our continued focus on revenue quality and a more premium U.S. volume mix has delivered several consecutive quarters of product and customer mix improvement, reinforcing that our strategy is working. Moving to revenue. For the first quarter, U.S. domestic generated revenue of $14.1 billion. This was a decrease of 2.3% year-over-year against an ADV decline of 8% with strong revenue per piece growth of 6.5%, largely offsetting lower volume. Breaking down the components of the 6.5% revenue per piece improvement. Base rates and package characteristics increased the revenue per piece growth rate by 340 basis points. Customer and product mix improvements increased the revenue per piece growth rate by 200 basis points. The remaining 110 basis point increase was due to changes in fuel price. Turning to cost. In the first quarter, total expense in U.S. domestic was nearly flat. While we delivered higher productivity and continue to make progress on the Amazon glidedown, those benefits were partially offset by short-term cost pressures in the first quarter. As Carol mentioned, these included temporary third-party lease expense to cover capacity constraints from retiring our fleet of MD11 aircraft, transition costs and excess operational staffing related to ground saver, and the combination of inclement weather costs and higher casualty expense. Combined, these pressures totaled about $350 million in additional expense for the first quarter. Cost per piece in the first quarter increased 9.5% year-over-year. The U.S. Domestic segment delivered $565 million in operating profit and operating margin was 4%, including a 250 basis point negative impact from the short-term cost pressures. These cost pressures are largely behind us as we move into the final months of the execution of our Amazon glidedown and network reconfiguration initiatives. Moving to our International segment. In the first quarter, revenue grew across all regions, driven by strong revenue quality and our focus on premium markets. Plus, we saw signs of recovery in trade length shifts stemming from the 2025 trade policy changes. Additionally, with the onset of the conflict in the Middle East, we adjusted our network and continue to serve our global customers throughout the first quarter. In the first quarter, total international average daily volume declined 6%. International domestic ADV decreased 6.6% compared to last year, led by a decline in Europe, that was partially offset by growth in Canada. Like in the U.S., we saw improvement in customer mix with SMB penetration reaching over 60%. On the export side, average daily volume in the first quarter decreased 5.5% year-over-year led by declines on U.S. destination lanes resulting from the pull forward of purchases in the first quarter of last year, spurred by changes in trade policy. U.S. imports in total were down 16.4% year-over-year led by a 22.5% ADV decline from Europe to the U.S. The China to the U.S. Lane, which is our most profitable trade lane was lower by 18.3% compared to last year. But as we have said before, with changes in trade policies, we see that trade doesn't stop, it moves somewhere else, and we continue to see volume growth in other parts of the world. Turning to revenue. In the first quarter, International generated revenue of $4.5 billion, up 3.8% from last year, driven by strong revenue per piece growth Operating profit in the International segment was $551 million, down $103 million year-over-year, primarily due to trade policy changes. International operating margin in the first quarter was 12.1%. Looking at Supply Chain Solutions. Supply Chain Solutions made strong progress during the first quarter, highlighted by the doubling of operating profit year-over-year, driven by improvements across business units. In the first quarter, revenue was $2.5 billion, lower than last year by $176 million. Logistics revenue was down year-over-year, driven by lower revenue in Mail Innovations. This was partially offset by revenue growth in Healthcare Logistics, reflecting market conditions, air and ocean forwarding revenue was down year-over-year. And UPS Digital, which includes Roadie and Happy Returns, delivered another consecutive quarter of revenue growth, with revenue up 19.9% compared to the first quarter of 2025. In the first quarter, Supply Chain Solutions generated operating profit of $206 million, an increase of $108 million year-over-year. Operating margin was 8.1%, up 450 basis points compared to last year. Lastly, looking at cash. In the first quarter, we generated $2.2 billion in cash from operations. Now let me provide an update on our Amazon glidedown, cost out and network reconfiguration efforts from the first quarter. Starting with variable cost. Total operational hours paced down with volume in the first quarter, and we're on track to reach our 2026 reduction target of 25 million hours versus last year. Looking at semi variable costs. By the end of the quarter, we reduced operational positions by nearly 25,000 compared to the first quarter of last year. In addition, the Driver Choice program that we initiated during the quarter is expected to reduce full-time driver positions by approximately 7,500 over time, putting us firmly on target to reach our reduction goal of 30,000 operational positions this year. And moving to our fixed cost bucket, we completed the closure of 23 buildings during the first quarter. We are planning to close an additional 27 buildings this year, most of which will be closed in the second quarter. We are pleased with the progress that we are making on our Amazon glidedown and network reconfiguration initiatives and are on track to achieve our targeted $3 billion in savings in 2026. Moving to our 2026 financial outlook. While the macroeconomic environment is different now compared to our expectations at the beginning of the year, we have been quick to adjust to the changing conditions and we're continuing to closely monitor the broader impacts across the global economy. As Carol stated, we are reaffirming our full year 2026 consolidated financial target. We are on track to generate revenue of approximately $89.7 billion with an operating margin of approximately 9.6% and diluted earnings per share expected to be about flat to 2025. The conflict in the Middle East in March drove an immediate spike in fuel costs. Our fuel surcharges are linked to published fuel benchmarks and adjust with fuel prices on a weekly basis. And we expect these surcharges to provide coverage as fuel prices continue to fluctuate. Now let me add color on the segment. Looking at U.S. domestic, full year 2026 revenue is still expected to be approximately flat year-over-year. We expect ADV to be down mid-single digits year-over-year due to our actions with Amazon which will be offset by a strong revenue per piece growth rate in the mid-single digits. Full year operating margin is still expected to be flat to 2025. Looking at the second quarter of this year compared to the first quarter, the USPS transition has been completed. The Amazon glidedown and network reconfiguration will wrap up by the end of June. We are leasing fewer replacement aircraft to 767 deliveries continue, and premium volume is expected to further improve mix. As a result, we expect revenue to be up low single digits and operating margin to be between 7.5% and 8.5%. Moving to the International segment and starting with the full year. We still anticipate revenue growth in the low single digits year-over-year, driven by a solid increase in revenue per piece. Operating margin in the International segment is expected to be in the mid-teens. Looking specifically at International in the second quarter, we will lap tough comparisons from changes in trade policy, benefit from normal seasonal uplift and continue to realize savings from our air network cost actions. As a result, we expect low single-digit revenue growth and an operating margin between 13% and 14%. And in Supply Chain Solutions for the full year 2026, we still expect revenue to be up high single digits, which includes revenue from our Andlauer acquisition and operating margin in SCS is expected to be in the low double digits. Looking at the second quarter, we expect momentum from the first quarter to continue, and we expect revenue in SES to be up low single digits year-over-year and operating margin between 9.5% and 10.5%. Now let's turn to our expectations for cash and the balance sheet. Capital expenditures are still expected to be about $3 billion, and we plan to make our annual pension contribution of $1.3 billion. We expect free cash flow to be approximately $5.5 billion, including onetime payments for the Driver Choice program. Lastly, we are still planning to pay out around $5.4 billion in dividends in 2026, subject to Board approval. As we near completion of our Amazon glidedown and network reconfiguration initiative, we will enter the second half of this year with a more agile and more automated network. Our focus is on premium volume and revenue quality and will grow in the best parts of the market. Taken together, these actions set us up for operating margin expansion and greater operational agility. With that, operator, please open the lines for questions. Operator: [Operator Instructions] Our first question comes from the line of Tom Wadewitz from UBS. Thomas Wadewitz: So I wanted to ask you a question about the kind of ramp from 1Q to 2Q. You were a bit -- I think in early March, you pointed to kind of 4% to 5% 1Q margin. You were at the lower end of that. I know you identified, I think, kind of $350 million total transitional costs. How do you think about that like the key pieces of that ramp and just visibility to that versus what you might have had in terms of visibility to that ramp a month ago or 2 months ago? So I don't know if that kind of a little lower 1Q margin reduces visibility or if you say, hey, that was just kind of transitional. And then how does fuel factor into the kind of 2Q versus 1Q? Is there some tailwind that you consider? Or is that something you don't factor in but could give you a little support? So really just to kind of how do we think about the key levers, 2Q versus 1Q. Brian Dykes: Sure. Thanks for the question. So yes, let me make a couple of points on the impacts on the first quarter. So first, if you think inside the quarter, right, relative to the 4% margin, we incurred incremental weather and casualty costs that was more than what we had initially expected when we were setting the guide in and where we were in March. That was about 70 basis points, which gets us kind of towards the higher end of that -- of the range that we laid out. Second, when you go from first quarter to second quarter, there's really 2 components, right? We have normal seasonal uplift, right, from first quarter to second quarter. The other part is if you think about that weather and casualty, those are behind us, right? The aircraft leases, as Carol and I have both mentioned, we continue to take deliveries. So the incremental costs associated with those is coming down. And we've now completed the ground saver outsourcing. So a lot of that transitional costs that we incurred in the first quarter now comes out. And so that helps you bridge from first quarter to second quarter. On fuel, look, we reaffirmed our guide. We are not updating for fuel at this point. Fuel didn't have a material impact in the first quarter because really the ramp in prices happened late in the quarter and as we've gone into April. Look, fuel -- we manage fuel through fuel surcharges. So even though we have a large airline, we're very different than passenger airlines and our industry operates very differently. And so our fuel surcharge indexes protect us from impact to profit, right? Now there could be revenue impact to that, but there will also be offsetting expense. What we don't know is how long the high prices could persist. And then what happens, which relative to oil prices and commodity prices around the world where we actually procure. So we feel confident in the profit number based on the protection our indexes will provide and our surcharges, but it's not appropriate for us to update until we have further clarity on how long this will last. Carol Tomé: It's just too early in terms of the conflict. Clearly, there's a benefit right now to the top line, not so much on the bottom line because we're just covering our costs. But it's too early in the conflict to predict fuel might mean for the rest of the year. So we're going to stay close to it, and we're going to manage through it as carefully as we can, but we didn't want to lift because it's just too early. Operator: Our next question is coming from Scott Group from Wolfe Research. Scott Group: So just following up there, I get we don't know where fuel is going to end up, but in a higher fuel price environment where you guys are also raising the surcharge schedules, like should we assume that there is some sort of profit benefit from the higher fuel environment? And then maybe just, Carol, let's just take a step back, like big picture, like we're going to end up in the 7% and 8% range on U.S. margin this year. Help us think about where that can go over the next couple of years? We get through the Amazon glidedown, maybe we start to see a little bit of wage inflation start to kick in again next year. But where do you think margins can start to go over the next couple of years here? Brian Dykes: Sure. So let me talk quickly about the fuel. So Scott, as I mentioned before, look, the prices have spiked very quickly. It will have a revenue impact, but we also have associated costs. So we don't see this as a windfall in the near term. And again, depending on how long it lasts, it could have a revenue impact, but there could ultimately be a demand impact. So again, as Carol said, it's just too early to speculate on what the ultimate implications of could be. We'll monitor it. And as we know more, we'll update Carol Tomé: And Scott, we brought you all through a lot over the past almost 18 months, but we did it deliberately because it frees us to focus in on the market that we want to serve and serve them better than anybody else. And that includes SMB and B2B and health care. And with those premium markets, and the productivity that Nando and his team are driving in our business, there's an opportunity for continued margin expansion. This is the year of inflection. So the back half of the year will look considerably different than the first half of the year. And as we exit this year, we have an opportunity to grow U.S. margins in a meaningful way with that between RPP and CPP. So at the end of the year, we'll give you a sense of what we think '27 will look like, but it's going to be much better than '26 based on what we're seeing in the underlying health of the business. We're winning in the right markets. Our churn is declining. And all of this leads to stickiness with the customers that we want to serve with the right revenue quality coupled, with great productivity. Our hub productivity is the best has been in 20 years, just to put a point on it. We now have automated 67.5 points our teams almost on our way to 68%. And we know that cost per piece on an automated building is 28% lower than the cost and piece of nonautomated buildings. So there's some really good underlying trends here in the domestic business. And then outside the United States, we can't ignore that because our business performed better than we thought in the first quarter due to the great work of Kate and her team who also are leaning into the premium segments of the market. Brian called out that we grew SMB penetration in the international business, we did. It's now 62%. We also grew our B2B penetration outside the United States, now about 71%. So Kate and team are going to continue to lean into the premium part of our international small package business and we won't forget health care ever, because health care is such an important part of our growth engine it is in every segment of our business with double-digit operating margins, and we're going to continue to lean into that space in a meaningful way. And with just one more comment on that, just put a pin on it with just the changes that we're seeing in pharmaceutical companies with GLP-1 drugs and how they're going direct to consumer rather than through distributors. That's an opportunity for us and proud to say that we lead the market in that area. Operator: Our next question comes from Chris Wetherbee from Wells Fargo. Christian Wetherbee: Maybe just a quick clarification question and maybe bigger picture, I guess, for the driver buyout in the second quarter, can you just give a sense of what the impact will be if there will be a benefit in 2Q from that? And then maybe zooming out a little bit. We're about a quarter away or maybe a couple of months away from the end of the Amazon glidedown, there still is a significant amount of revenue associated with that customer. And I think there's been some changes, and they're always doing various things in the market. But I guess the question is, Carol, is this sort of where you want the portfolio? Do you think there is incremental work that needs to be done around that? How defensible it is? Just sort of give us a sense of how you think about that customer exposure. Carol Tomé: Yes. On the driver buyout, the drivers are leaving in April. So there will absolutely be a benefit in the second quarter. I don't know, Brian, if you want to dimensionalize that. Brian Dykes: Well, and that's part of the step-up that we've got, right? So we had a roughly $150 million in transitional costs in the first quarter that starts to go away as we go to the second quarter, and it helps us with the margin improvement that we see in the second quarter and then going into the second half. Carol Tomé: And as it relates to the Amazon question, at the end of the first quarter, Amazon made up 8.8% of our total revenue. That's down from, it was north of 13%, not very long ago. So really pleased with how we've partnered with Amazon on this glidedown. We hold that company in very high regard. And for the volume that we have remaining with Amazon, I think we're going to get to where we want to be. We are -- we have a great return network. And as you know, returns are the nemesis of anybody who's in the e-commerce. In fact, 19% of all e-commerce sales are returned. And so with our great reverse net work. And the capabilities that we have for Box's labelless returns, that relationship with Amazon is just going to continue to grow. And it's not just returns, that certainly is a key part of it. So give a shout out to the team at Amazon for working with us. We're pleased where we are, and we want to continue our relationship in the nutritive way that is turning out to be. Operator: Your next question is coming from Jonathan Chappell from Evercore ISI. Jonathan Chappell: Brian, I want to take Tom's question and flip it to international. As Carol noted, you did much better there. You're looking for flat revenue, you did up almost 4%. Your margin was over 12%, the range was 10% to 11%, yet the 2Q guide is exactly the same. Was there something temporary in 1Q that enabled you to beat by so much relative to what you were expecting in the first week of March? And why wouldn't that upside across both margin and revenue be extrapolated going forward? Brian Dykes: And yes, we were very pleased with the performance in international. I think when you -- there's a couple of things that drove it in the first quarter. As Carol mentioned, leaning into premium segments in Europe are helping us to drive revenue quality as well as, I would say that we mentioned the decline in the China to U.S. trade lane while it's down, it's not as bad as what it has been, right? And so I would say things were not as bad as what we expected or what they could have been. And so we are starting to see some recovery in certain trade lanes. As we roll into the second quarter, remember, we're still lapping the -- May will be the lap of the liberation Day and the China de minimis elimination which will provide some improvement in step up. And then we'll have another lap in September of the full de minimis elimination. So we do expect the improvement to persist. The other thing that's going on in international is we are seeing some incremental costs associated with the network reconfiguration around the Middle East conflict. It has impacted flight and block hours and some of the lanes. While it's not a large demand area or delivery area, it has impacted some of the network flows that we're managing through. Carol Tomé: Thanks for making that point. I think that's an important point. If you look at our exposure in the Middle East, it's pretty small. Job #1 was to keep our people safe. We have about 2,000 people there, and they're safe, I'm happy to say. In the first quarter, the export and import revenue was about $130 million. So it's not a lot of exposure, but we can't fly over the aerospace because we can't fly over the aerospace that is putting cost into the network. We want to continue to serve our customers. The other thing we're taking a cautious outlook on is just the elimination of de minimis in Europe. That happens this summer. We don't know if it will be disruptive or not, but it's a change and we saw the disruption that happened last year with the elimination of the minutes here in the United States. So we're just watching that. But I couldn't be more happy about actually the work that our international team is doing, to drive really great revenue quality and growth. Operator: Your next question is coming from David Vernon from Bernstein. David Vernon: So I'd like to kind of maybe understand the pace of cost takeout. Has there been any shift in timing caused by discussions you have the unions around the driver buyout? And then Brian, when you're thinking about the overall message you're trying to give us with guidance here, it does seem like first quarter domestic, if you give you credit for the 350 and international is performing really, really well, but we're not changing the full year. Like is this just, well, while we put the numbers out in the first quarter, and we're going to see how the year plays out, and we'll update it later? Or is something getting worse in the business that we can't see? Because I think the market's kind of hearing a beat and to raise as a beat and maybe core worse for the last half of the year. I'm just wondering if you could help me kind of understand what the messaging is here. Carol Tomé: Well, maybe I'll start and then Brian, you can come in. It is early in the year to raise. The underlying business is better than we thought. If I look at the results in April, we're going to exceed the plan that we put in place. If I look at the results outside the United States, have moved from red and certain trade lanes to orange. So everything is moving in the right direction. But David, it's early in the year. And there is a war in the Middle East. High gasoline prices could potentially impact demand towards the end of the year. We don't know. So instead, we want to stay with our plans, but I couldn't be more pleased with how our company is performing. There's nothing on the underlying trend that should be concerning here. It's just too early in the year to raise. Brian Dykes: Yes. And David, I would just add to that. On the guide, Carol is absolutely right. We feel very good about the health of the underlying business. If you remember, we said SMB grew in the first quarter. We expect that to continue. We'll lap some of the actions that we took on the enterprise customers as we go through the second quarter and see growth back to Amazon in volume in the back half. We expect revenue at Amazon to grow every quarter this year. So health of the underlying business is strong. Rev per piece is strong, base pricing is strong. So we feel really good about that. And Carol hit on international. On the pace of cost takeout, nothing's changed, right? I think if you look at the actions that we took in the first quarter, they actually set us up to do exactly what we said we were going to do, right? We transitioned ground favor. We executed on the DCP. As Carol said, nearly 80% of those positions will be eliminated by the end of this month. We are replacing the MD11 capacity as we take delivery of the 767. So we're moving in the right direction. We're getting things behind us that are going to help us drive the margin inflection as we go into the second half. Carol Tomé: Brian, isn't the shape of the cost out much like the shape of the cost out last year. Brian Dykes: It is very much so, right? And so you'll continue to see that improvement as we go through the course of the year. Carol Tomé: It accelerates as we had to do the back. Operator: Your next question is coming from Stephanie Moore from Jefferies. Stephanie Benjamin Moore: Great. I wanted to maybe ask a clarification on the driver bio program. It sounds like it ended up coming in or the involvement is either in line or slightly better than what you expected, but admittedly, there are a lot of articles out there in the news that are kind of discussing maybe a little bit less willingness to move forward with that program on the driver side. So it would be helpful if you can maybe separate fact from fiction, what you're seeing, help line expectations? Any clarification there would be helpful. Carol Tomé: Yes. Happy to. So when we laid out our internal plans for the driver buyout, we wanted to land on 7,500 physicians. Our program was oversubscribed. So perhaps that's the basis for some of the articles. So we had more drivers applying than we could accept. We accepted the 7500, we couldn't be more happy. Brian Dykes: And Stephanie, I would say that aligns with the pace of the cost takeout that we had laid out at the beginning of the year. we feel very comfortable that we're going to get to the $3 billion as we laid out and the actions that I articulated earlier are how we're going to get there. Carol Tomé: And you might say, well, why didn't you take more in? Well, we have to run the business. This is what we needed to run our business. Operator: Your next question is coming from Jordan Alliger from Goldman Sachs. Jordan Alliger: I wanted to come back to international. Obviously, with all the trade lane ships and everything that's gone on, margins are below what had historically been the long-term trends. So I'm just sort of wondering, over time, can we push back into a high teens margin level what will it take to get that margin uplift again coming from international? Carol Tomé: Well, if you look at the international business, there's been a lot of movement in the trade lines. And as we've talked to you, our China U.S. trade lane is our most profitable trade lane. We saw the margin in our APAC region down 500 basis points year-on-year. This is a moment in time because of the impact of the tariffs. This is going to normalize over time. And in fact, with the elimination of the EBA tariff and going back now to the 122 tariffs of 10%, we're actually seeing trade lanes move from red to orange yellow in the subpieces grain. So things are starting to normalize. So that means the margin will get back up. Operator: Your next question comes from Bruce Chan from Stifel. J. Bruce Chan: Maybe just wanted to zoom out here and get some high-level thoughts on demand and maybe what's assumed in your outlook here. We've heard from a few companies this quarter that maybe got some early indications of industrial demand recovery. Again, maybe you can just give us some high-level macro thoughts and talk about what you're seeing in terms of maybe any pockets of emerging strength by segment or geography or end market or whatever. Brian Dykes: Sure. So as I mentioned in my earlier remarks, look, we see the puts and takes on the macros, right? GDP ticked down a little bit. Industrial production ticked up a little bit. But I think you're right, we do see pockets of strength in the places where really leading in, right? So we mentioned automotive, high tech, health care, industrial, where we are seeing our ability to win more and take share. We don't expect -- we haven't seen a material shift in what we would expect for the addressable market growth in small package in the U.S. to low single digits, but we are winning where it matters to us. As Carol mentioned, health care, in particular, we grew across all segments of the business, and we continue to see strong uptake in there, which is higher than the average market growth rate. On the international side, Carol hit on it, right? We're I would say that while we're still down on certain trade lanes, they are moving in the right direction, right? And in particular, we are seeing international to international origin destinations growing, right? So trade is moving in places that don't touch the U.S., and it's improving in places that do touch the U.S. So overall, I would say not a robust improvement but incremental progress. Carol Tomé: If you look at China, Rest of the world, it's up 14% year-on-year. It's a small portion of our business, but that's an encouraging sign to see that growth rate. Operator: Your next question is coming from Ari Rosa from Citigroup. Ariel Rosa: Carol, you mentioned the CPP versus RPP spread -- we've seen RPP grow pretty nicely, but we've also seen CPP obviously take a pretty big step up. I'm wondering how you think about that normalizing? And when we get to a more normal level, what that can look like. Specifically, in terms of what's driving up CPP, how much of that are fixed costs that start to go away? And then on how much is the pricing environment helping you versus the mix benefit that you might be realizing from the shift towards higher-yielding packages? Carol Tomé: Well, I'll let Brian take that. Brian Dykes: Sure and I'll start. And so thanks. So look, I think getting back to this, call it, 50 to 100 basis point spread is healthy, right, for our business. And we'll be back there by the end of this year, right, is the way the year kind of sits out. When you think about what's going to drive that, one, we're taking actions to bring the network capacity in the U.S. back in line with the volume level that's DCP, that's Amazon building consolidation. That's all the things that we've outlined. And those, for the most part, now are done or are in progress. So we feel really comfortable with our ability to get the capacity lined up in the back half. On the revenue side, look, we talked about this $250 to $350 kind of range of base pricing improvement. And we've been in that range, right? And as we've been very clear about what's mix versus fuel versus base pricing. And I think we'll continue to get that kind of base pricing increase. You do that, right, through making sure that you're selling into the segments of the market that where we can deliver value to our customers, right? SMB, B2B, health care, and that's where we're really leaning in and that's where we're winning. So I think we do have the ability to get there in the near term and then manage that and grow in a more a more accretive manner more efficient network as we go into the fourth quarter of this year in '27. Carol Tomé: And I know Brian called this out in his prepared remarks, but in the U.S., the RPP growth was driven by base rate improvement, 340 basis points. Mix improvement, 200 basis points and then about 110 basis points from fuel. And that mix improvement is coming through this leaning into the premium segment, leaning into SMBs and leaning away from, well, volume that was related to China e-commerce retailers, mostly ground favor. So that's been moved out of the network. We've offered that volume to the market so that we can focus on the premium side. Operator: Your next question is coming from Ken Hoexter from Bank of America. Ken Hoexter: Carol, I guess your competitor noted it posted the strongest quarter of profitable U.S. share gain in 20 years. You noted your churn is declining. You're seeing favorable mix improvements here, especially on the target audience B2B. It sounded like your -- or Brian's answer to Bruce earlier that there's not that underlying strength that you're kind of really seeing kind of runaway here. I just want to understand, given what we're seeing in truck market on some of the rail volumes, that underlying -- is there just a delay typically in what you see economically? Are you seeing some of that pop up? I just want to understand maybe that mix or is it just what you're chasing is just different than the market now? Carol Tomé: Well, let's talk about market share for a moment. If we ignore the volume that we have made available to the market, and that includes Amazon and volume from e-commerce, Chinese retailers. If we ignore that volume, we actually gained 1.2% market share growth. So we have made volume available to the market that has gone to other carriers, including our largest competitor. It has. Because we deliberately moved -- made that volume available. So if I look at the underlying business, I'm really pleased with the share that we're getting. In terms of trends... Brian Dykes: Yes. And Ken, I think you're right. There is a slight delay in how things move through the supply chain, through the ports, through the TLs, the LTLs and the rails into us. We -- and like I said, I would say we see incremental momentum in our B2B business in the industrial business, part of that through capabilities, right, that we've been investing in. But part of it is through momentum. I would just say it has not been runway growth that would cause us to fundamentally change our market growth assumption for the year yet. Operator: Your next question is coming from Richa Harden from Deutsche Bank. Richa Talwar: It's Richa here. So yes, trying to get a longer -- a sense of longer-term cost per package potential. Obviously, CPP pressure has been high recently influenced by your Amazon glidedown. But as you progress through this year and into next year, how could your CPP trajectory look in light of maybe more cost efficiency from automation things to offset the step-up that we're going to see in your contract, I believe, next year, if that's right? Trying to just add more to Carol, your point that 2027 should look a lot better than 2026. I'm just trying to understand like puts and takes on the CPP line. And then in the spirit of longer-term potential, I just want to clarify one thing. Carol, I think you said you think margins will be back to high teens in international? Are you assuming U.S.-China business that wasn't structurally impaired from de minimis and it should return to where it was prior in terms of overall volume? Or how do you get back to high teens. I'm just trying to understand. Carol Tomé: Well, clearly, as the trade lanes normalize and we see more volume flowing through the China U.S. trade lane, that will help our margin. But it's not just that. We are investing in the premium opportunities where we're underpenetrated in Europe. Moving away from e-commerce, which is low margin into premium opportunities, and that's going to significantly improve our domestic margins in Europe. So it's a combination of actions that we are driving to drive back to mid to high teens in our international business. And then on the CPP potential. Brian, I'll let you take that. Brian Dykes: Sure. And I think even if you look into the back half of this year, our CPP gets down into the low single digits, right? And that's -- as Carol said, we have -- while we've been going through the network reconfiguration, we have been eliminating some of the less productive older buildings that require more maintenance. We have been heavily investing in automation that drives a much more efficient and agile network that should allow us to keep CCP in the low single digits. And then have that 50 to 100 basis point spread because we've got a more healthy customer mix and grow from there. That's a healthy business that can drive growth and profit improvement for us. Carol Tomé: And with our new outsourced relationship with the USPS, we'll be able to drive density upon the delivery, and that's a real way to lower the cost per piece is to improve the density per delivery. And as you know, we've just kind of completed the ramp up. So now we're going to start to see some benefits from that move. Richa Talwar: Okay. Just in the offset from the contract with the changes and how is that going to inflow nth back half of '27? Carol Tomé: Well, I'll tell you one thing. We have a lot fewer employers in our company than we had when we started this work. So that helps on the CPP management next year. Operator: Your next question is coming from Brian Osenbeck from JPMorgan. Brian Ossenbeck: Maybe just 2 sort of quick follow-ups. Just on mix shift, I understand the increasing percentage of mix for SMB and B2B, but it looks like B2B volume in absolute was down 5%. I don't know if you can provide some color as to why that occurred and what might be moving forward here? And then, Carol, just on the transition for the USPS, it sounds like it's done, maybe not everything went back to them in terms of final mile delivery. Can you give a little bit more color on that and also just how you expect to manage their own fuel surcharge, which was kind of a big headline. They never really had one in the past. So I don't know if that's something you can pass through as well with that program. Carol Tomé: So in the first quarter, we tendered about 977,000 ADV to the USPS, which was about 44% of our ground paper product. It was a wrap because we had to get -- work through dual labeling and some work that we had to do to transition. So it was a ramp up, really pleased with how we exited. And as we look to the second quarter, we'll be tendering around $1.5 million, something like that. So that's moving the way we thought it would. In terms of interesting surcharge that they put in, which appears to be a temporary surcharge, not entirely sure. It's not appropriate for us to talk about how we manage pricing by customer, but I will say the Pulse system tends to set the floor for the economy product, which is actually pretty good for the whole industry if they're raising prices. Brian Dykes: That's right. And Brian, on your question around B2B, the B2B volume decline was really driven by some of the intentional actions that we took last year. And part of it is Amazon, part of the Amazon volume that we're exiting through AFN is delivered to commercial addresses. There's other stuff that was returns for Chinese e-commerce and some other things that we're moving through. We'll cycle through that as we go through the second quarter. And again, we see strength in the underlying B2B business where we're winning on capability. Carol Tomé: And that may sound a little curious that a retailer would be a B2B, but it's the way that we think about our customer segmentation. If it's a return to store or return to a physical building, we're going to do that as a business transaction, even though the pay, if you will, the customer who's paying us might be a retailer. PJ Guido: Matthew, we have time for one more question. Operator: Our final question comes from the line of Ravi Shanker from Morgan Stanley. Ravi Shanker: Carol, the reports that you and your peer have applied for tariff refunds through the portal. Can you just tell us your understanding of how that will work kind of when that might come through? And also, what happens next? Do you get to keep the tariffs? Or do you have to pass them through to the end customers? Carol Tomé: Well, thanks for the question, Ravi. This is a complicated matter for sure. I'm going to zoom out just to talk about the EPA tariffs in total. So last year, since the tariffs have been initiated, the Customs Border Protection processed $53 million IPA-related entries and collected $166 billion in tariffs. For us, we processed $16 million EPA-related entries and remitted over $5 billion to the US. Treasury. Ravi, we are just a pass-through. We collect and we remit to the government. So now that the tariffs have been deemed refundable, we are working with the Customs Border Protection to apply for those refunds. Our approach is to work with the U.S. government and not to sue the U.S. government. We have applied for the refunds pursuant to the guidelines from the Customs Border Protection. Interestingly, they are not going first in, first out, but actually last in. So it's for the tariffs that have happened this year. For us, it means applying for tariffs for 2.5 million entries, a little under $500 million. We are making those applications started on April 20. We are making those applications today. We think it's going to take some time before the treasury remits money to us. But as soon as we get that money, we're going to remit it right back to our customer. Brian Dykes: Yes, that's a really important point. And I think, as Carol mentioned, we are purely a pass-through, so we don't expect that this will have an impact on our financial statements. Operator: Thank you. I will now turn the floor over to your host, Mr. PJ Guido. PJ Guido: Thank you, Matthew. This concludes our call. Thank you for joining, and have a good day.
Operator: Good morning, and welcome to the General Motors Company First Quarter 2026 Earnings Conference Call. [Operator Instructions] As a reminder, this call is being recorded on Tuesday, April 28, 2026. I would now turn the call over to Ashish Kohli, GM's Vice President of Investor Relations. Ashish Kohli: Thanks, Denise, and good morning, everyone. We appreciate you joining us as we review GM's financial results for the first quarter of 2026. Our conference call materials were issued this morning and are available on GM's Investor Relations website. We are also broadcasting this call via webcast. Joining us today are Mary Barra, GM's Chair and CEO; along with Paul Jacobson, GM's Executive Vice President and CFO. Susan Sheffield, President and CEO of GM Financial will also be joining us for the Q&A portion. On today's call, management will make forward-looking statements about our expectations. These statements are subject to risks and uncertainties that could cause our actual results to differ materially. These risks and uncertainties include the factors identified in our filings with the SEC. Please review the safe harbor statement on the first page of our presentation as the content of our call will be governed by this language. And with that, I'm delighted to turn the call over to Mary. Mary Barra: Thanks, Ashish, and good morning, everyone. Once again, thanks to our strategic product portfolio and great execution by the GM team, including our dealers and suppliers we delivered an outstanding quarter. I couldn't be more proud of the team's efforts and our results. We are continuing to execute our plan to return to 8% to 10% EBIT-adjusted margins in North America for the full year. In fact, in the first quarter, we achieved an EBIT adjusted margin of 10.1%, including 1.5 points of benefit from the accounting adjustment resulting from the recent Supreme Court tariff decision. This nets to an 8.6% margin. Complementing our performance in GM North America was our sixth consecutive profitable quarter in China and higher year-over-year results in GMI excluding China. We're also building tremendous momentum in digital services. They are playing an increasingly important role in our success, and they will drive even stronger results in the future. If you look deeper at our results, especially in North America, you can see how the depth and breadth of our vehicle portfolio is driving the business. Following a very strong close to the fourth quarter, we began this year with lean inventory in the U.S., and we had planned downtime in North America during the quarter to install tooling for our next-generation full-size pickups. Even with tight inventory, we continue to lead the industry in the U.S. and Canada, and we're #2 in Mexico. We also continue to lead in full-size pickup sales and share with 42% of the U.S. market. In addition, we were #1 in fleet, including commercial deliveries, and we were #2 in EVs. As we exited the quarter, our EV market share in the U.S. was 13% up from about 10% in December 2025, which underscores the appeal of our portfolio as the segment stabilizes. I would also like to highlight the growth of our crossover business, which is an important differentiator for GM. Since we began refreshing our lineup in 2023, crossovers have grown from just over 40% of our sales to more than 46%. We've also gained 2 full points of share in vehicles like the Chevrolet Trax and Equinox, the [indiscernible] and the GMC Terrain and the Chevrolet Traverse and GMC Acadia. have become significant contributors to our profitability. Additionally, we delivered these results with incentives that continue to be [indiscernible] the industry for both ICE and EV. As we look ahead, the SAAR is holding steady, showroom traffic is stable, and we continue to operate with lean inventory. We began the second quarter with about 47 days of supply on dealer lots. All of these winning vehicles are laying the groundwork for higher company level profitability around the world through durable reoccurring digital revenue streams. We are on pace to add more than 1 million OnStar subscribers in 2026 with about 30% of our existing customers choosing a premium plan. Outside of the U.S. and Canada, we have more than 20 revenue-generating markets and regions, including Mexico, Brazil, China, South Korea and the Middle East. Within the OnStar platform, Super Cruise is also scaling quickly. Our customers have now driven 1 billion hands-free miles and our subscription performance is on pace to exceed 850,000 subscribers by the end of the year with strong renewal trends in the 30% to 40% range. You will find that our attach rates, subscription renewals and revenue generation compare favorably to others in the industry. The continued growth of this ecosystem, including the customer base, miles traveled and the insights we're gaining to train our AI models will help pave the way for our eyes off, hands off technology launching in 2028 on the Cadillac Escalade IQ. The escalate IQ is just the start. We are doing something unique in the autonomous space, which is developing a system for personal vehicles that we can deploy on both ICE vehicles and EVs and scale across multiple brands and price points. We're stress testing it in the digital environment capable of simulating roughly 100 years of human driving every single day. We recently took the next step and began supervised on-road testing in California and Michigan. The way we're building this technology is a reflection of how seriously we're embracing AI across the enterprise. Today, nearly 90% of the code written by our autonomy team is generated by AI. Next, let me comment on our updated EBIT adjusted guidance, which we are raising by $500 million to a range of $13.5 billion to $15.5 billion to reflect the flow-through of the tariff adjustment. While our operating performance remained strong as reflected in our excellent first quarter results, the war in Iran has raised our cost and its duration remains uncertain. We are working to offset these cost pressures by reducing spending in other areas and by continuing to find efficiencies across the business, but we believe it's prudent to wait and see how events unfold before we make any further changes to guidance. As we move forward, I'm confident that our portfolio, production, inventory and incentive discipline, balance sheet strength and free cash flow generation will continue to differentiate GM. With that, I'll ask Paul to take you deeper into the quarter, and then we'll move to Q&A. Paul Jacobson: Thank you, Mary, and we appreciate everyone joining us this morning. The GM team delivered another outstanding quarter. Thanks to their hard work and strong execution. Q1 EBIT adjusted was $4.3 billion, surpassing expectations even after excluding the $0.5 billion tariff adjustment. Once again, we demonstrated discipline in our approach to both pricing and inventory. In the first quarter, our U.S. incentive spend per vehicle as a percentage of MSRP remained more than 2 points below the industry average. U.S. dealer inventory ended the quarter at 516,000 units, down 6% year-over-year overall and down 9% for full-size pickups, even against the difficult comparison created by outsized pre-tariff March deliveries last year. While we further strengthened our leadership in U.S. full-size pickups this quarter, leaner inventory constrained retail sales. Looking ahead, we are working to increase inventory levels of key products and believe that we can take this higher over the next several quarters while being mindful of the broader demand environment. Let me now provide more details on our strong first quarter results. For the total company, revenue was down year-over-year by approximately $400 million in the first quarter, as expected, driven primarily by lower EV wholesale volumes. ICE wholesales were flat year-over-year, with higher GMI volumes being offset by lower North American volumes, which were constrained by the end of production of certain Cadillac crossovers, lower imported volumes from Korea and full-size pickup downtime. As I mentioned earlier, our Q1 EBIT adjusted came in better than our expectations, driven by solid execution across all of the businesses and good expense management. Year-over-year, Q1 EBIT adjusted was up approximately $750 million, driven by the [ IIFA ] tariff adjustment, lower EV losses and FX benefit, lower warranty expense and emissions-related regulatory savings. These tailwinds were partially offset by a full quarter of tariffs. Let's expand on a couple of these items. In the first quarter, we incurred $200 million of incremental gross tariff costs, including the tariff adjustment compared to minimal tariff costs last year. EV losses were down several hundred million dollars year-over-year in the first quarter, driven by lower volumes, manufacturing efficiencies and lower fixed costs. On warranty, we continue to expect a year-over-year tailwind of $1 billion with first quarter results improving roughly $200 million versus the prior year. Q1 results included $400 million of lower warranty liability reserve adjustments, partially offset by higher warranty rate accruals on new vehicle sales. We continue to pursue a comprehensive multipronged approach to reduce our warranty expenses from product development and current production all the way to repairs at our dealers. Let's turn next to an update on our EV charges. Last year, as you know, we reassessed our EV capacity and manufacturing footprint to better align with softer demand and elimination of U.S. tax incentives. As previously indicated, we are transitioning Orion assembly from EV to ICE production and resolving associated supplier contracts. With the exception of the BrightDrop EV van, we have not recorded impairments to our current EV portfolio. Our focus remains on improving EV profitability and scaling our business as market adoption grows, albeit at a slower expected pace than we had previously seen. In the second half of 2025, GM recorded a total of $7.6 billion in EV related charges. This breaks down into $4.6 billion of estimated cash charges and $3 billion in noncash impairments. In the first quarter, we took an additional $1.1 billion in EV charges, driven mainly by contract cancellations and supplier commercial claims. We expect about $1 billion of this will have a future cash impact. We're moving quickly to finalize claims. To date, we've already recorded around 90% of the expected total supplier commercial claim costs, and we anticipate reaching agreements in principle on most of the remainder during the second quarter. Separately, we continue to work expeditiously through rightsizing our battery supply chain with our joint venture partners. Of the total, $5.6 billion in EV-related cash charges recorded since the second half of 2025, $2.6 billion has been paid as of March 31. In April, we've already paid an additional $600 million, and we continue to expect most of the remaining cash flows to occur in 2026. We remain steadfast in our desire to get these claims resolved quickly and fairly for our business partners and our shareholders. Now let's turn to a regional perspective. In North America, Q1 EBIT adjusted was $3.7 billion with a 10.1% margin, including an approximately 1.5 point benefit from the tariff adjustment, which nets to 8.6%. We're off to a terrific start to deliver a North American margin in the 8% to 10% range for the full year. Excluding the plant sale gain, China equity income was $100 million. This shows ongoing resiliency from our prior restructuring as well as disciplined production and inventory management in the face of softer macroeconomic conditions. GM International, excluding China equity income delivered approximately $40 million in EBIT adjusted despite the Iran conflict disruptions in the latter part of the quarter. We have been and will continue to divert some full-size SUVs and pickups from the Middle East back to North America, helping to alleviate low domestic inventory levels. GM Financial continued its stable performance, delivering EBT adjusted of $700 million for the quarter. Now let's look ahead to 2026 guidance. While the U.S. economy has been resilient, we haven't seen any material changes to demand or mix thus far. There remains considerable uncertainty, and therefore, we want to be prudent as we think about the future. Based on what we know today and assuming the SAAR remains in the low 16 million unit range, we are raising our overall EBIT adjusted guidance to $13.5 billion to $15.5 billion up from $13 billion to $15 billion. Likewise, we are raising our EPS diluted adjusted guidance to $11.50 to $13.50 per share, up from $11 to $13. While our execution and discipline helped drive first quarter outperformance, we now expect incremental commodity and freight costs versus our original guidance. At the same time, our FX outlook has improved from a small headwind to neutral for the full year. As a result of these changes, we are increasing our full year guidance for year-over-year commodity inflation, including logistics and higher DRAM costs to $1.5 billion to $2 billion. The incremental $500 million is expected to be more or less equally weighted across the remaining 3 quarters. In light of that, we're continuing to take proactive steps to ensure that we are efficiently allocating our resources and are ready to quickly adjust as needed. Meanwhile, our gross tariff costs are now expected to be $2.5 billion to $3.5 billion for the year, down from our original guidance of $3 billion to $4 billion because of the tariff adjustment we took in Q1. We expect 2025 self-help offsets to continue in 2026 and are pursuing additional opportunities to further mitigate these costs. Relative to our international regions, we expect China to remain profitable and to deliver results consistent with 2025. However, we anticipate some softness in our international operations outside of China due to the impact of the conflict and around on Middle East wholesales in particular. There is no change to our other 2026 key guidance assumptions. On price, we continue to expect to be flat, up 0.5%, benefiting from model year 2026 price increases. ICE volumes are expected to be flat to modestly up though production is constrained due to the major refresh on full-size pickups as well as the end of production of the Cadillac XT6. For EVs, we expect volumes to be lower as the market shows early signs of stabilizing around 6% of U.S. industry sales. We continue to expect a benefit of $1 billion to $1.5 billion for the calendar year as we rightsize our EV capacity and run at substantially lower EV wholesale volumes. The production pause at Ultium Cells means lower benefits from production tax credits flowing through material costs, but this is largely offset by positive inventory adjustments from lower cell inventory levels. On regulatory costs, we continue to expect $500 million to $750 million tailwind year-over-year. The endangerment finding repeal in February was already assumed in our plan. GM Financial continues to expect EBT adjusted in the $2.5 billion to $3 billion range, including accelerated depreciation on its EV lease portfolio. As part of our disciplined risk management, GM Financial regularly evaluates the estimated residual values and proactively adjust depreciation accordingly. We are maintaining our adjusted auto free cash flow guide of $9 billion to $11 billion with a heavier weighting to the second half. Note that this guidance excludes the EPA tariff refund given uncertainty around payment timing. Our capital allocation policy remains unchanged. We are committed to investing in the business, maintaining a robust balance sheet and returning the remainder to shareholders. We believe that repurchasing GM stock at the current valuation remains one of the most effective ways to deploy capital and create long-term value for our shareholders. In Q1, in addition to distributing $164 million in dividends, we made $800 million in open market stock repurchases, retiring approximately 11 million additional shares at an average price of $75.02 per share. We ended Q1 with $19 billion of cash and $5.5 billion remaining on our share repurchase authorization. Before I open the call for Q&A, I want to highlight our OnStar digital service business. This includes Super Cruise, but also a broader suite of connected services that we highlighted earlier in the quarter. It's an underappreciated asset that is growing and margin accretive. In Q1, we saw recognized revenue of over $750 million, up over 20% year-over-year. For the calendar year, we expect $3.1 billion of recognized revenue, up 15% year-over-year. We are on track to reach 13 million subscribers by the end of 2026, up by $1 million year-over-year with a monthly average revenue per subscriber of around $20. Those subscribers are driving ongoing deferred revenue growth as well. In Q1, the deferred revenue balance ended at $5.8 billion, up $2 billion or over 50% year-over-year. For the calendar year, we expect deferred revenue to approach $7.5 billion, up more than 35% year-over-year. In conclusion, I have tremendous confidence in the GM team's ability to successfully navigate the evolving geopolitical landscape. Our broad ICE and EV portfolios remain key competitive advantages versus our peers and our disciplined approach to inventory and incentives keep us agile. Just like we've done with other macro headwinds, we are proactively planning for a range of potential outcomes. We are working to identify additional profit improvement opportunities and have begun taking initial no-regret steps to moderate spending. As events continue to unfold, we will remain flexible and execute the right playbook to optimize profitability, maximize free cash flow and continue to deliver strong returns for our shareholders. Thank you for your continued support. And with that, we now begin our Q&A portion of the call. Operator: [Operator Instructions] Our first question comes from Itay Michaeli with TD Cowen. Itay Michaeli: Maybe just to start, Paul, just a clarification on the guidance. Can you talk about the offsets from a cost perspective or otherwise to the higher commodity inflation that's leveling to kind of raise the guidance outside of the AEPA, of course. Paul Jacobson: Thanks for kicking us off today. So I think when you look at the inflation, the pressures that we're seeing, the offset come in a couple of different forms. Number one, we've put a little bit in the bank in Q1 from our outperformance from what we've seen. Some of that was timing, but there was some good core movement on many of the staples that we've talked about, whether it's warranty or EV profitability, regulatory costs, et cetera. But then there is also the playbook that we referenced in our comments, which similar to what we've done, whether it was tariffs or chip shortage or COVID, et cetera, that's worked really well for us. So we're looking at doing that. What we don't want to do, we don't want to rush and do a lot of things that are going to jeopardize or otherwise put at risk longer-term strategic initiatives by overreacting to what's going around us. So we have sort of degrees of freedom in terms of what we're going to do, starting with relative low hanging fruit, maybe deferring some hiring or things like that. But overall, I think we're going to be measured about it. So while we have this uncertainty, I think holding our numbers consistent net of [ AEPA ], I think is the prudent thing to do with all this uncertainty. And if things abate, then we could potentially see upside in the future. Itay Michaeli: That's very helpful. And then a bigger picture question, quite to say the progress on software and services. And how level -- how should we think about the ARPU opportunity for the company on the upcoming SDV platform in 2028? As the sort of opportunity continues to grow from here? Paul Jacobson: Well, I think, Itay, you look at the momentum we have, and I appreciate you pointing it out. We've started to lean more into disclosing a lot of what's going on here. And I think what we're really focused on right now is the attachment rates and delivering value to the customer. As we roll out SDV 2.0, the number of opportunities out there start to magnify pretty significantly in terms of what the digital offerings that we can put out there. You'll hear more information about that over the coming months. as we lean into when SDV 2.0 comes. But clearly, when you look at -- we might have a lower average revenue per unit than, say, Tesla does, but we already have significantly higher volumes deferred revenue, more realized revenue. And that's where the real scale benefit comes across the portfolio. So we think that this is a growing and soon to be really influential piece of the business going forward. Operator: Our next question comes from Joe Spak with UBS. Joseph Spak: Paul, I know you're on TV this morning, and I think you mentioned some industry discounting. I was just wondering if you could expand on that a little bit because it doesn't really sound like you changed your own sort of volume or pricing assumption. So is what you're seeing sort of in line with what you expected, call it, 90 days ago? And then just given some of these cost pressures, if there -- if competitors do start to maybe try to price for some of these cost pressures, does that -- do you feel like gives you a little bit of leeway to do the same to cover some of those higher costs you mentioned? Paul Jacobson: Yes. Thanks, Joe. I would say it's largely in line with what our expectations have been. There have been some really unique things that I think have played out this year among the competitive set that we haven't seen historically. But we continue to, I think, be very disciplined in our approach. I think a lot of the share data that people saw during the quarter was probably more a result of some of the challenges we had with inventory on lots. We came into the quarter light on our targeted inventory levels primarily because we've had such a really strong December, for example. And then with the storm and some other challenges that we had, we weren't really able to catch up. Wholesales call up towards the end of the quarter, but that really didn't show up in showroom we're optimistic that as we get more product out to the dealers in Q2 that we can help to reverse some of the share losses that we saw without getting into heavy discounting across the board. So I think nothing has changed in our playbook. We're going to continue to be tactical and we're going to continue to be disciplined. Joseph Spak: Makes sense. And maybe just one on the cost side then, obviously, some good management here in the quarter. And I think you sort of mentioned maybe some cost timing or phasing, I guess the one I'm asked -- I'm curious about is, I think you mentioned, call it $1 billion to $1.5 billion in onshoring and software costs. Like how is that tracking? And is that something that really started to come in this quarter? Or is that sort of more weighted to the remainder of the year? And then one clarification on [ AIBA ]. This is just the receivable for your overpayment, right? Like you're not assuming that you're not paying this in -- or I guess the 122 replacements, like those stay in place. It's not that there's like a benefit assuming your guidance that you do not paying that in the back half, correct? Paul Jacobson: Yes. So let me cover the tariff question first. So all we've done here is taken the [ IEFA ] direct tariff that we paid last year. that was subject to the Supreme Court decision and credited that back as a receivable. And as we said, we haven't changed our free cash flow guidance because we don't know what the -- when the refunds are going to be received, how that window might work. going forward. But that's all we've assumed. Now keep in mind, most of our tariff burden comes from 232. So EPA versus our size is relatively small. But because of that entry, that's why we took the guidance down. We're not projecting any other change. We're not projecting any other changes to our tariff bill. When I said guidance down, I went to tariff bill guidance. And then on the cost side, I think it's a couple of things. FX was obviously a benefit for us, primarily the Canadian dollar and then also Korea and some of our imports getting better treatment there. We think that will hold. When you look at other cost items, we can -- we make progress on warranty, a couple of hundred million dollars of warranty in line with what we said we're going to do for the year. EV profitability improved largely as a result of better, more efficient use of the capacity as the whole -- as the write-offs that we took hold. And then also on the regulatory side around GHD. So I think many of those are going to hold on when you look at the cost pressures as we've talked about, pretty much the onshoring costs are going to be really heavily weighted towards the back half of the year, as expected, and we start to hire people to get the plants running in early '27. Operator: The next question comes from Emmanuel Rosner with Wolfe Research. Emmanuel Rosner: So quite an uncertain environment as you certainly indicated. I was curious in terms of the factors you're monitoring, you indicated you'd want a little bit more clarity on some of those before making any additional changes to the outlook. In terms of things that could move the needle for this year that you're monitoring? Is it more on the demand side, vehicle mix, input cost, I'm curious which are the ones that could still move up or down the most and impact you? Mary Barra: Emmanuel, I think the #1 thing that we're watching is what happens from -- with the Iranian conflict because obviously, with oil prices affect a lot more we're seeing from not only logistics, but also other commodity costs. So if the conflict ends in a shorter period of time, I think we'll see a return back to normal levels. If it stays on longer tell me how high oil prices go before we'll start talking about what demand is. But I also want to remind you that we're -- although we have an incredibly strong truck franchise and I'm very excited about the new truck that we have coming out at the end of the year, we also have a very strong midsize crossover portfolio and small crossover portfolio as well as a strong midsize truck. So I think we're well prepared with portfolio I'd stand against anyone when we look at how consumer behavior might shift depending on how long the war lasts, but we just don't know. So I think those are the primary things that we're watching. And as Paul said, we looked at the years, seen that uncertainty, especially as the conflict began, and that's why we started to really work on cost management. There's other areas that we're working on to continue to do that. But I think the biggest variable that we're looking at is how long does the conflict last and what does it cause from a cost perspective across logistics supply chain. And if it ends up having anything -- any impact on a shift in mix. But to date, we really haven't seen that. Emmanuel Rosner: That's very fair and great color. And I guess just -- as a follow-up on this then in terms of the input cost inflation and commodities, can you tell us what you have assumed in this updated guidance, which has been -- the inflation cost has been increased by another $0.5 billion. What are you assuming for commodities in the back half or for how long they stay high as a base case scenario? Paul Jacobson: Yes. Emmanuel, what we've done is essentially taken the kind of the curve where it sits today, net of our hedges, and remember, we -- it's not all direct and linear because we've got, for example, steel contracts. If you'll recall, we have about 1/3, 1/3, 1/3, of spot, 1/3 expiring within a year and a third kind of over 2 years. So that's helped us quite a bit. During times when prices go down, we pay a little bit more, but we pay a little bit less when prices go up. So we're really looking at the current environment kind of persisting for the year. And to Mary's point, conflict end and commodity prices and oil prices returning back down to pre-conflict levels, then we could potentially see upside in that scenario. Operator: The next question is from Mark Delaney with Goldman Sachs. Mark Delaney: You mentioned the downtime that GM had for tooling in the first quarter related to the next-gen full-size pickups. I'm hoping to better understand if investors should expect more downtime for the upcoming full-size pickup launch? And that's a potential incremental headwind? Or is that now behind and higher full-size pickup truck production should be a tailwind for the volume and share plans that you articulated in your prepared remarks. Paul Jacobson: Yes. Mark, thanks for that. We had some significant downtime in the quarter primarily related to heavy-duty trucks. I think a lot of that is behind us. There may be some selective downtime, but I think a lot of it can be done during shutdown, et cetera. So we're not anticipating any material downtime at this point. But that's what we're going to need to lean into a little bit to try to get our inventory levels back into the targeted range from where they've been because even when we ended the quarter, we were still down below our target levels. So we're hoping that we can get that back. And the team has done a really, really good job of managing through all of the logistical challenges. Mark Delaney: My other question was on Super Cruise and the digital services. For the strong growth that GM has been seeing in Super Cruise and the willingness for consumers to subscribe after the prepaid subscriptions last, can you speak a bit more on the breadth of that consumer demand? And is it concentrated in the higher end parts of the portfolio like Cadillac or is GM seen consumer demand for those solutions more broadly? Paul Jacobson: So what I would say, Mark, we're continuing to trend at about that 40% attachment rate after the subscription period and we do it differently, right? Other competitors that put the hardware on every vehicle, and they're bearing that cost for us, it's consumers who have purchased Super Cruise, they prepaid for a 3-year period, and we see that in terms of the hardware cost. So we have the deferred revenue that comes with the vehicle and then we have the subscription afterwards we're starting to see escalation in terms of the number of vehicles that are coming off of that 3-year prepaid period, and we're still holding attachment rates in that 40% range. So we're very optimistic about what that means. And I think that's what I was adhering to in the earlier question of when you look at the ARPU, you've got to really take into account the scale advantage we have, especially as we start growing into SDV 2.0 and expanding that across the -- but Super Cruise is a really strong leading indicator, and we're continuing to invest in delivering more value to customers that we think are going to make that even more attractive in the future. Operator: The next question comes from James Picariello with BNP Paribas. James Picariello: My first question, just about -- just as we think about adjusted auto free cash flow, how should we be thinking about the GMF? The GM Financial dividends? That was a pretty notable step up at $650 million for the first quarter. And then just to clarify, regarding the EV cash restructuring, of $4 billion or so for the full year. The majority, the remainder of that gets achieved in the second quarter. Is that right? Paul Jacobson: Yes, James, a couple of things. First, on GMF, we saw an opportunity in the first quarter largely as a result of GMF cash position to step up the dividend from our traditional level. We're not changing the full year expectation of the dividend, so pretty consistent there for the full year. But from a timing perspective, we saw that opportunity and we took it. On the EV cash charges, as we've laid out, we're going hard and aggressively at the sort of commercial relationships where approximately 90% with those. And we expect to have substantially all of that cash paid out before the end of this quarter -- this quarter being the second quarter. We still have a couple of battery raw material negotiations that we're working through. They're obviously more complex. But those will come in over time as well as we continue to work with our partners. But our goal here is to try to put as much of this behind us as quickly as we can so that we can be focused with our supply chain partners on tomorrow and stop having conversations about yesterday, which I think is way ahead of the expectations that many of our competitors have placed. So we're focused on that. We also don't want it to be an overhang for cash flow. Despite that, a significant cash outflow that we've seen as a result of those restructuring charges, we were still able to repurchase $800 million of shares in the quarter, and we remain committed to our capital allocation going forward. So I think the team has done a really good job of managing through those challenges and through those conflicts. James Picariello: Very helpful. And then just on the GMI downside within the guide now, just how should we be thinking about -- I mean, is that order of magnitude, like $300 million of incremental downside? And just how to think about volumes for GMI, the remainder of the year relative to the first quarter? And to that thought, just high-level cadence for adjusted EBIT for the year? Typically, the second and third quarters are the strongest for GM? Paul Jacobson: Yes. I would say that a lot of that is -- the impact is really being driven by the Middle East. In the quarter, we actually reallocated about 7,500 full-size SUVs that were originally slated to deliver to the Middle East operation under GMI. We reallocated them to North America, partly because of the conflict and the logistical challenges of getting them to market, but also partly to help bolster some of our lower inventory levels here in the U.S. So I think from an enterprise perspective, we're largely mitigating that impact, as we've said. But depending on how long the conflict goes and how long we see challenges in the Middle East, that's what's going to really ultimately determine the pressure on GMI. Operator: The next question comes from Michael Ward with Citigroup. Michael Ward: Just a follow-up on the truck changeover. So you planned downtime for the tooling and the actual change takes place in the second half, 4Q, specifically. Is that right? And does -- is there an impact on the volume in 4Q? Or is that all largely behind you? Mary Barra: Well, I would say as we look at that ramp will start in the third quarter and then we'll accelerate. So depending on how successful we accelerate, there's a tremendous amount of work going on. I'm really pleased with what the truck is from a quality perspective right now. But there may be a small impact, especially since we're running so lean from the current year. It's a good thing, though, that there's still such strong demand for our current generation trucks. So we think it's going to be a pretty smooth changeover, but there could be a small amount of impact as we get into the latter part of the year. Michael Ward: And then just going back to the digital services. I think you said that you expect margins to be in line with other software companies. When will we see those types of margins? I don't know if we're there yet now or not or if they're upfront costs you take. How does that cost/revenue curve look out over the next 2 to 3 years? Paul Jacobson: Yes. So Mike, this gets a little bit technical. I'll try to summarize it as best I can. But when we sell a vehicle with Super Cruise, all the hardware gets expensed right away. And then the revenue associated with that gets deferred over the 3-year trial period. So that's coming on at a very, very sizable margin because we've already recognized the cost in that going forward. And then when you look at the other digital services and OnStar, there are some hardware costs, et cetera, that are expensed with the vehicle. There are some service costs that go in. So the margins aren't quite as robust as if you expense everything because there are service costs associated with it, but they're still pretty sizable. So as we ramp up that deferred revenue base and it starts to amortize the P&L at increasing rates, that's where you start to see the impact. And what we talked about, if you go back to Investor Day several years ago. We talked about that having an impact and growing to a point where it has an impact on the overall margins of the company, we're starting to see that take hold, and we see -- we've got a lot of about the potential of what SDV 2.0 and the future improvements to Super Cruise and ultimately, autonomy can do for us when you look at it across scale. Operator: The next question comes from Andrew Percoco with Morgan Stanley. Andrew Percoco: I want to start on the digital services. I appreciate the added disclosure you guys have started to give here. But if I look at the 13 million or so subscribers that you're targeting by year-end. You've also got, I think, 45 million to 50 million vehicles on road. So I'm just curious, like how do you tap into that 35 million to 40 million other vehicles that don't currently have any subscription these digital services? Is there a hardware limitation? I know there might be some limitations around supervision, but outside of supervision, what's the opportunity to get some of those customers into some of these higher-value digital services? Paul Jacobson: Yes. Thanks, Andrew. I appreciate that. So I think when we talk about the car park that's out there in the universe of GM vehicles that really is meant to signal the opportunity that exists going forward. So as we continue to put SDV 2.0 and other capabilities, many of the vehicles that are out there don't have the hardware capabilities to be able to deliver that. So we're looking at that growth potential and really sizing the box for the future as we continue to expand that. So we do have, like I said before, in response to the other question, with Super Cruise, it really is a case where the hardware is on there for people that buy it. As we continue to get the cost down, we can look to potentially approach the market differently on that. But we see a ton of potential here because we're already driving approximately $7.5 billion of deferred revenue by the end of this year with what we have. So it really speaks to the opportunity that's ahead of us. Andrew Percoco: Got it. That makes sense, and that's super helpful. And I guess, as a follow-up question to that, I think super cruise is available on, I think, 750,000 miles of roads in the U.S. What's some of the gating factors in expanding that? Is it regulatory? Is it your own kind of risk appetite? Just help us think through what some of the kind of gating factors are there. Mary Barra: It really is as the company looks, it's both from -- in many cases, we have LIDAR map with the current system. But -- and it's also -- we've really focused on highway and major roads. And so it's a focus that we continue to look at how we expand. And we -- as you've seen from when we first launched Super Cruise and it started on a certain amount of roads, we continue to expand that over time. So we are now on additional roads, not just highways, and we'll continue to look at the opportunities to do that and making sure we do the technology correctly because one of the things we're most proud of from a Super Cruise perspective is it's viewed as extremely safe and the customers, we're building a lot of trust with Super Cruise as we do that, which I think will also play well as we launch our next generation with the Escalate IQ with the ISO hands-up. Operator: The next question comes from Dan Levy with Barclays. Dan Levy: Paul, you mentioned earlier that some of these commodity costs are staggered and they hit on the lag. So presumably, if cost hold, you'll be facing somewhat of an incremental headwind in '27. I know you're probably not prepared to outline what that -- what the magnitude of that headwind might be to be curious to know. But I'm just wondering, how much do you have in your back pocket on cost mitigation that even if the inflation on these commodities continues to rise into '27 that, that can be neutralized? Paul Jacobson: Yes, Dan, you're right. It is way too early to speculate on 2027. As we talked about that the pressure that we're seeing right now is a function of the forward curve, that forward curve is going to change 200x between now and 2027. So it's way too early. But if you think about where we are, and we started to outline this in prior presentations that the momentum we have in '26 and what we're starting with warranty improvement, EV profitability improvement regulatory cost improvement should all continue to be tailwinds in 2027 for us as well. And in addition, we've talked about we basically have stopped production at many of our cell plants to work down our inventory levels, which means we're not capturing the production tax credits that we have in prior years. That when we get battery cell inventory to a normal level, that will get us to a point where we can start to collect those going forward as well as the improved profitability of EVs. And then you look at the product portfolio with the new pickups coming in 2027, end of this year and into 2027, you start to see some momentum, but way too early to speculate. We just -- at the end of the day, we're executing on what we see and planning for future contingencies should we need to do that. Dan Levy: Great. I have a follow-up. I wanted to double click on some of the competitive dynamics within large pickups because I think there's been some attention on one of your competitors that's trying to pick up shares. So I'm wondering if you can help just to double-click within the share dynamics. We know that there is a large skew in the profitability within some of the subsegments within large pickups. Maybe you could just tell us, we see the overall data, but within some of the more profitable areas within large pickups, are you still holding your share? And is that some of those share gains from your competitor are coming at the less profitable areas, and that doesn't matter as much to you? Mary Barra: Well, I think we -- because of some of the issues of ending the year so strong that we were low in inventory and then with the planned downtime we expect, we still had very strong demand for our trucks. And we're not seeing -- I mean we are seeing strong demand across the board in the upside. But we want to welcome every truck customer. I think because of our lean inventories and if you look at some of the incentive rates of some of the competitors. You can see how disciplined we are and still selling every truck that we can. And so I think that's the formula and the recipe that we're going to continue to do is work to earn every truck every truck buyer in a disciplined way because of the strength of our products. So it's across the board. Operator: The next question is from Alex Perry with Bank of America. Alexander Perry: I just wanted to follow up a bit on the input cost inflation that you guys are seeing. I guess what commodities in particular, can you remind us where you're hedged? And then are you starting to see any shortages in any raw materials? Or are you concerned at all of shortages if the war sort of persist here? Paul Jacobson: Yes. Thanks for the question. We vary our hedge levels based on commodities. We're kind of seeing pressure a little bit across the board, as you would expect, primarily driven by higher energy prices et cetera. We're not projecting or worried about any shortages right now. And I think the supply chain team has continued to prove their results through yet another challenge as we've seen them do in years past. So no shortages. On the commodity side, it depends 25% to 50% hedged. That certainly helped us in the aluminum space this year. But overall, I think it's pretty manageable from that standpoint. We're just going to continue to watch it. I think the hedges and the staggered steel contracts buys a little bit of time to adjust the business, which is why we do it that way. But overall, no real concerns right now. Alexander Perry: Perfect. And then could you just remind us on the cadence of the wholesale volumes for the year with the refresh company? Any change to seasonality? And I guess as a follow-up to the inventory question, is the expectation that you'll be able to rebuild some of the depleted truck inventory? And then just on pricing, are you sort of holding that flat to up 50 bps pricing guide for the year? Paul Jacobson: Yes. No change to our pricing guide. I would say no change to the regular cadence on wholesale across the board. We do have the opportunity, I think, to get a little bit of [indiscernible] deficit on the inventory shortfalls that we've had. We saw some of that come in late in the quarter. that are making their way into showrooms or have made their way into showrooms this month. But we're going to continue to work and try to manage it in that 50- to 60-day range. And the team has done a really good job of trying to make that up. Operator: The next question comes from Chris McNally with Evercore. Chris McNally: I guess as hitting the end of the call, I wanted to think a little bit further out. One of the discussions -- for the first time in a decade, GM is going to have the ability to have more capacity in pickups and SUVs, given -- I think you guys saw it much earlier than everyone else about reshoring. So you'll have both Orion plus Mexico that will still have capacity, not numbers, but more strategic, where do you think GM could theoretically sell more of these higher value-add vehicles? Is it the upper end of the market, lower end of the market, if it not, North America, where you can sell in Mexico and Latin America. But just a little bit about the strategy, '27, '28, '29 at the Orion is done, where could you sort of increase the absolute number of pickups in SUVs that you could sell? Mary Barra: Well, I think we look -- and Paul already mentioned that we shifted some production from the Middle East. Usually, that's a very strong market. So after this conflict in, there's -- I think there's upside there. There's upside in many other markets, not only in full-size trucks, but also in full-size SUVs, both in the U.S. as well as globally, and those tend to run on the higher contented vehicles. So I'm extremely excited about the upside opportunity when we have more full-size SUVs and more trucks to really serve the globe as well as demand in the United States. So it's a huge opportunity for us as that plant comes online. Chris McNally: And I guess the follow-on is around USMCA. I mean I imagine the determination of how much capacity you would want to keep in Mexico even after Orion is done is somewhat dependent upon sort of this next level of USMCA, where I think everyone believe at some point, we'll have some logic where we get back from 25% to something closer to the global import average of 15%. Is that fair to say that some of the stuff is going to have to be live to see where USMCA final negotiations dollar, which is most likely second half, if not even maybe early next year. So we're going to have to wait and see on some of those numbers? Mary Barra: We think -- we understand, and it's a part of the USMCA process that it is updated periodically. We're in that review right now to see how it changes. We think having the appropriate levels around USMCA is very important for the U.S. automakers to compete with the rest of the globe that leverages whether it's other countries in Asia or Eastern Europe, et cetera. From a cost perspective, we've moved several peoples and have the opportunity to build them in the U.S. And we think we've looked at the footprint extremely strategically with the moves we've decided to make. So I think we're going to be well positioned to respond to not only U.S. demand but global demand. So I think our look at USMCA is not so much of a footprint issue. It's more of making sure it's done in such a way that we can compete with those even though -- and have a level playing field not only with the vehicles -- the tariff on the vehicle, but the tariff on the parts and the underlying cost of those parts. And so that's the work that we're doing now to make sure that the administration and those involved in the USMCA negotiations understand. And I have to say that I think the administration has been very good at having a deep understanding and want to understand what unintended consequences could be. So they further strengthen American manufacturing, not the reverse. So we're going to provide -- continue to provide our input, and we look forward to having USMCA revised in a way that is appropriate to achieve the administration's goals as well as strength in the U.S. manufacturing. Operator: And our last question comes from Ryan Brinkman with JPMorgan. Ryan Brinkman: Could you maybe comment on your operations in China? How far along you might be with regard to some of the product portfolio refresh initiatives? You've talked about on some of these earlier calls, including the NAV push. And then also with regard to some of those operational restructuring initiatives you've talked about and taking charges for in the past. Just trying to look at like the equity income that we see for the quarter, $165 million ability to annualize that? Is that sort of the run rate of profitability your operations are at once they're done with these improvement initiatives? Or where could they get to if you complete that part? Mary Barra: Well, I'm very pleased with the restructuring work that we've done in China. And I think we continue to be one of the -- the only, if not one of the only Western OEMs that is profitable in growing share. in the market. I think over the last few years, we've launched some very important products, including our luxury band that's premium segment, a premium product in the market. So I think we're continuing to work on having the right portfolio, but I also say the software and the services aspects the vehicle as we've launched and the new system that we're launching out across the portfolio, is rated higher than many of the Chinese OEMs when you look at it from a -- if this is an external rating from usage perspective. So I think you can see us moving to have the right product portfolio with the right software and services to be able to continue to grow share. Having said that, the China market is seeing some weakness. And so we're going to continue to monitor that side. I'm not in a position that I'm going to project what our equity income goals are. We want to see those continue to grow, but it's going to be having the right product portfolio and competing effectively, which I'm proud of the team because that's exactly what they're doing. And as related to additional restructuring costs, Paul, I don't have any comments specifically on that. I don't know if there's any comment you want to make. Paul Jacobson: No. I think the team has done a really good job from that standpoint. There's still some final ticking and time going on some of the actions that we've taken, but nothing material that we expect. Ryan Brinkman: Okay. That's helpful. And just as a follow-up, given some of the intent that you alluded to Mary and some of the other unhealthy aspects of the China market with the operate capacity, et cetera, I think exports have been attractive release valve. And just curious if you can comment on your export business from China with regard to ruling? Or what progress have you made there? Are those -- is that a more profitable part of your business in China? And how do you see that potential evolving? Mary Barra: Well, in the markets outside of the U.S., we're -- there already a significant Chinese participation. We have both, I'll say, products from -- that were designed and developed in the United States as well as those from China and especially at some of the price points to meet some of the more price-sensitive developing markets. I think we've seen success of what the right recipe is to have a strong product at the right price point to participate in those markets. So we'll continue to look at those opportunities and continue to refresh the portfolio, again, with products sourced from multiple locations. But I think that is a strength for us. Operator: I'd now like to turn the call over to Mary Barra for her closing comments. Mary Barra: Well, thank you, and thanks to everybody for your questions. I hope you see that we're clearly operating in a very dynamic environment, but that's not unusual for the industry, and that's why we have a multiyear focus to ensure we have the right products the right team and a strong balance sheet supported by healthy cash flows to achieve our long-term goals and execute on our capital allocation strategy, regardless of the short-term volatility or longer-term cyclicality. To sum it up, we're executing well against our plan, and we've shown quarter after quarter that we have durable earnings, we're growing our software revenue. We're disciplined with our capital allocation, and we have multiple paths to profitable growth. We have strong momentum in the core business, thanks to our broad and deep portfolio of vehicles. We remain focused on delivering 8% to 10% North American margins this year. Our OnStar Digital business, which includes Super Cruise is contributing to high-margin revenue growth. And I'll remind everyone that it's not cyclical. And we're advancing automated driving technology in a way that separates GM from other companies. Finally, we're addressing the near-term cost impacts of higher costs, and we're prepared to respond quickly and strategically as the market continues to develop. So once again, thank you for joining us, and I hope everyone has a good day. Operator: That concludes the conference call for today. Thank you for joining.
