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Operator: Good day, and thank you for standing by. Welcome to Norwood Financial Corp. First Quarter 2026 Earnings Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. To ask a question during the session, you will need to press star 11 on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star 11 again. Be advised that today’s conference is being recorded. I would now like to hand the conference over to Mackenzie Jackson, Corporate Secretary. Please go ahead. Mackenzie Jackson: Thank you, Liz. Good morning, everyone, and welcome to our first quarter 2026 earnings conference call. With me today are James Donnelly, our President and CEO, and John McCaffery, our CFO. The press release we issued earlier this morning, together with presentation material that accompanies our remarks, are available on the Investor Relations section of our webpage. Comments made by any participant on today’s call may include forward-looking statements. These statements are subject to various risks, uncertainties, and other factors that are difficult to predict. Actual results may differ materially from those expressed or implied, and we assume no obligation to update any forward-looking information. Please refer to our most recent Form 10-Ks and other subsequent reports filed with the SEC for more information about risks related to forward-looking statements. During our discussion, we may refer to certain non-GAAP financial measures. These measures are useful for analysts, investors, and management to evaluate ongoing performance. A reconciliation of these measures to GAAP financial results is provided in our presentation materials. I will now turn the call over to James Donnelly. James Donnelly: Good morning, everyone. We began 2026 with strong performance, extending the momentum we began to build last year. This was the first quarter that included results from the Presence Bank acquisition, increasing our assets, loan portfolio, geographic presence, and earnings power. I am proud of our team’s ability to focus on our mission to make every day better by serving our customers and communities while making significant progress on our integration activities. Net interest income was a record 24.6 million, an increase of 38% compared with 2025. Net interest margin expanded by 38 basis points to 3.68%. It was a great quarter for the bank as we benefited from our repositioned bond portfolio and favorable interest rate movement. Net income and earnings per share increased 35% and 14%, respectively, on an adjusted basis, with higher adjusted returns on average assets and tangible equity. I am pleased with our first quarter performance and remain optimistic that 2026 will be a great year for the bank. During our fourth quarter earnings call, I introduced our 2026 strategic priorities. I would like to provide you with an update on these. The first priority is to successfully complete the Presence Bank integration. I am pleased to report that we are on plan with these activities. Our plans include driving uniform systems and operating practices across the new combined entity, uniting the acquired businesses and branches under our new brand, and engaging in open conversations across our locations and functions to identify and adopt best-in-class policies that will enable us to better serve our communities while improving our results. Among our early accomplishments is the completion of our core integration and unifying our IT and HR systems. We have also begun the work of unifying all acquired locations under our brand, including signage, logos, and other branded materials to drive consistency and unity across our organization. The integration requires a lot of planning, organization, and execution across sites and functions to complete. While we have been actively integrating the systems, we have not taken our eye off serving our customers and communities, which has resulted in impressive loan and deposit growth during the same period. I am proud of our team for going above and beyond to ensure our integration plans are being accomplished and for taking great care of our customers while doing so. Our second strategic priority is to increase operating efficiency and elevate the customer experience through AI. This is an area where we are implementing best practices from Presence Bank and deploying their developed systems and processes across the combined organization. One item I am really excited about is the commercial credit system, which we will integrate in July. This uses embedded AI and machine learning to enhance the productivity of our talented credit officers by bringing automation, speed, and quality to the process. For example, automatic spreading will allow our credit analysts to save time, better reporting will provide our credit officers with helpful insights to make informed decisions, and the ability to draft credit memos will improve the speed and quality of the documentation process. These benefits will enable our employees to perform higher-value functions as well as underwrite deals more quickly to improve deal flow. Our third objective is to strengthen the talent pool and deepen our leadership bench. As I have met with our employees across the sites, including the newly added sites in Chester, Lancaster, and Dauphin Counties, I am continually reminded of the great team we have, and I firmly believe our key to success is our people. They are dedicated to serving the communities and working hard to find ways to make every day better. The team became bigger and stronger during the quarter as we welcomed the former Presence Bank employees to our organization, including additions to our executive leadership team. I am confident that together, we can continue to deliver financial solutions that improve the lives of our customers, allowing them to achieve their financial goals. Our fourth and final priority is to ensure everything we do increases shareholder value. The results we reported today demonstrate how we have accomplished this during the quarter, a culmination of our performance in Q1 and actions taken in previous periods, including the portfolio rebalancing we completed in 2024. The first three priorities I have reviewed position us to create even more value in future periods. One shining example of how we are creating value for shareholders is through our recent acquisition. Not only did the transaction bring immediate and meaningful growth to our bank, but we are also realizing the strategic and financial benefits of our acquisition more quickly than planned. One demonstration of this is that we now expect accretion to shareholder value ahead of our original projections. As a result of the quality of the Presence Bank team and assets, plus interest rates that have moved in our favor, we anticipate the tangible book value payback to occur more quickly than planned. After only one quarter since we closed the acquisition, it is obvious that we acquired a solid business with high-quality credit metrics and an excellent team, including several talented executives that have joined the Wayne Bank team, demonstrating their confidence in our joint future. The strong strategic fit and cultural alignment is contributing to our early success. I am encouraged by our initial progress and even more optimistic about our future and ability to generate meaningful and lasting shareholder value. I will now turn the call over to John to walk us through the results. John McCaffery: Thank you, Jim. Good morning, everyone. In the first quarter, we delivered improved financial results on an adjusted basis, continuing to benefit from our repositioned balance sheet and the outstanding performance of the entire Norwood Financial Corp. team. It was a great start to the year, continuing the momentum from 2025. We achieved record net interest income, increasing 3 million on a linked quarter basis due to higher interest-earning assets. Margin improved 8 basis points due to a slight decline in deposit costs coupled with a 7 basis point increase in interest-earning asset yields. Below the margin line, our quarterly results continue to include merger charges. We had about 5 million in merger charges in the quarter. We provided adjusted returns in the press release to show you performance ratios excluding these expenses. We are also providing pre-provision net revenue across the entire span of the press release. Provision was higher in Q1 versus 2025. Part of the increase was the result of annual updating of historical factors in the model as well as the integration of the Presence Bank portfolio. Our coverage ratio stands at 1.09%, compared to 1.07% at year-end. I will also note that we elected to adopt early ASU 2025-8 and therefore did not experience a CECL double count on the acquired non-PCD loans. Adjusted pre-provision net revenue was up about 11% on a linked quarter basis, mostly due to the improved margin on a larger balance sheet, offset by higher expenses. Noninterest income increased compared to the same period last year due to higher service charges and debit card income. Quarterly expenses were up as a percent of average assets compared to Q4 2025. Most of this increase is technology-related, as we are investing in new systems that will ultimately drive efficiency in the future. On that note, I would like to give a shout-out to the finance team that implemented a new accounting system while executing a merger and a core conversion. The first quarter was a transition period as we integrated the acquisition, with GAAP results impacted by related expenses. On an adjusted basis, we achieved strong growth in net interest income, partially offset by higher expenses. To expand on Jim’s point earlier, growth since January 5: loans grew approximately 46 million, or 8.4% annualized, and deposits grew about 70 million, or 11.6 million on an annualized basis. Overall, we are pleased with our performance and believe that our sound balance sheet management and credit metrics position us well for the future. Jim and I will now be happy to answer any questions you may have. Operator, please provide instructions for asking questions. Operator: If you would like to ask a question at this time, please press star 11 on your telephone and wait for your name to be announced. To withdraw your question, please press star 11 again. Our first question comes from Daniel Cardenas with Brean Capital. Analyst: Good morning, guys. Couple of questions. On the operating expense number that came in this quarter, you said part of that was tech-related. How much was that? And then are all of the tech-related investments made? I am just trying to get a sense for what is a good run rate on operating expenses going forward. John McCaffery: The increase in tech expenses was mostly due to, well, again, we are increasing investments, as Jim mentioned, in the ABRICO system and our new accounting system. So there are ongoing expenses. We tried to exclude all of the conversion and other charges that were one-timers in Q1. So I think for OpEx going forward, the level that we are at is probably a pretty good run rate. Analyst: Okay. On the 16.1 million per quarter, is that where you think things will kind of shake out here? John McCaffery: I would like to see them come down a little bit. Again, we are trying to pull apart how much actually was related to activity during the quarter because of the merger, but I do think we will get efficiencies. I would not drop it below 15.08 million, I think, for the quarter. Analyst: Alright. Thank you. And then on the margin, the 3.68% margin, I probably missed it in the press release, but what was the contribution from yield accretion in the quarter? John McCaffery: The total pretax impact of purchase accounting was 435,000. That is substantially margin-related. There is some for the leases, but that is a minimal amount. So probably about 6 basis points this quarter. Analyst: And on a go-forward basis, what do you think yield accretion will contribute? John McCaffery: On a go-forward basis for the full year of 2026, we are scheduled at about 2.2 million, dropping to about 2 million for 2027, in total margin accretion. Analyst: Got it. And then one more question. The nonperforming number for the quarter, roughly 11 million if I am calculating that correctly. Was that all attributable to the acquisition, or were there other issues in the portfolio? John McCaffery: I do not think there were any nonperforming loans contributed from Presence. So that was mostly us. I am not aware of any large nonperformers that came in. Analyst: Pretty granular increase. Is that mostly on the commercial side? Maybe a little color as to what made up the linked-quarter increase? John McCaffery: Largely commercial. The indirect and consumer portfolios are about the same as the quarter before. We had a little dip in the last quarter on the commercial side, and we came back up to about where we were the previous quarter. I think we leveled off at that amount. Analyst: Okay. I will step back for now. Thank you. Operator: Our next question comes from Matthew Breese with Stephens. Analyst: Hey, good morning. I was hoping maybe to touch on the components of the margin. First, more broadly, I would love some color on competitive conditions around deposits in the Northeast. We have started to hear inklings of maybe some high 3% and low 4% promotional rates. Are you dealing with that? And what are your thoughts around the deposit cost outlook now that it does not seem like we are getting much, if any, rate cuts? John McCaffery: Even into Q1, we were continuing to lower deposit costs based upon the December rate cut. We are not talking about raising any of our specials on CDs at all. In the new markets, I think they are a little more competitive than we are used to up here in Northeast Pennsylvania, but we are not seeing competitive pressure in our markets on deposit pricing yet. James Donnelly: Yes, Matt. We see some spotty stuff. If you dig into why they are doing it, they are people with very high loan-to-deposit ratios or just interesting business strategies sometimes. But we see that we are competitive with our current rates, and we are not seeing a lot of upward pressure. I am still seeing some competitors bringing their rates down. Analyst: Got it. How much more room do you think there is to squeeze deposit costs lower? I look at your CD cost this quarter knocking on 3.6%. Is the blended rate of maturities still in the 3.30% range with some downside? John McCaffery: Most of that is just really churning our specials we have had out there. And there is a push to get our CDs down below 40% of total deposits. We hope that will give us some more levers to push on going forward. We had just a couple basis points drop in some of the deposit categories—just 1 basis point overall. I want to get a better feel for the full portfolio now that we have the deposits in one system. We completed the core conversion on April 5, so getting that kind of data is underway. We are not seeing downward pressure on the lending rates to the level that might be seen elsewhere in the Northeast. I think our ability to squeeze out of the deposits will be smaller than it has been. It is there, but it will be a smaller amount. Analyst: And then on the lending side, same question around competitive conditions. What are new origination yields on the pipeline right now, and how does the pipeline look? John McCaffery: The pipeline is very healthy and has been. Looking ahead 30, 60, 90 days, we are ahead of our general pipeline. Quality is very good. Pricing is in line with our expectations. The closings that we just had averaged 7.05% for the last 18 we booked. Most of the rates coming across are still higher than the portfolio yield, so we think there is still room for some expansion. Analyst: So it sounds like deposit costs are flat to down a little bit, and there is still upward repricing on the loan side. How do you feel like the margin will shake out as we progress through the year? John McCaffery: I think we still have room to expand somewhat. I would not put it at what we experienced in the first quarter, given the different financial ins and outs with the acquisition. If we can get another, let us say, 3 to 5 basis points on loans going forward, I think we can do better. We had some drag on cash in Q1 as well, which we will be able to deploy more easily going forward, given the systems issues. So I think the margin can increase throughout the year. I would not put it at 8 basis points on a linked-quarter basis, but maybe 3 to 5 basis points. Analyst: Great. I appreciate all that. I will stop there. Thank you. Unknown Speaker: Thanks, Matt. Operator: We have a question from Daniel Cardenas with Brean Capital. Analyst: Thanks, guys. Just a couple of quick questions. The margin discussion you just had, John—are you talking 3 to 5 basis points for the remainder of the year, or perhaps over the next couple of quarters? John McCaffery: Over the next couple of quarters. Analyst: Good. And then on the fee income side, nice improvement quarter over quarter. What are some of the drivers that could potentially push that number higher as we look at 2Q and beyond? James Donnelly: Part of it, Dan, is we were an underperformer on debit revenue. We put a strategy in place a couple of years ago and changed the way we were looking at that and promoting it. Part of it is getting more debit cards in more people’s hands and promoting utilization. We have been working on growing our fee income businesses for the last few years, and it is starting to pay dividends. There is lots of room for us to grow there. It is just a matter of making sure that we are able to staff up appropriately to grow our brokerage, trust, and mortgage businesses. Analyst: Okay. James Donnelly: Treasury management is geared up for the second half of the year to do a nice job as well. Analyst: I was just going to ask you about that. Okay. Perfect. Alright. I will step back. Thank you. Unknown Speaker: Thanks, Dan. Operator: That concludes today’s question-and-answer session. I would like to turn the call over to James Donnelly for closing remarks. James Donnelly: Thank you once again for joining us this morning. We made a great start to 2026, continuing the momentum built in 2025 as we live out our mission to help our customers and communities build strong financial futures so that every day, every year, every generation is better than the last. As we continue to integrate the Presence Bank acquisition and benefit from the shared best practices, we will be better positioned to deliver that better future, united to serve our communities. As we move forward, our disciplined approach, high-quality credit metrics, and careful execution enable us to deliver improved financial results and lasting value for our shareholders. I look forward to updating you on our progress. Have a great day. Operator: This concludes today’s conference call. Thank you for participating. You may now disconnect.
Operator: Greetings. Welcome to the Easterly Government Properties, Inc. First Quarter 2026 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session between the company's research analysts and Easterly Government Properties, Inc.'s management team. To ask a question during the session, analysts will need to press 11 on their telephone. They will then hear an automated message advising their hand is raised. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Cole Barterwell, Director of Investor Relations. Please go ahead. Cole Barterwell: Before the call begins, please note that certain statements made during this call may include statements that are not historical facts and are considered forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Although the company believes that its expectations as reflected in any forward-looking statements are reasonable, it can give no assurance that these expectations will be attained or achieved. Furthermore, actual results may differ materially from those described in the forward-looking statements and will be affected by a variety of risks and factors beyond the company's control, including, without limitation, those contained in the company's most recent Form 10 filed with the SEC and in its other SEC filings. The company assumes no obligation to update publicly any forward-looking statements. Additionally, on this conference call, the company may refer to certain non-GAAP financial measures such as funds from operations, core funds from operations, and cash available for distribution. You can find a tabular reconciliation of these non-GAAP financial measures to the most comparable current GAAP numbers in the company's earnings release and separate supplemental information package on the Investor Relations page of the company's website at ir.easterlyreit.com. I will now turn the conference call over to Darrell William Crate, President and CEO of Easterly Government Properties, Inc. Darrell William Crate: Thank you, Cole. Good morning, everyone. We continue to operate in a market defined by volatility, whether it is interest rates, geopolitical uncertainty, or broader capital market disruption. In these environments, investors tend to focus on businesses with durable cash flows, strong tenant credit, and disciplined capital allocation. We believe Easterly Government Properties, Inc. continues to stand out in each of these areas. Our portfolio supports essential government functions that continue regardless of economic cycles or external events. These are facilities tied to critical federal missions, high-credit state and municipal agencies, and select defense-related tenants. The durability of those missions and the strength of those credit relationships continue to provide a stable foundation for our business. Importantly, we believe our portfolio is often misclassified alongside traditional office real estate. That comparison misses the specialized nature of what we own. From our FBI offices in places like El Paso, New Orleans, and Pittsburgh, these facilities include secure, classified environments, SCIFs, and other controlled spaces where sensitive law enforcement and intelligence work is conducted. These are highly tailored facilities with spaces that support agency-specific operations and are difficult to replicate. They serve essential functions, benefit from long-duration leases, and are backed by some of the strongest credit tenants in the world. Against that backdrop, we remain focused on a straightforward strategy: growing earnings steadily, allocating capital thoughtfully, and continuing to improve overall portfolio quality over time. Over the past several years, we have taken deliberate steps to strengthen the company, including leadership transitions, resetting the dividend, and maintaining additional capital internally. These decisions are not always easy, but they position us to enter 2026 from a position of strength, supporting a robust and sustainable dividend while continuing to deliver consistent earnings growth that outperforms our peers. Turning to the quarter, our portfolio continued to perform at a high level. Occupancy continues to outpace our REIT peers at 97%, and weighted average lease terms stood at approximately 9.4 years. These metrics reflect both the quality of our assets and the mission-critical nature of the work taking place inside our buildings. During the quarter, we also completed our first mezzanine investment tied to the development of a new VA outpatient clinic. This transaction reflects how we are thinking about capital allocation in today's environment. While traditional acquisitions remain central to our long-term growth strategy, we are also identifying adjacent opportunities that can generate attractive current returns while preserving future optionality. This investment is expected to deliver a 12% yield, is backed by a committed federal tenant, and allows us to remain connected to an asset that may ultimately fit in our long-term ownership strategy. VA facilities represent one of our largest portfolio exposures—that is by design. These assets are highly specialized, tend to be very sticky, and are backed by the credit quality of the federal government. We were recently at our VA Jacksonville facility, and it was filled with veterans receiving the care and services they need—an important reminder that these are not traditional office buildings, but essential infrastructure supporting a critical mission. We also believe that the administration's increased focus on defense spending represents an additional tailwind for the company, particularly as it relates to external growth opportunities. As we look to the year ahead, we are encouraged by the strength of our first quarter performance and our ability to raise the low end of guidance. While broader market volatility remains, our priorities remain unchanged: disciplined capital allocation, operational execution, and consistent earnings growth. We believe our portfolio offers investors a compelling combination of income stability, long-term growth, and exceptional tenant credit quality. With a leased portfolio that generates a AA+ revenue stream, we look forward to working with the credit agencies on achieving an investment grade rating in 2027. To wrap up, we are pleased with how the year started. We are growing earnings, maintaining strong occupancy, allocating capital thoughtfully, and continuing to improve portfolio quality. We believe that disciplined execution will continue creating long-term value for shareholders. I want to thank our team for their continued focus and execution as well as our tenants and shareholders for their ongoing trust and partnership. With that, I will turn the call over to Allison. Allison E. Marino: Thanks, Darrell, and good morning, everyone. I am pleased to report the financial results for the first quarter of 2026 on this sunny Monday morning. The underlying growth in the business is clear. Total revenue increased to $91.5 million, up from $78.7 million in 2025, a 16% year-over-year increase. This was driven primarily by acquisitions completed over the last twelve months, contractual rent growth, and continued lease stability across the portfolio. EBITDA also grew meaningfully, increasing to $57.3 million from $51.0 million last year, representing approximately 12% growth, reflecting the expanding earnings power of the platform. Most importantly, that growth continued to translate into higher earnings for shareholders on a per-share basis even as we raised capital to support portfolio expansion. On a fully diluted basis, net income per share was $0.03. FFO per share increased to $0.76, up from $0.71, representing approximately 7% growth, while core FFO per share increased to $0.77 from $0.73, or roughly 5.5% growth year over year. Our cash available for distribution was approximately $32.2 million. In terms of our active development projects, we are on track to meet previously communicated timelines. Our Fort Myers, Florida lab project is expected to complete and commence its lease in 2026. That will be followed by the Flagstaff Courthouse in Arizona, which is scheduled to deliver in 2027. Finally, the Medford Courthouse in Oregon is anticipated to complete during 2027. The delivery of these development projects are natural delevering points toward our medium-term cash leverage goals, as the NOI comes online and any agreed-upon lump sums are received. Turning to leverage, our adjusted net debt to annualized quarterly pro forma EBITDA was 7.3x, edging higher during the quarter due primarily to the timing of equity issuance relating to our Commonwealth of Virginia acquisition. Given the share price volatility the broader markets experienced in the first quarter, we elected to defer issuing the majority of that equity, and we expect to complete the issuance by the end of the year. As Darrell mentioned, during the quarter we completed our first mezzanine loan investment, providing $7 million of financing for the development of a new 120 thousand-square-foot VA outpatient clinic in Kennewick, Washington. The loan carries an anticipated 12% yield and supports a 20-year firm term lease commitment from the Department of Veterans Affairs with an expected project completion date of October 2028. The transaction is backed by an experienced VA and GSA developer, SB sponsor, who our team has known for decades and Easterly Government Properties, Inc. has transacted with multiple times. This allows us the opportunity to acquire the property upon completion as well. The investment enables us to generate attractive current returns while remaining closely aligned with assets that fit our long-term portfolio strategy. With the successful closing of the mezzanine loan during the quarter, we are raising the low end of our full-year guidance by $0.10 from $3.5 to $3.6, resulting in a revised full-year range of $3.6 to $3.12. While performance year to date is trending modestly ahead of our initial expectations, we continue to take a disciplined and cautious approach as we evaluate the remainder of the year, particularly given the ongoing uncertainty in the interest rate and broader equity market environment. At the midpoint, our guidance assumes that we will have $50 million to $100 million of gross development-related investment during the year, and $50 million in wholly owned acquisitions. We continue to maintain a $1.5 billion development pipeline, and we are beginning to make meaningful progress on potential transactions that meet our investment criteria and can be executed at a spread to our cost of capital, either independently or through a partnership. We are staying disciplined on capital allocation, focused on retaining our tenants, and executing across our development pipeline, all in line with the strategic objectives we have communicated. These are the fundamentals behind Easterly Government Properties, Inc.'s stable and growing cash flows, and we believe this will drive shareholder value. Thank you for your time this morning. We appreciate your partnership and look forward to updating you on our progress. I will now turn the call back to the operator. Operator: We will now open the call for questions. As a reminder, to ask a question, you will need to press 11 on your telephone. Our first question is from Seth Eugene Bergey of Citi. Please proceed with your question. Seth Eugene Bergey: Thanks for taking my question. I guess just starting off with the mezzanine lending piece. Is the $7 million kind of a one-off transaction, or is there something you would look to do more of? And how should we think about the sizing of that if that is something that you would think about doing more of in the future? Darrell William Crate: Yes. I mean, look, it is a terrific way for us to get involved early in a project, and I think we could see ourselves allocating about $30 million to this pipeline. The VA pipeline over the next four, five, six years is quite significant. There is a set of terrific, well-respected developers who really have a knack for building these well. And as you can see, at $7 million, roughly $30 million allocated to this effort would get us involved in three or four projects, which, again, as those buildings are ready to go online in one to two years, positions us very well for them to become part of the broader portfolio. Seth Eugene Bergey: Thanks. And then it sounds like the size of the pipeline is kind of unchanged at the $1.5 billion, and with the Virginia campus closing you have kind of hit the acquisition or most of the acquisition guidance for the year. Just how active is that? What kind of catalyst do you think could unlock more of that acquisition activity? And just trying to think about how conservative that number is. Darrell William Crate: Yes. I mean, look, we are very active in working the pipeline. We are also just super judicious about making sure it is accretive. And so, as we look at our earnings that we are delivering for shareholders this year, the midpoint of the range is 3% growth, which I think is very favorable relative to the REIT sector, especially given our sort of AA+ revenue stream. I think things will pop out of that $1.5 billion. We are maintaining a very wide funnel on opportunities that are all high quality. The intent for that wide funnel is for it to then narrow down to some opportunities. Given a little bit of our cost of capital challenge with regard to stock price, as we improve on cost of capital and debt and we continue to find opportunities, we can do things that are really attractive—accretive not only to core FFO per share but also accretive to the portfolio in general. There are a couple of very large development opportunities of the VAs that I am discussing that are in that pipeline which would be very attractive. We have made some relationships with folks that are five, six, seven years old, and ultimately, I think we will be able to work some things out with each of them. We want to make sure the promises that we make on this call we can keep. I think that we are delivering strong growth, but we are very optimistic about what this pipeline can produce over the next one, two, three years. That is why we are confident in saying that our long-term growth rate for the company is 2% to 3%. As we work with the rating agencies and achieve an investment grade rating, that can also lead to our growth targets growing as we basically get that refinanced over the next three, four, five years. Seth Eugene Bergey: Great. Thank you. Operator: Our next question is from John Kim of BMO Capital Markets. Please proceed with your question. John Kim: Thank you. It sounds like you are moving forward with some investments in your acquisition pipeline of $1.5 billion. So I am just wondering why not update guidance in terms of investment activity, and can you just update us on what kind of spreads you are looking for in terms of investment versus your cost of capital? Allison E. Marino: We have thought a lot about whether or not to update guidance, particularly with respect to the acquisitions pipeline this quarter. And as Darrell mentioned, we are being conservative as we evaluate near-term opportunities within that pipeline and would look to update guidance as we are closer to those deals being fully cooked. That does not reflect at all what we think we can do; it is just about being super disciplined about how near-term the opportunities are. And then to the second part, we target a 100 basis point spread to our cost of capital. Obviously, this mezzanine financing transaction creates like a 600 basis point spread for a fairly nominal investment. So we are definitely balancing all of the opportunities—mezz is an example of one of the actionable opportunities in our pipeline today and one that, as Darrell mentioned, we will continue to evaluate as we go forward. I would say, just to reiterate, the target is 100. Fifty to 100 is our defined range. John Kim: And on the mezz book getting to $30 million potentially, is that something that could happen this calendar year, or if you could just talk about how fast you want to get to that $30 million over the next period? Darrell William Crate: Yes, over the next eighteen months, John, is when we can get that deployed. I think we have delivered some really terrific growth for this year, and I think we are really setting ourselves up for a nice 2027. I would love to be giving guidance for 2027, but Allison and Cole will not let me. We are excited again to continue to grow in a way that we think will be pleasing to shareholders. John Kim: Are these on projects that you feel comfortable owning, or do you plan to own some of these assets? Darrell William Crate: Yes, they are great assets. How we are legging our way into them I think is very attractive for shareholders, and these are assets that are, you know, 7-cap kind of assets that I think, given how we are entering and where we are in the capital structure, we can buy attractively. Allison E. Marino: And this is an area where we really do have a deep underwriting expertise—not just on the financing product, but the underlying collateral. The VA CBOC program is one that continues to expand. There are 20-plus projects that are coming through various stages of procurement, so we do expect additional opportunities in that space particularly, though there are other GSA projects coming on as well. Darrell William Crate: Not to sound too exuberant about it all, but we absolutely understand these assets. It is worth saying that we are working with folks we have known a long time. We are also good at developing mission-critical projects and working with the government. We are seeing it at our Fort Myers project that is being run by a terrific group called Seagate. Our understanding and perspective on how to move things along with the government is certainly neutral to accretive with regard to the project. We are getting to see how these buildings are built because we do work in collaborative partnership with folks that we are mezz lending to. We are not just a lender in the cap structure. We can also make suggestions along the way that can either save cost or position the building for more attractive operating costs for the next 20 years. We are a terrific mezz partner. Given where the company is today in cost of capital, it is an excellent way for us to get involved in these assets, and we are really excited for the growth that means for shareholders over the next handful of years. Operator: Our next question is from Merrill Raw of Compass Point Research & Trading. Please proceed with your question. Merrill Raw: I am sorry, was that me? Yes. Okay. The sound dropped out. Okay. So will any of those VA projects be acquired by the JV, or is that entity filled? Darrell William Crate: Great question. The answer is it could be either. While we do have this very strong pipeline, we also are being more active today with potential JV partners, and we have some excellent long-term relationships there. I think these are fantastic assets, and to the degree we can afford them and deliver growth to our shareholders, they can be wholly owned. That said, if there is an opportunity for us to lend our ability to manage these kinds of facilities in the efficient way that we do that would allow us to buy them through joint venture, we would certainly want those economics. But the north star of all of this is delivering accretion and taking on projects that have that 100 basis point premium to our cost of capital. When we think about cost of capital, we really do think about it on an accounting basis—looking at stock price and FFO as cost of equity—because that is what drives FFO accretion. When you think about the IRRs of our projects, with a dividend of 8% and growth of 2% to 3%, we can also start vectoring into different kinds of cost of equity, but we give very little credit for our future growth in our cost of equity as we allocate it and think about what the spread needs to be to deliver accretion to shareholders. Focusing on that FFO per share growth is the number one metric for this management team. Merrill Raw: Great. And as you look at your pipeline further out, is it primarily federal government? You said outside the VA there was activity, but is there also activity at the state level? Because the Florida acquisition or development is pretty lucrative. So it would be interesting to know the mix. Darrell William Crate: We love Florida. Everybody is moving to Florida. Lots of great people are moving to Florida, but there are a few criminals in that mix, so they will be building law enforcement facilities in Florida. They are pretty good at law enforcement. The one that we are working on right now will actually be delivered early—crazy as it sounds—and on budget. They have three or four more of those on the dashboard that they need to get built over the next three to five years. I think that we are very well positioned to be a good partner in doing that and can probably do it in a way that is very attractive for the taxpayers of Florida, and an opportunity for us to do something that is very accretive for shareholders. Allison E. Marino: And then the broader pipeline, you can think about it in roughly thirds. We see about a third of that $1 billion being federal, a third being state and local, and a third being government-adjacent. Between the split of regular-way wholly owned, joint venture, development, and mezz financing, it is a mix of all of that with primarily regular-way acquisitions as well as development filling that pipeline up. Darrell William Crate: The team has done a terrific job of building a toolbox of ways to generate accretion for shareholders. Allison and her team are doing a terrific job on the balance sheet, and I think we will have some nice things to talk about over the next six to nine months. Merrill Raw: I do appreciate the thought of diversity inside the portfolio. Thank you. Operator: Our next question is from Michael Carroll of RBC Capital Markets. Please proceed with your question. Michael Carroll: Darrell, I wanted to circle back on the mezz investment. I know you said a couple of times that you have the ability to potentially acquire these assets someday in the future. Is there a purchase option related to that that Easterly Government Properties, Inc. can exercise to acquire those properties, or is it just the relationship you get that would allow you to be able to negotiate a price as that deal gets completed? Darrell William Crate: We have a series of different ways where we have an advantage in the purchase. Allison, do you want to expand on that? Allison