Operator: Hello, and welcome to the Commvault Q4 Full Year 2026 Earnings Conference Call. [Operator Instructions] Now I would like to turn the call over to Mike Melnyk, Vice President of Investor Relations. Please go ahead, Mike. Michael Melnyk: Good morning, and welcome to our earnings conference call. Before we begin, I'd like to remind you that statements made on today's call will include forward-looking statements about Commvault's future expectations, plans and prospects. All such forward-looking statements are subject to risks, uncertainties and assumptions. Please refer to the cautionary language in today's earnings release and Commvault's most recent periodic reports filed with the SEC. For a discussion of the risks and uncertainties that could cause the company's actual results to be materially different from those contemplated in these forward-looking statements. Commvault does not assume any obligation to update these statements. All Commvault's financial results are presented on a non-GAAP basis. A reconciliation between the non-GAAP and GAAP measures can be found on our website. Thank you again for joining us. Now I'll turn it over to our CEO, Sanjay Mirchandani, for his opening remarks. Sanjay? Sanjay Mirchandani: Good morning, and thank you for joining us. We had a strong finish to the fiscal year, delivering results at or above our guided metrics while continuing to build momentum across the business. In the fourth quarter, subscription ARR increased 27% to $989 million. This was led by another quarter of strong growth from our SaaS business, which grew 42% to reach $400 million in ARR milestone for Commvault -- subscription revenue grew 20% to $208 million, and we generated a record free cash flow of $132 million in Q4, resulting in $237 million for the fiscal year. We're growing at scale while also generating strong profits and cash flow. We believe this combination reflects the health of the industry, the strength of our platform and the durability of our model. Now let me take a step back and talk about what's driving this momentum. In 1 word, its data. Data is the lifeblood of every organization. When it's down due to an outage cyber attack or human era, business comes to a halt. Organizations today are facing a variety of challenges with their data. First, data is scattered across environments, on-premise, at the edge and in the cloud, expanding the surface for bad actors. Second, cyber attacks continue to grow in volume and sophistication. -- adversaries are getting smarter and stronger. Compromise is almost certain. Third, Identity has become 1 of the hottest new threat factors. This is compounded by AI as nonhuman identities outnumber human identities by 50 to 1. Commvault helps organizations address today's challenges by protecting, identifying, securing and when needed, rapidly recovering their data. But these challenges aren't static. With the rise of AI, we're in the most important technology shifts in modern history. AI creates more data, more access and more risk directly increasing demand for protection, governance and trusted recovery. We see AI as a powerful tailwind for Commvault because it -- the importance of what we do. In an AI-driven world, if your data is compromised, your AI is compromised. Commvault provides the picks and shovels that empower customers to adopt AI security and responsibly. We do this in a variety of ways. We protect the data sets used for AI and a broad spectrum of AI workloads. help customers leverage AI to detect threats faster, recover at greater scale and automate resilience operations. We help customers activate AI data security for use with models and agents, and we bring governance to AI data. For example, with our Satori acquisition now fully integrated to the Commvault Cloud, customers can monitor and enforce agents at the data. Additionally, as customers embrace and deploy AI, they're also focused on simplifying their technology stack. Enterprises don't want a patchwork of fragmented tools and products. They want the best unified platform to bring it all together, Commvault Cloud. Combo Cloud unifies data protection, data security, identity resilience and recovery all on 1 scalable control plane. Increasingly, more customers are standardizing on our platform as evidenced by growth we see across the business. Let me shine a light on some of the major growth drivers for Commvault, which will extend into fiscal year 2017 and beyond. First, we continue to add new subscription customers to our platform. Second, we're expanding and driving multiproduct adoption across our SaaS states. And third, we're seeing strong momentum with emerging revenue streams, including identity resilience. Now I'll discuss each of these in more detail. First, we added over 2,500 subscription customers in fiscal year '26. The growth-oriented investments we made over the past 2 years paid off. In the on-prem market, we're winning against other vendors while seeing customers return to Commvault after upstarts failed to live up to the high. For example, in Q4, 1 of the world's top 50 law firms returned to Commvault because enough start overpromised and underdelivered on products that quote on the road map and did not work. This customer is now leveraging our software and SaaS solutions, including a complete suite of data security, identity resilience and recovery offerings. Second, we're making steady progress in driving multiproduct adoption. A core pillar of our growth strategy. This is especially true in our SaaS business. The percentage of Commvault managed SaaS customers using more than 1 offering increased to 48% and PAUSE a 500 basis point improvement from Q4 of last year. For example, in Q4, we added a large virtual charter school that could not securely or efficiently manage its multi-cloud architecture with native hyperscaler tools. Lithos Commvault to help manage their multi-cloud estate with the addition of airgap, threat scan and cleanroom recovery to meet the resiliency requirements. In fiscal -- we're doubling down and incentivizing our sales force to build on this multiproduct momentum. Third, in terms of monetizing new offerings, we're seeing healthy momentum as identity becomes we target for actors. Our active directory enter ID and office solutions are landing new customers and expanding existing. In Q4, Active Directory was once again 1 of our fastest-growing SaaS offerings with AR more than doubling year-over-year. And collectively, our identity resilience and data security offerings represented 33% of net new ARR in Q4. For example, after a competitor suffered a crippling ransom or attack, a Fortune 500 retailer determined its resilience posture was too complex and costly. In Q4, they purchased Commvault's active retro protection because it provides lower TCO and reduced recovery time from 2 days to under 90 minutes. As identity threats continue to evolve, this will continue to be an area of focus and innovation for us in fiscal year 2017. In closing, Commvault provides customers with a single unified platform that it's essential for today's diverse data environments and tomorrow's AI-driven applications. Let me leave you with a few key takeaways. First, the market is getting bigger by the minute. AI is driving more data, more complexity and more risk, increasing the need for resilience as data grows, so as combo. Second, Combo Cloud is the differentiator. Customers are consolidating fragmented tools and standardizing on a single platform for data protection, data security, identity resilience and recovery. And third, we're delivering durable high-quality growth. We're scaling SaaS, expanding within our customer base and doing so with improved margins and strong cash flow. That is why we believe we are well positioned to win in the AI era. And now I'll turn it over to Gary Merrill, who's back as our CFO, to discuss our results and outlook. We welcome him and Jeff Hayden as our new President of Customer and Field Operations. Gary? Gary Merrill: Good morning, and thank you for joining us. For those who have not yet met, I served as Commvault's CFO from 2022 through 2024 before moving into the Chief Commercial Officer role. I'm excited to return as a -- especially as we close fiscal year '26 with strong momentum. I look forward to working with you as we continue to drive disciplined execution to capitalize on the growth opportunities ahead. Our Q4 results demonstrated accelerating SaaS growth, improved profitability and record free cash flows. I will discuss our Q4 and fiscal year 2026 financial metrics using our existing reporting definitions. Additionally, please note that we will transition to the new financial reporting effective fiscal 2021 that was discussed later in my prepared remarks. Turning to our fiscal Q4 results. I'll start by discussing ARR and free cash flow, which we believe are the North Star metrics. We encourage you to evaluate these metrics on an annual basis, which is aligned to how we plan and manage our business. In Q4, subscription ARR increased 27% and to $989 million. On a constant currency basis, using FX rates for March 31, 2025, we added $53 million of net new subscription error. Our strongest performance of the fiscal year. Within subscription, our SaaS ARR had a major milestone, growing 42% to $400 million, reflecting both new customer growth and healthy expansion from existing customers. We continue to make meaningful progress in multiproduct adoption, a core pillar of our growth strategy. As Sanjay noted, 48% of Commvault managed SaaS customers are using more than 1 product. This adoption is supported by a strong uptake of our identity resilience and data security solutions, which represented 33% of net new ARR. Our SaaS net dollar retention improved to 122%, highlighting our ability to expand within existing accounts. Total ARR, which includes subscription ARR and the maintenance associated with perpetual licenses increased 21% to $1.12 billion. On a constant currency basis, using FX rates as of March 31, 2025, we added $44 million of net new total ARR during fiscal Q4. Moving to free cash flows. Q4 rebounded to a record $132 million, reflecting strong collections aligned with focused working capital management. Full year fiscal 2026 free cash flows were $237 million, growing 16% year-over-year. In Q4, we accelerated our stock repurchases to 3 million shares for total consideration of $259 million, reflecting our confidence and focus on delivering long-term shareholder value. This brings total fiscal year 2026 fixed repurchases to $446 million, representing over 4 million shares. Now I'll discuss our income statement performance. Q4 total revenue increased 13% to $312 million. Subscription revenue grew 20% to $208 million, led by a robust 43% growth in SaaS revenue to $93 million. Pure software license revenue grew 6% against a challenging comparison driven by strong renewals and existing customer business. We continue to see strength in large enterprise accounts, with revenue from transactions over $100,000, increasing 9%, driven by higher deal volumes. Turning next to profitability. Q4 consolidated gross margin -- expanded 30 basis points sequentially to 81.8%. This reflects continued improvement in SaaS hosting margins driven by scale efficiencies and ongoing product optimization. Q4 operating expenses increased 11% to $187 million, representing 60% of revenue, an improvement of 100 basis points year-over-year. This reflects benefits of our past optimization program aimed to expand margins and allow for reinvestment in strategic growth initiatives. Non-GAAP EBIT in Q4 was $66 million, representing a non-GAAP EBIT margin of 21.3%. Looking ahead, we are entering fiscal year 2027 with strong momentum. With our subscription transformation largely complete, our financial priorities are to scale subscription ARR, expand margins and increased free cash flow. Before reviewing our outlook for fiscal year 2027, I will briefly discuss 3 updates to our financial reporting that will be effective in fiscal Q1. These changes are outlined in our earnings press release and on Slides 25 to 27 in our earnings presentation. First, we have recast certain revenue and ARR classifications. The primary adjustment removes all term sulfur-related support revenue into subscription revenue alongside term software licenses and SaaS revenue. Perpetual support revenue is now presented on its own line in our P&L, which directly correlates to our nonsubscription-based revenue and ARR offerings. These recast changes are being made to, one, provide a consistent view of our offerings across subscription revenue and subscription ARR. Secondly, align financial reporting with our subscription-based business model. And finally, they reflect how we manage internally. There are no changes to the total revenue or total ARR for any period presented. Under the recast presentation for fiscal year 2026 Subscription revenue was 82% of total revenue and subscription ARR was 90% of total ARR. To assist with year-over-year comparability, of our new financial reporting effective in fiscal year 2027, we have provided a 2-year quarterly look back in our earnings press release and earnings presentation, all of all recast events. For modeling purposes, an excelled download is also available on the Investor Relations website. The second change in our financial reporting is to streamline our KPI framework with emphasis on 4 key guided metrics, subscription ARR, free cash flow, subscription revenue and non-GAAP EBIT. We will also provide supplemental total revenue and diluted share count guidance to assist with P&L modeling. Going forward, we will no longer disclose the total ARR as the remaining perpetual maintenance stream will be less than 10% of our business. In addition, our subscription ARR guidance will no longer peg to the beginning of the fiscal year FX rate. The final change to our fiscal year 2020 reporting will be a transition to subscription net dollar retention measured on an annualized basis. This includes both our term software and SaaS offerings and will align net dollar retention metrics with our subscription ARR and revenue disclosures. For context, fiscal year 2026 subscription net dollar retention measured on an annualized basis was 114%. I'd like to reiterate that we will guide subscription ARR and free cash flow annually, which matches our business planning and management approach. Perm software accounts for most of our ARR and upfront revenue. So quarterly results may fluctuate due to factors such as the mix between software and SaaS transactions, renewal timing and shift in contract duration in any discrete quarter. Typically, these fluctuations even out over the fiscal year. Now moving to our fiscal 2027 outlook using our new financial reporting. For fiscal Q1, we expect subscription revenue of $263 million to $265 million, representing approximately 15% year-over-year growth at the midpoint. This would result in approximately $310 million of total revenues. We also expect EBIT margins of approximately 19% and a diluted share count of approximately 42 million shares. For the full fiscal year 2027, we expect subscription ARR growth of 18% to 19% year-over-year, representing a range of $1.20 billion to $1.21 billion. Our subscription ARR growth percentage will continue to be led by our SaaS offerings, which we expect to exceed $0.5 billion of ARR by the end of fiscal 2020. We expect subscription revenue in the range of $1.115 billion to $1.125 billion. representing approximately 15% year-over-year growth at the midpoint. As I mentioned earlier, we will also guide total revenue to assist with financial models. We expect total revenue of $1.30 billion to $1.31 billion. PAUSE In addition, for fiscal 2027, we expect non-GAAP EBIT margin of 20.5%, free cash flows of $250 million to $260 million weighted towards the second half of the fiscal year and diluted share count of approximately 42 million shares. Finally, our Board refreshed our share repurchase authorization for $250 million. We currently expect to allocate approximately 60% of annual free cash flow to share repurchases, subject to market conditions. In closing, I'm excited to return the CFR role and look forward to working with you as we continue to execute with discipline and capitalize on our growth opportunities ahead. We operate in a large and growing addressable market. There is meaningful potential to acquire new customers and expand with our installed base to increase multiproduct adoption. I'm focused on executing those opportunities with a clear path to continued margin expansion and strong free cash flow generation while driving shareholder value. With that, I'll open the call for questions. Operator? Operator: We will now begin the question-and-answer session. [Operator Instructions] And our first question comes from the line of Todd Weller with Steve. Todd Weller: Thanks for the question. You mentioned kind of the success with multiproduct sales and changes in compensation. Could you walk us through at a high level, your FY '27 kind of sales comp structure and kind of what behaviors you're trying to drive differently versus FY '26.. Gary Merrill: Todd, it's Gary. Thanks, Amit. I will take this. I'll hit the multiproduct question that you were asking. But before I do that, I'll hit sales compensation. First, we don't disclose the discrete components of our compensation plan. But what I can tell you is that our compensation plan in the field is geared towards 2 items specifically. The first is new customer acquisition. And the second is cross-sell. So platform expansion in our hybrid environment. So these are the 2 key pillars of our compensation plan for FY '27. As we look back to FY '26, we're seeing great progress that we want to build off on multiproduct expansion, especially with our customers that are now licensing at least 2 of our SaaS products. PAUSE that's now approaching 50% of our SaaS customers and our ability to cross-sell and the opportunity to drive growth and cross-sell is a key pillar of our FY '27 strategy. Operator: And our next question comes from the line of Aaron Rakers with Wells Fargo. Aaron Rakers: Yes. I have 2 real quick. I guess maybe going back to late last year, I'm curious with your cloud Unity platform, what you've been seeing in terms of customer engagements, customer interest? Any kind of metrics you can share on those platforms? Obviously, the Satori acquisition. And just curious as we think about these multiproduct platforms do -- what you've seen in terms of the products introduced late last year. Gary Merrill: Sure. Again, when we think about what we announced at unit -- the objective number 1 is to drive customer engagement. So to give the ability for our customers to leverage our platform now truly across any workload, whether it's on-premise or in the cloud. And our primary measurement of that is really driving new subscription customer growth, okay? So we've added about 2,500 new subscription customers in the past months. This quarter alone, it was roughly 600. And then how we start to monitor and measure that going forward will be across metrics of multiproduct adoption. As well as our ability to cross-sell. So not just upsell because now we're starting to see the acceleration on the cross-sell motion as well. Sanjay Mirchandani: Let me -- Aaron Sanjay here. Let me just add a little bit more to that. So the platform, if you remember, the Unity in the platform was about making sure we could give customers a singular capability to take data security, identity resilience and data recovery as 1 unified offer, whether they deploy it in SaaS or they deploy it on-premise. Just -- and identity resilience and security, as an example, represented 33% of our net new ARR last quarter. And we also added hundreds of Active Directory customers. Our ARR on Active Directory doubled year-on-year, and it's 1 of our fastest-growing offers in the history of the company. So without getting into absolute specifics, it gives you a sense that the design of Unity is exactly where customers are leaning in. Aaron Rakers: Yes. And then maybe as a quick follow-up. Gary, now that you're back in the CFO seat. I'm curious, I know you gave guidance for the full year at 20.5%. And operating margin. How do you think about the leverage that you see in this model? Is there any kind of thoughts of driving incremental operating margins? Could we see maybe mid-20-plus percent operating margin in the Commvault story as we look forward? Gary Merrill: Eric, thanks for the second poll question. First, Guidance for FY '27 to 20.5%. Our belief when thinking about guidance is setting our guidance at the level that we believe and that we're confident that we contain, as we think about long term, especially as we scale our SaaS platform, there is leverage in this business model. AI from both an internal perspective and a customer's objective, will give us great operating leverage opportunity. AI is driving data growth. It's driving efficiencies in our product, and it's driving efficiencies in how we talk to customers every single day. So the short answer is yes. We're not at the point where I'm ready to give multiyear guidance, but at baseline of 2.5 is a good starting point, and we look to expand on that from there. Operator: And our next question comes from the line of Michael Romanelli with Mizuho Securities. Michael Romanelli: Just maybe on the '27 guide, can you walk through some of the top line puts and takes for us? And as part of that, you announced some recent leadership changes, obviously. How does that factor into the thought process and logic around setting guidance? And I have a follow-up. Gary Merrill: This is Gary. I'll take the first part. If I zoom up and maybe go very at the macro level and as we thought about our plan for FY '27, our objective is to build durable growth, okay? So the plan is built along the foundation of durable growth. There's 3 pieces that will help us drive those growth vectors. First is AI data growth. So AI is driving massive amounts of data growth. That becomes a tailwind to our business. When you combine that with the complexity of hybrid environments, it makes what we do from a resiliency perspective, even more important. And then when you add the third vector of AI cyber-led attacks, which brings in the resiliency and security aspects, you have 3 growth vectors that build the foundation of the plan. As we think about how we measure that success, you heard in my prepared remarks about our North Star metrics of subscription. So that is the key way we will measure it. We're a hybrid business, and we're expecting continued momentum in that business. And as we serve our customers, whether they're on-premise or in the cloud, we expect acceleration to continue to come, especially from our SaaS business. Sanjay Mirchandani: Yes. And I'll add a little bit on the leadership transition. So Gary was our Chief Commercial Officer, helped build the plan was intricately involved in all aspects of both the guidance as well as where the revenue numbers we were forecasting. And then Jeff was a Board member and on the inside was had full visibility as to what we were -- what our assumptions were and how we were thinking all through the process. We were able to synchronize the leadership transition at the start of our fiscal year and had both of them at our sales kickoff, which is very important from a handover point of view and consistency point of view. And for all the important things like comp plans, territory planning, forecasting methodology, it was 2 in the box, getting it done. So I feel pretty good about -- I feel very good actually about the timing and the leadership that we brought into the company to take 7 and beyond. Michael Romanelli: Got it. Super clear and helpful. So Sanjay you've laid out what is a pretty clear AI resilience vision and more recently unveiled data activate the Protect and AI studio. How are you just thinking about the commercial opportunity there, a significant growth driver for you guys in fiscal '27? Or is the real monetization perhaps beyond that? Just would love to person on that. Sanjay Mirchandani: We're not pinpointing the exact number that we're attributing to AI because it's still early days, but it's definitely a tailwind. And it's -- to oversimplify it. We believe, and obviously, a bias to believe that data is at the heart of AI and is driving AI models is driving how customers use AI in the enterprise. And what we're trying to do is make sure that we're giving them not only the products and the capabilities you mentioned, which is the latest. But doing what we've done for the better part of 30 years, which is protecting the components that build up the systems they use. So whether it's a better databases, whether it's the Deep S3 bucket that they're storing data in, whatever it may be, where every day we're supporting more and more of the component fee that builds up the AI apps that they're building. And we'll continue to do that to give them all the availability. Plus, with the capabilities that we've just announced. We give them a genetic access to our workflows. We give agenetic access to single policy engines. We're giving them everything they need to really protect their environments with the right guardrails and be able to recover as they roll out these fairly complex AI capabilities inside their enterprise. So early days for us in quantifying it externally, but we feel today pretty good about the fact that it will -- as long as the data keeps growing, which we think it does because of AI, what we do by way of resilience becomes front and center. Operator: Our next question comes from the line of Eric Heath with KeyBanc. Eric? Eric Heath: Great. Congrats on the results, gentlemen, strong AR acceleration and Gary welcome back to the seat. So can you just talk about what you saw from a macro perspective, both in the quarter given just some macro headwinds out there? And also, memory is also an issue. So anything you could speak to about memory impact in the quarter. And then, Gary, just coming back to some of the guidance philosophy and the assumptions there, but just -- any change in the philosophy we should be thinking about it? I know you addressed some of it already, but just given the leadership changes, any additional prudence there? And similarly, along the earlier question, any assumptions on macro or memory pricing that you're assuming in the guidance? Gary Merrill: Eric, -- thanks and good to hear from you. I'll hit it specifically. I'm going to start with the last on the macro and the memory pricing. We had to look at them as a combined we're managing that in our pipeline. And from an outlook perspective, the current trends are baked into our guidance. Now we've been successful in being able to navigate that with our platform. We have 3 primary ways how we navigate supply chain or macro related to memory. First is we have a broad technical partnership with all the major storage providers. So we're able to leverage those partnerships, whether it's on supply or technical alignment as well. So the depth and breadth of our platform integration is a key competitive differentiator. Secondly, we work with our customers to use sweat the assets. So even if it's a competitive takeout and it's a fresh install working with our customers to leverage their existing infrastructure. And the third, which we think is one of our best competitive ability is our SaaS platform. So we have the ability from a workload perspective to migrate customers to our SaaS platform and which is kind of where we see our ability to then manage these work close regardless of what's happening in the broader economy. On your second question which I believe is guidance philosophy. Fundamentally, I've been a part of the leadership team now for many years. So as we think about how we run the business day to day, nothing's changed, I would say, right? The collaboration between myself with Sanjay and now Jasin, the broader team is consistent regardless of what role that I was in -- so the way we think about guidance is taking a look at the market opportunity and then providing a number externally that we feel confident in. Sanjay Mirchandani: And I'll just say this, and everything. But having a CFO who's been a -- is one heck of an asset because you get a very pragmatic point of view on how to look at things. So we're very happy with that. Operator: And our next question comes from the line of Jason Ader with William Blair. Jason Ader: Yes. Thank you. Good morning. First, I want to just applaud you guys for the shift of the term support to the subscription line. It's something that Mike, I've mentioned to you many times. So I think that just cleans things up, and we -- I think we all appreciate that. For Sanjay, you talked a little bit about -- or I guess, Gary, you talked about the hardware pricing. I'm just wondering, has it actually impacted deals where some of your competitors are more tied to hardware, specific hardware and therefore, it sort of shifted deals like that were late in process towards you because of the supply availability and your sort of hardware agnosticism. Sanjay Mirchandani: I'll take the first. I'll take the first shot at it. We -- I will say this, we have probably -- we are probably at the place in this -- in our company's history, where have the strongest relationships with our technology partners. We work with them very closely on the pipeline. We work with them very closely on the customer requirements. And so as much as availability and pricing does cause a little bit of revisits as part of the process. We've been so far, I'm going to say, so far, been able to manage the forecast pretty tightly in conjunction with our partners. And one of the things -- almost more importantly, that we can do, that Gary mentioned that holds us in good stead is allowing customers because of the way our platform is architected to sweat the asset a little longer, till they can get the right setup that they need and the timing that they want and the project kick off the way they acquired. But if they need the resilience we provide, in many cases, we've been able to go in and just sped out the asset. And without getting super technical, we can also let them run the control plane in any way they want so that they could -- they're not beholding to a particular piece of hardware. So we've got that flexibility in the architecture, and it's been used every single day as a hybrid company. So whether they're using the SaaS piece of it or they're running it in the cloud, we're letting them work through this present sort of situation to start. Gary Merrill: Jason, to go back to your first comment about the recast. I appreciate the call out. One of the key priorities with that is aligning our P&L today are -- so now you can specifically see how the AR momentum is translating into acceleration on the top line within the subscription. And then it's also important to give the clarity to our shareholders about the actual size now of the perpetual business now that it's become nominal to the overall business. Sanjay Mirchandani: That's fair. Jason Ader: Great. And 1 follow-up. On the comment, the 33% of new ARR coming from identity and data security. Can you just give us a quick report card, Sanjay, on some of the data security products, like what's going well? Where do you still feel like you've got some work? I know you have a handful of different products there, some acquisitions. Just it would be great to get a quick report card. Sanjay Mirchandani: Yes. I think with Unity, we really upped the ante, if you would, on how our policy engine operates across the product. So when you look at Satori and what it does with data security being integrated, so those capabilities, the implied capabilities are in the product, right in the product. If you look at Threat Scan, which has been something that has done really, really well for us. Now it's been completely revamped and taken inputs from a variety of sources, including our own IP and third-party IP to really give customers deep scanning capabilities to look at what happened. You tie that back to clean room, which we brought to market 2 years ago, this generation of cleanroom has tight integration with AGT and all the risk analysis that we could do to tell customers what happened, who touched it. Now when you fast forward this to a genetic capabilities. A lot of companies are fixated on what the rolling back in agent, which is fine. But that is one threat vector in the overall scheme of things that needs to be looked at in sort of cohesion to bring back -- to really have resilience. So that's where we're going. And the numbers we shared sort of bode well for where customers' minds are and where -- how they're thinking about resilience because you have to look at it in an integrated way, data security, identity resilience and true single-click recovery on large platforms. Operator: And our next question comes from the line of James Fish with Piper Center. James Fish: Topic that's coming up, of course, is hardware and cloud. Maybe just to go back to that, are you seeing customers initially actually start with the on-prem for either a net new or new deal completely, but then evaluate or turn to you guys to see what kind of cloud equivalent pricing would be, just given the rising hardware costs. And how are customers handling that sort of messaging how are they handling that overall exposure to you? And is there a way to understand that penetration of cloud within subscription entirely at this point? Gary Merrill: Jim, it's Gary. I'll start on this. So as it relates to thinking about navigation. So what customers want is they want the diligence at the end of the day. So if you start with the macro theme of what we provide as resilience, so when you get into, I'll say, Tier 2, Tier 3 apps, maybe not like the mission-critical Tier 1, the flexibility is there to think about the ability to be agnostic between whether they use on-premise infrastructure or they use cloud and to structure their own storage or even our own ubstores. So that's kind of where we see it. And when you combine that with the flexibility with the hardware partners that we have as well as helping us with the assets, if it becomes about the options that they have to make sure that we can keep their projects on track. Now to quantify what I'd say that shift has been material to our SaaS business, not yet. Okay, not yet. But what it does is it keeps our project top of mind and it allows us to continue to execute with a close plan. Sanjay Mirchandani: Because we're very unique in what we can deliver in that true hybrid capability, letting customers truly mix and match how they wish to deploy. Now of course, it's a regulated industry. They have their own policy. There's a lot of things that come into play. But that we give them a very unique flexibility that nobody else can to do what they need to do. And over time, they can mix and match. and some do. James Fish: Yes. Just to follow back up. I know I asked a long question there, but what's the customer penetration of cloud within subscription entirely? And can you just remind us what optimizations on the product setting and where cloud gross margins are now today? Sanjay Mirchandani: I'll take the first part, you take the second. Gary Merrill: Okay. So penetration of cloud. So cloud native workloads. So if you think about workloads that are now running the cloud, whether there's databases Monoject, even our -- and we think about contribution, okay, to our growth, that bucket of our cloud, digital native cloud native offerings from Q3 to Q4 was our fastest-growing segment that contributed to ARR, okay, which shows what the ability is to move and protect cloud applications with our cloud product. So a major contributor, Jim, to our success sequentially. From a margin perspective, continued optimization. I don't have the margins in front of me, but we can get them back to you. I would say sequential improvement on margins are North Star is driving well north of 70% and we're on pace for that over the next couple of years. So that's where we're focused on is the product optimization and building that durable business of in the cloud. Operator: And our next question comes from the line of Param Singh with Oppenheimer. Param? Paramveer Singh: Maybe, Sanjay, I wanted to understand the buying persona for identity resilience, is that more focused towards. And are you investing more in your security focused sales teams, not just find resilience but for some of the other workload opportunities, particularly around ransomware and then lastly, in that vein, are you also investing in R&D to sell some of the technical gaps on the ransomware side? Or do you feel you have a robust portfolio today? Sanjay Mirchandani: Param. I'll take the last part first. I think we've got a world-class platform when it comes to not just ransomware as a threat vector, but broader and making sure that -- and I don't need to say this in any way, but serious, which is regardless of the threat vector or what causes the damage of the data our focus is to be able to bring customers back to life, recover them. So it's broader than ransomware, but it definitely does ransomware if that makes sense, okay? And it does it very well. Every day, we're helping customers with it. On your -- on the first part of your question, on the buying persona of identity, Identity is quickly becoming because of AI, is quickly becoming sort of a joint decision between the CSO organization and the classic CIO organization, because, in some cases, identity is managed by the IT organization and now with AI applications being developed by teams or new teams sometimes, it's sort of going up in visibility. So we're seeing both. We think both. I'm not adding more security specialists, if you would. But over the past couple of years, a lot of the folks that have come into the company have come in from a security patron. In fact, Jeff Hayden, our President also has a deep security background because today, like I keep saying, data security, identity and recovery are implicitly high. So we're cross training our people. There's a lot of enablement we're doing going to make sure that they can talk to the different personas, identify the right kind of conversations to have. I feel pretty good about the progress we've made. I mean we don't -- it's rare that we lose a deal because we didn't have a security capability. Paramveer Singh: Understood. Great. And as a follow-up, if I could, -- not to get into the memory side. I know you're managing the supply chain well, but a different question, right? The higher memory and component pricing does constrain budget dollars a little bit. Have you had concern from customers where they're picking and choosing what workloads are mission critical and more important to secure now and potentially pushing off certain workloads through the next year? Or do you feel that the entire data state is crucial enough today where dollars would primarily be spend on cyber resilience first and then something else. Any clarity there would be really appreciated. Sanjay Mirchandani: I'll take the first shot. The -- anecdotally, use -- customers are focused on resilience because you're only as good as the breadth of your coverage, okay? And your resilience capability increases with pretty much you have to protect everything that runs your business mission critical. For that, if customers are doing refreshes, they prioritize that in whatever architecture their industry allows them or their policies allow them to do. So in some cases, it's not about pushing it off to next year. It's saying, I think we can run this through a SaaS capability that -- so we look at your sat, Oh, we could have it hosted, and we'll write the data on-premise. So again, it comes back to the architecture, which we think gives customers the choices they need to be able to prioritize both the cost increases and the availability of memory and servers, et cetera. So it comes back to that. There's no single answer. But yes, obviously, if things are in scarce supply or more expensive people do prioritize and we're right there with them to help them through that. Operator: And our next question comes from the line of Yun Kim with Low Capital Markets. Yun Suk Kim: Congrats on a strong thing to finish to the year. If you can update us on the overall partner ecosystem that you're expanding, especially around service providers. I think you had some announcements on that recently with Google and whatnot. How important is that securing that close in ship with the major hyperscalers in your go-to-market especially around cyber resiliency and then especially with much of the Agent framework running on those agree platforms? Sanjay Mirchandani: Yun, it's Sanjay. I'll try and address that. So our relationships with the hyperscalers are pivotal. It's very important as customers truly embark upon not just hybrid cloud, but multi-cloud deployments our ability to protect customers with a single platform across multiple cloud and on-premise capabilities is unique. So our hyperscaler relationships are something that we invest deeply in, okay, both from an engineering point of view, and a go-to-market point of view. So access, if a customer wants to purchase off of a marketplace, we have deep integrations into all the marketplaces. And then we continue to evolve the platform as customers make choices around Atento your point, whether it's the vector databases, whether it's the agent framework that they have, identity systems that they use. We're continuing to build out our resilience capabilities on that so that when the customer makes that choice, we're right there with them. okay? And we've done that for years, and that's obviously held us in good set, so we continue to do that. What was the other part of your question. Resilience. Yes. And what we do, for example, that makes us, again, very unique from a resilience point of view is customers can write their data into our air gap immutable capabilities on any of the 4 major hyperscalers today. So they can mix and match as they need to. And for whatever for economic reasons, commercial reasons, resilience reasons, redundancy reasons, we can -- we allow them through the same control plane very seamlessly to be able to protect their data and their capabilities on any of the hyperscalers. So the abstraction is what we bring, TCOs, what we bring. And you mentioned, Google, our Compal Cloud platform supports Google. but our Fumio platform, which is designed for cloud natives, which has thus far been an Amazon, AWS sort of protection has now expanded into Google. So Google Cloud is also supported by Glumio,hirwhich is quite the favorite with the cloud natives. Yun Suk Kim: Okay. Great. Sanjay. Gary, in regard to probably a question that I probably wanted to avoid so far. But in regard to seasonality of your SaaS business for -- in your outlook, is there any big renewal quarter where you're expecting a certain upsell or even a conversion of term license to SaaS. Gary Merrill: Yes. Thank you. I'll hit it. The average contract length of our SaaS deals is 1 to 2 years, so we're in that midpoint of 1 to 2 years. So what that means is as you see that they are accelerate and grow every quarter, that means that our renewal base is growing every single quarter. So what happens is and what you'll see is some of the acceleration in the second half of fiscal year '26, is that it's our renewal population natural opportunity for that cross-sell opportunity that you see and that's coming through in some of our prepared remarks. So we expect that trend to continue with our typical seasonality. So as we build out and think about renewals in the second half of fiscal year '27, the opportunity will be that much bigger on incremental cross-sell as well. Operator: Our next question comes from the line of Howard Ma with Guggenheim Securities. Howard Ma: I'll keep it short. And Gary, welcome back to the speed. My question is, are there any trends to call out in terms of new and renewal procurement decisions? And what I'm really getting at is how comfortable are you in the initial subscription revenue and margin guide. Did you appropriately bake in -- I kind of think there's 3 things. There's higher memory prices. There's cloud modernization that are happening broadly and then there is the potential impact of -- cloud Unity on shorter contract duration. So did you appropriately take in potential contract duration compression? Gary Merrill: Howard, glad to talk to you again. I'm glad to be back working with you. Couple of different pieces there. If you look at the renewal pool, I would say, on the software side in FY '27 relative to FY '26. It's roughly the same or slightly bigger, but not significant. And so we have factored in our expectations on new full term like Term link. What we saw in some fiscal Q3 to 4 is roughly no change to term link, but we've modeled that out now into FY '27. I think if I think about the way we've built the guidance around subscription ARR. We expect the vast majority of subscription ARR driven from our business, okay, similar to the trends that you saw for FY '26. So therefore, we'll continue to see acceleration in the SaaS business, our software business and our hybrid environment is a roughly plus or minus similar renewal pool. And then the difference will be what we expect to take from the new logo acquisition on-premise. Operator: Our next question comes from the line of Rudy Kessinger with the D.A. Davidson. Rudy, please go ahead. Rudy Kessinger: Great. Gary, certainly looking forward to working closer with you again going forward. Gary, you said in response to a question on memory earlier, 1 of the 3 reasons we're able to navigate this is the ability to maybe cover some of those -- both from the cloud, and I just want to clarify that with respect expect how much of a driver of your SaaS and Nene in fiscal Q4 was from customers protecting on. premise workloads via your SaaS offering as opposed to purchasing new hardware. Was that a material driver? And do you expect that to be a material driver of SaaS going forward this year just given the memory price increases? Gary Merrill: Rudy, Nice to talk to you again as well. Not significant in Q4. What it does, it gives us the ability to make sure that our project with the customer to help meet the resilience you need stays on track. To give them that option if they need to go that way in the future that they've scoped out the technical considerations. So not a significant contributor to Q4 acceleration that is not factored into my guide. For FY '27 either. My guidance related FY '27, exceeding $500 million of DAS ARR would exclude any significant impact from that. Operator: Our next question comes from the line of Joseph Gallo with Jefferies. Joseph? Joseph Gallo: Subscription NRR was really impressive at 114%. Just given the broadening portfolio, how should we think about how that trends in fiscal '27 versus your sub-A guide of 18.5%? Gary Merrill: It's Gary, Joseph. Nice to meet you, and thanks for asking the question. Yes. So one of the retail items that I made thinking about going in FY '27 is hopeful thing on that subscription NRR as a key measure because -- you're right, it aligns to both our revenue and subscription and the ARR. We're not modeling significant upside in that number in the guidance. So in the guidance generally reflects that steady state. And that keeps our SaaS NRR very healthy and gives us opportunity to improve also on the software piece as well. Joseph Gallo: Awesome. And just as a quick follow-up. I mean it was great to hear the potential competitive differentiation with higher memory prices versus other vendors. I'm just curious, broadly, have you seen any changes in the pricing environment competitively? Gary Merrill: No significant. If I look at discounting trends that we had during the quarter, they were consistent with the last couple of quarters. It is a competitive market, obviously, as you guys do your research, but we're not seeing any incremental pricing pressure. It's more, I think, as Sanjay outlined and you even emphasized it's navigating those cost challenges relative to the resilience budget and making sure that resilience budget is maintained as a priority versus traded off as just storage costs. Operator: Our next question comes from the line of Shrenik Kothari with Baird. Shrenik? Shrenik Kothari: Welcome back, Gary. Sanjay, just in relation to oral outlook and guide. I know in prior calls, you have talked about AI as a big growth driver, but it was mostly is proof of concept within your customers. It seems now you're pushing harder, AI is driving more data, more risk. You mentioned the market is getting bigger by the minute. Just which of the use cases that you are most excited about and you're seeing real enterprise budget pull today compared to sort of what you talked earlier, if you can sort of elaborate more across protecting data sets versus model flows as the recovery of agent-driven workloads, also governing data access and cloud native recovery. Any thoughts there? And I had a quick follow-up. Sanjay Mirchandani: Sure, sure. Shrenik, I'd say in the enterprise, enterprise-grade applications we're in the early days. There's a lot of trials. There's a lot of models being used. So what we're doing is getting back to, like I said in an earlier response, is making sure that we can broadly protect the componentry that customers will use -- are using or will use to build these apps. To the databases, the vector database is where the data is stored, exposing that data so they can use it in pipelines to the newer products we have, giving them agent capabilities to quickly get resilience built day 0 into the apps as opposed to an afterthought because what we believe is critical in this new sort of new types of apps, AI-enabled apps that have been mild is that protection and resilience needs to be active and not passive. It needs to be on the front end of as you build the app as opposed to in the back end of when you've got the app. So we're -- so you mentioned many things. It's like is it risk? Is it data? Is it recovery policy, cloud-native full all of it. So we're helping them through the process. But again, our focus is data and recovering the data regardless of what may have touched it, agenetic nonagentic, human nonhuman, all of that. So we're -- it's early days. It's a journey, but our goal is to be able to give customers through Commvault Cloud, a single click recovery of the entire AI stack. That's where we're driving to. Shrenik Kothari: Great. Very helpful. Just very quickly, again, Gary, in relation to -- I know you did mention there's field comps are geared for the next year towards both new logos as well as cross-sell platform. Just -- it sounds great, right, especially given the stronger identity and multiproduct momentum. But just how different is this in practice from fiscal '26 in terms of how you are sort of fine-tune that incentives, any success metrics around AI, atenty. Just anything that you can provide there granularity. Gary Merrill: Yes. I can summarize this for you. So if I -- the comp plan design for our field teams for FY '27 is roughly consistent with '26. So what we do is tweak a cross-sell incentives, on the products that we believe have the greatest opportunity for growth. And then obviously, our customers need to stay resilient. So it's a tweet in the -- where we point them as it relates to the specific products, but new logo acquisition has always been a fundamental pillar of our complaint. Operator: Our next question comes from the line of Junaid Siddiqui with Truist. Junaid Siddiqui: Sanjay, as frontier area models become increasingly embedded across cybersecurity workflows. And as the model providers themselves potentially push further into security, how do you see Commvault role evolving to remain core to cyber resilience and how are you partnering with these platforms to protect customers in a more agentic world? Sanjay Mirchandani: Junaid, it's these models used right, will to make for better software, okay, more secure software. So I think I think we're seeing the start of this in the industry. Our focus has always been a combination, making sure that the platform we provide the combo capabilities we provide or equal parts, data security, identity resilience and recovery. I'd probably take that back. I'd say more recovery. And we specialize on the recovery capabilities. But it's with the same policy engine that gives you the providence of what happened to the data to allow customers to truly recover. So whether the agent caused something to happen, or a cyberattack cause something to happen or human error cost something to happen or a corruption case something to happen, our focus always is data out, making sure we can get the data recovered for the business. So the models we'll make for most secure software, I believe. But what we need to do is stay focused on and what we're focusing on is just getting customers back from anything that may have happened to their systems. -- especially when you're looking at the pace at which AI changes things. So I'm kind of giving you a 10,000-foot response on it, but we're obviously looking at it's a multipronged capability, whether it's Agentic or cyber or just system providence. We're looking at all of that and making sure that our capabilities can bring all of them back with single policy. Operator: Our next question comes from the line of Joe Vendre with Deutsche Bank. Joe? Unknown Analyst: Sanjay, you called out multiproduct adoption as a driver of growth and also touched on the momentum in your identity protection products. Can you talk about the typical deal size for identity and maybe the ACV uplift when a customer adds on that identity protection. And also, is there a way to think about what percentage of the base has adopted identity protection today, and should that adoption rate eventually get to 100%? Gary Merrill: It's Gary. I'll jump in and answer this for you. So what -- we don't disclose the actual ASP of our denting solution. However, what I can provide to help is that it's a good land or a would expand motion to drive the stickiness in the platform. to how we think about it internally is that it's less about the individual ASP of the offering. It's more how we're driving the adoption of the platform, okay? And when you get multiproduct adoption, as you would expect in any business, our ARPA goes up significantly, okay? And we'll start to give color on that in the out quarters as we get going and get more penetration. To the positive side on opportunity, we've had great success on our identity year-over-year. The business grew about 100% year-over-year. and it's still a very small proportion of our installed base that have adopted it. So we still have a long runway of opportunity to drive that as we continue to enhance the platform with even more identity solutions. So just not about the traditional active directory when we get into other offerings like Ostend other and ID, it's the whole platform approach across multi identity solutions which will drive multiproduct adoption and then drive our PARP, which we'll continue to talk about as we build those measures. Sanjay Mirchandani: Right. Joe, just to close, I mean, just to give you a typical scenario -- use case scenario, outcome-based scenario that a customer would look at. They would start with identity they would look at clean room to be able to test that identity and they would look at AGP, our Air Gap Protect capabilities to be able to restore data from that secure location, whether it's for test purposes or production purposes. So without identity resilience, you are -- it's an incomplete solution. So that's how we think about it. In and of itself, it's a starting point. It's a good land spot. It's a good expense part of a customer already using our technology, but it really shines when you look at the life cycle of how a customer would use it. Michael Melnyk: Mark, we'll take our last question, please. Operator: Our last question comes from the line of Tom Blakey with Cantor Fitzgerald. Thomas Blakey: Well, thanks for in here, Michael. Sanjay and Gary, great to be working with you again. I guess my first question is on this net new ARR in constant currency metric that we've heard from the company in the past. It seems like with AI increasing data, very successful push here in terms of organic growth from a new product perspective as well as M&A. It seems like if I'm looking at the moving pieces here, the new target of $1.205 billion in subscription ARR. Just maybe kind of talk about what we're kind of expecting here and embedding in the guide for net new ARR on a constant currency basis into fiscal '27? That's my first question. Gary Merrill: Tom, it's Ger. I'll jump in. So how we'll be guiding that new ARR going forward? It's really tied to subscription error, the overall subscription ARR. That will be an annual guide. So we set up the annual guide for FY '27 at the midpoint, that's 18% and 18.5%, okay? If you quantify that, that means that the amount of subscription net new ARR for the full fiscal year 2017 will be roughly $190 million. Okay. So that's kind of a key base part. Now what I won't be doing is giving a discrete guide on any individual quarter, okay? As you've seen in our business in the past, there's to be puts and takes from quarter-to-quarter. But we'll continue to provide -- and I'll continue to provide the updated view of the annual number, how we're trending against that annual number and also empty relative mix between the software and SaaS pieces of the business. For FY '27, we continue to expect majority of that $190 million of net new ARR for the full year to continue to be led by acceleration in our SaaS platform, which should exceed about $500 million by the end of FY '27. Thomas Blakey: Super, super helpful. And good to see the uptick there on the net new ARR basis that we could just maybe imply for fiscal '27? And just maybe a look back at as it relates to look forward -- could you maybe expand on the market share gains that you experienced at some of the -- at the expense of some of the legacy players in fiscal '26 and what you're embedding in the fiscal 2027 guide, that would be helpful just given the dynamics there. Gary Merrill: Overall, FY '26 was a strong net new customer, right? There was some fluctuation quarter-to-quarter. Q3 was an extremely strong piece of the business on net Blue. Q4 was more tied to our existing installed expansion business. But overall, when you look out at the full fiscal year, we saw strong growth. And it's beyond I would say now the legacy players that only have on-premise because our value prop is the hybrid. It's the hybrid and managing those workloads on-premise or across multiple clouds. So what you see in our subscription ARR, whether it shows up in software or in SaaS, it's our hybrid approach that's giving us the competitive advantage. So we may swap out a legacy install on-premise and that new deal will end up likely being hybrid across both on-premise and cloud. So that's why the combined subscription era becomes the North Star metric because it will show the penetration and success of that hybrid New logo acquisition. Sanjay Mirchandani: That's key. The hybrid is key. And we believe that as AI gets rolled out broadly in the enterprise, it will continue to be hybrid. Michael Melnyk: Mark, [indiscernible]. Operator: Okay. So there's no further questions at this time. That concludes today's conference call. You may now disconnect.
Operator: Good morning, and welcome to the Galaxy Digital First Quarter 2026 Earnings Call. Today's call is being recorded. [Operator Instructions] I would like to turn the conference over to Jonathan Goldowsky, Head of Investor Relations. Please go ahead, sir. Jonathan Goldowsky: Good morning, and welcome to Galaxy's First Quarter 2026 Earnings Call. Before we begin, please note that our remarks, including answers to your questions, may include forward-looking statements. Actual results could differ materially from those described in these statements as a result of various factors, including those identified in the disclaimers in our earnings release or other filings, which have been filed with the U.S. Securities and Exchange Commission and on SEDAR+. Forward-looking statements speak only as of today and will not be updated. Additionally, we may discuss references to non-GAAP metrics, the reconciliations of which can also be found in our earnings release. Finally, none of the information on this call constitutes a recommendation, solicitation or offer by Galaxy or its affiliates to buy or sell any securities. With that, I'll turn it over to Mike Novogratz, Founder and CEO of Galaxy. Michael Novogratz: Yes. Good morning, everyone. Listen, first quarter crypto prices down on average of 25%, you can see our headline number, certainly, isn't what we'd like to be delivering quarter after quarter. All that said, I feel pretty good about the business right now. And so you come into this earnings call, and I thought, well, let's break it, down data centers and then crypto and give you just how I'm seeing it from the CEO perspective, right? Every Monday morning, I look at my to-do list in the Data Center business, and it has 4 buckets, right? Are we delivering on time and on cost? That's not an easy feat. But so far, our team is doing an awesome job. We delivered our first data halls. We're on schedule. More than half of the data centers around the country can't say that. And so we feel pretty good about the team down in Texas and the hard work they're doing. And so that's in check, right? The second is we've got to finance Phase II and then Phase III. The financing markets are open. I was hoping we would have the definitive deal details today, trust me, that will come in a very short order, we will have Phase II financed. Our partner, CoreWeave, we've their credit spreads have come in, the financing markets are pretty robust right now. And we're looking at a few different options. Part 3 is we have this 830 megawatts that we were granted recently tenant for that, right, that would take a lot of stress off of me and derisk this company even further. We're in conversations with a lot of big people you can guess who they are. That process, Chris will get to the dynamics of it later. My sense is that's probably going to be a second half of the year process as we get closer to 2027, the stress around 2028 power will pick up. Right now, most of the hyperscalers are focused on this year and next year and just getting the power they need. And finally, new projects that we've been looking at circling around, same answer. Hopefully, in the not-too-distant future, we're announcing a pretty cool one. And so stay tuned. I don't have anything specific to tell you today. But in each of those buckets, I'm not sweating. I feel good about where we are, I feel good about the progress we're making. And I feel good about the future after that even. And so I can give a big check on the Data Center box. Then I flip to Digital Assets. As I said earlier in the year, I think this is a transition year for the crypto business at large, not just at Galaxy, but globally. And what I mean by that is, we are going from a very speculative business where if you were being crash, you would say, is the crypto casino to a technology that is going to be used in industry all over the world. And you're seeing that pickup in an accelerating fashion, right? Every trade by organization is working on their version of that infrastructure. They need a wallet, they need custody. And so we have an infrastructure business that's doing great stuff right now, is engaged in all kinds of conversations. Again, I'm not going to announce anything today, but stay tuned. We will we've got some announcements that are coming soon. deals that roughly are done, just aren't at the announcement stage. And -- but that business is going to keep on growing. And for the world, it's important, right? When you want to understand what's really happening as we're tokenizing equities, tokenizing privates, tokenizing mortgages, tokenizing currencies, right, this is void that the United States projects its power around the world. If you want to think about the real use case of crypto, it has always been the rest of the world more so than the United States, right? Here, we've got great financial services accessible to most Americans. But there are 5 billion, 5.5 billion people that, that's not true for. And so you're going to see the big brands being sold to places like Paraguay and Bhutan and Cambodia all over the world, where people have access to our financial services. And that part of what needs to happen is the Infrastructure Bill in D.C., the CLARITY Act. That's got a really important 6 weeks. I still believe it gets passed. There's a few obstacles, right? [ Thom Tillis ], who's a friend of mine, and he's a tough son of a gun; he has been digging in. Him and the President are not on the best of terms. And so he's pushing pretty hard on the ethics piece of this thing. I do think they'll get through that. It's important for both the Republicans, who campaigned on it to get this build on; and for the Democrats who don't want to have to campaign on it to get it done. And it's important for America. And so I think once that gets done, you're going to see a further acceleration in that build-out, and it's also going to help crypto prices. Bitcoins, which is the bellwether, first quarter, we had a pretty severe sell off all the way to 60,000. It feels like that has -- that will be a tradable bottom for this part of the move. We bounced up to 80. Now I think we're trading 76, 77. I don't see big clean exploding in the near term, but it might. And so I think you're going to have some wood to chop through 80, 85. Once you get through that, the next stop is 100. And if you break that, then it's all price discovery. And so it's not my prediction that we break that 100 this year. You're going to need a few things to happen. Mostly that will be an easing central bank. And given the war in Iraq, we've got some pretty ugly inflation prints that are going to come through the pipeline -- I'm sorry, the one Iran, pretty bad inflation points that will come through the pipeline. And so I don't think the Fed does anything but sits and watches I know Kevin Warsh, is a real believer in the productivity miracle that is coming from AI. One thing I was pointing out to the guys here is all of this wild acceleration we're seeing in AI is mostly being done on the infrastructure that already existed. Campuses like Helios where we're delivering the data centers, it's still not really -- we deliver the data center support. They then take another 2 to 3 months to build out the insight for final customer use. And so it's really not until this time next year when the next phase of power comes into powering AI. And so the AI revolution is just starting, and its impact on inflation and its impact on productivity, Its impact on how the world changes. And so I think the Fed will be cutting rates by the end of the year. I think that will be very supportive of a broad crypto prices. One thing I'd point out is that prices were around 20%. Volumes in trading markets were roughly down 20%. And here at Galaxy, volumes were flat. And so it's for the first time we really started to see a decoupling of our business from the price, and that's very promising. If I could see that 4 quarters in a row, I have a big grin on my face. The balance sheet lost money as crypto prices were down, but we way outperformed what we would have done if we had not a cut some positions and also shifted a lot of our Level 2 exposure to Hyperliquid, which is one of the tokens that I talked about. We've been a supporter mostly because it's got an economic model unlike many of the other tokens, which were more association tokens. And I think Hyperliquid is a good way to look at what the future of crypto is going to look at. And so again, the headline numbers weren't what I want. But I feel really good about the two businesses, both how we're doing in the macro over backdrop for both of them. And what that will pass it on. Anthony Paquette: Great. Thanks, Mike, and thank you, everyone, for joining the call today. I'll start by walking through the consolidated financials and the balance sheet and then dive into the digital asset operating businesses in more detail. before turning it over to Chris for an update on Data Centers. As Mike mentioned, Q1 was a challenging quarter for Digital Asset prices with total crypto market cap declined roughly 20%. While that impacted our reported results, our operating businesses continue to perform and we reach an inflection point at Helios as we started to come online. For the first quarter, we reported a GAAP net loss of $216 million or a loss of $0.49 per share and firm-wide adjusted EBITDA of negative $188 million. These results were driven primarily by unrealized mark-to-market losses on our balance sheet, Digital Assets holdings, with the Treasury & Corporate segment reporting an adjusted gross loss of $140 million in the quarter. Firm-wide operating expenses, excluding rose transaction costs and the impairment of Digital Assets were approximately $147 million in Q1. Down 7% quarter-over-quarter, driven by lower professional fees and a decrease in compensation expense. On the operating business side, our Digital Asset segment generated $49 million of adjusted gross profit, roughly in line with Q4 results despite broad market weakness in Q1, as Mike mentioned. I'll provide more detail on this performance in a few moments. In Data Centers, our financial results remain de minimis in Q1 as we work through the final stages of construction and commissioning for Phase 1 at Helios. As mentioned previously, revenue will begin ramping in Q2 as we deliver data halls under our CoreWeave lease agreement. As a reminder, these are 15-year contracted cash flows at approximately 90% average lease level EBITDA margins entirely uncorrelated to Digital Asset prices. As that revenue comes online, it will begin to meaningfully diversify our revenue and earnings profile in the coming quarters. Turning to the balance sheet, we ended Q1 with approximately $10 billion in total assets, down from $11 billion at year-end, driven by the decline in Digital Asset prices. Total equity capital was $2.8 billion with roughly 60% allocated to our operating businesses. This mix will fluctuate quarter-to-quarter. But as previously noted, we expect this year of capital allocated to our operating businesses to continue increasing in the coming quarters, driven primarily by the ongoing build-out in Helios. Within Treasury & Corporate, we have approximately $1.4 billion of net Digital Assets and investments, down 19% quarter-over-quarter, primarily reflecting market appreciation. During Q1, we repurchased 3.2 million shares of our Class A common stock for $65 million under our previously announced $200 million share repurchase authorization. This amount more than offset dilution from equity-based compensation awarded in 2025 and brought our quarter end share count to approximately 390 million basic shares outstanding. We view share buybacks as an attractive use of capital when we see meaningful disconnect between the stock price and the intrinsic value of the company, and we'll continue to use them in a disciplined manner, consistent with this philosophy going forward. Cash and stablecoin in balances were approximately $2.6 billion at quarter end, roughly flat from year-end. We will continue to manage our balance sheet with discipline, balancing investments while maintaining sufficient capital and liquidity, including for the potential repayment of $445 million of exchangeable notes maturing in December of this year. Now turning to our operating results, starting with digital assets. Q1 reflected in a more challenging market backdrop as we talked about with Digital Asset prices down quarter-over-quarter and a corresponding softening, trading volumes and on-chain activity. Against that backdrop, our Digital Asset segment delivered $49 million of adjusted gross profit, roughly flat quarter-over-quarter. In a sequentially weaker environment, this stability reflects how the composition of the business has begun to shift, Recurring fee revenue and transaction income continue to scale across the platform, and this pace will hold up better in quarters where volumes and prices do not. We also tightened operating expenses during the quarter, narrowing the adjusted EBITDA loss by roughly 1/3 from Q4. In a volatile industry, how we manage the business in challenging environments matters just as much as how we perform in strong ones. The Global Markets business delivered adjusted gross profit of $31 million, up 3% quarter-over-quarter, with Digital Asset trading volumes holding steady, as Mike mentioned, even as the industry-wide activity declined more than 25%. We're adding new trading clients at a steady pace and the mix is shifting with the growing share coming from traditional asset managers and hedge funds, reflecting the ongoing convergence of digital assets and traditional finance. On the lending side, our average loan book declined approximately 20% quarter-over-quarter, driven by digital asset price appreciation, modest client deleveraging and roll-off of 2 larger loans. Since then, we've added new clients and originated new loans while further diversifying our counterparty base, which will continue to support a more durable loan book going forward. A quick update on GalaxyOne, where we're quietly continuing to build momentum. We recently launched Solana staking at 0% commission and will be opening the platform to business accounts in the coming months, expanding the user base and addressable market. GalaxyOne is still early, but we see a meaningful opportunity to continue layering in capabilities that integrates trading, yield and asset management into a single unified experience. Turning to Asset Management, we delivered adjusted gross profit of $18 million and ended the quarter with approximately $8 billion in assets on platform. In Asset Management, we generated $69 million of net inflows during the quarter, underscoring the durability of our platform against the soft market backdrop. Flows were broad-based across both our ETF platform and alternative suite, reflecting continued institutional demand for access to digital asset ecosystem and confidence in our ability to manage through volatility. Subsequent to quarter end, we secured a new $75 million investment mandate, one of the largest single client inflows in our history. Our [ SMA ] and managed account business continues to grow as an increasingly important part of our overall platform, and we see a clear path to further expansion through 2026 as client appetite for bespoke mandates remain strong. In addition, on May 1, we will be launching a new fintech hedge fund focused on the convergence of traditional financial services, blockchain infrastructure and emerging technologies. This is thematic we've been operating within at Galaxy for nearly a decade and one we believe gives us a differentiated edge as investors. We've seen this space at all firsthand, we understand how these businesses are built and we're able to underwrite opportunities with a level of conviction that comes from being both operators and longtime participants in the ecosystem. This approach is consistent with how we're building the asset management platform, focusing on differentiated strategies that align with where we see long-term capital formation and innovation across the digital asset ecosystem. On to digital infrastructure solutions, as Mike mentioned, we spent the past 8 years building institutional-grade infrastructure to support our own operating businesses. And what we're seeing now is a shift where the largest financial institutions are preparing to move on to blockchain-based rails and are coming to Galaxy as a partner in that transition. Institutions need foundational infrastructure to operate in a tokenized financial system. That includes wallet and custody technology that enable secure 24/7 movement of digital assets as well as the ability to deliver financial products in a way to integrate with their existing systems. This isn't limited to banks or traditional asset managers, it's every institution that touches a digital asset that is now trying to determine what infrastructure they need in a tokenized world. Whether it's trade settlement and clearing collateral management, corporate treasury or fund administration, all of that has to be re-architected for a digital-native environment. So when we think about the total addressable market, it is not niche, it's the entirety of the capital markets across the front, middle and back office, all of which ultimately needs to be rewired. Against that backdrop, institutions are looking for partners with the technical capabilities infrastructure and expertise to support that transition, capabilities we at Galaxy have been building for nearly a decade. We are now taking those learnings and productizing our digital infrastructure platform into a B2B model through white labeled solutions, bespoke integrations and custom infrastructure to meet institutions where they are in their adoption cycle. This spans powering staking infrastructure for leading asset managers to developing wallet custody and private key architecture for financial institutions and service providers. Once we're embedded at the infrastructure layer, we're able to provide a set of services where we have real competitive strength that includes acting as a liquidity provider to enable their clients, access to crypto markets, delivering fund and investment products and providing lending and financing solutions. As we expand this business and deepen those integrations, we expect a continued shift in the composition of our revenue. Over time, our results should become less correlated to the underlying price of digital assets and increasingly driven by the pace of institutional adoption and utilization of the infrastructure itself. These are not short-cycle engagements. Winning and growing these mandates requires time, integration and a high degree of trust. We've been investing in these relationships for a long time, and we're seeing that begin to translate into tangible opportunities, which we're excited to build on in the quarters and years ahead. Stepping back, the regulatory environment is continuing to develop. Institutional adoption is accelerating, and the pipeline of opportunity across our digital asset businesses is extremely robust. Q1 was a difficult quarter from a market standpoint. But the most consequential developments in digital assets don't happen in price, they happen in infrastructure, regulation and institutional adoption. Before I turn it over to Chris, I want to touch on our Q2 preliminary performance. So far in Q2, we have seen an improvement in digital asset prices and overall activity. This has translated into a strong start to the quarter for Galaxy, with second quarter-to-date adjusted EBITDA estimated at approximately $90 million through last Friday. With that, let me turn it over to Chris. Christopher Ferraro: Thanks, Tony. The lights are on at the Helios campus. We've delivered the first data hall to CoreWeave, and I would call that the most significant milestone this business has hit since the day we signed the lease. Not long ago, this was a Bitcoin mining facility. Today, it is a live operational AI data center with power distribution, cooling and network connectivity. That's a credit to the team on the ground in Texas and here in New York. This is the single most important derisking event this business has experienced. We now have a track record of delivering on time and on budget, not a projection. That distinction matters when you're sitting across the table from a prospective customer or capital partner. We've proven we can take a site from concept to operational data center at hyperscale, and that credibility is opening doors. We remain on track to deliver substantially all of the 133 megawatts of critical IT capacity for Phase I by the end of Q2. Our client, CoreWeave, has indicated that it expects a multitrillion-dollar investment-grade public company to be the end user for their GPUs at our Phase 1 Helios facility once the clusters are operational. Turning to Phase 2. We've made meaningful progress on the greenfield construction for the 260 megawatts of incremental critical IT capacity. Site work, concrete and steel are advancing on the new data center buildings, and Phase 2 data hall deliveries are on track to commence in the first half of 2027. On Phase 2 financing, we're seeing strong demand for financing the build. Our focus is on maintaining a capital structure that gives us the flexibility to scale without overleveraging the platform, and we expect to have more to share on Phase 2 financing in the near term. Turning to leasing the available 830 megawatts, the demand environment for large-scale HPC capacity remains very strong. Every major participant in this market has capital available and is racing to lock up future capacity, and we're seeing that firsthand in the quality of the conversations we're having. We are in active discussions with a select group of potential customers. A lease of this scale, multiple years and billions of dollars of contracted revenue requires extensive diligence, bespoke structuring and careful negotiation. We've been through this process before, and we know what it takes to get it right. The compounding value of picking the right partner and the right structure is enormous, and that is worth us being deliberate about. From our seat, 830 megawatts of approved front-of-the-meter power in ERCOT is a one-on-one asset. And the responses from potential customers evaluating the opportunity reinforces this view. Importantly, though, we are not waiting on commercial structure to be finalized to proceed on development. Consistent with our approach throughout the initial Helios build, we've begun procuring critical infrastructure for the 830-megawatt development. Specifically, we have placed deposits and issued purchase orders on main power transformers and circuit breakers for the first phase of that development and have secured capacity for the balance of long-lead electrical infrastructure. Lead times for this equipment stretch to multiple years. And steering supply early has been core to our development basis and scheduled forecasts. A brief update on the evolving ERCOT regulatory framework. In mid-March, ERCOT published a draft rule, PGRR145, which establishes a base load category for projects with a 2028 energization date. Projects in that category are not subject to restudying batch 0. Eligibility requires two things: Valid completed interconnect studies and a signed interconnection agreement with the utility. Our interconnection studies were completed on January 15, and our service agreement is already executed. We satisfy both requirements to be eligible for baseload within batch 0 based on the current draft. I will note that PGRR145 is still in draft form and could change. We're tracking it closely and are in active dialogue with ERCOT and our advisers. But as we read it today, nothing in the current draft indicates a deferral, and we are certainly not treating this capacity as speculative. There's still a lot to develop at the Helios campus, but scaling beyond [Audio Gap] we continue to evaluate a deep pipeline of opportunities across the U.S. We're being highly selective. Not every megawatt is worth pursuing. And we're only going to transact on sites where we have conviction in power availability, land suitability, development timeline and customer demand. Several of those sites have progressed to LOIs, and we expect we will be discussing our multicampus portfolio within this year. The Helios campus is the foundation, but the vision is a multicampus, multicustomer platform built the same way, one disciplined step at a time. We spent the better part of 2 years building this business, and now that foundation is operational. Phase 1 is delivering. Phase 2 is under construction. We have 830 megawatts of approved incremental capacity with active customer conversations underway. We have an additional 1.8 gigawatts progressing through the ERCOT study process and a growing pipeline beyond that. We've proven that we can execute. What lies ahead of the Helios campus and beyond is an opportunity of extraordinary scale, and we're just getting started. I'll turn it over to the operator for questions now. Operator: [Operator Instructions] The first question comes from Peter Christiansen with Citi. Peter Christiansen: Great to be a part of the call. I'm curious on the financing side as it relates to data centers here. I mean fully stabilized lease hyperscale deals are seeing tightening spreads. But I guess, the rating agencies have been calling out syndicate financing for large deals being potentially get strained. Just curious if you're seeing the same. And how are you thinking about that on your go-forward financing strategy? Christopher Ferraro: Yes. So I would agree with the comment that financing for stabilized assets in the space has started to tighten. That's definitely true. The -- what I would say is prior to maybe 6 months ago, the market was split and/or pretty heavy towards bank syndicates financing, more traditional project finance style financings. The high-yield bond market has definitely stepped in, in a big way over the last few months and has taken a lot of the market share from the larger bank syndicates, which is good because it's a much more distributed base of investors with much more flexible pools of capital rather than a traditional bank that's looking to either hold and syndicate sort of prescriptive project financing, We've pretty much seen -- things could change, but we've pretty much seen spreads tighten across the board, and that's come from a peak of sort of concern around build-outs, CapEx budgets, credit quality. And spreads have come in pretty significantly. And so the rating agencies have come through and they've started to rate a number of issues that have come out either at or above the underlying credit levels, which sort of takes into account the fact that folks like us are actually building long-lived, durable infrastructure. Even though we have a tenant who has their own credit quality, those assets live beyond any tenant deal and a repurposeable et cetera. And so we're actually -- we're pretty constructive right now about the opportunities for financing cost and beyond relative to where the market even was a few months ago. Operator: The next question comes from Patrick Moley with Piper Sandler. Patrick Moley: Yes. On the additional 830 megawatts at Helios, Mike, you mentioned that there was maybe some deals that were getting done but nothing ready for an announcement yet. I'm -- just to kind of level set, is it safe to say that this is not an extension of the current agreement with CoreWeave, but in fact, separate tenants? And then is there anything you can add on... Michael Novogratz: I think you missed -- either I misspoke or you misheard me. What I was saying is on the 830, we're engaged in lots of conversations. And then on new projects outside of Helios, we are -- as Chris said in his remarks, we're LOI stage. And hopefully in the distant future, we'll have things to announce where we've got actual locked-up projects. And so that's separate from Helios, which has always been our goal to have a multicampus business. And so hopefully, by the time we're on next quarter, we're talking about that with much more detail. Christopher Ferraro: Yes. And just to add on to what Mike said, Patrick, to get a different angle of the question you're asking, the -- in addition to a multicampus strategy, we are very focused on a multi-tenant strategy as well. And so I think it's very fair to assume that we're always talking to CoreWeave because they're our biggest partner in the business today. But the customer conversations we're having extends pretty far beyond just CoreWeave. And I would expect our decision-making around the 830 is going to take into consideration the fact and the importance of having a diversified exposure client base across all our assets. Operator: The next question comes from James Yaro with Goldman Sachs. Unknown Analyst: I'm speaking on behalf of James Yaro. My question is, what is the risk appetite among your crypto trading clients? And when do you expect it to stabilize or inflect as crypto prices have appreciated now? Michael Novogratz: That's a good question. Listen, like I said in my remarks, volumes across all of crypto trading was down, call it, 25% on average last quarter. We felt good that we were flat. I think you need a few catalysts. What was nice is that what you saw broadly selling from old school, old holders of crypto that drove the prices down and who came in was retail, retail through ETFs and retail through buying micro strategies, equity, which then translates into Bitcoin buying and other crypto. When Bitcoin stabilizes and trades up, the rest of crypto does better. And so you've got places like Morgan Stanley, who have moved into the space in an aggressive way and have their whole sales force now pitching a fairly large allocation of Bitcoin as part of their portfolio. And so I think what we're seeing is this transition from people that held crypto for 5, 10, 15 years. taking some profit, selling some of theirs, and that's being replaced by a broad retail buying base. We've seen a couple of sovereign funds come in and buy as well or add to positions. And so I would be lying here and say if it's more muted than had it been in previous years. There's more excitement in AI equities, in crude oil around the war. And what we're seeing is crypto infrastructure is now being used to also trade those. And so you're seeing perpetuals, which was a crypto innovation, being brought to equity markets. And so the broad, big-picture theme is this infrastructure and what goes along with it will be very supportive to the whole space, but it's not necessarily short-term demand for -- you name the token. If it's Solana, Polkadot or Ethereum, right? That demand is less, less exciting right now, a little bit more muted. Again, cutting rates and the CLARITY Act passing probably gives that a kick. But what we've always seen in crypto is what really drives crypto is price. And so again, we're basing, once we get moving, people will find all kinds of reasons to get excited. Operator: The next question comes from James Faucette with Morgan Stanley. Please go ahead. James Faucette: I wanted to build in quickly through the approval process in ERCOT and the batch process that as I understand, it will be starting this summer. Can you just touch on two things? First, any clarification to make sure that the recently approved 830 megawatts isn't subject to any part of that batch process or review of the batch process? And then, can you give us an assessment of where you think you are or what you may need to do to gain incremental approvals as part of that process for additional capacity and what that time frame may look like? Christopher Ferraro: Sure. So let's start with -- we have two pieces right today at Galaxy, Our originally 100 megawatts that's already leased, let's focus on that first. There's nothing in the current regulatory landscape that we see that puts that capacity at risk. We have a fully executed service agreement, complete interconnect studies, Phase I is live, and we're delivering power to it. Next, the 830 megawatts approved earlier this year, we're equally confident in that. I think in my comments, we talked a little bit about the draft PGRR145 rule which sets baseload category for projects that are not subject to restudy, not subject to looking at. And it's very clear to us and it's been communicated as such that the 830 megawatts that was approved is part of that baseload capacity to be for batch zero, meaning not part of -- meaning it's the base case for all new power being studied. We had our studies approved in January. We had an interconnect agreement with the utility. So that -- as it's drafted today and as far as we can see any potential iterations of that draft is covered. That leaves us with today what we expect could be up to an additional 1.8 gigawatts. That 1.8 gigawatts for us is what's in question from a timing perspective. And I think the best I can give you on that today is ERCOT is still working through the specifics on what they think the new batch process is going to be and therefore, which parts of our 1.8 gigawatts would fit into potentially being looked at as new studies in batch 0 or new studies beyond batch 0. So that's probably the best I can give you today. Operator: The next question comes from Bill Papanastasiou with Chardan Capital Markets. Bill Papanastasiou: Congrats on the recent progress at Helios. I just wanted to dig a bit deeper on potential lease economics. How could they look at -- for the uncontracted capacity relative to the CoreWeave deal? Should we expect similar headline metrics? Or do you think it would be more aligned with other deals that we've seen by some of your peers? Christopher Ferraro: So that is a very good question and it's hard to answer it directly because there's a bunch of different factors, right? So when we originally signed the CoreWeave deal, CoreWeave was -- actually, when we entered negotiations, CoreWeave was still a private company and there was a very different credit quality than at least on the headline than when we signed it today. So credit quality is a very important element to any economics to get signed with any counterparty. And the way we think about it is while a headline dollars per kW per month rent rate is an important metric, sort of the net after financing cost spread capture of any deal we signed for us is probably more -- is more important. And so you have this balancing act between headline monthly rent revenue versus that minus financing costs, which you're going to be very clearly will be tied to what kind of tenant we have. And so the market -- now in the interim, a number of deals have gotten done. And while the headline numbers with regards to their rent versus ours, are lagging, meaning like our headline rent number with CoreWeave is a standout in the market. We're pretty constructive that on an after-financing cost basis, the economics to us, both on a dollar and on an IRR basis to build for this next capacity, is going to be equally attractive. And so that's just a framework for the way we think about the opportunity set and how we would strike a deal in the things we consider. Operator: The next question comes from Devin Ryan with Citizens Bank. Devin Ryan: Question just on trading activity. And if we were to just assume the CLARITY Act passes, let me just get some thoughts around what you think will happen with trading volumes? And Mike, I heard obviously the comments around price and trading kind of going together. But as we think about just the demand for some of the kind of the further out layer 1 and layer 2 beyond the top 10 or 20, seems like demand has dried up quite a bit. And so I'm just curious, whether you feel like that's cyclical just because of risk appetite is not there or maybe secular because there's just not a lot of activity happening on those blockchains and so maybe we consolidate activity to a smaller number of large blockchains and that's good for maybe institutions, but maybe not as good for kind of the speculative retail piece. So just curious kind of how you see things playing out post CLARITY does pass. Michael Novogratz: I think my answer is going to tend towards the latter setup that you had. Listen, I think CLARITY will bring more and more institutions in, and those institutions will come in some set of direct trading desks to compete with us in Bitcoin and Ethereum and some of the other big majors, people getting more comfortable with the neobank that will have a broader selection of -- neobank wallet structure that people are pushing a broader selection of tokens. But I think the bigger idea here is that as you turn Wall Street on, you turn a selling machine on and it starts with Bitcoin and Ethereum, and those things have generally propped up the whole industry. The big transition we're seeing as we move using crypto infrastructure, it's happening at the same time where there are so many other avenues for people to speculate, right, the explosion of sports betting, online gambling, sports betting, prediction markets, even Mean coin trading. In some ways, I don't think you'd ever saturate people's desire to gamble, but there's a lot more on offer than just Polkdot tokens. And so those tokens need to, those ecosystems need to find a way to be more relevant. We've seen it with Hyperliquid. It's a perfect example of great technology, a tight team. But mostly an economic model in the token, that lets people feel like they're participating in the economics of the underlying ecosystem, not just having association with the ecosystem. And we have an entire hundreds of tokens that really were mostly association tokens, and that was mostly because of the regulatory environment. And I think those tokens are going to either have to restructure or they're going to slowly, slowly have less and less participation from both retail and the broad community. It doesn't mean they all will die because if there's a community that cares about it, they'll keep pouring in resources and trying to bring in more people. But we're going to go through this transition where I would hope and think in 5 years, most tokens that are out there are more than just community tokens. Operator: The next question comes from Edward Engel with Compass Point. Edward Engel: I appreciate all the clarity, comments on ERCOT's new load approval process, and I know this is still being finalized by them. But I guess from a timing perspective, I mean when do you think you're going to have more clarity on where some of your pipeline stands within either batch 0 or 1 or beyond that? Christopher Ferraro: Yes. Right now, the best visibility we have is around June, which is what indications are that both ERCOT will start to narrow in on their process for the batch interconnect study framework, at which point, we're sort of doing all the background work and ready to engage with that [ post taste ] once that comes through. So a couple more months from now towards the mid of the year. Operator: The next question comes from Benjamin Sommers with BTIG. Benjamin Sommers: I know you guys mentioned a little bit about expanding the total addressable market for GalaxyOne. But I guess just kind of curious, I know it's still early days, but what's kind of been the most, I guess, used features of this platform? And what's kind of drawn -- what do you think has gone most investors draw into this platform so far? . Christopher Ferraro: Yes. So there's a decent amount going on there. I think we have been more -- we were surprised. Actually, crypto trading has been the largest use case so far, which is a little counterintuitive because there are a lot of existing crypto trading platforms out there today. And our capabilities on that front are lagging today, although we're working very hard to both expand coin coverage adding staking, which we just did in the last quarter for Solana, and we're going to -- we'll follow up with the rest of those stakeable assets very soon. But crypto trading use case has outperformed expectations. Cash products are performing okay, lagging a little behind. The next step we're focused on, we're exciting about is sort of tying it all together by offering really financing solutions for individual consumer users that allow consumers to basically leverage their entire portfolio together to increase buying power in a thoughtful and safe way. And so our product deliveries today outside of the moonshot stuff, which we're very focused on iterating on, is around creating an entire wallet effectively that a consumer can own all of their assets, cash, equities, crypto and beyond; and thoughtfully increase their buying power without taking outsized risk. So yes, that's the GalaxyOne stands today. Operator: The next question comes from Martin Toner with ATB Cormark. Martin Toner: The revenue number was a nice one, given how difficult crypto markets were in Q1. Is the business becoming less cyclical? And is Galaxy to be able to do better in some of these weaker crypto markets? . Michael Novogratz: Your lips to God's ears. If we could do that 3 quarters in a row, I'll have more confidence to say it's less cyclical. This was a a promising quarter in that the trading desk stayed flat to quarter-on-quarter when overall revenue went down 25%. And and our balance sheet was well positioned. Again, we were in Hyperliquid and had less of other [ L2s ]. We have a little less big than we normally have, et cetera. And so if you're just looking at Digital Assets business, that's our goal, is to make it less cyclical. What you're going to see in the second half of the year as we'll make some announcements about the infrastructure business, which is certainly going to be less cyclical and help in that, right, relative to crypto trading. And then if you take Digital Assets and you combine it with the Data Center business, which I try to keep those things separate in my head, so we don't take hard-earned money in one and funs stuff willy-nilly and the other, right? We're going to try to be very thoughtful in both businesses and where we deploy capital. But overall, Galaxy will be less cyclical to crypto in a big way just because of Data Center earnings 12 months from now. But even within the Digital Assets business, our goal is to become less cyclical. And I think that's going to happen. But I'm not going to declare any kind of victory for at least 2 to 3 more quarters. Operator: The next question comes from Joseph Vafi with Canaccord. Joseph Vafi: Maybe you could touch a little bit more on real-world assets tokenization strategy. I know you mentioned both the wallet custody. And Mike, you just kind of talked about infrastructure. It seems from my seat, at least, this is kind of a bigger trend than pretty much anything else in the ecosystem right now. And just just a little more color on how it evolves, how you exploit the strategy. Christopher Ferraro: We would agree with you around the size of the direction of the trend line and the size of the total addressable market now being up into the right and larger than we've actually ever seen in our existence. Historically, Galaxy has been building technology products and services that we've been offering to largely institutional clients for most of our -- directly to largely institutional clients and buyers with a more recent step into more consumer-focused product offerings. What we're seeing on the tokenization -- I'll say, tokenization large, but really it's digital infrastructure to support bearer instrument tokenized assets, is a demand from the business side. What people would have considered to be the biggest looming concern for Galaxy is institutional business being bank competitors. We've seen the demand for those theoretical bank competitors be limit up for partnering with Galaxy to either buy or implement and use as a vendor, Galaxy's technology so that the financial system itself can build out the digital infrastructure and stitch it all together, so it actually works so that end users can seamlessly store value, transfer value, et cetera. And so the organization opportunity, we have been obviously tracking very closely. Our purchase of GK8 back in -- late 2022, early 2023 was one big step. A handful of smaller acquisitions we've made with great talent, engineers, technology on staking, liquid staking, other digital infrastructure has been a sign of us seeing it coming. We didn't really know in our heart of hearts where the market was going to land in terms of our market opportunity. It's crystallizing pretty fast now. And the market opportunity for us to build infrastructure for what everyone would have thought was going to be our biggest competitors might now become our biggest customers. And so we're very excited about that. That's where the real opportunity we see sits today. And I think Galaxy is best positioned to actually be the partner that the large financial legacy companies need versus some of our other competitors who are either highly undercapitalized, don't have the brand, don't have the trust in their staying capacity or have chosen to really be a vertical stack that's competing directly with those institutions. And so the landscape for our opportunity to really take advantage of the opportunity, it's pretty attractive. And that's -- we've sort of retooled the team, retooled our go-to-market to take advantage of that now. Operator: The next question comes from Chris Brendler with Rosenblatt. Christopher Brendler: I thought the Digital Assets business was was pretty resilient, given market conditions. But the one area that I thought was a little weaker than I was expecting was lending. Does it reflect decreased risk appetite? Is it asset price sensitive? Just a little color on the decline in lending. We love to see how that's being managed in this environment. Christopher Ferraro: Yes. Look, I think we have a pretty consistent and strong trend line in the lending business overall throughout our entire history. I think the #1 KPI is that we don't lose money, we don't lose our money, we don't lose shareholder money, we don't lose client money, counterparty money. We -- this was one of the first times in a while we saw a pullback I think it's pretty natural, given that a large percentage of our book is always denominated in crypto prices, we've either lent or borrowed crypto assets. that when you see a couple of repeated quarters in terms of -- including the last quarter with crypto prices down mid-20s for your notional U.S. dollar balance of your lending book to see some impact. While we'd love to keep the book growing all the time, when clients -- when prices are down and clients themselves are derisking, it's probably also smart to follow that trend, see a little bit of pullback, derisk your book and then rebuild. And so there was a couple of things. Crypto prices is down when a percentage of your book is exposed means your U.S. dollar notional by definition, should follow that. We also had a handful of large, very low-risk loans that were in the book that rolled off, which is just natural roll off. And so when you're sort of picking period quarter-end number and pegging it and looking at the health of the business, like having those roll off and then post subsequent to quarter, rebuilding the book and adding more diverse client base is pretty a pretty natural progression. So from my perspective, there's nothing to read into that other than we are continuing to grab market share, we're very happy to, for a period of time, sort of allow the deleveraging and the derisking to happen naturally. But our #1 goal of building a bigger, larger resilient borrowing pool of clients while being pretty aggressive on limiting downside risk. So we're very constructed in the business. That's one of our specialties. I think the opportunity set not of just building a bilateral lending book with institutions, but expanding that to pretty nascent early markets on chain, for example, is a wide open opportunity set for us. And so where we can grow the book smartly, the cone of that opportunity is a lot wider than what we worry about on the downside from a shrinking of the business. Operator: And the final question will come from John Petersen with Jefferies. Jonathan Petersen: Great on financing Phase 2 and maybe refinancing Phase 1, I'm curious, 1 of your peers earlier this year was able to restructure their debt with CoreWeave with a kind of an ultimate parent guarantee from the IG-rated hyperscaler that was actually using the compute, just curious, if you have a sense maybe that's something about restructuring Phase 1 when it's completed or construction financing on Phase II, if that sort of solution is part of any of the negotiations that could help on debt pricing? And if I could sneak in a follow-up. Do you guys have any updated thoughts on splitting the Data Center business from the rest of the company? Christopher Ferraro: Sure. I'll take the first one to start. I would answer that pretty succinctly in that all options are on the table. The market has been -- is pretty nascent. And the deck chairs of the largest companies in the world are shifting always pretty fast in the direction of own more compute, reduce the cost of owning more compute. And so we don't observe what you observed lightly and ignore it. Our approach to that is going to be pretty firm in terms of -- we know the value of Helios. We have a very attractive economic deal with a great partner today. To the extent we do, there is an opportunity to do something along the lines you're suggesting we're going to do it with a clear eye towards net present value to shareholders being equal or better on a risk-adjusted basis with clients. For Phase 1, I'll just reiterate my comment today that CoreWeave has stated that our end tenant in that facility is going to be a multitrillion-dollar IG public company. And so having -- knowing that, that's the anchor in our first facility gives us and should give investors as well as our financing partners there. a lot of derisking and a lot of comfort level there. On the second one, on splitting the business or the potential of it, no update on that. Our posture on that is the same as it's always been. It is from a management time and focus perspective, myself, Mike, Tony, the whole crew are equally focused on building both businesses, we're involved in building both businesses. We do recognize the capital structure and the capital needs of both businesses. And the earnings potential and visibility are very different. And so the -- today, they aren't natural synergistic businesses. but we're not convinced that that's not true in the future. And so we're going to continue to build both businesses and evaluate what the opportunities are when the time is right. Michael Novogratz: Just to put an exclamation point, Chris said, if you think about even the growth of where these businesses are, end of the year, we have a convert that rolls off. Helios actually is Phase 1 at least is fully cash flowing and Phase 2 is getting started. And so it's probably more of a debate for us around the end of the year than it is today. Operator: This concludes our question-and-answer session. I would like to turn the conference back over to Mike Novogratz, Founder and CEO of Galaxy Digital for any closing remarks. Michael Novogratz: Yes. guys, we appreciate your time today. It is a beautiful day in New York. I usually give a weather update at the start. Just want to reiterate, like we're optimistic on both businesses. We've got 700-plus people here working very hard every day. We understand we're in an environment where AI is changing every company in ways that they hadn't dreamed of 2 years ago, and we are engaged with that trend as well. And so I think the world is at an AI revolution, and we plan on riding that wave and paddling our canoe as fast as possible in what will be choppy waters because this is a pretty disruptive technology. But like hang on to your seats is the broader macro view. And thanks for your time. Operator: The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
Operator: Good morning, and welcome to S&P Global's First Quarter 2026 Earnings Conference Call. I'd like to inform you that this call is being recorded for broadcast. [Operator Instructions] To access the webcast and slides, go to investor.spglobal.com. [Operator Instructions] I would now like to introduce Mr. Mark Grant, Senior Vice President of Investor Relations and Treasurer for S&P Global. Sir, you may begin. Mark Grant: Good morning, and thank you for joining today's S&P Global First Quarter 2026 Earnings Call. Presenting on today's call are Martina Cheung, President and Chief Executive Officer; and Eric Aboaf, Chief Financial Officer. We issued a press release with our results earlier today. In addition, we have posted a supplemental slide deck with additional information on our results and guidance. If you need a copy of the release and financial schedules or the supplemental deck, they can be downloaded at investor.spglobal.com. The matters discussed in today's conference call may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, including projections, estimates and descriptions of future events. Any such statements are based on current expectations and current conditions and are subject to risks and uncertainties that may cause actual results to differ materially from results anticipated in these forward-looking statements. Additional information concerning these risks and uncertainties can be found in our Forms 10-K and 10-Q filed with the U.S. Securities and Exchange Commission. In today's earnings release and during the conference call, we are providing non-GAAP adjusted financial information. This information is provided to enable investors to make meaningful comparisons of the company's operating performance between periods and to view the company's business from the same perspective as management. The earnings release contains financial measures calculated in accordance with GAAP that corresponds to the non-GAAP measures we are providing and the press release and the supplemental deck contain reconciliations of such GAAP and non-GAAP measures. The financial metrics we'll be discussing today refer to non-GAAP adjusted metrics unless explicitly noted otherwise. As noted in the press release and slide, financial guidance provided today assumes contributions from Mobility for the full year and excludes any impact from anticipated stranded costs. The company expects to update adjusted guidance to exclude Mobility and institute GAAP guidance upon completion of the spin. I would also like to call your attention to certain European regulations. Any investor who has or expects to obtain ownership of 5% or more of S&P Global should contact Investor Relations to better understand the potential impact of this legislation on the investor and the company. At this time, I would like to turn the call over to Martina Cheung. Martina? Martina Cheung: Thank you, Mark. We are pleased with the results that we achieved in the first quarter. Revenue increased 10% year-over-year or 9% on an organic constant currency basis. Revenue from our subscription products increased 6% year-over-year. We saw even stronger growth in our market-driven businesses this quarter with Ratings and Indices both showing remarkable resilience. On a trailing 12-month basis, we delivered 140 basis points of margin expansion, and increased adjusted diluted EPS by 14% year-over-year in the quarter. We demonstrated a continued commitment to disciplined capital allocation returning $1 billion to shareholders through share repurchases in addition to our cash dividends in the quarter. We delivered these results in an incredibly volatile and dynamic operating environment, making clear progress in each of the 3 pillars of the strategic vision we outlined at our Investor Day. While we're pleased with the innovation, execution and results that we delivered in the first quarter, we acknowledge the macro uncertainty that has increased in recent months. Even if conflicts are resolved quickly from this point, we expect it to take some time for supply chains to return to normal. In recent months, the geopolitical and economic backdrop has shifted and become substantially more challenging for many of our customers. The conflict in Iran has shocked energy markets and supply chains. This has led to much higher energy and commodity prices while also elevating volatility. The longer the duration of this conflict, the broader and more severe the impact on global supply chains and markets across sectors. This quarter, we also saw private credit navigate increased scrutiny, wider spreads and elevated redemptions. We expect strong growth in private markets over the medium term, but this growth will require increased transparency from data and benchmarks, which is an important area of focus for S&P Global. Throughout all of this, the pace of technology innovation has only accelerated. Clearly, the markets are reacting quite aggressively to new AI frontier model headlines, shifts in diplomatic initiatives and the unpredictability of the current environment. That manifests in volatility across the global markets. We've seen broad dispersion in the performance of different sectors of the equity markets, elevated volatility in equity and commodity markets and shifting expectations for central bank actions. Despite the turmoil in the macro environment, issuance was resilient. Billed issuance increased 14% year-over-year in the first quarter, primarily driven by strength in investment grade. Investment grade benefited from hyperscaler investments in AI infrastructure. Notably, even without the hyperscaler issuance, investment grade delivered healthy growth in part benefiting from several large M&A transactions. Growth was partly offset by a high-teen decline in bank loan volumes as we lapped a very difficult compare in the first quarter of 2025. We saw spreads widen slightly in the quarter as a reaction to uncertainty around AI, private credit and geopolitical conflicts. Over spreads are still below historical norms. While first quarter billed issuance was above our initial expectations, Much of the outperformance was driven by hyperscaler issuance that our original guidance assumed would be spread more throughout the year. Our full year expectations for the debt markets are largely unchanged. Everything we see reinforces our vision for the company, and our priority remains on executing our strategy. We are committed to our mission to advance essential intelligence by advancing our market leadership, expanding into high-growth adjacencies and amplifying enterprise capabilities and AI. Customers are coming to S&P Global with increased urgency for our differentiated data and benchmarks. Insights and tools to make timely and informed decisions in this rapidly evolving operating end market environment. For instance, we saw record revenue and attendance at CERAWeek, the premier global conference addressing the intersection of energy, finance, technology and geopolitics. This year's conference hosted a record 11,000 attendees and more than 2,300 companies from over 90 countries. We are helping our clients make sense of and manage the spike in volatility. We posted record-setting revenue in Global Trading Services and Energy and record quarterly average daily volumes for the S&P 500 Indices. We are also advancing our leadership as we help our customers unlock the potential of AI. As we discussed at our Investor Day, we are deploying AI native solutions and tools like ChatAI and Document Intelligence for those seeking speed and scale on our platform. For those who want to build their own AI-enabled or Agentic solutions, we are increasingly making our data accessible via standard protocols like MCP. We've seen meaningful enhancement to the value that our products are creating for customers. More than 1/3 of our CapIQ Pro users engage with the AI features we've launched, including ChatIQ and Document Intelligence. We also saw tremendous growth in the usage of S&P Global data in the quarter. In March, we shared that nearly 150 customers across the Market Intelligence and Energy divisions, were interacting with our data through AI applications like Claude and Copilot. We now have more than 300 customers under contract or in trial periods for Kensho-LLM-ready APIs. In addition to the rapid growth in customers, we are seeing large increases in the volume of data that's consumed directly via API calls from customers and through these platforms. For instance, in the first quarter, the volume of API calls made by our customers was more than 5x the volume that we saw just 1 quarter ago. Volumes doubled month-over-month just from February to March. We can see early indications of this translating into economic benefits. ACV growth among customers who use our AI solutions is outpacing growth from other customers by a wide margin. Growth in Market Intelligence is 30% higher among AI customers compared to others and growth among AI customers and Energy is double the growth rate among other customers. Chief Client Office customers are also actively seeking the deep expertise of our in-house Kensho team. 25% of these clients are engaged with our Kensho Labs Technologies to explore opportunities to leverage our technology and data to help solve their most challenging problems. All in, our approach to leveraging AI in S&P Global Products and S&P Global data in AI platforms is resonating with customers in a meaningful way. While it will take some time to see exactly how this manifests in our financial results, we are confident that the value we create for our customers is increasing and the economics will reflect that over time. At our Investor Day, we provided a breakdown of the revenue that S&P Global generates based on different categories of our data, benchmarks and workflow tools. We noted that less than 5% of total revenue comes from undifferentiated data. Even within Market Intelligence, undifferentiated data contributes only 12% of revenue, but we wanted to share the full breakdown of the division here. Advisory, Consulting and Events constitute about 11% of Market Intelligence revenue and our workflow tools, which include a portion of Capital IQ and all of Enterprise Solutions constitute about 37%. Our proprietary and curated data includes proprietary data based on our intellectual property as well as curated contributory and reference data. For our curated data, perhaps the biggest challenge in replicating some of these data sets like Compustat and SNL is the means by which we aggregated these data sets to begin with. Often, employees would have to physically scan and paper documents in local offices. While some of that data may be publicly available, many of these types of data sets are only available in digital formats from S&P Global. Importantly, Market Intelligence is also the distribution platform for our Ratings content through RatingsDirect on Capital IQ Pro and RatingsXpress. Contributory data sets include products and data like Visible Alpha and With Intelligence. We also have reference data in this bucket, which is based on intellectual property owned or co-owned by S&P Global like the Global Industry Classification Standard, or GICS, and LoanXID or LXIDs. We also generate unique proprietary data from our events, including our private market events. With Intelligence team collects insights through engagement with LPs that help GPs target more accurately based on fund, strategy, sector and regional capital commitments. This unique insight is available through our intentions and preferences data set. One important point is that we have attributed the revenue from Capital IQ across 3 categories: benchmarks, workflow tools and undifferentiated data. While many of our customers would likely attribute less value to the undifferentiated data, we wanted to take a conservative approach to this analysis. That breakdown is important because it highlights the multifaceted value proposition for Capital IQ Pro. When we talk about Capital IQ Pro, many investors often focus on our core platform or desktop offering. However, CapIQ Pro's value to our customers extends far beyond the desktop to the data, business logic and tools that are housed within the platform. As I mentioned earlier, we are deploying AI native solutions and tools for those seeking speed and scale on CapIQ Pro, including ChatIQ and Chart Explainer. These features are already driving customer engagement, and we expect many of our customers will continue to consume our content and data primarily through an integrated desktop solution. Other customers will have an interest in interacting with our content in their own AI environments and in third-party productivity tools like Claude and ChatGPT. Much of our data is accessible via model context protocol or MCP, and other standard protocols to customers in these environments. Our branded custom business logic and calculation engines as well as many of the tools that exist in Cap IQ Pro will integrate with platforms like Copilot and Claude. Our customers are on their own AI journeys, and adopting these new platforms in different ways, depending on urgency, comfort level and regulatory sensitivity. We will continue to invest in new ways to create value for our customers, including delivery through MCP and agent agent protocol, to ensure that customers can access our data and tools where they need it. And as usage increases and use cases expand, we expect to align the economics with the value we create through price. In the first quarter, we saw a great deal of innovation, including new products, new features and new services for our customers. Within Market Intelligence, we continue to make progress in the private markets with our partnership with Cambridge Associates and Mercer. In our Energy division, we just wrapped up the best CERAweek we've ever had. We unveiled our new AI native Upstream product for data and insights called CERA Titan. As we've discussed with you previously, we are in the process of completely revamping the Upstream business within our Energy division. 70 customers were able to demo the new platform and feedback was overwhelmingly positive. We immediately saw an increase in leads and sales pipeline for Upstream Data & Insights. And one large strategic customer was so pleased with the new platform that we were able to close a large renewal with a meaningful increase in contract value. In addition to improving our Data & Insights solutions, we also announced in a separate press release that we have signed an agreement to divest the software portfolio in our Upstream business, and we expect that to close in the second half of 2026 or early 2027. This allows us to more tightly focus our efforts on the proprietary Data & Insights within Upstream, and we believe this will allow us to make faster progress towards returning Upstream to sustained positive growth. We continue to innovate within S&P Dow Jones Indices with the launch of iBoxx U.S. Treasuries Index, as the first major index available as a native digital asset on a blockchain. We also launched an additional tokenized S&P 500 Index on blockchain in partnership with Centrifuge, and we launched S&P Link in U.S. and Europe senior debt indices. We continue to focus on decentralized finance and fixed income as strategic initiatives and are excited about the slate of new products coming to In Ratings, we raised the first esoteric ABS issuance backed by Bitcoin as we continue the innovation leadership in digital asset finance that we started in 2018. As we continue to execute our strategy, we are pleased with the results we're delivering for our shareholders with strong revenue growth and margin expansion in every division. With that, I'll hand it over to Eric to walk through the quarter's financial results and the guidance. Eric Aboaf: Thank you, Martina, and good morning, everyone. Starting with Slide 16. We delivered strong first quarter financial results with 10% reported revenue growth, 9% organic constant currency revenue growth and 14% growth in adjusted diluted EPS. This performance underscores the durability and resilience of our business even amid a period of elevated geopolitical and economic disruption. Reported revenue growth of 10% includes the acquisition of With Intelligence, which closed in the fourth quarter, offset by the divestitures of EDM and thinkFolio in January as well as modest tailwind from FX. Adjusted expenses increased 8%. As Martina mentioned, we began to see volatility in macro risk increase in late February and continue through March. We reacted quickly to make sure we were measuring expenses effectively allowing for better first quarter margins in every division than we had anticipated when we gave initial guidance. Strong growth and disciplined expense management combined to deliver 100 basis points of year-on-year margin expansion to 51.8% and 12% growth in adjusted operating profit. Excluding OSTTRA from the prior year period, our first quarter 2026 margin expansion would have been 160 basis points. Turning to our divisions on Slide 17. Market Intelligence revenue grew 8% and organic constant currency revenue grew 6% in the first quarter. Subscription revenue increased a solid 6%, both on a reported and organic basis, driven by strong renewals and net sales across the franchise. Subscription growth included a 50 basis point headwind from the timing of revenue recognition that we expect to reverse in the back half of the year. Onetime revenue and volume-driven revenue grew 18% in aggregate in the quarter. This was partly driven by the acquisition of With Intelligence and partly by the rebound of volume-driven activity. Data Analytics & Insights reported revenue increased by 11%, driven by our first full quarter of revenue from the With Intelligence acquisition worth 6 percentage points as well as solid 5% organic growth driven by market data and valuations, Cap IQ Pro and Visible Alpha. Enterprise Solutions reported revenue grew 3%, reflecting the divestiture of EDM and thinkFolio in mid-January. The business has delivered very strong organic growth of 14%, with double-digit growth across all major product lines. We've also included an additional slide in our supplemental deck to provide a breakdown of the workflow tools in our Enterprise Solutions segment, most of which benefit heavily from S&P Global data and strong external networks. Credit and Risk Solutions revenue grew 6%, driven by strong subscription sales of RatingsXpress and RatingsDirect. Market Intelligence's adjusted expenses increased 7% year-over-year driven by a full quarter of expenses from the With Intelligence acquisition as well as an unfavorable FX impact, higher compensation expense and long-term strategic investments, partially offset by the impact from the recent divestitures, including the sale of EDM and thinkFolio. Market Intelligence delivered 80 basis points of operating margin expansion to 33.6% in the quarter. Now turning to Ratings on Slide 18. Ratings revenue increased 13% year-over-year, exceeding our internal expectations for the quarter. Growth was strong across both transactional and non-transactional revenue streams. Transactional revenue increased 15%, driven by strength in investment grade, supported by a number of large hyperscaler or M&A transactions in the first quarter. Transaction revenue from governance, high-yield and structured finance also grew in the quarter but was more than offset by the weakness in bank loans due to a high teens decline in billed issuance. Private markets revenues were up over 25%. Non-transactional revenue grew 11%, driven primarily by higher annual fee revenue. We were also pleased by our growth in issuer credit ratings or ICRs, and Rating Evaluation Services or RES in the quarter. adjusted expenses rose 8%, reflecting higher compensation costs and continued strategic investments in our people, technology and product development. This contributed to the division's 160 basis points of margin expansion to 67.8%. Now turning to S&P Global Energy on Slide 19. The conflict in Iran has brought considerable volatility and uncertainty to the Energy markets that has persisted into the second quarter. Some of the Energy customers in the Middle East have experienced a direct impact to their facilities and many are facing supply chain and/or distribution disruptions. Even in this environment, Energy revenue grew 7% this quarter as we benefited from very strong events revenue, and we saw a spike in value-driven transactional activity. At the same time, the conflict weighed on other parts of our Energy division, including our subscription revenue. Sanctions continue to be a headwind as well as we've called out in recent quarters, but the conflict in the Middle East is pressuring clients and could lead to slower growth in the coming quarters. As Martina noted earlier, amid this uncertainty, our customers are turning to S&P Global for Data & Insights only we can provide. CERAWeek in Houston hit new records and online, the number of user queries in our Energy platforms, ChatAI feature more than doubled quarter-over-quarter. Energy & Resources, Data & Insights and Price Assessments grew 7% and 6%, respectively, driven by strength in petroleum gas, power and renewables. The sanctions we discussed last year drove a 100 basis point headwind to Energy & Resources and 140 basis points headwind to Price Assessments. Advisory & Transactional Services revenue increased 15%, driven by strong growth in conference and training revenue as CERAweek delivered record-setting attendance and revenue. We also posted close to 30% growth in Global Trading Services or GTS amid elevated energy market volatility. Upstream Data and Insights revenue declined 5% in the quarter. driven by the absence of a prior year onetime fee. We continue to streamline this business line and refocus on the areas of proprietary Data & Insights, as Martina mentioned. Our transformation is on track, including the realignment of the sales teams and the debut of our upgraded client platform at CERAWeek, which already has sparked strong customer interest. We're pleased with the team's progress, but given heightened Energy market volatility and uncertainty, we still think it could take several quarters before these management actions drive growth in Upstream. Adjusted expenses grew 4%. Our teams in Energy did a particularly good job moving quickly to keep expense growth low to preserve margins during a volatile period. The expense growth we did see was driven by higher compensation costs and unfavorable FX impact as well as ongoing investments in growth initiatives. First quarter margin expanded by 120 basis points to 49.3%. Now turning to S&P Dow Jones Indices on Slide 20. Revenue grew by 17% with double-digit growth across all business lines. Revenue associated with asset-linked fees grew 18% in the first quarter. This was driven by year-over-year equity market appreciation and net inflows into products based on S&P Dow Jones Indices. As we've noted before, in periods of heightened volatility, we often see slower flows and higher priced indices like sector, factor and thematics and higher flows in lower price indices like the S&P 500. That was the case in the first quarter as well, and that mix shift drove a modest decline in average realized price year-over-year in our asset-linked fees business. Exchange-Traded Derivatives revenue was up 18%, driven by strong volumes, particularly in SPX, which continues to demonstrate the natural hedge we have in this business during times of geopolitical and macroeconomic disruptions. Data and custom subscriptions continued to benefit from our focused commercial efforts over the last several quarters posting its third consecutive quarter of double-digit growth. Revenue increased 12%, largely driven by new business growth and end-of-day contracts. Adjusted expenses were up 13% year-over-year, driven by higher compensation costs and investments in growth initiatives. Indices operating profit grew 18% and and operating margin expanded 90 basis points to 73.8%. Now turning to Mobility on Slide 21. Revenue grew 8% in the first quarter, underscoring the mission-critical nature of the division's products with high single-digit growth in both dealer and financials and other and a modest tailwind from FX. Customers continue to rely on CARFAX's unique data and solutions, driving strong subscription growth despite a complicated environment for automotive OEMs. Dealer revenue increased 9%, benefiting from momentum in new customer growth at CARFAX and automotiveMastermind. Manufacturing revenue grew 5%, driven by subscription growth and increased discretionary spending. Growth was partially offset by softness in recalls and OEM marketing related products. Financials & Other grew 8% as the business line continues to benefit from underwriting volumes and commercial momentum. Adjusted expenses grew 5%, driven by advertising and promotional investments. Mobility's operating margin expanded 150 basis points year-over-year to 40%. Looking forward, we remain on track for our planned separation of the Mobility business, including completion of the spin mid-2026. We will file our Form 10 publicly this quarter, and the Mobility Global team is excited to be hosting their Investor Day in New York City on May 12, ahead of the launch of its equity roadshow. We also plan to launch a public debt offering for Mobility at some point this quarter, targeting an investment-grade rating. As a reminder, from a financial reporting and guidance perspective, S&P Global will continue to fully consolidate Mobility Global in our financial statements and 2026 guidance until the separation is complete. Upon completion of the spin, we intend to provide recast financials for the 4 quarters of 2025 and any 2026 periods reported adjusted to exclude Mobility's contributions along with other relevant adjustments as outlined at our Investor Day. We also expect to issue updated 2026 guidance at that time, excluding Mobility. Now shifting to our outlook, starting with Slide 22. I'd like to review the key macroeconomic assumptions that underpin our guidance, which takes into account the current geopolitical environment. The conflict in Iran has led to the largest energy shock since the 1970s and counterbalance what was previously a broadly favorable economic environment for business. Our current outlook assumes the situation stabilizes by the end of the second quarter, but we acknowledge the risk of a protracted conflict. We assume 3.2% global GDP growth, including 2.2% growth in the U.S. We also assumed 3.2% CPI growth in the U.S. We expect near-term energy client demand to remain suppressed given our expectation for ongoing market uncertainty. Should the conflict persist longer or escalate, we could see more significant direct headwinds, particularly in our Energy business and significant indirect headwinds in our market-sensitive businesses depending on equity market reaction and credit market conditions. We continue to see favorable market conditions for issuance in 2026 even though we now only expect 1 rate cut in the U.S. We also entered the year with encouraging maturity walls as we discussed on our fourth quarter call, and we are encouraged by the growth of announced M&A. As Martina mentioned, some of the strength in issuance in the first quarter was driven by front-end loading of hyperscaler issuance relative to our initial expectations. Given both the outperformance in the first quarter and the more modest expectations for Q2, we do not expect to see acceleration in Ratings revenue growth in the second quarter. We continue to expect Ratings growth to moderate in the third quarter before turning negative in the fourth quarter as we lap prior year highs. This leads us to our updated guidance for the Enterprise on Slide 23. At the consolidated level, we are reiterating our guidance for organic constant currency revenue growth in the range of 6% to 8%. We're also reiterating our guidance for 50 to 75 basis points of margin expansion in 2026 excluding the impact of OSTTRA. Our adjusted EPS guidance is also unchanged at slightly higher expected interest expenses offset by lower share count due to the additional repurchases we now expect. As you can see on Slide 24, our division guidance is also unchanged with the exception of our Energy division. Given the external environment, particularly the impact of the Iran conflict and the energy disruption on both the demand and supply side, we currently expect to deliver organic constant currency revenue growth in the range of 4.5% to 6%, 1 percentage point lower than the previous guidance. Importantly, our guidance assumes that the current elevated level of disruption in the energy market persists through the second quarter. The supply chain disruptions would not fully be resolved until later this year. For our Indices business, our full year guidance is unchanged. However, the underlying assumptions have been adjusted to reflect the current market dynamic. Our guidance now assumes equity markets roughly flat from current levels and low double-digit growth year-over-year in ETD volumes. We also wanted to provide some directional color for the second quarter. In Market Intelligence, we expect some acceleration in subscription revenue, given what we're seeing in