E. Marino: Yes. We have both a ROFR and a ROFO on that particular deal, and those are mechanisms we look to build into financing arrangements like this as a first look. Michael Carroll: Okay. And then when you talk about deferring funding some of these deals, does that mean that you have to be more thoughtful about deploying capital here in the near term until you fund the deals that you announced year to date? Darrell William Crate: What does that mean exactly? Michael Carroll: I guess on the call, you said that you deferred raising equity to fund the 1Q 2026 acquisitions, and correct me if I am wrong on that. So if you are waiting to fund those deals, does it make it more difficult to execute on the pipeline because you have not funded the 1Q deals yet? Allison E. Marino: Yes. I mean, look, I think it is really a pretty marginal comment and it is more geared toward our debt providers—the idea being that we are going to continue to bring our leverage down over the medium term. We are going to get something that has a six handle on it. Even though our leverage modestly ticked up a little bit this quarter, that is not a reflection of a change in our strategy to continue to properly equitize these opportunities. As we look at some of the tools with regard to mezz and some of these development transactions, I think we are going to find ourselves where we deliver the growth that we are promising and we can get our leverage in the right place. We are absolutely directionally showing us getting into the right place. I have said obtaining an investment grade rating can lead to 100 to 150 basis points of additional FFO per share growth over the next five years. Michael Carroll: Okay. Great. And then just last one for me. On the available space you have in your portfolio—the 3% vacancy—what are the prospects of being able to lease that up? Is some of this space potentially leasable within your portfolio that is currently free? Darrell William Crate: Yes, crazy enough. This is on the list of all the initiatives where I am super proud of the expanded leadership team. They are working tirelessly. The FDA lab in Atlanta that we just opened has tens of thousands of square feet that are not leased. The building is fantastic, and all the vacant space that we have now is space that we underwrote to be vacant when we purchased these buildings or were forecasting NOI. So a lot of it is a little extra, and we are pursuing that more aggressively than we ever have. That would also be incremental earnings growth on top of what we have set in our guidance. These leases do take a while with the government, and these can be six- to nine-month things. But as we look to 2027, I see the opportunity to get some of this vacant space leased and to see some things shaking out of our pipeline that are unique for us—how we are positioned to the asset and the needs of the seller can probably come together in a pretty nifty way. We are excited for the opportunity. We do not know exactly where that is going to all come from, but when you look at the pipeline of opportunities, the tools that we have, and the management team’s enthusiasm, effort, and skill, we are really excited for 2027. We are excited for 2027. Operator: Our next question comes from Analyst of Jefferies. Please proceed with your question. Analyst: Darrell, you noted in the opening remarks the intention to achieve an investment grade credit rating in 2027. Can you just speak to the deleveraging strategy and other metrics you are focusing on to achieve this? Darrell William Crate: There are a couple. One, if you just squint at it, you can see that there are other firms that are quite similar to us that have a BBB+ rating, or flat BBB—solid investment grade. Their revenue streams start from a place of being single A- to BBB+. If you look at the revenue stream that pours into the top of our business, it is basically AA+. The idea that the revenue comes in as AA+ and then all the things that happen before it gets to a bondholder is eight notches lower—that is what it would take for us to receive a non-investment grade rating. As we look at scale of the business, we are in a place that is attractive—probably a little bit on the lower end—and that is probably why we have not pursued an investment grade rating as aggressively as we could have in the past. If you look at leverage, again, we are in the zip code for obtaining an investment grade rating today, especially when we talk about that differential of us being five notches among REITs of similar credit quality. If we get into the sixes and, as you look at the scattergram of real estate REITs, again we are very much in a place. So leverage is probably the only metric that we look at—and maybe a little bit on scale—where we would not be a BBB. That said, we are working at all of those things, and we are very committed to behaving like an investment grade company. We understand what that takes, and with a WALT that is almost a decade plus all that AA+ money coming in, we are in a nice spot to be able to harvest that opportunity. It could take a little time, but we think 2027 is hopefully our year. Analyst: Makes sense. And then just on investments, acquisition target is still at $50 million. I do understand cost of capital is a constraint. Maybe just to ask more of a direct question: at what share price would you be able to become more active and aggressive on this $1.5 billion? Darrell William Crate: Look, every little bit of share price will obviously make it easier. From where we are, we do not want to have a robust call and try to get expectations ahead of where we are. We are really happy with the growth we are delivering right now. We are going to be very deliberate about making sure 2027 is right on track. To set ourselves up to disappoint anybody is not what we want to be doing. To answer your question directly: $24, $25, $26, $27—those become very, very constructive. The flywheel really gets going for what we do. Analyst: Great. Thank you for taking time. Appreciate it. Darrell William Crate: If we do not get the support from the capital markets and continue to have this 8% dividend, we can still meet these growth targets. We have built enough tools. We have strong JVs, so we are going to be able to deliver that value. But, of course, with a lower cost of capital, we are excited—the team is excited—and our disposition is to really accelerate the growth of the company. The team is very aligned in achieving those objectives consistently for a bunch of years. Operator: Thank you. Our next question is from Michael Lewis of Truist Securities. Please proceed with your question. Michael Lewis: Thank you. Regarding the mezzanine loan investments, is this now the preferred way to do developments rather than the large cash outlays and the reimbursement later? Does it make sense to do more with developers and then you become the takeout on the back end? Should we expect you to do more of that and less of the other? Darrell William Crate: It is a good question. I think it really depends on the project. You look at these FDA labs—there are seven more to be built, and we have built three of them—and each one has been a better value for the government because they have been terrific collaborators with the same team on each of those three buildings, and we have been able to get really into stride on how to save money. There are 35 thousand miles of pipe and wire and all sorts of things that go into it, and so we kind of figured it out. I think that we can build the lowest-cost FDA labs and highest quality for the U.S. government, so we should be doing exactly that. For some of these VAs, while we can build them well, there are five developers that have done a terrific job in this space. For us, the idea of competing with five quality developers—spending the search costs to do it—we might as well let one of those high-quality folks win, stand really close to them while they are building the project, and end up, I think that creates more value for our shareholders. When you look at Medford, Oregon or Flagstaff, we are very good at building courthouses. These are courthouses that are in areas where this was not a major metropolitan courthouse. We may have found ourselves with a high-cost competition with 11 other developers. The folks who are running the procurement understood Easterly Government Properties, Inc., understood the value that we deliver. They are in markets where the competition was less familiar with these types of assets. In those cases, us doing development from start to finish was the way to go. It is really about using our expertise to deliver the most value for shareholders with each of these very high-quality projects. They are terrific because you end up with a 20-year lease and find yourselves in a place where you really have significant government cash flows for years to come. Michael Lewis: No, that is great. Thank you. And then just lastly for me, you kind of alluded to a little bit of conservatism maybe in the acquisition guidance or the FFO guidance. When we annualize the first quarter results, it gets you to $3.10 for the year; the midpoint of the range is $3.09. Is that just a little bit of conservatism, or are there any drags through the rest of the year why you would not have any sequential growth? Allison E. Marino: Yes. So a few things. One, as you can imagine and have even seen in the markets recently, interest rates are really wacky right now. There is increased short-term volatility that we are seeing with respect to both SOFR and then all of the versions of Treasury we like to play in. A little bit of our conservatism is really driven by the fact that we need to see if some of that volatility calms down, which would allow us to improve our cost of capital as the year goes on as we strategically look to the debt markets to term out the revolver. That is a big piece of uncertainty. I do not think we sat here two months ago and necessarily felt that way, but I do not think we are in poor company today with that concern either. That is a big piece of the puzzle as we move throughout the remainder of the year. Obviously, as developments come online, timing is a very large piece of what underpins our guidance range. The earlier in Q4—or the closer to the beginning of Q4—we are able to deliver the FDLE lab in Florida, the more improvement in our guidance range you might see. But we are still in the critical six months here of being close enough to it on the horizon to be excited about an opening party, but still far enough where there is development risk left. We will continue, as we march closer to that, to evaluate its final projection of delivery as well. Michael Lewis: Actually, maybe I will throw in one more, because since I asked a guidance question about 2026—I know you are not going to give guidance for 2027—you said you are excited about it. The consensus number for FFO is the same as it is for 2026. Is there anything you could say about what excites you about 2027 and the growth potential there? Darrell William Crate: If you look at all the tools that we have created and the opportunity set that we are harvesting, the idea of us being flat next year would make no sense. That is my point. We have an FAA lab that finally is going to leave—it has been eight years that they are there. That is a little bit of a drag. But everything else that we are doing—from releasing to vacant space to mezz debt to harvesting a pipeline—and Allison has it just right. Look, it is 2026, so not fair to look out. But we have more stable cash flows than every other REIT out there. As we are looking forward, we are feeling a level of optimism. As things unfold here over the next six months, I think we are going to be able to be very specific about where we are going for the year. With all these tools and the team really reoriented towards growth—everyone understands what they need to do—and we are going to grow 2% to 3% a year. We have done it for two years now. If we hit the middle of our guidance this year, we are going to be there as well, and we believe that is our plan for the next handful of years to grow at that pace. Analyst: I understand Allison not wanting to give the guidance. A much bigger refi year next year than this year. So if interest rates are uncertain, they are more uncertain for next year. Thank you. Darrell William Crate: Yes. That is why we cannot give guidance, but I certainly would love to. But Allison will not let me. Operator: Thank you. I would now like to turn the conference back to Darrell William Crate, President and CEO of Easterly Government Properties, Inc., for closing remarks. Darrell William Crate: Great. We really appreciate you joining the conference call as we share our first quarter earnings. We are very excited about what we are doing. We are excited about our growth, and we really look forward to you paying attention to the company and spending some time with us. We appreciate it and we look forward to getting together at this time in about three months. Operator: This concludes today's conference call. Thank you for participating. You may now disconnect.
Kotaro Yoshida: This is Kotaro Yoshida from Daiwa Securities Group Inc. Thank you very much for taking the time to participate in our conference call today. I will now explain the financial results for the fourth quarter of FY 2025 announced today following the presentation materials available on our website. First, please turn to Page 4. I will begin with a summary of our consolidated financial results. Percentage changes are in comparison to the third quarter of FY 2025. In Q4 FY 2025, despite the continued highly volatile market environment, our profit base, primarily driven by asset-based revenues, functioned steadily, allowing us to maintain a high level of consolidated profit. Net operating revenues were JPY 197.8 billion, up 1.7%. Ordinary income was JPY 67 billion, down 3.6% and profit attributable to owners of parent was JPY 49.8 billion, up 7.3%. Looking at the results by division in the Wealth Management division, as a result of our focus on total asset consulting, both the contract amount and net inflow for wrap account services reached record highs and net asset inflows also expanded. In Securities Asset Management and real estate asset management, assets under management grew steadily, continuing to expand our revenue base. Global Markets accurately captured customer flows amid market fluctuations, resulting in increased revenues in both equity and FICC. In Global Investment Banking, domestic M&A remained strong. As a result of these factors, the annualized ROE was 11.5%. The year-end dividend is JPY 35 per share. Combined with the interim dividend of JPY 29, the annual dividend will reach a record high of JPY 64, resulting in a dividend payout ratio of 50.8%. Please turn to Page 8. This page shows base profit, our KPI for stable earnings as outlined in the medium-term management plan. FY 2025 base profit grew steadily to JPY 182.7 billion, up 32.9% year-on-year. We have achieved a level that significantly exceeds the JPY 150 billion target set for the final year of the medium-term management plan, doing so in just the second year of the plan. Please turn to Page 11. I will now explain the statement of income. Commissions received was JPY 131.2 billion, up 2.0%. A breakdown of commission received is provided on Page 26. Brokerage commissions increased significantly to JPY 31.9 billion, driven by an increase in customer flow. Please turn to Page 12. Selling, general and administrative expenses were JPY 138.3 billion, plus 4.1%. Personnel expenses increased due to an increase in performance-linked bonuses. Please turn to Page 14. This slide shows the annual trends in revenues and SG&A expenses. Whilst performance-linked costs and strategic expenses such as IT investments have increased in tandem with business expansion, the increase in fixed cost has been constrained, keeping overall costs at a well-controlled level. Please turn to Page 15. Total ordinary income from overseas operations was JPY 6.9 billion, down 17.6% quarter-on-quarter. By region, Asia and Oceania saw an increase in profit, supported by equity-related revenues driven primarily by Asian equities. On the other hand, the Americas recorded a decrease in profit due to a decline in M&A revenues. Next, I will explain the financial results by segment. Please turn to Page 16. First is the Wealth Management division. Net operating revenues were JPY 81 billion, plus 5.2% and ordinary income was JPY 33.1 billion, plus 12.1%. We believe that the results of our ongoing efforts in the asset management type business have manifested in our sales performance despite the persistent high volatility in the market environment. By product, equity saw a revenue increase of JPY 1.1 billion due to increased trading in Japanese equities. Fixed income revenues also increased by JPY 500 million as we accurately captured investment needs. Sales of fund wrap increased significantly, driven by growing demand for long-term diversified investment and portfolio management. In addition to inflation hedging, wrap-related revenues reached a record high of JPY 18 billion. Asset-based revenues reached a new record high of JPY 33.4 billion, driven by increase in agency fees for investment trust and wrap-related revenues. The fixed cost coverage ratio based on asset-based revenue in the Wealth Management division was 120%, and the total cost coverage ratio was 76.5%. Please turn to Page 17. This slide shows the status of sales and distribution amount by product within our domestic Wealth Management division. Our wrap account service reached a record high level with total contract AUM rising to JPY 6.4046 trillion. New contract amounted to JPY 386.2 billion, and net inflows came to JPY 276.2 billion, both marking all-time highs. Our fund wrap also continues to grow strongly. Its characteristics have been well received by clients in both favorable market conditions and during periods of adjustment, resulting in a significant expansion in assets under contract. In addition, collaboration with external partners such as Japan Post Bank and Aozora Bank has been progressing steadily, contributing further to the growth in the new contracts. Please turn to Page 18. This section outlines the progress of our wealth management business model. Cumulative balance-based revenues for fiscal 2025 increased to JPY 123.2 billion. Net inflow of assets also remained high, totaling JPY 1.6342 trillion. In line with our group's fundamental management policy of maximizing clients' asset value, we will continue to provide optimal portfolio proposals based on each client's total assets while working to build a revenue base, which is less susceptible to market fluctuations. Please turn to Page 19. Here, we show the status of Daiwa Next Bank. NII, net interest income, totaled JPY 11.2 billion, up 11.2% and ordinary profit reached JPY 6.2 billion, up 30.2%. The increase in policy rates contributed to an expansion in net interest margins. The promotion of total asset consulting, together with initiatives such as competitive deposit interest rates, including a 1.2% 1-year time yen time deposit for retail customers proved effective and deposit balance surpassed JPY 5 trillion. And now turning to Page 20. Let me explain the Asset Management segment, beginning with Securities Asset Management. Net operating revenues were JPY 19.7 billion, up 5.9%; and ordinary income was JPY 11.4 billion, up 11.6%. Daiwa Asset Management publicly offered securities investment trust AUM topped JPY 37 trillion, hitting record high. And then moving on to Page 21 for real estate asset management. Net operating revenues were JPY [ 9.9 ] billion, down 10.6% and ordinary income was JPY 9.8 billion, down 5.6%. While revenues and profits declined on a quarterly basis, mainly due to the absence of property sales gains recorded in the previous quarter, real estate asset management is a business in which the profit grew in line with AUM. AUM at Daiwa Real Estate Asset Management surpassed JPY 1.6 trillion, and we expect stable midterm growth in line with continued AUM accumulation. In addition, equity method investment gains from Samty Holdings contributed to maintaining a high level of profit. On Page 22 is Alternative Asset Management. Net operating revenues were negative JPY 2.6 billion and ordinary income was negative JPY 4.8 billion. And the Renewable energy, we recorded provisions and impairments due to the revaluation of certain portfolio investments. On Page 23, lastly, let me explain the Global Markets and Investment Banking division. First, Global Markets, net operating revenues were JPY 51.3 billion, up 13.4% and ordinary income was JPY 17.7 billion, up 48.6%. Both equities and FICC performed strongly, resulting in a significant increase in revenues and profits. In equities, trading flows in Japanese stocks increased substantially, particularly among overseas investors, leading to a 6.2% rise in revenues. By offering a diverse range of execution methods, we successfully captured large-scale trading mandates contributing to revenue growth. In FICC, revenues increased 20%, driven by strong performance in JGBs and credits. We effectively captured customer order flows in both domestic and foreign bonds and the position management remained solid even in a highly volatile market environment. And now turning to Page 24. In Global Investment Banking, net operating revenues were JPY 24.1 billion, down 7.4% and ordinary income was 2.1 billion, down 60.5%. But M&A advisory remained strong in Japan and the revenues increased in Europe within our overseas operations. That concludes the explanation of our financial results for the fourth quarter of fiscal 2025. Fiscal 2025 on a full year basis experienced high volatility in stock price and interest rates, but the year itself was quite active overall. And the entire business portfolio had higher stability so that income was stable and the market response capability also improved. We were able to benefit from both of them. As a result, the second year of this midterm plan hit record high in terms of the profit and the ordinary income was hitting the highest in the last 20 years. Well, towards the end of the midterm plan, we think that we have a very good strong result. Now we'd like to move on to the announcements that we have made about the subsidiary of the ORIX Bank, as we have explained on our website. I will explain the overview, objectives and financial impact in accordance with the materials published on our website. Please turn to Page 2 of the document entitled regarding the acquisition of ORIX Bank as a subsidiary. This is a transaction summary. In this transaction, Daiwa Next Bank will make ORIX Bank a wholly owned subsidiary. We also plan a merger of the 2 banks in the future. The acquisition price is JPY 370 billion, and the final acquisition price will be determined after price adjustments stipulated in the share transfer agreement. The acquisition will be funded entirely by our own funds, strategically utilizing the capital buffer we have accumulated to date. Next, the primary objective of this transaction is to continuously expand the stable revenues of the Daiwa Securities Group and improve ROE and EPS through the strengthening of the Wealth Management division. By integrating Daiwa Next Bank and ORIX Bank, which have different strengths, we aim to enhance our ability to provide solutions for our clients' challenges regarding both assets and liabilities, thereby significantly improving the corporate value of both banks. Specifically, we will realize sustainable growth by combining the outstanding lending and trust capabilities cultivated by ORIX Bank with the deposit gathering capabilities backed by our group's solid customer base and sales network. There are 3 pillars to this strategy. First, deepening the total asset consulting tailored to the life stages of each individual client. Second, establishing a sustainable growth model through a virtuous cycle of deposit and lending expansion. Third, maximizing synergy effects through functional integration by a future merger. I will explain each of these in turn. Please turn to Page 3. The post-integration bank will have total assets of JPY 9 trillion and approximately JPY 400 billion in equity capital, evolving into a comprehensive bank, combining advanced lending and trust functions with strong deposit gathering capabilities. By offering competitive deposit rates backed by ORIX Bank's high investment capabilities, we aim to establish a sustainable growth model through a virtuous cycle of deposit and lending expansion. Regarding the impact on consolidated financial results, there is a potential to improve net interest income as a synergy effect. In addition to the over JPY 1.5 trillion of drawable funds from Daiwa Next Bank's current account at the Bank of Japan, we aim to accumulate JPY 2 trillion in deposits over the next 5 years as a synergy effect, separate from the stand-alone deposit growth of both banks through the provision of competitive deposit rates. We plan to invest a total of JPY 3.5 trillion in real estate investment loans and securities-backed loans to improve net interest income. Assuming we can secure a 1% interest rate margin improvement, our estimates indicate a potential improvement of JPY 35 billion in net interest income. In addition to these synergy effects, ORIX Bank's stand-alone performance will be consolidated into our financial results. The bank's average ordinary income over the past 5 years is approximately JPY 30 billion with a net income of approximately JPY 20 billion. On the other hand, we expect to incur amortization expenses for goodwill associated with the acquisition. Next, regarding capital and regulatory aspects. We will maintain financial soundness while effectively utilizing our capital buffer. Whilst the implementation of this transaction will lower the consolidated total capital adequacy ratio by 5 percentage points, it will still exceed 14% on a fully loaded Phase III finalization basis, securing a certain level of capital buffer. However, to expand our capacity for future growth investment and shareholder returns, we will also consider issuing perpetual subordinated bonds. Please note that we are not considering equity financing. Now moving on to Slide 4. Let me see the strength of Daiwa Next Bank. That is the strong deposit gathering capability. In the meanwhile, it has to challenge with the limited lending and the trust functions. Against that, the ORIX Bank has a strong lending and trust function. That's their strength, while the challenge is the deposit gathering capability. So while we are complementing or we are able to complement each other with the strength and the challenge, we think this is an ideal match between the 2. And moving on to Slide 5. I may be repeating myself, but the objective of making them a subsidiary is to strengthen the wealth management division and also a great leap in terms of the stability of the income as a result of that. The stronger Wealth Management division is not coming from one point. It comes from some pillars, the deepening total asset consulting, virtual cycle of deposit and loan expansion and accelerating growth through collaboration with the Asset Management division. Those are going to be the 3 pillars to enhance the management division and the stability of the income. And then moving on to Slide 6. We are trying to see the deeper total asset consulting capability for the clients. The assets and liabilities of our customers would change from life stage to life stage. That's the reason why not only the assets, but the liabilities all included. It's quite important to have the total asset consulting capability to optimize our capability of designing the balance sheet of the customers. By utilizing the ORIX strength, which is the lending and the trust, we are going to be providing the solutions for the pains of the customers depending upon their life stage. And then moving on to the Slide 7. We're thinking about accelerating the growth spiral by leveraging the strength of the banks. we look at those banks alone, the balance is going to be accumulated. But as a result, in addition to the growth of each bank's deposit balance, we aim to expand the deposit by over JPY 2 trillion in the next 5 years as a synergy effect, the asset -- the loan asset of the ORIX is quite competitive. So based upon which we're going to offer the Daiwa Securities customers a competitive deposit interest so that we are able to get -- acquire the [ stucki ] deposit. And then eventually, that is going to increase the deposit balance. That is going to be a great spiral of the growth of the banks overall. And then on Slide 8, this shows the changes of the balance sheet structure as a result of the integration of the 2. On the asset side, the lending and securities and on the liability side, the ordinary deposit and the time deposits are going to be all balancing so that the balance sheet is going to have a good risk diversification. The explanation is over with that. The details is going to be explained by our CEO, Ogino, at the management strategy meeting, which is scheduled to be held next month. By responding flexibly to the variety of needs by the customers, we're going to be capturing the changes in the market environment. And as a leader of the financial and capital market, we are going to pursue sustainable growth. We sincerely appreciate your continued support, and thank you very much for your kind attention. With that, we finish our explanation. Now let us move on to the Q&A session. Kana Nakamura: [Operator Instructions] I would like to introduce the first person, SMBC Nikko, Muraki-san. Masao Muraki: This is Muraki from SMBC Nikko Securities. So I have a question related to ORIX Bank's acquisition. The first point relates to Slide 3. You talked about the synergy and how it supplements with one another. So deposit is JPY 2 trillion increase. That is the number you've mentioned already, so 1.05% to 2%, that is the time deposit level. So going forward, do you intend to actually increase this to a competitive level? That is the first question. And also, you would have a loan increase by JPY 3.5 trillion. So you have the real estate loan and the secured loans. What is the breakdown in terms of the loan growth? So second part of the question relates to your capital strategy. So this is Slide 12 of the material. You have the image here. So this will be over 14%. The capital ratio will come down. But if you look at the future from the current level, the capital level intends to be built. So I don't know if it's 17% or 18%, it's hard to tell from this diagram. So whilst you're increasing this level, what are some prospects of the share buybacks? What are some of the ideas we should have? In the past, the share buybacks they conducted even amongst the high level of capital. But now if the capital is going to be depressed, perhaps there will be less allocated or different allocation to the share buybacks. So please give us some idea. Kotaro Yoshida: Thank you very much for that question. The first part of the question, so what are the JPY 2 trillion of deposit as part of the synergy? So what is the outlook? So related to this point, we are confident that we can acquire. We believe there is a fair chance that we can achieve that number. So within this fiscal term -- so after the rate hike, so Daiwa Securities, there has been a 2% of provision in the year. So last year, in terms of the time deposit, so about JPY 650 billion increase in terms of the time deposit. So if you can provide a competitive -- the deposit, right, given the fact that Daiwa Securities have a nationwide network and the high-level consulting capabilities and through our consultants, we should be able to acquire the deposit. So of course, there has been a shift away from savings to investment. But this is not just the deposit into equities. But also, we have been providing consulting to their entire asset, inclusive of deposit. So within that process, the larger the pie is, the better chance that we may have for the acquisition of deposits. So JPY 2 trillion is feasible. That is our expectation. Also about the JPY 3.5 trillion of the loan, so real estate loans and also the securities, the back loans, the breakdown of that, we don't have the exact number as we speak. But already, what ORIX Bank is providing, that is an investment use in real estate loan, it is for the one mansion for the single-family hold in the metropolitan area. So the number of banks have been on the decline. But in terms of the number of households, single households in the metropolitan area is expected to rise. Therefore, we do believe there is sufficient demand. In the past several decades, ORIX Bank has built this lending capability. So in relation to that, it is very possible that we can achieve that JPY 3.5 trillion of lending. Also the second part of your question about the capital, the strategy. Please hold. So through this acquisition, so in terms of the consolidated total capital adequacy ratio will be out -- will be down by mid-5% or so. So right now, it's over 14%. So that is the level that we're expecting at this moment. So going forward, how the capital policy may change, and that is the intent of your question. But as of this moment, no change vis-a-vis our basic policy. So the dividend -- the payout ratio is at 50% or higher. And also the floor for the annual dividend of JPY 40, we'd like to maintain that. So through this acquisition, there will be some level of decline in terms of the total capital adequacy ratio. However, we can ensure the financial soundness. And also by steadily building on the profit, we can continuously keep this financial soundness. Also in order to ensure flexibility, AT1 bonds issuance is also under explanation. Of course, the actual amount is still under consideration. But again, we'd like to further have a solid capital base. Also in terms of share buybacks, the question was what are our plans going forward. Again, no change in terms of our general stance. So based on the assumption of financial soundness, in light of the different operating environment, gross investments will be considered. But of course, that is necessary for future shareholders' return. So we definitely like to prioritize on that. So looking at the gross investment and the buyback, we need to strike the right balance and be agile and flexible. So this particular deal, this is an impact of the profitability of ORIX Bank. And also through the realization of the synergy, we can expect to enhance the capital generation within the group as a whole. So ultimately, this would actually lead to increase in the source for shareholders' return. So going forward, the capital allocation, capital policy is a very important policy. So given the current operating environment, we'd like to make a comprehensive approach. Masao Muraki: Related to the second part of my question. So at this particular timing, you didn't announce the share buybacks. So in terms of the perpetual subordinate bonds utilization, related to that point, so what is the potential amount AT1 bond issuance that is? What is the amount they have in mind? And once you announce that, in light of the credit rating, we expect you to conduct share buybacks at that timing. Kotaro Yoshida: Thank you for that question. So in terms of the AT1 bonds, the issuance, so it will be within the part of the consideration. But in terms of concrete details, we will consider those going forward. Also in terms of the credit rating, so we would like to definitely conduct meticulous communication with the credit rating companies. So we may also incorporate those ideas. So based on that, so whether there's a possibility of buybacks, again, we'd like to take a comprehensive approach in making that decision. So that has been my answer. Kana Nakamura: The next question is by Morgan Stanley, Sato-san. Koki Sato: This is JPMorgan, Sato speaking. Well, I have several questions about the bank. One, we simply this consolidation, you're going to make them a subsidiary. After that, how should we think about how you're going to be executing it? On the material, you're talking about the recurring income of about JPY 30 billion and the net profit of about JPY 20 billion. What kind of upside are you expecting from that baseline? I think that, of course, depends on the analyst, but the depreciation or the amortization of the goodwill and also the sourcing cost, probably a part of that needs to be recognized as well. So when you explain that to the market participants, what kind of a level are you going to say to them on the annual contribution? What is going to be the level that you think you're going to be talking in that communication to the market? The second question is about this -- by the acquisition of this ORIX Bank, you still have an external partners. Are there going to be any changes in the relationship with those partners? Like Aozora Bank, you are currently accounting for them under equity method. So your business alliance with them, is it going to be changing because of your acquisition? There might be some changes in terms of like focal point that you are working together with those external partners. And also when it comes to the asset-backed ones, partly, you are working together with Credit Saison. What are you going to be thinking about those asset-backed securities? Kotaro Yoshida: Thank you very much for your questions. The first question about the bank. Well, as you say, the average of the ordinary income is about JPY 30 billion of the ORIX and the profit is about JPY 20 billion. At Daiwa Shoken Daiwa Securities Group, our capital average is about JPY 1.7 trillion, meaning that on a simple calculation, it has the positive impact of pushing up the ROE by 1.2%. The equity finance is not likely to happen. So that's the scenario that we are seeing at this point. But the amortization of the goodwill and assuming that AT1 is going to be issued, which we, of course, need to examine. But anyway, setting that aside, we think that is a basic simple calculation that we are currently having our basis. And the second question, first of all, we do have the external partnership with Aozora Bank. And regarding that partnership, we assume there's no impact. Well, regarding the integration, it's for strengthening the wealth management business. The total asset consulting business for the retail business, the asset to support from the total asset consulting is going to be stronger. And the trust functions in order to work in our wealth management business for the retail market, it's important to have the trust function. Well, organically within the company, we did not really have much capability to grow itself. And by having the external partners, we have provided some instruments. But from now on, we think we'll be able to do that in-house. That's going to be another one big pillar. Well, regarding Aozora Bank, our partnership with Aozora Bank, there are some corporates that are listed and private. We have been providing the referral to the Aozora Bank and also the LBO financing, for example, have been provided and have been providing in the past so that the customer trade is quite different in Aozora Bank. So we think both can actually stand. And also for the real estate-backed loans, well, Credit Saison is a part of the business that we've been engaged with. But Fintertech is jointly operating -- operated by Credit Saison. So they have the asset -- the real estate asset-backed loans. But of course, the market size is limited so that the capacity is not that big. And this time, thinking about the capability being much bigger. I think the issuance coming from the business is going to be having new opportunities for us to grow our pie itself. Does that answer my question? Koki Sato: What about the amortization of the goodwill. Any color on that scale? Kotaro Yoshida: The amortization amounts and the cost for the amortization we're going to be discussing in details more. So at this point of time, there's nothing that we can comment. So please be patient. During the time comes for the closing, we think we'll be able to come to that point. Kana Nakamura: So let us move on to the next question. BofA Securities, Tsujino-san, please. Natsumu Tsujino: The last point about the goodwill amortization, it could be as long as 20 years, but some say it could be 10 years. So you should have some sort of image in terms of the amortization. And also in terms of decision of the dividend, it would be -- so the net profit -- so would you be using the same sort of net profit regardless of the amortization. So 20 years or 10 years, I don't think that you have no image as to the amortization. If you can give us some color, that would be helpful. That is the first question. Kotaro Yoshida: Thank you very much for that question. So of course, we have some image or some ideas. So the duration that you've mentioned, it will be within the time frame that you've mentioned. But as of this moment, we're working together with the auditors. So we would like to refrain from giving you an exact answer. Also, as far as dividend is concerned, as you rightly mentioned, no change in terms of the dividend payout ratio. So 50% or higher of the earnings. So no change in terms of the dividend policy. Also in terms of ORIX Bank, so they have the Tianjin report. So as of September end, so in terms of the J-GAAP, excuse me, J-GAAP earnings, JPY 7.4 billion, and ordinary income was JPY 10.6 billion. So