customer traction and sales pipeline. We expect that to be offset somewhat as growth in nonsubscription revenue normalizes. In Ratings, we will be lapping the disruption caused after Liberation Day last year, which creates a favorable compare. We expect growth to remain strong, but we do not expect acceleration in 2Q. We do expect investment grade to continue to represent a higher mix of issuance compared to historical averages, particularly if we continue to see elevated hyperscale CapEx driving large volumes in the second quarter. For Energy, the macro disruption has a concentrated impact in the second quarter, and we have already seen that impacting our near-term sales pipeline. We expect revenue growth in the second quarter to fall slightly below the guidance range for the full year before reaccelerating in the second half. We will be monitoring the sales motion, customer health and macro environment closely and managing expenses throughout the year to ensure we are preserving margin. For Indices, we expect continued robust growth in the second quarter before growth decelerates in the second half given the tougher compares in 3Q and 4Q. For Mobility, we expect growth to accelerate slightly from the first quarter levels with stronger growth expected in the second half. On second quarter margins, we expect margin expansion to be above the enterprise full year range for Ratings and Indices, slightly below the range for Mobility and Energy and within the range for Market Intelligence. This is largely due to the timing and quarterly phasing of expense recognition as we were very disciplined in our approach in the first quarter. Our full year expectations in each of these divisions are unchanged. Lastly, we want to provide an update on our capital plans for the rest of the year. As you know, we have a target gross leverage range of 2 to 2.5x trailing 12-month EBITDA. Given the expected loss of Mobility EBITDA, our current leverage of 2.3x will naturally increase to 2.4x at the end of the year. However, we expect to issue approximately $2 billion in debt at Mobility in conjunction with the spin. Proceeds are expected to fund a cash payment to S&P Global, which we would expect to use for a combination of incremental share repurchases and some debt reduction. Given the strength and resilience of our business and our confidence in its long-term profitable growth, we believe the current share price reflects an attractive opportunity to increase our repurchases from the expected 85% of adjusted free cash flow to at least 100% or to roughly $4.5 billion for the year. With that, let me turn the call back over to Mark for your questions. Mark Grant: Thank you, Eric. [Operator Instructions] Operator, we'll now take the first question. Operator: Our first question comes from Toni Kaplan with Morgan Stanley. Toni Kaplan: Martina, thanks for the color on what you're doing with regard to the AI distribution channels. I was hoping that you could expand on how you're thinking about the partnership strategy with the large AI players? Are you building SMP, MCP apps on the platforms? Or you just plan to continue to provide the data through the MCP integrations and the APIs? And maybe if you could just talk about the monetization model and directional economics between the different distribution channels. Martina Cheung: Toni, thanks for the question. And the quick answer to the first part of that around MCP applications is, yes, that is our intention. I think we're going to be very thoughtful around how we build those applications and for what, particularly. This is one of the reasons why we wanted to highlight the value that exists in the workflows in Cap IQ Pro today, for example, it's not just the data. It is the standards, the business logic as well as the tools and all 3 of those will be part of that strategy. The first step to doing that has actually been the announcement of the S&P Global plug-in, which was announced in line with the Claude for Financial Services announcement in the first quarter. And that's essentially a series of agents that teach AI agents within the platform, how to actually conduct specific tasks for data, AI-ready data that the client might be licensed to. So maybe to give you an example, one of our buy-side clients working with Kensho was looking at our financial data via at AI-ready API and Kensho helped them to understand how to use the plug-in to perform tasks like creating tearsheets or creating earnings calls previews. And as a result, the clients liked it so much that they actually canceled their existing provider and went with our data and plug-in even though it was about 20% more expensive. Now look, it's early days. Obviously, we just launched that in Q1, but I think it's an interesting signal for how clients are testing the value of our IP, whether it's our logic, our standards as well as our data in the context of these providers. Now the point I would make on monetization is that we are really thinking about monetization through the lens of enterprise value. So as you know, we don't do seat-based licensing. We don't do usage only. We track usage, channels, the value we create and a number of other metrics as part of the discussions that we have with our clients on value and price accordingly. And that's going to be true for plug-in. It's going to be true for MCP. It's going to be true for AI-ready data as well. And we're seeing clients who are quite interested in the value that we bring through all of that. Perhaps maybe one other example I would provide is in the quarter two financial clients who are just subscribing to our data at renewal, were opting to get that data available in an AI-ready format. And were willing to pay in the range of 35% to 45% on the renewal increase to get the AI access. So again, early days, but some very strong signal here around the monetization from an enterprise value standpoint. Thanks for the question. Operator: Our next question comes from Faiza Alwy with Deutsche Bank. Faiza Alwy: Martina, I wanted to follow up on the same topic. On Slide 11, where you talk about Market Intelligence data differentiation. I'm curious how would you -- when we look at workflow solutions, how would you attribute sort of the value of the proprietary data versus sort of the software component of the workflow tools here. Martina Cheung: Thanks for the question. So with regards to workflow, you'll see a lot of these products embedded in our Enterprise Solutions business. And there, we operate many mission-critical software and workflows for our customers. These would be workflows that are scaled, require robust controls, risk management, and compliance layers and really require a lot of intervention through our managed services to make sure that they're continuing to deliver. And so there's very much a mission-critical nature to many of these. There are several of them that actually function as networks for industry groups, not just for an individual client. And so there, we would see perhaps the Wall Street office, for example, or ClearPar in that category, and again, serving not just a client, but the benefit of it being derived because it is actually informing a whole ecosystem. And in many cases, the value that our clients get from these tools is a function of some of the proprietary content that we embed in the tools. A good example there would be the loan reference data that is provided through Wall Street Office. And so we think of it more as the value that we are bringing to the clients through the workflow tools and the importance and criticality of those systems to clients very, very critical processes. And that's one of the reasons why we continue to see good growth in these tools across Enterprise Solutions as well. Thanks for the question. Operator: Our next question comes from Ashish Sabadra with RBC Capital Markets. Ashish Sabadra: In regards to MI, the subscription growth is expected to accelerate in 2Q. I was just wondering if you could unpack that some more what's driving it? How much of it is driven by AI products, key client office or any other color that you've been providing? . Eric Aboaf: Ashish, it's Eric. We've seen very good performance in the first quarter as we've started the year in MI. And we just expect that to continue to build. Subscription revenue growth was in the 6% range. We feel good that, that will continue to build. But we had very good performance that augurs well for the coming couple of quarters. Net renewal rates are up 100 basis points or so. Pipeline has been building January to February to March. Our average deal size is up, our net sales are up. So we see good underlying indicators across that franchise in a number of ways. And we think that will just build during the course of 2Q, 3Q and 4Q and deliver the full year guidance that we expect in a nice way. Thank you for the question. Operator: Our next question comes from Scott Wurtzel with Wolfe Research. Scott Wurtzel: On the Market Intelligence margin, just wondering if you can maybe help contextualize how much of the margin expansion that you're seeing is being driven by efficiency gains associated with AI. Eric Aboaf: Scott, it's Eric. Margin expansion has come in nicely in MI in particular, in first quarter. We were careful with the external environment. Starting late February, we -- the Iran conflict started. We're careful about our discretionary spending. And so you saw particularly strong performance in MI as well as our other 4 divisions as we just carefully thought about pacing expenses through the year. More broadly, if you think about margin expansion in MI and other divisions, it's really a combination of factors. There's certainly a set of AI benefits that we're getting as we think about our data operations, which is a big part of MI. We see emerging progress or I think I'd say good progress in software development activities that are AI-driven with all the new tools available to it. And then we see the continued kind of classic productivity tools being effectuated in MI as the team there is really driving a combination of top line and bottom line. So we're feeling comfortable about the margin expansion for the full year. We feel like we got off to a good start. And we just see with AI, a set of tools that become stronger and stronger and more and more valuable to us as we continue to deliver margin and earnings growth quarter after quarter. Operator: Our next question comes from Curtis Nagle with Bank of America. . Curtis Nagle: Just a really quick one for me. Just if we go through, I guess, how to think about the balance of transaction, non-transaction growth within the Ratings business for the rest of the year? And I guess just for the first quarter, what drove a pretty notable spike in the non-transaction numbers. You have to get answer that. Eric Aboaf: Curtis, maybe I'll start on nontransaction. We had good growth in annual fees as the franchise continues to to be viewed very favorably by our clients around the world. And then our CRISIL revenues, which are booked there, which have a mix of different factors, performed very, very well in the first quarter, which we were pleased with. So a couple of good tailwinds, and we expect some of that to to generally moderate in the coming quarters, but we think it will help contribute to our full year revenue guide. Martina Cheung: And Curtis, I would maybe just add that we -- you may recall when we gave our guidance back in February that we mentioned we had prudent and moderate expectations for hyperscaler issuance within the year. And a good part of that was that we didn't assume that all of the announced CapEx was going to be debt financed. And as we looked at the amount of hyperscale issuance in Q1, we believe that there was some pull forward there relative to our expectations for hyperscale issuance. And this is one of the reasons why we are continuing to maintain our expectations for billed issuance for the full year. Thanks for the question. Operator: Our next question comes from Manav Patnaik with Barclays. Manav Patnaik: I was hoping just going back to the workflow conversation, you could help us just appreciate the strategy in Energy where you're selling the workflow businesses and focusing in data, like how would those workflow brands different than the ones you were talking about in MI? And as a quick follow-up, just I think there were like 7 or 8 different brands, I think you're selling in Energy. I was just hoping you could help us size that for our models? Like how much are you getting selling to SLB. Martina Cheung: Manav, thanks for the question. Maybe to start, the size of that is about 25% of Upstream revenues. And that software portfolio, as you mentioned, is actually quite varied and quite distinct. And so one of the reasons that really informed our decision there is that we think SLB is a very good partner on that. And as part of that decision to divest, we also have a new distribution partnership with SLB that we are quite excited about as we close that. And so what I would focus on maybe is the 75%, which is highly differentiated and unique proprietary content. Maybe just to give you a sense for what is here we cover from basin to reservoir subsurface and geoscience data, including seismic surveys as well as in logs and spatial data. Some of the stuff that is particularly useful for our clients is Vantage asset valuation data that covers over 17,000 global upstream and gas assets. And we also have very, very unique benchmarking performance content that is based on contributory data and it allows operators to actually do peer-to-peer performance data, and is highly valued. This data actually goes back over 30 years, covering about 80,000 wells globally. There's a lot more to that. And one of the things that we're super excited about is actually creating Titan that we talked about in the prepared remarks that sits on top of all of that data and provides the workflow for our clients to really interact with that data more seamlessly. This is something that our clients have been asking us for, for many years. And the overwhelmingly positive feedback that we got when we use CERAWeek for that soft launch was just really very encouraging. And we were able to close one client already just on the demo of the new tool because those clients are very, very aware that our data is the highest quality and most unique out there. And so Upstream more broadly, I would say, we look to our broader revenue transformation there. We look to the full hard launch of Titan later this year. and are very excited about the progress that we're making there as well. Thanks for the question. Operator: Our next question comes from Alex Kramm with UBS. Alex Kramm: Just I think -- I don't know if I missed this, but one of the things you changed in your guidance was also the I guess, acquisition and divestiture contribution on Market Intelligence. It's a small change, but just wondering if I missed it, what changed there? And maybe related to that, With Intelligence, now that you've owned the business for a little over a full quarter. Just wondering what kind of underlying growth rates you're seeing and any on how that asset is performing? Eric Aboaf: Alex, it's Eric. Let me just summarize. As you noticed, the organic versus reported revenue contribution really has 5 deals, 3 of which are quite large, both divestitures and acquisitions. You've got EDM and thinkFolio being sold, you got With Intelligence coming in and 2 other small ones. And so what we just did was updated the contribution from the net effect of those 5. It's primarily driven by a modest change in revenue recognition. But as we step back, we're quite pleased in particular With Intelligence. As we said in our last call, we closed that early and even more quickly than we had thought. The team has really been digging in deeply and beginning to focus on all the synergies, both expenses and revenue in particular. And as we've said when we announced the deal, we expect high teens revenue growth in With Intelligence with some upside as we go 1 year to the next just because there are so many opportunities to redistribute that content across our franchise and really leverage the depth of the proprietary and the contributory data that Martina referenced earlier. Thanks for the question. Operator: Our next question comes from Owen Lau with Clear Street. Owen Lau: So following up on the AI Upstream data platform Titan, it's still in beta testing version. But could you please talk about your go-to-market strategy and the revenue model of this product? Is it going to be a subscription-based model or consumption-based or a combination of the two? Martina Cheung: Owen, it's Martina. Thanks so much for the question. It's going to be a subscription-based model. And in terms of the broader go-to-market strategy, I think the team was able to really effectively leverage CERAWeek because we have so many clients in town to be able to do our launch and get this into the minds of so many of our customers. And so we're excited about this. And the official hard launch for the product is going to be a little bit later this year. And as I mentioned, just to say again, the experience there is very comprehensive, bringing together so many of these unique data sets that we have, and it's powerful enough that one of our clients renewed with a very large uptick just on seeing the demo. Operator: Our next question comes from Jeff Silber with BMO Capital Markets. Jeffrey Silber: You highlighted the wars impact on the energy sector. I'm just curious, hopefully, this war is going to end soon. What do you think the impact would be on the other businesses? When should we start to see a rebound there? Eric Aboaf: Jeff, it's Eric. The impacts on the energy business, as we described, are quite direct, right, because customers are affected that slows down decision-making. And obviously, we need to help customers focus on their core business. In the other divisions, it's really a question about how expectations around the conflict evolve, what sort of macroeconomic and, I'll say, economic disruption we see globally and also region by region because that's going to affect equity price levels, which have an impact on our asset under our asset-linked fees. It's going to affect potentially credit markets and the flow of issuances in different market segments. So I think the indirect effects for the time being has been relatively small. The question is, does the conflict resolve itself in the coming months? Or does it drag on? Because the longer drags, it create more uncertainty and a wider range of outcomes. So in general, there's a range of factors. We're trying to be careful and prudent. You saw some of that in our patterning of our expense spend that we feathered in carefully in the first quarter to create some additional margin expansion. And we're just being vigilant about the effects and staying close with our clients and making sure we support them across our various divisions. Operator: Our next question comes from Andrew Steinerman with JPMorgan. Andrew Steinerman: Eric, it's Andrew. What was the organic ACV growth in the first quarter for MI? And then also remind us on the Ratings side, if S&P includes bank loan repricing transaction and billed issuance or not and how it impacted first quarter. Eric Aboaf: Andrew, it's Eric. Thanks for the question. On MI, we saw good ACV growth in the first quarter. It was right around the level of subscription growth, which we showed at 6%. And I think in line with the last couple of quarters. And then in terms of repricing for bank loans, that's not included in that line. Operator: Our next question comes from George Tong with Goldman Sachs. Keen Fai Tong: Can you talk a little bit more about the latest trends you're seeing in the private credit markets and how much S&P Ratings revenue you expect to come from private credit? Martina Cheung: George, it's Martina. Thanks for the question. Well, this is an area that we've seen very strong growth in over several years now. And in fact, we ended full year 2025 at the enterprise level was north of $600 million in revenues in private markets. As I mentioned in my own prepared remarks, Ratings Private Credit grew 25% off a decently substantial base. Remember, we've been investing in this area for several years, and we made sure that we have the analytical capacity expertise and the appropriate methodologies here. So it's an area that we are, I would say, cautiously optimistic about over the very immediate time frame just given some of the stresses on the sector that we mentioned. But we started this year with those potential stresses in mind. We didn't necessarily assume there was going to be huge growth in middle market CLOs, for example, we assumed that there would be some softness in BDCs. And so far, we're seeing the trends play out as expected. And then, of course, if you take a step back and you look at what we're doing in the broader Market Intelligence and Index strategies around private markets, all of what we're doing is geared towards giving LPs and GPs performance data and benchmarks and data and analytics to assess how these investments are trending as well as how LPs are thinking about shifting allocations, et cetera. And we are seeing a lot of demand for that data. Maybe just to give you two additional examples. During the quarter, we launched one of the first -- we launched the first tranche of the data from our Cambridge Associates and Mercer partnership focused on private credit and infrastructure. And there's a lot of interest in that data because of its contributory nature. And we also integrated With Intelligence, the first tranche of With Intelligence documents into Cap IQ Pro, which again has stimulated quite a bit of interest because it enables GPs to really look at and target LPs based on their allocation strategies. So overall, I think, look, at this point, whether it's our Ratings, our performance data at the fund level, deal level, et cetera, and the analytics, there is a really big need and a lot of interest in what we're providing here. Thanks for the question. Operator: Our next question comes from Craig Huber with Huber Research Partners. Craig Huber: I wanted to ask about AI efficiencies at your company. To the extent that you can give us some more examples of how AI internally is helping you guys be more efficient across your various sectors, including outside of the MI division? And also, Eric, I wanted to ask your 50 to 75 basis points expected improvement, excluding OSTTRA, how much ballpark do you think AI efficiencies is actually helping that number? Martina Cheung: Craig, thanks for the question. Let me start, and then I'll hand over to Eric. I would say that we have been tackling AI by looking at some of our largest strategic processes across the company. And so at our IR Day, for example, we mentioned four particular areas that we were focused on, including our Ratings analytic workflows, our research workflows in Energy and in Market Intelligence as well as our technology and data workflows. And these comprise roughly around half of the resources that we have at the company. And so if you want to think about areas outside of maybe some of the more obvious areas like the data organization, we can see tremendous capacity expansion within Ratings, for example, where they have been a very early adopter of AI as part of augmenting analytical capacity and making sure that our analysts can do more high-value things like thought leadership and additional research. And so we're really leaning into this. We have announced you will see the joining of Firdaus Bhathena as our Chief Technology and Transformation Officer. And Firdaus really as part of that is looking at how we will scale AI and other technologies like quantum and blockchain so that we can actually get the full benefit around the Enterprise. And he will also look at this transformation program that has started with these four strategic processes and make sure we're scaling it out to the rest of the organization over time. Eric, I'll hand over to you. Eric Aboaf: Craig, I'd just add, AI is just beginning to have some positive impact on margin. I'd say beginning because, remember, AI is just a continuation of machine learning tools and a wide range of capabilities that we've used and leveraged across our processes. I've talked at length about the enterprise data office and what we do in data operations. And so I'll say the predicate to the the new LLM tools have aided the margin expansion over the last year, some into this year. But I think the upside from the broad adoption of Frontier models is just beginning. And really will have an impact in '27, '28 and in the future years as they get expanded into a wide range of these strategic and important processes that we operate and will be helpful in that regard. Thanks for the question. Operator: Our next question comes from David Motemaden with Evercore. David Motemaden: Just a quick one on how clients are accessing your content maybe a little bit to Slide 12. You talked about usage through your own solutions like ChatIQ and then also through the Frontier large language models. Are you seeing any meaningful differences in usage patterns or engagement with your data across those two broad channels today? And I guess I'm wondering, as adoption scales, where do you see the balance between direct delivery through your own solutions and third-party large language models ultimately settling out? Martina Cheung: David, it's Martina. Let me start, and then I'll hand over to Eric as well. This is something, obviously, that we're spending quite a bit of time thinking about. And I would start with our customers and what they're telling us and basically the types of deals that we are signing with our customers. So if we start from that perspective, there's a spectrum, if you like, along the very large number of users of our products in this area in Capital IQ Pro. It ranges from customers who will persist in using the integrated desktop over a period of time. And this is for a variety of reasons. It can be because they prefer to have us do the hard work for them in terms of integrating the AI capabilities and it can also be because they may look over time at the cost of adopting some of these models and prefer to have us manage that for them at scale, which can provide efficiencies rather than having them do that bespoke work themselves. We will also have clients who will do both. And so we see that already. We have one large global bank that signed an extended contract with us in the first quarter. It included expanding the usage of the Desktop Capital IQ Pro to additional users around the organization. And it also included increasing licensing for AI use of several of our data sets. And the bank actually made our data sets the standard on their own internal LLM, and so this is an example of where Capital IQ Pro will continue to be used alongside LLM model consumption within our clients. And I would say that, that is the majority of the conversations that we are having. Now will clients look to just use their in-house LLMs? That's potentially a scenario that we could see play out over a period of time. We're ready for that. And in that case, we think our data becomes even more valuable because our data is required to really get the full benefit of using these channels. As I mentioned earlier, we will use the plug-in option, and we will also use MCP applications to make sure that we can continue to improve the user experience for clients that want to use these third parties. And all of this really is very consistent with how we have thought about partnering with third-party channels for many years now, and it's why we talked a lot about flexible distribution back in our IR Day. Maybe Eric, do you want to talk a little bit about how we're seeing the usage evolves? Eric Aboaf: Yes. Let me just give you some examples. On the direct usage side, right, where clients are using our platforms and within our platforms, usage continues to build very substantially. I described in our Energy core platform, AI queries are up 2x in iLEVEL, the automated data ingestion through AI is up 2x. And so seeing very significant increases, which we're monitoring in our minds, that's the way clients are gaining value. At the same time, in the -- through the LM channels, the frontier models, the models that our clients have. As we said earlier, call volume is up very significantly, literally 2x from February to March, 5x from December to March. And so again, we're seeing the value that clients are seeking in our data and proprietary offerings that they're looking for. And then what we find is where there's more usage, there's more value over time, that will create economic benefits and opportunities for us. In the clients that have been using our AI tools and availing themselves of those in MI, we're seeing a couple of hundred basis points higher retention rates. In Energy, over 500 basis points of higher retention rates because, again, usage is value for clients. They get more benefits, and that helps us drive the overall economics of each of our businesses across the range of channels that we provide. Operator: Our next question comes from Jason Haas with Wells Fargo. Jason Haas: Can you just clarify on the ACV growth? I think you said that it was 6% in the quarter. I believe the past couple of quarters is 6.5% to 7%. So did it decelerate? And if so, what drove that? Because the commentary on revenue side optimistic for the rest of the year. So I just wanted to follow up on the ACV point. Eric Aboaf: Jason, it's Eric. I said the ACV growth was in line with subscription revenue growth, which was around 6%. I think we've quoted over the last 5 quarters, 6% to 6.5%, 6.5% to upper 6s percent. So it's in the range. There's always going to be a little bit of volatility. But what we see is that the underlying drivers are moving in the right direction. We're feeling good about net sales, net renewals and so forth across MI. And so we see this as a good outcome for the first quarter and expect that to build momentum into 2Q, 3Q and 4Q. Operator: Our next question comes from Shlomo Rosenbaum with Stifel. Shlomo Rosenbaum: I just want to get a better sense as to how you are thinking about the Ratings revenue through the year? I know you gave the cadence, but in aggregate, from the change in the geopolitical environment, like is there an aggregate any change over -- in the way that you're thinking about Ratings revenue for the year? Or is there would you say there's more risk to what you're -- what you've been assessing. And then also, if you don't mind just quantifying the Ratings evaluation services, what was the growth you said it was healthy. I think you quantified it somewhat before in other quarters in. Has that changed at all in terms of the growth rate of that business, it's usually a precursor to additional issuance? Martina Cheung: It's Martina. I'll take the question here. I think the -- ultimately, as you know, obviously, we didn't change our guidance for the full year for billed issuance and for Ratings. And I think the -- look, the thing that we're watching is this kind of end-of-2Q resolution, right? So we haven't necessarily seen any direct impact on Ratings revenue. But if we were to see GDP growth coming down, much broader sector shocks around the world, that's a scenario where we could see some weakness in the environment. And I think maybe to your question on RES, we had a good quarter in RES. A lot of that was driven by M&A assessments from issuers, but strong performance there overall. Thanks for the question. Operator: We will now take our final question with Jeff Meuler from Baird. Jeffrey Meuler: Just looking out past the Iranian conflict thinking about your Energy business, how do you expect it to be impacted by the energy complex build-out associated with the data center and AI infrastructure build-out. Just any specific products that you'd expect to benefit any new customer type opportunities. That's it. Martina Cheung: Jeff, thanks so much for the question. I think this goes back to 1 of the things that we really highlighted at our Investor Day around Energy expansion. There's a tremendous amount of additional growth that will be projected in demand for energy as well as demand for critical minerals. And our data is really quite unique across these various different areas and gives us a true opportunity to work with clients around the world to help them understand forecasts for renewables, forecast for hydrocarbons, the trade-offs between both as demand increases, et cetera. And so we're seeing great opportunities, not just in the -- some of the ones that we've been talking about within Ratings, for example, on data center issuances, but we also saw increased issuances from utilities. In the power sector in Ratings. We see demand for additional scenario planning around power and utilities in the Energy team, and we've seen particular demand in the Energy team's unique insights and data on critical minerals. And so these are all areas where we would expect to see additional demand over time. Thanks for that question. And in closing, I'd like to thank our people for delivering such a strong quarter. Our mission of advancing essential intelligence is now more relevant than ever as we help our clients navigate the uncertainties in this environment. And we're making really great progress against our strategy and are exceptionally well positioned and excited about our opportunity to drive value this year and beyond. We really appreciate you joining the call today. Thank you. Operator: That concludes this morning's call. A PDF version of the presenter slides is available for downloading from investor.spglobal.com. The replays of the entire call will be available in about 2 hours. The webcast with audio and slides will be maintained on S&P Global's website for 1 year. The audio-only telephone replay will be maintained for 1 month. On behalf of S&P Global, we thank you for participating and wish you a good day.
Operator: At this time, I'd like to welcome everyone to the Coca-Cola Company's First Quarter 2026 Earnings Results Conference Call. Today's call is being recorded. [Operator Instructions] I would like to remind everyone that the purpose of this conference is to talk with investors, and therefore, questions from the media will not be addressed. Media participants should contact Coca-Cola's Media Relations department if they have any questions. I would now like to introduce Todd Beige, Vice President and Head of Investor Relations. Mr. Beiger, you may now begin. Todd Beiger: Good morning, and thank you for joining us. I'm here with Henrique Braun, our Chief Executive Officer; and John Murphy, our President and Chief Financial Officer. We've posted schedules under financial information, in the Investors section of our company website. These reconcile certain non-GAAP financial measures that may be referred to this morning to the results as reported under generally accepted accounting principles. You can also find schedules in the same section of our website to provide an analysis ofour gross and operating margins. This call may contain forward-looking statements, including statements concerning long-term earnings objectives, which should be considered in conjunction with cautionary statements contained in our earnings release and the company's periodic SEC reports. Following prepared remarks, we will take your questions. Please limit yourself to 1 question, reenter the queue to ask follow-ups. Now I will turn the call over to Henrique. Henrique Braun: Thanks, Todd, and good morning, everyone. We are off to a good start this year. We delivered strong first quarter results despite a complex external environment. I'd like to thank our system associates for their continued commitment. We are focusing on becoming more consumer-centric, remaining constructively discontent, and leveraging our digital capabilities to create enduring value. I'm confident we are well positioned to deliver on our updated 2026 guidance. This morning, I will provide the perspective on the global operating landscape before diving into our business performance. Then I will share how we are getting closer to consumers by operating with both granularity and scale. Finally, John will discuss our financial results and 2026 guidance. During the quarter, the external environment differed greatly across our market. While many consumers remain resilient, others are under pressure due to persistent inflation, greater macroeconomic uncertainty and volatility driven by the conflict in the Middle East. Against this backdrop, we are operating in an expanding industry. We harness the power of our brands and our unmatched system reached to deliver 3% volume growth, and we grew volume across all segments. We also extended our streak of gaining overall value share for the past 20 consecutive quarters. Excluding the impact from 6 extra days in the quarter and the timing of concentrate shipments, organic revenue growth is on track with our full year guidance. We also expanded comparable operating margin, which contributed to double-digit comparable earnings per share growth. We are always pushing ourselves to do even better and focusing on getting more for more markets and more from our brands to drive balanced growth. Starting with North America. While we benefited from cycling an easier comparison versus the prior year we delivered solid performance. We gained both volume and value share and grew volume, revenue and profit. The softness in price/mix can be attributed to Easter timing, coupled with unfavorable category mix from packaged water and constrained production capacity for Topo Chico and Felli. We had broad-based strength across our total beverage portfolio. a straight mark Coca-Cola, Fanta, Prescot Body Arbor Powerade the sunny smartwater and Minuteman each grew volume. Trademark Coca-Cola also led the industry in retail sales growth. Innovation contributed strongly to revenue growth. For example, we are tapping into the consumer insight favoring all things Cherry, with Coca-Cola Cherry flow, Diet Coke Cherry and Mr. Peak, also powered power water and the expansion of Minicans into the convenience retail channel, both had strong performance. In Latin America, we gained value share and grew volume, revenue and profit by focusing on fewer but more impactful initiatives. -- volume growth in Brazil and Central America more than offset declines in Mexico and Argentina. Across the region, to drive resilience, we are balancing relevance with scale and more closely integrating our marketing and commercial plan. For example, we activated Coca-Cola with the CFO World Cup trophy. -- and offered fans interactive experiences, music, games and product sampling. Consumers assess ticket giveaways by scanning our connected packaging which allows us to gather insights to customize future offerings and content. In EMEA, we gained value share and grew volume across all operating units. We also grew both revenue and profit. In Europe, despite a cautious consumer environment, we gained better share. We are better linking our brands to key drink and occasions including the Coke and mills campaign and passion points like the FIFA World Cup profit and the English Previ League. Also, we are more granularly focusing on value offerings at attractive absolute price point. In Eurasia and the Middle East, we gained better share. While we grew volume for the quarter, our volume declined in March after the onset of the conflict. Our top priority is supporting the safety and well-being of our system associates and partnering closely with customers across the region. Lastly, in Africa, we are highlighting the localness of our system and sharpening our revenue management capabilities. For example, in Egypt and Nigeria, our Ramadan campaign linked our brands to the mills occasion and emphasized reputable package. In Asia Pacific, we grew volume across all operating units despite cycling a strong comparison versus the prior year. We also grew revenue, but profit declined driven by commodities, headwinds in tea and coffee and phasing of inventory costs. In ASEAN and South Pacific, despite a continued challenging external environment, we leaned into impactful marketing campaigns like the FIFA World Cup of tour and innovations like the Fanta Pineapple. We also focused on refillable packaging and driving availability. In China, we activated our broad portfolio and stepped up execution in targeted channels during the Chinese New Year. In India, we drove affordability and linked to our brands to consumer passion points, for instance, by connecting terms up with the T20 Cricket World Cup. We also expanded strike into more rural regions with content tailored to local languages. Lastly, in Japan, we gained value share by doubling down on consumer needs. We grew volume across our key brands with Georgia Coffee, we refined our package options to address different drinking occasions. In summary, we're adapting our execution as needed and focusing on improving performance across all dimensions of our strategic growth flywheel to recruit consumers and drive balanced long-term growth. At CAGNY, I discussed how we are becoming even more consumer and customer-centric by applying the for eyes, inside, innovation, intimacy and integrated execution. Levering data and our digital capabilities are unlocked to be much more precise in how we serve consumers and customers. Here are a few examples of the 4 eyes in action this quarter. In Europe, in select markets, approximately 60% of adult drinkers monitor Cathrin intake in the evening. To capture incremental drinker occasions, we relaunched Coca-Cola Zero-Zero, which offers 0 sugar, 0 cafe and 0 calories with a new visual identity, expanding availability and activations tied to the evening meals occasion. Coca-Cola Zero-Zero had a strong trial, positive repeat rates and contributed to the trademark of a Coca-Cola growing volume in Europe. For Sprite, we recently launched our global campaign. It's dead fresh, which includes partnerships across music, basketball, price food and fashion. We're also scaling and launching products tailored to local need. In China, we launched Sprite prebiotic and lifted and shifted Sprite from North America. In the resin the Middle East, to refresh consumers during Ramadan, we are linking Sprite Lemon Mint to local festivities and key drinking occasion. Globally, Sprite had strong volume growth. Finally, Fuze Tea, which is available in more than 80 markets, appeals to consumers who are looking for greater balance. While we execute Fuze Tea made of Fusion campaign globally to scale the brand, we deliver intimacy with a highly localized product portfolio tailored to taste profiles, key types and 0 sugar options. In Turkey, for example, we accelerated growth by emphasizing peach lemon, watermelon and dragon fruit flavors, along with strong activation during Ramadan. Globally, Fuze Tea grew volume double digit. It goes without saying that marketing and innovation do not come to life without commercial excellence. And our system is working towards mastering the fundamentals of integrated execution to drive customer value creation. In the past year, our system added more than 600,000 outlets, which increased outlet coverage. To drive basket incidents, we increased our share of visible inventory and grew off-the-shelf points of interruption by double digits to capture impose purchase. To drive transactions our system also placed over 340,000 units of cold drink equipment. For the past 8 years, we have been the leaders in customer value creation for our industry. Overall, greater focus across each element of the fees resulted in both volume and value share gains, volume growth and more weekly plus drinkers during the quarter. In summary, it's early in the year, and we know the external environment remains complex and it's quickly evolved. However, we continue to benefit from 3 unwavering delay. One, -- we are in great resilient industry. Two, we have a powerful portfolio as demonstrated by our $32 billion brand; three, our pervasive yet local system is a clear advantage. Moving forward, we will continue to invest in these beliefs and leverage our all-weather strategy to achieve our objectives. With that, I will turn the call over to John. John Murphy: Thank you, Henrique, and good morning, everyone. During the quarter, we navigated market dynamics locally to deliver on our global objectives. We grew organic revenues 10%. Unit case growth was 3%. Concentrate sales were 5 points ahead of unit case sales as the impact of 6 additional days in the quarter, was partially offset by the timing of concentrate shipments. Our price/mix growth of 2% was primarily driven by approximately 4 points of pricing actions partially offset by 2 points of unfavorable mix, which was primarily driven by 3 items: one, Easter timing and category mix in North America; two, stronger growth of value offerings from revenue growth management initiatives across Asia Pacific; and three, geographic mix in Latin America. Comparable gross margin declined approximately 30 basis points, stemming primarily from commodity pressures in our tea and coffee businesses, phasing of inventory costs and timing of trade spend. However, comparable operating margin increased approximately 70 basis points, as we've realized operating expense efficiencies while investing further behind our brands. Below the line, we benefited from a combination of higher equity income, lower net interest expense and realized security gains in our captive insurance companies, which benefited comparable other income. Putting it all together, first quarter comparable EPS of $0.86 increased 18% year-over-year, helped by 3% currency tailwinds. Free cash flow was approximately $1.8 billion, an increase versus prior year. Our balance sheet remains strong with our net debt leverage of 1.6x EBITDA, which is below our targeted range of 2 to 2.5x. We're continuing to judiciously manage our balance sheet as we await a court decision related to our ongoing dispute with the IRS. We're confident in our long-term free cash flow generation and are prioritizing a capital allocation agenda that creates optionality to both reinvest in our business and return capital to shareowners. Enabled by our all-weather strategy, we're on track to deliver on our updated 2026 guidance. We continue to expect organic revenue growth of 4% to 5%. We now expect growth in comparable currency-neutral earnings per share, excluding acquisitions and divestitures of 6% to 7%. Notwithstanding volatility in certain commodities like tea and coffee, we believe the overall impact on our cost basket is manageable at this time. However, uncertainty stemming from geopolitical tensions may cause this outlook to change. Divestitures are expected to continue to be an approximate 4-point headwind to comparable net revenues and an approximate 1 point headwind to comparable earnings per share. This assumes the pending sale of Coca-Cola Beverages Africa, which is subject to regulatory approvals, closes during the second half of 2026. Based on current rates and our hedge positions, we now anticipate an approximate 1- to 2-point currency tailwind to comparable net revenues, up from an approximate 1 point currency tailwind in our previous estimate. We continue to expect an approximate 3-point currency tailwind to comparable earnings per share for full year 2026. Based on the latest analysis of our global operations, our underlying effective tax rate for 2026 is now expected to be 19.9%, which is a 1 point reduction versus our previous estimate. All in, we now expect comparable earnings per share growth of 8% to 9% versus $3 in 2025, which is an increase from our prior estimate of 7% to 8% due to the lower effective tax rate. Finally, there are some considerations to keep in mind for 2026. As a reminder, due to a calendar shift, the fourth quarter will have 6 fewer days compared to the fourth quarter of 2025. We estimate the shift of Easter into the first quarter with a 0.5 point benefit to first quarter volume. We also expect concentrate shipments to like unit cases by a couple of points during the second quarter. Lastly, assuming the pending sale of Coca-Cola Beverages Africa closes during the second half of 2026, we see opportunity for more margin expansion in the latter half of this year. To sum it up, we remain focused on improving execution of our strategy and are well positioned despite macro complexity and uncertainty. We look to drive balanced top line growth, margin expansion, cash generation and returns over the long term and we'll do so with continued strong partnership with our bottlers across the world. And with that, operator, we are ready to take questions. Operator: [Operator Instructions] Our first question comes from Dara Mohsenian from Morgan Family. Dara Mohsenian: Just given the strength we saw in Q1 unit cases at the corporate level, but also price mix that was more subdued than recent trends for the second straight quarter. I just was hoping to get your view on the balance between volume versus price/mix in the remainder of the year, particularly in North America and Asia, where we saw some large variances in the quarter. And on the volume front, just wondering is consistent unit case growth reasonable in the balance of the year with Easter help in Q1, some potential Ron impact? And just on pricing, how much of the lower growth in the last couple of quarters is due to that affordability focus that you mentioned, John, which should see more ongoing versus just some quarterly mix variances that are less ongoing? Henrique Braun: Thank you, Dara. It's great hearing for you. Look, first of all, we are really pleased with the results of the quarter. We believe it's a statement to everything that we continue to say that would be a year where we would have a top line balanced algorithm, not only the quarter but for the full year, -- more importantly, growing volume across all operating units, gaining share and also topping the EPS growth as well, gives us the confidence that we are on the right track. What we will continue to see is an algo that will be balanced as we have said in the past that we -- it's not a coincidence that we actually got this in the quarter. We planned ahead of the curve. We invested accordingly. We started the year with a fast start as well. And what we're going to see probably in the next 2 quarters, it varies around that balanced algorithm. But at the end of the year, what you see is this balanced growth about volume and price mix playing a balance of whether it's going to be 3 to 2 like we have here in the quarter or it's going to be 2 to 3 a variable during the different quarters, we're going to see it. But we're managing all the levers to continue to deliver that. Pricing is embedded into this equation as well. We are going where the consumer is, right? The affordability to continue to be part of the revenue growth management architecture that we have not only in the U.S. but in different parts of the world as well. The consumers that have pressure today at the low-income consumers, and we really dial up our affordability options to get closer to them. In North America, for instance, we went into bringing options not only on the single serve, but on the mood serve enter packs and helped us to continue to keep them in the franchise. So in a nutshell, what we are. We believe we had a great start of the year. We will continue to be balanced. We'll have confidence that we're going to deliver on the updated guidance to the year, and we'll continue to play on our RGM capabilities. Operator: Our next question comes from Steve Powers from Deutsche Bank. Stephen Robert Powers: Great. I wanted to give a little bit to cost, if I could. John, you mentioned that you were fairly well positioned despite the broader inflationary backdrop as you think about the year. But you also acknowledge that could change. And I guess, as I think about the system broadly, I'd expect some of the pressures that we're all thinking about to be building a bit more acutely on your borrowing partners already. So perhaps can you talk about how you're working with those bottling partners to address the burgeoning headwinds together and how the system overall is positioning to navigate what is likely going to be a net higher cost environment as you look through this year and potentially into next? John Murphy: Yes, Steve, thanks. A very important topic for all of us here and with our partners. Yes, the environment you say is fluid. It's difficult at this stage to say exactly how it's going to play out. As highlighted in our script, it's -- right now, we estimate is manageable at the company level, given we have less exposure. Our bottling partners have more exposure, predicted to aluminum and PET on the back of both the oil price impact and just the overall supply disruptions that are likely to affect us as we go through the year. with the system, we have a playbook that we've had to use now for quite a few years on a range of disruptions. And it's a playbook that is working well for us. We have our RGM capabilities as Henrique just pointed out, we have our cross-enterprise procurement group that works with the vast majority of our system partners on both resiliency and productivity initiatives. We have a number of playbooks I would describe them at the cost management level. And yes, each market is different. And so the way that we use these various levers will vary by market, and we have confidence that the decision-making at the local level will allow us to navigate as well as we can through this. As we said, the next few months are fluid, and it's important to keep agility at the center of this equation. And I guess just from the way that we've operated over the last 3, 4, 5 years on this front, gives us that confidence and it's important, I think, to be able to lead forward on the range of these topics as we look to Q2 and the rest of the year. Operator: Our next question comes from Lauren Lieberman from Barclays. Lauren Lieberman: I just have a question about trademark Coke. So Henrique, you mentioned the relaunch of Zero-Zero in Europe. And I know that historically, I guess the system kind of struggled with how to balance time and attention and resource attributed to Diet Coke and Coke Zero concurrently had a manager of -- and a decision to have more of a portfolio in no sugar options is a newer drive. So how should we think about Zero-Zero flowing into that? And maybe what are you doing from the center from the KO level to make sure that the system kind of has the right balance to have a portfolio as you make these moves. And with Zero-Zero just being the latest example? Henrique Braun: Thank you, Lauren, and also great talking to you. Look, we -- first of all, we are very pleased also with the performance of Corporate mark overall in the quarter. We had volume growth that gives us the confidence that not only at the core of it, but all the options and variables that we bring in terms of innovation in different package sizes, playing a big role to that. To your question regarding how we actually bringing this to life in the marketplace in an effective way. We have to go back and start the conversation from years ago when we started to step up our RGM capabilities across the world working in tandem with our bottlers. And we have been doing better every day. You remember that the CAGNY was mentioning that 1 thing that plays in our advantage is the scale. But if we can actually gain a little bit every day, scale matters and it helps us to get there. that mindset, along with the capabilities that we built over time to execute the marketplace, a broader portfolio helped us a lot. But there is one element that's key to the story. It's the connectivity to the consumer centricity approach that we have and everything that we put in the market now. The reason by Zero-Zero is working right now in Europe because it started with the 4 eyes that was mentioning before, with a big insight that at a certain time of the day the consumers want to load down -- reduce the cafe intake, but they want to stick to the flavors and the brands that they love. And then by bringing that with the right packaging, the right price and right communication, we ended up getting a really good innovation and amplify our reach to that consumer, which then in turn and with our capabilities to execute better, you get a successful story. And that it took years. And it's important that also on the innovation discipline that we have developed over the years. We are bringing more insights and discipline on managing innovation and the success rates over time, that gives us a better chance of success, and this was the reason why we materialize that moving forward. So we are seeing that not only with Zero-Zero-Zero since we're talking about Coca-Cola trademark, let me bring it to North America where we had also an opportunity to amplify our portfolio with the archery space, where we have Diet Coke Cherry, we haven't tried it. It's one of my favorites. We got Coca-Cola Zero Cherry Float, which is also great. And we continue to expand that portfolio also with Mr. Piv on the Cherry space, which then connects with what I'm saying before, more connectivity to the consumer centricity on the platform and executing better because we built the right capabilities moving forward. Operator: Our next question comes from Chris Carey from Wells Fargo. Christopher Carey: I wanted to ask about gross margin. This is the first quarter in a few years where the underlying contribution to gross margin is a bit negative. I was wondering if you could just give us a sense of whether there are any timing elements associated with Q1, inflation impacts that you might be seeing this quarter, which is really bringing that up to you flagged, coffee and tea. And then the general progression of the underlying contribution to gross margin as you would see it sort of going forward as the costs normalize. And then just one quick follow-up, John. I think you mentioned that the timing of CCBA could dictate margin progression in the back half. Can you just dig a bit deeper into what you were referring to with that comment? John Murphy: Sure, Chris. Let me start with the overall gross margin profile. Q1 was somewhat anomalous given one particular item in APAC, the phasing of juice inventory costs, particularly in China. And that's really as a one-off in the quarter. We have had commodity pressures in the tea and coffee space, and that's going to continue somewhat through the year. But at the overall level, if I take a step back and look at the underlying drivers of gross margin for the full year, we don't see a big deviation from the playbook that we've had. We'll -- we see the revenue growth management architecture work as a very solid foundation to sustaining margins. We continue to drive a lot of efficiency throughout the P&L. But on the cost front, we'll be taking a number of measures to somewhat mitigate against some of the commodity pieces I talked about earlier, which I said are manageable. So for the full -- I don't see it as being an area that's going backwards, the gross margin trends when I take out that inventory issue I mentioned we've got a lot of levers to work through and both as a company and as we alluded to earlier as a system. With regard to the CCBA piece, just it's a mechanical topic in terms of the impact it will have to the margin profile of the company. If we take CCBA's numbers out, lower-margin bottling business will automatically result in the overall company margin profile improving. And we've highlighted that to be a second half of the year topic. For '26, too, we can say for -- which is anomalous relative to other years FX will be a slight tailwind on the margin front, too. Thanks. Operator: Our next question comes from Robert Ottenstein from Evercore. Robert Ottenstein: Great. Congratulations on a great start to the year and your tenure. I was wondering if you could go into a little bit more detail on the underlying drivers of your performance in APAC, particularly China and India, 2 years in a row of good -- very strong results. How sustainable is this do you think throughout the rest of this year and going forward? And what are you doing differently now than in the past to produce such strong results? Henrique Braun: Thank you, Robert. We in APAC, we're pleased with the volume growth across operating units in there. We also pleased with the fact that we gained share overall in the region. But there is still a lot of work to be done. And the reason why I'm saying that is because it's one region that we're developing definitely for the future. The big majority of the countries in there are still under development stage. If take a site like Japan, Korea, Australia, that are in a different stage. But everything else in a huge population in there, it's equally important that we not only deliver on the volume growth, but we built this industry for the future. So we're really focused China and India, as you mentioned, on developing first the industry and the foundations of our business as we've learned in other parts of the world with the right price package, architecture, playing where we believe we can win and then continue to expand that for it. If we drill down a little bit about China, a few years ago, we took a stand and said, "We're not going to play in every category. We're going to play on a quality, volume and categories that we believe we have the rights to win." And that is now starting to pay back because we continue to lead on Sparkling. We are gaining share. And we're also building with our partners in there, a better capability on how to execute the core to then expand to more. And then if you go to India, it's equally important to build this for the long term, a place where we are fortunate to also have local brands under the portfolio that were acquired a long time ago, composing a full portfolio that gives us the opportunity to be connected with the consumers in a very unique way in that place, but we're still far away from getting our overall architecture on RGM and our development capabilities with our bottlers to the stage that we can actually call it a mature market. So what you're going to see also and we saw across the region, is actually in this quarter, if we go down, you see that our price/mix was negative 6 points in the region. And the reason is exactly connected to what I was just saying before. We're investing for the future. We have, obviously, in this quarter, a few elements, as John pointed out, that impacted the quarter. But on the long term, the most important thing in this market is to invest for growth, build a system, health economic system that allows us to invest ahead of the curve and bring more consumers to the base. John? John Murphy: Yes. Just let me -- given the previous questions on margin, I have no doubt there will be focus on the margin numbers for the Q1. So 2/3 of the margin compression in Q1 is related to the inventory item I mentioned. We also have, in APAC, as we've discussed in previous calls, just a structural headwind given the geographic mix of the markets, Japan versus the more developing part of the equation. So while we expect us to make progress in the course of the year on overall margin profile, it is a longer-term play, as Henrique said, with the priority #1 is getting the consumer base even more closer to us. So more to comment on that as we go through the year. Operator: Our next question comes from Bonnie Herzog from Goldman Sachs. Bonnie Herzog: All right. I just had a question on your business in Asia. Your top line growth was good, but your op margins contracted almost 10 points I know, John, you touched on this a bit, but just hoping to hear a little more color on what drove this and really how we should think about profitability in that region going forward? John Murphy: Yes, Bonnie, it's just what I just said in the last question, the margin profile in Q1 was impacted by an inventory item, which is unique to Q1. We do have plans in the course of the year and then lead into next year to address this. Priority #1 is the consumer franchise getting volume growth back into the range of markets that we have and investing appropriately behind them. So as Henrique said, APAC is a land of opportunity. We both lived and worked there and appreciate that it doesn't happen overnight. And we're very -- we're bullish on the way the year has started on the volume front. And we're fortunate to have a global portfolio that will allow us to invest as we need to in the short term while we get the margin profile where it needs to be longer term. Operator: Our next question comes from Andrea Teixeira from JPMorgan. Andrea Teixeira: Henrique and John, obviously, the resilience has been nothing short of impressive, both in terms of like your ability to sustain volumes and pricing. But you did call out that volumes understandably turn negative in March in the Middle East. I was just hoping to see if you can give us some sort of color for EMEA and obviously, from 2 standpoints, right, the conflict and also the fact that as you go into a situation where inflation will be more pervasive in the region and broadly in EMEA for obviously fuel for gasoline prices. And then also for the bottlers to be able to pass through, so I was hoping to see if you can help us with that. And then in terms of the U.S., we saw fair life and again, you had explained to us. But in terms of the category and shake category deceleration, competition in the category, anything you can help us with as you have more capacity into the system this year. Henrique Braun: Good. Thank you, Andrea, for the question. Look, in the EMEA as a whole, right, that encompasses Europe -- Eurasia and Middle East and Africa, we had a good overall performance, we grew volume and profit and continue to gain share, which was great results. If you dial up[ a little bit the conversation on Eurasia and Middle East, as you wanted to know yes, we grew volume actually in the quarter and March was the month that got more impacted by the conflict and we continue to work with our partners to support, number one, the safety of our associates and the business continuity. And it is a playbook that everyone in the region has learned from past situations similar to this and try to focus on what we can control and continue to drive and being closer to the consumer. If you look at the outlook from the region itself, we are confident that we can manage the complexity in there. We will continue to be focused on the balanced growth, which is important for us, as we said, not only in the region, but globally, having volume being a key driver of this balanced growth, but it's going to be a composition that in the year, we will leverage the whole more than ever in a world that's going to be very dynamic. And so far, we believe that we have everything in place to continue to drive there. And we're going to continue to pivot with a playbook that has worked for us in years in the region. Since you asked I'll give a chance to answer also the fair life here. It's a fantastic brand, as you know. We are excited that as planned, the Webster capacity is going to start to get align in the Q2, and we're going to ramp up through the year. So that's the latest on that. And we're very excited also about the fact that we're investing for the next chapter of growth there on the business itself. Operator: Our next question comes from Filippo Falorni from Citi. Filippo Falorni: I was hoping you can touch a bit more on the North America business, solid performance on volume to start the year. You have the FIFA World Cup coming in couple of months. So just any thoughts on like potential opportunities there in terms of accelerating volumes and activation at the brand level, obviously, both for the U.S. and Canada, but also if you can touch on Mexico and the opportunity there. And maybe even give some color on like the performance of the business post the sugar tax in Mexico. Henrique Braun: Okay, Filippo. Look, North America, we're definitely very happy with where we landed on the volume growth it indicates that the strategy and also how we're showing up as a system, it's in the right place. We had a broad-based growth across different categories and brands, which is ensuring that its equipment with the right impact, right, in the marketplace. And FIFA World Cup, look, we actually started to execute that in Q1. It was another great decision by our operators with the bottlers in North America and Mexico that you've mentioned as well in Latin America. Both of these regions decided to go head on and start the activation of FIFA World Cup in the Q1. And now in Q2 is when we're going to realize that in there. I want to bring a point here that it's also very interesting in the execution of the World Cup for us, and you heard me at CAGNY saying as well, that we're not only getting closer to the consumer, but bringing digital at the core of everything that we do. And if you find our packages in the market now in the U.S. and you're going to see Mexico as well, you can actually interact with that package with the right content. Actually, in the U.S., we do that for the 250 celebration as well. That interactivity, you get the content of the campaign. You also engage the consumer on a reward experience. And you have a chance to connect even with the retailer on transforming engagement of the consumers all the way down to transactions, which is what we believe we should continue to drive in our campaigns and bringing the whole digital space into doing better what we do best. So that's about North America. Since you asked about Mexico, let me talk a little bit about what we're doing there. As you know, we had the sugar tax at the beginning of the year. That had an impact. The system has a strong resilience in the playbook on how to deal with this situation. It happened in 2014 as well. The impact is there. But with the right RGM capabilities and granularity, as I was explaining, using everything that we already had plus the personalization connections with consumers and our customers, we continue to do better than we expected, but still having Mexico playing a geo mix effect in the overall price/mix for the time. Over time, during the year, we're going to continue to dial up the campaigns, our local and global brands, which is a strength that we have also in the region to continue to engage with the consumer and to overcome the impact that we have on taxes in there. Since I was talking to Mexico, I think I should say as well that Brazil and the Central America actually offset the impact of volume declines in Mexico and Argentina. Operator: Our next question comes from Peter Galbo from Bank of America. Peter Galbo: I wanted to pivot to the Away-From-Home business a bit. I know that you've had maybe a more offensive minded effort there recently with the Andacoke campaign in the U.S. John, I think you mentioned the Coke in a meal in Europe campaign, obviously, a pretty big win in the hospitality space that we've heard about. So maybe you can just dig in a little bit more on kind of the double down efforts on the Away-from-Home channel, just given it's a part of the business we often don't hear a lot about. Henrique Braun: Yes. Great, Peter. So first of all, globally, we see channel-wise, not a significant change, but the better performance on Away-From-Home than at home in the U.S. was actually the opposite in the quarter. But nevertheless, the strategy remains the same, which is connecting the consumer on every occasion and new states that we have. And what we are doing actually very consistent in the foodservice in North America is to work together with our customers on understanding in detail and granularity, their consumer profiles and how we can actually bring not only our core offerings, but other choices that they started to innovate within that category. So what we're seeing is that there is an opportunity to continue to expand the beverage occasions and we think that being the preferred partners for the majority of the foodservice partners, we believe that we have a great runway actually to continue to develop that category and continue to drive. Our focus is always on driving more incidents on that channel. And to that element, everything that I said that we're building the right capabilities house with RGM and being closer to the consumer, helps us to continue to drive in there. So more to come. Operator: Our next question comes from Michael Lavery from Piper Sandler. Michael Lavery: Henrique, I wanted to just maybe zoom out a little bit and see if there's any new learnings in the first few weeks, just seeing the company through the CEO lens. And it doesn't have to be marketing specific, but I know you've talked about a step change in recruitment, especially converting younger drinkers at the point of sale. I'm just curious if you could maybe lay out a little bit of some of the changes you might anticipate to the marketing approach to improve that and how quickly it might evolve. Henrique Braun: Thank you, Michael. Look, it has been a very smooth transition. And you heard me at CAGNY, there's so many things that we're doing right over the last few years that I would not be the one to touch that and change the trajectory because I fully believe in that. And it's very important to remind what those beliefs were. Number one, it's this belief that we are in the best industry to be in, not only ourselves here at the top of the house on the company, but our bottlers share the same belief. They continue to invest accordingly. That's very important. The number two is what I said also at CAGNY, this unrivaled portfolio that we have, the $32 billion brands, bringing more to the family and making the billion-dollar brands become multibillion over time, that's where I believe the consumer centricity in bringing the 4 eyes can help us to actually even do better over time. And the third one was about this unmatched system reach is with our bottlers, we know we have a very pervasive distribution system. But if we dial this up with what I mentioned before, bringing digital to do better what we are ready to best, scale will help us to actually unlock further growth and a bigger headwind -- sorry, headroom on how to bring more consumers to the base, how to bring more value to our customers and how to work as a system in a more integrated way. So that's what we're focusing on. But a lot of that continues to be very consistent of the way we have been working with our bottlers, our partners, and you can expect that, that's going to be the way moving forward as well. Operator: Our next question comes from Kaumil Gajrawala from Jefferies. Kaumil Gajrawala: If we can dig in a little bit on the United States and Peter's question on the Away-from-Home than specifically, there's -- for the first time this emergence of what seems like an entirely new channel with the Dutch Bros and brews of the world and these sorts of things. So McDonald's is obviously doing the same sort of thing. So I'm just curious, are you evolving your foodservice strategy to figure out how to participate better in this evolution of retail? And then maybe if you want to talk a little bit more about the McDonald's relationship, of course, the news of them using red bulls, I think, surprising to many of us outsiders given the depth of your relationship over such a long period of time. So just curious how you're thinking about that as well. Henrique Braun: Yes. Thanks, Kaumil. So first of all, I start from there. We have a fantastic and very long-standing partnership with McDonald's, and that's intact, right? We continue to be very happy with that partnership. And in terms of how they are also looking into creating this craft beverage offerings, and you alluded to also the fact that other players in that segment is working on, we totally embedded into the conversations about how to be part of that in McDonald's specifically. We have our Sprite brands being very -- doing very well with that space of the craft beverage offerings. We have 2 flavors, Sprite Berry Blast and Lunar splash with them that continue to perform really well. And that expands actually the beverage occasions and the opportunity within the outlets. The way we see this at the end of the day, the beverage space continue to be vibrants and more opportunities to play within that. And we believe that being part of this with our customers and being the #1 value creator for them, we're going to have an advantage over time. We do respect the decisions on other choices about their relationships with other companies. But the most important thing is that we've been very consumer centric about how to bring innovation to each customer, and we continue to have an expanded footprint, not only bringing more to the to our pool of customers, but getting more out of that relationship on a daily basis. Operator: Our next question comes from Carlos Laboy from HSBC. Carlos Alberto Laboy: Henrique, can you please expand on the fries in a slightly different direction to get all 4 of these to optimally work, you've put in a lot of effort into establishing the right incentives and the long-term clarity of what each side you and the bottlers are supposed to do and allowed to keep over the long term. Can you speak to how this is reinforcing the loops between you and the bottlers, so the trust can -- allow these insights and innovations a little more easily for better demand creation? And also related to that, how do you drive trust formation, this effort and this philosophy throughout the company as well? Henrique Braun: Yes. Thanks, Carlos. Good to here with you, too. Look, at the end of the day, I think what we have today and all of us that have been in this business for years. I have been for 30 years. John and myself and James that have been around the same tenure. We believe that we have an unprecedented trust level of about presenting a great relationship that we don't take for granted. We nurture this every day. And the most important thing to your point about how we connect the 4 eyes to generate value on these trust level that we have with our bottlers, comes down to having those 3 beliefs that I mentioned before that if we are faithful to the consumer centricity of everything that we do from a portfolio view, how we engage with them, and we bring value to our customers, understanding what are the levers that we have and they have to make that occasion work, the pie is going to be bigger for everybody. And that's what we have been doing in the last few years. The trust brings agility. The trust brings a bigger value for the ecosystem, but you never take for granted it takes years to build it and a second to lose it, and we nurture this every day. So on the 4 eyes, it's the same with the consumer. We need to honor the choices that they want, and we need to be there every day. And we are humble that we know we can do better every day at scale, and that's how we're focusing moving forward. Operator: Our last question today will come from Robert Moskow from TD Cowen. Robert Moskow: You might have touched on this, but I was wondering about the mix headwinds in the first quarter. How sustainable are those headwinds during the course of the year? Do they fade -- and what I'm trying to get at is what's the underlying price that we should expect for the company and maybe even if we can drill down to Lat Am, which was unusually low in first? John Murphy: Yes. Thanks, Robert. So just the quarter was 3 volume, 2 mix -- 2 price/mix, cycling 1 and 4 and -- 1 and 5 and so the name of the game for us this year, and we're going to be very consistent in talking about it, is to have a more balanced algorithm driven from the top line throughout the year. So starting out with the 3 and 2 is pretty close to where we expect us. In the first quarter, there were a couple of points of mix related to the north -- in the area of North America. Some category mix, which was a little stronger headwind-wise than we expected. We would not necessarily expect that to repeat going forward. And Henrique talked about Mexico and been at the revenue line, offset with strong performance in Brazil and Central America. But that too has a geographical mix feature there that accounts for maybe a slightly lower PMO than people were expecting. For the full year, our guidance -- and our guidance, we remain committed and we remain very much focused on delivering that balanced algorithm. And the outlook for the rest of the year, we're confident we can meet it. So 3, 2; 2.5, 2.5; 2, 3, we'll take any one of those. Operator: Ladies and gentlemen, this concludes today's question-and-answer session. I would like to turn the call back to Henrique Braun for closing remarks. Henrique Braun: Thank you, everyone, for participating. To close this out, enabled by our all-weather strategy, we are prioritizing agility, remaining consumer-centric and partnering closely with our customers. While the external environment is dynamic, we are using the capabilities to drive continued growth and create enduring value. Thank you for your interest, for your investment in our company and for joining us this morning. Thank you so much. Operator: Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.
Operator: Ladies and gentlemen, thank you for standing by. Welcome to the First Quarter 2026 Earnings Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. I would like now to turn the conference over to Chris Keenan, Director of Investor Relations. Please go ahead. Unknown Executive: Thank you, and good morning. Welcome to Corning's First Quarter 2026 Earnings Call. With me today are Wendell Weeks, Chairman and Chief Executive Officer; and Ed Schlesinger, Executive Vice President and Chief Financial Officer. I'd like to remind you that today's remarks contain forward-looking statements that fall within the meaning of the Private Securities Litigation Reform Act of 1995. These statements involve risks, uncertainties and other factors that could cause actual results to differ materially. These factors are detailed in the company's financial reports. You should also note that we will be discussing our consolidated results using core performance measures unless we specifically indicate our comments relate to GAAP data. Our core performance measures are non-GAAP measures used by management to analyze the business. For the first quarter, differences between GAAP and core EPS include constant currency adjustments as well as primarily noncash items, including acquisition-related costs, discrete tax items and other tax-related adjustments and restructuring impairment and other charges and credits. A reconciliation of core results to the comparable GAAP value can be found in the Investor Relations section of our website at corning.com. You may also access core results on our website with downloadable financials in the Interactive Analyst Center. Supporting slides are being shown live on our webcast, and we encourage you to follow along. They're also available on our website for downloading. And now I'll turn the call over to Wendell. Wendell Weeks: Thank you, Chris, and good morning, everyone. Today, we announced excellent first quarter 2026 results. Year-over-year sales grew 18% to $4.35 billion. EPS grew 30% to $0.70. Operating margin expanded 220 basis points to 20.2%. Gross margin expanded 120 basis points to 39.1%, and ROIC expanded 190 basis points to 13.5%. These excellent results were led by Optical Communications and Solar. Our performance this quarter serves as yet another proof point of Springboard's powerful trajectory. Versus our quarter 4 2023 springboard starting point, we grew sales 33% and EPS 79%, and we expanded operating margin and ROIC by 390 basis points and 470 basis points, respectively. As you remember, on our last earnings call in January, we upgraded our internal Springboard plan to add $11 billion in incremental annualized sales by the end of 2028 from our quarter 4 2023 starting point. Now based on increasing demand for our innovations, we actually plan to upgrade again and extend our plan through 2030 at our investor event in New York City on May 6. We will share our improved Springboard plan and the key drivers as well as a particular focus on the latest developments in our Gen AI portfolio. So today, I want to get into more detail about our first quarter results and highlight some of the topics that we'll cover next week. I'll begin with Solar. In quarter 1, we grew solar sales 80% year-over-year. So let's talk about what's going on in this new market access platform. We have previously shared our goal to build a $2.5 billion revenue stream with profitability above the corporate average by 2028. We're making key strategic progress on the commercial and policy fronts. We now participate in the solar industry through 3 major manufacturing operations. First is solar polysilicon. We did a business where we had a minority ownership and we were receiving about $50 million a year in cash flow in the form of dividends. And we've turned it into almost a $1 billion revenue business, and we've been able to do all of this with customer funding and government support, all while generating positive cash flow every year. We activated idle assets to serve the need for domestic solar polysilicon. Now that, that capacity is online, you can see the incremental sales in our results. The business performed above our corporate operating margin target of 20% in the first quarter. Now the focus is on improving the productivity of our operations to further improve our throughput and profitability going forward. Moving down the value chain. We added the capability to transform our polysilicon into higher-value domestically made solar wafers, all integrated together on our campus in Michigan to leverage our advantage position in polysilicon. We built the largest solar ingot and wafer facility in the United States in just 18 months in order to establish a commercial footprint and to take advantage of government incentives in a very short time frame. Importantly, we have committed customers for our wafer output. Now we had to move fast. Part of that meant bringing up our facility on temporary power and water systems because we couldn't get the utilities to build the permanent systems on our schedule. Our ramp is running behind our ambitious plans. Our wafer facility will undergo an extended maintenance shutdown, and we will transition to a permanent power system and repair and upgrade production equipment to increase throughput in future quarters. To cover this transition, we have built into our second quarter guidance, $30 million of additional expense versus the first quarter. We've also successfully entered the module business. We saw that 90% of the mass in a solar panel is materials in which we have adjacent world-class capabilities. We make the best technical glass in the world. We apply coatings through our strength in vapor deposition, and we have long-standing leading position in polysilicon for semiconductor materials. So not only is this an opportunity that's right for innovation, but it's also right in our wheelhouse. Therefore, we acquired and ramped a module manufacturing facility in Arizona to position ourselves for innovation as we progress the business. That factory is now up and running. And you can see incremental sales from this operation in our results. Profitability in this business should cross over our corporate operating margin target of 20% in the second quarter. We are now in the midst of adding capacity to this operation. And as it comes online and gets through our start-up period, this will further accelerate our growth and profitability. Altogether, we are seeing strong strategic and commercial success across our solar market access platform. As a result, we will be increasing our sales plan for the solar map as part of our Springboard upgrade on May 6. Turning to Optical Communications. We saw robust demand across the business and continue to improve our productivity with year-over-year sales growth of 36%. In our Enterprise business, early in the quarter, we announced our multiyear up to $6 billion agreement with Meta to support their apps, technologies and AI ambitions using our newest innovations in optical fiber, cable and connectivity solutions. On our last call, I shared that we were in the process of concluding other agreements of the same size and duration as the Meta agreement. We now have concluded two more large long-term agreements with hyperscale customers. And they are each similar in size and duration to the Meta agreement. Now I know we will get questions on who the other customers are and the specifics of our arrangements. However, our philosophy is to let our customers decide when and where they choose to make announcements on their critical supply chain decisions. I can share that these deals are very significant, and they share the risk and rewards of the required expansions with our strategic customers. For long-time followers of Corning, you would recognize the model is quite similar to our extremely successful Gen 10.5 agreements with our display customers. We're taking the proven approach in our glass businesses and applying it to Optical Communications. Our partnership with Lumen Technologies in the carrier space is another good example of this approach. We previously shared our agreement with Lumen to provide our new Gen AI fiber and cable system that enables them to fit anywhere from 2 to 4x the amount of fiber into their existing conduit. In February, Lumen shared that we've expanded and extended our multiyear agreement to ensure they have access to the newest state-of-the-art fiber technology. Lumen and fiber-to-the-home contributed to carriers' growth in the quarter. You'll recall at the beginning of Springboard, we pointed out that fiber-to-the-home would recover strongly during the planning period. We are seeing just that in our sales. As noted in public statements, carriers are planning to expand their fiber networks going forward. The typical run rate for homes passed by our large carrier customers has increased about 50% since the beginning of Springboard. Overall, based on our strong progress in Optical, we will be upgrading our sales plan for the business through 2030 at our investor event next week. Obviously, we have a lot of news to share next week. As part of our activities, we are planning to ring the bell at the New York Stock Exchange to celebrate our 175th birthday the day after our May 6 event. It is perhaps fitting that as we celebrate 175 years, we will share a significant upgrade to our Springboard plan with all of you. Highlighting that we are in one of the most exciting growth periods in our long history. The demand for our innovation capabilities has never been stronger. We are seeing the power of our innovations drive growth across all our market access platforms. Thank you for being with us on this journey, and I look forward to seeing you next week. Edward Schlesinger: Thank you, Wendell. Good morning, everyone. Our strong first quarter results show continued excellent performance on our Springboard plant. We delivered our eighth consecutive quarter of year-over-year sales growth while continuing to enhance the financial profile of the company. Year-over-year in Q1 sales grew 18% to $4.35 billion and EPS increased 30% to $0.70 per share, both coming in at the high point of our guidance. Operating margin expanded 220 basis points to 20.2%. ROIC grew 190 basis points to 13.5% and we delivered robust free cash flow of $188 million. With that, let's look at our progress to date. Comparing our Q4 2023 Springboard starting point to Q1 2026, we grew sales 33%, improved operating margin by 390 basis points, grew EPS 79% and expanded ROIC 470 basis points. In total, this represents a significant enhancement to our financial profile and establishes a new base from which to launch another round of strong, more profitable growth and we see even stronger growth ahead. On our last call, we upgraded our internal Springboard plan to add $11 billion in incremental annualized sales by the end of 2028 and $6.5 billion by the end of 2026. Now we have another quarter behind us. And as you can see, sales came in above our guided range. I'll share more on our second quarter guidance in a moment, but you can see we expect to continue performing well on our upgraded plan. Overall, we're capturing significant sales growth with powerful incremental profit and cash flow, and we expect our momentum to build. Let's turn to our business segment results. Today, we announced changes to our segment reporting effective first quarter 2026 which better align with our current operating and management structure. Here's a breakdown. First, will now report the results of our Solar business in its own segment. Since the launch of Springboard, we've communicated that a key element of our plan is to build at least a $2.5 billion revenue stream in this space. Previously, we reported our solar business results within Hemlock and Emerging Growth Businesses. We've advanced the business to the point that it now warrants its own segment which will include our solar and semiconductor polysilicon sales as well as our wafer and module businesses. As Wendell shared with you, we are making key strategic progress on the commercial and policy fronts. We now participate in the solar industry through 3 major manufacturing operations polysilicon, wafers and modules. Our solar ramp continues with our polysilicon business performing above our 20% corporate operating margin target in the first quarter and our module business on track to cross over in the second quarter. Second, we are combining Display and Specialty Materials into a new segment called Glass Innovations. Included in this segment are our glass and glass ceramic businesses that primarily serve the consumer electronics and semiconductor industries. These businesses share core technologies, manufacturing capabilities and market access and we have aligned them under a unified management structure to increase operational flexibility, improve efficiency and strengthen our leadership positions in the markets we serve. Our Automotive and Optical Communications segments remain unchanged, and all other results will be grouped as Life Sciences and Emerging Growth Businesses. Now I'll turn to segment results. In Optical Communications, sales were $1.8 billion, up 36% year-over-year, driven by robust demand for Gen AI products. Net income was $387 million up 93% year-over-year. Sales in both enterprise and carrier rose 36% year-over-year. In Enterprise, building off our multiyear up to $6 billion agreement with Meta, we entered into large long-term agreements with two additional hyperscale customers, and we are working to conclude others. And in Carrier, we are seeing growth stemming from both data center interconnects and strong demand for fiber to the home. Moving to glass innovations. First quarter sales were $1.4 billion, up $14 million or 1% year-over-year. Net income was $324 million, up $7 million year-over-year. Net income margin for this new segment was 22.8%. Display glass volume for the quarter was down slightly sequentially better than our expectations of down mid-single digits. Demand for premium Gorilla Glass products remains resilient despite rising memory costs for our customers. We expect memory prices to significantly impact the market in 2026. We expect to outperform the market, driven by strong demand for our innovations. As part of a continued focus on innovation and technology leadership, we recently launched Corning Gorilla Glass ceramic 3. The latest example of how we are extending our material science capabilities to meet evolving device requirements. This reinforces the strength of Corning's innovation engine and our more Corning approach, translating advanced glass and ceramic science into higher-value applications that expand our long-term growth opportunities. And in the semiconductor market, we continue to see short-term and long-term opportunities for our advanced optics products driven by the secular growth drivers in high-performance computing and AI driven data center build-outs. As chip makers ramp up production to meet the demand around generative AI, we expect to see higher demand for our EUV lithography business. Longer term, we expect growth in this segment to be driven by the adoption of our glass innovations. Turning to automotive. Q1 sales were $437 million, down 1% year-over-year. The global automotive vehicle market was down 3%. Higher heavy-duty sales in Europe and India largely offset a weaker heavy-duty market in North America. Net income of $70 million was up $2 million or 3% year-over-year. We remain focused on executing our more Corning growth strategy as underlying secular trends that are favorable to Corning remain intact and will drive adoption of more larger and higher resolution displays as well as new emission control products across the global automotive market. And in solar, sales were $370 million, up $164 million or 80% year-over-year. Net income was $7 million, down $20 million year-over-year. As Wendell mentioned, we have a goal to build a $2.5 billion revenue stream in this map with profitability above the corporate average by 2028. We're making key strategic progress on the commercial and policy fronts. We participate in the solar industry through 3 major manufacturing operations, polysilicon wafers and modules. Our solar ramp continues with our polysilicon business performing above our 20% corporate operating margin target in the first quarter and our module business on track to cross over in the second quarter. Our first quarter actuals included about a $0.04 EPS impact as we continue to bring up solar wafer capacity to meet committed demand. Our second quarter forecast includes an incremental $30 million of expense versus the first quarter for an extended maintenance shutdown, including the transition to a permanent power system. We will repair, upgrade and modify our production equipment to increase throughput in future quarters. Sales in Life Sciences and emerging growth businesses were flat year-over-year. Net income improved year-over-year but was down sequentially. Now I'd like to take a moment to discuss operating expenses. In the quarter, was $823 million. Included in Q1 OpEx was higher variable compensation expense, including stock-based compensation. The primary driver the higher expense was the significant increase in our stock price in the quarter. So with that, let's turn to our outlook. In the second quarter, we expect to grow sales about 14% year-over-year to approximately $4.6 billion and to grow EPS about 25% year-over-year to a range of $0.73 to $0.77. And as I just mentioned, our second quarter forecast includes an additional $30 million of expense in Q2 versus Q1 as our solar wafer plant undergoes an extended maintenance shutdown. Even with the extended shutdown, we expect Q2 '26 to be one of the strongest quarters in a string of very strong quarters. For the full year, we expect to generate significantly more free cash flow year-over-year while continuing to invest strongly in our growth vectors aided by customer financial support. Now let me spend a minute on capital allocation. As we've previously shared, we prioritize investing in organic growth opportunities that drive significant returns. Overall, we believe this approach creates the most value for our shareholders over the long term. And our investors have confirmed they see the value in this approach. To deliver the larger growth opportunity in our upgraded Springboard plan, we need to invest. And as we invest, we will use a variety of tools to share the cost and risk of our required expansions with our customers to ensure we generate strong returns on our investments and secure our planned cash flows. We also seek to maintain a strong and efficient balance sheet. We're in great shape. We have one of the longest debt tenors in the S&P 500, our current average debt maturity is about 20 years, and we have no significant debt coming due in any given year. Finally, we expect to continue our strong track record of returning excess cash to shareholders. We already have a strong dividend. And therefore, as we go forward, our primary vehicle for returning cash will be share buybacks. Stepping back, we feel great about our progress on Springboard. Our performance is outstanding and we're energized about the tremendous opportunity for value creation for our shareholders. Since the start of Springboard, we've captured significant sales growth and we've transformed our financial profile, establishing a strong foundation for future growth. And we expect our momentum to build as we capture a strong set of opportunities across the company. At our May 6 investor event in New York City, we plan to upgrade and extend our Springboard plan through 2030, share the underlying growth drivers in our maps and detail the technical drivers of growth in our enterprise business as well as our new Photonics map. I look forward to sharing more with you next week at our investor event. And with that, I will turn things back over to Chris for Q&A. Unknown Executive: Thank you, Ed. Operator, we're ready for the first question. Operator: [Operator Instructions] The first question will come from John Roberts with Mizuho. John Ezekiel Roberts: On the new hyperscaler agreements, are there material glass fiber draw capacity expansions associated with that? Or maybe a different way, is the extension to 2030 going to involve glass draw capacity expansions? Wendell Weeks: These agreements taken in total are driving so much growth, John, that you're going to see expansion across all of our major optical operations, including expanding our fiber operations. What we seek to do with these arrangements is to make sure we're appropriately sharing the risk of the required expansions with our customers in a way that assures return to our shareholders. John Ezekiel Roberts: Okay. And then when you complete and you're fully ramped on solar, what would be the approximate breakdown between semiconductor wafers and modules? Edward Schlesinger: So I would say that we're running at about $0.5 billion semiconductor business. That business will continue to grow over time. And the remainder of all of that business or all of that segment and all the growth will come in the solar space. John Ezekiel Roberts: And primarily wafer? Wendell Weeks: It would be -- say that again, John? John Ezekiel Roberts: Primarily wafer? Wendell Weeks: Wafer and module. Both of those. And next week, we'll share a little more on that. What we're seeing is demand for our downstream manufacturing operations be so strong is that we will raise our sales plan above the $2.5 billion that we shared with you previously, John. Operator: Next question will come from Wamsi Mohan with Bank of America. Wamsi Mohan: I was wondering, Wendell, if you could maybe characterize the state of supply-demand balance in the Optical Communications market. We're hearing a lot of anecdotal talk about price increases. Some of your competitors internationally have raised prices within fiber. And so just curious how tight are you seeing the current state? Are you able to meet supply enough to meet the demand? And how are you seeing the evolution of pricing for both [ Optical Fiber and connect price cables ]. Wendell Weeks: So we are seeing a very robust demand for our innovation sets, Wamsi. What we're doing is entering into these very long-term agreements because the growth rate is accelerating so robustly, Wamsi. And so what we're doing is, given that we are going to be undertaking expansions across our opticals, what we seek to do is do 3 things that are buried in these big agreements. First, we're trying to serve all of our customers. And we're trying to get very balanced coverage so that we aren't dependent on any one model maker or any one AI cloud provider. Because though clearly, AI is going to make a powerful difference in worldwide economies, picking specific winners and losers I think, is problematic. So what we seek to do is take this very robust demand that we have, and we want to serve all of the customers and do it in a very balanced manner. And then as part of those, what we seek to do is appropriately share the risk of the required expansions to support this rapidly accelerating growth. So I'm just going to answer your question in sort of 3 layers. So that is the first layer, which is we -- given our strong profitability in this business, being able to meet the growth requirements and to derisk those for our shareholders is our top priority to do with the strong demand for our innovations. Second, you are correct that the pricing environment is clearly favorable for those who have capacity. Our approach to increasing our profitability though comes primarily from how do we uniquely innovate and how do we uniquely manufacture our products rather than focusing on price increases of commodity-based products. So what we try to do here is we're introducing these new innovations that you hear our customers talk about and hear us talk about. And what they do is they create more value for our customers by reducing their total installed cost. And then we share that value creation with them, which increases our profitability much more rapidly and sustainably over time than simply capturing any particular near-term move, whether it be on bare fiber or [indiscernible] cable or anything like that. Does that make sense to you, Wamsi, did I answer your question? Wamsi Mohan: Yes. No, that's helpful, Wendell. If I could just follow up on your very helpful analogy with display Gen 10.5 relative to the Optical business, I was wondering if you [ would venture ] to say that the margins that have historically been extremely strong in display, are we entering an environment in Optical where you could eclipse gross profit margins or [ up ] profit margins [indiscernible] in display given the strength and momentum and the size of the business. If you could extend that analogy there, that would be super helpful. Wendell Weeks: So the simple answer is yes. And what will be critical for that will be the rate of adoption and the value of the innovations that we create here and really the size of the competitive moats that we're able to build. Our goal is to create so much value that this becomes an all-time star for us as a company. So that's what we're seeking to do. Edward Schlesinger: And Wamsi, I would add one other thing, just I think that's important for you and investors to think about is we're a capital-intense company across all of our businesses. But if I think about Optical in general, it's a little less capital intense than a business like display where you're purely melting and forming glass. So your return on invested capital is high. And I think we will see that drive a lot of profit dollars and cash. So your financial model is a little different. It will require investment, but your return will be very high in that space. Wendell Weeks: I think that's super helpful, Wamsi. [indiscernible] is correctly making us describe what we mean by enhanced profitability. What we always are aiming at is the return on invested capital. So it's the totality of the financial model, both our asset turns as well as our margin percent. So in my answer, what I am driving at is the totality of that and that our return on invested capital in this business, we would like to see that exceed our glass businesses, and that's what we're aiming at. Operator: The next question comes from Josh Spector with UBS. Joshua Spector: I had two questions on margins, kind of a similar vein of thought here in that -- if I look at what you did in the first quarter, I mean, sequentially, your incremental margins were north of 50%, in Optical year-over-year, they're close to 40%. So I don't know if you can break that apart in terms of operating leverage versus price mix as the larger contributor to those two pieces. And then secondly, you've talked a lot about next week. You're going to talk more about Springboard, upgrade your sales plan. Do you expect to have a new margin target that you're going to put out there next week? Edward Schlesinger: So let me take the first one, Josh. I'm not going to break it apart into all those piece parts, but I will say that a large driver of what we're going to see in Optical, and we actually did have a great net income margin, which report for each of our segments in Q1 is the impact of moving to our new innovations and those products, I think as Wendell was sharing in his previous answer, that sort of moves us up in margin over time. In a way, it's like capturing price. It's a little different than comparing like apples-to-apples on price. If we can sell more solutions or new innovations, our margin goes up. We're certainly getting operating leverage and growing is certainly going to help. But I think that's a good way to think about it in Optical Communications. And I think rather than steal away anything from our next week event, hopefully, you'll tune in. And hopefully, we'll see you there, and we can talk about all the impacts of our financial profile and how we expect to see growth in the future. Operator: Our next question comes from Asiya Merchant with Citi. Asiya Merchant: Great. And a good set of numbers here, looking forward to seeing you guys next week. A question I've often got from investors this quarter about these long-term agreements with hyperscalers and model builders. Are you able to, kind of within these contracts, raise prices over the long term? Or how are you kind of factoring that in, given the extent of these multiyear agreements that could stretch over 3 to 5 years? And one more, if I can. The solar drag, I think you talked about an incremental $30 million here related to some power related stuff. When should we expect the drag on these expenses to be completed, both from what was happening in 1Q plus the incremental that you're talking about in 2Q? Wendell Weeks: Why don't you take the second part first and then I'll tackle the long-term agreements. Edward Schlesinger: So on solar, maybe just take a step back for a second. We're doing -- we have 3 big things we're doing, adding polysilicon capacity, module capacity and wafer capacity. And on polysilicon, we're in great shape. We will get better. We have an opportunity to drive more productivity and improve our profitability there, but that's not causing us any kind of a drag. And on modules, we're adding capacity but we're actually starting to get pretty close, and we'll cross through our corporate operating margin target of 20% in the second quarter, and we'll continue to add capacity there. So I think those two things are in a good place. In wafers, which is probably the most complex thing that we're trying to get done, that's really where the impact is. And what I tried to say my section of our prepared remarks was that we had a drag, which continues from ramping that facility and now we have the impact of this extended maintenance shutdown. When you take that in aggregate, it's probably close to $0.07 of EPS in the second quarter guide that we gave. So just -- so you have sort of that as we're all on the kind of same page. So it impacts our margin. It impacts our EPS. And it also reduces our sales because we're shut down for a period of time here, at least a couple of months, let's say, in the second quarter. And so our sales guide reflects that. It will get better. I think calling the exact timing of when we get to the operating margin target is very hard to do because we have a lot of work. I would expect it to sort of sequentially get better over time. So once we bring the factory back up online, that will have some impact in a positive way, and then we'll continue the ramp of adding all the capacity. Wendell Weeks: Just one before I shift to your first question is pricing environment looks very good for us in solar, demand environment looks very good for us in solar, policy environment looks very good to us in solar. 2 of the 3 manufacturing operations are tracking well against our plans. We just have to get transferred over to our permanent systems here. And we just got to get more productive in making ingots and wafers as we go forward. And so that will definitely happen. And whenever you ask an ops person like when will everything get better when we're already shut down, they will always say, Well, let me get up and running again. So after we pop out of this extended shutdown, we'll be able to be really clear with you last year. Is that okay on that one? And can I turn to the first question? Asiya Merchant: Yes. Wendell Weeks: Great. So what we're mainly focused on here is improving visibility. If you sit down with our key customers, the amount of growth of their growth that they would like us to take responsibility for is quite significant. And so what we seek to get visibility on is, first, what amount of demand do they actually have in total. And that sets for us to [indiscernible] sort of how we think about how we can help you on what our long-term sales look like and help ourselves as far as what would be appropriate plant and equipment to support those growths. Second thing we see visibility on is the product itself is -- the sets of products that we're introducing are continuing to change and innovate. And where the products are used is changing. One of the things we're going to sit down and talk about next week is there are new links within a back-end AI network that are going to fall into our space. So real clarity on what those products need to look like, what do we have to invent, what do we have to create and how we're going to make that is the next improving hunk of visibility. Then the piece after that is how do we approve [indiscernible] share the risk of any of our investments in talent and treasure so that we can assure our investors a super strong return. And those tend to dominate those dialogues. Those are more important financial drivers than once again sort of just what would be the increase on the bare fiber cost. Their fiber in and of itself is now turning much more into a component for us of our more innovative systems and an important component without doubt, but it is adoption the rate of adoption of those new product types that is going to be the key driver to our profitability and revenue growth. We'll try to share a little more of that next week, and that's why we're choosing to do a dive in that area. Operator: The next question comes from Samik Chatterjee with JPMorgan. Samik Chatterjee: Wendell, if I can just ask you to go back to your comments on the hyperscaler agreements. And curious, you mentioned this a few times in terms of sharing the risk with your customers. How should we think about what that actually implies? Does it imply sort of take-or-pay contracts? Does it imply capital commitment from them? What are you getting as part of these incremental hyperscale agreements to share the risk? And then with the initial agreement that you had with Meta, our impression with scale-up wasn't necessarily a part of that. It was primarily focused on scale-out. As you think about -- as we think about these two incremental hyperscaler wins today look very similar to that framework that Meta had? Or does it include scale up incrementally? Wendell Weeks: Samik, let's answer the sort of easy part of the question first and then the hard one. Okay. So the easy part. The simple answer is, yes, all of the above. You're going to see a blend that best meets our customers' utility preference curves for how they would like to share the risk. For us, what's just important is that we share that risk. And we have a variety of different tools to do it. And you've named a number of them. You have funding, you have guaranteed revenue, you can have price, right? You have all of the variety, you can have accelerating share agreements, you can have all sorts of things like that, all that are aimed at how do we appropriately share the risk. And different ones of our customers just have different risk profiles and different things they like from that overall tool set. So if you could be sitting in the room with us, which I'm sure you would like to do Samik, right? What you would see is us explaining that tool set and then them saying, okay, which do I like? What is the blend of that? How does that best meet my needs. Does that address your question? The first question, Samik? And then I'll do the hard part. Samik Chatterjee: Yes, please go ahead. Wendell Weeks: Okay. So scale out, scale up and then what happens as our products go inside the box. Things like CPO [ NPL ], what will be in our photonics map. So the way we think about this is that there is a set of products for us in fiber cable and connectivity that we seek to cover with our customers. Part of when I say what we do is we seek visibility on what exact products to make, what we are talking about is the first sort of phases of this have been aimed at scale out as you get -- because these are long-term agreements. As you get out longer term, what we're engaged with our customers about is how will your demand for our products change as more and more links fall to fiber optics. And that will tend to increase these commitment levels over time, above and beyond scale out. But when they happen is going to happen at different times for different customers just depending on their architecture choices. When we talk about Photonics, we're talking about creating a new map that is aimed at our OEM customers in Gen AI. So those will be separate again, right, from our agreements with our hyperscalers and incremental. Is that explanation helpful, Samik? Operator: Next question is from Meta Marshall with Morgan Stanley. Meta Marshall: Maybe just stepping to the carrier piece of the business for a second, probably the best quarter in a number of years. I guess I just wanted to get a sense of you mentioned fiber to the home plans increasing. Are you guys starting to see some of the [ demand ]? Do you think that you're gaining share in that market? Just a little bit more visibility to what you're seeing on the carrier side would be helpful as a starting point. Wendell Weeks: Speed is still quite small. And we will always secure a hunk of our capacity to be able to serve the underserved and [indiscernible] customers. But that's not what's really driving these numbers. What's driving it, and you actually see it a lot in the news now is just the ascendancy of fiber to the home. That versus other technologies that people used to ask me a lot about fixed wireless, right, hybrid fiber coax, whether satellites make a difference. And all you're just seeing is the ascendancy of our technology from the big carriers is what's primarily driving these numbers and they've been very public about it in their decisions, Meta. Meta Marshall: Got it. And then maybe just a follow-up question. I expect we'll hear more next week, but just within specialty, within Glass Innovations. Just -- are there any innovations coming this year that you would expect to drive kind of material upside to that business during this year? Wendell Weeks: Always so thoughtful when I answered this question because who I'll be [ interpreter ] or speaking for. Let me reflect on the appropriate way to answer that question. Thank you for the gift of giving me until next week to do so. Operator: Next question is going to come from George Notter with Wolfe Research. Unknown Analyst: It's Brendan Rogers on for George. A quick one. Can you guys share any more details on kind of the split between carrier and enterprise growth rates this quarter? A sense for like the relative size of those at this point or just broad strokes, enterprise versus carrier growth rates? And then another quick one on the Photonics platform that we should expect to hear next week. Are LTAs going to be kind of a mechanism that you guys are going to pursue there? Obviously, OEMs are different sort of customer set. So anything you could share there. Edward Schlesinger: Yes. I'll take the first one. So both carrier and enterprise grew 36% year-over-year in Q1. So just coincidentally, that equals the segment growth rate. Enterprise continues to grow really well, and we continue to outperform sort of the broader metrics, I would say, in that space. We'll certainly share more about that next week. In carrier may be building a little bit on what Wendell said, we had a great quarter. You've got fiber-to-the-home, you've got data center interconnect in there. I wouldn't take Q1's growth to be indicative of a growth rate for carrier because whatever happens in any given quarter or what happened in the prior year, and that quarter could have an impact on that rate, but we certainly expect to see growth in the carrier space over the horizon of our Springboard plan. And then on your second question, I think we'll address our new Photonics map in more detail next week, what's in there, how we're thinking about it, the growth drivers and how we expect that to play out over the next several years. Wendell Weeks: Yes. And but you'll really -- the change from previous dialogues that you've had with me has been that -- up until recently, I hadn't believed that we would begin -- we would see a significant increase in our revenues between now and 2028, from the scale-up portion of our network. Well, I should say it did not rise to the probability level that we felt comfortable of sharing that with you and saying you could count on that piece -- those pieces of the network falling our way. What has happened is technical progress at a number of very deep dialogues with key customers that has now increase the probability of the scale-up piece of the network, making a difference in the near term in our revenue outlook. And we will share what those -- what's driving that change on our part and that upgrade on our part with the really key technical drivers behind it so that our investors can get their own points of view around the adoption rate of those technologies. Unknown Executive: Thank you. Last question? Operator: And the last question is going to come from Martin Yang with Oppenheimer. Martin Yang: My question is on capital expenditure plan for the year. you haven't raised the CapEx plan despite the two new agreements. So were those two new agreements already incorporated when you originally gave the CapEx plan for the year? Or does that suggest the timing which means their CapEx ramp starts beyond 2026? Edward Schlesinger: Yes. Thanks, Martin. So we had given guidance last quarter that CapEx would be about $1.7 billion. We could be a little above that number this year. That's certainly true. As Wendell said earlier, we will definitely be investing across all of our product sets in optical. We have tools we use to share that investment with our customers. So to some extent, there's some impact in there. And then we'll certainly see investment continue into next year. And we'll share more next week on how we're thinking about it. Wendell Weeks: And the shorter version of this is when we share the CapEx [indiscernible] had in our mind that -- because we are -- these dialogues take a long time that we were going to be able to reach these agreements with our customers. And because of the demand is coming at us relatively rapidly, we would have had to have been in progress already on those expansions. So I think that is -- I agree with Ed's commentary on CapEx. I think going forward, what's intriguing will be how does the various funding and risk sharing work and how that impacts our overall cash flow. Overall, we feel very good about having accelerated cash flow and really not going through any sort of significant dip due to an investment cycle largely because of the risk-sharing agreements that we are seeking with our customers, if that is where you are aimed, which I bet it is. Operator: And that will conclude our question-and-answer session. I will turn it back over to Chris for closing remarks. Unknown Executive: Thank you for joining us. And before we close, I wanted to let everyone know that we'll be hosting an investor event at the New York Stock Exchange on May 6. We'll also be attending the JPMorgan Global Technology, Media and Communications Conference on May 19. And additionally, we'll be scheduling management visits to investor offices in select cities. Finally, a web replay of today's call will be available on our site starting later this morning. Once again, thank you all for joining us. Operator, that concludes our call. Please disconnect all lines. Operator: Thank you for participating. Everyone may now disconnect.
Operator: Thank you for standing by. My name is Bailey, and I will be your conference operator today. At this time, I would like to welcome everyone to the Ventas, Inc. First Quarter 2026 Earnings Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session. 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, again, press star and one. I will now like to turn the call over to Bill Grant, Senior Vice President of Investor Relations. You may begin. Bill Grant: Thank you, Bailey. Good morning, everyone, and welcome to the Ventas, Inc. First Quarter 2026 Results Conference Call. Yesterday, we issued our first quarter 2026 earnings release, presentation materials, and supplemental information package, which are available on the Ventas, Inc. website at ir.ventasreit.com. As a reminder, remarks today may include forward-looking statements and other matters. Forward-looking statements are subject to risks and uncertainties contemplated in such statements. A variety of factors may cause actual results to differ materially from those. For a more detailed discussion of those factors, please refer to our earnings release for this quarter and to our most recent SEC filings, all of which are available on the Ventas, Inc. website. Certain non-GAAP financial measures will also be discussed on this call, and for a reconciliation of these measures to the most closely comparable GAAP measures, please refer to our supplemental information package posted on the Investor Relations website. And with that, I will turn the call over to Debra A. Cafaro, Chairman and CEO of Ventas, Inc. Debra A. Cafaro: Thank you, BJ, and good morning to all of our shareholders and other participants. I want to welcome you to the Ventas, Inc. first quarter 2026 earnings call. Ventas, Inc. continues to drive growth and outperformance as a leading participant in the longevity economy. We are already into our fifth consecutive year of double-digit annual growth in our senior housing operating portfolio, or SHOP. Even more exciting, this year represents a new and positive inflection point when demographic demand jumps and growth remains elevated for over a decade. Our business and team have been built to meet this moment and seize the unprecedented opportunity for multiyear growth and value creation. With SHOP as our engine, Ventas, Inc. is now a $6 billion S&P 500 company with a portfolio of over 1,400 properties serving a large and growing aging population. We have developed a unique brand that stands for delivering for stakeholders and winning together. Our excellent first quarter results and improved full-year outlook demonstrate our competitive advantages, the impact of our differentiated platform, strong execution of our one-two-three strategy, and our momentum. In the quarter, Ventas, Inc. delivered 9% year-over-year growth in total same-store property NOI and normalized FFO per share. SHOP NOI grew over 15%, and U.S. occupancy increased 370 basis points, fueled by broad-based demand and our Ventas OI initiative. Accretion from senior housing investment activity further contributed to our growth in the quarter, showing our strategy in action. And notably, our liquidity reached record levels and our financial position continued to strengthen. Based on our first quarter results and our confidence, we have improved our outlook for the full year, increasing our mid guidance for FFO per share by $0.03 to $3.86 per share, led by SHOP same-store growth of 16%. As a result of our strategy and execution, we have already grown senior housing to over 60% of our business, and our communities now serve nearly 100 residents. In a large and highly fragmented sector where most operators run 10 or fewer communities, our platform gives us unique advantages to drive outperformance at scale through data and experiential insights. With our collaborative approach, Ventas OI also attracts many experienced operators who want to manage our communities and benefit from Ventas, Inc.’s aligned approach, people, and platform. And we are just getting started. In the investment market for SHOP, we have an outstanding private-to-public arbitrage opportunity. We have already closed $1.7 billion of attractive senior housing investments this year and over $6 billion since 2024. Our number one capital allocation priority remains U.S. SHOP communities that meet our strategic framework and can deliver unlevered IRRs in the double-digit to mid-teens range at pricing below replacement cost. Interestingly, because there is significant existing and new investor interest in senior housing, for all the obvious reasons, we are seeing more owners and potential sellers bringing assets to market and engaging in conversations with us about transacting. This trend is expanding our pipeline significantly. We are confident in our ability to capture more than our fair share of desirable deals because of our momentum in the market and our competitive moats. We have now increased our 2026 investment volume guidance to $3 billion. We are focused on increasing our SHOP business organically and externally to drive our forward enterprise growth rate and serve the nearly 70 million baby boomers who start turning 80 in 2026. In the next five years alone, this group will grow nearly 30%. Yet, in the first quarter, senior housing construction starts totaled only about 1,500 new units, and total senior housing communities under construction remained at historic lows. With at least a three-year start-to-finish development cycle, these favorable demand-supply trends provide our advantaged platform with compelling and durable tailwinds. The Ventas, Inc. team is unified and enthusiastic about outperforming at scale and the multiyear growth and value creation opportunity ahead. We are excited about our improved outlook for 2026 and the setup for the coming years as we pursue our mission to help people live longer, healthier, and happier lives. With our unique brand standing for commitment to each other and our stakeholders, we are in it to win it together. In closing, I want to recognize our admired colleague, Pete Bulgarelli. Pete is retiring after an extraordinary four-decade career in commercial real estate and eight years leading our OMAR business with excellence and integrity. On behalf of all of us at Ventas, Inc., I thank Pete, and wish him every continued success and happiness. With that, I am pleased to turn the call over to Justin. Thank you, Debbie. J. Justin Hutchens: I am pleased to join you today to discuss another strong quarter of execution in senior housing, reflecting continued momentum across both organic performance and external growth in our SHOP portfolio. I will start with SHOP performance, then provide updates on our active asset management and the full-year outlook, and conclude with investments and capital deployment. Starting with SHOP, the first quarter results reflect both strong market fundamentals and sharp execution across the portfolio. In the first quarter, SHOP same-store NOI increased over 15% year over year, kicking off our fifth consecutive year of double-digit NOI growth. This is driven by a powerful combination of occupancy growth, pricing strength, and operating leverage, and increasingly supported by the Ventas OI initiatives we are deploying with our operators. Occupancy continues to be the primary driver of performance. Same-store average occupancy increased 310 basis points year over year, reaching 90.4%. Performance this quarter was particularly broad based, with so many operators contributing to our success there are too many to name. The results in the U.S. portfolio were especially strong, where same-store occupancy increased 370 basis points year over year and outperformed the NIC top 99 markets by 150 basis points. On pricing, RevPOR increased 5% year over year, reflecting strong in-house rate increases that are running at nearly 8%, as well as continued improvement in street rates across geographies, operators, and product types. Operating expenses increased 5.8% year over year, which was largely driven by higher occupancy levels and winter storm-related costs. Net-net, NOI grew over 15% year over year, and we delivered meaningful operating leverage, with NOI margins expanding 170 basis points year over year to 30% and incremental margins at 50%. As we continue to deploy our active asset management, we are executing in close partnership with our best-in-class operators and with a talented and recently expanded Ventas SHOP team that is driving performance at the unit, community, and portfolio level. Across the portfolio, we are focused on community-level execution alongside our operating partners, supported by the continued evolution of Ventas OI. We are deploying targeted initiatives, including refresh CapEx, price-volume optimization guidance, and a sharp focus on sales culture, with the ultimate goal of achieving zero lost revenue days in our highly occupied communities. We are also implementing unit-level sales strategies supported by boots-on-the-ground site visits from our team. And we are doing it in collaboration with operators, delivering strong revenue and NOI growth while ensuring the senior living value proposition is realized for residents and families through the care, services, and peace of mind provided in our communities. This combination of active asset management and structural demand tailwinds has led us to increase our 2026 SHOP outlook, including same-store NOI growth of 16% at the midpoint, up from 15%. This is driven by a higher expectation of occupancy growth of approximately 300 basis points, which is leading to increased revenue growth expectations of approximately 8.75%. As we have discussed previously, the key selling season runs from May through September. While we enter the season in a favorable position because of the first quarter strength, our success during the key selling season will determine the full-year outcome. Looking ahead, there is real momentum building for us to expand on several key fronts. Over recent years, we have made intentional strategic moves to ensure Ventas, Inc. stands ready to harness the growing surge in senior housing demand. Because of those efforts, we are confident that we will continue to drive solid organic growth fueled by ongoing increases in occupancy and the operating leverage we are achieving across the SHOP portfolio. And with our U.S. communities averaging about 87% occupancy, there is still significant runway for us to continue to drive outperformance. Importantly, the strength we are seeing in SHOP performance gives us confidence to continue leaning into external growth. Turning to investments, 2026 is off to an excellent start as we execute our external growth strategy with focus and intention. Year to date, we have completed $1.7 billion of high-quality senior housing acquisitions in the U.S., building on the fast start we saw in January. On this activity and our outlook for the remainder of the year, we are increasing our senior housing-focused investment guidance from $2.5 billion to $3 billion for 2026. While there is heightened interest in senior housing investments as additional capital flows into the sector, Ventas, Inc. remains competitively advantaged. Notably, of the $1.7 billion of investments closed year to date, more than 90% were relationship-driven, over 60% were sourced off-market, and more than 40% were completed with repeat sellers. Since 2024, we have now completed over $5.7 billion of senior housing, adding more than 17,000 units to the SHOP portfolio. These investments have been carefully selected to closely align with our right market, right asset, right operator framework, and they are performing in line with our underwritten expectations. We are buying communities that enhance portfolio quality, are located in attractive markets with strong demand growth, are insulated from future supply risk, and deliver low- to mid-teens unlevered IRRs. Our investment strategy and team are focused on senior housing investment opportunities with different combinations of growth and yield that can produce attractive risk-adjusted returns. For example, earlier this month, we completed a $540 million acquisition of the Revel portfolio, which represents a value-add lease-up opportunity at scale. This investment consists of newly built luxury independent living communities located in affluent, high-growth markets across the Western U.S. With average in-place occupancy in the mid-70% range, the combination of the newer assets, high-barrier markets, and significant embedded occupancy upside creates a highly attractive growth profile. This portfolio was acquired at a significant discount to replacement cost, even with its quality, scale, and amenity set. The seller elected to retain a 25% interest in the portfolio to share in the strategic and financial benefits of implementing Ventas OI initiatives across the portfolio to drive unlevered IRRs in the mid-teens. Transactions like this underscore the advantages of scale, relationships, operating expertise, and decisiveness in today’s market. Excluding the Revel transaction, our remaining senior housing investments completed so far in 2026 are expected to generate a 6.9% year-one NOI yield and low- to mid-teens unlevered IRRs. These investments also allow us to expand our operator relationships. Our Ventas OI platform provides the capabilities to manage multiple operators at scale, enabling us to retain strong in-place operators and support their growth. Looking ahead, we plan to continue to pursue attractive senior housing investments that combine durable in-place cash flow, embedded growth, and attractive risk-adjusted returns. In closing, we are encouraged by the performance of the SHOP business in the first quarter and excited about the opportunities ahead. We are executing from a position of strength with strong organic growth, compelling external investment opportunities, and a long runway for value creation. With that, I will turn it over to Bob. Robert F. Probst: Thank you, Justin, and good morning, everyone. I will cover three areas this morning: first, our financial results for Q1; second, our balance sheet and capital activity; and finally, our updated outlook for 2026. Starting with our overall enterprise performance, we delivered a strong start to the year led by over 15% same-store cash NOI growth in our SHOP portfolio. Normalized FFO for the first quarter was $0.94 per share. Up 9% year over year, driven by total company same-store property-level growth of nearly 9% and accretive senior housing investments. Our outpatient medical and research portfolio, or OMAR, delivered 2.4% same-store cash NOI growth, led by outpatient medical growing 3.1% year over year. Occupancy in outpatient medical reached almost 91% in the first quarter, a 50 basis point increase year over year that marks the seventh consecutive quarter of occupancy growth. Our triple-net segment grew same-store cash NOI by 1.6% in the quarter, benefiting from the 35% Brookdale cash rent escalator which went into effect 01/01/2026. Triple-net results are in line with our expectations and supportive of our confirmed full-year guidance for the segment. Turning next to our balance sheet, our balance sheet continues to strengthen as a result of organic SHOP growth and equity-funded senior housing investments. Net debt to EBITDA improved to 5 times at quarter end, a 20 basis point sequential improvement, with further improvement expected through the balance of the year. Liquidity is strong, with $5.5 billion available at the end of the first quarter, providing Ventas, Inc. with significant financial flexibility. Our investment momentum has continued into 2026. To fund this growth, we raised approximately $2.4 billion of equity designated for 2026 investment activity, including $800 million settled during the first quarter and $1.6 billion currently available through forward equity sales agreements. Given our encouraging start to the year, we are improving our outlook for 2026. We now expect normalized FFO per share to range from $3.82 to $3.89, or $3.86 at the midpoint, a $0.03 increase from our prior outlook. Bridging from our prior guidance midpoint, the $0.03 increase is driven by stronger organic property performance led by SHOP and accretive senior housing investment activity, which together contributed a $0.04 per share increase. These favorable items are partially offset by $0.01 from the higher forward interest rate curve. We are also increasing our total company same-store cash NOI growth outlook to nearly 10% at the midpoint, resulting from a 100 basis point higher SHOP midpoint of 16%. A more fulsome discussion of our guidance assumptions can be found in our Q1 supplemental earnings presentation posted to our website. To close, we are very pleased with our start to 2026. The first quarter reinforces the strength of our organic performance, the durability of senior housing demand, and the embedded growth profile of our portfolio. With that, I will turn the call back to the operator. Operator: Thank you so much. At this time, I would like to remind everyone, in order to ask a question, press star and the number one on your telephone keypad. Your first question comes from the line of Julien Blouin with Goldman Sachs. Your line is open. Julien Blouin: Yes, thank you for taking my question. Just wanted to touch on the $540 million Revel investment. In your view, what had driven the underperformance of that portfolio, keeping it in the mid-70% range? And then as we think of how Ventas OI plugs in there, what are the lowest hanging fruit that Ventas OI can allow you to improve, and what are some of the longer-term gains that the platform gives you? And more generally on the current transaction environment, how would you describe the current level of competition and capital chasing transactions? Are you seeing a lot more bidders showing up when you are participating in more widely brokered opportunities? And are you starting to see that reflected in some of the cap rates? Have you changed your expectations at all on the cap rate front for the rest of the year? J. Justin Hutchens: Great questions. I will step back and give a little history and then some of the attributes of the acquisition and the opportunity ahead. This is a portfolio that was built by Wolff Company, which is a large multifamily developer with a very long history based in Scottsdale. They entered the senior housing sector with this really exciting development because it is a resort-like independent living product that would appeal to a very active senior in a highly amenitized, luxury setting. At the beginning, when they entered the space, they used third-party management. When they got into it, they realized they were probably better off setting up their own platform, so they set up Revel, and that was a slow start. Now they have a team that is very talented across the board. One of the reasons they wanted to work with Ventas, Inc. is the Ventas OI platform and the ability also to stay in this joint venture so they could participate in some of the upside. What we like about it is the quality of the assets is really high, we are buying below replacement cost, and we see significant operational upside. Our team and the Revel team are already on the ground, and we are seeing pretty immediate sales upside. We are catching that portfolio at a time where it has good momentum already. We are facing a forward market that has 1,200 basis points in net demand over the next few years, so we are playing into tailwinds as well. Put together, it is a really exciting, high-growth investment opportunity in really high-quality assets, sourced completely off market, and it should generate really good returns for us moving forward. Stepping back on the broader market and competition, we just updated our investment guidance to $3 billion, the highest we have had in three years, during a period where there is more interest in the sector. There are clearly new investors: a wide variety of PE, both large and small, owner-operators, other REITs, institutional capital. Even with that, we raised guidance with high confidence because of our competitive moat: the Ventas OI platform; the ability to manage operators at scale in a highly fragmented sector, now up to 44 operators; no financing contingency; very high liquidity; and an excellent track record of execution. Year to date, 90% of investments are relationship oriented, 60% off market, 40% repeat sellers. The pipeline is growing. On cap rates, I mentioned previously there was a drift down from the 7s into the 6s. We printed around a 6.5% all-in, including the Revel deal, and 6.9% without. Looking at the rest of the year, we are expecting high-6s moving forward, with a mix of value-add and high-performing communities with upside. Even though cap rates have drifted down a bit, our IRRs have remained solid, driven by Revel and other value-add opportunities that are delivering growth. Operator: Your next question comes from the line of James Hall Kammert with Evercore. Your line is open. James Hall Kammert: Justin, I think you mentioned expenses were 5.8% this quarter, if I am not mistaken. Generically, how much of that would you say is recurring food and labor versus temporaries like sales commissions or weather? J. Justin Hutchens: It was total expenses at 5.8%. A lot of it was weather related. We had a little bit of volume impact. The full-year guide is 5.5%, and that includes the weather-related expense in the first quarter, but also some volume impacts throughout the rest of the year. Robert F. Probst: The principal driver to the OpEx guide from 5% to 5.5% is volume, Jim. James Hall Kammert: That is helpful. And how does Ventas, Inc. educate its senior housing residents regarding that expense dynamic vis-à-vis probable price increases? Do you think residents understand that? Debra A. Cafaro: Jim, good morning. One important point to start the conversation is that the labor market has been pretty constructive, and that is important given that we do hire caregivers to take care of the residents. J. Justin Hutchens: The other point is really the value proposition that the residents are realizing. There is a wide variety of reasons they engage with us: safety, socialization, peace of mind, ease of living, amenities, and the care delivery in assisted living and memory care settings. If you are delivering services and care the right way and engaging with residents and families in a way that builds and maintains trust, the value proposition is well understood, and the price discussion is understood as well. There is certainly an active dialogue between our operators and the residents around the cost of service and care delivery and the prices we charge in association with that. James Hall Kammert: Appreciate it. Thank you. Bill Grant: You bet. Operator: Your next question comes from the line of Nicholas Joseph with Citi. Your line is open. Nicholas Joseph: Thanks. It is Nick Joseph here with Seth. In terms of your comments on increased competition or more interest in the sector, in your prepared remarks you mentioned that supply and construction starts are still very low. At what point are you starting to see capital, as cap rates compress and interest rises, move into development, particularly given your comments on acquisitions versus replacement costs? I know there is still a gap there, but are we getting closer to some of that capital becoming interested in starting new supply? And then on asset sales, given the strong transaction market and interest, what is the opportunity from the Ventas, Inc. portfolio side to recycle any senior housing assets to harvest value and redeploy into other opportunities? J. Justin Hutchens: Another really good question. We are still 20% to 40% off in terms of where rents need to be for most developments to pencil. When developments start to be delivered or you see starts announced, it is most likely going to be a very high price point product that is disconnected from the existing market such that the underwriting “works” for that niche. Across our markets, we see 20% to 40% higher rents needed to support new supply. That does not mean there is no interest from potential capital, operators, and developers. Given the fundamentals are so strong and the demand outlook is so incredibly strong, it makes sense we will need new supply at some point, but it still does not seem near term. On recycling, each year we have a small amount of targeted dispositions, usually a few hundred million dollars. There is always some in senior housing. A key part of our strategy is ensuring we are in the right markets with the right assets. If we see anything that does not support the growth profile we are targeting, we will introduce it to the market as a sale. We have been doing that consistently over the past several years, and we will continue to look for that bottom part of the portfolio to sell. Operator: Your next question comes from the line of Vikram Malhotra with Mizuho. Your line is open. Vikram Malhotra: Good morning. Thanks for taking the questions. First, going back to the Revel deal, can you give a bit more flavor as to why occupancy has not picked up and their positioning of the portfolio in terms of product mix? Is it a price point issue, a labor issue, or unit mix? What could get you trending higher over the next year or two? And secondly, is it time for Ventas, Inc. to maybe use the fund it already has or create a new fund to monetize certain core higher-occupancy senior housing or maybe some life sciences, where you could perhaps get fees and promotes? J. Justin Hutchens: Good question. There is no structural issue like studios in a one-bedroom market mismatch. This investment was well built for the type of resident they are trying to serve. When you visit, you do not see many residents in their apartments—these are very active communities with a significant focus on health and wellness, fitness, and education around those topics. There are social events, music, activity at the bar in the afternoons—it is a great environment. They have done a great job introducing a product that will work and be popular. Many locations are already proving out stabilized occupancy, but a lot of the newer product is still in lease-up. We will target those communities and work with the team in place that has generated some momentum to improve sales execution. There are also price sophistication opportunities we can bring through the Ventas OI platform. Debra A. Cafaro: Vikram, this is Debbie. We do have a Ventas investment management business that includes an open-end fund and some other vehicles. With all the interest in senior housing and with Ventas, Inc.’s competitive advantages and brand, we are well positioned to continue to try to expand our footprint in senior housing in a variety of ways, which could include additional vehicles. Operator: Your next question comes from the line of Austin Wurschmidt with KeyBanc Capital Markets. Your line is open. Austin Wurschmidt: Good morning. Justin, the incremental margin within the SHOP segment has remained around the 50% level, which I think you previously assumed in initial guidance. Has anything changed relative to what is assumed in the revised guidance? And given occupancy within the same-store pool is now above 90%, when do you think you could start to see that incremental margin improve into the 60% to 70% range or better? Also, you reiterated that the May to September key selling season will determine how the year plays out, but you did increase occupancy guidance given the lack of seasonality you saw in 1Q. How much of that occupancy guidance increase was specific to 1Q versus flowing through a better outcome through the balance of the year? J. Justin Hutchens: The incremental margin has been around 50% for years, running that journey from the mid-80s to 90% occupancy. Guidance assumes it remains in the 50s this year. In our portfolio, communities that are 90%+ occupied and had flat occupancy year over year deliver a 70% incremental margin. We still have a group of communities in lease-up—our U.S. portfolio is only 87% occupied—so many communities are delivering occupancy growth. Our goal over time is to get as many communities into that flat, high-occupancy category as possible. On occupancy guidance, the key selling season has not even started yet. We have optimism heading into it because of the strong start, and you should think about the strong start driving the increase to approximately 300 basis points for the full year, with a lot of execution left during the most important part of the year. Operator: Your next question comes from the line of Michael Albert Carroll with RBC Capital Markets. Your line is open. Michael Albert Carroll: With seniors housing occupancy now above 90%, does it make more sense for operators to push for higher rates as opposed to when occupancy was in the low 80% range? Does the improved occupancy level allow these operators to be a little bit more aggressive in their operating strategy? J. Justin Hutchens: I would remind you we are 87% occupied in the U.S., so we see our opportunity very much as volume driven. We are happy to see good performance from both occupancy and rate, which is delivering the approximately 8.75% revenue guide for the full year. Everything is contributing to the revenue growth and the improved outlook, however volume remains the number one focus. We do know when you have higher-occupied communities there is better opportunity for price performance, and we see that in our portfolio, but the primary opportunity is to continue to drive occupancy in the U.S. Debra A. Cafaro: Right, and that is what sets up the multiyear growth and value creation opportunity from organic growth in SHOP—the rate and occupancy working together to deliver outperformance. Michael Albert Carroll: And circling back on potential developments, have there been interesting development opportunities across your desk that you are willing to pursue, or is it still mainly focused on acquisitions at this point? J. Justin Hutchens: We are certainly focused on acquisitions. We are in our third year of a very successful run acquiring communities that are accretive in year one and have a growth profile supporting low- to mid-teens unlevered IRRs. The pipeline has grown, and we are executing on it. That is our first priority, along with continuing to drive organic performance across the SHOP portfolio and improving performance in the communities we already own. Development opportunities may come in the future, but that is not our focus at this time. Operator: Your next question comes from the line of Wesley Keith Golladay with Baird. Your line is open. Wesley Keith Golladay: Good morning, everyone. Back to the Revel portfolio—looking on the website, A Place for Mom looks highly rated. What is the game plan? Is it really leaning into Ventas OI given the [inaudible] operator, more data, advice on pricing—how near term is the opportunity? Will their portfolio be ready for the key leasing season? And when you look at the pipeline, is this a unique opportunity, or do you have similar value-add deals coming that could deliver nice growth within a few years? J. Justin Hutchens: It is absolutely ready for the key selling season. These are well-constructed, resort-like communities that will be very competitive. Early in discussions with Wolff, it became clear that the combination of great communities in high-demand markets, a newly reinvigorated and talented management team, and the Ventas OI platform—which includes our data analytics and boots-on-the-ground approach already underway—sets us up to create value together. The biggest opportunity is to continue to drive sales, and price and volume always work together, so we will bring our expertise in both areas. On whether this is unique, we have had a number of similar value-add opportunities already—just smaller. This is the first at scale, and we are excited about it. We have other value-add opportunities in the $3 billion pipeline and look forward to delivering accretive investments with growth. Operator: Your next question comes from the line of Juan Carlos Sanabria with BMO Capital Markets. Your line is open. Juan Carlos Sanabria: Good morning. On seniors, there have been press articles about operators being able to charge entrance fees and maybe generate some revenue off waitlists given tight markets. What is your approach, and how might that contribute to the 100% occupancy goal or zero-days downtime? And second, on development or supply, curious on the appetite to structure something with a preferred or mezz component where you could earn a return during buildout or lease-up—historically you have not done U.S. development in seniors housing. Is that of interest, given some leading operators have talked about development? Debra A. Cafaro: It starts with the value proposition. This is a private-pay, consumer-driven business that people choose for the security it offers them and their families. That is encouraging, especially with the demographic demand accelerating and remaining elevated for a long period. Justin can speak to management of communities as they go up the curve in occupancy. J. Justin Hutchens: You mentioned entrance fees—I will reframe as community fees, which have been part of industry pricing for many years. In more competitive periods, they would be reduced or waived; in this period of increased demand, they are going up. We are seeing higher community fees across our portfolio. We are also starting to see waitlists form. We have had them for many years in Canada—our longest waitlists are in Quebec—and we are starting to have some in the U.S. There are certainly deposits required for waitlists, and in some cases you can charge to be on a waitlist. We are at the front end of that, but demand and the value proposition are very appealing, which has supported better pricing. On structured development capital, there are structures we can utilize that make sense, and with the right opportunity we can underwrite returns, and we have partners qualified to do that with us. It is just not a big area of focus for us. We are focused on acquisitions that are accretive and deliver low- to mid-teens unlevered IRRs. So yes, there is a way to do it, but that is not where we are focused at scale at this point. Operator: Your next question comes from the line of Farrell Granath with Bank of America. Your line is open. Farrell Granath: Hi, good morning. First on the increase in cash G&A—you mentioned adding staff on the SHOP platform. Are there any other contributing factors or initiatives going into that figure? And on the rollout of Ventas OI, is that fully with all your operators currently on your SHOP platform, or is there an additional rollout we should expect? Robert F. Probst: On cash G&A, as we mentioned in February and as you see in the first quarter numbers, we are investing behind the business. We are growing and scaling the platform and investing behind that—people, process, technology—in order to accelerate growth. We continue to believe that growth in cash G&A will be in line with the growth of the enterprise. We remain focused on efficiency and effectiveness, and the first quarter is representative of the plan. J. Justin Hutchens: Ventas OI is fully integrated. If you are new to us, there is a period of time that has to pass before you are fully integrated, and we have a number of newer operators that have joined us in recent months. But this is a fully integrated platform across all of our operators and geographies, primarily in the U.S., combining our data analytics platform with experiential insights delivered through boots-on-the-ground site visits with our operators. Operator: Your next question comes from the line of Richard Anderson with Cantor Fitzgerald. Your line is open. Richard Anderson: Thanks. Good morning. Great quarter. Early on, Debbie, you said you are seeing increased engagement to do deals with Ventas, Inc. I am curious why anyone would be a motivated seller with everything starting to happen here—it is not like they are getting 5 caps and getting paid for the opportunity set going forward. What is in it for people to be a seller today beyond Revel? And along those lines, do you think there will be more in the way of JV-type deals you will have to accommodate to continue to grow? Debra A. Cafaro: Good question. It is true more people are bringing assets to market, building our pipeline and giving us a great opportunity set. Sellers come in different varieties: private equity, holders with limited-life vehicles or holding periods that have been extended over the last couple of years who want to achieve returns and recycle capital; we see some debt maturities. When assets get into our hands, they are likely to perform better. We may have better returns than the seller could if they held on, given our advantaged platform. This is a very difficult business to run on a one-off basis or at small scale. We are building a platform to outperform at scale. Those are some of the reasons. J. Justin Hutchens: On joint ventures, the Revel deal is a strength-on-strength JV to create value. In any investment, we look for alignment. We found it there through a JV. Most of our senior housing investments are done through aligned management agreements, helping us be on the same page with operators from day one. The rest of our expected investment activity is 100% equity by Ventas, Inc. Richard Anderson: A follow-up—many REITs and others are going after this opportunity. Everyone is sort of standing on the same side of the boat, and eventually the boat tips. Do you see an opportunity where buyers today may be necessary sellers a couple of years from now when development comes back and rents move closer to support new supply? Debra A. Cafaro: I agree, and the reason is about the expertise and data necessary to do well in this business. Some new entrants will find it more challenging and will likely be sellers, because you really have to know what you are doing. Justin has decades in the industry, and we have spent five years building this platform. It is differentiated and effective. Without that, it is harder to succeed. That should give us more opportunity over the next couple of years. Richard Anderson: Okay. Great. Thanks very much. Operator: Your next question comes from the line of Michael Goldsmith with UBS. Your line is open. Michael Goldsmith: Thanks for taking the questions. Sticking with the Revel investment, it sounds like you have done some smaller lease-up or unstabilized acquisitions in the past. This one is clearly a bit bigger. Are you more willing now to be a buyer of these types of properties? If so, is that driven by the improved backdrop or something else? And can you provide an update on the Brookdale transitions—how those 45 assets are trending? Are you in line with your expectation of realizing $50 million of upside, and what is the timeline? J. Justin Hutchens: From the beginning of this investment run which started in 2024, we have been focused on unlevered IRRs in the low- to mid-teens, and we have been delivering that through a variety of senior housing investments. Value-add opportunities are great because they support more growth, and Revel hits the mid-teens on unlevered IRRs. There are other smaller opportunities like that we have done, and others in the $3 billion pipeline that will be closer to mid-teens as well. You are really pulling two levers to get there: the going-in year-one yield and the expected growth profile over time. On the Brookdale transitions, the 45 communities were transitioned late last year and earlier this year from our Brookdale lease to our SHOP portfolio. These are large-scale communities in high-demand markets—tailwinds we are playing into. They require additional investment to be competitive. We will have completed by next month a majority of those investments. The CapEx deployment is on track. All five operators are fully integrated into the communities and are getting a handle on the operation, focused on the key selling season. That is going as planned. We viewed 2026 as the year to put the pieces in place, and 2027 and beyond as the NOI growth opportunity. Back in 2024, NOI run rate was around $50 million, and we anticipate doubling that over the next few years. We have put the pieces in place to get started on that process. Operator: Your next question comes from the line of Michael Lee Stroyeck with Green Street. Your line is open. Michael Lee Stroyeck: With bidding getting more competitive, particularly within high-quality, well-stabilized product, have you seen meaningful declines in your win rates within that subsector? And a separate question: you have highlighted growth in operator count over the years. Philosophically, how do you think about operator count—what are the gives and takes of greater operator diversification, and do you expect your operator count to grow or contract from here? J. Justin Hutchens: Interestingly, our win rate has been pretty consistent. The pipeline is bigger, and with a consistent win rate, that is why we raised investment guidance. Yes, there are exceptional deals that go for aggressive cap rates, but we have been able to exploit our strengths and track record and maintain confidence in our ability to execute. Win rates stay high also because many deals are off market and bilateral in nature. On operator count, the sector is fragmented—most operators have 10 or fewer assets, and the larger ones are usually around 100 or less. If you are going to invest in the space at scale, you need a platform that can accommodate multiple operators. We focus on operator selection criteria: strong local market focus and reputation; expertise in the product type; experienced talent; a management team that can create value and deliver great care and services; a culture that measures and improves customer and employee satisfaction; and managers who can deliver growth and do repeat business with us. Engagement with Ventas OI has become a competitive advantage. We like the advantage of having more operators. We are at 44 now, and as we continue to grow in senior housing, we believe you must have a platform that can handle multiple operators. Operator: Your next question comes from the line of Michael William Mueller with J.P. Morgan. Your line is open. Michael William Mueller: For the U.S. portfolio, what are your current thoughts on where your AL and IL occupancy should be able to max out over time? J. Justin Hutchens: That remains to be seen. We have had outperformance in IL occupancy growth. Debbie mentioned the demand profile, and we are really just getting to the point for our business as the baby boom population starts turning 80 this year. Assisted living also has really strong demand. We think both IL and AL have strong demand and will probably surpass previous industry highs. Our goal is to outperform. We would expect both categories to be well into the 90%. Debra A. Cafaro: Justin is a big believer in zero lost revenue days—he will not be happy until every room is happily occupied by a happy resident. J. Justin Hutchens: Keyword is happy. If you are delivering best-in-class care and services, then people should live with us. We will do our best to deliver on that. Operator: Your next question comes from the line of Nicholas Yulico with Scotiabank. Your line is open. Nicholas Yulico: Thanks. Back to Revel—you gave the stats on an average of six years old and mid-70% occupancy. Can you give a feel for the vacancy—Is it concentrated evenly or more in recent deliveries? And for you, Debbie, we have spent most of this call on senior housing—you are having operating success and expanding the portfolio, but SHOP is 56% of NOI. How are you thinking about the rest of the portfolio—outpatient medical, research, IRFs, LTACs, health systems—which are not adding to your growth rate or multiple? Is there opportunity to JV assets or sell them, and what would trigger reducing exposure there? J. Justin Hutchens: Vacancy is more in the recent deliveries. There are a handful stabilized, and the more recent deliveries have the most upside. We looked at the track record of the early developments and their lease-up once the new management team was in place, and we anticipate leveraging that approach combined with Ventas OI to deliver more occupancy growth where we have vacancy. Debra A. Cafaro: When we developed our one-two-three strategy in 2023, the focus was on growing SHOP organically and externally—that is one and two. Number three is driving performance across the portfolio. We have been successful executing that strategy: SHOP has delivered a fifth year of double-digit NOI growth, and we are adding over $6 billion of investments in SHOP, making it a much larger part of our portfolio. Senior housing itself is over [inaudible] percent, and by definition, the other parts of the portfolio are becoming a smaller portion overall—that is part of the strategy. As for actions, we have shown a willingness over time to take actions to modify the portfolio when we think it will create long-term value, and we are open to that. Right now, our focus is on growing SHOP organically and externally, and we are devoting our efforts there with great effect because we think it is creating value for stakeholders. Operator: Your next question comes from the line of Ronald Kamdem with Morgan Stanley. Your line is open. Ronald Kamdem: Two quick ones. On pricing, I know the RevPOR guide was unchanged, but where did operators put through increases this year versus last year? How do you think about new versus renewal pricing and where you can push? And on acquisition mix, a couple of years ago you were more focused on stabilized assets. With this Revel deal and maybe others, is there more of a shift to taking on a little more lease-up risk given better growth and your conviction in getting those portfolios filled? Debra A. Cafaro: The revenue guide increased to about 8.75%. Justin will comment on in-place increases. J. Justin Hutchens: We have had another good year—around 8% all-in on in-house increases. In January, where half the increases take place, it was around 7% last year, so we have seen improvement. Moving rents are favorable as well. As demand continues to pick up and occupancies go up, we would expect that to continue. Still a lot of occupancy upside though, so it is volume first and then price opportunity down the road. On acquisition mix, our focus has been to use the right market, right asset, right operator framework to determine investments. If you get the markets right and have competitive assets, you are well positioned. From there, we find the right operator—whether keeping in place or transitioning. We overwhelmingly keep operators. We then target double-digit to mid-teens unlevered IRRs. We have delivered low- to mid-teens unlevered IRRs over the past few years across a wide variety of senior housing communities, including some value-add opportunities. Revel is bigger and serves as a case study. We anticipate repeating that playbook. Operator: There are no further questions at this time. I will now hand the call back over to Debra A. Cafaro, Chairman and CEO of Ventas, Inc., for closing remarks. Debra A. Cafaro: Thanks, Bailey, and thanks to all of you for joining us today and for your interest in Ventas, Inc. as we drive forward on this multiyear growth and value creation opportunity. We look forward to seeing you in person soon. Thank you. Operator: This concludes today’s conference call. You may now disconnect.