it is actually quite lower in comparison to 5-year average. So in order to drive this, do we just work towards that JPY 8.6 trillion. I think that is the direction we should aim for. But right now, it's a midterm -- sorry, interim times 2. Natsumu Tsujino: Is that the image that we should have in mind for ORIX going forward? The interim number, double that number? Kotaro Yoshida: First of all, as of September 2025, the interim results for the company -- so within ORIX Bank, there were some rebalancing of the securities. So there were some loss from sales. So that is why the amount has ended to that one. So somewhat lower that is. That is our understanding. So in terms of the underlying capability, then it is closer to 5-year average then. Natsumu Tsujino: Okay. Understood. So the third point -- the third question I have, this is a question related to the results. So FICC has been very favorable. So Q3, there was a growth. In Q4, there was a further growth in FICC. So how sustainable is this? So for the March quarter, how has been the recent performance? And how is it trending now as we speak? Kotaro Yoshida: Thank you very much for that question. So in terms of FICC, amidst this very high level of volatility, we were able to capture the customer flow, and we've been able to turn those into profit. So that has been very positive. Also in terms of products, that's been all around. So we have JGBs and also, we have some domestic derivatives and so forth. So within this high level of volatility, we do have a high level of activities amongst the customers. So the customer flow, we were able to capture that through the communication with the customers. We can anticipate the customer flow and conducted the positioning. So through this control, that has led to a positive impact of the earnings. So that has been the experience of this past quarter. So for FY 2025, in the first part of the year at the phase of rate increase, I think we have also mentioned there were some difficulties in conducting the position control. But we have addressed these issues, conducted communication with the customers and also develop customers and also address the diverse needs of the customers. We've been able to have more strengths in the position management. But just because that we were able to do that. That doesn't mean we can sustain this without doing anything because, of course, the market is changing every day. So accordingly, we would like to enhance our capability to capture the customer flow. And also, we'd like to steadily strengthen the position management system. Also for the fourth quarter, so for the March quarter, that is FICC, the revenue image that is, so January 3 and February is 2 and March is 5. So in terms of the month of April, so in comparison to the fourth quarter average, maybe it is somewhat subdued for the month of April. But again, the customer flow continues to be fairly active. So of course, the environment continues to be uncertain, but we would like to have a closer communication with the customers. And we are hoping that we can turn it to our better performance. Kana Nakamura: Next question is Nomura Securities, Sasaki-san. Futoshi Sasaki: This is Sasaki of Nomura Securities. One question about the earnings call results and one about ORIX. Well, I'd like to talk about the wealth management. The AUM in the first half was declined and the previous quarter was down, but the asset inflow was making an improvement. I would understand that, that is because of the drop in the U.S. equity price. For the retail investors, there was some sales for the realization sales. Am I right to understand that? If I'm not, then please correct me. And the second question is about the acquisition of ORIX Bank. So-called -- are there any binding contracts for like a key man close that you are going to be able to retain the key men or the management people. I will also be able to get those words from the ORIX side. The ORIX side, the asset is very characteristic is because of the support getting from their parent company, which is ORIX. Is that also something that you have captured? Or do you think the business is going to be continuing based upon your strength as a stand-alone basis? Kotaro Yoshida: Well, thank you very much for your questions. First of all, about the asset inflow. On the earnings announcement material, Slide -- just a moment. For the fiscal 2025, we have had the inflow. So compared to the year before, the inflow amount was about the same as the 2024. Futoshi Sasaki: I'm sorry. The fourth quarter is my question. The fourth quarter inflow. Kotaro Yoshida: Okay, Q4 only. But regarding the AUM, on this quarter, the amount has declined. However, the U.S. stock was one reason. And also the fall in the stock price in domestic as well. So the asset inflow, the net inflow has increased has surpassed as a result. But the asset inflow itself, as I mentioned earlier, has been quite active and quite strong. Well, since 2007, the asset flow side has been really big. Futoshi Sasaki: Okay. And regarding the acquisition of M&A in the contract, do we have any key men close about the retention of the management people. Kotaro Yoshida: Well, regarding the close of the contract, I should not make any remarks. But after the merger or after the integration, the smooth integration is going to be, of course, the most important. And ORIX and ORIX Bank, both are, of course, making effort for the smooth and continual operation. So as a large direction, we, of course, have had the agreement to come to this agreement or decision so that we shall make an effort to deliver results. Futoshi Sasaki: So assuming that, for example, the real estate finance, the property sourcing is basically coming from partly support from ORIX. Am I correct? The support from the ORIX Group. Is it also coming? Kotaro Yoshida: I didn't really understand. Well, from the very beginning for the sourcing, the ORIX Bank has been acquired by using their own network. So the support from ORIX is, as far as we understand, is limited, if any. Kana Nakamura: I would like to move on to the next question. SBI Securities, Otsuka-san, please. Wataru Otsuka: This is Otsuka from SBI Securities. Can you hear me? Kotaro Yoshida: Yes, we can hear you. Please go ahead. Wataru Otsuka: So one question at a time. So related to the -- you've talked about the asset inflow related to the previous question. So in terms of the cash in the past 2 years, it has been the strongest. So if you can actually tell us the reasons behind that. This is Page 49, Slide 49 about the actual the cash that is. Kotaro Yoshida: Thank you very much for that is. So we have the bank deposits as cash and it may turn into investment trusts and fund wraps. So there are different objectives for that. But roughly speaking, Q4 fund wraps, in order to contract the fund wraps, there are a lot of cash paid in from other banks. So we did see a lot in the past quarter. Also for Daiwa Next Bank deposit, so there were some cash paid in for Daiwa Next Bank's deposit. That was another reason. Also, there has been active transaction of the Japanese equities for the March quarter. So in order to buy the equities, a lot of people have actually cashed in. On the other end, the share price actually peaked in the month of February, some may actually sold their holdings. So actually, they may have withdrawn the cash. So on a net basis, this is the number that we had. Wataru Otsuka: Understood. So fund wraps then. So for additional and also new purchases, both have been strong then? Kotaro Yoshida: Yes, both. Wataru Otsuka: Second question relates to ORIX Bank. So this is Slide 6 of the presentation material. So in terms of the clients' life stage, I'd like to understand this accurately. So with the acquisition of ORIX Bank, the question is, where would you like to focus? So according to Slide 6, so 60s, 70s, 80s, actually, the asset exceeds the liabilities. So those who are in excess of assets and those generation, ORIX excels in the best real estate investment loans. So do you intend to actually provide those to those elderly customers? Or are you actually focusing on more those in 30s and 40s where the liability is larger for assets? We will be focusing on extending credit to them. So for those in 30s to 40s, so they will be the first house the purchases. So this is different from the investment real estate loans. So this may be an area ORIX Bank is not necessarily strong. So how do you intend to actually approach the different life stages of the clients? Kotaro Yoshida: Thank you very much for that question. So according to the Slide 6 on the bottom part about the image of asset and liability balance by generation. So generally speaking, by different age, so the younger, you would have more liabilities. So you may have the housing loans or investment loans. So basically, liabilities tends to be higher in comparison to assets. But once you exceed over the age of 60, net assets would start to increase. So for Daiwa Securities, the main customers for Daiwa Securities are mainly those 60s or above. So as you can tell from this image, so asset on a net basis, it is larger. And so we have been providing different consultation for the management of their assets. So in other words, for those customers in the 40s and 50s, asset formulation type of proposals by NISA, that has been conducted. But of course, the inherent needs of these generation is how they can actually extend and also repay the loans. And also for those who wish to actually invest in real estate, we didn't have the facility to actually provide credit towards that end for those in the 40s and 50s. Now for ORIX Bank, the real estate, the bank loans, the main customer image is to share with you is in the metropolitan area. And so those in the 30s and 40s, family men working for listed companies, they account for a large proportion of ORIX Bank. So generally speaking, they do have high level of income. And of course, they have their own the housing. But at the same time, they are investing in the metropolitan one-room mansions, one-room condos. So that has been the main customers that ORIX Bank has been cultivating. So going forward, what ORIX banks provide. So they have the apartment loans that is another part of the loan product offerings. So this is more towards high net worth individuals and also more of the more elderly customers. So we can actually provide these products to the Daiwa Securities customers for these apartment loans. Also from what we have received, the securities from the Daiwa Securities customers, we can actually use them. The securities can be backed and use it as part of the business. But of course, we do have -- we are connecting that already. But because of the capital regulation and so forth, it has been somewhat restricted. So with the addition of the ORIX Bank, we could expect to see further accumulation of the loans with the securities backed loans. Wataru Otsuka: I couldn't quite understand that point. So you mentioned those in 30s and 40s working for listed companies. And those who already have credit with ORIX Bank, you mentioned that. So already, they are customers of ORIX Bank. So whether ORIX Bank will become a subsidiary of Daiwa Securities, it doesn't really matter, doesn't it, because they are already customers. So is my understanding correct? Kotaro Yoshida: So if they're going to start the transaction with Daiwa Securities, that is positive. But taking this opportunity, it is not likely -- to be honest with you, I cannot actually imagine that they would all start doing business with Daiwa Securities. Actually, we do believe there could be a positive impact. So those who have the real estate loans from ORIX Bank, it is not so large in terms of number in comparison to Daiwa Securities customer base. So the impact could be limited. But in terms of the real estate investment loans, the customer base or customer potential is much larger, not just confined to those who are customers of ORIX Bank. So we also intend to develop new customer base together with ORIX Bank, so we can further expand the customer base. Wataru Otsuka: Understood. So perhaps at the IR meetings and also at the business strategy meeting, we'd like to continue the discussion. Kana Nakamura: Next is going to be the last questioner, UBS, Niwa-san. Koichi Niwa: This is Niwa of UBS. Can you hear me? Kotaro Yoshida: Yes. Koichi Niwa: Well, regarding the bank, I have 2 questions. One, I'd like to know the background of the acquisition. Which one has made the first comment and how long did it take? And also, you're talking about the margin of 1%, the interest margin of 1% as a guideline. How realistic that is going to be? According to your model, 1% of the interest margin seems to be easy to achieve. If that's the case, then that's going to be the image that we should consider as conservative? Or should we think about that a challenging target? That is the question about the bank. The second part of the question is that the U.S. private asset is now going through some turmoil. Any impacts on your business? Or do you have any exposure? And also the response of the retail investors, are there anything that you can share with us? Kotaro Yoshida: Thank you very much for your questions. First of all, the background of this M&A. We, with the ORIX as a company for our group, well, they have been an important business client for a long time. Including the management, we have had very good relationships. And there is much complementarity between the 2 banks. The possibility of working together, we have sounded out to the ORIX Bank from our side. In the last few years, because we entered into a world with positive interest rate, as I mentioned earlier, we have a high expectation of the complementary synergy to deliver. So since last fiscal year, we have made some serious proposals. So the 2 companies continued discussion. And as a result, we decided to work together as one company. That is the background. And talking about the interest margin, Daiwa Next has the deposit to BOJ, of course, at 0.75%. But the weighted average of the bank is about 2.1% for the lending. So thinking about the better yield for our companies, that's going to be 1.36%. So if we're going to have the calculation on a test basis at 1%, that was the scenario that we wanted to provide with you. And then moving on to the private credit, our exposure and the impact. First of all, our exposure is the one that we do have an origination, there's nothing. For the group as a whole, as an exposure, it's very limited and very much of the indirect exposure. So on a consolidation basis, there's no impact on our margin. And for the retail investors -- alternative asset -- for alternative assets -- as Daiwa Securities, the alternative investment is an option for less liquidity, but higher diversification so that the return profile can improve. So alternative is a very important asset class for us. But liquidity is limited. So when our clients decide to buy, then we do have the higher compliance guideline to follow. When there is enough assets and also the exposure should be just one portion of the total asset, especially given the consideration of the low liquidity, those are the items that need to be fully explained and then understood by the customers. The credit -- the private credit trust investment is managed and then consigned to Blackstone. The minimum amount of the investment is USD 50,000. So the subject is the high net worth customers. Though recently, we do see the mass media coverage. And that is causing some concern for the customers. So for all the customers who have those exposures, we are following up for all of them. For the Daiwa Asset and for ourselves, we have been very flexible and trying to provide the information that is user-friendly. So at present, we do see the situation where the cancellation request is mounting or anything. There are some number of people who are considering the cancellation, but it's not that high. So continuously, we will monitor the situation and then think about the follow-up to our customers. Kana Nakamura: Niwa-san, thank you very much for your questions. With that, we want to finish our Q&A session. Unknown Executive: [indiscernible] speaking from Daiwa Securities Group. Well, thank you very much for joining today for investors and analysts who would like to have a continued communication. So thank you very much for your continued support. If you have any further questions, please send us to IR team. Thank you very much for your attention today. Thank you. [Statements in English on this transcript were spoken by an interpreter present on the live call.]
Dominik Prokop: Good morning. This is Dominik Prokop, on behalf of Alior Bank. May I welcome everyone to the results conference. We will talk about the first quarter 2026. And the first part, the bank's results as well as the trends, they will be discussed by members of the Board, President, Piotr Zabski, who will sum up the most important trends and will tell us about business results, Deputy President, Marcin Ciszewski, who will tell us about Risk; and Deputy President, Zdzislaw Wojtera, who will tell us about finance. After the end of the presentation, we will have a Q&A session. Before I hand over to Piotr, may I encourage everyone to ask questions already during the first part of the conference, which will help us smoothly move into the Q&A session. Piotr, you have the floor. Piotr Zabski: Good morning, everyone. The presentation will be composed of 4 parts. Firstly, operational activities with 2 business lines, the corporate and the individual customers, then the risk result and then financial results and other issues. So let me move on to the operational activities and about the first quarter. What you can see here is a slightly changed makeup of the presentation. We wanted to refer to our strategies. There are 3 pillars on the left, scaling up, high resilience, operational excellence. And it's within these categories that I'd like to tell you about what went on in the first quarter. But before moving on, let me just sum up. This was a good quarter for Alior Bank. Our results were PLN 1.5 billion with a 2% growth year-on-year. And taking into account that we have lower interest rates in the country, this kind of growth is really -- in revenue is really making us very happy. This is a real scaling up results. As far as net profit is concerned, we have PLN 403 million. This is a drop of 15%. The corporate income tax is the main result -- the main cause of this result. We will hear from our colleague later about more details. As far as the gross profit are concerned, we are on more or less the same level. As far as other parameters are concerned, very good return on equity, 13.8% increase, the corporate income tax is important in this regard. Very well-managed costs, 37.8% cost-to-income ratio, and we believe that this good level will be maintained. NPLs at a low level, even lower than last year. So this downward direction in the NPLs is maintained. What is crucial is, what you can see on the left-hand side and the first pillar, the scaling up. We grew in the deposit portfolio by 9% year-on-year, which is making us very happy. We want to grow in this particular area. As far as loan sales are concerned, there are 2 elements. But I want to mention mortgage loans in the first quarter 2026 in relation to the previous year, namely the first quarter 2025. It's an increase of 84%, PLN 1.8 billion was the value of the loan sales. There's been a very good quarter as far as the development of relational customers is concerned. We grew by over 100,000 in the number of relational customers. They have to meet a certain level of requirements. It is not obvious that you already become a relational customer while being a bank customer. It's been a very good quarter for Alior Leasing, which is our sister company. And that's part of our scaling up process. As far as high resilience is concerned, I want to draw your attention to our rating. We received an investment rating from S&P, which is important for us because we will be issuing bonds in the euro market, so we hope to receive a good rating level there. Our costs are stable. The credit risk is going down. And we are recommending for the third year running, the payment of dividend to the tune of 50%, PLN 8.93 per share. In the third pillar, the operational excellence, I want to draw your attention to our mobile app development. There's been a new launch of it in the current year. And compared to the previous version, it's on a much higher level. And so we are growing in terms of the users' numbers. It's the highest dynamic in the market, 90% growth at the end of March 2025 (sic) [ 2026 ]. Very good capital position, which gives us the opportunity for further growth. Liquidity is on a good level. New elements in the area of technologies, we have adopted an ambitious AI strategy. We want to be even more dedicated to this high-end use of AI in the bank, and we have very ambitious plans for the next years. That is all as far as the general summary is concerned. Now a bit more about the numbers. If you look at our balance sheet, the assets is almost PLN 105 billion, PLN 85 billion of that is deposits, which is a 9% growth. Assets grew by 8% and the gross performing loans grew by 7%. That's the performing loans, Batik 1 and 2. So these increments, which we announced in the strategy are taking place and allow us to realize higher levels of growth in spite of the drop in interest rates. In this particular slide, some more information about our customers. The relation customers grew by 6% over the year, and there's a 19% growth in mobile app users. What you can see on the right-hand side among the relational customers, which is 50% of the users of our application. And the customers are banking with us quite efficiently. In the mobile app, we have 44% sales in the general framework of our sales channels. As for the balance sheet on the left-hand side, we have the loan portfolio and the deposits on the right-hand side. Let me say a few words about the loans. The customer loans are stable in the growth. The general effort goes to maintain the portfolio and recreate the sales levels. There's a considerable growth in the Burgund Depart, namely the real estate loans. These are important. And the whole portfolio has grown by 8% over the 12 months. As far as the deposits are concerned, all the constituent parts in these bars are growing. That's a good result. The whole of the growth is 12% year-on-year, and we are very happy to see the growth in each of these constituent parts we are improving the results and that coincides with our strategic plan. As far as retail customers are concerned and the mortgage loans, there's been an 80% growth there, there's a lot of activity in the market as a whole. But on our side, the market shares in mortgages, for instance, is definitely higher than the Alior Bank share in the banking sector. So this is something that makes us very happy, and we are catching up there. As for the other loans, non-mortgage loans in the Burgund Depart, you have the installment loans. They have performed slightly worse in the first quarter, but the result was the fact that there's been some carryover of the business partner negotiations, and we haven't managed to do something in the first quarter, but I can be confident that it will be made up in the subsequent quarters. As for the cash loans quarter-on-quarter, there has been growth in spite of prepayments, in spite of the churn and short tenures. The effort that we put into the recreation of the balance is quite efficient and the balance will grow in the subsequent months. As far as the retail customers are concerned, I want to draw your attention to 2 types of activities. Our brokerage house on the left and our TFI sector on the right. What we announced in the strategy was for the second pillar of our strategy to make our results stable by use of the commission. One of the strong players in that department is the activity of our brokerage house. As you can see, there's been a 52% rise in the commission year-on-year, which is considerable with 38% growth of assets and FIO and the considerable rise in the structured product sales. On the side of Alior TFI, we are approaching the PLN 5 billion level of assets. We've even crossed over it, but March has not been a good result for that type of activity as there's been a lot of redemptions. So we hope to come back to the level of PLN 5 billion, but the 34% year-on-year rise is notwithstanding that, and we are definitely on the right track. And it is with these activities that we will be helping to stabilize the commission result. Now the business customer, the left-hand side is the business loan portfolio, which is quite stable if you compare year-on-year results. But within the portfolio, there's been some changes. The first one that means [ commenting ] is that the nonperforming loans dropped down from PLN 2.4 billion year-on-year. And this drop is mainly in the micro businesses sector. We had quite a big historical baggage of nonperforming loans in the micro companies sector. And this part is diminishing. What is important is the growing part in the middle are the segments that we want to develop, namely the small- and medium-sized companies. And here, we've seen an 11% growth. However, in the portfolio, we also have big consortium, the biggest players in the market where you can have slight movement. So the mix of the portfolio in the middle is changing. But in the general terms of its value, we have stability. And I can safely say that the mix of the portfolio is changing for the better. There is more of the healthy parts of the portfolio, which makes our business aims more viable. As far as business customers are concerned, there's been a 5% growth year-on-year in the deposit volume. The last quarter has been very important. We've had a 22% growth in the current account sales. So this is a good offer. It's been readily picked up by the customer and over 70% of the sales is online sales, the new type of banking that we have launched for business customers. And this is bringing profits in terms of current accounts sold. One more slide devoted to the corporate sector, let me draw your attention to our leasing company activity. Alior Leasing has seen record growth in sales, both in terms of leasing and loan sales, 27% is the rise year-on-year and the whole portfolio grew by 12%. So this is the kind of growth which is considerably above the level of the whole of the market. Our activity focuses on financing cars up to 3 tons. We are very strong in that particular area and the share of the market has grown by 6% from 2.9%. So you can see that the leasing is an alternative form for small and medium-sized companies, and these can readily obtain financing from our bank when they've been at least 2 years in operation and so we catch up the gap, we can sell it in the banking channels, and we are very happy with the growth that has been observed there. Some other type of information we are being appreciated in the market. We've been on the podium in the Golden Banker services. And in the Mobile Banking, our application reached the first prize. We have been a leader in the Institution of the Year ranking, so we've been appreciated there. And also, we've received 6 statuettes. Also, we've been appreciated in the top employer title. We've received the certificate for 2026. And what is crucial, but let me stress that again, the investment rating of the bank represents the appreciation of our efforts, which we put into building a quality portfolio, and this translates into the payment of the dividends, generating new sales. And this all creates a situation where Alior Bank is a bank with an investment rating, which makes us very happy. That is all from me about the first quarter, and I will hand over to Marcin for his comments about the risk management. Marcin Ciszewski: Thank you, Piotr. Good morning to all of you. The first quarter of 2026 ended with a very safe capital position. Tier 1 and TCR ratios are at the level of 17.85% with a huge excellent PLN 3.9 billion, which makes it possible to implement all the strategic endeavors. Concerning the TREA ratio, it's been at 21.60%, which is also a very safe position as far as liquidity is concerned. LCR is also at a very high level as well as NSFR, which is definitely higher than required by regulations, 236% and 152%, respectively. We are working on the transformation of our loan portfolio, and we are successively reducing the nonworking portfolio. NPL is at 5.39% at the end of the first quarter. We are maintaining our strategic goal, which is to get below 5% with this ratio at the end of this year. The cost of risk measured with the CoR 0.67%, slightly higher than during the previous period. But here, we can see the impact of our approach towards the sales of nonworking portfolios, which can be seen in the upper right graph, where we can see that at the end of the second and fourth quarters of the year, we are checking the level of the nonworking portfolio, and we are getting additional revenues, improving our CoR ratio. The nonworking portfolio went down from PLN 429 million to PLN 364 million. As far as the NPL indicator is concerned in segments for the retail customers, it's at 2.41% at the end of the first quarter market level. Concerning the business sector, we are reducing it consistently, but it's still higher than expected. At the end of the quarter, we are at the level of 11.35%. We confirm that as far as the cost of risk of our bank, it should not exceed 0.8%, which is also reflected by our strategy, which is implemented consistently. Thank you very much. And now Zdzislaw, has the floor. Zdzislaw Wojtera: Thank you, Marcin. Good morning. I'm going to discuss about the financial results right now. If we look at our income base, as Piotr has mentioned, in the business part, we are glad to see that the number of the clients and the level of loans and deposits are all increasing. With the interest rates getting down, this makes it possible for our income to grow by 2% year-to-year. Of course, the division of the results differs because on the interest rates, we are 0.3 points down. But on the commissions, we are 6% up. If we look at the net result, we can see that it's definitely lower. But as all the banking sector did, we applied a new approach for banking. But what is important is that the gross result is almost the same as the one we have obtained last year in the first quarter of '25. When we look now at the income statement, the P&L, so we can see the total income, net interest income and also the commissions. We have got dedicated slides I'm going to discuss in a moment. And we've got also results on other activities. Let me mention that we have got also the hedging transactions, plus PLN 18 million and also on the transactions with financial instruments, PLN 6 million. And in particular, the hedging transactions assessment is positive in this quarter, and it contributed in a good way to the result. It can change in the future, as you know very well. That's a positive one-off. If we look now at the total costs, they are also under good control. The costs of our activities increased by 2% only, and I'm going to discuss it more precisely on the dedicated slide. What is also important is that the legal risks costs, well, we have identified PLN 37 million as loss of risks due to foreign currency loans. And this is mainly due to the model modification. So when we extended the horizon from 2 to 5 years, the provision for that topic has increased. We do not see a major influx of mortgage in foreign currencies, claims, so this is a trend that is not deteriorating. As far as the gross result, the gross profit is almost at the same level as last year, which with lower interest rates and higher cost is quite a good result for this quarter. Concerning the net profit, we've got the impact of the corporate income tax. We have 37% of rate that has been applied to the whole year here. So getting down to more specific elements of the interest rate results, we can see a decrease by 1% quarter-to-quarter. But taking into account the fact that in February, we have 2 days less, so we can say that this is quite comparable as far as the interest rate results are concerned. When we look at the interest rate margin, which is probably more interesting for you, we can present with a big level of satisfaction this decrease because when we look at what happened as far as the reference interest rates of the National Bank of Poland is concerned, they went down by 200 basis points last year. And as we have already been saying for some time, we are changing the structure of our sales, and we have a huge growth of the mortgage loans, which is stabilizing the income of the bank in the long term, but it has got a negative impact on the margin. Taking into account those 2 basic elements. The fact that we went down from 5.88% to 5.19% only, this can be considered a huge success when we look at the general trend of this decrease. Concerning the deposits and loan ratio, it's 78.5%, which is quite a good result. Concerning the fees and commissions, it has increased by 6% year-to-year. When you look at its development in the past quarters of 2025, we can see that every quarter, it has improved. And I believe that this year, the trend should be continued, which would mean that the number of the clients will increase. The sales of our products will also result in an improved commission income. When I look at the first quarter, year-to-year, there are 2 things that needs to be commented. First of all, the increase of the brokers commissions by PLN 10 million, and this is connected with a higher volume of the investment funds and to a higher activity of our clients at the stock exchange. We've got also a second item, the sales of insurance connected with the mortgage loan sales. We have also seen here a huge growth by PLN 7 million. And my last slide on the operating expenses. As mentioned in the strategy, we want to maintain them at a comparable level, and we want to maintain them in a regime that we have adopted. In order to present it better, we have split costs, operating expenses into bank operating costs and BFG costs, which are above it. So as you can see, every quarter is getting slightly higher, but it's still comparable. When we look year-to-year, quarter-to-quarter, all we can see that there is a slight increase in costs. When we look at the last quarter, we can see that we have mainly HR costs that have increased, but this is due to the structure and to the charges we need to pay as employer for the social security. That's for the first quarter and then it's getting down in the next quarters. When we look at the general governance costs, so usually, in the last quarter, there are additional activities such as marketing activities, IT projects, consultancy services, and this all resulted in higher cost in the fourth quarter. So now we have a decrease in the first quarter of '26. What is important is that when we look at the cost/income ratio, BFG in time, 37.8% for the bank for a bank with our structure, which is a growing bank, it's a very good value. And the most important information for you, I think, we would like for the general cost of governance once BFG included to be maintained at the level of the inflation, so that it would not exceed the inflation ratio this year. Thank you very much. The floor is back to Piotr. Piotr Zabski: Thank you, gentlemen. On the last slide, I would like to comment as follows. We had quite a good quarter. I mean, the first quarter of 2026. We are changing the structure of our balance sheet, of course, it's moving progressively, but in the good direction. The P&L is increasing and even faster than expected in some segments. Mortgage, consumer loans are increasing. Concerning the business clients, the portfolio is stable, but the structure and the mix is improving. We are reducing the nonworking part. We are improving the segments in which we would like to be active. Concerning the P&L, well, all this results in higher income, PLN 1.5 billion that has been mentioned here is due to the increase of our volumes, and we are very glad because of that. Of course, our P&L is highly impacted by all kind of costs that seem to be very well managed. They are not increasing. They're not growing. We may say that in some areas, we are even able to reduce them. That's why we have a very good position on the risks and with a good road followed by the NPLs, all of the risks. The P&L is at a very good level. It's very stable, very solid, PLN 403 million of our results impacted by the corporate income tax mainly is very good. It's one of the best return on investments on the market currently. Cost-to-income, I have already mentioned that and NPLs. So we consider that this quarter has been a good one. It's a good opening of the year. The dividend is paid and our rating -- investment rating have been a strong element of this first quarter. And I think that I will end here, and we will be glad to answer to your questions. Unknown Executive: Well, first of all, what we are observing is a much better situation in terms of winning the law suit. That is why the reserve level is as it is. We are being much more efficient in the litigation process, and that's been the main reason for the drop. Thank you very much. The next question. Unknown Analyst: In the first quarter, was there a reserve for the legal risk related to SKD? And if yes, what was the amount of the reserve? Unknown Executive: Well, in the first quarter, we did not set up a reserve fund for that. We simply decreased because of the incidents of higher success rate that Piotr mentioned. What about the MREL at the end of first quarter 2026. At the capital group level, we received 11.5%. Unknown Analyst: The next question, does the Board see an impact of relational customers to the provision result? And what is the outlook as regards to the commission results for 2026? Unknown Executive: Well, I think this question is not so much about relational loans, but relation with customers. Yes, we see an impact. The relational customers give us a better level of banking. The relational customers bank more readily and use more of our products. Our aim is to increase the commission result by 4%. And we are on a good track as far as this is concerned, there's a growth trend which Zdzislaw showed us. Unknown Analyst: What was the WFD result at the end of the first quarter? Unknown Executive: 44.7%. Unknown Analyst: What is your assessment of the ECJ ruling about the para loan results? Well, what is this ECJ ruling about? Unknown Executive: ECJ said that banks can provide credit for commission, but cannot receive interest from it. However, the fact that they can't receive interest, so the loss from that can be set off by higher interest. So these are 3 important constituent parts of this ruling. We are analyzing what's going on. This is a very fresh ruling. We are very active in the Polish Bankers Union. And the whole of the sector will be very active in limiting the results of that ruling because in our view, this is about the mechanics of the calculation of the bank's remuneration. This mechanics should be modified. And ECJ said simply the potential losses that occur because you do not take interest on commission can be set off by higher interest. So ECJ agrees that remuneration is due to the bank because of that type of activity. And the next question. Unknown Analyst: What part of contract contains the cost of commission of insurance? Unknown Executive: As far as new sales are concerned, we're talking about marginal level of value. We have one as far as I remember. open line, but it is practically being wound up. As far as the other part of the portfolio is concerned, we are analyzing this. This is a fresh issue. So we cannot respond giving you any figures. But historically, we realize that this has taken place, and we are assessing the situation because there's been many changes in the contract, and it's too early to provide a definitive answer on that. Thank you very much. Dominik Prokop: The question from [indiscernible ]. Unknown Analyst: Piotr mentioned about the rise of MSP volumes by 11% year-on-year. On Slide 30, you show the drop by 16% year-on-year. Well, the drop is in the micro companies. But in other segments, we are growing. So I don't know what this is about. In one slide, we're talking about a working portfolio, the one that generates stable growth. And there, we have increased results. But in the subsequent slide, we have the total portfolio in the gross value, which includes the nonperforming loans? Another question about the ECJ ruling about SKD. Can this impact the bank's reserve levels? Unknown Executive: Well, I want to be quite definite. This particular ruling did not refer to SKD. Let us not introduce any confusion here. This ruling was about the right of the bank to obtain interest on the cost of credit like commission or whether this can be compensated. And ECJ said that this can be compensated by a higher level of interest. So this is not an SKD case. There is no sanction related to a free loan. This is about the mechanics of the calculation of revenues due to the bank stemming from commission on loans. Dominik Prokop: Thank you. That was the last question. Thank you all very much for the questions, and thank you to the Board. [Statements in English on this transcript were spoken by an interpreter present on the live call.]
Dominik Prokop: Good morning. This is Dominik Prokop, on behalf of Alior Bank. May I welcome everyone to the results conference. We will talk about the first quarter 2026. And the first part, the bank's results as well as the trends, they will be discussed by members of the Board, President, Piotr Zabski, who will sum up the most important trends and will tell us about business results, Deputy President, Marcin Ciszewski, who will tell us about Risk; and Deputy President, Zdzislaw Wojtera, who will tell us about finance. After the end of the presentation, we will have a Q&A session. Before I hand over to Piotr, may I encourage everyone to ask questions already during the first part of the conference, which will help us smoothly move into the Q&A session. Piotr, you have the floor. Piotr Zabski: Good morning, everyone. The presentation will be composed of 4 parts. Firstly, operational activities with 2 business lines, the corporate and the individual customers, then the risk result and then financial results and other issues. So let me move on to the operational activities and about the first quarter. What you can see here is a slightly changed makeup of the presentation. We wanted to refer to our strategies. There are 3 pillars on the left, scaling up, high resilience, operational excellence. And it's within these categories that I'd like to tell you about what went on in the first quarter. But before moving on, let me just sum up. This was a good quarter for Alior Bank. Our results were PLN 1.5 billion with a 2% growth year-on-year. And taking into account that we have lower interest rates in the country, this kind of growth is really -- in revenue is really making us very happy. This is a real scaling up results. As far as net profit is concerned, we have PLN 403 million. This is a drop of 15%. The corporate income tax is the main result -- the main cause of this result. We will hear from our colleague later about more details. As far as the gross profit are concerned, we are on more or less the same level. As far as other parameters are concerned, very good return on equity, 13.8% increase, the corporate income tax is important in this regard. Very well-managed costs, 37.8% cost-to-income ratio, and we believe that this good level will be maintained. NPLs at a low level, even lower than last year. So this downward direction in the NPLs is maintained. What is crucial is, what you can see on the left-hand side and the first pillar, the scaling up. We grew in the deposit portfolio by 9% year-on-year, which is making us very happy. We want to grow in this particular area. As far as loan sales are concerned, there are 2 elements. But I want to mention mortgage loans in the first quarter 2026 in relation to the previous year, namely the first quarter 2025. It's an increase of 84%, PLN 1.8 billion was the value of the loan sales. There's been a very good quarter as far as the development of relational customers is concerned. We grew by over 100,000 in the number of relational customers. They have to meet a certain level of requirements. It is not obvious that you already become a relational customer while being a bank customer. It's been a very good quarter for Alior Leasing, which is our sister company. And that's part of our scaling up process. As far as high resilience is concerned, I want to draw your attention to our rating. We received an investment rating from S&P, which is important for us because we will be issuing bonds in the euro market, so we hope to receive a good rating level there. Our costs are stable. The credit risk is going down. And we are recommending for the third year running, the payment of dividend to the tune of 50%, PLN 8.93 per share. In the third pillar, the operational excellence, I want to draw your attention to our mobile app development. There's been a new launch of it in the current year. And compared to the previous version, it's on a much higher level. And so we are growing in terms of the users' numbers. It's the highest dynamic in the market, 90% growth at the end of March 2025 (sic) [ 2026 ]. Very good capital position, which gives us the opportunity for further growth. Liquidity is on a good level. New elements in the area of technologies, we have adopted an ambitious AI strategy. We want to be even more dedicated to this high-end use of AI in the bank, and we have very ambitious plans for the next years. That is all as far as the general summary is concerned. Now a bit more about the numbers. If you look at our balance sheet, the assets is almost PLN 105 billion, PLN 85 billion of that is deposits, which is a 9% growth. Assets grew by 8% and the gross performing loans grew by 7%. That's the performing loans, Batik 1 and 2. So these increments, which we announced in the strategy are taking place and allow us to realize higher levels of growth in spite of the drop in interest rates. In this particular slide, some more information about our customers. The relation customers grew by 6% over the year, and there's a 19% growth in mobile app users. What you can see on the right-hand side among the relational customers, which is 50% of the users of our application. And the customers are banking with us quite efficiently. In the mobile app, we have 44% sales in the general framework of our sales channels. As for the balance sheet on the left-hand side, we have the loan portfolio and the deposits on the right-hand side. Let me say a few words about the loans. The customer loans are stable in the growth. The general effort goes to maintain the portfolio and recreate the sales levels. There's a considerable growth in the Burgund Depart, namely the real estate loans. These are important. And the whole portfolio has grown by 8% over the 12 months. As far as the deposits are concerned, all the constituent parts in these bars are growing. That's a good result. The whole of the growth is 12% year-on-year, and we are very happy to see the growth in each of these constituent parts we are improving the results and that coincides with our strategic plan. As far as retail customers are concerned and the mortgage loans, there's been an 80% growth there, there's a lot of activity in the market as a whole. But on our side, the market shares in mortgages, for instance, is definitely higher than the Alior Bank share in the banking sector. So this is something that makes us very happy, and we are catching up there. As for the other loans, non-mortgage loans in the Burgund Depart, you have the installment loans. They have performed slightly worse in the first quarter, but the result was the fact that there's been some carryover of the business partner negotiations, and we haven't managed to do something in the first quarter, but I can be confident that it will be made up in the subsequent quarters. As for the cash loans quarter-on-quarter, there has been growth in spite of prepayments, in spite of the churn and short tenures. The effort that we put into the recreation of the balance is quite efficient and the balance will grow in the subsequent months. As far as the retail customers are concerned, I want to draw your attention to 2 types of activities. Our brokerage house on the left and our TFI sector on the right. What we announced in the strategy was for the second pillar of our strategy to make our results stable by use of the commission. One of the strong players in that department is the activity of our brokerage house. As you can see, there's been a 52% rise in the commission year-on-year, which is considerable with 38% growth of assets and FIO and the considerable rise in the structured product sales. On the side of Alior TFI, we are approaching the PLN 5 billion level of assets. We've even crossed over it, but March has not been a good result for that type of activity as there's been a lot of redemptions. So we hope to come back to the level of PLN 5 billion, but the 34% year-on-year rise is notwithstanding that, and we are definitely on the right track. And it is with these activities that we will be helping to stabilize the commission result. Now the business customer, the left-hand side is the business loan portfolio, which is quite stable if you compare year-on-year results. But within the portfolio, there's been some changes. The first one that means [ commenting ] is that the nonperforming loans dropped down from PLN 2.4 billion year-on-year. And this drop is mainly in the micro businesses sector. We had quite a big historical baggage of nonperforming loans in the micro companies sector. And this part is diminishing. What is important is the growing part in the middle are the segments that we want to develop, namely the small- and medium-sized companies. And here, we've seen an 11% growth. However, in the portfolio, we also have big consortium, the biggest players in the market where you can have slight movement. So the mix of the portfolio in the middle is changing. But in the general terms of its value, we have stability. And I can safely say that the mix of the portfolio is changing for the better. There is more of the healthy parts of the portfolio, which makes our business aims more viable. As far as business customers are concerned, there's been a 5% growth year-on-year in the deposit volume. The last quarter has been very important. We've had a 22% growth in the current account sales. So this is a good offer. It's been readily picked up by the customer and over 70% of the sales is online sales, the new type of banking that we have launched for business customers. And this is bringing profits in terms of current accounts sold. One more slide devoted to the corporate sector, let me draw your attention to our leasing company activity. Alior Leasing has seen record growth in sales, both in terms of leasing and loan sales, 27% is the rise year-on-year and the whole portfolio grew by 12%. So this is the kind of growth which is considerably above the level of the whole of the market. Our activity focuses on financing cars up to 3 tons. We are very strong in that particular area and the share of the market has grown by 6% from 2.9%. So you can see that the leasing is an alternative form for small and medium-sized companies, and these can readily obtain financing from our bank when they've been at least 2 years in operation and so we catch up the gap, we can sell it in the banking channels, and we are very happy with the growth that has been observed there. Some other type of information we are being appreciated in the market. We've been on the podium in the Golden Banker services. And in the Mobile Banking, our application reached the first prize. We have been a leader in the Institution of the Year ranking, so we've been appreciated there. And also, we've received 6 statuettes. Also, we've been appreciated in the top employer title. We've received the certificate for 2026. And what is crucial, but let me stress that again, the investment rating of the bank represents the appreciation of our efforts, which we put into building a quality portfolio, and this translates into the payment of the dividends, generating new sales. And this all creates a situation where Alior Bank is a bank with an investment rating, which makes us very happy. That is all from me about the first quarter, and I will hand over to Marcin for his comments about the risk management. Marcin Ciszewski: Thank you, Piotr. Good morning to all of you. The first quarter of 2026 ended with a very safe capital position. Tier 1 and TCR ratios are at the level of 17.85% with a huge excellent PLN 3.9 billion, which makes it possible to implement all the strategic endeavors. Concerning the TREA ratio, it's been at 21.60%, which is also a very safe position as far as liquidity is concerned. LCR is also at a very high level as well as NSFR, which is definitely higher than required by regulations, 236% and 152%, respectively. We are working on the transformation of our loan portfolio, and we are successively reducing the nonworking portfolio. NPL is at 5.39% at the end of the first quarter. We are maintaining our strategic goal, which is to get below 5% with this ratio at the end of this year. The cost of risk measured with the CoR 0.67%, slightly higher than during the previous period. But here, we can see the impact of our approach towards the sales of nonworking portfolios, which can be seen in the upper right graph, where we can see that at the end of the second and fourth quarters of the year, we are checking the level of the nonworking portfolio, and we are getting additional revenues, improving our CoR ratio. The nonworking portfolio went down from PLN 429 million to PLN 364 million. As far as the NPL indicator is concerned in segments for the retail customers, it's at 2.41% at the end of the first quarter market level. Concerning the business sector, we are reducing it consistently, but it's still higher than expected. At the end of the quarter, we are at the level of 11.35%. We confirm that as far as the cost of risk of our bank, it should not exceed 0.8%, which is also reflected by our strategy, which is implemented consistently. Thank you very much. And now Zdzislaw, has the floor. Zdzislaw Wojtera: Thank you, Marcin. Good morning. I'm going to discuss about the financial results right now. If we look at our income base, as Piotr has mentioned, in the business part, we are glad to see that the number of the clients and the level of loans and deposits are all increasing. With the interest rates getting down, this makes it possible for our income to grow by 2% year-to-year. Of course, the division of the results differs because on the interest rates, we are 0.3 points down. But on the commissions, we are 6% up. If we look at the net result, we can see that it's definitely lower. But as all the banking sector did, we applied a new approach for banking. But what is important is that the gross result is almost the same as the one we have obtained last year in the first quarter of '25. When we look now at the income statement, the P&L, so we can see the total income, net interest income and also the commissions. We have got dedicated slides I'm going to discuss in a moment. And we've got also results on other activities. Let me mention that we have got also the hedging transactions, plus PLN 18 million and also on the transactions with financial instruments, PLN 6 million. And in particular, the hedging transactions assessment is positive in this quarter, and it contributed in a good way to the result. It can change in the future, as you know very well. That's a positive one-off. If we look now at the total costs, they are also under good control. The costs of our activities increased by 2% only, and I'm going to discuss it more precisely on the dedicated slide. What is also important is that the legal risks costs, well, we have identified PLN 37 million as loss of risks due to foreign currency loans. And this is mainly due to the model modification. So when we extended the horizon from 2 to 5 years, the provision for that topic has increased. We do not see a major influx of mortgage in foreign currencies, claims, so this is a trend that is not deteriorating. As far as the gross result, the gross profit is almost at the same level as last year, which with lower interest rates and higher cost is quite a good result for this quarter. Concerning the net profit, we've got the impact of the corporate income tax. We have 37% of rate that has been applied to the whole year here. So getting down to more specific elements of the interest rate results, we can see a decrease by 1% quarter-to-quarter. But taking into account the fact that in February, we have 2 days less, so we can say that this is quite comparable as far as the interest rate results are concerned. When we look at the interest rate margin, which is probably more interesting for you, we can present with a big level of satisfaction this decrease because when we look at what happened as far as the reference interest rates of the National Bank of Poland is concerned, they went down by 200 basis points last year. And as we have already been saying for some time, we are changing the structure of our sales, and we have a huge growth of the mortgage loans, which is stabilizing the income of the bank in the long term, but it has got a negative impact on the margin. Taking into account those 2 basic elements. The fact that we went down from 5.88% to 5.19% only, this can be considered a huge success when we look at the general trend of this decrease. Concerning the deposits and loan ratio, it's 78.5%, which is quite a good result. Concerning the fees and commissions, it has increased by 6% year-to-year. When you look at its development in the past quarters of 2025, we can see that every quarter, it has improved. And I believe that this year, the trend should be continued, which would mean that the number of the clients will increase. The sales of our products will also result in an improved commission income. When I look at the first quarter, year-to-year, there are 2 things that needs to be commented. First of all, the increase of the brokers commissions by PLN 10 million, and this is connected with a higher volume of the investment funds and to a higher activity of our clients at the stock exchange. We've got also a second item, the sales of insurance connected with the mortgage loan sales. We have also seen here a huge growth by PLN 7 million. And my last slide on the operating expenses. As mentioned in the strategy, we want to maintain them at a comparable level, and we want to maintain them in a regime that we have adopted. In order to present it better, we have split costs, operating expenses into bank operating costs and BFG costs, which are above it. So as you can see, every quarter is getting slightly higher, but it's still comparable. When we look year-to-year, quarter-to-quarter, all we can see that there is a slight increase in costs. When we look at the last quarter, we can see that we have mainly HR costs that have increased, but this is due to the structure and to the charges we need to pay as employer for the social security. That's for the first quarter and then it's getting down in the next quarters. When we look at the general governance costs, so usually, in the last quarter, there are additional activities such as marketing activities, IT projects, consultancy services, and this all resulted in higher cost in the fourth quarter. So now we have a decrease in the first quarter of '26. What is important is that when we look at the cost/income ratio, BFG in time, 37.8% for the bank for a bank with our structure, which is a growing bank, it's a very good value. And the most important information for you, I think, we would like for the general cost of governance once BFG included to be maintained at the level of the inflation, so that it would not exceed the inflation ratio this year. Thank you very much. The floor is back to Piotr. Piotr Zabski: Thank you, gentlemen. On the last slide, I would like to comment as follows. We had quite a good quarter. I mean, the first quarter of 2026. We are changing the structure of our balance sheet, of course, it's moving progressively, but in the good direction. The P&L is increasing and even faster than expected in some segments. Mortgage, consumer loans are increasing. Concerning the business clients, the portfolio is stable, but the structure and the mix is improving. We are reducing the nonworking part. We are improving the segments in which we would like to be active. Concerning the P&L, well, all this results in higher income, PLN 1.5 billion that has been mentioned here is due to the increase of our volumes, and we are very glad because of that. Of course, our P&L is highly impacted by all kind of costs that seem to be very well managed. They are not increasing. They're not growing. We may say that in some areas, we are even able to reduce them. That's why we have a very good position on the risks and with a good road followed by the NPLs, all of the risks. The P&L is at a very good level. It's very stable, very solid, PLN 403 million of our results impacted by the corporate income tax mainly is very good. It's one of the best return on investments on the market currently. Cost-to-income, I have already mentioned that and NPLs. So we consider that this quarter has been a good one. It's a good opening of the year. The dividend is paid and our rating -- investment rating have been a strong element of this first quarter. And I think that I will end here, and we will be glad to answer to your questions. Unknown Executive: Well, first of all, what we are observing is a much better situation in terms of winning the law suit. That is why the reserve level is as it is. We are being much more efficient in the litigation process, and that's been the main reason for the drop. Thank you very much. The next question. Unknown Analyst: In the first quarter, was there a reserve for the legal risk related to SKD? And if yes, what was the amount of the reserve? Unknown Executive: Well, in the first quarter, we did not set up a reserve fund for that. We simply decreased because of the incidents of higher success rate that Piotr mentioned. What about the MREL at the end of first quarter 2026. At the capital group level, we received 11.5%. Unknown Analyst: The next question, does the Board see an impact of relational customers to the provision result? And what is the outlook as regards to the commission results for 2026? Unknown Executive: Well, I think this question is not so much about relational loans, but relation with customers. Yes, we see an impact. The relational customers give us a better level of banking. The relational customers bank more readily and use more of our products. Our aim is to increase the commission result by 4%. And we are on a good track as far as this is concerned, there's a growth trend which Zdzislaw showed us. Unknown Analyst: What was the WFD result at the end of the first quarter? Unknown Executive: 44.7%. Unknown Analyst: What is your assessment of the ECJ ruling about the para loan results? Well, what is this ECJ ruling about? Unknown Executive: ECJ said that banks can provide credit for commission, but cannot receive interest from it. However, the fact that they can't receive interest, so the loss from that can be set off by higher interest. So these are 3 important constituent parts of this ruling. We are analyzing what's going on. This is a very fresh ruling. We are very active in the Polish Bankers Union. And the whole of the sector will be very active in limiting the results of that ruling because in our view, this is about the mechanics of the calculation of the bank's remuneration. This mechanics should be modified. And ECJ said simply the potential losses that occur because you do not take interest on commission can be set off by higher interest. So ECJ agrees that remuneration is due to the bank because of that type of activity. And the next question. Unknown Analyst: What part of contract contains the cost of commission of insurance? Unknown Executive: As far as new sales are concerned, we're talking about marginal level of value. We have one as far as I remember. open line, but it is practically being wound up. As far as the other part of the portfolio is concerned, we are analyzing this. This is a fresh issue. So we cannot respond giving you any figures. But historically, we realize that this has taken place, and we are assessing the situation because there's been many changes in the contract, and it's too early to provide a definitive answer on that. Thank you very much. Dominik Prokop: The question from [indiscernible ]. Unknown Analyst: Piotr mentioned about the rise of MSP volumes by 11% year-on-year. On Slide 30, you show the drop by 16% year-on-year. Well, the drop is in the micro companies. But in other segments, we are growing. So I don't know what this is about. In one slide, we're talking about a working portfolio, the one that generates stable growth. And there, we have increased results. But in the subsequent slide, we have the total portfolio in the gross value, which includes the nonperforming loans? Another question about the ECJ ruling about SKD. Can this impact the bank's reserve levels? Unknown Executive: Well, I want to be quite definite. This particular ruling did not refer to SKD. Let us not introduce any confusion here. This ruling was about the right of the bank to obtain interest on the cost of credit like commission or whether this can be compensated. And ECJ said that this can be compensated by a higher level of interest. So this is not an SKD case. There is no sanction related to a free loan. This is about the mechanics of the calculation of revenues due to the bank stemming from commission on loans. Dominik Prokop: Thank you. That was the last question. Thank you all very much for the questions, and thank you to the Board. [Statements in English on this transcript were spoken by an interpreter present on the live call.]