Operator: Good morning, and welcome to PACCAR Inc's first quarter 2026 earnings conference call. All lines will be in a listen-only mode until the question and answer session. Today's call is being recorded. If anyone has an objection, they should disconnect at this time. I would now like to introduce Ken Hastings, PACCAR Inc's director of investor relations. Ken, please go ahead. Ken Hastings: Good morning, and welcome, everyone. My name is Ken Hastings, PACCAR Inc's director of investor relations, and joining me this morning are Preston Feight, Chief Executive Officer; Kevin D. Baney, President; and Brice J. Poplawski, Senior Vice President and Chief Financial Officer. As with prior conference calls, we ask that any members of the media on the line participate in a listen-only mode. Certain information presented today will be forward-looking and involve risks and uncertainties that may affect expected results. For additional information, please see our SEC filings at the Investor Relations page of PACCAR Inc. I would now like to introduce Preston Feight. Preston Feight: Hey. Thanks, Ken. Good morning, everyone. In the first quarter, PACCAR Inc's outstanding employees did an excellent job providing our customers with the highest quality trucks and transportation solutions in the industry. I really appreciate their hard work, high performance, and dedication as we increase build rates in our factories all around the world. PACCAR Inc achieved revenues of $6.8 billion and net income of $605 million in the quarter. These results were generated by strong PACCAR Parts and Financial Services results, as well as solid growth in the truck businesses. PACCAR Parts achieved quarterly revenues of $1.7 billion and quarterly pretax income of $402 million. PACCAR Financial had a strong quarter, achieving pretax income of $116 million. Looking at this year's U.S. and Canadian truck market, we estimate it to be in a range of 230 thousand to 270 thousand units. The market is strengthening as driver and fleet capacity becomes limited and customers begin to realize higher freight rates. This is somewhat moderated by fuel and other operating cost volatility. In the first quarter, Kenworth launched a new C 580 heavy-duty vocational truck. This large multi-axle model was introduced at the CONEXPO trade show and is a unique super heavy-duty truck used in severe service applications around the world. We project the 2026 European above-16-ton market size to be in a range of 280 thousand to 320 thousand. DAF’s premium aerodynamic trucks provide customers with the latest technology and best operating efficiency. As mentioned on the January earnings call, the DAF XF and XD electric vehicles won the International Truck of the Year 2026 honor. In the first quarter, DAF extended its EV leadership by introducing new flagship XG and XG+ electric vehicles. In addition, the XF Electric earned another award, the 2026 Eco-Friendly Truck of the Year in Spain. This year's South American above-16-ton market, where DAF trucks are desired by customers for their durability and advanced technology, is expected to be in a range of 100 thousand to 110 thousand vehicles. In the first quarter, PACCAR Inc delivered 33 thousand 1 trucks. In the second quarter, we will deliver an estimated 37 thousand to 38 thousand vehicles. PACCAR Inc's truck, parts, and other gross margins increased from 12% to 13.1% in the first quarter due to improved truck segment performance. Second quarter margins are forecast to expand to around 13.5% as global production volumes increase. We anticipate continued performance improvements in the second half of the year as our customers benefit from our local-for-local manufacturing strategy, experience better operating conditions, and purchase trucks in front of the coming 2027 emissions change. PACCAR Inc's exceptional range of trucks, compelling parts business, industry-leading financial services, and advanced technology strategy position the company well for an excellent future. Kevin will now provide an update on PACCAR Parts, Financial Services, and other business highlights. Kevin? Kevin D. Baney: Thanks, Preston. PACCAR Parts achieved first quarter revenues of $1.7 billion and profits of $402 million. Gross margins were 29.6%. We estimate parts sales to grow by about 3% in the second quarter and be in the range of 3% to 6% for the full year. PACCAR Parts has 21 parts distribution centers worldwide and has plans to expand its global distribution network and TRP stores. As mentioned in our recent Analyst Day, we continue to see great opportunities for broad-based parts growth and look forward to realizing that opportunity in partnership with our outstanding dealer network. PACCAR Financial Services pretax income was a robust $116 million. The continued strong performance is a result of solid asset growth, improving margins, and the used truck market that is beginning to strengthen. This year, we are planning capital investments in the range of $725 million to $775 million and R&D expenses in the range of $450 million to $500 million as we continue to invest in key technology and innovation projects. These include advanced flexible manufacturing technologies, next-generation powertrains, PACCAR Inc's autonomous vehicle platform, and integrated connected vehicle services. We are excited for the growth PACCAR Inc will experience in the coming quarters and years. We are now pleased to answer your questions. Operator: We will now begin the question and answer session. If you would like to ask a question, please press 1 to raise your hand. To withdraw your question, press 1 again. 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 Michael J. Feniger of Bank of America. Your line is open. Please go ahead. Michael J. Feniger: Thanks, everyone. Just on the parts guidance, what did you see in the quarter? It feels like a slower start. I would love if we could just start there with what you are seeing on the parts side, how we are looking so far through Q2, and how we should think about that in the back half with orders starting to pick up and be better than expected. And just on the gross margin, the pickup to 13.5% versus 13.1% in Q1—should we still think that gross margins sequentially walk up through the year as build rates recover? Is there a pricing expectation that could also get better as well, given your comments that the U.S. markets continue to strengthen? Just kind of curious how we should think about as we build through the year and what number we might be exiting the year as we are starting to see some strength in freight rates even excluding fuel right now. Thank you. Preston Feight: Hey, Michael. Thanks for the question. It is good to talk to you. We do see increasing volumes and are really pleased with how the factories have been able to create this local-for-local manufacturing capability in America. We see the volumes increasing, as we said, to 37 thousand to 38 thousand in the second quarter. That is on the basis of build rates that we have already put in place, so teams have done a really good job of that. We see some of that margin growth coming from that volume, partially offset a little bit by the price of energy, steel, aluminum, and other raw material pricing. I am not quite sure customers have seen the full effect of tariffs yet, but we feel really good about the cadence throughout the year as the market and our customers get healthy, and we see accelerating sequentially. Hey, Miriam. Let us go to the next question. Operator: Next question comes from the line of Jerry David Revich of Wells Fargo. Your line is open. Please go ahead. Jerry David Revich: Yes. Hi. Good morning, everyone. I am wondering if we could just talk about the really strong profit per truck that you folks delivered in the quarter. With lower parts contribution, you still exceeded the guidance ranges, so it looks like your profit per truck was up to about $5.3 thousand from $2.9 thousand last quarter. Can we unpack that—how much of that was better cost execution versus mix and any other moving pieces as we think about the profile heading into the rest of the year? And as we look at the backlog, how much more favorable is price/cost based on what is in backlog versus what we saw in the first quarter? And one last one to calibrate expectations on orders over the balance of the year—we are hearing that there is a limited number of build slots available that might hamper orders over the next couple of quarters versus underlying demand. Is that the case for your business? What proportion of your build slots are already spoken for for the next three quarters? Preston Feight: Jerry, thanks for the comments. We did have price/cost advantage in the quarter sequentially, so we saw ourselves up over a percent in price/cost, which is good. I think the teams are doing a really good job of focusing on the market we are in, being careful on pricing to make sure that we get our percentage of the market. In fact, we saw that in terms of our percentage of market build—31.8% in the first quarter—which is very favorable. So we are balancing that growth with price/cost favorability. Looking forward into the second quarter, we think we will have favorability. We are full through the second quarter, and we have good visibility into the third and the fourth quarter. As for build slots, we are full in Q2 and a majority full in Q3 and Q4. I am not sure I recognize the commentary about people not having slots; that sounds more like a marketing scheme. Tami Zakaria: Hey. Good morning, and thank you so much. My first question is on the simplified metal tariffs that went into effect in early April. Does that change your view on what would be the tariff impact, especially for aftermarket parts versus the last time you spoke? Or does it not change the tariff headwind that you expected? And based on third-party data, orders have been very strong year-to-date. You kept your U.S./Canada outlook unchanged. Does this outlook include the year-to-date strength in orders—meaning do you expect orders to moderate as we go through the year as we get close to the next timeline—or is your view shaped by supply chain rather than demand? Preston Feight: Hey, Tami. It is good to hear from you. It does not really have a lot of impact for us because the truck-specific 232 has specific offsets, and it applies mostly to those materials. So there is some moderate impact, but not significant. Kevin D. Baney: Same on the parts side, Tami. Preston Feight: On the outlook, our view is shaped by the fact that the first quarter really did not have a high cadence to it. If the first quarter ran at something around or a little under 200 thousand, then in order for it to come to the midpoint at 250 thousand, there is going to have to be a rapid acceleration. We have a great supply base, but they also need to be able to spin up their operations. So the rate of increase quarter over quarter is what probably informs the total market size. Rob Wertheimer: Thanks. Is there any visible impact of the war in the Middle East on confidence or demand or orders in Europe? And the rise of electric trucks in China has been very sharp. Could you talk about your own experience? Do you see strong demand from customers? Is there a crossover on total cost of ownership yet on some size classes or models? How do you see that shape at present? Preston Feight: On confidence and demand, people are paying attention and trying to discern what it might mean for the general economy, of course. From a demand standpoint, we have seen less impact. We have seen continued good order intake throughout the last couple of months. On electric trucks, Kevin, why do you not share some thoughts? Kevin D. Baney: In Europe, geopolitical factors have had an impact on fuel prices, and the cost of diesel is a bigger percent of operating cost for customers. So there has been a lot more discussion about battery electric trucks in Europe. As we said, DAF just won International Truck of the Year with the DAF XF and XD Electric. They just expanded their product range, so we are in a really good position to address the growing customer questions and demand about battery electric trucks in Europe, and we are well positioned against the competition. Preston Feight: I have to say I had a chance to drive that XD Truck of the Year—it is amazing. It is a really wonderful truck to be in. For the U.S. market, without subsidies, widespread adoption is probably less likely. There can be markets where it makes sense—certainly in urban environments. We just launched a couple of new medium-duty models for Kenworth and Peterbilt, so we have those regional delivery EVs, which is where the market makes the most sense in America. David Raso: Hi. Thank you. Question relates to trying to understand your operating performance in the truck business, particularly. It looks like you can back into the gross margin for truck at around 6.9% in the first quarter. Sequentially, the truck revenues went up $11 million, but your gross profit went up $73 million. Was there anything in the first quarter about reversal of old tariffs that you could take the benefit with AIPA gone? I know we already had truck 232 in, but just making sure that is a clean quarter. I appreciate U.S./Canada as a percent of the shipments was a lot bigger this quarter than last. Can you walk us through that gross margin improvement in truck on really no revenue increase? And then for next quarter, where your truck revenue could be up, call it, $600 million, you would think the gross margin impact could be more significant than going up only 40 bps at the company level. I think earlier you mentioned parts gross margins for 2Q. I do not think you called out anything particularly negative for it. Again, I am just trying to understand that impressive performance 4Q to 1Q, but then 1Q to 2Q seems a lot more muted despite this being the quarter you get a bigger revenue move. Preston Feight: David, you always do such a good job with your analysis, and you continue to do that. We had somewhere above 7% for our truck margin, and that came largely because the teams did a really good job selling these best-in-class products. The leverage we got off of the volume helped us as well, and the price/cost advantages contributed to that. We also had favorable product mix, selling more of the Kenworth and Peterbilt brand at year-end being lower because of the holiday shutdown season, and then, of course, DAF at the end of the year usually has a few units that they are getting done on their fleets that they hold in inventory. So a little bit of a favorable mix effect on where we are selling the trucks helped us. We did not record any increase for IEPA related to AIPA. So, in summary, it was a very clean quarter—nothing to put in or take out of it. For Q2, we gave you 13.5% as our midpoint guidance for our margin. We do see volume being a good thing. Our build percentage has increased in the market in North America to 31.8%. Pricing remains competitive as our customers are just beginning to experience acceleration in their end markets, so there is a competitive price point out there. One other comment worth making: when we guided 3% growth in parts, obviously the truck volume will be much greater than 3%, going up by 6 thousand to 7 thousand trucks. So you have a negative, if you want to call it, price/mix effect that also dampens the total margin percent. Chad Dillard: Hey. Good morning, guys. How do you think about the prebuy likely to hit later this year? What are your plans for the number of shifts or build slots compared to where you are today or a year-on-year basis? How quickly could you ramp that up versus where you are today if you got a little more visibility into the durability of demand? And can you talk about how industry pricing behavior has changed versus the start of the year? Are some of the nondomestic producers starting to price for tariffs? Preston Feight: We have great operations teams—they have demonstrated that not just in the past year, but over the decades—and they continue to be able to move up quickly. It is more about what the supply base and order board look like and how quickly they have visibility to it. The hiring cadence across the industry will probably inform how quickly it can go up. I feel very confident in our team’s ability to add the people and the capacity we need to support the market in any market size. As for pricing behavior, you would have to ask others about their pricing scheme. We do see a competitive market right now. Our customers are just starting to see improvement. Raw material pricing is high, so those factors are still in play. We are at the beginning of what feels like an acceleration, considering that the first quarter build was just under 200 thousand and last year was low. If you think about the average market being 267 thousand units, there is going to be some replacement demand and strengthening financial performance, both of which are good for us in the near and midterm. Stephen Edward Volkmann: Thanks. Good morning. You are good at managing supply chains—probably the best at that. We have a big ramp in the second half this year, and we are starting to hear some early signs that there might be constraints in things like memory chips and maybe even aluminum supply. Is there anything on your radar that could actually constrain the second half build? And can you comment about the mix you are seeing relative to vocational versus over-the-road as the second half ramps up? Preston Feight: Great question. The thing informing supply chain right now is how much energy-related exposure suppliers have to materials and what that might do to their costs. The second factor is the hiring cadence—getting people trained up to speed in a sustainable manner for suppliers to be ready for the ramp. Nothing specific is standing out yet. On mix, it has been pretty uniform. We have seen over-the-road companies getting their recovery now with spot rates up double-digit, even up to 20%. We have seen contract rates improving, helping our truckload carriers. The vocational market continues to be solid, as well as LTL. We are seeing orders coming in from all sides as people want to make sure that they have their fleet in the right spot for this year and next year. Kyle David Menges: Thank you. I wanted to go back to your gross margin comments. It sounds like you are expecting improvement quarter over quarter as we move through the rest of the year. I understand volume is a big piece of that, but how are you thinking about pricing momentum as we get to the second quarter and into the second half? And how are you thinking about price/cost for the rest of the year? Also, we are getting pretty close now to the new EPA mandate. How is the new engine performing in the market, and will it be ready in time? Preston Feight: The year is a long way off, so for this discussion we really focus on the next quarter. We expect to have price/cost favorability in the quarter. How that gets informed is based upon what the market asks for and how raw material pricing finishes up for us. We will watch carefully how raw material pricing moves through the year—there is volatility—and that will have consequences, but we do expect favorability throughout the year. On the EPA mandate, PACCAR Inc’s team does a great job of having the right engines for our customers. We are really pleased with the engine development programs that are ongoing for us, and we are watching how it is going with our partner Cummins. We look forward to seeing how the implementation rolls through for everyone, and I feel great confidence in our teams and what we will deliver. Jamie Lyn Cook: Hi. Good morning, and congrats on a nice quarter. First, as we think through the second half of the year and throughout the cycle, what is the setup for PACCAR Inc in terms of incremental margins? Last cycle, you delivered above-average incrementals with a lot of new product launches. This cycle, we have the Section 232 benefit and market share opportunity. How will you balance the two? Should we think of normalized incremental margins at 15% to 20% or above that? Second, can you talk to channel inventory—where PACCAR Inc is sitting versus its peers—and whether peers have made any progress on destocking inflated inventory in the channel? Preston Feight: On inventory, we feel it is in very good shape at just under three months—2.8 months—and that compares to 2.2 months back in December. We have been able to get a little bit of inventory back into the market, which feels healthy. The industry overall has a higher percentage of inventory—over four months. PACCAR Inc feels like we are in really good shape there. Dealers have been able to get a few trucks on the lot and get ready to go. Inventory for us is affected by our higher percentage of vocational share—people getting bodies put on trucks is an influencing factor. On incrementals, we see margin being favorable, and our build percentage at 31.8% in the first quarter is good for our performance and good for our customers who will get trucks from us. Being full in the second quarter, we feel good about our position. Steven Michael Fisher: Thanks. Good morning. I wanted to clarify the parts acceleration you expect in the second half. You mentioned clients starting to get healthier, and fuel had an impact in Q1. What will drive the acceleration? Do you still need to see freight rates continue to rise? Do you need to see fuel costs falling? Is it about getting more trucks on the road or freight shipments picking up? Kevin D. Baney: It is a little bit of all of that. As we see the increase of truck orders, more trucks are on the road, and as our customers’ business improves, we see that on the parts side. Increased fuel and operating cost volatility leads customers to focus on required maintenance and delay optional parts purchases. We see both volume and mix improving, and that leads to acceleration through the year. As the truck market improves, the parts market follows. Steven Michael Fisher: To what extent have you had discussions with customers about 2027 planning? How are you characterizing the expected pickup in the second half of this year—prebuy or just buy? Preston Feight: There is a little bit of both going on. There is “buy” because customers are getting healthy and want fleet age to come back to where they want it. On the “prebuy” side, there is a cost impact to a 35 milligram engine, and customers are sensitive to that, so some are putting orders in front of it. Looking into 2027, we will see how the year fills out—full-year retail and build will inform what 2027 will look like. Kevin D. Baney: The second half of the year is pretty well balanced in terms of the fill between the third and fourth quarter. If it was more weighted to a prebuy, we would see demand higher at the end of the year, but we see a nice balance in both quarters. Angel Castillo: Hi. Good morning, and thanks for taking my question. The EPA formalized the low NOx emissions rule communicated at the end of last year. Does that have any bearing on the ability of the industry to launch and move forward with engines that meet the latest low NOx standard? Any implications on customers’ ability to move forward with orders or a potential prebuy? If we do not have formalized releases there, any insights as to when we might get that? Also, could you give the deliveries guidance for 2Q by region—specifically, how much you expect for U.S. and Canada versus Europe? And revisiting the 13.5% gross margin, beyond truck mix being a slight drag, are there any other factors keeping it from being a more material step up quarter over quarter? Preston Feight: The formalized release is that it will be a 35 milligram standard come 2027—that is the law. There is not any modification expected to that in terms of the standard for new engines in 2027. The parameters around that are being contemplated based on customer and market feedback. On deliveries, we expect Q2 volumes to be up around the world—build rate increases everywhere are driving the increase in volume. On the 13.5% margin, it is volume-based improvement with slight price/cost favorability, with pressure on pricing in the market as tariffs may not have been fully rolled through yet, and PACCAR Inc performing really well in terms of share of build. Analyst: Good morning, everyone. Thank you for taking my questions. We have heard about customers potentially pushing back their delivery dates for trucks. Are you seeing any evidence of this occurring? And on the tariffs topic, can we get your latest understanding on when we could expect the previously announced 3.75% NSRP credit to be applied? Preston Feight: We have not seen that in our backlog. On the 3.75% NSRP credit, it is fairly well defined for the truck side of the 232, and now it is about when we can apply for them and get them back. We would expect that to be in the not distant future. Scott H. Group: Hey. Thanks. Good morning. On the prebuy versus buy discussion from earlier, do you have a sense on the buy part of it—how much is fleet growth plans versus pent-up replacement? And to the extent there is more replacement, as we start replacing more after aging fleets, does that naturally pressure parts growth? Also, orders have doubled year to date versus a year ago, and you are still talking about a competitive pricing environment. Why are we not seeing a bigger or faster improvement in pricing? Preston Feight: On buy versus replacement, there has been a tough little run for some of our customers, and now as financial performance improves, they can allocate capital to trucks. Keeping fleet age reasonable is good for them and their operating costs—when they buy Kenworth, Peterbilt, or DAF trucks, they are getting highly efficient trucks, replacing older units with lower fuel economy. It is tied to their financial performance and the truck replacement cycle. On pricing, orders can be around multi-year items and projections; orders are not the cleanest thing to measure. A cleaner indicator is build. If you look at build and retail—build it, you will retail it. Orders do not necessarily come through the same way for everyone. With our 31.8% build in Q1, we feel good about the position, and there are still some orders left in the second half to be had. Stephen Edward Volkmann: Thank you. I figured it out this time. Just a quick follow-up. I know you give average prices in the 10-Q. Do you have those available for truck and parts, or should we wait for the Q? Brice J. Poplawski: For the first quarter compared to the first quarter last year, you will see truck price up 2%, and you will see our cost, unfortunately, up higher than that, so that made our margins down on the truck segment. Price on the parts side was up 6%. Preston Feight: Sequentially, you would see truck price roughly flat and cost down more than a percent per truck. Sequentially for parts, price was up a couple percent and cost was only up a percent. Timothy Thein: Great. Thank you. First question is on the customer mix within the backlog and how that may or may not be influencing truck margins. On-highway in North America, you have skewed more toward small and midsized fleets historically, and fluctuations in diesel costs can hit smaller carriers harder. Is there a mix shift between large mega fleets versus your historical small fleet base? Also, relating to lease and rental customers, sometimes they can be a canary in the coal mine when truckload markets inflect. Looking at the PacLease fleet—which has been declining quite a bit over the past few years—are you starting to see any change in utilization or aspirations to reverse that and start expanding? Any clues you are picking up from that cohort? Preston Feight: It is an interesting concept, but I do not think it is significant. We have a broad mix of customers buying trucks right now. Fuel surcharges may be more cash impactful to smaller customers, but I do not think it is informing what is going on. We are seeing the beginning of a market recovery—things are starting to improve for most of our customers. They are starting to get better rates and buy more trucks, which positions PACCAR Inc well for the next quarter and beyond. On lease and rental, we are seeing a little bit of an increase in utilization. Another indicator is the used truck market, where we are seeing price, utilization, and volume demand starting to strengthen as well. Those are indications that we are starting to see the market improve. Operator: There are no other questions in the queue at this time. Are there any additional remarks from the company? Ken Hastings: We would like to thank everyone for joining the call, and thank you, Miriam. Operator: Ladies and gentlemen, this concludes PACCAR Inc's earnings call. Thank you for participating. You may now disconnect.
Operator: Good morning. My name is Krista, and I would like to welcome everyone to the JetBlue Airways fourth quarter 2025 earnings conference call. As a reminder, today's call is being recorded. At this time, all participants are in a listen-only mode. I would now like to turn the call over to JetBlue's Director of Investor Relations, Koosh Patel. Please go ahead, sir. Koosh Patel: Morning, everyone, and thanks for joining us for our first quarter 2026 earnings call. This morning, we issued our earnings release and the presentation that we will reference during this call. All of those documents are available on our website at investor.jetblue.com and on the SEC's website at www.sec.gov. In New York, to discuss our results are Joanna Garrity, our Chief Executive Officer, Marty St. George, our President, and Ursula Hurley, our Chief Financial Officer. During today's call, we will make forward-looking statements about our outlook, strategy, and future performance. These statements are based on our current expectations and are subject to risks and uncertainties that could cause actual results to differ materially. Please refer to our earnings release and SEC filings for information about factors that could cause those differences. We may also discuss certain non-GAAP measures. Reconciliations to the most directly comparable GAAP measures are included in our earnings materials and on our website. And now I'd like to turn the call over to JetBlue's CEO. Joanna Garrity: Thank you, Koosh. Good morning, and thank you for joining JetBlue's first quarter 2026 earnings call. I want to begin by thanking our crew members for their continued [inaudible] during what has been another challenging start to the year. And I also want to recognize the TSA agents for their commitment during this shutdown. This first quarter included multiple winter storms and TSA disruptions, but through it all, we are grateful our teams remained focused on delivering a safe and reliable service for our customers. The conflict in the Middle East and its impact on fuel prices is the most significant headwind we face as an industry since COVID. Given the sharp increase in the price of fuel and the expectation for elevated prices throughout this year, we are suspending our prior full-year guidance as we aggressively adjust to the evolving macro backdrop. I want to be clear: suspending our full-year guidance reflects external factors alone and not a change in the strong progress of Jet Forward. We have taken immediate action to offset fuel costs with our ultimate focus on minimizing the financial impact and preserving our liquidity position. The three primary levers available to us are adjusting fares to better align with input costs, moderating unproductive capacity, and pursuing additional cost savings opportunities. We recognize that customers expect strong value from JetBlue, and we're continuing to carefully balance our path to restoring profitability with meeting those expectations. Importantly, demand remained strong. This backdrop allows us to recover some of the increase in fuel costs, and as such, we've adjusted fares along with the industry over the last two months. Bookings have remained resilient amidst these changes, which is an encouraging sign. However, the first quarter was already over 90% booked before fuel prices suddenly spiked, reducing the opportunity to immediately recapture the impact of this significant fuel increase. We expect 30% to 40% fuel recapture in the second quarter and plan to achieve 100% recapture by early 2027. Given the broader cost environment, we've also made targeted updates to ancillary fees such as checked bags. This allows us to better cover costs while keeping our base fares competitive. We will continue looking for additional ways to strengthen revenue performance throughout the rest of the year. At the same time, we are aggressively reducing capacity, targeting adjustments in off-peak and shoulder periods. We've acted quickly, reducing capacity by nearly one point versus close-in expectations in the second quarter, with plans to reduce the second half by at least two to three points. While we are able to reduce capacity closer in, as we've done, these decisions are more beneficial when made at least 60 days in advance to take even greater advantage of cost savings opportunities. And with demand continuing to remain strong, it's important we take a flexible approach, trimming capacity as we head into the peak summer season. We plan to closely monitor market conditions and expect to reduce additional capacity after the summer peak, assuming fuel prices remain elevated. In addition to managing capacity, we have opportunities to reduce other expenses and better align our cost profile with capacity. This includes efforts to reduce controllable spending and hiring, and in a lower capacity environment, we also expect savings on maintenance and other variable costs such as landing fees. As we meaningfully adjust capacity to address higher fuel, we are committed to pulling all levers available to mitigate potential upward pressure on unit costs. Alongside these efforts, we believe Jet Forward remains the right strategy to navigate us forward. Across each of our priority moves—reliable and caring service; best East Coast leisure networks; products and perks customers value; and a secure financial future—we are seeing clear evidence that our strategy is working. We remain on track to drive $310 million of incremental Jet Forward EBIT in 2026 and $850 million to $950 million in 2027. And as a reminder, we have transformational initiatives launching this year, including domestic first class, continued implementation of our Blue Sky collaboration, and our second Blue House, which are expected to drive significant value for years to come. In closing, demand remains intact. Our Jet Forward initiatives are performing, and we are actively managing levers within our control. I remain confident we have the right strategy and the right team to navigate yet another challenging year for the sector, even in the face of these macro factors. As we gain greater visibility into fuel and its impact on the macro environment, we will plan to provide an updated view on full-year expectations. I'll now turn it over to Marty. Marty St. George: Thank you, Joanna, and thanks again to our crew members. We delivered strong RASM performance, a positive 6.5% in the first quarter, in line with our revised guidance and exceeding the midpoint of our initial RASM range by 4.5 points. The Caribbean airspace closure in January and winter storms Fern and Orlando combined to reduce capacity by nearly four points, which benefited RASM performance by two points. The remaining 2.5 points of our RASM beat is a reflection of demand strength and the effectiveness of our Jet Forward initiatives. Demand trends strengthened as the quarter progressed, and importantly, that momentum has carried into the second quarter. We saw strength across the booking curve, both close-in demand and further out, with improvements in both peak and trough periods. Premium continued to outperform core, with year-over-year premium RASM better than core by nine points in the first quarter. We are encouraged by improvements in core demand and RASM, which is now strongly positive year over year, reflecting a more balanced demand environment across our offerings relative to what we experienced last year. Delivering the differentiated JetBlue experience across each unique customer offering meant even more in core remains a priority, reinforcing our commitment to all customers, not just select segments, even as fuel costs remain elevated. Lastly, while we saw strength in both domestic and international bookings, domestic has recovered meaningfully, and year-over-year RASM outperformed international. First quarter RASM was also benefited by about 1.5 points from a shift of outbound Easter traffic into late March. This was a historic quarter for our loyalty program, highlighting the investments we've made in our product and operation. Loyalty cash remuneration grew 19% year over year, driven by double-digit growth in spend on the JetBlue card. In addition to record levels of spend and a 45% increase in card acquisitions, we achieved all-time highs for TrueBlue active members and attach rates in our non-focused city geographies. Blue Sky is also driving co-brand sign-ups, reflecting the broader reach the collaboration brings to our loyalty program. We continue to add utility and value for our members in other ways this quarter, including the ability to use points for ancillary purchases, which is off to a very strong start. We also launched Family Tiles, an industry first that allows parents to earn status faster when traveling with their children. Finally, customers are responding exceptionally well to our Blue House at JFK, with NPS trending well above expectations and driving premium credit card sign-ups beyond our initial targets. We believe the opening of our next lounge in Boston later this summer will be a further catalyst for premium growth, alongside the launch of domestic first class, expected in the second half. As these products and perks ramp, and both new and existing members deepen their loyalty engagement, we expect meaningful sequential growth in loyalty revenue throughout the year. Strong customer response to our strategic growth in Fort Lauderdale drove first quarter RASM growth of 5% even with capacity growth of 23%. In late March, we announced another round of additional service from Fort Lauderdale—one new destination to Cleveland, and added frequencies on nine routes—where customers want more choices where they fly. With the addition of Cleveland, JetBlue will have launched nonstop service to 21 cities and increased frequency on over 20 high-demand markets in Fort Lauderdale over the past year, further strengthening our investment in building depth and connectivity in Florida's biggest premium market. Through our recent growth and competitive reductions, we've been able to take advantage of newly available gate space to build a schedule with four connecting banks beginning this summer, up from two banks previously. This provides our customers in the Northeast significantly more opportunities to connect to our growing portfolio of destinations in the Caribbean and Latin America. We remain excited about the long-term opportunity in this focus city, and continue to view it, in addition to key leisure destinations throughout the state of Florida, as an essential component of our network strategy. We've now grown to 11 destinations in Florida, following the launch of service to Destin-Fort Walton Beach from both New York and Boston in the first quarter. Blue Sky reached a new milestone in the first quarter with the launch of interline flight sales with United. We are encouraged by the early results we're already seeing and are excited by the new opportunities we expect this collaboration to bring to our customers. This quarter, reciprocal loyalty benefits across Mosaic and MileagePlus tiers are expected to turn on, in addition to sales of rental cars through our Paisley platform. For the second quarter, we expect continued strength in RASM supported by sustained demand trends and progress from our Jet Forward initiatives. This quarter is anchored by peak periods in early April, late May, and late June. The Easter outbound shift represents a second quarter headwind of about 1.5 points of RASM. As a result, we expect RASM to grow 7% to 11% year over year on 1.5% to 4.5% more capacity. Our investments in Fort Lauderdale now comprise all of our second quarter capacity growth. We are taking a similar approach to guiding RASM as we have in the past—guiding to what we see today, which points to a sustained level of strong yields and loads for the remainder of the quarter. As we progress through the quarter, we plan to monitor the demand environment for opportunities to continue optimizing yields to help offset fuel costs. As of today, over two-thirds of the quarter's revenues are on the books, and as mentioned, our second quarter RASM guidance implies we recaptured 30% to 40% of the fuel cost increases versus our initial plan for the quarter. We are encouraged by the demand trends we're seeing, and believe we are well positioned to generate significant RASM growth this quarter as we head into the summer peak travel season. Now I will turn it over to Ursula. Ursula Hurley: Thank you, Marty. As Joanna mentioned, the start to 2026 was marked by a dynamic operating environment and macro backdrop. The industry climate seems to be evolving every day, and we are responding quickly to position JetBlue to our financial priorities. For example, we've actioned several capacity reductions across the second quarter and plan to stay nimble in the second half of the year. At the same time, we are prioritizing capacity investments in our Fort Lauderdale focus city where customer response has been strong and the resulting RASM is performing extremely well. Our underlying business is clearly improving, with a roughly five-point spread between RASM and CASM ex-fuel expected at the midpoint of our guidance ranges this quarter. We haven't seen a gap like this in years, and it reflects strong demand for our product, better cost discipline, and real momentum from our Jet Forward initiative. During the first quarter, CASM ex-fuel growth finished up 6.6%, four points of which was due to close-in capacity reductions from the operational disruption. Without these impacts, CASM ex-fuel would have finished up 2.5%, or two points better than our initial midpoint. One point of this beat was due to cost-saving efforts, while one point of spend is expected to shift into the remainder of the year. For the second quarter, we expect CASM ex-fuel to increase in the range of 3% to 5% year over year. We continue to expect CASM ex-fuel growth to moderate down during the second half of the year, with over two points less unit cost growth than the first half, although this remains subject to how the price of fuel evolves in the coming months and our final capacity levels. Average fuel price for the first quarter was $2.96, 26% higher than the midpoint of our initial guidance. We expect second quarter fuel price to be in the range of $4.13 to $4.28, with the midpoint 75% higher year over year, which is derived from the forward Brent curve as of April 10. As a reminder, every 10¢ increase or decrease in fuel price is the equivalent to about $85 million of expense for the full year. To help offset a portion of fuel costs, we continue to focus on our fuel efficiency programs, with 30% of our second quarter capacity powered by more fuel-efficient new engine technology, supporting a targeted 5% fuel-efficiency improvement over the last three years. With oil and crack spreads expected to remain elevated for a sustained period, we are actioning incremental cost reductions beyond capacity cuts to mitigate the impact. These include reducing spend across both OpEx and CapEx and slowing hiring in some work groups to better align with our capacity expectations. At the same time, we are executing on our structural cost initiatives under Jet Forward, including rolling out new technology and AI to support improved planning for our crew and operation, launching a sourcing center of excellence to further optimize contract spend with business partners, and implementing more efficient insourcing and outsourcing opportunities across the business. Taken together, we expect our near-term cost reduction efforts and our Jet Forward cost initiatives to support strong cost control this year. While we did suspend our full-year CASM ex-fuel guidance, we expect its historical relation to capacity to continue this year, which implies roughly flat CASM ex-fuel on mid- to high-single-digit capacity growth. Turning to our fleet and capital expenditures, in the first quarter, capital expenditures totaled $141 million, $59 million lower than our initial guidance due to timing shift of deliveries. Looking ahead, we expect approximately $275 million of capital expenditures in the second quarter and approximately $800 million in 2026. There has been a slight shift to our A220 deliveries, and we now expect 12 total aircraft deliveries this year, down from our January guidance of 14 aircraft. And as previously discussed, we expect CapEx to remain below $1 billion annually through the end of the decade. Shifting to our balance sheet, we believe our unencumbered asset base and liquidity help us successfully manage through industry shocks like these, and I am pleased with the runway we've built for JetBlue. We raised over $3 billion back in 2024 to secure our financial future and give Jet Forward a runway to perform, and the cash we have on hand as a result is a valuable cushion in this volatile high-fuel environment. We ended the quarter with $2.4 billion of liquidity, or 26% of trailing twelve-month revenue, above our liquidity target of 17% to 20%. This excludes our $600 million undrawn revolving credit facility. Earlier this month, we raised $500 million secured by aircraft collateral, with an accordion feature that allows us to upsize to $750 million. We plan to reassess our funding needs as the year progresses. We also recently repaid the remaining $325 million of our 2021 convertible notes. Lastly, following this month's capital raise, our unencumbered asset base remains over $6 billion, with approximately a quarter in tangible collateral. Our priority remains maintaining a strong liquidity position and ensuring Jet Forward has the runway to perform. To wrap up, the environment we are operating in is challenging and volatile. We are focused on taking swift action and executing on our Jet Forward strategy to put JetBlue in a position to restore operating profitability when the environment has normalized. We have taken meaningful action across the three main levers we control—fares, capacity, and cost—and we are pleased with the early results of these actions. We remain encouraged by the underlying performance of the business and are confident that Jet Forward is the right plan to navigate this challenging environment and deliver value for our shareholders. With that, we will now take your questions. Operator: Thank you. If you would like to ask a question, please press [inaudible]. We also ask that you limit yourself to one question and one follow-up. For any additional questions, please requeue. And your first question comes from Mike Linenberg with Deutsche Bank. Please go ahead. Analyst: Mike Linenberg, Deutsche Bank: Yeah, hey, two questions here. With respect to your domestic first class, have you actually started selling that for the back part of the year? And if you are, can you just give us a sense of what the initial uptake looks like? Okay, great. And then just my second question probably to you, Joanna. There appears to be, like, a subset of the industry that, among other things, is requesting a suspension of the ticket tax, and given that that is a user fee to fund the system, could we be in a situation where half the industry is, I don't know, subsidizing the use of the system for the benefit of the other? Is something like that even possible? I'm just curious about your thoughts about that. Thanks for taking my question. Marty St. George: Hi, thanks. Good question, Mike. We have not begun selling it yet. We want to wait until we understand fully the implementation timeline. As we said, it was gonna come in 2026, and we're still on track for that to happen, but we will announce the open sales date when we know the first plane is to be out there for sale. We're currently going through the certification process. On the ticket tax question, I'd also add the ticket tax is viewed by the industry as a very unfair tax because we way overpay versus private aviation. I would love for it to be reformed for other reasons, but I'm not sure this is the reason. Joanna Garrity: Yeah, not entirely sure maybe which fee you're speaking about, but if it were to apply to one carrier, it would presumably need to apply to everybody. The numbers associated with that—we looked at that early on—aren't significant. Every dollar counts, but it ultimately was somewhere in the area of $2.025 billion annually. Operator: Your next question comes from the line of Conor Cunningham with Melius Research. Please go ahead. Analyst: Conor Cunningham, Melius Research: Hi, everyone. Thank you. I'm trying to understand the comment that you were 90% booked in 1Q when jet fuel started to move up and just what that means to sequentials. Again, I realize you expect 30% to 40% recapture, but I would think that the fact that—I think there's been, what, six industry fare increases—that the uplift in revenue would have been a little bit better in 2Q. So if you could just talk about what's going on there in a sequential step-up? I realize the capacity is stepping up with it, but just any thoughts. And then, Ursula, maybe you could—I think you have $6 billion of unencumbered assets. I realize you probably don't want to touch that quite yet, but if you could just talk about the accordion that you have within that current structure, what scenarios you would see yourself looking to tap that $250 million, just in general? Thank you. Joanna Garrity: We were 90% booked in 1Q because, remember, fuel spiked in early March. We were already 90% booked for the quarter. So you aren't able to recapture with those fare increases for the bookings already on the books because they were booked in January and February at a lower price. Everybody would have been largely in the same position as us—there were already bookings that had taken place for 1Q. So headline, there's no news there. It's just saying we weren't able in 1Q to take advantage of the fare increases because people already bought fares at the lower prices. Going forward, once those fares started going in, very different story. Ursula Hurley: Thanks for the question, Conor. We're certainly pleased with where we ended the quarter in terms of liquidity. Our target is 17% to 20%. We ended the quarter at 26%, so we still have a cushion. Our original 2026 plan assumed that we would raise $500 million this year. We executed a deal utilizing aircraft to lock that in. We've drawn on a portion of that already, and we'll draw on a second portion later this year. We obviously built in flexibility in the accordion, so we do have an incremental $250 million that we can draw on. Given the magnitude of the fuel price impact that we're seeing in the business, we will most likely draw down on that in order to maintain our 17% to 20% liquidity target. Operator: Your next question comes from the line of Dan McKenzie from Seaport Global. Please go ahead. Analyst: Dan McKenzie, Seaport Global: Oh, hey. Good morning. Just, Ursula, following up on that last question, what additional cash could potentially be raised from extracting equity from deliveries or just aircraft financing? And under what scenarios might you want to raise additional capital beyond that accordion? And second question here, maybe for Dave or Marty: going back to the script here, two points of RASM beat from stronger-than-expected demand and demand that sort of accelerated at the end of the quarter. What's driving that? How sustainable is it? And at what point would you expect demand to be more elastic? Ursula Hurley: Thanks for the question, Dan. Our target is 17% to 20% liquidity, so I feel comfortable staying within that range. The aircraft that are purchased this year—there are 12 of them coming—we're assuming we purchase those with cash. So if we are at risk of falling below our liquidity level, we could decide to lever up those new deliveries. We also currently have a healthy unencumbered asset base of $6 billion—about 30% of that is aircraft and engines that we currently have on property. And then we also have our slots, gates, and routes, our brand, and incremental loyalty that we can do. So we have options, and if we're at risk of falling below our liquidity target, we'll assess all markets and look at all of our collateral and decide what would be the most effective. Marty St. George: Dan, thanks for the question. I'd say two things. In the fourth quarter, when we did our fourth quarter call three months ago, we called out that we had RASM performance accelerating through 2025. So what we saw in early 2026 is consistent with what we've seen in general. The revenue environment has been extremely robust even in the face of pretty high fare increases. Air travel is still a really good value. A4A put out a document looking at price changes from 2019 to 2026 across 20–30 different commodities—air travel was the only one where prices are actually down from 2019. Eggs up 96%, air travel down 3%. It's very common that you can fly, for example in June, from Orlando to JFK for cheaper than it takes to take an Uber from JFK to Midtown. With the quality of JetBlue, demand has held up very well for us. Even with the price increases, we still see economy demand strong and positive unit revenue in the economy cabin. Maybe I'll just add our Jet Forward initiatives are contributing to this—product, loyalty, merchandising—driving stronger engagement and yield performance. Our co-brand acquisitions are up, so elements of the strategy are also contributing to this stronger environment specific to JetBlue. Operator: Your next question comes from the line of Jamie Baker with JPMorgan. Please go ahead. Analyst: Jamie Baker, JPMorgan: Hey, good morning, everybody. So, Marty, JetBlue ordinarily generates less revenue in the third quarter relative to the second quarter, and of course there's a positive Easter benefit in this year's second quarter, making the comparison even tougher. But there's significant yield momentum right now. Fuel recapture improves over time. What probability would you ascribe—the third quarter revenue being higher than that of second quarter? Or is that simply off the table? And second, Joanna, you're not a member of this association for value airlines, but I've seen varying press reports that maybe you did participate in the recent $2.5 billion bailout request. Can you clarify and bring us up to speed in general on your thoughts as to selective government bailouts? Marty St. George: We've not guided third quarter and we're not going to guide third quarter. Based on what we're seeing in the demand environment right now, we remain optimistic that as the year progresses we will continue to recover more and more of the increased price of fuel. We need to recover more than that because many of our other inputs have gone up, but we feel very optimistic about demand. For the last month of the third quarter, we've talked about capacity cuts—internally, we've taken two to three points out of our second half supply, very much focused on the September through December period. We're assuming fuel prices at the current curve, and because of that, there's certainly capacity that we think will not be economical. That's also contributory to a good revenue environment. I won't give a probability, but as of now, we're very happy with the demand environment we're seeing in both premium and coach. Joanna Garrity: Thanks. High level, it's no secret that the last administration contributed to a disadvantage in the industry, whether it's Spirit–JetBlue's proposed merger or the blocking of the NEA, contributing to a sector that is less resilient compared to some of the larger carriers. We're in a different position because we have a healthy unencumbered asset base and strong liquidity. Never say never—we're open to anything and everything, assuming the terms would make sense for JetBlue. But at this point, we're focused on executing Jet Forward, continuing to control the pieces of the business that we can control to offset the impact of elevated fuel prices, and we'll watch like you're watching to see how that shakes out with Spirit and the value carriers and whether anything comes their way. Operator: Your next question comes from the line of Duane Pfennigwerth with Evercore ISI. Please go ahead. Analyst: Duane Pfennigwerth, Evercore ISI: Thanks. Maybe just a follow-up right there. Joanna, in the scenario where Spirit gets support but nobody else does, would this influence your thinking about consolidation? And then, Marty, as you think about dialing down your schedule in the second half, what is your focus? What types of flights are most under the microscope? Joanna Garrity: No. There are enough people out there commenting on every little piece of the business right now. We're focused on executing the plan. Even in a potential Spirit bailout scenario, we’re going to continue to execute our Fort Lauderdale strategy. As was mentioned, our Q1 ASMs were up 23%, RASM is up 5%. Customers are clearly picking JetBlue—it’s a better product and better service, and we’re going to fly. We have a great plan regardless of the outcome at Spirit. I feel for their people—we’re hiring a number of them to try to make sure they have a soft landing. But it's a really tough situation. There continues to be an imbalance of scale in the industry. We’re doing what we can with Blue Sky. It is full steam ahead in Fort Lauderdale, and we look forward to continuing to bring the great JetBlue product and service there. We’re now the number one carrier at Fort Lauderdale compared to pre-COVID, and we look forward to continuing to grow. Marty St. George: Thanks. That's a simple one. We are assuming the fuel price for the rest of the year will match what the forward curve is saying, and at that level, there are certainly a small percentage of flights that we believe will not be accretive during that time period. The economics of reducing capacity are very much biased towards reducing it further out in advance because you can save a lot of expense when you do that. We did a little bit of pulling from the May schedule; it's much less effective that close-in because crews are already bid. But when we make decisions early for the fall, it's very effective to save significant expense. Where the pulls are happening is generally off-peak periods—Tuesdays, Wednesdays—nothing unusual. Although we are seeing good strength in the troughs, they're still troughs compared to peaks. It's a math exercise rather than a strategic exercise. Our goal is to get to the best top line we can, and if we see stuff that won't contribute, we will take action. Operator: Your next question comes from the line of Savi Syth with Raymond James. Please go ahead. Analyst: Savi Syth, Raymond James: Hey, good morning. Marty, on Fort Lauderdale, given all the changes you’ve done and the significant investment there over the last years, post this summer rebanking, where are you in the innings of really building up Fort Lauderdale, outside of maybe the opportunity if you get more gate? And as a follow-up, on New England strength—where are you on that front? Marty St. George: Great question. The real question is what happens with our biggest competitor there. We have added significant capacity; we're double the size of our next biggest competitor. We did not go into this with any expectation of Spirit going away. We've taken advantage of gate availability with some of their pull-downs to add more service and have a more formal bank structure, which we're excited about. To the extent they keep pulling down, we will backfill that capacity. Adding roughly a quarter of our capacity and still having RASM about one point off system RASM is outstanding performance. The JetBlue value proposition resonates in South Florida. We're extremely excited about the arrival of the domestic first class product later in 2026. Success should breed success, and we’ll continue to build Fort Lauderdale as capability allows. When we first talked about Fort Lauderdale, we said our goal was to get to the size of Boston. As capability happens, we will be at that point—a third leg of the stool. A lot depends on gate availability. On New England, I’m comfortable with what we’ve done. The addition of service in places like Bradley and Providence, in addition to Boston, is performing well. Airplanes will follow demand. We’re on year two of the ramp and generally ahead of where we expected, in some cases way ahead. Summer is somewhat lower demand for Fort Lauderdale; once we get to the fall, we should expect significant additional growth in Fort Lauderdale to the extent we have gates. Operator: Your next question comes from the line of Michael Golding with BMO Capital Markets. Please go ahead. Analyst: Michael Golding, BMO Capital Markets: Good morning, and thank you for the question. You're seeing healthy card spend and acquisitions. Can you unpack this by region? Is this really JFK-driven right now? And how does that influence your thinking for the opening of Boston, as well as how things are trending with Fort Lauderdale? And then on Paisley and Blue Sky, can you talk about the pipeline and initiatives to add additional partners to scale this platform, over and above United? Marty St. George: Hi Michael, thanks for the question. I wouldn’t say there are significant regional differences in card spend. There are regional differences in where the cards are—New York, New Jersey, New England account for the majority. One focus in 2026 is to increase our base in South Florida. We’ve done well with the credit card but are under-indexed in South Florida. As we add capacity there, plus United’s capacity and Blue Sky redemption opportunities—customers can fly anywhere in the world with TrueBlue points—we’re bullish about building a broader offering from South Florida that will translate into credit cards. Given the location of the Blue House, New York and Boston are focal points for the card business. We are looking to find space for a Blue House facility in Fort Lauderdale. Terminal 3 is tough for lounge space, but we’re working with Broward County Aviation to find a solution—no news to report yet. On Paisley, we’ve talked to a single-digit number of other partners—some airlines, some non-airline. We’re in the RFP process with one partner now and are very excited. Nothing to report on details, but we expect to be competitive. We are starting to get some United content independently. Today, you can buy a JetBlue Vacations package that has United air in it, and JetBlue Vacations has sold packages to United destinations. Rental cars are coming very soon, hotels at the beginning of the third quarter, and we’ll continue with packages, cruises, etc., later in the year. The relationship with United has been very strong, and we’re excited to get their customer base to experience Paisley. Operator: Your next question comes from the line of Tom Fitzgerald with TD Cowen. Please go ahead. Analyst: Tom Fitzgerald, TD Cowen: Hi, thanks for the time. Sticking with Blue Sky, I think on this call a year ago you talked about a TrueBlue person who might need to go to, you know, Omaha or Boise, and the value prop for them. Are you seeing the response from those customers that you hoped for? And what's the early response from MileagePlus customers onto your own network? And as a follow-up for Ursula: lessons learned on pulling controllable spend closer in than expected, and levers you're looking to pull in the back half of the year? Marty St. George: Great question, and we watch this closely. We have a forecast of where we would expect United customers to book on us, and it's exactly what we expected—LA–New York, Boston–New York, LA–New York, San Francisco–New York, San Francisco–Boston. Surprisingly good results at DCA—DCA to Florida and DCA to Boston—given United’s large customer base. This is exactly what we hoped for: JetBlue flights within the United distribution channel help us in places where we don't have the same share of mind, like Washington or the West Coast. We’re working on mixed-metal connections—flying JetBlue into, for example, New York–Houston in United’s banks and then connecting on United to secondary destinations. No date yet; it’s a tech challenge, but we’re optimistic. At its core, this is like our other 50-something interline relationships, just with a very big airline with strong distribution that complements our network. I’ll just add, the whole point is not to give customers any reason to choose anyone but JetBlue, particularly in Boston and New York. We’ve heard investor anecdotes where, because of United connectivity through Blue Sky, they booked via JetBlue to Asia, earned TrueBlue points, and chose us over a Boston-based competitor. Ursula Hurley: Thanks, Tom. I’m super proud of the team and how they’ve managed controllable costs. We pulled a significant amount of capacity out of the network last year given the lack of demand, and the team found $40 million that allowed us to maintain our full-year guide. We get creative—better aligning hiring, revising maintenance schedules, reducing discretionary spending. Great progress on fuel efficiency initiatives—about 5% savings over the last three years. We’re advancing Jet Forward cost initiatives: creating a sourcing center of excellence, leveraging data science and AI to build tools for better operating efficiency and planning. We’ve simplified the fleet by exiting the E190. Q1 is the high watermark, also impacted by disruptions. As Jet Forward cost initiatives ramp through the rest of the year and as capacity grows slightly in the second half, we’ll continue to see efficiencies. We’re going to do everything we can on controllable costs to come as close as possible to the original full-year guide. Operator: Your next question comes from the line of Brandon Oglenski with Barclays. Please go ahead. Analyst: Brandon Oglenski, Barclays: Hey, good morning, and thank you for taking the question. Joanna, it’s another frustrating year with volatility in oil markets and potentially another year of not turning a profit. You mentioned the lack of scale versus larger competitors with better balance sheets and profitability. How do you structurally address the lack of scale relative to competitors? Is there something you need to think about strategically? Joanna Garrity: Thanks for the question. Starting with Jet Forward: we are seeing it work and drive underlying performance. If you look at our operating margin for Q1 and adjust for fuel, it would have actually been five points better than the actual operating margin, and three points better than implied guidance—so negative five if you adjust for fuel versus an implied negative eight. Year over year, there was a three-point expansion when you adjust for fuel. We’re seeing gains in NPS—we’re back at the top of the industry; nice progress in Fort Lauderdale; a five-point RASM–CASM spread in Q2, the most we’ve seen since the start of Jet Forward. It’s a big year for Jet Forward: Blue Sky implementation, lounges, domestic first, and more. The strategy is working; the challenge is the macro environment and volatility. While macro factors impact the timing of our return to profitability, the goal is, when those subside, we’ll see all the benefits of Jet Forward come to fruition. On scale, we recognize its importance—that’s why we tried the NEA and Spirit merger. We’ve pivoted to Blue Sky, and early points show we’re giving more utility and relevance to customers even if we don’t serve a particular destination. We continue to raise concerns in Washington about imbalance, but we’re focused on what we control—our network, our loyalty platform—and accelerating relevance where people know and love our brand: the Northeast and Fort Lauderdale. Scale will continue to be a challenge for midsize and small carriers, but Blue Sky is an important part of helping with that. Paisley is the other piece—a low-capital business that should drive earnings over time and give us an independent revenue stream to help propel us back to profitability over time. When the macro subsides, the plan should produce; early signs show it is producing, masked by macro headwinds. Analyst: Brandon Oglenski, Barclays: I appreciate that. And Ursula, as you think about capital needs, is taking potentially more debt the right path here as well? Ursula Hurley: I’m cognizant that the balance sheet isn’t where we want it to be; it’s been strained post-COVID. Our number one priority is maintaining adequate liquidity to navigate volatile times. We acknowledge interest expense is material, so we don’t take debt raises lightly. We need to maintain our 17% to 20% liquidity target and be thoughtful. Our priorities are: positive operating margin, delivering free cash flow, and delevering the balance sheet. We’ll focus on execution and, if there’s risk we fall out of our 17% to 20% target in the back half, we will assess all markets—we have $6 billion of unencumbered assets—so we have flexibility in how we raise, on a go-forward basis. Operator: Your next question comes from the line of Atul Makharia with UBS. Please go ahead. Analyst: Atul Makharia, UBS: Good morning. Thanks for taking my question. I want to circle back on the second quarter recapture rate of 30% to 40%. It seems a little lower than some larger peers who are about 10 points ahead on recapture. Your booking curve is probably shorter than theirs since you have more domestic business, implying more of 2Q would be booked at higher fares for you. Any color on why the lower recapture rate versus legacy peers would be helpful. And as my second question, on the capital raise plan—the $750 million in total—what fuel recapture and demand scenarios did you use to come up with that number? Just trying to assess whether you might need to raise more capital later in the year. Marty St. George: Thinking about what we heard on other calls, I don’t think we’re dramatically lower. Recapture rate is different at different fare levels. A big focus of Jet Forward is improving penetration in the premium market. Airlines selling $6,000 business class fares to Asia may have a different recapture profile than we do. That will get better as we finish Jet Forward over the next 18 months. Our internal calculations and timing—late 2026 or early 2027 for 100%—are similar to what we’ve heard from others. If there’s a slight difference, it may be premium and corporate mix, which we’re addressing through Jet Forward and first class launching at the end of the year. Ursula Hurley: At the highest level, our original 2026 budget assumed Brent at $63. Clearly, we’re in a severely elevated environment. The original budget assumed we would raise $500 million this year to maintain our 17% to 20% liquidity target, so we locked that in. We have an accordion for an incremental $250 million. It’s too early to tell, given the volatility of oil in the back half, what the impact will be—part of why we pulled full-year guidance. We will assess as we progress if we need to raise more liquidity to maintain that 17% to 20% target. We are planning for multiple scenarios at different fuel prices and maintaining flexibility to time transactions and leverage our unencumbered asset base in the most favorable way possible. Operator: Your next question comes from the line of Chris Stathoulopoulos with SIG. Please go ahead. Analyst: Chris Stathoulopoulos, SIG: Good morning, everyone. I’ll keep it to one. As we think about response to demand elasticity or potential demand destruction, could you frame potential resiliency around yields? You have Blue House JFK and Boston, domestic first class, Blue Sky. Could you speak to that in a scenario where we start to see pushback from more price-sensitive travelers—how you think about yield resiliency? Joanna Garrity: First and foremost, we’re not seeing meaningful elasticity. Demand is strong across the booking curve. We are focused on yields, consistent with broader industry trends. Load factor is holding up well, and we are cutting flights that don’t make economic sense in the current fuel environment. Our VFR customers are an extremely resilient part of the franchise. We’re also increasing premium share—which is more resilient when inflation goes up—through domestic first and Even More Space, where we’ve seen nice progress. Fort Lauderdale growth targets the largest, more premium market in Florida. We’re happy with our focus on more resilient customers. Inherently, our model has a strong VFR component—loyal customers traveling to see family and friends—who are quite resilient. Marty St. George: We’ve already taken action to reduce capacity in the second half. When we hit windows of making significant cost commitments, we’ll relook at the demand environment. If it makes sense to pull additional capacity, we will. Our number one goal is to get our performance back where we want it, and being flexible on capacity is an important part. Operator: Your next question comes from the line of Catherine O’Brien with Goldman Sachs. Please go ahead. Analyst: Catherine O’Brien, Goldman Sachs: Hey, good morning. You noted a strong 45% increase in credit card acquisitions, and it sounds like Blue House is a driver. Can you give color on how much the JetBlue Premier card growth was within that? And is there a notable difference in annual spend between the Premier card and some of your other cards? And then for Ursula, with suspended full-year guidance and multiple moving pieces, based on capacity cuts versus the original plan and 1Q actuals, it looks like capacity will be up low single digits as of now. If that’s correct, is it reasonable to assume that on low single-digit capacity growth, your CASM ex would be mid-single-digit range for the year based on your commentary on the relationship between capacity and CASM? Anything to be aware of on cadence over 3Q and 4Q? Marty St. George: Hey Katie, a couple of things. We only lapped the Premier card in the first quarter, so for half the quarter there was no base to compare to. For the first year, we put what I’d call a prudent forecast in, knowing the lounge wasn’t open until later in the year, and we significantly exceeded that. The 45%—the Premier account is a contributor, but a lot of that is the base card we offer every day. The secret sauce of Blue Sky is utility: the value of TrueBlue points dramatically changed when you could earn and burn anywhere in the world on the United network. Later this year, we will have full elite benefits between the two airlines as well—Mosaic 3 and 4 will have an experience on United similar to JetBlue. Our goal is that customers can go anywhere they want within TrueBlue, which we’ve not had for a while. The acceleration we’re seeing is without any change in approval rates; it’s just more interest in JetBlue. Also, our core customer base—New York, New Jersey, New England—is generally more affluent and high-spending, so spend going up on the base card is a huge positive, and better than what some competitors have discussed. Ursula Hurley: Thanks, Katie. The historical relationship between capacity and CASM ex-fuel still stands. If capacity is mid- to high-single digits, ex-fuel would be roughly flat. Your example of low single digit capacity growth implying mid-single digit CASM ex-fuel is in the ballpark. As mentioned, we expect CASM ex-fuel growth to moderate in the second half—over two points less in 2H versus 1H—based on what we know today, including pulling two to three points of capacity in 2H. All of this is dependent on the oil backdrop. If we get relief or further pressure, we will adjust capacity as necessary. The team has historically done a great job executing on controllable costs, and I’m confident we can get as close as possible to the prior guide given what we know today. Operator: Your next question comes from the line of Ravi Shanker with Morgan Stanley. Please go ahead. Analyst: Madison for Ravi Shanker, Morgan Stanley: Hi, thanks for taking the question. More color on international in light of potential fuel shortages in Europe and resource allocation across the company—is there an opportunity to cut back there, or do you need to defend the spots you have? Joanna Garrity: We serve eight countries in Europe. Our frequency this summer will be about 14 daily flights. It’s only 6% of our ASMs as we navigate through the summer, so exposure is small. There are supply concerns in Europe; we’re watching closely and working with A4A and peers to advocate for operating procedures to consume as much fuel as possible. We’re hopeful that long-haul flying will be more protected versus short haul. We’re engaged and involved, but exposure is minimal for us. Operator: Your next question comes from the line of John Godyn with Citigroup. Please go ahead. Analyst: John Godyn, Citigroup: Hey, thanks for taking my question. I want to better understand the philosophy behind capacity cuts in the back half. Great that you’re making changes in response to fuel. Across the board, companies have been reluctant to cut to levels that directly offset fuel. What is your guiding light as you contemplate 2% to 3% being appropriate and maybe the next cut behind it? Is it trying to get to 100% pass-through? It doesn’t seem to be free cash flow. It’s not margin neutrality. When you’re running scenarios, what output are you managing to? And just as a follow-up: the curve implies a large embedded tailwind by year-end. It seems like you could hit pass-through numbers you’re describing even if demand doesn’t improve—does that framework resonate? Marty St. George: Our goal is to maximize EBIT and free cash flow with the assets we have. To the extent we make decisions early, we can save more expenses. With the fuel price we’re assuming for the rest of the year and expected demand—especially in trough periods—it’s important to take action soon to maximize EBIT. I’ve seen more talk of capacity cuts than action elsewhere. We are taking action. Pre-war, our goal was positive operating margin this year; we’ve suspended that guidance, but our goal is to get as close as possible. Given the fuel curve, it would be imprudent to make decisions that aren’t profit-maximizing. We do have constraints with slot usage at JFK—this is a long-term asset, and we won’t risk slots. This is transitory; we expect to get back to normal. We’re very happy with Fort Lauderdale, so there will be fewer cuts there. With fuel up materially, there will be flights that are not cash contributors, and those flights have to go. On the curve implying a tailwind: we also wonder how realistic it is. When we hit windows for making cost commitments—like pilot bidding—we will re-evaluate the capacity plan. If the curve improves, maybe we put points back; if it worsens, we’ll pull more. It’s prudent business to maintain flexibility. Joanna Garrity: We will maintain as much flexibility as possible. If you could tell me where fuel will be in September, I could tell you closer to what capacity will look like. Given demand and our investments in Fort Lauderdale and New York slots, we want to be mindful but aggressive on capacity cuts if fuel remains highly elevated. Operator: Ladies and gentlemen, this does conclude today's conference call. Thank you for your participation, and you may now disconnect.