Kotaro Yoshida: This is Kotaro Yoshida from Daiwa Securities Group Inc. Thank you very much for taking the time to participate in our conference call today. I will now explain the financial results for the fourth quarter of FY 2025 announced today following the presentation materials available on our website. First, please turn to Page 4. I will begin with a summary of our consolidated financial results. Percentage changes are in comparison to the third quarter of FY 2025. In Q4 FY 2025, despite the continued highly volatile market environment, our profit base, primarily driven by asset-based revenues, functioned steadily, allowing us to maintain a high level of consolidated profit. Net operating revenues were JPY 197.8 billion, up 1.7%. Ordinary income was JPY 67 billion, down 3.6% and profit attributable to owners of parent was JPY 49.8 billion, up 7.3%. Looking at the results by division in the Wealth Management division, as a result of our focus on total asset consulting, both the contract amount and net inflow for wrap account services reached record highs and net asset inflows also expanded. In Securities Asset Management and real estate asset management, assets under management grew steadily, continuing to expand our revenue base. Global Markets accurately captured customer flows amid market fluctuations, resulting in increased revenues in both equity and FICC. In Global Investment Banking, domestic M&A remained strong. As a result of these factors, the annualized ROE was 11.5%. The year-end dividend is JPY 35 per share. Combined with the interim dividend of JPY 29, the annual dividend will reach a record high of JPY 64, resulting in a dividend payout ratio of 50.8%. Please turn to Page 8. This page shows base profit, our KPI for stable earnings as outlined in the medium-term management plan. FY 2025 base profit grew steadily to JPY 182.7 billion, up 32.9% year-on-year. We have achieved a level that significantly exceeds the JPY 150 billion target set for the final year of the medium-term management plan, doing so in just the second year of the plan. Please turn to Page 11. I will now explain the statement of income. Commissions received was JPY 131.2 billion, up 2.0%. A breakdown of commission received is provided on Page 26. Brokerage commissions increased significantly to JPY 31.9 billion, driven by an increase in customer flow. Please turn to Page 12. Selling, general and administrative expenses were JPY 138.3 billion, plus 4.1%. Personnel expenses increased due to an increase in performance-linked bonuses. Please turn to Page 14. This slide shows the annual trends in revenues and SG&A expenses. Whilst performance-linked costs and strategic expenses such as IT investments have increased in tandem with business expansion, the increase in fixed cost has been constrained, keeping overall costs at a well-controlled level. Please turn to Page 15. Total ordinary income from overseas operations was JPY 6.9 billion, down 17.6% quarter-on-quarter. By region, Asia and Oceania saw an increase in profit, supported by equity-related revenues driven primarily by Asian equities. On the other hand, the Americas recorded a decrease in profit due to a decline in M&A revenues. Next, I will explain the financial results by segment. Please turn to Page 16. First is the Wealth Management division. Net operating revenues were JPY 81 billion, plus 5.2% and ordinary income was JPY 33.1 billion, plus 12.1%. We believe that the results of our ongoing efforts in the asset management type business have manifested in our sales performance despite the persistent high volatility in the market environment. By product, equity saw a revenue increase of JPY 1.1 billion due to increased trading in Japanese equities. Fixed income revenues also increased by JPY 500 million as we accurately captured investment needs. Sales of fund wrap increased significantly, driven by growing demand for long-term diversified investment and portfolio management. In addition to inflation hedging, wrap-related revenues reached a record high of JPY 18 billion. Asset-based revenues reached a new record high of JPY 33.4 billion, driven by increase in agency fees for investment trust and wrap-related revenues. The fixed cost coverage ratio based on asset-based revenue in the Wealth Management division was 120%, and the total cost coverage ratio was 76.5%. Please turn to Page 17. This slide shows the status of sales and distribution amount by product within our domestic Wealth Management division. Our wrap account service reached a record high level with total contract AUM rising to JPY 6.4046 trillion. New contract amounted to JPY 386.2 billion, and net inflows came to JPY 276.2 billion, both marking all-time highs. Our fund wrap also continues to grow strongly. Its characteristics have been well received by clients in both favorable market conditions and during periods of adjustment, resulting in a significant expansion in assets under contract. In addition, collaboration with external partners such as Japan Post Bank and Aozora Bank has been progressing steadily, contributing further to the growth in the new contracts. Please turn to Page 18. This section outlines the progress of our wealth management business model. Cumulative balance-based revenues for fiscal 2025 increased to JPY 123.2 billion. Net inflow of assets also remained high, totaling JPY 1.6342 trillion. In line with our group's fundamental management policy of maximizing clients' asset value, we will continue to provide optimal portfolio proposals based on each client's total assets while working to build a revenue base, which is less susceptible to market fluctuations. Please turn to Page 19. Here, we show the status of Daiwa Next Bank. NII, net interest income, totaled JPY 11.2 billion, up 11.2% and ordinary profit reached JPY 6.2 billion, up 30.2%. The increase in policy rates contributed to an expansion in net interest margins. The promotion of total asset consulting, together with initiatives such as competitive deposit interest rates, including a 1.2% 1-year time yen time deposit for retail customers proved effective and deposit balance surpassed JPY 5 trillion. And now turning to Page 20. Let me explain the Asset Management segment, beginning with Securities Asset Management. Net operating revenues were JPY 19.7 billion, up 5.9%; and ordinary income was JPY 11.4 billion, up 11.6%. Daiwa Asset Management publicly offered securities investment trust AUM topped JPY 37 trillion, hitting record high. And then moving on to Page 21 for real estate asset management. Net operating revenues were JPY [ 9.9 ] billion, down 10.6% and ordinary income was JPY 9.8 billion, down 5.6%. While revenues and profits declined on a quarterly basis, mainly due to the absence of property sales gains recorded in the previous quarter, real estate asset management is a business in which the profit grew in line with AUM. AUM at Daiwa Real Estate Asset Management surpassed JPY 1.6 trillion, and we expect stable midterm growth in line with continued AUM accumulation. In addition, equity method investment gains from Samty Holdings contributed to maintaining a high level of profit. On Page 22 is Alternative Asset Management. Net operating revenues were negative JPY 2.6 billion and ordinary income was negative JPY 4.8 billion. And the Renewable energy, we recorded provisions and impairments due to the revaluation of certain portfolio investments. On Page 23, lastly, let me explain the Global Markets and Investment Banking division. First, Global Markets, net operating revenues were JPY 51.3 billion, up 13.4% and ordinary income was JPY 17.7 billion, up 48.6%. Both equities and FICC performed strongly, resulting in a significant increase in revenues and profits. In equities, trading flows in Japanese stocks increased substantially, particularly among overseas investors, leading to a 6.2% rise in revenues. By offering a diverse range of execution methods, we successfully captured large-scale trading mandates contributing to revenue growth. In FICC, revenues increased 20%, driven by strong performance in JGBs and credits. We effectively captured customer order flows in both domestic and foreign bonds and the position management remained solid even in a highly volatile market environment. And now turning to Page 24. In Global Investment Banking, net operating revenues were JPY 24.1 billion, down 7.4% and ordinary income was 2.1 billion, down 60.5%. But M&A advisory remained strong in Japan and the revenues increased in Europe within our overseas operations. That concludes the explanation of our financial results for the fourth quarter of fiscal 2025. Fiscal 2025 on a full year basis experienced high volatility in stock price and interest rates, but the year itself was quite active overall. And the entire business portfolio had higher stability so that income was stable and the market response capability also improved. We were able to benefit from both of them. As a result, the second year of this midterm plan hit record high in terms of the profit and the ordinary income was hitting the highest in the last 20 years. Well, towards the end of the midterm plan, we think that we have a very good strong result. Now we'd like to move on to the announcements that we have made about the subsidiary of the ORIX Bank, as we have explained on our website. I will explain the overview, objectives and financial impact in accordance with the materials published on our website. Please turn to Page 2 of the document entitled regarding the acquisition of ORIX Bank as a subsidiary. This is a transaction summary. In this transaction, Daiwa Next Bank will make ORIX Bank a wholly owned subsidiary. We also plan a merger of the 2 banks in the future. The acquisition price is JPY 370 billion, and the final acquisition price will be determined after price adjustments stipulated in the share transfer agreement. The acquisition will be funded entirely by our own funds, strategically utilizing the capital buffer we have accumulated to date. Next, the primary objective of this transaction is to continuously expand the stable revenues of the Daiwa Securities Group and improve ROE and EPS through the strengthening of the Wealth Management division. By integrating Daiwa Next Bank and ORIX Bank, which have different strengths, we aim to enhance our ability to provide solutions for our clients' challenges regarding both assets and liabilities, thereby significantly improving the corporate value of both banks. Specifically, we will realize sustainable growth by combining the outstanding lending and trust capabilities cultivated by ORIX Bank with the deposit gathering capabilities backed by our group's solid customer base and sales network. There are 3 pillars to this strategy. First, deepening the total asset consulting tailored to the life stages of each individual client. Second, establishing a sustainable growth model through a virtuous cycle of deposit and lending expansion. Third, maximizing synergy effects through functional integration by a future merger. I will explain each of these in turn. Please turn to Page 3. The post-integration bank will have total assets of JPY 9 trillion and approximately JPY 400 billion in equity capital, evolving into a comprehensive bank, combining advanced lending and trust functions with strong deposit gathering capabilities. By offering competitive deposit rates backed by ORIX Bank's high investment capabilities, we aim to establish a sustainable growth model through a virtuous cycle of deposit and lending expansion. Regarding the impact on consolidated financial results, there is a potential to improve net interest income as a synergy effect. In addition to the over JPY 1.5 trillion of drawable funds from Daiwa Next Bank's current account at the Bank of Japan, we aim to accumulate JPY 2 trillion in deposits over the next 5 years as a synergy effect, separate from the stand-alone deposit growth of both banks through the provision of competitive deposit rates. We plan to invest a total of JPY 3.5 trillion in real estate investment loans and securities-backed loans to improve net interest income. Assuming we can secure a 1% interest rate margin improvement, our estimates indicate a potential improvement of JPY 35 billion in net interest income. In addition to these synergy effects, ORIX Bank's stand-alone performance will be consolidated into our financial results. The bank's average ordinary income over the past 5 years is approximately JPY 30 billion with a net income of approximately JPY 20 billion. On the other hand, we expect to incur amortization expenses for goodwill associated with the acquisition. Next, regarding capital and regulatory aspects. We will maintain financial soundness while effectively utilizing our capital buffer. Whilst the implementation of this transaction will lower the consolidated total capital adequacy ratio by 5 percentage points, it will still exceed 14% on a fully loaded Phase III finalization basis, securing a certain level of capital buffer. However, to expand our capacity for future growth investment and shareholder returns, we will also consider issuing perpetual subordinated bonds. Please note that we are not considering equity financing. Now moving on to Slide 4. Let me see the strength of Daiwa Next Bank. That is the strong deposit gathering capability. In the meanwhile, it has to challenge with the limited lending and the trust functions. Against that, the ORIX Bank has a strong lending and trust function. That's their strength, while the challenge is the deposit gathering capability. So while we are complementing or we are able to complement each other with the strength and the challenge, we think this is an ideal match between the 2. And moving on to Slide 5. I may be repeating myself, but the objective of making them a subsidiary is to strengthen the wealth management division and also a great leap in terms of the stability of the income as a result of that. The stronger Wealth Management division is not coming from one point. It comes from some pillars, the deepening total asset consulting, virtual cycle of deposit and loan expansion and accelerating growth through collaboration with the Asset Management division. Those are going to be the 3 pillars to enhance the management division and the stability of the income. And then moving on to Slide 6. We are trying to see the deeper total asset consulting capability for the clients. The assets and liabilities of our customers would change from life stage to life stage. That's the reason why not only the assets, but the liabilities all included. It's quite important to have the total asset consulting capability to optimize our capability of designing the balance sheet of the customers. By utilizing the ORIX strength, which is the lending and the trust, we are going to be providing the solutions for the pains of the customers depending upon their life stage. And then moving on to the Slide 7. We're thinking about accelerating the growth spiral by leveraging the strength of the banks. we look at those banks alone, the balance is going to be accumulated. But as a result, in addition to the growth of each bank's deposit balance, we aim to expand the deposit by over JPY 2 trillion in the next 5 years as a synergy effect, the asset -- the loan asset of the ORIX is quite competitive. So based upon which we're going to offer the Daiwa Securities customers a competitive deposit interest so that we are able to get -- acquire the [ stucki ] deposit. And then eventually, that is going to increase the deposit balance. That is going to be a great spiral of the growth of the banks overall. And then on Slide 8, this shows the changes of the balance sheet structure as a result of the integration of the 2. On the asset side, the lending and securities and on the liability side, the ordinary deposit and the time deposits are going to be all balancing so that the balance sheet is going to have a good risk diversification. The explanation is over with that. The details is going to be explained by our CEO, Ogino, at the management strategy meeting, which is scheduled to be held next month. By responding flexibly to the variety of needs by the customers, we're going to be capturing the changes in the market environment. And as a leader of the financial and capital market, we are going to pursue sustainable growth. We sincerely appreciate your continued support, and thank you very much for your kind attention. With that, we finish our explanation. Now let us move on to the Q&A session. Kana Nakamura: [Operator Instructions] I would like to introduce the first person, SMBC Nikko, Muraki-san. Masao Muraki: This is Muraki from SMBC Nikko Securities. So I have a question related to ORIX Bank's acquisition. The first point relates to Slide 3. You talked about the synergy and how it supplements with one another. So deposit is JPY 2 trillion increase. That is the number you've mentioned already, so 1.05% to 2%, that is the time deposit level. So going forward, do you intend to actually increase this to a competitive level? That is the first question. And also, you would have a loan increase by JPY 3.5 trillion. So you have the real estate loan and the secured loans. What is the breakdown in terms of the loan growth? So second part of the question relates to your capital strategy. So this is Slide 12 of the material. You have the image here. So this will be over 14%. The capital ratio will come down. But if you look at the future from the current level, the capital level intends to be built. So I don't know if it's 17% or 18%, it's hard to tell from this diagram. So whilst you're increasing this level, what are some prospects of the share buybacks? What are some of the ideas we should have? In the past, the share buybacks they conducted even amongst the high level of capital. But now if the capital is going to be depressed, perhaps there will be less allocated or different allocation to the share buybacks. So please give us some idea. Kotaro Yoshida: Thank you very much for that question. The first part of the question, so what are the JPY 2 trillion of deposit as part of the synergy? So what is the outlook? So related to this point, we are confident that we can acquire. We believe there is a fair chance that we can achieve that number. So within this fiscal term -- so after the rate hike, so Daiwa Securities, there has been a 2% of provision in the year. So last year, in terms of the time deposit, so about JPY 650 billion increase in terms of the time deposit. So if you can provide a competitive -- the deposit, right, given the fact that Daiwa Securities have a nationwide network and the high-level consulting capabilities and through our consultants, we should be able to acquire the deposit. So of course, there has been a shift away from savings to investment. But this is not just the deposit into equities. But also, we have been providing consulting to their entire asset, inclusive of deposit. So within that process, the larger the pie is, the better chance that we may have for the acquisition of deposits. So JPY 2 trillion is feasible. That is our expectation. Also about the JPY 3.5 trillion of the loan, so real estate loans and also the securities, the back loans, the breakdown of that, we don't have the exact number as we speak. But already, what ORIX Bank is providing, that is an investment use in real estate loan, it is for the one mansion for the single-family hold in the metropolitan area. So the number of banks have been on the decline. But in terms of the number of households, single households in the metropolitan area is expected to rise. Therefore, we do believe there is sufficient demand. In the past several decades, ORIX Bank has built this lending capability. So in relation to that, it is very possible that we can achieve that JPY 3.5 trillion of lending. Also the second part of your question about the capital, the strategy. Please hold. So through this acquisition, so in terms of the consolidated total capital adequacy ratio will be out -- will be down by mid-5% or so. So right now, it's over 14%. So that is the level that we're expecting at this moment. So going forward, how the capital policy may change, and that is the intent of your question. But as of this moment, no change vis-a-vis our basic policy. So the dividend -- the payout ratio is at 50% or higher. And also the floor for the annual dividend of JPY 40, we'd like to maintain that. So through this acquisition, there will be some level of decline in terms of the total capital adequacy ratio. However, we can ensure the financial soundness. And also by steadily building on the profit, we can continuously keep this financial soundness. Also in order to ensure flexibility, AT1 bonds issuance is also under explanation. Of course, the actual amount is still under consideration. But again, we'd like to further have a solid capital base. Also in terms of share buybacks, the question was what are our plans going forward. Again, no change in terms of our general stance. So based on the assumption of financial soundness, in light of the different operating environment, gross investments will be considered. But of course, that is necessary for future shareholders' return. So we definitely like to prioritize on that. So looking at the gross investment and the buyback, we need to strike the right balance and be agile and flexible. So this particular deal, this is an impact of the profitability of ORIX Bank. And also through the realization of the synergy, we can expect to enhance the capital generation within the group as a whole. So ultimately, this would actually lead to increase in the source for shareholders' return. So going forward, the capital allocation, capital policy is a very important policy. So given the current operating environment, we'd like to make a comprehensive approach. Masao Muraki: Related to the second part of my question. So at this particular timing, you didn't announce the share buybacks. So in terms of the perpetual subordinate bonds utilization, related to that point, so what is the potential amount AT1 bond issuance that is? What is the amount they have in mind? And once you announce that, in light of the credit rating, we expect you to conduct share buybacks at that timing. Kotaro Yoshida: Thank you for that question. So in terms of the AT1 bonds, the issuance, so it will be within the part of the consideration. But in terms of concrete details, we will consider those going forward. Also in terms of the credit rating, so we would like to definitely conduct meticulous communication with the credit rating companies. So we may also incorporate those ideas. So based on that, so whether there's a possibility of buybacks, again, we'd like to take a comprehensive approach in making that decision. So that has been my answer. Kana Nakamura: The next question is by Morgan Stanley, Sato-san. Koki Sato: This is JPMorgan, Sato speaking. Well, I have several questions about the bank. One, we simply this consolidation, you're going to make them a subsidiary. After that, how should we think about how you're going to be executing it? On the material, you're talking about the recurring income of about JPY 30 billion and the net profit of about JPY 20 billion. What kind of upside are you expecting from that baseline? I think that, of course, depends on the analyst, but the depreciation or the amortization of the goodwill and also the sourcing cost, probably a part of that needs to be recognized as well. So when you explain that to the market participants, what kind of a level are you going to say to them on the annual contribution? What is going to be the level that you think you're going to be talking in that communication to the market? The second question is about this -- by the acquisition of this ORIX Bank, you still have an external partners. Are there going to be any changes in the relationship with those partners? Like Aozora Bank, you are currently accounting for them under equity method. So your business alliance with them, is it going to be changing because of your acquisition? There might be some changes in terms of like focal point that you are working together with those external partners. And also when it comes to the asset-backed ones, partly, you are working together with Credit Saison. What are you going to be thinking about those asset-backed securities? Kotaro Yoshida: Thank you very much for your questions. The first question about the bank. Well, as you say, the average of the ordinary income is about JPY 30 billion of the ORIX and the profit is about JPY 20 billion. At Daiwa Shoken Daiwa Securities Group, our capital average is about JPY 1.7 trillion, meaning that on a simple calculation, it has the positive impact of pushing up the ROE by 1.2%. The equity finance is not likely to happen. So that's the scenario that we are seeing at this point. But the amortization of the goodwill and assuming that AT1 is going to be issued, which we, of course, need to examine. But anyway, setting that aside, we think that is a basic simple calculation that we are currently having our basis. And the second question, first of all, we do have the external partnership with Aozora Bank. And regarding that partnership, we assume there's no impact. Well, regarding the integration, it's for strengthening the wealth management business. The total asset consulting business for the retail business, the asset to support from the total asset consulting is going to be stronger. And the trust functions in order to work in our wealth management business for the retail market, it's important to have the trust function. Well, organically within the company, we did not really have much capability to grow itself. And by having the external partners, we have provided some instruments. But from now on, we think we'll be able to do that in-house. That's going to be another one big pillar. Well, regarding Aozora Bank, our partnership with Aozora Bank, there are some corporates that are listed and private. We have been providing the referral to the Aozora Bank and also the LBO financing, for example, have been provided and have been providing in the past so that the customer trade is quite different in Aozora Bank. So we think both can actually stand. And also for the real estate-backed loans, well, Credit Saison is a part of the business that we've been engaged with. But Fintertech is jointly operating -- operated by Credit Saison. So they have the asset -- the real estate asset-backed loans. But of course, the market size is limited so that the capacity is not that big. And this time, thinking about the capability being much bigger. I think the issuance coming from the business is going to be having new opportunities for us to grow our pie itself. Does that answer my question? Koki Sato: What about the amortization of the goodwill. Any color on that scale? Kotaro Yoshida: The amortization amounts and the cost for the amortization we're going to be discussing in details more. So at this point of time, there's nothing that we can comment. So please be patient. During the time comes for the closing, we think we'll be able to come to that point. Kana Nakamura: So let us move on to the next question. BofA Securities, Tsujino-san, please. Natsumu Tsujino: The last point about the goodwill amortization, it could be as long as 20 years, but some say it could be 10 years. So you should have some sort of image in terms of the amortization. And also in terms of decision of the dividend, it would be -- so the net profit -- so would you be using the same sort of net profit regardless of the amortization. So 20 years or 10 years, I don't think that you have no image as to the amortization. If you can give us some color, that would be helpful. That is the first question. Kotaro Yoshida: Thank you very much for that question. So of course, we have some image or some ideas. So the duration that you've mentioned, it will be within the time frame that you've mentioned. But as of this moment, we're working together with the auditors. So we would like to refrain from giving you an exact answer. Also, as far as dividend is concerned, as you rightly mentioned, no change in terms of the dividend payout ratio. So 50% or higher of the earnings. So no change in terms of the dividend policy. Also in terms of ORIX Bank, so they have the Tianjin report. So as of September end, so in terms of the J-GAAP, excuse me, J-GAAP earnings, JPY 7.4 billion, and ordinary income was JPY 10.6 billion. So it is actually quite lower in comparison to 5-year average. So in order to drive this, do we just work towards that JPY 8.6 trillion. I think that is the direction we should aim for. But right now, it's a midterm -- sorry, interim times 2. Natsumu Tsujino: Is that the image that we should have in mind for ORIX going forward? The interim number, double that number? Kotaro Yoshida: First of all, as of September 2025, the interim results for the company -- so within ORIX Bank, there were some rebalancing of the securities. So there were some loss from sales. So that is why the amount has ended to that one. So somewhat lower that is. That is our understanding. So in terms of the underlying capability, then it is closer to 5-year average then. Natsumu Tsujino: Okay. Understood. So the third point -- the third question I have, this is a question related to the results. So FICC has been very favorable. So Q3, there was a growth. In Q4, there was a further growth in FICC. So how sustainable is this? So for the March quarter, how has been the recent performance? And how is it trending now as we speak? Kotaro Yoshida: Thank you very much for that question. So in terms of FICC, amidst this very high level of volatility, we were able to capture the customer flow, and we've been able to turn those into profit. So that has been very positive. Also in terms of products, that's been all around. So we have JGBs and also, we have some domestic derivatives and so forth. So within this high level of volatility, we do have a high level of activities amongst the customers. So the customer flow, we were able to capture that through the communication with the customers. We can anticipate the customer flow and conducted the positioning. So through this control, that has led to a positive impact of the earnings. So that has been the experience of this past quarter. So for FY 2025, in the first part of the year at the phase of rate increase, I think we have also mentioned there were some difficulties in conducting the position control. But we have addressed these issues, conducted communication with the customers and also develop customers and also address the diverse needs of the customers. We've been able to have more strengths in the position management. But just because that we were able to do that. That doesn't mean we can sustain this without doing anything because, of course, the market is changing every day. So accordingly, we would like to enhance our capability to capture the customer flow. And also, we'd like to steadily strengthen the position management system. Also for the fourth quarter, so for the March quarter, that is FICC, the revenue image that is, so January 3 and February is 2 and March is 5. So in terms of the month of April, so in comparison to the fourth quarter average, maybe it is somewhat subdued for the month of April. But again, the customer flow continues to be fairly active. So of course, the environment continues to be uncertain, but we would like to have a closer communication with the customers. And we are hoping that we can turn it to our better performance. Kana Nakamura: Next question is Nomura Securities, Sasaki-san. Futoshi Sasaki: This is Sasaki of Nomura Securities. One question about the earnings call results and one about ORIX. Well, I'd like to talk about the wealth management. The AUM in the first half was declined and the previous quarter was down, but the asset inflow was making an improvement. I would understand that, that is because of the drop in the U.S. equity price. For the retail investors, there was some sales for the realization sales. Am I right to understand that? If I'm not, then please correct me. And the second question is about the acquisition of ORIX Bank. So-called -- are there any binding contracts for like a key man close that you are going to be able to retain the key men or the management people. I will also be able to get those words from the ORIX side. The ORIX side, the asset is very characteristic is because of the support getting from their parent company, which is ORIX. Is that also something that you have captured? Or do you think the business is going to be continuing based upon your strength as a stand-alone basis? Kotaro Yoshida: Well, thank you very much for your questions. First of all, about the asset inflow. On the earnings announcement material, Slide -- just a moment. For the fiscal 2025, we have had the inflow. So compared to the year before, the inflow amount was about the same as the 2024. Futoshi Sasaki: I'm sorry. The fourth quarter is my question. The fourth quarter inflow. Kotaro Yoshida: Okay, Q4 only. But regarding the AUM, on this quarter, the amount has declined. However, the U.S. stock was one reason. And also the fall in the stock price in domestic as well. So the asset inflow, the net inflow has increased has surpassed as a result. But the asset inflow itself, as I mentioned earlier, has been quite active and quite strong. Well, since 2007, the asset flow side has been really big. Futoshi Sasaki: Okay. And regarding the acquisition of M&A in the contract, do we have any key men close about the retention of the management people. Kotaro Yoshida: Well, regarding the close of the contract, I should not make any remarks. But after the merger or after the integration, the smooth integration is going to be, of course, the most important. And ORIX and ORIX Bank, both are, of course, making effort for the smooth and continual operation. So as a large direction, we, of course, have had the agreement to come to this agreement or decision so that we shall make an effort to deliver results. Futoshi Sasaki: So assuming that, for example, the real estate finance, the property sourcing is basically coming from partly support from ORIX. Am I correct? The support from the ORIX Group. Is it also coming? Kotaro Yoshida: I didn't really understand. Well, from the very beginning for the sourcing, the ORIX Bank has been acquired by using their own network. So the support from ORIX is, as far as we understand, is limited, if any. Kana Nakamura: I would like to move on to the next question. SBI Securities, Otsuka-san, please. Wataru Otsuka: This is Otsuka from SBI Securities. Can you hear me? Kotaro Yoshida: Yes, we can hear you. Please go ahead. Wataru Otsuka: So one question at a time. So related to the -- you've talked about the asset inflow related to the previous question. So in terms of the cash in the past 2 years, it has been the strongest. So if you can actually tell us the reasons behind that. This is Page 49, Slide 49 about the actual the cash that is. Kotaro Yoshida: Thank you very much for that is. So we have the bank deposits as cash and it may turn into investment trusts and fund wraps. So there are different objectives for that. But roughly speaking, Q4 fund wraps, in order to contract the fund wraps, there are a lot of cash paid in from other banks. So we did see a lot in the past quarter. Also for Daiwa Next Bank deposit, so there were some cash paid in for Daiwa Next Bank's deposit. That was another reason. Also, there has been active transaction of the Japanese equities for the March quarter. So in order to buy the equities, a lot of people have actually cashed in. On the other end, the share price actually peaked in the month of February, some may actually sold their holdings. So actually, they may have withdrawn the cash. So on a net basis, this is the number that we had. Wataru Otsuka: Understood. So fund wraps then. So for additional and also new purchases, both have been strong then? Kotaro Yoshida: Yes, both. Wataru Otsuka: Second question relates to ORIX Bank. So this is Slide 6 of the presentation material. So in terms of the clients' life stage, I'd like to understand this accurately. So with the acquisition of ORIX Bank, the question is, where would you like to focus? So according to Slide 6, so 60s, 70s, 80s, actually, the asset exceeds the liabilities. So those who are in excess of assets and those generation, ORIX excels in the best real estate investment loans. So do you intend to actually provide those to those elderly customers? Or are you actually focusing on more those in 30s and 40s where the liability is larger for assets? We will be focusing on extending credit to them. So for those in 30s to 40s, so they will be the first house the purchases. So this is different from the investment real estate loans. So this may be an area ORIX Bank is not necessarily strong. So how do you intend to actually approach the different life stages of the clients? Kotaro Yoshida: Thank you very much for that question. So according to the Slide 6 on the bottom part about the image of asset and liability balance by generation. So generally speaking, by different age, so the younger, you would have more liabilities. So you may have the housing loans or investment loans. So basically, liabilities tends to be higher in comparison to assets. But once you exceed over the age of 60, net assets would start to increase. So for Daiwa Securities, the main customers for Daiwa Securities are mainly those 60s or above. So as you can tell from this image, so asset on a net basis, it is larger. And so we have been providing different consultation for the management of their assets. So in other words, for those customers in the 40s and 50s, asset formulation type of proposals by NISA, that has been conducted. But of course, the inherent needs of these generation is how they can actually extend and also repay the loans. And also for those who wish to actually invest in real estate, we didn't have the facility to actually provide credit towards that end for those in the 40s and 50s. Now for ORIX Bank, the real estate, the bank loans, the main customer image is to share with you is in the metropolitan area. And so those in the 30s and 40s, family men working for listed companies, they account for a large proportion of ORIX Bank. So generally speaking, they do have high level of income. And of course, they have their own the housing. But at the same time, they are investing in the metropolitan one-room mansions, one-room condos. So that has been the main customers that ORIX Bank has been cultivating. So going forward, what ORIX banks provide. So they have the apartment loans that is another part of the loan product offerings. So this is more towards high net worth individuals and also more of the more elderly customers. So we can actually provide these products to the Daiwa Securities customers for these apartment loans. Also from what we have received, the securities from the Daiwa Securities customers, we can actually use them. The securities can be backed and use it as part of the business. But of course, we do have -- we are connecting that already. But because of the capital regulation and so forth, it has been somewhat restricted. So with the addition of the ORIX Bank, we could expect to see further accumulation of the loans with the securities backed loans. Wataru Otsuka: I couldn't quite understand that point. So you mentioned those in 30s and 40s working for listed companies. And those who already have credit with ORIX Bank, you mentioned that. So already, they are customers of ORIX Bank. So whether ORIX Bank will become a subsidiary of Daiwa Securities, it doesn't really matter, doesn't it, because they are already customers. So is my understanding correct? Kotaro Yoshida: So if they're going to start the transaction with Daiwa Securities, that is positive. But taking this opportunity, it is not likely -- to be honest with you, I cannot actually imagine that they would all start doing business with Daiwa Securities. Actually, we do believe there could be a positive impact. So those who have the real estate loans from ORIX Bank, it is not so large in terms of number in comparison to Daiwa Securities customer base. So the impact could be limited. But in terms of the real estate investment loans, the customer base or customer potential is much larger, not just confined to those who are customers of ORIX Bank. So we also intend to develop new customer base together with ORIX Bank, so we can further expand the customer base. Wataru Otsuka: Understood. So perhaps at the IR meetings and also at the business strategy meeting, we'd like to continue the discussion. Kana Nakamura: Next is going to be the last questioner, UBS, Niwa-san. Koichi Niwa: This is Niwa of UBS. Can you hear me? Kotaro Yoshida: Yes. Koichi Niwa: Well, regarding the bank, I have 2 questions. One, I'd like to know the background of the acquisition. Which one has made the first comment and how long did it take? And also, you're talking about the margin of 1%, the interest margin of 1% as a guideline. How realistic that is going to be? According to your model, 1% of the interest margin seems to be easy to achieve. If that's the case, then that's going to be the image that we should consider as conservative? Or should we think about that a challenging target? That is the question about the bank. The second part of the question is that the U.S. private asset is now going through some turmoil. Any impacts on your business? Or do you have any exposure? And also the response of the retail investors, are there anything that you can share with us? Kotaro Yoshida: Thank you very much for your questions. First of all, the background of this M&A. We, with the ORIX as a company for our group, well, they have been an important business client for a long time. Including the management, we have had very good relationships. And there is much complementarity between the 2 banks. The possibility of working together, we have sounded out to the ORIX Bank from our side. In the last few years, because we entered into a world with positive interest rate, as I mentioned earlier, we have a high expectation of the complementary synergy to deliver. So since last fiscal year, we have made some serious proposals. So the 2 companies continued discussion. And as a result, we decided to work together as one company. That is the background. And talking about the interest margin, Daiwa Next has the deposit to BOJ, of course, at 0.75%. But the weighted average of the bank is about 2.1% for the lending. So thinking about the better yield for our companies, that's going to be 1.36%. So if we're going to have the calculation on a test basis at 1%, that was the scenario that we wanted to provide with you. And then moving on to the private credit, our exposure and the impact. First of all, our exposure is the one that we do have an origination, there's nothing. For the group as a whole, as an exposure, it's very limited and very much of the indirect exposure. So on a consolidation basis, there's no impact on our margin. And for the retail investors -- alternative asset -- for alternative assets -- as Daiwa Securities, the alternative investment is an option for less liquidity, but higher diversification so that the return profile can improve. So alternative is a very important asset class for us. But liquidity is limited. So when our clients decide to buy, then we do have the higher compliance guideline to follow. When there is enough assets and also the exposure should be just one portion of the total asset, especially given the consideration of the low liquidity, those are the items that need to be fully explained and then understood by the customers. The credit -- the private credit trust investment is managed and then consigned to Blackstone. The minimum amount of the investment is USD 50,000. So the subject is the high net worth customers. Though recently, we do see the mass media coverage. And that is causing some concern for the customers. So for all the customers who have those exposures, we are following up for all of them. For the Daiwa Asset and for ourselves, we have been very flexible and trying to provide the information that is user-friendly. So at present, we do see the situation where the cancellation request is mounting or anything. There are some number of people who are considering the cancellation, but it's not that high. So continuously, we will monitor the situation and then think about the follow-up to our customers. Kana Nakamura: Niwa-san, thank you very much for your questions. With that, we want to finish our Q&A session. Unknown Executive: [indiscernible] speaking from Daiwa Securities Group. Well, thank you very much for joining today for investors and analysts who would like to have a continued communication. So thank you very much for your continued support. If you have any further questions, please send us to IR team. Thank you very much for your attention today. Thank you. [Statements in English on this transcript were spoken by an interpreter present on the live call.]
Krissy Meyer: Good morning. Thank you for joining Bank of Marin Bancorp's earnings call for the first quarter ended 03/31/2026. I am Krissy Meyer, Corporate Secretary for Bank of Marin Bancorp. During the presentation, all participants will be in a listen-only mode. After the call, we will conduct a question and answer session. Joining us on the call today are Bank of Marin President and CEO, Timothy D. Myers, and Chief Financial Officer, David Bonaccorso. Our earnings news release and supplementary presentation, which were issued this morning, can be found in the Investor Relations section of our website at bankofmarin.com, where this call is also being webcast. Closed captioning is available during the live webcast as well as on the webcast replay. Before we get started, I want to note that we will be discussing some non-GAAP financial measures. Please refer to the reconciliation table in our earnings news release for both GAAP and non-GAAP measures. Additionally, the discussion on the call is based on information we knew as of Friday, April 24, 2026, and may contain forward-looking statements that involve risks and uncertainties. Actual results may differ materially from those set forth in such statements. For a discussion on these risks and uncertainties, please review the forward-looking statements disclosure in our earnings news release as well as our SEC filings. Following our prepared remarks, Timothy D. Myers, David Bonaccorso, and our Chief Credit Officer, Misako Stewart, will be available to answer your questions. I will now turn the call over to Timothy D. Myers. Timothy D. Myers: Thank you, Krissy. Good morning, everyone, and welcome to our quarterly earnings call. We are very pleased that our execution in the first quarter across a number of key areas resulted in continued improvement in year-over-year profitability metrics, loan production, net interest margin expansion, and improved credit quality. I would like to discuss our first quarter highlights. Compared to 2025, net income and earnings per share grew by 7,577%, respectively, in the first quarter of this year. Largely due to the repositioning of our balance sheet, our net interest margin increased 6 basis points on a sequential quarter basis and 47 basis points over the prior year’s period. During the quarter, we originated $81 million in new loans, $61 million of which was funded, an almost 30% increase over the prior year’s period. While the first quarter is a seasonally slower period for production, the additional hires we made to our banking team, the generally favorable economic conditions we continue to see in our markets, and a healthy increase in commercial real estate loan demand led to our strongest first quarter in a number of years. New loan product allocation was roughly in line with our existing portfolio with a slight skewing towards C&I. During the quarter, we worked diligently to improve our credit quality. We sold our longest-tenure classified and nonaccrual loans totaling $16.3 million, which were downgraded to substandard in 2021 and moved to nonaccrual in 2024. At that time, we took specific reserves of $7.3 million based on property valuation. The note sale proceeds validated our reserve assumptions, with the charge-offs equaling the specific amounts reserved. While other workouts were offset by new downgrades, the impact of the note sales on credit metrics was substantial. Nonaccrual loans declined from 1.27% of assets to 0.41%, and the ratio of classified to total loans decreased from 1.51% to 0.85%. Notably, following the note sales, virtually all of the remaining nonaccrual balances are comprised of one non-owner-occupied commercial real estate loan that has no loss expectations based on underlying valuation and cash flow. Despite strong seasonal loan originations, Q1 loan growth was negatively impacted by our nonaccrual loan resolutions. Excluding these purposeful exits, loan payoffs were roughly in line with the prior year’s period and were generally driven by asset sales and cash payoffs. We continue to experience elevated payoffs in consumer-related loans, primarily within acquired portfolios including auto and mortgage loans. Despite these dynamics, our net interest margin benefited as new loans came onto the books at an average rate that was 40 basis points higher than the average rate on payoffs. A Q4 interest recovery of $667 thousand not repeated in Q1 and the decreased number of days in the first quarter masked that rate-spread benefit. Excluding other unique transactions, we believe our loan originations will positively impact the net interest margin in 2026 going forward. Our banking team continues its relationship-based approach to attract lending opportunities and to cultivate new, deeply rooted relationships, with particularly strong momentum in the first quarter in the Greater Sacramento area. While we continue to navigate a competitive market environment on pricing and structure, we have attracted a significant amount of new client relationships while maintaining our disciplined underwriting and pricing criteria. Our total deposits increased in the first quarter due to a combination of increased balances from long-time clients as well as continued activity bringing in new relationships. The rate environment remains competitive and clients remain rate sensitive; however, they continue to bank with us for our service levels, accessibility, and commitment to our communities, allowing us to continue reducing our cost of deposits while growing our deposit base. With that, I will turn the call over to David Bonaccorso to discuss our financial results in greater detail. Thanks, Tim, and good morning, everyone. David Bonaccorso: Our net income was $8.5 million, or $0.53 per share. Our net interest income increased from the prior quarter to $30.3 million due to average balance sheet growth and higher investment security yields and reduced deposit costs, as well as the positive churn in the loan portfolio that Timothy D. Myers discussed, resulting in a 6 basis point increase in our net interest margin. Adjusting for the fourth quarter recovery of interest and fees on a paid-off nonaccrual loan relationship, our sequential quarter net interest margin growth would have been even more impressive at 14 basis points. During the quarter, the expansion of a deposit relationship with a relatively high cost was a headwind to net interest margin. At quarter-end we moved a portion of these funds off balance sheet to take advantage of a relatively high one-way sell rate, which boosts our overall net income and contributes to noninterest income. This opportunity has persisted into Q2; we will continue to look for opportunities like these to actively manage our balance sheet to improve shareholder returns. Moving to noninterest income, most areas of fee income were relatively consistent with the prior quarter, although we did receive a special dividend on FHLB stock as well as a BOLI death benefit, which positively impacted our total noninterest income in the first quarter. Our noninterest expense increased by $2.5 million from the prior quarter, primarily due to higher salaries and employee benefits related to seasonal salary and benefit accrual resets, including payroll taxes, incentive compensation accruals, profit sharing, insurance, and 401(k) matching. The first quarter also included a higher level of our annual charitable giving, which we expect will comprise almost 70% of the total for 2026. Overall, Q1 noninterest expense was broadly in line with our expectations. Though charitable giving is expected to return to more normalized levels during the coming quarters, we otherwise expect noninterest expense to continue near current levels as we continue to invest in people and technology, which we believe will fuel our growth and ultimately drive shareholder returns. Due to the improvement in asset quality in our loan portfolio and the substantial level of reserves we have already built, we did not require a provision for credit losses in the first quarter, and our allowance for credit losses remained strong at 1.08% of total loans, which we believe is an appropriate level following the sale of our nonperforming loans. Given the continued strength of our capital ratios, our Board of Directors declared a dividend of $0.25 per share on April 23, the eighty-fourth consecutive quarterly dividend paid by the company. With that, I will turn it back over to you, Tim, to share some final comments. Timothy D. Myers: Thank you, Dave. We continue to see stable economic conditions in our markets. Our credit quality continues to improve. Our loan pipeline remains strong amid healthy demand, and we continue to expect to generate solid loan growth in 2026 while also continuing to grow deposits through the addition of new relationships and expansion of existing client relationships. Given the positive trends we are seeing in many key metrics, we expect to continue to deliver strong financial performance for our shareholders as we move through the year. With that, I want to thank everyone on today’s call for your interest and your support. We will now open the call to questions. Operator: If you would like to ask a question, please click on the raise hand button at the bottom of your screen. Once prompted, please unmute your line and ask your question. We will now pause a moment to assemble the queue. Our first question will come from Matthew Clark with Piper Sandler. You may now unmute and ask your question. Matthew Clark: Hey. Good morning, guys. Timothy D. Myers: Good morning, Matthew. Matthew Clark: How much was the interest reversal that negatively impacted the loan yield on a dollar basis? That was prior, in Q4? It was, I believe, $667 thousand. Oh, okay. I am sorry. I think I misheard you. I thought there was some another one here in Q1. There is not. It was— David Bonaccorso: There is not. Timothy D. Myers: Quarter over quarter, and part of the decline was impacted by that $670 thousand interest accrual reversal in Q4. Matthew Clark: Got it. Okay. Okay. Thank you. And then I saw the spot rate on deposits. How are you thinking about deposit costs beyond that spot rate with the Fed on hold, and what would you suggest is your marginal cost of new deposits these days? David Bonaccorso: I think, similar to what we have done in recent quarters, we will continue to make targeted adjustments away from Fed cuts. Obviously, probably fewer Fed cuts are expected now than compared to what the market was expecting to start the year. So that is how we will continue to address that. We also have time deposit repricing happening in the background; I believe that was a 24 basis point decline sequential quarter. So those are a couple of data points. Anything else you want to add, Tim? Timothy D. Myers: No. I think some of the pressure on total deposits continues to be just large existing clients that have relationship rates that continue to go up. Some of that we are managing with one-way sells, etc. But overall, we continue to look for off-cycle reductions. And as you noted, the spot rate is 4 basis points lower than the total deposit rate at the end of the year. Matthew Clark: Yep. Okay. Great. And then you have not bought back stock for the last couple of quarters. You have a lot of your credit pretty much resolved here. How should we think about the buyback here going forward? Timothy D. Myers: As we described when we did the balance sheet restructure, given that we got support from the regulators and our constituents to do it without any equity raise, just with sub debt, we had said we were going to earn our way back into a median leverage ratio or CET1 ratio coming back toward peer levels. Certainly at the time, the perception was that holding more capital is better in the event that the credit situation with those loans worsened. As you noted, taking that off the table brings us closer to having a comfort level to do that. So it is a conversation we are going to start having. But we still want to earn our way back into a bit of a higher ratio before maybe embarking on that. Not needing to keep capital for the risk inherent in those deals we shed during the quarter makes us feel better about having that conversation. I do not want to overpromise, but that did remove a big hurdle for sure. Matthew Clark: Okay. Thank you. Operator: Your next question will come from Jeffrey Allen Rulis with D.A. Davidson. Jeffrey Allen Rulis: I guess, kind of following the restatement you had during the quarter, trying to get my bearings on the margin and expense levels. I think you outlined the expense expectation—it sounds like pretty flat from here, a pretty front-end loaded Q1 and then leveling off. But if I try to get into NII and the margin, I think we had discussions of a terminal margin level in the high 3s given the adjusted number is sort of a mid-3 figure. I am trying to get a sense for—there has been a lot of restructuring and repositioning. It sounds like there is still an upward bias to the margin, but all in, whether specific or not, what margin level is indicative of the balance sheet today? David Bonaccorso: I think on a full-year basis, mid-3s is probably still appropriate, in line with the comment you just made, obviously adjusted downward given the restructuring. We covered deposit costs a little bit, but we still think there are decent tailwinds with regard to loan repricing. Jeffrey Allen Rulis: So, Dave, the step-up this quarter, linked quarter—the jump-off rate of March is 3.26%. And you are saying by the end of the year, a mid-3s is doable. Would that put the linked-quarter margin increase—give or take—a pretty good proxy? David Bonaccorso: I would look at it a different way. You are probably looking at a handful of basis points a quarter. There are some movements comparing off the prior quarter with that nonaccrual loan payoff, etc. But that is how I would think about it moving ahead: with the benefits to loan repricing, that is probably worth a few basis points, and then any other deposit repricing benefits we have along the way would add to that, such that you get potentially up to a mid-3s number for the year. Jeffrey Allen Rulis: That is great. Thank you. And then maybe just one other question on the credit side. The timing of the large loan resolution—is that its own independent path, or do you find that is indicative of something moving in the market that makes you feel like you can move forward on this other larger $8 million owner-occupied CRE? Or do you view them really independently? Is that something that you were chasing down separately? And for this remaining loan, do you expect the workout phase to continue for quarters to come? Timothy D. Myers: They are completely different animals, Jeff. The notes we sold were the ones we downgraded—that was our pandemic special that we have been talking about ad nauseam for a number of years. The market was not going to recover in time for that to be properly restructured. We are not going to maintain a loan on our books where we need to take a charge-off, so we elected to sell the note, and Misako has done a really good job of estimating value and negotiating that sale such that we did not have any further provisioning impact. The other loan we have mentioned on the calls is something where, again, the loan-to-value, the debt service coverage ratio—all the metrics are adequate. We are in a dispute over terms of an extension or renewal—an extension. That is what is keeping it where it is. We are in the middle of a legal process on that, so it is not apples to apples. We will continue to look to resolve that, but we do not have any loss expectations on that credit, whereas the other one had a serious valuation impact, as you know. Jeffrey Allen Rulis: Appreciate it, Tim. Maybe most importantly, interested in your view of the general market on the CRE side. As you view vacancy rates and the broader Bay Area, is it firming up? How would you characterize recent CRE trends in the area? Timothy D. Myers: I would continue to bifurcate the Bay Area between San Francisco—particularly for office—and the rest of the Bay Area. We never saw the significant value degradation or lease rate declines in the outer markets that we saw in San Francisco, which, as you know, plummeted. The trends continue to be very positive, certainly a lot of that driven by AI-related investments. Even on the property, on the note we sold, we were looking at 20% to 30% a year of improving NOI. The market is rebounding. There is news about retail coming back in the retail areas. It had to hit a bottom. You see people being opportunistic now. For those of us that had assets at prior valuations, that was going to take a long time, but we certainly see more opportunism in the market. Some of our activity over the last couple of quarters has been related to people taking advantage and making purchases. I view all that as a positive. Again, I would bifurcate between dealing with an asset that was on the books before the value degradation and what is happening now. Overall, the trends remain very positive in San Francisco. Jeffrey Allen Rulis: Thanks. Appreciate it. Operator: Your next question will come from Woody Lay with KBW. Woody Lay: Hey, good morning, guys. David Bonaccorso: Morning, Woody. Woody Lay: I was hoping you could walk through the higher expenses in the first quarter—the jump from January. And it sounds like the forecast, excluding the charitable contribution, should remain relatively flat. Does that embed any additional hiring from here? David Bonaccorso: Sure, I will start. Zooming out a little bit, the company has a long-standing history of very strong expense management. If you go back the last ten years or so, our noninterest expense to average assets has been in the favorable top 30% of peers. It is important to what we do, and that is despite operating in some pretty expensive markets. Where the deviation may have happened is if an estimate was jumping off of Q4 for personnel expense. Keep in mind we did have some incentive bonus reversals in Q4, and historically Q3 has probably been a better predictor of Q1 than Q4 has. Relative to Q3, our Q1 looks similar to where it has been the last couple of years. Then you put on top of that the annual resets we discussed in our earnings materials—payroll taxes, profit sharing, etc.—that is how we get to the key driver of our overall number this quarter, which is personnel. On charitable contributions, we expect that to normalize. One other area that was a bit of an outlier this quarter was FDIC insurance expense. Due to the repositioning, we had a lower leverage ratio and negative earnings in our last assessment because of those losses. That was applied to a higher assessment base given the balance sheet growth and also lower tangible equity. That explains some of the expense you are seeing in Q1, and we expect that to normalize as more of the benefits of the repositioning flow through. Woody Lay: Got it. That is helpful. And then, putting some of the moving pieces together, it sounds like there is a continued tailwind to the margin. You have a slightly higher expense base, but it should be relatively stable versus Q1. So is the expectation still for positive operating leverage throughout the year? David Bonaccorso: Yes. I agree with that. Timothy D. Myers: We are looking to be opportunistic, though, and continue to add hires that help us drive growth. I cannot really predict the timing for that, but we are looking to make strategic growth efforts in some of the markets that maybe have been lesser performing for us to get more pistons firing. If we can make some hires that can help drive growth, we will be doing that with a mind toward adding interest-bearing assets to the books. That could impact the run rate over the year. But as Dave said, when you take all the noise out, it starts to flatten out—minus any adds. Woody Lay: Got it. Alright. I appreciate all the color. Thanks for taking my questions. Timothy D. Myers: Thank you. Operator: Your next question will come from Robert Andrew Terrell with Stephens. Robert Andrew Terrell: Hey, good morning. Maybe going back to the margin, I was hoping I could get a finer point on some of the loan repricing dynamics. Where are new origination yields coming in today, how does that compare to what is rolling off, and do you have a cadence of what you expect to reprice or turn over on the loan book throughout the year? David Bonaccorso: The usual statistic we give is a 12-month look at monthly loan yields, and that number is probably 15 to 20 basis points comparing the monthly loan yield in March 2026 to March 2025—interest rates flat and balance sheet flat. On yields of new loans, those were 5.91% in Q1, which compares to 5.51% for paid-off loans. We have about 17% of the portfolio repricing in the next year and 34% over the next three years. That is on page 25 of the deck. Not much change to those numbers, and still a relatively low level of floating rate. Timothy D. Myers: One of the headwinds is that for the prior couple of quarters, it was a pretty flat trend in new asset yields versus those paying off. We continue to have headwinds in the payoff of some of the acquired mortgage or auto loans that we have talked about, and that was one of the larger payoff categories in the quarter again, and those are at higher yields. Getting a 40 basis point lift despite that is encouraging, but that has been a headwind because those were some of our better-yielding loans, and the payoffs on that because of the rates have been slightly higher. Robert Andrew Terrell: Yep. Okay. Great. I appreciate it. If I could shift over—you talked a bit on the buyback—but your CET1 and capital ratios have normalized post the restructure last year. It seems like you are relatively in line with peer levels. Can you reframe—post the restructure and now that the credit picture looks a lot cleaner this quarter—where would you like to be from a CET1 or leverage ratio standpoint? Remind us of the north stars there or the binding constraints? Timothy D. Myers: We have not really established a specific level where we need to be. It is all relative to the risk on your balance sheet, obviously. As I mentioned before, that is a conversation we are going to be more willing to have now that we have less risk within our loan book and less chance of large, surprising provisioning or charge-offs. I am reluctant to give a target there, but I would say it is a conversation we are going to be more willing to have as a management team and board. I will add, because a lot of attention gets paid to holding company capital ratios, an important consideration for us is our bank-level capital ratios and relative to peers there. I think that is where we have probably more to do in terms of rebuilding those. Robert Andrew Terrell: Makes sense. Last one from me. Your profitability is up quite a lot since the restructure, but ROTCE on an operating basis is still around that 10% level. As you step back and look at your forecast, where do you see the incremental levers to pull to improve profitability closer to peer levels? Timothy D. Myers: The two where we are most intently focused are building loan activity—particularly while yields are where they are—and driving more fee income. We have some strategic initiatives around that. Someone mentioned building more operating leverage into the model; that is what we are looking to do. If we make adds, it will be mainly around driving loan growth. If that happens quickly enough, you get that almost immediate positive operating leverage. And we have strategies around driving fee income that can add meaningfully to the bottom line—nothing overly dramatic, but important steps. I do not see any big cost reduction activity; the goal at this point is not to cut our way into more profitability. Robert Andrew Terrell: Got it. Okay. Thank you for taking the questions. Timothy D. Myers: Thank you. Operator: As a reminder, if you would like to ask a question, please click on the raise hand button at the bottom of your screen. Our next question will come from David Feaster with Raymond James. David Feaster: Hi. Good morning, everybody. Timothy D. Myers: Morning. David Feaster: On the growth side for a minute, there are some really encouraging trends with the originations and the pipeline growth. I was hoping you could elaborate on some of the drivers. You alluded to new hires—that makes obvious sense as to increasing productivity—but you also discussed in the deck comp program enhancements and updates to calling programs. Can you elaborate on what you did there, and how much of the growth in originations you are seeing this quarter is from new hires versus increasing productivity from existing bankers? Timothy D. Myers: Thanks, David. I would say the majority of the production came from those hires we have been referencing over the last year. The top people continue to be the top people. We have made some leadership changes in our Sacramento market, realizing we needed to do better post the American River Bank acquisition to capture the opportunities out there, and that is paying dividends. I would say the Sacramento market overall is driving a good portion of the growth that was booked—even loans booked in other offices are to borrowers that are in Sacramento, just other people’s relationships. So it is doing a better job in Sacramento, doing a better job with hiring, and having an incentive plan that pays people fairly without so many caps so that you are incenting more of a hockey-stick approach. Maybe people have to do more to enter into the incentive component, but if they accelerate or exceed their higher hurdles, then the payouts get bigger. Combine good people with a better plan and you get results, and that is what we are seeing. We are starting to see life in the construction market. Our construction group has gotten a lot more active—going back to my comments earlier about activity in San Francisco—more people stepping in to buy properties for development for condos and single-family residences. We are starting to see that come back as well. It is not any one thing; it is a combination of all those things. David Feaster: Okay. Maybe just touching on the credit side. It is nice to see the credit cleanup this quarter. Exclusive of that—with that in the rearview—things look pretty benign, at least on your balance sheet. What are you seeing on credit broadly? I know the wine industry is under a bit of pressure. You have done a deep dive into upcoming CRE maturities. Can you talk about the takeaways from that—high-level credit commentary—and whether you are seeing more pressure on underwriting or credit broadly given increasing industry competition? Timothy D. Myers: I will start at your end there. I think competition has picked up—loan-to-value, debt coverage, recourse versus nonrecourse. We certainly see the market getting frothy at times, particularly in certain asset classes like multifamily. Wine is a big weak spot. We think we are managing that well, and our exposure is not all that big there anymore, but as a headwind to part of the North Bay economy, yes, that industry is struggling. We do not see a lot of impact within our customer base from things that are making the national news like tariffs or cost of oil and transportation. Not that it is not out there, but we are generally seeing stable and healthy economic trends with what we are looking at. We feel good about our commercial real estate and, minus some ups and downs in individual performance, I do not see any trends that cause me to worry that we are going to revert back to larger downgrades into substandard or nonaccrual. If you took out the legal aspect of what we are dealing with on the singular nonaccrual loan we have, we would be back to almost zero, which, as you know, is where we love to be. David Feaster: That is helpful. Looking at your slide deck—on slide six, you have those four top priorities to drive long-term value. Number three is scaling through efficiency gains and M&A. You already talked a bit about number four and number one, and said you are not going to talk about number two. I was hoping you could talk a bit about number three—where you are seeing opportunities for efficiency gains and any thoughts on M&A. Timothy D. Myers: I will talk about number two—it is not that I will not—it is just that giving guidance is something we are very reluctant to do. But we do have specific initiatives around treasury management fee income, wealth management and trust income. There are a number of components that will add up to a meaningful increase in that component, but no one thing that is overly dramatic. On M&A, getting our valuation back and continuing to build on that opens more doors for us. It is certainly something we remain open to; we have not shut the door on that at all. For a while, it was challenging on deal metrics with where we were trading, but we are hoping that continues to make improvements and M&A can become a more realistic opportunity for us. On efficiency, over the last couple of years we have done some staff adjustments and closed some branches. We are now in our second year of significant efficiency strategies within technology and back office, and going forward around AI—using that intelligently to build efficiencies into the system and more operating leverage. Again, it is lots of arrows in the quiver as opposed to any one or two big things. Those are the main things we mean in that number three. David Feaster: That is helpful. Thanks, everybody. Operator: Your next question will come from Timothy Norton Coffey with Brean Capital. Timothy Norton Coffey: Alright. How are you guys doing today? Timothy D. Myers: Good morning, Tim. Timothy Norton Coffey: Morning, Tim. I have a couple of questions on the loan side. When it comes to the spreads in the market right now, are you concerned about those spreads starting to compress given, one, the general level of competition, but also some of the new entrants to the market? Timothy D. Myers: There is no question there has been pretty incredible compression in pricing. We try to stick to an approach that meets our ROA hurdles. Generally, loans priced in the 200 over Treasury, depending on type of loan or above, are going to meet that. We regularly see people bidding at the 150 to 175 basis point level. Our job is to parse through those, get the really attractive opportunities, and not race to the bottom—get high-quality credit at as high a spread as we can. But the market is very aggressive on pricing. Timothy Norton Coffey: As you grow loans this year or book new loans, are you agnostic to the type, or do you prefer one over the other—like commercial over commercial real estate, for instance? Timothy D. Myers: I have been saying for a while I would love to do a higher proportion of C&I. That is a slow shift to turn, but we are seeing a higher proportion. If you look at the breakdown of loans we booked this quarter, it pretty much mirrors that of the overall portfolio, but within that breakdown there was a skewing towards C&I. We had almost $9 million of unfunded commitments within that C&I bucket for the quarter, so we would love to continue to drive that. We are seeing a higher mix over the last few quarters of multifamily, and I think all of which has been CRA-qualified, so that accomplishes a number of things. If we can win a multifamily deal at a good spread, that is something worth being moderately aggressive over. I expect construction to pick back up—obviously there is always risk in that book you have to manage—but that has been a piston that was not firing. Given the kind of construction projects we did in the geographies we did them, it is nice to see that coming back as well. We are generally agnostic, but if we continue those trends, it will help from both a concentration standpoint and the growth aspect. Where we are doing a good job and where the growth in the market is right now seem to align pretty well. Timothy Norton Coffey: Further growth in C&I and construction, all else equal, would probably put upward pressure on your allowance ratio. Is that about right? David Bonaccorso: Possibly, yes. Timothy D. Myers: It depends on the individual credits, but yes, that is possible. Timothy Norton Coffey: And then one for you, Dave. What is the appropriate tax rate to use? David Bonaccorso: What we experienced this quarter, I think, is pretty indicative for the full year. Timothy Norton Coffey: Alright. Great. Those are my questions. Thank you much. Timothy D. Myers: A little easier year from a tax perspective than last year. Timothy Norton Coffey: Alright. Got it. Thank you. Operator: We have no further questions at this time. I will hand back to Timothy D. Myers for closing remarks. Timothy D. Myers: Thank you again to everybody. If you need any follow-up information, by all means, please reach out to David Bonaccorso and/or myself, and we will get you answers. Looking forward to seeing you on the next quarterly call.