Operator: Hello and thank you for standing by. My name is Bella, and I will be your conference operator today. At this time, I would like to welcome everyone to Northwest Bancshares, Inc. first quarter 2026 earnings call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. If you would like to ask a question during this time, please press star then the number 1 on your telephone keypad. To withdraw your question, press star 1 again. I would now like to turn the conference over to Michael Perry, Managing Director of Corporate Development, Strategy, and Investor Relations. You may begin. Michael Perry: Good morning, everyone, and thank you, operator. Welcome to Northwest Bancshares, Inc. first quarter 2026 earnings call. Joining me today are Louis J. Torchio, President and CEO of Northwest Bancshares, Inc.; Douglas M. Schosser, our Chief Financial Officer; and Thomas K. Creal, our Chief Credit Officer. During this call, we will refer to information included in the supplemental first quarter 2026 earnings presentation, which is available on our investor relations website. If you would like to read our forward-looking and other related disclosures, you can find them on slide 2. Thank you. I will now turn the call over to Louis J. Torchio. Louis J. Torchio: Good morning, everyone. Thank you for joining us today to discuss our first quarter 2026 results. I will let Douglas M. Schosser take you through the specifics of our first quarter performance, but first, I want to reflect on the growing momentum and continuing transformation at Northwest Bancshares, Inc., and how our achievements in the first quarter have positioned us for continued growth in 2026. On slide 4, you can see some of the financial highlights of the first quarter 2026. We delivered $51 million in net income for the first quarter, a record in the company's history, resulting in more than 16% year-over-year net income growth. Momentum in our C&I business continued with $191 million of average C&I loan growth in the first quarter, representing 28% year-over-year growth. We have continued to grow our nationwide business verticals in a disciplined manner. The first of these was launched in 2023, and collectively, they now represent approximately 23% of our commercial lending portfolio. These verticals are led by experienced and highly networked industry leaders, giving us a strong point of distinction in these specialty finance areas. We continue to focus on growing our SBA lending business both locally and nationally in 2026, building on our momentum from earning a spot among the top originators in the U.S. by volume in 2025. We recorded a net interest margin of 370 basis points in 2026, benefiting from our deposit franchise, which is one of Northwest Bancshares, Inc.'s core strengths. We achieved our third consecutive quarter of lower deposit costs, among the best in class among our peers. Our ongoing expense management discipline allowed us to achieve another quarter of improved performance with our efficiency ratio at 59.4% and our adjusted efficiency ratio of 57.8% for the quarter, and we have now fully recognized all the expense benefits from our recent acquisition. Our record net income in 2026 drove strong returns with an ROAA of 1.22% and ROTCE of 14.6%. In addition, with recent headlines surrounding credit, I want to highlight that we saw our nonperforming assets and overall delinquencies decline this quarter, and we recorded a lower annualized net charge-off ratio of 16 basis points for the quarter, which is below the low end of our full-year guidance. We achieved these results while continuing to invest in talent, technology, and new financial centers to support our future growth. I am pleased with our results, and I am proud of the team for driving strong core performance across the bank. As we have highlighted on previous calls, we continue to execute on our plans to transform the consumer bank. With the opening of our first new financial center since 2018 in the Indianapolis MSA last year, we debuted our new financial center design focused on customer hospitality. We are continuing to build out our presence in our Columbus headquarters market with five new financial centers now under development and due to open later this year in key locations. We expect to open the first of these by the time we have our next earnings call in July. In 2026, we delivered on our commitment to our shareholders, returning more than half of our profits through a quarterly dividend of $0.20 per share. This is the 126th consecutive quarter in which the company has paid a cash dividend. Looking ahead for the rest of 2026, we continue to focus on delivering organic growth and strong financial performance, expanding our financial center network, serving our core customers and communities, and delivering growth across our consumer and commercial lines of business. I will now turn the call over to Douglas M. Schosser to review our first quarter results in more detail. Douglas M. Schosser: Thank you, Louis, and good morning, everyone. As Louis indicated, we are pleased with our financial performance in the first quarter. This is the product of the efforts of our entire team working tirelessly to deliver these results, and I am grateful to the team for their efforts. Now let us continue on slide 5 of the earnings presentation, where I will walk you through the highlights of Northwest Bancshares, Inc.'s financial performance for the first quarter. Our GAAP EPS for the quarter was $0.34 per share, and on an adjusted basis our EPS was $0.35 per share, an improvement on the prior quarter of $0.31 per share and $0.33 per share, respectively, primarily driven by expense management discipline and a decrease in our overall provision for credit losses. Net interest income grew $300 thousand, or 0.2% quarter over quarter, with net interest margin improving to 370 basis points, benefiting from an increased securities portfolio yield and a decrease in our cost of deposits. On a year-over-year basis, net interest income improved 11.5%. Noninterest income decreased by $5.2 million quarter over quarter, driven by a higher BOLI benefit recorded in 2025. On a year-over-year basis, noninterest income improved 14.9%. Total revenue was $175.1 million for the first quarter, which represented a slight decline quarter over quarter due to a higher BOLI benefit recognized in 2025, but represented a 12.1% increase year over year. I would also point out that we achieved significant positive operating leverage of 560 basis points quarter over quarter in 2026 as we maintained our focus on exercising tight expense discipline and saw the last of our Penns Woods acquisition expense savings materialize. This also translated into an improvement in our adjusted efficiency ratio to 57.8%, which was a 170 basis point improvement quarter over quarter. All of this created an improvement in our pre-tax pre-provision net revenue in 2026, which increased to $71.7 million, a 1.5% increase from fourth quarter 2025 and a 9.3% increase year over year on an adjusted basis. Turning to slide 6, I will spend a moment covering our loan balances. Average loans grew $102 million quarter over quarter, benefiting from organic loan growth in both our commercial and consumer businesses as we continue to experience runoff in our residential mortgage and legacy CRE portfolio. We achieved our second consecutive quarter of period-end loan growth in the first quarter, with period-end loans increasing by $49 million to $13.1 billion, laying a strong foundation for continued growth in 2026. Our loan yield decreased to 5.62%, or 3 basis points, in the first quarter as we saw the impact of the December 2025 rate cut become fully priced into our loan portfolio. Our C&I loan growth continued with strong performance in several of our new verticals and in our other commercial loan portfolios. Average C&I loans increased $191 million, or 7.8%, quarter over quarter and $579 million, or 28.2%, year over year. Our overall interest rate sensitivity position remains slightly asset sensitive with continued growth in floating-rate commercial loans. However, we feel we are appropriately positioned for the current and expected interest rate environment in 2026 based on what we know now. Moving to slide 7 and our deposits, which continue to be a source of strength and stability, our average total deposits grew by $276 million quarter over quarter, partially benefiting from continued focus on commercial growth and deepening consumer relationships. Our granular, diversified deposit book has an average balance of more than $19 thousand 500, with customer deposits consisting of over 719 thousand accounts with an average tenure of more than 12 years. Our cost of deposits decreased 5 basis points to 1.48%, a product of our proactive management of the overall portfolio. As an example, 43% of our CD portfolio matured in 2026 at a weighted average rate of 3.60%. New volumes came on at a weighted average rate of 3.12%, supporting an overall decline in deposit costs. On slide 8, we show net interest margin increased 1 basis point to 370 basis points in 2026, with purchase accounting accretion's net impact equating to 7 basis points. Turning to our securities portfolio on slide 9. New security purchases in the quarter were consistent with the current composition of the portfolio and continue to strengthen an already strong source of liquidity. Our portfolio yield continues to increase as new securities purchased came on at a higher yield than the runoff portfolio, resulting in a yield increase of 4 basis points to 3.15% in the quarter. Twenty-six percent of this portfolio is in held-to-maturity, to protect tangible common equity. Turning to slide 10, our noninterest income decreased $5.2 million quarter over quarter, driven by a decrease in bank-owned life insurance income due to a higher BOLI benefit in 2025. Noninterest income increased $4.2 million year over year, benefiting from an increase in service charges and fees and a gain on an equity method investment. Regarding noninterest expense, as detailed on slide 11, as previously referenced, the adjusted efficiency ratio was 57.8% in 2026, representing our third consecutive quarter of improvement, continuing the expense management focus over the last year. Overall expense, excluding merger and restructuring expenses, was lower quarter over quarter due to lower compensation and benefits expenses driven by the completion and recognition of all the costs and benefits of the Penns Woods acquisition, combined with more normalized performance-based incentive compensation expenses. On a year-over-year basis, expenses in the first quarter 2026 were higher, but the year-ago quarter did not include the acquired Penns Woods operations. On slide 12, you will see our overall ACL coverage remain flat at 1.15% in 2026, driven by lower net charge-offs in the current period. Our quarterly annualized net charge-offs of 16 basis points were below the low end of our full-year guidance. Our NPAs declined this quarter. While our classified loans did increase this quarter, we have no expectation that the increase would result in higher overall charge-offs. Turning to credit quality on slide 13, our credit risk metrics remain within internal expectations, given the impacts of loans that we acquired. Our total delinquency declined from 1.50% to 1.30% quarter over quarter, primarily as a result of the planned runoff in the CRE criticized portfolio. Our 90-day-plus delinquency declined from 51 basis points to 34 basis points quarter over quarter. NPAs decreased by $16.5 million quarter over quarter to 70 basis points of average loans and are only slightly above the levels of first quarter 2025, mostly due to the payoff of a long-term health care facility. Taking a deeper dive into the breakdown of our credit quality on slide 14, in 2026 we did experience an increase in classified loans as a percentage of total loans and on an absolute basis, which was attributed partially to two C&I borrowers. As we have discussed on earlier calls, our strategy with respect to classified loans is to continue to work with our borrowers and preserve our market relationships. In addition, as we highlighted in the earnings release, the Board of Directors reviewed our share repurchase program, and we now operate with a buyback authorization of up to $50 million. This action, when combined with renewal of our shelf registration, is simply additional and appropriate capital management. Our capital priorities remain unchanged. Finally, on slide 15, we are maintaining our previous outlook for the full year 2026. We continue to be confident about Northwest Bancshares, Inc.'s business, and we are excited about the prospects for the year ahead. I will now turn the call over to the operator. Operator: We will now open the call for questions. At this time, I would like to remind everyone that in order to ask a question, please press star then the number 1 on your telephone keypad. We will pause for just a moment. Your first question comes from the line of Daniel Tamayo with Raymond James. Please go ahead. Daniel Tamayo: Thank you. Good morning, everyone. Maybe starting on the balance sheet growth on the loan side, can you walk us through expectations for paydowns, what drove them in the first quarter, and thoughts on the pace of slowing paydowns going forward and how that balances against origination activity in the commercial book? Also, it was a good quarter from a credit perspective with NPAs coming down and lower charge-off activity. You touched on the increase in criticized and classified, and you commented you are not expecting higher net charge-offs from that. Can you expand on why that would be the case and what gives you confidence those inflows will come through? Douglas M. Schosser: Thanks for the question. In the first quarter, as we have discussed on prior calls, we continued to work through our criticized and classified asset book, so there will be some downward pressure from payoffs there. Additionally, there were some payoffs in CRE. A few years ago, we stopped originating a lot of commercial construction loans. Those are now slowly moving into the permanent market, so we continue to have a little bit of runoff there, and we are not necessarily back into that space in a significant way. Those dynamics will continue. One reason we are reiterating and keeping our guidance consistent is we believe there is opportunity around slowing residential mortgage loan payoffs that can help, and we continue to see good pipelines in all the commercial verticals and commercial businesses. Generally speaking, we are comfortable with the forward look on low- to mid-single digit loan growth for the year. On credit, we are reevaluating internal ratings on our loan portfolio. If we believed there was loss content, those credits would migrate into lower ratings and ultimately charge-offs. As we sit here today, we do not see that as a high probability. We continue to work with our borrowers through the cycle to preserve market relationships and help them work out credits in a positive way for both the borrower and the bank. There was nothing in the increase that gave us a lot of pause. Operator: Your next question comes from the line of Jeff Rulis with D.A. Davidson. Please go ahead. Jeff Rulis: Thanks. Good morning. On the securities purchases in the quarter, you added quite a bit. Do you feel like you still have appetite where earning asset growth outpaces loan growth, or are you still interested in building that side of the balance sheet? And on reserves, with the charge-off outlook you outlined, is the 1.15% reserve level roughly where you expect to manage it? Lastly, on capital, with the buyback, is that just widening the tools to use, and any update on M&A appetite? Douglas M. Schosser: On securities, you are seeing a couple of dynamics. We discussed last quarter growing the overall size of the book because we were a little low relative to peers, but that was not meaningful growth. We also took advantage of what we thought the rate market would do. Early in the quarter, when we thought rates were likely to be cut a couple of times, we made some opportunistic purchases for paydowns we knew were occurring later in the first and into the second quarter. You will see the book grow a bit from that, but we are not going to reinvest new cash flows when they come off; they have already been reinvested. That is a more precise, tactical positioning rather than a material change to the composition of the balance sheet. So yes, it may be lumpier this quarter, but if you smooth it over the year, we expect pretty balanced percentages, and we are not anticipating growth in the securities portfolio as a percent of earning assets. On reserves, we are comfortable at the 1.15% coverage. It will be influenced by CECL model economics, charge-offs, and loan growth. With loan growth, we would have some additional reserving, but keeping overall coverage around 1.15% is likely. On the buyback, our prior authorization from 2012 was stale. It is good corporate practice to refresh it and share that with the street. It should be viewed as another tool in the capital management toolbox, much like the shelf registration. No change in capital priorities as a result of that move. I will turn it to Louis for M&A. Louis J. Torchio: As we noted in our earlier commentary, we are most pleased with core growth and a really clean quarter. Our focus throughout 2026 is to continue to execute post-acquisition, scale our businesses, and improve financial returns, including ROA and ROTCE. Anecdotally, given uncertainty in the marketplace—macroeconomic, geopolitical, interest rates, and Fed policy—the M&A dialogue has slowed. We remain laser-focused on core organic back-to-back quarter results, and that is where we will be focused throughout 2026. Operator: Your next question comes from the line of Tim Switzer with KBW. Please go ahead. Tim Switzer: Good morning. My first question is on deposit competition. There have been reports that certain markets have been more competitive recently, particularly as it now looks like the Fed may not lower rates until later this year, if at all. Can you talk about what you are seeing in your markets—are any more competitive than others, and are different deposit categories more intense? Also, can you help us think about the expense trajectory over the course of the year, and where you think we might be sitting at the end of this year heading into 2027? Douglas M. Schosser: We continue to see a very strong competitive set for deposits, and we do not see that changing. We also have branch openings and other initiatives where certain markets will be priced differently when you are in a heavy acquisition campaign versus maintenance. We are not seeing a let-up in deposit competition and continue to operate with that mindset. On expenses, we are pleased to have the Penns Woods expense saves behind us, so we would not expect further reductions from that activity. The path now is to manage expense growth consistently. With stronger performance, there can be higher potential costs around incentives and producer compensation. We have not changed our guide. We are slightly below an annualized level on the low end of that guidance, and we have given ourselves some room on expenses. We will continue to manage for positive operating leverage and keep expense growth in line with revenue growth. Operator: Your next question comes from the line of Brian Foran with Truist. Please go ahead. Brian Foran: Good morning. You mentioned the national commercial verticals are now 23% of loans. Two questions: Is there an upper limit or range where you are comfortable letting that get to as a percentage of the total loan book? And as you look ahead, is there anywhere you would flag either adding to existing teams or any appetite to add additional verticals? Also, on commercial real estate, is competition leading to pricing or structures where you are having to pass on deals? Douglas M. Schosser: There is not a hard upper limit, but we remain prudent. The verticals are newer and have not gone through full cycles, so we are mindful of that. We are also looking for balanced commercial opportunities. We would like to see CRE paydowns slow. We have a new leader in that group and are optimistic about the business. We are around 130% of Tier 1 capital on CRE, so there is room there. We will make smart, strategic additions when opportunities arise, but we do not rely on any one area. On CRE competition, it is certainly competitive. We have been able to find spaces where we remain relevant to customers and maintain good pricing and structures. If that changes, we would reevaluate. Right now, structure has not been a binding constraint for us; there can be some pricing give. For well-structured deals with full relationships, that is part of the game. Louis J. Torchio: Those national verticals provide differentiation and diversification of risk. We have procured industry experts, are scaling prudently, and are watching vintages. We want complementary growth in our core markets across the four states where we operate—lower middle market and business banking. We would like to mitigate some CRE runoff by focusing on light industrial, away from construction multifamily. We are maintaining hurdle rates and prudent underwriting amid economic uncertainty. We would not expect verticals to overtake the portfolio. Our pipeline is much stronger than a year ago, in large part due to scaling those verticals. Operator: Your next question comes from the line of Manuel Navas. Please go ahead. Manuel Navas: Thanks for the commentary today. Net charge-off performance was really strong. Is there potential for lower guidance eventually, and could you be looking at a lower long-term rate? Also, near-term NIM—can you talk about the moving parts? Where do you see loan yields from here, what are new pricing levels, and can deposit costs decline more without a Fed rate cut? With new branches opening, do you have room in your NIM guide to win market share in those markets? And lastly, where could you have eventual fee synergies from the Penns Woods acquisition, including C&I-driven fee opportunities? Also, on BOLI, is this quarter the right run rate? Douglas M. Schosser: Our long-term net charge-off rates are through-the-cycle metrics to accommodate economic transitions, so we are not changing the long-term view. We are very happy with 16 basis points this quarter, but it is too early to pull back on the full-year guide, which is why we did not change it. It remains a wide range, and right now we think it is likely toward the lower side, but we are not changing it yet. On NIM, on the asset yield side with no rate cuts, we feel good about maintaining current levels. There is a push-pull as loans originated at higher rates pay off, creating pressure, but new originations are still priced a few basis points better on average than loans coming off. On deposits, we have originated deposits in a lower-rate environment, especially shorter-term CDs, so as that book rolls, there is still opportunity for cost reduction, but not as large as it has been. That is why we expect a pretty stable margin in the low 3.70% area. Competition is a factor. We are working hard to maintain margin, and it will be more of a grind—no big moves expected either way. On new branches, yes, we have room within our guide to support market-share acquisition with appropriate pricing. They will open throughout the year, and activity will be a relatively small percentage of the total. Pricing will differ by market, and we expect to see marketing and acquisition pricing tied to those openings. On fees, we are excited about growing our wealth business. We have added a new head of wealth and see opportunities, particularly as commercial grows and we connect wealth and commercial for liquidity events. Our offerings span brokerage to trust. SBA continues to be a fee opportunity with room to run. On BOLI, you are closer to the normal run rate now, but it can move around; within the number, we had about $100 thousand of benefit this quarter, so not materially different on a core level. Louis J. Torchio: I would add that we are offering a more robust commercial suite—products and services that support fee generation. The Penns Woods acquisition fit nicely into our footprint and was lower risk for us. We are focused on transition and execution and believe we can do even better in-market with wealth, SBA, and commercial offerings. Our mortgage banking and home equity offerings are also robust. In Columbus, where we are headquartered, we see significant opportunity and scale. We are already in-market with hiring across commercial, small business, wealth, and mortgage to support upcoming branch openings. Operator: Your next question comes from the line of Daniel Edward Cardenas with Green Capital. Please go ahead. Daniel Edward Cardenas: Good morning, gentlemen. Most of my questions have been asked. Could you give additional color on the increase in classified loans? I think you said two C&I credits accounted for that jump. What industries were they in, and is that indicative of bigger trends? Douglas M. Schosser: If you look at slide 14, we offered some color there. No one vertical or area stands out, and nothing gives us concern about the overall portfolio. They are somewhat isolated. As new financials come in, there will be migrations in and out. There was nothing that raised significant concern about emerging losses in future periods as a result of those changes. Operator: Your next question comes from the line of Kyle Gierman with Group. Please go ahead. Kyle Gierman: Hi. This is Kyle on for Dave Bishop. You had a nice uptick in C&I loans this quarter. Which verticals contributed the most, and what is the outlook for new segments into 2026? Douglas M. Schosser: We do not break out growth by specific verticals. We continue to see good momentum across our national verticals. We are not planning to add new verticals at the moment and have no current intentions to change how we go to market. Operator: Last question comes from the line of Matthew M. Breese with Stephens Inc. Please go ahead. Matthew M. Breese: Good morning. On commercial real estate growth for the remainder of the year, is the expectation stabilization or even growth, or should we expect continued, albeit more moderate, declines from here? Also, on the C&I pipeline, what are the yields and spreads, and are there notable differences between local in-market C&I lending versus the national verticals? Douglas M. Schosser: We are focused on stabilization rather than leaning into growth near term. We have new leadership, and we are working through prior pressure from construction loans refinancing to permanent that are coming off the book. We have room in CRE; our concentration is relatively low, and CRE remains a product that makes sense in our markets. On pipeline yields and spreads, composition is consistent with what has been going on the book. We are not seeing notable changes. Within our verticals, SBA will have higher spreads given the risk profile. We are comfortable with our opportunity to continue driving similar spreads and yields. In-market deals can be more competitive given different local players, which can create pricing pressure. The national verticals tend to reflect a more market-based perspective on rates and spreads. Louis J. Torchio: Not all verticals are created equal. Some have broader opportunities for deposits and fees, while others are more transactional and asset-based. While in-market yields can be a little thinner given competition among large and small banks, cross-sell opportunities and integrated product penetration per customer are important to our strategy. Both the national and in-market approaches are important, and we are highly focused in-market to capture our share. Operator: That concludes our Q&A session. I will now turn the call back over to Louis J. Torchio, CEO, for closing remarks. Louis J. Torchio: On behalf of the entire leadership team and the Board of Directors, thank you for joining our call this morning. I am excited about our momentum in 2026, as we are well positioned to capitalize on opportunities to drive profitable core growth. I look forward to speaking with you on our second quarter earnings call in the summer. Operator: That concludes today’s call. Thank you all for joining. You may now disconnect. Everyone, have a great day.
Operator: Welcome to Xylem Inc.'s first quarter 2026 results conference call. All participants will be in listen-only mode. You may press star, then 1 on your telephone keypad. Note this event is being recorded. I would now like to turn the conference over to Mr. Michael Travers, Senior Director of Investor Relations. Please go ahead. Michael Travers: Thank you, operator. Good morning, everyone, and welcome to Xylem Inc.'s first quarter 2026 earnings call. With me today are Chief Executive Officer, Matthew Pine, and Chief Financial Officer, Bill Grogan. They will provide their perspectives on Xylem Inc.'s first quarter results and discuss the second quarter and full year 2026 outlook. Following our prepared remarks, we will address questions related to the information covered on the call. I will ask that you please keep to one question and a follow-up, and then return to the queue. As a reminder, this call and our webcast are accompanied by a slide presentation available in the Investors section of the website. A replay of today's call will be available until midnight, May 12, and will be available for playback via the Investors section of our website under the heading Investor Events. Please turn to slide two. We will make some forward-looking statements on today's call, including references to future events or developments that we anticipate will or may occur. These statements are subject to risks and uncertainties such as those factors described in Xylem Inc.'s most recent annual report on Form 10-K and in subsequent reports filed with the SEC. Please note that the company undertakes no obligation to update any forward-looking statements publicly to reflect subsequent events or circumstances, and actual events or results could differ materially from those anticipated. Please turn to slide three. We have provided you with a summary of our key performance metrics, including both GAAP and non-GAAP metrics. For the purposes of today's call, all references will be on an organic and/or adjusted basis unless otherwise indicated, and non-GAAP financials have been reconciled for you and are included in the appendix section of the presentation. Please turn to slide four. I will now turn the call over to our CEO, Matthew Pine. Matthew Pine: Thank you, Mike. Good morning, everyone, and thank you for joining us. Coming off a strong 2025 with sustained momentum, 2026 is proving resilient with a solid first quarter financial performance despite a dynamic external environment. Demand for our mission-critical solutions was consistent with expectations. Our teams are leveraging our reduced complexity to execute with discipline, staying close to customers, as evidenced by our strong book-to-bill in the quarter, and focusing on long-term value creation. We had a strong start to the year deploying capital across the business in line with our priorities. In January, we increased our dividend by about 8%. In February, we announced a new $1.5 billion share repurchase authorization, executing on $581 million in the first quarter. This reflects our confidence in the business and our commitment to a balanced approach to capital allocation. In March, we signed an agreement to acquire a German firm that designs and manufactures highly engineered water quality instruments. The company is a leader in submersible sensors for environmental monitoring, and the acquisition expands our role as a systems intelligence partner supporting resilient long-cycle demand, enabling higher-value digital and service solutions. I also want to highlight how our transformation is helping advance our priorities. Our self-improvement initiatives are foundational, simplifying our structure and processes to build stronger capabilities. They strengthen our resilience, enhancing our ability to mitigate macro uncertainty. That operational foundation is centered around making it easier to do business with us and building our growth engine. To that end, WSS booked our largest order ever this month, an outsourced water contract for $850 million delivered over 20 years. This is not just a milestone; it reinforces that our strategy is delivering. We continue to make progress with our disciplined approach to M&A with a solid pipeline of opportunities in place, progressing towards our $1 billion annual target, optimizing our portfolio, and leveraging our balance sheet. Taken together, this progress shows we are well underway in our multiyear operating model transformation, strengthening our growth engine through disciplined execution and operational rigor. I will now turn the call over to Bill to take us through the details of Q1 and updated guidance. Bill Grogan: Thanks, Matthew. Please turn to slide five. We are pleased with the strong start to the year. The team stayed focused despite volatility and delivered healthy results to build off of as we progress through the year. Demand remained solid with our ending backlog up sequentially to $4.7 billion and our book-to-bill for the quarter above one. Orders were flat versus last year, driven by project timing in WSS offsetting strength in the other segments. Revenue was also flat in the quarter versus prior year, in line with expectations, as we saw impacts from our 80/20 efforts in China, with headwinds moderating our short-term revenue outlook. The team's operational discipline delivered a quarterly EBITDA margin of 20.6%, up 20 basis points versus the prior year. Improvement was driven by productivity and price, more than offsetting inflation, significant mix, and lower volume. We also achieved quarterly EPS of $1.12, a 9% increase over the prior year. Net debt to adjusted EBITDA increased to 0.6 times, driven by our opportunistic share repurchases in the quarter. Free cash flow was positive in the first quarter, driven by timing of accruals and lower payments, offset in part by restructuring costs and higher CapEx. The teams continue to make progress with our working capital efficiency metrics. Please turn to slide six. In Measurement and Control Solutions, book-to-bill was below one, but backlog remained flat sequentially at roughly $1.4 billion. Orders were up a robust 15%, driven by smart metering demand in Water as we made progress on the projects that shifted out of Q4. We expect double-digit orders growth for Water throughout the balance of the year. Revenue was up 1%, driven by Energy metering demand, offset in part by softness in Water meters. EBITDA margin was 20.9%, down 10 basis points year-over-year, driven by unfavorable mix and inflation, partly offset by productivity and price. We also want to provide an update to our metering divestiture. Due to regulatory approval timing, we now expect the deal to close at the end of Q2, which is reflected in our updated guidance. In Water Infrastructure, orders were up 2% in the quarter, driven by strong demand in Transport, supported by growth in the U.S. and India. Revenue was down 1%, driven by softness in Treatment related to walk-away actions, partly offset by strength in Transport. Growth in the U.S. was offset by declines in China and Western Europe. EBITDA margin for Water Infrastructure was up 120 basis points, with productivity more than offsetting inflation and mix. In Applied Water, orders were also up 2% and book-to-bill was well above one, lifted by large projects and data center wins. Data center orders in Q1 exceeded the full-year amount for all of 2025. Revenues were flat versus the prior year, primarily driven by strength in U.S. commercial buildings offsetting softness in industrial and residential end markets. EBITDA margin was below expectations but increased 10 basis points year-over-year, driven by productivity and price, mostly offset by inflation, volume, and mix. We are confident in the segment's strong margin expansion opportunities throughout the remainder of the year. Finally, Water Solutions and Services saw an orders decline driven by capital project timing. Subsequently, WSS booked its largest order ever in April, an $850 million outsourced water contract. Revenue declined 2% year-over-year, driven by capital project timing and weather impacts on service branch operations, partly offset by strength in dewatering. Segment EBITDA margin was 22.1%, up 40 basis points versus the prior year, driven by price, productivity, and mix, offset by inflation, volume, and investments. Please turn to slide seven for our updated full-year and second-quarter guidance. The organic outlook is largely unchanged versus what we provided at the start of the year, with minor changes to our reported figures due to the delayed divestiture closing in MCS. Full-year reported revenue is now expected to be $9.2 billion to $9.3 billion, up from the prior guide of $9.1 billion to $9.2 billion, which delivers revenue growth of 2% to 3%, while organic revenue growth of 2% to 4% remains unchanged versus prior guidance. EBITDA margin is expected to remain at 22.9% to 23.3%. This represents 70 basis points to 110 basis points of expansion versus the prior year, driven by productivity and price more than offsetting inflation, as well as investments in the business. Benefits from our simplification efforts will help mitigate mix pressure from MCS. There is no material impact to our projected results from recently announced changes in tariffs. Despite the benefit from share repurchases, we have chosen to keep our EPS range unchanged at $5.35 to $5.60, reflecting a prudent approach to guidance in an uncertain macro environment and not a change to our outlook for the year. Cash flow generation started strong this year. We remain committed to low double-digit free cash flow margin in our long-term financial framework, and we will make additional progress in 2026. Now drilling down on the second quarter, we anticipate revenue growth will be in the 2% to 3% range on a reported basis and roughly 1% organically. We expect second quarter EBITDA margin to be approximately 22% to 22.5%, which is up 20 to 70 basis points, driven by price realization, productivity gains, and higher volumes. Second quarter MCS EBITDA margin will be down year-over-year, driven again by the impact from Energy; however, we expect it to improve sequentially from the first quarter and return to margin expansion in the second half. These results will yield second quarter EPS of $1.31 to $1.36. We started the year with strong demand and in a position of strength. Our balanced outlook reflects our strong commercial position, the durability of our portfolio, and benefits from our simplification efforts, while we also continue to monitor broader market conditions and volatility, including the Middle East conflict, changes in tariffs and other inflationary pressures, along with fluctuations in currency and interest rates. Overall, our expectations for the year remain positive and we are building on our strong momentum. With that, please turn to slide eight, and I will turn the call back over to Matthew for closing comments. Matthew Pine: Thanks, Bill. I want to return to the core purpose of our company: to empower our customers and communities to build a more water-secure world. We have been very intentional about putting customers and communities at the center of our strategy. One place you can clearly see that progress is in sustainability. Xylem Inc.'s 2025 sustainability report was posted to our website on April 24. The report reflects the fundamental truth about our business: long-term success is driven by disciplined execution, applied in service of a clear purpose that delivers meaningful outcomes for the communities we serve. Looking back at 2025, that alignment delivered concrete, measurable results. In partnership with our colleagues, customers, and communities, we achieved our sustainability goals we set in 2019 around water reuse, pollution prevention, and stewardship. Looking ahead, we are building on that progress through our 2030 sustainability agenda, which is focused on longer-term systematic impact around three signature priorities: decarbonizing the water sector, strengthening water stewardship, and expanding access to water, sanitation, and hygiene. Sustaining this progress means continuing to evolve Xylem Inc. so we are positioned for what comes next, especially for our customers, as we leverage the simplicity we have created through the first phase of our transformation. That is why I am pleased to share two updates to the executive leadership team to further strengthen how we serve our customers across our global footprint. Snehal will assume a more focused role as Chief Growth and Commercial Officer. In this role, Snehal will lead our enterprise growth strategy and execution, doubling down on commercial excellence, customer focus, and consistent delivery of scale. At the same time, to accelerate innovation that directly translates into customer value, Sivan has been appointed to a newly created role as Chief Innovation and Products Officer. Sivan will build the capabilities required to bring differentiated solutions to market faster. This leadership update, along with our purpose-forward culture, operational rigor, and disciplined capital deployment, accelerates Xylem Inc.'s growth engine and positions us to deliver exceptional long-term value creation. We will now open the call for questions. Operator: We will now begin the question and answer session. To ask a question, you may press star, then 1 on your telephone keypad. If you are using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star, then 2. Our first question comes from Deane Michael Dray with RBC Capital Markets. Please go ahead. Deane Michael Dray: Thank you. Good morning, everyone. Can we get more about this outsourced contract and congratulations. This is exactly the way you have positioned WSS to build out services. Anything about the customer and anything on the economics? And is there a pipeline for more of these types of outsourced contracts? Matthew Pine: Yes, there is more pipeline, and I push the team every day on that topic, Deane. Thanks for the question. I cannot name the actual customer, but it is an existing customer of ours in the specialty chemical vertical. We are providing process water for cooling and also boiler feed water in their manufacturing process. It is a great example of our technical know-how on the front end of a capital build along with our ability to provide a long-term service tail, which is really great for the next 20 years for our business. I will have Bill walk you through some of the numbers. Bill Grogan: Yes, Deane. Out of the $850 million, it is about 75% service and 25% capital. We will realize about 10% of the contract value this year, with the balance of the capital build next year, and look to flow water in 2028 to start the service tail. Deane Michael Dray: Really good to hear. Just a second question, Matthew. I like how you started off using the word resilient. Can you give us a sense of the municipal demand outlook at this stage of the year, and anything on the macro? There is nervousness about project activity away from municipal, but just the approval process on projects. Any color would be helpful. Thanks. Matthew Pine: Yes. I would say that overall utility demand remains resilient. As I noted, I was with about 15 utility CEOs across all parts of the U.S. a few weeks back. These are large municipalities across the U.S., and there was no indication of any meaningful funding pullbacks or project delays outside of some of the normal things you would expect to see. For our business in Q1, U.S. utility orders—based on the MCS and the Water Infrastructure segments, which are really a proxy for utility orders—were up double digits in the U.S., and our revenue was up mid-teens. That shows the resilience of utility demand in the U.S. If you pull the lens back, overall Water Infrastructure was up 2% in orders, supported by Transport, the U.S., and India. We have talked a lot about China and have signaled that in the past, and we were down 30% year-over-year in China, which is a big part of the drag. In Western Europe, there is short-term noise with our 80/20 initiatives. In MCS, as Bill noted, orders were up 15%, driven by large Water orders primarily in the Southeast U.S. and solid Energy activity. All in all, there remains significant demand for our solutions. We are dealing with aging infrastructure in the developed parts of the world—Western Europe and the U.S.—that must be addressed. The U.S. Army Corps of Engineers grades our water infrastructure poorly—C- to D+ depending on drinking water, wastewater, or stormwater—so there is about $1.5 trillion needed over the next decade just in the U.S. to maintain those poor ratings. From our perspective and from customers' perspectives, things are still robust. Operator: Thank you. The next question comes from Andrew Alec Kaplowitz with Citigroup. Please go ahead. Andrew Alec Kaplowitz: Good morning, everyone. Can you give us a little more color on what you are seeing in terms of price versus inflation across the company? And you mentioned Applied Water—Q1 margin was generally fine across the portfolio—but you thought Applied Water would get back to 20%, and you did acknowledge you recorded a bit lower than you expected. Talk about conviction staying ahead of inflation and getting that uptick in margin trajectory for the rest of the year. Bill Grogan: For the broader portfolio, we are still price-cost positive from a price and material cost perspective, including the tariff piece. The teams have been extremely proactive and have built up a solid skill set to understand the levers, timing, and process to capture incremental value to offset inbound inflation. With the escalation in the Middle East and fuel prices increasing, we have implemented immediate fuel surcharges to offset that. We are confident we can stay ahead of inflation through price as our first lever, with sourcing actions as a secondary lever. For Applied Water specifically, performance was below our expectations, primarily due to mix within sales on the gross margin line. We are confident they will get back above 20% as we look at the balance of the year relative to cost actions taken, mix normalizing, and some of the data center projects Matthew highlighted starting to ship at a little bit higher margin, with sequential improvement through the balance of the year. Andrew Alec Kaplowitz: Thanks, Bill. Maybe the same kind of question on organic growth for the year. You need an uptick in growth in the second half to meet your forecast. It seems like you made progress on booking those 5–10 projects you have been most focused on in MCS. Give us a little more color there. And on WSS, do you need a capital recovery at all to make your original mid single-digit organic growth for that segment? Bill Grogan: We have seen the things we needed to see happen in the first quarter relative to strong MCS orders and some of those projects that were delayed now converting, which will play out through the balance of the year. We still need a couple more orders to hit for us to reach our back half, but conversations with the team look positive. The book-and-ship for MCS is actually up 9%, so there is a lot of traction and progress, and channel inventory is back to normalized levels. From a broader Xylem Inc. perspective, we will see a significant ramp in volume from the first quarter as part of our normal seasonality. If you look at the third quarter, it is basically the same revenue dollars sequentially, and we go from 1% growth to 5%. Then we will see the normal seasonal ramp in the fourth quarter relative to Water Infrastructure to get to another mid single-digit number. Normal seasonality and the orders we needed to win have progressed and give us confidence in our back-half figures. Operator: The next question comes from Michael Patrick Halloran with Baird. Please go ahead. Michael Patrick Halloran: Good morning, everyone. Just touch on the capital allocation piece. Good to see the magnitude of buyback in the quarter. What does the intent look like from here? If the stock stays in and around where it is now, do you see yourself being as aggressive as we move through the year? Matthew Pine: We continued to buy in April and will reassess the balance of Q2 after this month. We are looking at it a couple of ways: managing our leverage between half a turn and a turn net debt to EBITDA, and balancing that with taking advantage of stock dislocation. We will reassess at the end of the month as we get into Q2. We have a healthy balance sheet and will continue to deploy capital across our whole framework over the course of the year. Michael Patrick Halloran: Makes sense. Maybe talk about the M&A optionality—pipeline and ability—and give more context on why the tuck-in you made on the analytics side made sense. Matthew Pine: We have talked about $1 billion of capital deployment toward M&A to help us get to the mid-teens EPS growth outlined at our 2024 Investor Day. We are still tracking for that. Our improved internal process is now much more focused within segments with segment presidents owning pipeline development bottom-up. Because of that work, we have a very strong pipeline across all segments, which gives us confidence we can be more consistent over time with capital deployment. Regarding the recent tuck-in, we signed an agreement—subject to confidentiality with the seller—so we cannot share the target's name. The purchase price was $219 million. It is a highly engineered water quality instruments business, strengthening our position in high-margin optical sensing and process applications across clean water, wastewater, environment, and industry. We expect significant revenue synergies by leveraging our industrial and utility customer base as we continue to grow our analytics business. Operator: The next question comes from Jacob Frederick Levinson with Melius Research. Please go ahead. Jacob Frederick Levinson: Good morning, everyone. On Measurement and Control, it looks like things are stabilizing a bit there; the order book looks solid. Can you mark to market where we are in the cycle across Electric and Water? There is a refresh cycle in Electric; maybe that is coming in Water. How does that play out this year and into 2027? Matthew Pine: At a high level, if you go back to 2008–2009 with the American Recovery and Reinvestment Act coming out of the Great Recession, utilities on the Electric side did a major push on AMI. You started to see a refresh last year into this year and over the next couple of years. Water was five to seven years behind that initial wave of AMI deployments. As we move through the next two to three years of Electric refreshes, we will start to see a pickup in Water refresh as we exit this decade going into 2030. Jacob Frederick Levinson: That is helpful. On China, I think you mentioned it was down 30% this quarter. Have we bottomed in that market, and is it a function of comps? Relatedly, how much of that 30% is market versus the work you are doing to reposition the business? Bill Grogan: We would say it is bottoming out—bouncing at the bottom. The team is making progress with focused efforts in areas where we have more differentiation. Roughly a third of the decline is market, a third is competitor actions, and a third is us actively walking away from business. For total Xylem Inc., most of the pressure is in the first and second quarters, and the comp gets easier in the back half. For the full year, China is about a 1% headwind for sales, concentrated in the first half at about 2%. Jacob Frederick Levinson: Great. Thank you very much. I will pass it on. Operator: The next question comes from Nathan Hardie Jones with Stifel. Please go ahead. Nathan Hardie Jones: Good morning, everyone. On MCS, we have seen pretty good order growth over the last few quarters—double-digit for four quarters in a row—but the actual dollar level of orders has been below the level of revenue. How does that support growth going forward, not just this year but into 2027–2028? What kind of order rates do you need to support growth over the next couple of years? Bill Grogan: Long term over the cycle as things normalize, it is that high single-digit rate. Given lumpiness from large projects, you have to look at a combination of our backlog position in conjunction with orders. Our backlog increased sequentially but not to the magnitude implied by book-to-bill because some orders received within the quarter were for projects we had already won and now have firm commitments to start delivering within the year. Look over a rolling 24 months at a high single-digit orders growth rate, with a check on backlog growth and position as replenishments progress. Nathan Hardie Jones: As a follow-up, margins: you already guided to stronger margins in the second half, and the margin expansion in 2026 is significantly lower in the first half than implied in the second half. What are the contributors to accelerating margin expansion in the second half, and where should we see those materialize? Bill Grogan: It is across the portfolio, with significant expansion within MCS and Water Infrastructure, primarily as mix normalizes and we shift from price-driven growth to significant volume growth as projects hit in MCS and Water Infrastructure. We also get past some walk-away pressure and China pressure in the first half. It is volume and mix normalization, leveraging structural cost taken out last year and continued in 2026. Operator: The next question comes from Brian Blair with Oppenheimer. Please go ahead. Brian Blair: Good morning, everyone. Following up on Nathan's question, given current visibility with MCS inclusive of mix expectations and the pending divestiture, how should we think about margin cadence through the back half and, more importantly, a realistic exit rate—or equivalently—jumping-off point for 2027 margin? Bill Grogan: As noted in the prepared remarks, MCS will sequentially increase and exit the year post the international metrology divestiture well in excess of 25% EBITDA margins. That is the base rate going into next year, with the Water balance-of-sale normalizing and continued profitability improvements within the Gas and Electric businesses. Brian Blair: Understood. Your consolidated organic sales outlook is unchanged, and it does not sound like the moving parts have meaningfully shifted. If we think about the segment expectations you outlined last quarter, are there any shifts you would call out, particularly for MCS and WSS? Bill Grogan: No major changes to the organic guide in aggregate, and no major changes to the makeup between the segments. Operator: The next question comes from William Griffin with Barclays. Please go ahead. William Griffin: Thanks for the time. Good morning. Coming back to price-cost, specifically potential supply chain impacts on material costs as global supply chains continue to be disrupted. I know you have some fixed-price arrangements for materials, but how long do those last, how much do they insulate your business, and what is your visibility to managing increases in raw materials costs post those arrangements? Bill Grogan: We have some forward fixed contracts, but they are limited and focused on certain raw commodities. Our supply chain team does a strong job of alternate sourcing and competitive bidding to mitigate increases through dynamic supply chain management. Our first lever is incremental pricing. The team’s practice post-COVID, through inflationary drivers, tariffs, and now potential increased inflation due to rising fuel costs, gives us confidence we can continue to offset. The magnitude could compress margins slightly—since we are not getting 40% flow-through on incremental price—but dollar for dollar, our expectation is that we can manage. The next four weeks will be critical relative to geopolitical developments and logistics lanes, but we are as prepared as we can be given the nimbleness of our organizational construct. William Griffin: Appreciate that. On 80/20, you had previously talked about 2026 being the peak of walk-away—about a 200 basis point offset to organic growth guidance. What is the cadence or timing? Is that primarily in the first half or evenly spread? Bill Grogan: It is more weighted to the first two to three quarters of the year. There is some longer-tail activity within the Treatment business in Water Infrastructure that may extend past that, but it is more heavily weighted in the first half. Matthew Pine: We will wrap up there. Thanks for your questions, and thank you to everyone who joined today. Operator: The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