Operator: Good day, everyone, and welcome to the Kforce Q1 2026 Earnings Call. As a reminder, this call is being recorded. At this time, I would like to hand the call over to Mr. Joe Liberatore. Please go ahead, sir. Joseph Liberatore: Good afternoon, and thank you for your time today. This call contains certain statements that are forward-looking, are based upon current assumptions and expectations are subject to risks and uncertainties. Actual results may vary materially from the factors listed in Kforce's public filings and other reports and filings with the SEC. We cannot undertake any duty to update any forward-looking statements. You can find additional information about our results in our earnings release and our SEC filings. In addition, we have published our prepared remarks within the Investor Relations portion of our website. We are extremely pleased to have successfully driven results in the first quarter that again exceeded our expectations from both a revenue and profitability perspective. The momentum that we carried into the beginning of the year has continued to strengthen, resulting in year-over-year revenue growth for the first time in several years. As Jeff Hackman will cover in more detail, our trajectory has continued to improve in the first month of the second quarter, which we expect will lead to accelerating year-over-year growth in Q2 in the mid-single digits. I cannot be prouder of the tenacity of our people or more appreciative of the trust that our world-class clients are increasingly placing in Kforce to drive more meaningful and valuable engagements with them. Our go-to-market approach, which was borne out of our integrated strategy efforts, appears to be paying dividends. Our people continue to operate more fully as one Kforce, leveraging the firm's capabilities across all service offerings. While recent economic data continues to point to a generally softer labor market for professionally oriented roles, our performance reflects strong execution and a clear shift we're seeing across our customer base. However, several of the leading indicators we track, which have historically signaled strengthening demand for our services are improving. Companies are increasingly turning to flexible talent strategies to move forward on significant backlog of high-priority technology initiatives, especially in the age of artificial intelligence where CEOs remain cautious to add permanent headcount. At the same time, heightened geopolitical uncertainty, including the conflict involving Iran has contributed to significant volatility in the global energy markets, resulting in sharp price increases across oil, gasoline, natural gas and electricity. In this environment, clients are focused on agility. We believe uncertainty is reinforcing the value of flexible workforce solutions as organizations seek to adapt while they gain greater clarity around geopolitical developments and the longer-term impact of emerging technologies on their business and talent strategies. Against this backdrop, we remain optimistic that our recent operational data and several consecutive quarters of improving revenue performance reflect a more typical historical cyclical pattern consistent with prior demand recoveries. As we have stated, we've witnessed and participated in transformative technology shifts before such as personal computing, the emergence of the Internet, the mobile revolution and the move to cloud computing. Each of these periods of technological change impacted labor markets. Yet over time, workers, including technologists, have continued to upskill and retrain themselves to improve the relevancy of their skill sets as technology has evolved. Over the last 50-plus years, we've placed skill sets that include mainframe operators, COBOL programmers, database administrators, web developers, mobile application developers, DevOps engineers, cloud architects, UI/UX designers, data scientists, data engineers, AI platform engineers, AI product managers, prompt engineers, et cetera. The point is the task change or, in some cases, completely go away. Job titles change, skill composition shifts, and at the end of the day, new roles are created. New businesses are spurred, new industries are created, resulting in a net positive amount of technology-oriented job growth as society's unquenchable thirst for technology advancements and productivity gains. We believe generative AI and its offshoots into Agentic AI and Cognitive AI are in the early stages of the evolution and may just be starting to align with historical patterns we've experienced. Recruiting the right in-demand talent, assembling effective teams and implementing target enterprise-level initiatives are crucial for organizations seeking to successfully integrate and leverage these new tools to maintain a competitive advantage. Our strong position enables us to grow our client portfolio and bring on new client opportunities, thereby sustaining our history of consistent above-market performance fueled by client share growth, ultimately strengthening the foundation that delivers enduring value to our shareholders. Our business model is intentionally simple, organically driven and intensely focused. By limiting inorganic growth within our existing service areas, we protect our teams from unnecessary complexity and distractions. That focus allows our people to do what they do best, build deep relationships and partner with clients to solve their most critical business challenges. Our strategy has been thoughtfully refined over time, not overhauled because it has proven durable. That focus, combined with a unified and resilient culture is a real differentiator for us and is central to our consistent market outperformance. As our operating trends continue to improve, we're also making great progress on our key strategic initiatives, including the implementation of Workday, scaling our India development center, advancing our internal AI initiatives and continued refinement of the execution of our integrated strategy. Further to that point, we are pleased to have recently announced the establishment of our AI innovation studio within our headquarters and associated AI pods in India to support evolving client needs. As I conclude my remarks, I want to acknowledge the outstanding people who make up the Kforce team. I'm incredibly proud of their fortitude, adaptability and dedication demonstrated across the firm, particularly given the challenging business environment over the past 3 years. I am grateful every day for the opportunity to work with colleagues who bring this level of skill and commitment. Thanks to their efforts, we are well positioned strategically, and I feel confident in our trajectory and the opportunities ahead. Dave Kelly, our Chief Operating Officer, will now give greater insights into our performance and recent operating trends. Jeff Hackman, Kforce's Chief Financial Officer, will then provide additional detail on our financial results as well as our future financial expectations. Dave? David Kelly: Thank you, Joe. Total revenues of $330.4 million represented a return to overall revenue growth for the first time since the fourth quarter of 2022. Encouragingly, we were successful at delivering year-over-year Flex revenue growth in both our technology and FA businesses. The first quarter is typically characterized by sequential revenue declines on a billing day basis due to calendar year assignment ends. This is a very normal part of our business and the broader sector. There's been a lot of discussion about our ability and the sector's ability to deliver revenue growth given the much speculated demand impact of AI tools and technologies. A data point that we think is particularly relevant is that our first quarter performance was meaningfully better than the average sequential decline over the past 15 years prior to AI becoming an hourly topic of conversation. Our results were driven by a combination of lower levels of project ends and a faster-than-normal rebound in new assignment activity. Further to this point, as Jeff Hackman will cover in his prepared remarks, the midpoint of our guidance contemplates year-over-year growth in Q2 of approximately 4%. While clients continue to take a measured approach to technology spending amid an uncertain macroeconomic environment, investments in critical initiatives, particularly in data, digital and platforms that underpin long-term AI strategies are actively being prioritized by our clients. Our recent momentum and operating trends suggest clients are increasingly greenlighting long postponed initiatives through the use of flexible workforce solutions that are strategic to their needs and don't have an easy or obvious AI-related solution. Importantly, improvements in our business have been broad-based with positive trends evident across a wide range of industries within our client portfolio and utilizing a wide range of skill sets. While we certainly continue to see growth in AI-related data, digital and cloud projects, we're also seeing a ramp in demand for platform and application development roles and projects. The demand for technology is broad-based. We continue to make targeted organic investments in our Consulting Solutions business to meet rising client demand for cost-effective access to highly skilled talent. These investments are strengthening our value proposition by expanding flexible delivery models and deepening differentiated expertise. As a result, our consulting-led offerings are positively contributing to the performance of our technology business, supported by a strong pipeline of high-quality opportunities. Our fully integrated delivery model, offering a seamless client experience across consulting, project-based work and staff augmentation spanning multiple technology and skill sets remains a clear point of differentiation in the market. We've seen clear signs of improving demand across the entire spectrum of our service models. This integrated approach has been a core driver of our technology performance, enabling meaningful gross profit expansion over the past year despite a challenging macroeconomic backdrop while maintaining stability in average bill rates. We leverage long-standing client relationships as the foundation of our model and focus on simplifying the buying process and accelerating decision-making. An increasingly important component of our ability to deliver cost-effective solutions is our global talent strategy, including access to highly skilled professionals outside the United States. Our development center in Pune, combined with strong domestic sales and delivery capabilities and a high-quality vendor network enables a scalable multi-shore delivery model that comprehensively addresses client needs. Demand for this channel continues to accelerate, reinforcing its strategic importance and strengthening our confidence in the durability of this model. We now have a multi-shore delivery model being utilized within 60% of our 25 largest clients. We've been able to maintain a stable average bill rate of approximately $90 per hour over the last 3 years, while building a higher-quality, higher-margin revenue stream. The increasing mix of consulting-oriented engagements, which command higher bill rates and significantly stronger margin profiles, along with disciplined management of wage inflation and core technology skill sets has effectively offset the downward pressure on bill rates from a greater mix of consultants based outside of the U.S. Demand across our core practice areas, including data and AI, digital platform engineering and cloud remains strong, and our pipeline of consulting opportunities continues to expand. These disciplines represent foundational capabilities for the development and deployment of AI solutions, and we believe organizations will increasingly require access to specialized talent to execute their strategies, creating meaningful and durable growth opportunities for our firm. Over the last several years, we've made responsible adjustments to align headcount levels with revenue levels and productivity expectations. As noted in last quarter's call, we implemented further refinements to our organization in the first quarter. Despite these actions, we believe we have sufficient capacity to absorb the near-term improvements in demand levels without the need for significant incremental resources, particularly as we continue to enable greater efficiency through our use of AI solutions. We remain committed to investing in our Consulting Solutions business and other strategic initiatives that we believe will drive long-term revenue and profitability growth. The actions taken in the quarter provide increased confidence in our ability to continue making these investments while maintaining our previously stated profitability objectives. We are energized by the opportunities ahead and confident in our ability to sustain recent momentum while continuing to deliver strong results. Our success reflects the deep trust and long-standing partnerships we've built with our clients, candidates and consultants. These are relationships that continue to serve as the foundation for our growth and innovation. I will now turn the call over to Jeff Hackman, Kforce's Chief Financial Officer. Jeffrey Hackman: Thank you, Dave. First quarter revenue of $330.4 million exceeded our expectations and earnings per share of $0.46 was above the high end of our guidance. Our results for the first quarter demonstrate our ability to grow revenues while also driving a higher quality of business as evidenced by better-than-expected gross margins in the quarter as well as generating enhanced operating leverage. Overall gross margins of 27.3% were up 60 basis points on a year-over-year basis due to expanding Flex margins, which more than offset the impact from lower direct hire mix. Sequentially, gross margins were up 10 basis points in a quarter when they were expected to be seasonally down as improved Flex spreads and favorable health care costs more than offset the seasonal payroll tax resets. The success we have had expanding our margin profile can be attributed to our teams pricing more effectively with clients to more appropriately reflect the value of our services and the benefit of higher quality business that we have been strategically driving. We have discussed that solutions-oriented engagements have an appreciably higher margin profile. As that mix has continued to improve, that has driven margin improvement. In addition, Dave mentioned that the mix of consultants working outside of the U.S., both through our nearshore partners and through our India business continues to grow. We have seen higher margins from our business abroad, which although it's had a relatively small positive impact on current margins, it could continue to provide upward opportunity if the overall mix were to continue to grow. As we look forward to Q2, we expect overall Flex margins to improve sequentially due to the alleviation of higher seasonal payroll taxes, but for spreads to be relatively stable with first quarter levels. Overall SG&A expense as a percentage of revenue of 23.2% increased 40 basis points year-over-year, which was primarily driven by greater performance-based compensation due to the higher levels of financial performance we have been successful delivering in 2026. As discussed on our last call, the refinements we have made to headcount levels have provided incremental operating leverage, and we are continuing to make targeted investments in our sales and solutions capabilities while also maintaining investments in advancing key enterprise initiatives. While this will continue to impact near-term SG&A levels, we are beginning to see the benefits of these investments in our productivity metrics and expect continued improvements to create future operating leverage. As we have stated on prior calls, we anticipate beginning to realize benefits from our Workday implementation more significantly in the second half of 2027. Our operating margin was 3.6%, and our effective tax rate in the first quarter was 30.2%. During the quarter, we remained active in returning capital to our shareholders with $18.6 million in capital being returned through dividends of $6.8 million and share repurchases of approximately $11.8 million. We were incrementally opportunistic with respect to share repurchases in the first quarter and utilized our strong balance sheet during a typically low cash flow quarter, given what we believe is a disconnect between our operating trends and demand environment and the valuation of our stock. This resulted in an increase in net debt to $90.2 million from $64.3 million. Against trailing 12-month EBITDA, our leverage of 1.2x continues to be relatively conservative. Looking ahead, we expect to continue returning excess cash generated beyond our capital requirements and quarterly dividend to shareholders through repurchases, while being prudently opportunistic in repurchasing our shares. Operating cash flows were negative $4.1 million due to higher cash outflows in the first quarter associated with the actions we announced on our last call in addition to the timing of cash collections, which we expect to normalize in the second quarter. We expect positive operating cash flows of approximately $20 million in Q2. Our return on equity remains at approximately 30%. The second quarter has 64 billing days, which is one additional day compared to the first quarter of 2026, but the same as the second quarter of 2025. We expect Q2 revenues to be in the range of $344 million to $352 million and earnings per share to be between $0.67 and $0.75. The effective income tax rate for the second quarter is 31%. The midpoint of our guidance of $348 million in revenue is up approximately 4% on a year-over-year and sequential basis per billing day. Notably, earnings per share at the midpoint of guidance reflects a 20% increase year-over-year. Our guidance assumes a stable operating environment and excludes the potential impact of any unusual or nonrecurring items. We feel strongly about our strategic position and our ability to deliver above-market results while continuing to invest in initiatives that drive long-term growth. We are increasingly confident in our ability to generate at least 8% operating margin when annual revenues return to $1.7 billion, which is more than 100 basis points higher than when that revenue level was achieved in 2022. On behalf of our entire management team, I want to extend our sincere appreciation to our teams for their outstanding efforts. We would now like to turn the call over for questions. Operator: [Operator Instructions] The first question comes from Mark Marcon from Baird. Mark Marcon: Congratulations on the strong quarter and the even better guide. I was wondering if you could just talk a little bit about what you're seeing in terms of your trends by major verticals? And I'm particularly interested in terms of the financial services vertical. What are you seeing there? And just given the strength of the guide and the better-than-normal sequential uptick, at least relative to recent years, can you talk about any sort of new contracts that you may have won or gains that you're seeing among existing clients? David Kelly: Mark, this is Dave. Thanks. So I would say, generally speaking, Mark, across industries, we're seeing either stability or growth pretty broadly. In fact, year-over-year growth in 6 of our top 10 sectors that we segregate the business in. In particular, I'd note strength in the information space and manufacturing space. Retail has been also strong as well. And we've had some benefit, in particular, with some pretty digitally enhanced clients in the retail space. So when we think about our business footprint. Professional services has had some negative impacts when you kind of look year-over-year. Those are really pretty much DOGE-related, we think, though. Financial services, you asked about specifically. We've seen a little bit of seasonal decline there, some reasonable, however, stability. So I would say nothing materially out of some -- any variation across any industry. Maybe just to follow on, maybe give you a little bit more color. You asked a little bit about some of the indicators and pipeline. When we think about industry activities, projects, maybe I'll segregate a little bit into some metrics and then maybe a little pipeline information. When we think about some of the things that we cover from a metric standpoint to give you some sense of what we're seeing in terms of demand, we've had a pretty good strength as we've looked at this over the last year. When you look at client visit information in the first quarter, that really is up nearly 10% year-over-year. We've had some good strength from a job order perspective as well. That's up nearly 20% year-over-year, really translating into some good new assignment starts really that also in the low double digits. The point there is that's, again, pretty broadly distributed. In terms of project-related activity, we're seeing strength as we've been talking about, as you'd expect, in the areas where our consulting service is focused, digital data, platform engineering, cloud, all of those have been pretty good. I think notably, our data and AI pipeline is up nearly 50% year-over-year. So I would say, generally speaking, Mark, in terms of the strength in the revenue stream, we're seeing it, as Joe alluded to, across our service spectrum from staff augmentation all the way through consulting project work. We're certainly seeing strength in those AI and AI-related revenue streams, but also some of the more traditional areas of strength for the firm, we're continuing to see growth in as well, right, platform engineering, application engineering, application development, all pretty strong. So it's a pretty good story across the entire spectrum of the revenue stream. Joseph Liberatore: Yes, Mark, so I just net it out. I mean it was broad-based. It was across our enterprise accounts, our market accounts. So there were -- it was across geographies. So we're just -- we're seeing it broad-based. Mark Marcon: Great. And then can you talk a little bit to what extent you think you're gaining share? And to what extent are your -- it's still relatively new for you, but your Indian operations, to what extent are those helping you to capture share? And what percentage of the work is now being done in India? And since you're still relatively early in that journey, where do you think that could go? And what are the implications as it relates to gross margins for that? David Kelly: Yes. So well, let me first talk about India. You asked a few questions about that, and then we can get to the share question. So just as a reminder, we started this initiative, gosh, less than 2 years ago. The focus of this really is to enhance the capabilities of our domestic footprint, right? As I've mentioned and Joe had mentioned in the past, we're seeing a lot of demand from our client base to build blended projects. Obviously, cost is a key driver here. So this is not specifically set up to go and capture business in India with India clients. So I think probably the best way to think about this is how our clients are thinking about our prospects and how we're providing services in the types of business that we've been performing, right, across the spectrum of services that we provide. I made a comment in my prepared remarks, 60% of our 25 largest clients are using those services in a blended model. So it's a combination of a blended model. There are some projects that are offshore entirely. This is true in the consulting space, and that is really where we've set up this initially. We're just now starting to think about providing some staff from a talent solutions perspective, so more staff augmentation. That's early on. So we've seen some good growth there. It is still a very small percentage of the revenue stream. I think we're seeing a pretty significant increase in new orders, but still a very small percentage. In terms of future prospects, I think it's pretty clear. Our clients are always looking for ways to cost effectively find great talent. And I would say the talent that we find in India is as good as that as we would find in the United States. There's been a lot of firms who've had success there as well. So I wouldn't necessarily put a precise percentage number on it, but it wouldn't surprise me that a very, very high percentage of our clients use this as a blended model, and it could be a very meaningful percentage over the next couple of years. Joseph Liberatore: Yes. And the one thing that I would add there, Dave touched upon it a little bit there, but I want to accentuate this point, that talent level, especially when you get into AI skills of what we're identifying and finding in India, real shortage in the U.S. We're definitely seeing much more talent availability, especially from an AI standpoint, especially as we built out our AI pods over there to get some leverage for our people. David Kelly: So Mark, I think the second part of your question -- or the first part, I should say, was a question around share, market share, client share. I think again, we're quite proud of our performance this quarter. Just to reiterate, the expectation is revenue growth, we believe, is going to accelerate in the next quarter. We've had the benefit of generating some additional client share that is certainly a part of the revenue growth. We've also continued to attract a lot of new clients as well. So when you look more generally across the market, as I kind of look at the metrics of how the market might be performing, I think our growth rates certainly are in excess of that and are certainly expected to be in excess of that. So the math basically tells me we're capturing share both within existing clients as well as acquiring new clients. Mark Marcon: Great. And then just as I look at the -- and this is the last one for me, and then I'll jump back in the queue. But when I take a look at the bill rates moving up as well as the gross margin, can you just talk a little bit about the Indian portion of the mix, to what extent is it actually margin accretive as it relates to gross margin? And how are you able to offset the lower bill rates over there to end up actually increasing the bill rate? Jeffrey Hackman: Mark, this is Jeff. I appreciate the question. Let me first say, I think you touched on a couple of things, bill rate and margin. Let me first say, I'm really proud of the broader Kforce team for the collective efforts and ensuring that we're pricing the value into our engagements and assignments that we're bringing to our clients. You look at our gross margin profile, and we're up 60 basis points year-over-year. You look at our Flex gross profit margins, those are up 90 basis points year-over-year. The preponderance of that, Mark, is driven by good solid bill and pay spread expansion. Out of that 90 basis points, that comprised 70 basis points of that. Part of that is driven by, as I mentioned, the execution of our teams. The adjustments, we made some adjustments and refinements in how we're incentivizing and how we're compensating our people to put that a little bit more towards the forefront of the conversation. And then at the last component, I would say, Mark, is just what we're driving from an overall higher quality of business. To that last point, we've talked about the growing mix of Consulting Solutions business that margin delta continues to run in that 400 to 600 basis points of higher margin. So certainly, as that mix continues to improve, we're getting the benefit of that. You asked about our nearshore/offshore business. The margins there have also been very healthy relative to overall Flex margins. So to Dave Kelly's point, as that business continues to scale, we expect that to lead to enrichment at the Flex margin line. So I think, Mark, in the near term, these things don't change overnight. You heard the comments from us. This is a culmination of a lot of activities over the last year plus. I think in the near term, we certainly expect spreads to be stable, but over the medium to longer term, certainly an opportunity to see some further enrichment here. David Kelly: Just maybe a little added emphasis on Jeff's comments to make sure it's clear. The impact on flexible margins from the offshore facility are nominal, right? That spread improvement is a result of the demand for the services that we're providing here, the execution of our teams, the emphasis we're putting on execution just generally and the mix of business that we're seeing as it relates to the consulting work that we're doing. So that is an opportunity for us as we move forward. Operator: The next question comes from Trevor Romeo from William Blair. Trevor Romeo: I had maybe a couple of AI-related questions. So one is just along the lines of flexible talent becoming especially valuable in the AI era. I think I appreciate Joe highlighting how things have kind of evolved from mainframe operators all the way to prompt engineers and the like now. So the question is just to get a sense of how things can quickly change and how your model can adapt. Like is there some kind of way to think about what percentage of the demand you're seeing now for the Flex business or the consulting projects? What percentage of that is new roles or project categories that really weren't even around, say, 5 years ago? And how have things evolved? Joseph Liberatore: That's a great question. I guess I would start, and I don't want this to come across the wrong way. But virtually almost 100% of what we're doing today didn't exist 5 years ago because even the traditional roles that still exist today that existed 5 years ago, now they're being augmented with certain skills in AI. The bulk of the requirements that our people are coming across, some type of AI aspect is embedded in virtually every role that we're working on. In terms of what I'll say our newly created roles, I think we're still in the early stages of new role creation, I mean, outside of some of the general ones that you hear about with prompt engineering and certain other AI engineering specific. So I think this will continue to evolve. It's one of the reasons why I've always appreciated this business that we're in because we don't create demand. We follow where demand is. And at the end of the day, that's what we've been -- I've been doing this for 38 years. And the people that we're placing today aren't the same people that I was placing 38 years ago, although I did hear from some of our people that there's been a resurgence of demand for COBOL people, kidding. But the point being, the roles are constantly evolving, and our responsibility is to identify that talent that's in demand. So that's why we get really excited because we're not locked into any specific footprint. We typically move with where the footprint is moving towards. This is a lot of what we're seeing from an AI standpoint, not what I would consider pure AI, but augmented AI in terms of the skills and the skills evolution. So I don't know if that just gives you a little bit of a feel in terms of what we're seeing. Trevor Romeo: I appreciate that, Joe. That was helpful. And then you also mentioned the new AI innovation studio. So maybe you could talk a little bit more specifically about what that entails and what kind of value you can deliver to clients with that. Joseph Liberatore: Yes. One of the things in today's world with AI, the days of when you're in front of clients and you're trying to work through solutions for those clients of presenting PowerPoints or walking them through something visual like that. Organizations really want something that's tangible, that is a prototype, a working model. And so that's really what we're doing with our innovation studio, which is part of our broader innovation experience. And so that's so that we can work with clients on ideation, get real-world examples of what they're using, also expose them with some of the tools that our people have developed, which can also accelerate some of the development. So it's -- we've already been doing this mostly on client sites, but what we're also seeing is there are select clients that would prefer to get out of their environment and to get into a studio environment based upon the nature of what they're looking to do. And that's also tied into what we're doing in India. We've established what we call AI pods in India, which is where we get really a lot of leverage on building out some of these tools and the platforms that we're working with the clients. And we'll scale that accordingly based upon how demand evolves. Trevor Romeo: Helpful again. If I could maybe sneak one more quick one in for, I guess, either for Jeff or Dave. I think you typically give segment level expectations on these calls for the next quarter. So just any color you can provide on what's built into the guide for each of the segments in Q2? Jeffrey Hackman: Yes. Trevor, it's Jeff. I appreciate the question. Yes, and certainly happy to cover this in more detail tonight. But I think we mentioned in Dave Kelly's script that overall, at the midpoint of our expectations that year-over-year and very close to that is a sequential performance of roughly 4%. So if you look at technology with that being 93% of what we do, that technology performance is a preponderance of the driver there. I think when you go down and look at our FA business, again, we reorganized that business in early 2025, started to see sequential growth in the second quarter of last year, started to see some really nice sequential growth into the mid- to high single digits. In quarters 3 and 4, certainly saw some seasonal downtick to FA. But when you look at the year-over-year and our FA business at the midpoint of our guide, that's in the mid- to slight high single-digit range. Then you look at our direct hire business, the first quarter was the last year-over-year difficult comp for us. So really do expect at the midpoint, Trevor, some stability in our direct hire both sequentially and year-over-year. So you look across the market, very clear to us. Dave Kelly mentioned client share and market share, very clear at the midpoint, the 4% certainly is taking share. So hopefully, that helps, Trevor. Operator: The next question is from Tobey Sommer from Truist. Tobey Sommer: When you talk about your AI groupings in India, are you developing sort of repeatable solutions that maybe you could price differently than a bill rate, pay rate classic staffing or time and materials consulting model? Joseph Liberatore: Yes, I would say more so as we're working with clients, clients are looking for us to bring solutions to the table, which accelerate the development process, leveraging AI. So yes, the tools in themselves are repeatable. But in terms of products that we're looking to go to market with, we're not a product-based organization. But when it comes to methodologies, when it comes to tools, and all those things obviously get embedded into margins and pricing. So I would say that's more of the approach. Now I will say one of the things, obviously, we see is with industry focus, different organizations within a given industry, they're dealing with the same problem. So some of those things, which are not proprietary in nature, it does provide us an opportunity to bring those solutions that are more industry-specific to our other industry clients within the marketplace where we can leverage some of those past capabilities. Tobey Sommer: Right. So well, I didn't really intimate you're a product company, but if you're able to apply some of those learnings within different industry players and still respect confidentiality and all that, I'm sure you would price. Are you able to generate a higher return, higher margin on the second, third, fourth time you've sort of take a swing at a similar set of projects? Joseph Liberatore: Yes. Hypothetically, that would be the case. We don't have the practical experience that I can give you tangible that we've created a given AI solution and then we've taken that broadly across an industry. So I think time will tell on that, but logic would lead you down that path. Tobey Sommer: Okay. And Jeff, from a capital allocation standpoint, first quarter is a low cash quarter, so it makes sense that you're going to continue to return sort of at a more of an average quarter trend line. But given the valuation the way the stock has traded tomorrow notwithstanding where it's likely to be up, do you think you'll continue to, on a more sustained basis, lean into repurchasing shares at a greater level than annual cash flow? Jeffrey Hackman: Yes. I think, Tobey, you've certainly seen that, first, thanks for the question. You certainly saw that in 2025. I think we returned in excess of 100% of operating cash flows in 2025, took on -- leverage the balance sheet, the strength of the balance sheet that we had going into '25. We continued even in a -- as you acknowledged, Tobey, the first quarter for us relative to the other, certainly is the lowest cash flow quarter. We maintain share repurchases. Obviously, we're looking at our operating trends every day, every week and assessing what that means for our future. Certainly, in the first quarter, it looked like there was a significant dislocation between the underlying trends in the business and how the market was perceiving that with the valuation of our stock. So we're very comfortable outstripping the operating cash flows certainly in the first quarter. That led to debt of roughly $90 million, 1.2x levered. Tobey, you've been here long enough. I think since I joined in 2007, I think maximum leverage that I've seen in my tenure here is roughly 2x. So I think we're going to continue to pay attention to the trends, the valuation of our stock. But as we sit here today, we've got a very strong balance sheet. Historically, we have been conservatively levered at 1.2x as of March 31. So you're not going to see us get super aggressive and super wild, but we do have a strong balance sheet moving forward. Tobey Sommer: And last question for me. I think in the prepared remarks, you kind of said that this would be -- could look like a recovery from similar to historic recoveries. Is it your expectation that it is possible to have in year 1 or year 2 of this budding recovery, the kind of growth that we've had exiting prior recessions where there was relatively rapid growth for a year or 2 before settling into a more normalized rate? Joseph Liberatore: Yes. I would say let's remove the great shutdown, which was a little bit unique coming out of that. But if we look at prior cycles, that's really what our trends are telling us and what we're seeing. So Tobey, this goes back to the cycles that I know I spoke about. I know Michael spoke about, where we typically see companies when we go into tougher times, the first thing they do is they let go of contract or temporary labor. The next thing they typically do is they rightsize their organizations. Then as there starts to become some firming and visibility, they start to bring flexible workforce back in. And until there's great certainty, then they start to rebuild their permanent workforces. There is no question in looking at the data that the dynamics that were driven by coming out of the great shutdown, all of the overhiring, all of the hoarding of people, basically, our belief is we've now, over the course of 3 years, organizations by natural attrition versus rightsizing have basically gotten to a baseline of workers that they can't support the work that needs to be done. So we're at that same point that we historically have seen during normal recessionary cycles. We usually get there in a matter of 12 months. It's taken over 36 months to get there. So we would anticipate short of anything macro happening or major disruptions that that's where we are in the cycle and that the use of flexible workforce will continue to build from this point forward. Operator: [Operator Instructions] Up next is Josh Chan from UBS. Joshua Chan: I guess on that cyclical recovery point, I guess, in past cycles, you normally have like a broader economy recession before everything recovers. So I guess I'm wondering your thought about the ability to have a staffing recovery without a broader economic recession to kick start it all, I guess. Joseph Liberatore: Yes. I guess I would answer that a little bit differently. While we didn't have a GDP-oriented recession for the better part of the last 3 years, for professionally oriented roles, there has been a job recession. So a recession is a recession when it comes to the employment environment, and that's what we've experienced over the course of last 3 years, meaning the businesses -- and this isn't just Kforce, this is just not just technology. It's broad-based across all of the players. You saw what took place in terms of demand dropping. And again, that was because I'll go back to this. Employers were holding on to people. So basically, they were supplementing the work that normally would have been pushed off into temporary workforce models. They were getting it done internally by holding on to the people, letting natural attrition take place until now where they've gotten to a place where they can't get the amount of work that needs to be done, done. Joshua Chan: Okay. Okay. That makes a lot of sense. And then on the bill spread -- pay bill spread increasing, I guess, do you feel like the market is becoming less competitive because it's improving? Or do you feel like Kforce is securing the better portions of what's available in like an otherwise stable market? Jeffrey Hackman: Yes. Josh, this is Jeff. I appreciate the question. I don't think the competitive environment itself is becoming any tighter or any looser. As you mentioned on the margin question in my commentary earlier, much of this is execution and mix driven within our business. The higher quality revenue stream that we're driving with respect to our consulting solutions, those engagements, Josh, we've talked about it many times, are 400 to 600 basis points of higher margin. That mix benefit is benefiting overall gross margins. I know the nearshore, offshore is a relatively minor portion now as we move forward, expect a little bit of momentum there as well. But when you look holistically across our enterprise and market-based clients, we're executing well from a margin perspective. The mix clearly is benefiting us. So I do not believe that it's a competitive change in the marketplace. David Kelly: Yes. To further that, I don't -- you haven't seen broadly margin degradation in the space. And one of the things that we've continued to say, talent is sometimes difficult to find, right? So companies understand, especially highly -- we're talking about highly skilled talent in the space that we play. And so paying a premium to make sure you get the right individual with the right skill set or the right team of people, you are less price sensitive than you might otherwise be if you didn't need to get the work done. So it's a combination of those things, but this isn't just a pure dynamic that you have an individual and you just price it to the lowest price because you need the talent. Operator: And everyone, at this time, there are no further questions. I'd like to hand the conference back to Mr. Joe Liberatore for any additional or closing remarks. Joseph Liberatore: Thank you for your interest and support of Kforce. I'd like to express my gratitude to every Kforcers for your efforts and to our consultants and clients for your trust and faith in partnering with Kforce and allowing us the privilege of serving you. We look forward to talking with you again after our second quarter of 2026. Operator: Once again, ladies and gentlemen, that does conclude today's conference. Thank you all for your participation. You may now disconnect.