Operator: Hello, everyone. Thank you for joining us and welcome to Custom Truck One Source, Inc.'s first quarter 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 raise your hand. To withdraw your question, press 1 again. I will now hand the conference over to Brian Perman, Vice President, Investor Relations. Brian, please go ahead. Brian Perman: Thank you, operator, and good morning. Before we begin, we would like to remind you that management's commentary and responses to questions on today's call may include forward-looking statements, which by their nature are uncertain and outside of the company's control. Although these forward-looking statements are based on management's current expectations and beliefs, actual results may differ materially. For a discussion of some of the factors that could cause actual results to differ, please refer to the risk factors section of the company's filings with the SEC. Additionally, please note that you can find reconciliations of the historical non-GAAP financial measures discussed during the call in the press release we issued yesterday after the market closed. That press release and our first quarter investor presentation are posted on the Investor Relations section of our website. Yesterday afternoon, we also filed our first quarter 2026 10-Q with the SEC. Today's discussion of our results of operations for Custom Truck One Source, Inc., or Custom Truck, is presented on an historical basis as of or for the three months ended 03/31/2026 and prior periods. Also, a reminder that beginning this quarter, our financial reporting reflects our two new operating segments: Specialty Equipment Rentals, or SER, and Specialty Truck Equipment and Manufacturing, or STEM. While our 2026 results in our earnings press release and SEC filing reflect the application of intersegment pricing and margins, as per accounting requirements for intersegment sales, the segment results for 2025 reflect the intersegment sales with no margin, as no intersegment agreement was in place in the period. For an illustrative comparison of what the 2025 results would have been had intersegment sales been reflected with the appropriate gross margin and had other internal accounting policies been in place at the time, please see the appendix of the Q1 investor presentation posted on our Investor Relations website. Also, certain data in the appendix of the investor deck for Q1 and Q2 2025 for our STEM segment was corrected to reflect an internal error. Full year 2025 STEM results were not impacted by the change. Joining me today are Ryan McMonagle, CEO, and Christopher Eperjesy, CFO. I will now turn the call over to Ryan. Ryan McMonagle: Thanks, Brian, and good morning, everyone. 2026 is off to a great start, as we delivered record first quarter revenue driven by continued strong momentum in our core end markets and excellent execution by our team. In the first quarter, we generated revenue of $462 million and adjusted EBITDA of $98 million, up more than 933% year over year. The key driver of our performance in the quarter was continued strength in our Specialty Equipment Rentals segment, as the improvement we experienced throughout last year in the transmission and distribution markets continued into Q1. Our rental fleet averaged 81.4% utilization during the quarter, up 370 basis points from Q1 of last year. This was supported by continued robust levels of OEC on rent, which averaged $1.34 billion in Q1, up 12% year over year. So far in Q2, both measures have continued to strengthen, with utilization and OEC on rent currently trending above our first quarter averages. We ended the quarter with total OEC of $1.66 billion, the highest quarter-end level in our history, which will support our expectation for continued growth in SER revenues this year. Also, the average age of our fleet is less than three years old, which we believe is one of the youngest fleets in the industry and positions us well to support our customers. Our trucks and equipment continue to power the people who strengthen and build critical infrastructure in the U.S. and Canada. The market has been focused on the durability of demand in T&D, and our ability to convert improving rental KPIs into earnings and cash flow, and we believe our trending results over recent quarters speak directly to that. Bidding activity and ongoing conversations with our customers lead us to believe that these conditions will persist throughout 2026 and beyond. Performance of our Specialty Truck and Equipment Manufacturing segment in the first quarter was strong, reflecting continued healthy end market demand and order flow. For Q1, STEM revenue, excluding sales to our SER segment, was up 5% year over year. We also saw gross margin expand in the quarter driven by significant cost-out and productivity improvements led by our production team. New sales order backlog ended the first quarter at $411 million, up more than $76 million, or 23%, from the end of Q4. Our backlog has continued to grow so far in Q2. As we have noted in prior periods, backlog can move quarter to quarter with delivery timing and production schedules, so we also focus on order activity and conversion. We saw strong year-over-year net order growth of 13% in Q1, with particular strength coming from our local and regional customers. Despite slower growth in the infrastructure end market, the continued strength in order growth, and our ongoing conversations with our customers, provide us with the confidence to expect another year of growth in STEM, not including intersegment sales to our SER segment. Custom Truck One Source, Inc. is well positioned with our young rental fleet, current inventory positions, and strong relationships with our chassis OEM partners to navigate the impact of the EPA's 2027 emission standards. We are affirming our previous full year 2026 revenue outlook, which we updated earlier this month solely to reflect our new segment reporting with no change to consolidated guidance. We expect consolidated revenue in the range of $2.005 billion to $2.12 billion. Given strong conditions in the T&D end markets, we are raising both the bottom and top ends of our adjusted EBITDA guidance, and now project a range of $415 million to $440 million. Despite some macroeconomic volatility, we continue to be optimistic about our business. Long-term sustained end market demand is buoyed by secular megatrends, and our ability to provide exceptional execution on behalf of our customers sets us apart from our competition. Our longstanding relationships with our strategic suppliers and customers continue to be keys to our success. I continue to have the highest degree of confidence in the Custom Truck One Source, Inc. team and want to thank everyone for their hard work and dedication that helped achieve our strong results in the first quarter. We look forward to updating everyone soon. With that, I will turn it over to Chris to walk through the numbers in more detail. Christopher Eperjesy: Thanks, Ryan, and good morning, everyone. I will start with the consolidated results for the quarter, then discuss segment performance, our balance sheet, liquidity and leverage, and finally, our 2026 outlook. Before I begin, I would like to expand somewhat on Brian's comments in the introduction about our segment reporting. As a reminder, because of reporting guidelines for segment reporting, segment data included in our earnings press release for periods prior to January 1 are not fully comparable to the current year data, largely because 2025 results disclosed in our press release do not include any margin on intersegment sales. In the appendix of the deck we posted on our Investor Relations site in early April, we included reconciliations of our historical 2024–2025 quarterly segment data in an attempt solely to illustrate what those results would have been had our new segment reporting accounting and intersegment sales and margin agreements been in place at such time. The appendix of our first quarter 2026 investor presentation includes our segment data for 2026 as presented in our earnings press release, with additional adjustments shown so revenues and expenses are presented on the same basis as our 2025 as-adjusted results. For illustrative purposes, we provide comparison of the as-adjusted data for Q1 2025 and Q1 2026. All year-over-year comparisons in my portion of the call are based on the figures in our earnings press release. To the extent you have any questions, please do not hesitate to reach out to Brian, Investor Relations. Our first quarter 2026 results reflect stronger operating performance across the business and improved rental fundamentals, particularly in our T&D end markets. For the first quarter, total revenue was $462 million and adjusted EBITDA was $98 million, representing 933% growth, respectively, versus Q1 2025. Turning to our segments. In SER, first quarter third-party revenue, excluding intersegment sales, was $194 million, up 16% year over year, driven by strong double-digit growth in both rental revenue and rental equipment sales activity. Segment adjusted EBITDA of $105 million was up 23% year over year, with segment adjusted EBITDA margin in Q1 of 51.5%, up more than 415 basis points versus Q1 2025, continuing the momentum we experienced in 2025. Our key rental KPIs in SER remained quite strong in Q1. Utilization averaged 81.4%, up 370 basis points versus Q1 2025. Average OEC on rent in the quarter was $1.34 billion, up more than $141 million, or 12%, versus the same period in 2025. On-rent yield in the first quarter was 38.9%, reflecting both sequential quarterly and year-over-year increases. On-rent yield remained within our targeted upper-30s to low-40% range, and we continue to see opportunities for rate improvement as transmission mix grows and pricing discipline holds. Our current historically strong rental KPIs reflect both increased rental activity and the continued scaling of our fleet to meet demand. Net rental CapEx in Q1 was more than $49 million, and our fleet age at quarter end was just under three years, a modest increase from the end of last quarter, which is consistent with our plan to reduce maintenance CapEx and age the fleet somewhat this year. Our OEC in the rental fleet ended the quarter at almost $1.6 billion, up more than $107 million versus the end of Q1 2025, and up more than $18 million in the quarter. The increase reflects disciplined fleet investment against strong demand, particularly in T&D. While we expect to continue to invest in the fleet in 2026, our planned decrease in maintenance CapEx in 2026 compared to 2025 should contribute to increased free cash flow generation this year. In STEM, first quarter third-party revenue was $268 million, up 5% year over year, comprising equipment sales growth of more than 4% and parts sales and service revenue growth of almost 17%. STEM segment adjusted EBITDA was $33 million and segment adjusted EBITDA margin was 9% in the quarter. Recall that our 2025 segment adjusted EBITDA does not include any margin on intersegment sales, while 2026 segment adjusted EBITDA does. STEM margin gains in the quarter were driven by significant cost-out and productivity improvements led by our production team. Importantly, our new sales backlog ended Q1 at $411 million, up more than $76 million sequentially, within our expected range of roughly four to six months. We have continued to see strong order growth so far in Q2 2026, and our backlog currently stands at more than $425 million. Turning to the balance sheet and liquidity. With LTM adjusted EBITDA more than $408 million, and net debt of $1.65 billion, we finished Q1 with net leverage of slightly more than four times. This represents an approximately 30 basis point sequential improvement and approximately 80 basis points versus Q1 2025. Availability under our ABL was $257 million as of March 31, and based on our borrowing base, we have more than $190 million of additional availability that we can potentially access by upsizing our existing facility. Free cash flow generation and deleveraging remain key focus areas for us. Our inventory increased during the first quarter, reflecting seasonal order flow. Even with that increase, we expect to reduce inventory and floor plan balances over the balance of 2026, which should support improved free cash flow generation. With respect to our 2026 guidance, the macro demand across our key end markets remains very strong. We expect the STEM segment to continue to benefit from an overall favorable macro demand environment as well as strong relationships with our key customers and chassis and attachment suppliers. Our strong order backlog supports this. In our SER segment, consistent with our Q1 results, we expect this trend to continue in 2026. Demand for our equipment that serves the T&D utility markets continues at record levels, and we expect the vocational rental market to provide incremental growth as we further penetrate this expanding end market. We finished 2025 with the average age of our fleet at just over 2.9 years, down by more than a year since the beginning of fiscal 2022. As a result, we expect to be able to significantly reduce maintenance CapEx in our rental fleet in 2026 while continuing to generate growth. Our increase in fleet age to just under three years in the first quarter reflects this. We expect to grow our rental fleet based on net OEC by mid-single digits in 2026, with a net investment in our rental fleet of approximately $150 million to $170 million, a meaningful reduction from our $250 million in 2025. After prior years' investments in inventory, driven by the strong demand environment, we expect to continue making progress on further net working capital improvements in 2026, as we continue on our path of reducing inventory months on hand to our targeted range of below six months. As a result, we expect to generate more than $50 million of levered free cash flow and reduce our net leverage ratio to meaningfully below four times by the end of fiscal 2026, while progressing towards our three times net leverage target in 2027. Our affirmed 2026 revenue guidance reflects total revenue in the range of $2.005 billion to $2.12 billion. Given conditions in the T&D end markets, we are raising both the bottom and top ends of our adjusted EBITDA guidance and now project a range of $415 million to $440 million, resulting in year-over-year revenue growth of 3% to 9%, and adjusted EBITDA growth of 8% to 15%. We still expect non-rental CapEx of $40 million to $50 million. Our segment guidance for 2026 remains unchanged. We are projecting SER revenue of $835 million to $870 million and STEM revenue of $1.58 billion to $1.655 billion, with STEM third-party revenue growth of 3% to 10%. Overall STEM sales, including intersegment sales, are expected to be flat to slightly down solely as a result of the expected reduction in SER maintenance rental CapEx this year. Despite 2025 being a tough comp given the near-record level of new equipment sales in the quarter, given current trends, we do expect to show year-over-year growth in adjusted EBITDA in Q2. In closing, I want to echo Ryan's comments regarding our continued strong business outlook. Despite broader macroeconomic uncertainty, recent results and end market fundamentals support our confidence in the long-term demand drivers and our ability to deliver meaningful adjusted EBITDA growth this year. With that, operator, we can open the line for questions. Operator: 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. 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 Michael Shlisky of DA Davidson & Co. Michael, your line is open. Please go ahead. Michael Shlisky: Thanks. Good morning. Thanks for taking my questions here. Let me start off with a tariff question. Any worries you have on the recent changes to the Section 232 tariffs, either on recent quotes you have made or on what is in your backlog? Can you compare what the OEMs are saying on chassis pricing because of the tariffs compared to what you may be seeing from the body or back part of the truck that you are building? Ryan McMonagle: Yeah, Mike, good to talk to you, and great question. I think we are in a pretty good spot when it comes to tariffs, as we have talked about. Obviously, having inventory on the ground puts us in a good position. We are seeing a little bit of tariff exposure on some of our bodies because of February, but I think the team has done a good job managing that, and so I feel like we are well positioned. And then OEMs—as we are talking with OEMs—that is a discussion, but the bigger discussion right now seems to be getting orders for them heading into 2027. I think we are in a good spot overall, Mike. Michael Shlisky: Okay. Great. And then your metric of the average age being at roughly three years, that is up for the first time in quite some time. Can you maybe comment on how far ahead of the second-place player you are on average age? I am wondering how much you can age the fleet and still be reasonably ahead of peers and have a great-looking fleet. Is there a very big cash piece that you could be getting if you aged it, let us say, a half year or a year, or would you still be in front of your larger peers on the fleet side? Ryan McMonagle: Yeah, it is a great question. There is not great data on the other fleets and age of fleet, so it is more based on feel and what we hear from our customers. But I will give you this data point. When we put the business back together in 2021, the average age of the fleet was just about four years. So we are about a year younger than we were then, and I think the business performed well at that age too. So I think that is the band that we have talked about. We have been as low as 2.9; we are still under three; and four years ago, we were just under four years old. That feels like a good band. You are right, there is real cash generation in there as you think about it. But most important, as you know, is taking care of the customer and making sure we give them the product that they need to keep them working and to provide for what our trucks do. Michael Shlisky: Okay. Thank you. I will pass it along. Operator: Your next question comes from Daniel Hultberg with Oppenheimer & Co. Daniel, your line is open. Please go ahead. Daniel Hultberg: Thank you. Hey, good morning, guys. Congrats on the quarter. I want to hone in on margin a little bit. I mean, obviously, the rental revenue growth is strong and that is higher margin. But you also mentioned productivity improvement, and I see in the deck it says effective cost management. Could you please elaborate on what you are doing on the cost side to drive margin here, as well as how it pertains to the guidance increase? And then on yield, it is like the last quarter up 40 basis points year on year this quarter. Could you speak to the pricing environment and the opportunity there, and what is embedded in the guidance as it is? Ryan McMonagle: Yes, great questions. The team has done a great job of managing through our overall cost structure. There have been a lot of efforts underway by our production team to drive productivity improvement, and I think we are seeing the benefits of that. As we have talked about on a few prior calls, we continue to evaluate our overall cost structure, and the team has done a good job to right-size it, particularly related to our production efforts, which is why you see the expansion in STEM gross margin in particular. On yield, we talked about on the last call that we took a price increase on the rental side of the business in December of last year. It was about a 5% price increase. Some of that is what is flowing through the on-rent yield number that you see. The other thing flowing through there is mix. Transmission is coming on very strong, and that is at a higher yield than distribution, due to the type of equipment that we are renting there. That has been influencing yield well. Price typically takes a full year to cycle through the fleet because we increase price only as new equipment goes out on rent. The mix impact will be a function of how strong transmission stays, which we expect over the balance of 2026. Christopher Eperjesy: As part of your question was about guidance, we raised the EBITDA guidance really because, as Ryan was touching on, the rental business is outperforming, but then also due to some of the operating execution that is happening. It really is a combination of those two—the mix and the operating execution—and not so much anything on the top line in terms of a more aggressive top-line assumption. Daniel Hultberg: Gotcha. Perfect. Thank you so much. I will turn it over. Operator: Your next question comes from Justin Hauke with Baird. Justin, your line is open. Please go ahead. Justin Hauke: Thanks for taking the question here. I wanted to drill into the EBITDA guidance. It increased a little bit more, which is great to see. Obviously, we are looking for more. If I look at the quarter, you guys were thinking EBITDA would be up kind of 10% plus. You were meaningfully above that, so you are kind of $10 million to $15 million ahead of where you were guiding to. You raised by $5 million. Is that conservatism? Was there anything that was maybe a one-time pull-forward in the quarter that was unusually strong, or how should we think about how the $5 million factored into the raise? Christopher Eperjesy: Yeah, Justin, if you look at Q1, Q1 of last year was going to be our easiest comp. I think our actual guidance was that we were going to be up double digits. I do not think we necessarily banded what we thought that was going to be. Clearly, SER continues to outperform. OEC on rent is up, you know, $160 million to $170 million through the first four months of this year. We are continuing to see that strong performance, and really it is that mix that is driving it. But if you look at Q2, you are going to see the exact opposite; that is a pretty tough comp for us. We talked about this last year on the call. We had two months within the quarter that had third-party new sales above $110 million, and those were the only two months outside of December that were ever above $100 million. So it is going to be a much tougher comp here in Q2. I would not say we are being conservative, but we are certainly being prudent. We felt it was the right thing to do to increase our guidance, and we feel comfortable in that $415 million to $440 million range. We will adjust it as the year goes on if it makes sense to do so. Justin Hauke: Okay. Fair enough. My next question: we have been seeing more articles about political pushback on data centers and some of these projects getting pushed out. I know your direct exposure to data centers is pretty modest, but the impact to some of these interconnect T&D projects—are you seeing anything where that is having a discernible impact, or is that just noise in the market in terms of people procuring things in anticipation of that work? Ryan McMonagle: It is a great question. We are still seeing strong demand from our customers for equipment. Public companies’ sentiment and reported backlog continue to increase. Our conversations with our customers are still bullish on additional transmission work that has not yet started, which is a good tailwind for us. As we look at macro reporting around line miles in service and what is coming online, it continues to be very positive. I would say the specific noise around data centers does not seem to be impacting our customers and the work they are planning to start over the coming quarters and years. Justin Hauke: Yep. That is what I figured. Thank you for answering those two. I appreciate it. Operator: Your next question comes from the line of Naim Kaplan with Deutsche Bank. Naim, your line is open. Please go ahead. Naim Kaplan: Hey, good morning. On for Nicole DeBlase. First question: given the substantial macroeconomic assumptions underpinning your T&D outlook—specifically, you mentioned 23% expected CAGR in data center power demand—how much of this impending infrastructure wave is already actively reflected in the quoting pipeline? Are there specific specialized equipment categories that you foresee could have industry-wide supply chain shortages? In SER, you mentioned the rental business is performing very strong with OEC on rent, utilization, and gross margins all continuing to perform ahead of expectations in 2026. So why would you not raise the guide there? Is there maybe some conservatism? Ryan McMonagle: Good questions. Broadly on transmission, we are seeing demand for transmission equipment continue to pick up. It is not back to the highest levels that it has been over the past several years, but it is continuing to pick up. Conversations with our customers suggest that will continue to increase for the foreseeable future—certainly for the balance of 2026—and we are starting to talk about 2027 at this point. We are not seeing any product category where availability of equipment looks like it could be an issue right now. It continues to be favorable—bullish—as we think about transmission in particular. Christopher Eperjesy: When I said SER was ahead of expectations, the comparison was versus last year, and really ahead of expectations on the margin front. That is why we felt comfortable taking up the EBITDA guide but leaving the revenue range where it is for now. Naim Kaplan: Okay. I appreciate it. I will pass it on. Operator: Your next question comes from the line of Brian Brophy with Stifel. Brian, your line is open. Please go ahead. Brian Brophy: Yes, thanks. Good morning, everybody. Congrats on the nice quarter. I want to ask about bidding activity. You mentioned it is quite healthy in your opening comments. Any more color on what you are seeing there? And on the new equipment side, last year there was some discussion on pricing pressure that you were seeing. It does not appear that you mentioned that this quarter. What is the latest you are seeing on the pricing front on the new equipment side? Ryan McMonagle: Thanks for the question, and good to talk to you. It is robust, which is probably a fair way to say it. For us, bidding activity happens most on the transmission side of things. There are several specific projects that are in process where we are bidding and are waiting on awards to be made. It continues to remain robust, and we think we should be well positioned for the rest of 2026 and heading into 2027. Christopher Eperjesy: Compared to this time last year, pricing is certainly more stable. There still is some pressure. Ryan touched on cost improvement and initiatives that have benefited margin and allowed us to offset some of that pressure. The way I would characterize it is it is certainly a lot more stable than it was this time last year. Brian Brophy: Appreciate it. I will pass it on. Operator: Your next question comes from the line of Analyst with Cantor Fitzgerald. Your line is open. Please go ahead. Analyst: Yes. Hi, good morning. It is Manish. Two questions. First on STEM: how should we think about the normalized margins for STEM? And the backlog was up nicely on a sequential basis—what is driving that, what are the conversations like with your customers, and what is the customer composition? You have a lot of small customers, so with the macro environment, what does that backlog segmentation look like? Christopher Eperjesy: Historically, we have given guidance on the biggest component of STEM sales—third-party new sales—of a 15% to 18% range. A couple years ago, we were pushing that 18% and even slightly higher. This past year, we were closer to 15%. We have seen that go up now the last couple quarters, and we are living closer to 16%. I think 15% to 18% is still a good range; we are probably going to live closer to the 16% to 17% range this year. That is the best way to model it. Ryan McMonagle: On backlog, we actually saw the biggest pickup with our small customers. We break them into our local and regional customers, and that is where we saw the largest increase in backlog. From a product standpoint, utility is very strong, and we saw a pickup in backlog in our utility and forestry segment more broadly with those small customers. Where we have seen less of a pickup is on the infrastructure side—waste and dump truck segments have not seen a significant pickup yet in backlog. Operator: Your next question comes from the line of Tami Zakaria with JPMorgan. Tami, your line is open. Please go ahead. Tami Zakaria: Hey, good morning. Thank you so much. On the STEM segment, the backlog saw impressive growth. How much of the backlog is for 2026 versus beyond that? And because you resegmented your disclosures, of the $415 million to $440 million EBITDA guide for the year, what would be the mix from the two segments, SER versus STEM, in that full year number? One last one: the debt paydown target—three turns leverage by next year—do you expect any debt paydown, or is this all coming from EBITDA growth? Ryan McMonagle: Great question, and good to talk to you, Tami. The far majority of the STEM backlog will be for 2026 deliveries. There is very little at this point that we would not be able to deliver in 2026. Christopher Eperjesy: We do not give guidance for the segment EBITDAs. If you look at the prior year, you can get a relatively comparable mix. Given the guidance this year, there may be a little bit of a shift towards SER. I would look at what we disclosed on April 1, and you can use that as a proxy. One other point: as you do that, remember that the two segment adjusted EBITDAs will sum to a higher number than our consolidated guidance—you have to take into account the corporate unallocated cost, which you will also find in that April 1 presentation. On leverage, it will be both EBITDA growth and debt paydown. This year, we guided levered free cash flow north of $50 million. That would all be used to pay down debt. Tami Zakaria: Understood. Thank you. Operator: Your next question comes from the line of Abe Landa with Bank of America. Abe, your line is open. Please go ahead. Abe Landa: Morning. Thank you for taking my questions. One quick housekeeping: I know last year, within your STEM segment, it does not include margins on intersegment sales. If we were to look at it from an apples-to-apples perspective, what would that change be? And then shifting gears to the general environment—there are a lot of data centers, a lot more generation is on-site. Are you seeing that impact demand in any way, whether mix or actual absolute level of demand? How is that shift and the data center buildout impacting buy versus rent decisions by utilities, contractors, etc.? Lastly, longer term, you are saying inventory levels are going to be below six months by year-end. What is that number today and how do you expect that to trend during the year? Do you expect the EPA 2027 rules to have any impact on that? And overall on working capital, what are you assuming for the year, with inventory reduction being offset by revenue growth? Christopher Eperjesy: I do not have the intersegment apples-to-apples figure off the top of my head, but if you look in the April 1 presentation on our website, as well as the one we posted last night, that information is in there. On inventory, we are somewhere north of seven, probably closer to seven and a half months right now. It is typical to see an increase in Q1—seasonal timing and getting ready for the second half—and this year is consistent with that. We are only slightly higher than our expectation for this time of year—less than $10 million higher than we had forecasted. We had given guidance that we would expect to get north of $100 million year-over-year out of inventory as part of our working capital initiative this year. I would point out that the $100 million does not translate to $100 million in cash because between 75%–80% of the inventory is floor plan. Typically, if you reduce inventory by $100 million, you may generate $20 million of cash. In terms of our guide of $50 million levered free cash flow for the year, you are probably going to get between $30 million and $40 million from working capital. Ryan McMonagle: On the demand questions, generally, on-site generation around data centers is not impacting our demand in a significant way. It is something we watch, but it is not impacting our business directly. It is also not significantly impacting buy versus rent. As we have discussed, transmission is often rented because of the nature of the equipment, while distribution is more commonly bought and rented. On EPA 2027, we are in a really good spot. Three things to highlight: first, the age of the fleet—having roughly 10 thousand pieces in our fleet that are under three years positions us well for the new engines; second, having inventory on the ground—we are just over seven, seven and a half months now, and being at six months at the end of the year positions us well with current model year chassis heading into next year; and third, the strength of our relationships with our chassis OEM partners and our dealers. We are well positioned as we continue to watch how the mandate comes through and the final rulings from the EPA around warranty and other open questions. Abe Landa: Thank you for the time. Operator: Your next question comes from the line of Analyst with Cantor Fitzgerald. Your line is open. Please go ahead. A reminder to unmute locally if you would like to ask a question. Analyst: Hi. Can you hear me? Wonderful. Maybe, Ryan, can you talk about some of the bottlenecks that could slow execution despite strong end markets? Then maybe Chris—what is going to take over the next one or two quarters for you guys to raise the free cash flow outlook? Thank you. Ryan McMonagle: On bottlenecks, we are in a good spot, but we are watching our supply chain closely. Transmission seems very strong right now, so we are working closely with our suppliers—on the back end, that is our largest supplier on the transmission side, and some of our pulling and stringing suppliers as well—and we are working closely with our chassis suppliers. These are typically larger trucks, all-wheel drive—six-by-six and four-by-four chassis. It is making sure that supply chain continues to perform, which it is currently, but that is where a bottleneck would come from if one were to show up. Christopher Eperjesy: On free cash flow, we talked about three major areas that will drive it. First, incremental EBITDA—if you take the midpoint of EBITDA guidance, that is up $40 million to $45 million year over year. Second, rental CapEx—the net investment last year (growth CapEx plus maintenance CapEx less proceeds from sales) was roughly $250 million; we said it is going to be meaningfully less this year, in particular on the maintenance CapEx side—roughly $100 million less. Third, inventory—the bulk of the reduction is going to come in the second half, and typically our best free cash flow period is Q4. Those are the three main drivers: incremental EBITDA, lower net rental CapEx, and working capital unlock. Analyst: Okay. Wonderful. Chris, thank you so much. Ryan, best of luck as well. Operator: There are no further questions at this time. We have reached the end of the Q&A session. I will now turn the call back to Ryan McMonagle for closing remarks. Ryan McMonagle: Thanks, everyone, for your time today and your interest in Custom Truck One Source, Inc. We appreciate the continued engagement and look forward to updating you next quarter. In the meantime, please do not hesitate to reach out with any questions. Thank you again, and have a great day. Operator: This concludes today's call. Thank you for attending. You may now disconnect.
Operator: Good morning, and thank you for standing by. Welcome to the ArcBest Corporation First Quarter 2026 Earnings Conference Call. During the presentation, all participants will be in a listen-only mode. Afterwards, we will conduct a question-and-answer session. As a reminder, this call is being recorded. I will now turn it over to Amy Mendenhall, vice president, treasury and investor relations. Please go ahead. Amy Mendenhall: Good morning. I am here today with Seth K. Runser, our president and CEO, and J. Matthew Beasley, our chief financial officer. Other members of our executive leadership team will also be available during the Q&A session. Before we begin, please note that some of the comments we make today include forward-looking statements. These statements are subject to risks and uncertainties, which are detailed in the forward-looking statements section of our earnings release and SEC filings. To provide meaningful comparisons, we will also discuss certain non-GAAP financial measures that are outlined and described in the tables of our earnings release. Reconciliations of GAAP to non-GAAP measures are provided in the additional information section of the presentation slides. You can access the conference call slide deck on our website at arcb.com and in our 8-K filed earlier this morning, or follow along on the webcast. And now I will turn the call over to Seth. Seth K. Runser: Thank you, Amy, and good morning, everyone. The first quarter brought a challenging operating environment with severe winter weather, higher fuel prices, and continued uncertainty. Even so, we remain focused on what we can control: executing our long-term strategy with discipline and advancing initiatives that support profitable growth, efficiency, and innovation. I am incredibly proud of how the ArcBest Corporation team responded in a dynamic environment. They stayed disciplined, remained close to our customers, and continued delivering flexible, efficient, and integrated solutions to meet evolving needs. Customer demand has remained steady, and we continue to see improvement in our pipeline. While the timing and pace of a broader recovery remains hard to predict, conditions are becoming more constructive. Leading indicators of manufacturing activity have moved into expansion, which is supportive of future freight demand. At the same time, truckload markets are showing early signs of tightening as capacity continues to exit the industry, driven in part by regulatory enforcement and higher operating costs. In our customer conversations, there is an increasing emphasis on execution, reliability, and visibility, and those priorities align closely with how ArcBest Corporation serves its customers. Against that backdrop, we will launch ArcBestView in May. This platform enables customers to quote, book, and track shipments across our logistics solutions through a single intuitive interface. We developed ArcBestView in close partnership with customers, and early feedback has been very encouraging. Combined with our integrated solutions and continued progress in our digital capabilities, this platform enhances our ability to help customers respond quickly, manage complexity, and build more resilient supply chains. Importantly, this launch reflects a broader set of capabilities we have been intentionally building over time. Our investments in the network, technology, and operating tools have strengthened execution today while expanding what we can deliver for customers going forward. We continue to advance the initiatives we outlined at Investor Day, and our team remains focused and aligned on achieving our long-term targets. Let me walk you through our progress for the quarter. In the Asset-Based segment, daily shipments increased 2% year over year to nearly 20,000 shipments per day. While severe winter weather affected volumes and service earlier in the quarter, service has since normalized and remains at a high level. The investments we have made in our network, equipment, and labor planning tools position us to sustain strong, consistent service through the summer months and across the balance of the year. We also remain disciplined on pricing. Deferred price increases averaged 6% in the first quarter, our strongest result since 2022. That reflects our continued focus on revenue quality. In addition, the expansion of our dynamic quote pool has given us greater ability to make real-time pricing decisions, allowing us to be more selective and further optimize yield and profitability. Demand for our Managed Solutions offering continued to build during the quarter, resulting in another record performance and double-digit growth in daily shipments. This momentum reflects a stronger pipeline, deeper customer engagement, and the value our team brings as they help customers manage increasingly complex supply chains. In truckload, we remain focused on optimizing freight mix and maintaining pricing discipline. Revenue per shipment improved meaningfully both year over year and sequentially, driven by a tighter capacity market, higher fuel prices, and improved yield quality. Across the business, we continue to make progress on efficiency and innovation initiatives. Continuous improvement training has now been implemented across approximately 75% of the network. Teams are focused on process discipline, safety, and adoption of new tools, and that work is producing tangible results. To date, these efforts have generated $32 million in annualized cost savings, with additional benefits expected as implementation continues through the remainder of the year. We are also making meaningful progress with our city route optimization project and remain on track to complete the latest phases of deployment. This AI-enabled initiative is reducing manual work, improving route planning, and increasing asset utilization across the network. Phases two and three are expected to be fully operational in the coming months. To date, the program has delivered $15 million in annualized savings while also improving network efficiency and service. The success we are seeing with city route optimization reflects a broader philosophy at ArcBest Corporation. We start with strong ideas, test them in the business, learn quickly, refine what works, and then scale with discipline. That approach is shaping how we deploy AI and is guiding the next wave of initiatives across our technology roadmap. Our AI strategy is deliberate and closely aligned with our business priorities. We are deploying AI where it can create meaningful operational and financial benefits, and we are embedding AI capabilities in the core initiatives across the organization. Just as important, we are not forcing a single solution across a complex business. Instead, we are applying the right tools for the right needs. This approach allows us to move with speed and purpose while maintaining the governance required to ensure these solutions are secure, responsible, and scalable. We believe AI delivers the most value when it strengthens our people and enables better decision-making. Our approach is practical and disciplined. We are investing in initiatives with clear return, partnering externally where it accelerates progress, and combining advanced technology with the network, processes, and expertise that already differentiate ArcBest Corporation. Most importantly, our customers remain at the center of this work. Digital tools are helping us serve them better, while the expertise, responsiveness, and reliability they expect from ArcBest Corporation remain unchanged. Across our technology roadmap, including AI-driven initiatives, we are aligning resources, simplifying processes, and using data more effectively to help offset inflationary cost pressures, improve decision-making, and lower our cost to serve. That work is driving meaningful productivity gains across the business. In Asset-Light, for example, we continue to improve how we manage and optimize buy rates, particularly as market conditions shift. Initiatives such as offer collection, automated negotiation, and capacity sourcing augmentation are enabling faster, more informed decisions. Taken together, our technology and AI initiatives are strengthening our business. They are improving how we work, enhancing operational performance, and helping ArcBest Corporation execute effectively today while building for the long term. Looking ahead, we remain focused on removing barriers and simplifying how work gets done across the organization. That means enabling teams to collaborate more effectively, move faster, and stay focused on what matters most to our customers. As we continue to align and streamline our operation, we are strengthening our execution today and building a more agile, scalable ArcBest Corporation for the future. With that, I will turn the call over to Matt to walk through the financial results. J. Matthew Beasley: Thank you, Seth. Good morning, everyone. In the first quarter, disciplined execution, operational focus, and cost control enabled us to navigate the challenging environment while continuing to position the business for long-term success. On a consolidated basis, first quarter revenue was $1 billion, up 3% year over year. Non-GAAP operating income was $13 million, compared to $17 million in the prior-year period. Adjusted earnings per share were $0.32, compared to $0.51 in 2025. At the segment level, Asset-Based operating income declined by $9 million year over year, while Asset-Light generated non-GAAP operating income of $3 million, an improvement of $4 million from last year. Turning to the Asset-Based segment. First quarter revenue was $655 million, up 2% on a per-day basis. The ABS operating ratio was 97.3%, which was 140 basis points higher than last year and 110 basis points higher sequentially. Daily tonnage increased 7%, reflecting a 2% increase in shipments per day and a 5% increase in weight per shipment. Our large and growing digital quote pool continues to improve our visibility into demand and expand our options within the network. That has allowed us to target certain heavier shipments that fit well operationally and generate attractive incremental profit contributions. Revenue per shipment increased slightly, supported by the higher weight per shipment, but that was partially offset by a 4% decline in revenue per hundredweight, which primarily reflects the shift in freight profile toward heavier shipments. On the cost side, operating expenses increased for several reasons, including additional labor needed to support shipment growth, annual contract increases in union wage rates, higher fuel prices, and increased depreciation expense associated with our equipment investment. Turning to trends so far in April, shipments per day are down 1% year over year, while weight per shipment is up 6%, resulting in daily tonnage growth of 5%. We are beginning to see modest improvement in truckload-rated shipments which, along with other changes in freight profile, is contributing to the higher weight per shipment. Revenue per shipment in April has increased 10% year over year, driven by the heavier freight profile and a 4% increase in revenue per hundredweight, largely reflecting higher fuel surcharge revenue. Excluding fuel surcharge, revenue per hundredweight declined in the low single digits, primarily due to changes in freight profile. Sequentially, from March to April, weight per shipment is flat, shipments per day are up 1%, and tonnage per day is also up 1%. Revenue per shipment has improved by about 4%, due to a 4% increase in revenue per hundredweight, largely reflecting higher fuel costs. Excluding fuel surcharge revenue, revenue per hundredweight was slightly positive on a sequential basis. Fuel impacts became more pronounced in April than they were in the first quarter, which included only one month of elevated fuel prices. Higher fuel costs increased fuel surcharge revenue, but they also raise operating costs for us across the network. While our fuel surcharge mechanisms are designed to recover higher fuel costs over time, periods of rapid fuel price movement can create short-term timing differences between when revenue is recognized and when those costs are incurred. Historically, ABF’s non-GAAP operating ratio improved by approximately 350 basis points from the first quarter to the second quarter. Based on current trends, we expect second-quarter performance to improve sequentially by approximately 400 to 500 basis points. This outlook reflects continued momentum in our commercial pipeline, disciplined execution on pricing initiatives, and the impact of recent fuel price movements. Turning to the Asset-Light segment. First quarter revenue was $378 million, up 7% on a daily basis year over year. Shipments per day increased 10% and reached a new first-quarter record, as strong growth in Managed Solutions more than offset our strategic reduction of less-profitable truckload volumes. Revenue per shipment declined 3% as higher rates associated with tightening capacity and increased fuel costs were more than offset by a greater mix of managed business, which typically involves smaller shipment sizes and lower revenue per shipment. We also made meaningful progress on the cost side. Selling, general, and administrative expense per shipment declined 15% to the lowest level on record, driven by productivity initiatives and a higher mix of managed business, which carries a lower cost to serve. Employee productivity also reached a record high, with shipments per person per day increasing 26%. As a result, the Asset-Light segment delivered non-GAAP operating income of $3 million in the first quarter. Turning to April trends for Asset-Light. Daily revenue is up approximately 24% year over year, driven by 17% shipment growth led by our managed business. Revenue per shipment has increased 7%, reflecting higher fuel costs and early signs of tightening capacity in the truckload market. Looking ahead, we expect second-quarter non-GAAP operating income in Asset-Light to be in the range of approximately $1 million to $3 million. This outlook reflects continued yield discipline, active cost management, and improved productivity performance, which together provide a solid foundation for long-term profitable growth. Turning to capital allocation. We continue to take a balanced, long-term approach that supports growth while maintaining strong financial discipline. Many of the network, technology, and productivity investments needed to support future growth are already in place. As market conditions improve, we believe the business is well positioned to benefit from improving demand without a meaningful increase in capital requirements, which should support attractive returns on invested capital. Returning capital to shareholders remains an important priority. In 2026, we returned more than $10 million through a combination of share repurchases and dividends. Looking ahead, we expect to remain opportunistic with repurchases based on share price while continuing to prioritize high-return organic investments and a disciplined approach to leverage. Our balance sheet remains a significant strength. We have ample liquidity and a net debt to EBITDA ratio that is well below the S&P 500 average. This financial position provides flexibility to navigate uncertainty, invest where we see attractive returns, and respond quickly as opportunities emerge. As Seth said, we are staying focused on what we can control—executing our long-term strategy with discipline and advancing initiatives that support profitable growth, efficiency, and innovation. As we look ahead, we remain confident in our strategic direction and in our ability to deliver the long-term targets we outlined at Investor Day. We will now open the call for questions. Operator: As a reminder, if you would like to ask a question during this time, simply press star followed by the number one on your telephone keypad. You will be limited to one question per participant. Your first question comes from the line of Ravi Shanker from Morgan Stanley. Your line is live. Ravi Shanker: Great. Thanks. Good morning, everyone. At the top of the call you said you are seeing conditions becoming more constructive. Can you help unpack that a little bit—which end markets, maybe which parts of the country you are seeing that? And do you expect that to be fairly broad-based through the course of the year? Seth K. Runser: Hey, Ravi. Thanks for the question, and good morning. We are seeing demand trends that have started to stabilize, though overall levels still remain below mid-cycle norms. Manufacturing and housing continue to pressure our volumes like we have talked about in the past, particularly around weight per shipment, which remains below normalized levels for the network. Despite these headwinds, we grew shipments by 2% in Asset-Based year over year, and our dynamic shipments are starting to trend heavier as well, reflecting improving freight selection. April tonnage and shipments have also increased sequentially and tracked in line with normal seasonality, which is an encouraging sign as we move through the rest of the year. Our focus is on pricing discipline, service consistency, and cost control, while staying closely engaged with our customers during this volatile time with fuel prices and everything that is going on. Capacity fundamentals continue to move in a more constructive direction and provide the earliest sign of a more balanced market ahead. You have heard about ongoing truckload carrier exits, a tighter regulatory environment, and aging industry fleets—which makes me happy that we have invested in our fleet throughout this cycle. While the timing of the demand inflection remains uncertain, the supply rationalization is progressing. Manufacturing PMI has moved into expansion territory these past three months, an important directional indicator for freight demand. Housing and automotive are still constrained but could improve if we get rate cuts later this year. As conditions normalize, our available network capacity, strong customer relationships, and pipeline position us well to capture incremental demand efficiently and effectively. I have spent a lot of time with customers over the last three months, and it is clear they are gravitating towards partners they trust—organizations that can bring consistency, insight, and stability during rapid change. We view markets like this as an opportunity, and we have made purposeful investments throughout this cycle to ensure we are positioned ahead of the next inflection. In short, we are investing, listening, and executing—delivering value for our customers and shareholders regardless of the broader environment. Operator: Your next question comes from the line of Chris Wetherbee from Wells Fargo. Your line is live. Christian F. Wetherbee: Hey. Thanks. Good morning. I wanted to pick up on some of the comments you made about TL-rated shipments and the broader truckload market—what it might mean in terms of volume shifting back over. It seems like on the margin you are seeing that. You noted regulatory tightening moving in your favor. As you think about the rest of the year beyond what you have seen so far in April, what does that opportunity look like? What would you expect to see in terms of a tailwind from a volume standpoint? Seth K. Runser: Hey, Chris. Seth here. I will talk through the truckload side, and then Eddie can make some comments on truckload-rated business moving into Asset-Based. On the truckload side, most enterprise shippers are responding positively and granting increases where needed because they are seeing what is going on with capacity. We have seen a shift to shorter-term rate increases as well as mini-bids to mitigate our spot exposure while maintaining the service that our customers expect. Demand is more stable, but supply constraints continue due to increased costs and regulatory pressure. Spot rates are currently exceeding contract by 15% to 20%. Normalized for fuel, we saw contract increases in the low- to mid-single digits in the first quarter year over year, and we expect low- to mid-double-digit increases as we move through the second and third quarters—this is on the truckload side. Moving forward, we will continue to optimize our truckload volumes, bring on profitable new business, and shed business that we cannot profitably execute. I have been really impressed by the team—Asset-Light delivered $3 million in profitability in the first quarter, versus $1.5 million for all of 2025. I will turn it over to Eddie to talk about truckload-rated shipments moving into the Asset-Based network. Eddie Sorg: Yeah, Chris. This is Eddie. We have seen tighter truckload capacity producing higher spot rates, and combined with higher fuel prices, we are starting to see early signs of business push into our integrated logistics solutions and LTL. The first signs are in our transactional markets—we are up to over 250 thousand quotes a day—so we get early visibility into potential spillover from truckload to LTL. It is giving us a great opportunity to find the highest-quality revenue in those opportunities and then deploy dynamic pricing or one of our volume quote facilities to capture that business where it makes sense in our network. I would not say it is a robust spillover yet, but there are early signs of some of that coming back to LTL and our integrated logistics offerings. Operator: Your next question comes from the line of Jason Seidl from TD Cowen. Your line is live. Jason H. Seidl: Thanks, operator. Good morning, gentlemen. I wanted to talk about your comment that we are not yet near mid-cycle. You are clearly getting much better pricing right now, which is pretty impressive. As we move towards mid-cycle demand, where do you see pricing going, all else being equal, in the truckload space? Seth K. Runser: Hey, Jason. Good morning. Core LTL pricing continues to improve, supported by a rational market and the disciplined actions we have taken despite the softer environment. We expect that discipline to hold as market conditions evolve. Deferred contract renewals increased 6% in the quarter—our strongest result since 2022—and that reinforces the confidence and durability of our core customer relationships. Customers are still with us; they are just shipping less. As volumes recover and capacity tightens, we expect pricing discipline to persist and ultimately translate into further rate improvement. As volume improves, we also expect more core business from our current customers. Our strategy for dynamic quoted freight is unchanged, but its effectiveness improves as the quote pool expands. A larger quote pool gives us more selection within the targeted freight universe, allowing us to choose what fits best in our network to deliver high-quality pricing and profitability. Those shipments have trended heavier as the pool has expanded over the past six months. As optionality increases, we get better pricing. Our core pipeline continues to strengthen, and as we get new wins, we gain flexibility to optimize mix and maximize incremental profit contribution. We have a long history of pricing discipline and evaluate books of business based on how each account performs in the network—not a single pricing metric. We remain focused on profitable growth, ensuring we are properly paid for the value we deliver. We continue to make targeted investments in service and efficiency to enhance the customer value proposition while improving our cost structure. ArcBestView rolling out in May is another example. Feedback has been great, and we will continue to serve customers efficiently with pricing discipline through the cycle. Operator: Your next question comes from the line of Scott Group from Wolfe Research. Your line is live. Scott H. Group: Hey. Thanks. Good morning. With the OR guide for Q2 outperforming seasonality, can you add color on what is driving that—how much is flow-through from fuel versus tonnage getting better? And on fuel, in prior big diesel increases we have typically seen a bigger spike in revenue per shipment and revenue per hundredweight. Is there anything different about how we should think about fuel for you right now? J. Matthew Beasley: Hey, Scott. As we think about first quarter moving to second quarter, the outperformance versus what we would expect is broad-based. If you look at revenue per day, shipments per day, daily tonnage, weight per shipment, revenue per hundredweight—across all of those, our current projection for the second quarter is outperforming the ten-year history. Fuel was a factor in the first quarter given volatility, and we still would have been within our guidance range even without the fuel changes. Fuel changes are not the primary driver of the second-quarter outperformance. They are a contributor, but the strength across the business—both on the commercial side and on the yield side—is driving the sequential OR performance. Historically we see around 350 basis points of improvement moving from the first to the second quarter, but when you take into account the strength across revenue, shipments, tonnage, weight per shipment, and pricing, that puts us in the 400 to 500 basis points of improvement we are projecting. Operator: Your next question comes from the line of Jordan Alliger from Goldman Sachs. Your line is live. Jordan Robert Alliger: Hi. Morning. I wanted to come back to weight per shipment. You have mentioned your changing freight profile and mix is a big part of it. Historically, weight per shipment has often been correlated to improvement in the economy. Is some part of the weight per shipment strength you are seeing—even into April—related to the economy, or is it truly just mix shift? Seth K. Runser: Hey, Jordan. Good morning. Our weight per shipment on core business is still impacted by the softer manufacturing economy, which can cause shippers to reduce shipment size. Our retention is in a great place, and we are starting to see core produce more. Dynamic shipments have been trending heavier, which impacts weight per shipment and is a direct result of expanding the quote pool—it allows us to be more selective in real time, optimizing yield, network, profile, and profitability. That increased visibility and optionality allow us to accept certain heavier shipments that fit well within our network. In April, year-over-year weight per shipment is up about 6%, impacted by heavier dynamic shipments and a bit of truckload-rated shipments that Eddie mentioned earlier. We are beginning to see modest improvements, but it is still early. As a reminder, we are impacted a bit more than others on weight per shipment because our U-Pack service ties to the housing market. With housing where it is and interest rates elevated, it has resulted in fewer household goods moves—generally smaller in shipment count but heavier in nature. Normally, from first to second quarter, we see U-Pack improve, but it is still below historical norms, leaving operating leverage. We believe more truckload freight will move back into LTL as capacity normalizes in truckload, and our managed pipeline continues to grow. As managed grows, it feeds other service lines and we can select the best freight for the network. We have been through many cycles. There is still uncertainty, but I am proud of the team’s execution, customer engagement, and pricing discipline. We are built for any environment, and customers appreciate partnering with us when fuel moves up or capacity tightens. We focus on saying “yes” and delivering. Operator: Your next question comes from the line of Bruce Chan from Stifel. Your line is live. J. Bruce Chan: Thanks, operator, and good morning. On the Asset-Light business, you have been focused on productivity. It seems like a good chunk is coming from the mix of managed business. Assuming we are kicking off the cycle here, how are you thinking about shipment growth and the need for additional headcount in truck brokerage? And what is the spot versus contract mix there? Seth K. Runser: Hey, Bruce. I am really proud of the team for delivering $3 million in non-GAAP operating income in the first quarter—versus $1.5 million for all of 2025. We are encouraged by continued truckload capacity exits. We saw strong shipment growth led by Managed, which had another record quarter, reflecting investments we have made to position Managed as a truly integrated logistics company. Operating expenses were lower, and we ended with record-high productivity in Asset-Light and record-low SG&A cost per shipment, all contributing to improved productivity. This comes from technology investments to grow without adding headcount and developing our employees to be ready for the next cycle. Shipments and revenue are strengthening in April—we noted our operating income range of $1 to $3 million for Q2 in our 8-K. We continue to align costs and resources to business levels. I am also excited that Mac has three months under his belt; he has been a huge addition. We are improving profitability of our account base and focused on productivity with technology deployments—we are still in the early stages of a lot of that. J. Matthew Beasley: And, Bruce, on spot versus contract mix, over the last year it has been roughly a 50/50 split, and that is the level we saw as we moved through the first quarter as well. Operator: Your next question comes from the line of Tom Wadewitz from UBS Financial. Your line is live. Thomas Richard Wadewitz: Great. Good morning. Circling back on LTL pricing. In 2Q, revenue per shipment sounds like it is up nicely in April, but it also sounds like a lot of that is fuel. What is the lag we should consider with the stronger 6% contract renewals and also weight per shipment? Ex-fuel revenue per shipment sounded flattish in April versus March. When do we see improvement in ex-fuel revenue per shipment? Seth K. Runser: Thanks, Tom. Fuel surcharge is one component of pricing and generally protects us as fuel prices increase and helps customers as prices decrease. Fuel surcharge covers more than just over-the-road fuel—there is propane for forklifts, rail, purchase transportation, and other costs—so it is not just on the freight we move. Eddie can talk about yield and timing. Eddie Sorg: From a yield perspective, we really sharpened focus in the second half of last year, and we had a strong result in the first quarter with over 6% increases. We are building to a better overall mix in core LTL. With fuel moving up, it brings higher revenue but also higher cost, and the timing between fuel surcharge collections and underlying costs can make it harder to see the benefit in the near term. Overall, we feel good about the mix of business and our yield discipline. We are committed to continuing to improve LTL pricing. Confidence comes from strong growth in 2025 that is continuing in 2026, a robust sales pipeline—especially in Managed Solutions—and our expanding quote pool, which lets us further adjust business mix to secure the most profitable freight for our systems and network. Even if fuel moves up or down, the yield fundamentals remain strong. Operator: Your next question comes from the line of Brian Ossenbeck from JPMorgan. Your line is live. Brian Patrick Ossenbeck: Good morning. Thanks for taking the question. On recent headlines in truckload brokerage—the risks of chameleon carriers, the Montgomery case, and potential extension of safety or liability risk to brokers—are you doing anything with your carrier base based on these headlines and potential regulatory or Supreme Court outcomes? And if liability is extended to brokers, what does that do for the industry? Seth K. Runser: Thanks, Brian. Safety has always been fundamental to how ArcBest Corporation operates. While recent media attention has focused on specific situations, we remain focused on disciplined execution and consistent operating practices aligned with applicable laws and regulations. We use a structured, compliance-based process to select and monitor third-party carriers, with ongoing visibility into authority, insurance, and safety status. Carriers that do not meet requirements are not eligible to move freight for us. The FMCSA provides the national regulatory framework for carrier safety; we operate within that and invest in systems and processes to support disciplined risk management and operational consistency. At this time, we do not expect these developments to change our outlook or approach to safety and compliance—it is already embedded in how we run the business. Customers expect us to operate safely and responsibly, and we maintain open, constructive dialogue to support their long-term goals. Regarding capacity, continued truckload exits due to bankruptcies and regulatory pressures—along with developments like Delilah’s Law and issues around non-domiciled CDLs—are constraining supply. We focus on what we can control and partner with customers to navigate uncertainty. With service in a great place, we feel positioned to lead and capture opportunities. Operator: Your next question comes from the line of Stephanie Moore from Jefferies. Your line is live. Stephanie Benjamin Moore: Hi. Good morning. I wanted to talk about your 2028 targets. When you originally gave those targets, the macro was in a different position than it seems to be today. Can you talk about progress toward those targets with a firmer freight environment and how you are thinking about them now? Seth K. Runser: Hi, Stephanie. We have confidence in our long-term view and the targets we outlined at Investor Day. We did not expect a significant freight recovery in 2026 within those targets, so some of what we are seeing now is earlier than anticipated, but we still need more consistent demand. We are encouraged by truckload exits and three positive months of PMI readings. Geopolitical risk and higher fuel could impact inflation and rates, but supply-side effects are visible, and we are watching for further demand inflection. Across Asset-Based and Asset-Light, our focus is building a scalable, disciplined operation to fully capitalize on our initiatives and operating leverage. Over the past several years, we invested in network, technology, and productivity, and remained disciplined on pricing. As the market improves, we expect those investments to translate into greater network density, better utilization of excess capacity, and more freight per stop, allowing incremental volume to flow through resources already in place. At Investor Day, we outlined earnings potential as the market inflects. In Asset-Based, we modeled about 100 basis points of non-GAAP OR improvement versus 2024, with upside up to 280 basis points if industrial production returns to trend, housing normalizes, and truckload spot rates improve. In Asset-Light, we modeled a $10 million improvement in expedite and a $75 increase of net revenue per shipment per year, with upside of up to $30 million as expedite manufacturing recovers and truckload rates normalize. In truckload brokerage, every $10 of margin per shipment expansion equates to $3.5 million of incremental profit. As volumes inflect, we expect incremental margin to improve, and we feel good that we are on pace to achieve our long-term goals. Operator: Your next question comes from the line of Ari Rosa from Citigroup. Your line is live. Ariel Rosa: Hi. Good morning. The connection was not great there, so I may have missed a little bit earlier. Seth, you have now been in the CEO seat for a few months. The business is not new to you, but I would love to get your reflections after a few months—how you are thinking about potentially doing things differently from how Judy was running the business. You have the long-term targets, but broaden that out—how are you thinking about managing the business, and what objectives might differ from your predecessor? Seth K. Runser: Thanks, Ari, and good morning. I believe in our company’s strategy and our ability to achieve the long-term targets we outlined at Investor Day in September. I always go back to the customer. In my conversations, our solutions resonate. We differentiate as a logistics partner with assets, which is different from much of the competition. By finding ways to say “yes,” we believe we will drive greater revenue, profit, and account retention. I have been focused on optimizing our sales resources, putting people in the best position to succeed, win and grow business, and deepen long-term relationships. We continue to optimize our cost structure and improve customer experience. When ArcBestView launches in May, it will be differentiated and allow customers to self-serve key information. In my first three months, I believe accelerating our strategy will drive sustained value creation. The environment has been unpredictable for years, but I am confident: our strategy is sound; we navigated the downturn well; we have significant operating leverage when the market turns. This team focuses on what it can control and views these times as opportunities. We have positioned for growth and margin expansion with investments in Asset-Based, technology, and productivity. Our pipeline is strong; new business and cross-selling are accelerating; tech-enabled initiatives are progressing faster, and we continue to win external awards that validate the strategy. My goal is to accelerate our progress. None of this is possible without our people—I spend a lot of time with employees and could not be more proud. We are positioned to deliver on our long-term targets, deliver value for customers, and translate that into shareholder value creation. Operator: Your final question comes from the line of Ken Hoexter from Bank of America. Your line is live. Kenneth Scott Hoexter: Great. Good morning, Seth and Matt. I want to talk about the stickiness of the dynamic freight. In the past, you had too much, and as you wanted to switch to your own capacity, it was tougher. Do you have a newer process that enables more fluidity? Maybe talk about excess capacity now. And given the rising ISM, when do you see that shipment growth? Are others being more competitive and impacting shipments near term? Seth K. Runser: Thanks, Ken. Our business is primarily core, and that is where we spend most of our time. The dynamic mix has changed due to growth in the quote pool; the actual shipment count we target is relatively consistent, but with a bigger quote pool we can optimize the network. We optimize mix daily based on profit maximization, current market prices, and available capacity. As capacity tightens, we expect our optionality to improve. Since the inception of Dynamic, as the quote pool has expanded, our revenue per shipment has improved over 50%. Our peers often use 3PLs to make those adjustments—we are the 3PL with assets, which improves optionality for customers. On excess capacity and ability to scale, we think in three buckets: people, equipment, and real estate. On people, we have invested in labor planning tools and feel positioned for strong service through the summer and the remainder of the year. We have one of the newest fleets on the road due to disciplined investment through the cycle. On real estate, we have added over $800 to the network, with enhancements ongoing. As optimization efforts improve productivity, when volumes inflect we will need to recruit fewer people, which allows us to say “yes” to customers. Operator: That concludes the question-and-answer session. I would now like to turn the call over to Amy Mendenhall for closing remarks. Amy Mendenhall: Thank you to everyone for joining us today. We certainly appreciate your interest in ArcBest Corporation and hope everyone has a great day. Operator: That concludes today’s meeting. You may now disconnect.