Operator: Hello, everyone. Thank you for joining us, and welcome to the Q1 2026 Bed Bath & Beyond, Inc. Earnings Conference Call. [Operator Instructions] I will now hand the conference over to Melissa Smith, General Counsel and Corporate Secretary. Melissa, please go ahead. Melissa Smith: Thank you, operator. Good afternoon, and welcome to Bed Bath & Beyond, Inc.'s First Quarter 2026 Earnings Conference Call. Joining me on the call today are Executive Chairman and Chief Executive Officer, Marcus Lemonis; President, Amy Sullivan; Chief Financial Officer, Adrianne Lee; and Chief Operating Officer, Lisa Foley. Today's discussion and our responses to your questions reflect management's views as of today, April 27, 2026, and may include forward-looking statements, including, without limitation to statements regarding our future business strategy, goals, financial performance, outlook for the remainder of the quarter or any other period, anticipated growth, stock price, profitability, macroeconomic conditions, the value of any of our brands and investments, relationships with third parties and agreements we are entering into with them, margin improvement, expense reduction, marketing efficiencies, conversion, customer experience, changes to brands or websites, product offerings, the merger agreement with The Container Store, blockchain and tokenization efforts and strategies and the timing of any of the foregoing. Actual results could differ materially from such statements. Additional information about risks, uncertainties and other important factors that could potentially impact our financial results is included in our Form 10-K for the year ended December 31, 2025, and our Form 10-Q for the quarter ended March 31, 2026 and in our subsequent filings with the SEC. During this call, we will discuss certain non-GAAP financial measures. Our filings with the SEC, including our first quarter earnings release, which is available on our Investor Relations website at investors.beyond.com contain important additional disclosures regarding these non-GAAP measures, including reconciliations of these measures to the most comparable GAAP measures. Following management's prepared remarks, we will open the call for questions. A slide presentation with supporting data is available for download on our Investor Relations website. Please review the important forward-looking statements disclosure on Slide 2 of that presentation. With that, Marcus, it's all yours. Marcus Lemonis: Thank you so much. I am both honored and privileged to be serving, as of January 1, as the CEO of Bed Bath & Beyond, and I want to thank everybody for joining. Over the last 2 years, our company has been focused on rebuilding this business, reconstructing the cost structure and lowering the hurdle for profitability with an intense amount of discipline and tough decisions around headcount, legacy technology and the cost of acquiring and retaining our customer base. The objective has been to reposition the company for growth with a definitive point of view of reclaiming profitability, coupled with long-term durability. That work was not about short-term fixes or temporary solutions, it's about making structural changes to how we operate by simplifying the organization, removing layers, materially reducing our cost structure and aligning the team around a clear and consistent set of priorities focused on the homeowner, asset allocation and data. These priorities have not changed. We're focused on driving top line growth, operating profitability and building something that is unique, durable and meaningful in the home space. In many cases, those decisions were not immediately visible in the numbers. Last couple of years were rough. Declining revenue, while dramatically improving margins and lowering the cost structure created short-term pressure on the perceived value of our company. Those changes were necessary because without resetting the foundation, there was no path to substantive profitability or to building something with purpose that would last. I knew the changes would take time to show up, but that when they did, they would appear in a way that were durable and repeatable. This is the eighth quarter in a row where the bottom line has improved. Back in January, when I laid out our long-term plan with our Everything Home 3-pillar ecosystem, we as a team committed to inflect top line growth while continuing to reduce costs. That happened. We delivered revenue of approximately $248 million, up 7% year-over-year or 9.4% when you exclude our discontinuing operations from Canada, which marks the first time in 18 -- 19 quarters that this business has delivered year-over-year growth. That result occurred concurrently while our operating costs for the quarter reflected the lowest operating cost structure in over 12 years. The growth we are seeing is emerging from a fundamentally reset operating mindset, not incremental spending or short-term activity. That shift becomes clearer as you look beneath the top line. We're acquiring our customers more efficiently. Our own channels are performing better and the engagement we are seeing is higher quality. As the quality of the business improves, the financial performance begins to reflect it. Adjusted EBITDA improved by $5 million year-over-year, and our net loss improved by $24 million. At the same time, the underlying trends are moving in the right direction. We're encouraged by the stability of our active customer file with returning customers and orders delivered improving sequentially. These trends are important because they show that the foundation is not only holding up, but it's beginning to build. Stabilizing the business was never the end goal. It was just my starting point. Everything we are building starts with a simple idea. The home is not a single transaction, it is a life cycle that unfolds over time, providing us with an opportunity to use technology and data to create lifetime value from every single customer relationship. On average, homeowners remain in their home for approximately 11 to 12 years. And during that period, they move in, maintain their home, improve it, finance it, experience life events and eventually transition out of it. Historically, those interactions have been fragmented across different companies and disconnected systems. What we are now building is a connected approach. As a reminder, we have organized the business into 3 pillars that reflect that life cycle. The omnichannel platform is where the relationship begins. Yes, the retail business, online and in-store. Our products and financial services platform allows us to participate more deeply in the economic activity tied to the home. And our home services platform, maybe the one I'm most excited about, brings us directly, physically into the home. Earlier this quarter, we completed the first acquisition of our omnichannel pillar with the Kirkland's transaction. We acquired strategic real estate, a product development and sourcing organization second to none and exceptional management. Additionally, we announced the deal to acquire The Container Store. That transaction gives us stroking real estate that is wildly underutilized, a world-class distribution and supply chain system and a home services business with Elfa and Closet Works that will move into Pillar 3, a foundational culture and process that will sit at the hub of Pillar 1. And it comes with exceptional leadership as well. Between those two, we will absorb the capabilities our businesses and our customers want and eliminate all of the redundancies and inefficiencies quickly. Pillar 2, our product and financial services group, is just getting started. And as noted previously, will include property and casualty insurance and home warranties through a nationwide relationship with Brown & Brown Insurance via the Beyond Home Agency. It will also include America's first homeowner credit union in partnership with a leading credit union. Additionally, this pillar will include our credit card program and product warranties. At the center of this pillar is a transaction agreed to in principle that includes a real estate brokerage, home title company and mortgage brokerage. This acquisition would not only create an origination engine for the overall ecosystem, but through technology and AI will allow us to meet and transact with tens of millions of customers without a traditional cost of acquisition. The final pillar and potentially the most exciting is Pillar 3, our home services business. Early this quarter, we announced the intent to acquire F9 Brands, which includes Cabinets To Go, Lumber Liquidators and Southwind Building Products. This acquisition would serve as a platform transaction, bringing unbelievable executive management, warehouse and supply chain capabilities and over $0.5 billion of revenue. Attached to that platform are Elfa and Closet Works Elfa organization systems, which were part of The Container Store transaction. Lastly, we've agreed to in principle to acquire a nationwide network of installation and renovation professionals. We believe that's part of building our moat. Together, we believe this creates a high-margin pillar that is defensible against e-commerce competitors and firmly differentiates our company as a service provider regardless of what's happening with the economy. But what is equally important and what I want to be very clear about is how we are building this business. We are not acquiring companies for the sake of scale, we are acquiring capabilities. Many of these businesses and brands that I mentioned have had decades of success but struggled more recently as stand-alone entities. They became burdened with fixed costs, duplicative infrastructure and inefficient cost structures and debt that limited their ability to perform. What we see is something very different. We see capabilities that fill specific roles across our white paper for the entire homeowner life cycle. When you think about the white space of homeownership, each of these businesses represents a critical function that, that customer needs over time across those 11 or 12 years. Our strategy is to extract those capabilities, preserve what makes them valuable and eliminate, very strongly eliminate the layers of cost and inefficiency that came with operating them independently. We preserve what works, we remove what does not work, and we connect everything through a single system. Earlier today, we announced a partnership with Bilt that allows that single operating connectivity system to work for the consumer. When we bring those capabilities together inside of one platform, supported by shared infrastructure and a unified data lake and a single customer identity, they become significantly more powerful together than they ever were apart. This is where our model is fundamentally divergent from traditional consolidation. Most consolidations focus on cost removal. That's part of our model, and we'll continue to eliminate those costs and inefficient operating expenses, including underperforming assets. But the real opportunity is not just cost, the real opportunity is the revenue that we believe we can create by understanding that single sign-on, unified customer layer. Giving each of these brands and each of these businesses an opportunity to cross-promote inside of one big data lake. By connecting these businesses through technology and artificial intelligence, we are building a system that allows us to engage with the same customer across multiple needs over time, dramatically lowering our cost of acquisition while increasing the lifetime value that customer could offer us. Each of these businesses has built and retained its own customer base. By bringing those customer bases together into a single ecosystem, we create a competitive advantage that allows us to grow revenue at a disproportionate rate compared to stand-alone competitors. It's over 100 million unique homeowners. That's not theoretical, it's structural. That is our business model. When you look across the brands we've acquired and are in the process of acquiring, including Overstock, Bed Bath & Beyond, The Container Store, buybuy BABY, Kirkland's, Lumber Liquidators, Elfa, Closet Works and Cabinets To Go, along with our partnerships across insurance, credit, warranties and our planned acquisition in brokerage, mortgage, title, installation and renovation, what we are assembling is not a collection of businesses, it's an ecosystem. Each business contributes to capability, each capability strengthens the platform. And together, they create something significantly more value than the sum of its parts. Each of these pillars has value independently, but the real value is when they work together. That's what allows us to move from serving a customer once to serving the same customer repeatedly over time. With that, I'll turn the call over to Adrianne. Adrianne Lee: Thank you, Marcus. I'll now turn to our first quarter financial results. Revenue increased 7% year-over-year in the first quarter and 9% if you exclude the impact of discontinuing our Canadian operations. AOV improved 6%, driven by our continued focus on improving assortment, driving a healthy mix in the living room furniture and patio on the Bed Bath side and an increased sales mix in the Overstock. Orders delivered increased by almost 1% in the period. Gross margin landed at 23.9% for the quarter, a decline compared to the same period last year, but still within the bounds of our operating range. We maintained effective discounting tactics, partially offset by lower sales and marketing expense, lapped loyalty points breakage from 1Q '25 and saw benefits from improved carrier costs and exiting underperforming operations. Sales and marketing expense had improved efficiency of 50 basis points as a percent of revenue versus last year. This result was driven by disciplined spend in paid and improved return in owned channels. G&A and tech expense of $36 million decreased by $5 million year-over-year or $8 million if you exclude the impact of onetime costs from acquisition-related activities. All in, adjusted EBITDA came in at a loss of $8 million, a 41% or $5 million improvement versus the first quarter of 2025. Reported adjusted diluted EPS was a loss of $0.25 per share, a $0.17 improvement year-over-year. We ended the quarter with cash, cash equivalents and restricted cash of $163 million. Cash used in operating activities improved year-over-year by more than $39 million or 77%, illustrating stabilization of operations. In the quarter, we invested approximately $26 million in acquisition-related activities. With that, I'll turn the call over to Amy. Amy A. Sullivan: Thank you, Adrianne. Our focus on the operating side is simple: translate the strategy into consistent, disciplined execution and ensure that as we scale these capabilities, we do it in a way that is efficient, scalable and built to drive sustainable returns. This work is being led by a strong operating team. Lisa is driving execution across operations and shared services, while Kyla, who we announced this afternoon is leading our technology transformation. Together, they are building the unified data and intelligence layer that connects the ecosystem and enables how we operate and scale. Today, the majority of our revenue is driven by an asset-light, increasingly productive e-commerce platform. We're pairing that strength with a fleet of more than 320 stores, allowing us to serve the customer across channels while improving productivity and return on assets. As we scale, we are focused on identifying the capabilities that truly drive performance and building around them, while decisively eliminating the inefficiencies that come from operating as fragmented layered businesses. Across the fleet, we are evolving our store formats with clearer roles and stronger economics while taking a disciplined approach to underperforming locations through repositioning, consolidation or exit where returns do not meet our thresholds. That same discipline is driving our merchandising strategy, where we are simplifying assortments, improving margin productivity and strengthening vendor partnerships. Across the organization, we are simplifying how we operate, consolidating systems and teams into a unified platform while removing layers that slow decision-making and limit efficiency. This approach extends to our data and engagement layer. As announced this morning, our partnership with Bilt accelerates a unified customer identity and loyalty foundation across the portfolio, strengthening engagement and lifetime value across all our brands. Customer service is central to this transformation. As we consolidate these functions, we are raising the bar across every single brand and every touch point so the customer experiences consistency regardless of how they engage with us. This is about building an operating model that scales, retaining what drives value and removing what does not. As we continue to integrate new capabilities into the platform, that same approach will apply across the ecosystem, ensuring we preserve what works and remove excess complexity across retail, products and financial services and home services. The result is a simpler, more transparent and more accountable organization with a cost structure designed to drive profitable growth. With that, I'll turn back to Marcus to close. Marcus Lemonis: Thanks, Amy. What you're seeing this quarter is early proof of a model that is beginning to come together. Look, we've stabilized the core business, demonstrated that we can grow revenue while removing costs and established a framework that allows us to build on that foundation with confidence. As we continue to add capabilities into the platform, we expect those capabilities to contribute not only to the efficiency, but to the incremental growth across the system over time. Importantly, this is not a model built solely on cost reduction. While we will continue to remove duplicative and inefficient operating expenses, including underperforming assets, a larger opportunity is the ability to drive revenue through a connected system powered by data, technology and artificial intelligence. All can expect that over the next 9 months, as we bring these pillars together and fold in these companies with their capabilities, we will remove an additional $60 million of cost out of the consolidated company while simultaneously strengthening our ability to grow more efficiently. As we approach our shareholder vote on May 14, we are asking for your support as we continue to execute this strategy. For those of you who have been long-term holders of our company, we appreciate your trust. For those who are newer to the story, we believe there is nothing more meaningful than the opportunity ahead. We have work to be done to reset the business. We think we're well on our way. Before we head into the Q&A section, I want to thank Adrianne Lee for the years of service that she has provided this company. She has been by my side as we have taken the current business down to the studs. We've developed a new operating strategy and have seen the fruits of that labor pay off from our team's hard work in the first quarter. Brian LaRose, who came with The Container Store acquisition and has been a very formidable CFO in the omnichannel retail products and services space will be joining our company. He's joining us here on the call today. But it is important to recognize that we have seen a lot of changes in the last couple of years. And to Adrianne and all the folks that helped us get to this point, we are grateful to the new companies and new executives who are joining our company, like Jason, like Amy, like Brian, we believe that the future is very bright. So we'll move into the formal Q&A section. Operator: [Operator Instructions] Your first question comes from the line of Steven Forbes from Guggenheim. Steven Forbes: Marcus, the upcoming transition of The Container Store locations, curious if you can maybe just speak or give us a sneak peek in the amount of space you plan to merchandise with Bed Bath & Beyond products. What some of the key merchandising features you're going to be reintroducing to the consumer with these refreshes? And then if you can, like how you sort of expect sales per square foot to change over time as we look out 12, 24 months and so? Marcus Lemonis: Yes, it's a great question. I think it's important to delineate the two omnichannel businesses that we have purchased. Kirkland's with its small format, what I consider undermarket real estate. Meaning that we believe we acquired leases that are under market, about 230 to 240 of them. They range from 5,000 to about 10,000 square feet, and you've heard me talk about them over the last year. The reason that we slowed our pace down of converting many of them to Bed Bath & Beyond home stores is as we looked at the numbers, we just didn't feel like we had all of the categories that we needed. And while we did the economic standoff with the current owners of TCS, I knew that eventually we would get that transaction to fold in with the pressure that we were putting on that business. So in addition to the 100 Container Store locations, we will have at least 100 small neighborhood format locations of Bed Bath & Beyond/Container Store, Container Store/Bed Bath & Beyond. As I move to The Container Store specifically, for the last 18 months, I've been studying this business, visiting every single store. I've been to, I think, 93 of the 100 already and spent a lot of time really trying to understand what they had, what they had too much of, how their sales per square foot were functioning, how they used to function, how the custom spaces function. And what I came down to is one simple conclusion. Across the 100 locations, there was 2.2 million square feet of retail. And in my opinion, half of that, maybe slightly more, was wildly underutilized, with triple-facing SKUs with, in my opinion, certain categories far too wide and not deep enough and with an attempt to address certain categories that I felt fell very short. Rather than thinking about walking into the store and expecting to see Bed Bath & Beyond on the left and Container Store on the right, I would rather you thought about it as general merchandise in one specific area that includes storage and organization, kitchen, bath, bedroom, a little bit of decor and other impulse items that may be seasonal relevant on one portion of the store and the other portion of the store would be filled with custom spaces and design spaces, which would include Elfa, Closet Works, Gracious Home Cabinetry, which is a higher version of Cabinets To Go and Gracious Home Flooring, which is a higher version of Lumber Liquidators, but leveraging their existing supply chain and expertise. So that when a consumer walks through the door, it is my goal to take it from an average of about $220 per square foot, I think we can get to $500 a square foot within 24 months. Now nobody should be applauding or patting anybody on the back for $500 a square foot. The true number to get to the 7% EBITDA contribution on a 4-wall basis is it takes about $615 a square foot, but it takes a very good balance between general merchandise and the home services business. And the reason that I create that delineation is that the blended margin of general merchandise should be in the 35% to 37% range, and the blended margin of the home services business is north of 60%. So we want to make sure that we're allocating not only enough talent, training and resources to the home services, but we need that blended margin to come in north of 40% for us to see the kind of EBITDA margins we know give us the kind of returns on investment we need. Steven Forbes: That's super helpful. And then maybe just a quick follow-up and more of a clarification for myself and maybe the group on the line here. The goal to remove $60 million of cost, right, that's sort of post all the announced acquisitions over the next 9 months. And I don't know if you can maybe just frame up for us like what is the end state of that? Is that -- does that bring the business to a positive free cash flow state? Or is there still more work to be done, whether it's sales growth or greater productivity initiatives to get to a free cash flow positive state? Marcus Lemonis: It is my belief that if we continue with low to mid-single-digit revenue growth in our primary business, and we're able to stabilize the margin as we have for the last 12 months, continue to stabilize it, and we're able to expand the home services business, the $60 million of eliminated costs puts us way ahead of needing to worry about being cash flow positive. My goal is to get this business to a 6% to 7% EBITDA margin business. And to be candid with you, if you go back and look at the amount of costs that have been taken out of just the original Overstock business, which is north of $100 million, one should assume that my $60 million number is very conservative. What I want to be realistic about is that I want to make sure that we make the right decisions, the right decisions on what locations to close, the right decisions on what headcount to eliminate. But I have to be unfortunately brutally clear and honest with everybody, both internally and externally. With the formation of AI outside of our business and now being deeply integrated in our business and us only wanting to take on capabilities that we think add value, we're going to experience significant reduction in headcount, is significant. And in some cases, some of that reduction will be redeployed in areas where we think we're under nurtured. Customer service does not have enough to my liking. The amount of staff qualified, trained staff in the stores, upselling customers, designing for customers, servicing their home for customers is not enough. But we are going to become an organization that puts its payroll in the field, that puts its payroll generating revenue and does not put its payroll in corporate offices with big leases and lots of warehouses. So we will be eliminating supply chain costs. We will be eliminating IT, accounting, marketing, merchandising, et cetera, across the entire platform. And it's never a good thing to do that. But if you go back and you study the independent financial statements of all these businesses just in a normal mid-cycle environment, Container Store as an example, prior to COVID, $90 million every year. Kirkland's, $25 million every year. We know what Bed Bath can do, we know what buybuy BABY can do. The problem is we're living in a different world. And this particular forecast and model that I'm talking to you about today assumes no inflection in the housing market. The goal was always to get this business to neutral or slightly positive in this kind of economic environment that we're living at today, where the 10-year treasury is north of 4%, where mortgage rates are north of 6%. And while I don't have a crystal ball that will tell me when south of 4% and south of 6% are going to happen, we are going to take out all the costs to prove that we can be a breakeven company in an environment like this. What does that tell you? You get to a mid-cycle environment, and you're not talking about 4%, 5%, 6%, 7% increases in revenue, you're talking about low double-digit increases in revenue, 10%, 12%, 15%. And if the cost structure is right and the sourcing is right, then our profitability will be where it's supposed to be. Operator: Your next question comes from the line of Thomas Forte with Maxim Group. Thomas Forte: Amy and Brian, welcome to the call. Adrianne, it was a pleasure working with you, and I wish you all the best in your future endeavors. So Marcus, I have one plain vanilla question, and I have one spicy one. We'll start with the plain vanilla first. So can you give your current thoughts on your decision tree for building, buying or partnering to advance your three pillars? Marcus Lemonis: It's very simple for me. On a whiteboard back on December 31, while everybody was out having a party, I drew out what I thought the homeowner time line was to owning a home in one simple cycle, and it's about 11 or 12 years. And I thought about every single thing that the homeowner would do right before they decided to buy all the way to the point that they made the decision and close on the sale they bought 11 years ago. And I started to think about all the needs, both the products, the services, the financial needs that they would have, the insurance needs that they would have, the life events that they would experience and started to map out on the giant whiteboard, what were all the types of products and services that we're missing to be able to do this. Now most of you know what my background is. For 25 years, I had the blessing of being able to build a business that is an ecosystem around one particular lifestyle. And I understood that in order to do that, you had to aggregate all these products and services. And as you did that, the moat would get deeper and deeper and deeper. And the goal here is to not only build the moat, but to be part of the homeowners' life cycle, not just once but multiple times. What's missing for me, Tom, what was always missing is that it's great to sell couches and patio furniture and containers and decor for your home and flooring and all those things. But the reality of it is, is that the cost to find that customer, the cost to acquire that customer, retain that customer is what led most of those companies to have to take on debt, take on lots of different expenses, take on layers of personnel and allow them, force them to not be as successful. As I started studying all the things that were available in the marketplace, it is true, I do like distressed things. I like them because for my shareholders, we get a good deal. But we only get a good deal if we recognize that extracting capabilities and discarding duplicative costs has to be the mandate, have to be the discipline. When I listed off all those brands, I don't think a year ago or 2 years ago, everybody would have -- anybody would have imagined that all those brands can be part of one system. But the thing that I think is missing is how it all interconnects. And I'd like to have Amy talk about that. And then we'll get on to your other question. Amy A. Sullivan: Yes. So we announced our partnership with Bilt this morning, and I think that's a really important sort of moment to think about the sort of red thread that goes through all of these brands. And so when you think of the cost of customer acquisition and the desire to make those customers trust our brands and be the most loyal they can be to us, we believe the partnership with Bilt begins to build that entire network for us of how we link our brands together within our own ecosystem and how we link our brands within the neighborhood that he or she lives in. And so that partnership is really the part that begins to tie this together. Both Lisa, who is joining us on the call today and Kyla, who's an amazing new talent that we added to our team will be part of driving that with us. But there are parts of our business that are just such a natural match for what Bilt already does with renters that we believe we can benefit from what they have already built as well as partner together on things such as the financial services pillar of our business that we want to do together with Bilt. Thomas Forte: Great. And then for my follow-up, so Marcus, you're about assure as they come, and I appreciate all your efforts to drive shareholder value. I was curious what you thought of the following. Would you consider converting any of The Container Store locations to AI compute centers given their close proximity to urban city centers. Marcus Lemonis: The answer is no. We don't want to play games with having AI be part of our boxes. But what I can tell you definitively is that in our new team member, Kyla, who's joining our team and Lisa, who's now our Chief Operating Officer, the two of them have been insanely focused on eliminating headcount and eliminating costs by layering in AI as part of all of our business. And even when we start to look in the accounting or the risk mitigation world, where we're managing payables or managing receivables or managing treasury, this is a technology business first. The problem was is that the technology that we've been working through and getting rid of was a decade or 2 old. That doesn't make it bad, it just makes it not current. And so while we're not going to turn any of our locations into AI centers, we are going to turn our business into an AI-centric business, not because it's fun to say or we think it's going to drive our stock, but because we know it's necessary to be competitive. We know the customer expects it to get information that's curated for them. And we know that in order to efficiently market our business and get our marketing costs down back into the 12% or lower range, we have to be far more efficient with everything. Operator: Your next question comes from the line of Alicia Reese with Wedbush. Alicia Reese: First, just following up on the last question. You had mentioned in your prepared remarks, of course, that The Container Store real estate is wildly underutilized. Just wondering if you can speak to some possible uses, if it's not for AI data centers or anything of that manner. What possible uses have you considered so far? Marcus Lemonis: So when I take a typical store that's around 22,000 square feet, those stores have been generating a decent amount of revenue with general merchandise that The Container Store historically held and sold Elfa Closets and a few other custom closet systems. As we acquire businesses across the home space, it is our expectation that all of them in some form or another will have a physical presence there. And whether that is providing cash offers on real estate or allowing a title closing to happen there or allowing somebody to come prepared to take their son or daughter to college or getting ready for the Christmas holiday or picking out new floors for your newly bought house or designing a new kitchen. We want to make sure that every single square inch of those 22,000 square feet are intensely utilized. When I talk to you about the quality of this real estate, for those of you that know The Container Store in your own town, it is the cream of the crop real estate. But one of the things that I think brought Container Store to a tough spot is that it didn't have a broad enough offering for the home, it was very nichey. And as the Internet came to be more predominant, it lost a little bit of its competitive edge. As the economy got tougher, it lost a little bit of its competitive edge. Historically, The Container Store has served the customer that was probably $200,000 a year in household income. We believe that the addition of Bed Bath not only widens the funnel for that customer, but the offering widens as well. I would expect that within 24 months, the revenue coming out of those 22,000 square feet when you incorporate all the home services in the general merchandise, and you can quote me on this, should be double. It should be double. And I don't think anybody in our company believes that, that's a pie in the sky number only because the company has done it before. So we want to utilize those to meet customers, to serve customers and to have every pillar in our company, including our potential brokerage business, our credit union business, our credit card business, all of those businesses extract value. What we like to say internally is we're going to sweat the assets and get every last drop of revenue that, that piece of property was intended to give us. Alicia Reese: I'm wondering if you could also speak to the product mix shift at the original Overstock.com site and how you're honing that, to what extent you're layering products from the other businesses now or steering people to other banners under your other businesses? Amy A. Sullivan: Hi Alicia, I'll take that one. So from -- as we think about all of the banners, I do believe they each fill a unique portion of the home segment of the business. And so as Marcus just described in The Container Store real estate, in our largest stores, for example, there's an opportunity for all of those things to be represented. But when you get back to the e-commerce business, there's a massive opportunity for each of those to be more thoughtfully curated to what we all expect from those brands. Overstock specifically has really been headed in the right direction in terms of its focus on patio rugs and furniture as well as sort of an eye dropper amount of the fashion luxury space that does so well on that site. Bed Bath & Beyond is probably where we have the most opportunity to sort of fine-tune and make sure that, that business is the best of what we remember of Bed Bath & Beyond while still protecting some of the growth that we've sort of acquired over time with that legacy Overstock customer. So I think there's tremendous opportunity to curate each one of them, but really bring it together in the store footprint. Marcus Lemonis: I want to add a little bit to that. Overstock is run by an unbelievable woman who came back to the company because she liked the direction that we were going and has brought in a whole new supporting cast of merchants underneath her. And really, if you think about Overstock in its best days was great brands and big ticket items at unbelievable prices. You can expect that even by the end of the year, and I don't want anybody to like overreact to this, but even by the end of the year, in addition to selling patio furniture, Rolex watches, Gucci handbags, we will be selling cars and anything else that we believe fits into the four corners of the property and the four walls of the house. We're not going to be the sellers. It's a marketplace, and we rely on the best companies, the best brands and the best supply chains to satisfy that. But I think Overstock, when I look at all of our e-commerce businesses, separate from getting normal improvement out of Bed Bath and normal improvement out of The Container Store, Overstock is the one that has the most potential to be a massive brand again. On a trailing 12 months, we're back up around $0.25 billion. And every day, we're seeing $700,000, $800,000 a day. We know that it needs to be unlocked and unleashed, and we've always been trying to manage our priorities while trying to get to profitability. As we bring on these other businesses and we start to add billions of revenue, and I want to be clear, Container Store, Bed Bath, Overstock, Lumber, Cabinets To Go, Elfa, Closet Works, all these brands, we're starting to dance in the $2-plus plus-plus billion range. And when you start to add all of that revenue and all of that gross profit and you extract the costs that come with those, you start to get to profitability within a year or 2 in a material way. Overstock is like that prize jewel box that doesn't get enough attention, but it will continue to get the attention, and we expect the growth to continue to be low double-digit like it has been over the last 12 months. Operator: Your next question comes from the line of Jonathan Matuszewski with Jefferies. Jonathan Matuszewski: My first one, Marcus, was just on a theme that's emerging here, and that's kind of potential revenue synergies from cross-marketing across the businesses that you've been aggregating. So how should we think about kind of measuring progress there? As you think about the separate customer files today, where does cross-shopping stand before integration? And are there any kind of milestones that you have in terms of measuring as these businesses come under one umbrella? That was my first question. Marcus Lemonis: We've been working with a firm out of Canada, Lisa Foley, our Chief Operating Officer, has to really understand how to create one single data layer. And that data layer takes the entry point of any customer in any brand at any moment in time and ingest them into that data layer. Ultimately, what we want to do is ensure that we do that address and that person, and we create two unique identifiers. The first is the homeowner or a renter, it's an important distinction, both, the homeowner or renter themselves and their behavior and their historical purchases, so we know who they are and what their preferences are. That's the first unique sign-on. The second is the home itself. And I liken it to the automobile business when you think about cars. When you are in the automobile business and you're trying to grow any portion of that ecosystem, you think about the car and you think about the VIN number. And there's a term called VIN explosion, which allows you to understand a heck of a lot more about that car and its journey through its life cycle, including repairs, maintenance, accidents, insurance, everything. We look at the home address the same way. So the single sign-on with the customer tells us about them and the home address tells us about the home. Over time, with all of these partners, including title, mortgage, credit card and all of these other brands that we talked about, we want to be able to gather everything about that address that you can imagine, not only the purchase price, not only the square footage, permits, titles, deeds, surveys, mortgages, and you could expect all of that data to live on blockchain. Remember, this company is also heavily invested in tokenization and in blockchain. And we believe that the transfer of information for the homeowner, transferring it for themselves or for the home itself, transferring it from one owner through title to another owner should be able to transfer that proprietary data information on that home as well. As we understand those two single sets of data, we then create journeys that allow us to communicate with those two assets uniquely based on where we think they are in their 11- or 12-year life cycle. As we think about where they are in that journey, Lisa has done an unbelievable job of starting to craft the way we communicate with those different assets and giving them the right offer at the right time with the right price and the right tone, hoping that they will capture something there as opposed to this spraying effect where every customer gets every e-mail every single day. It is not a perfect science today, which is why Amy and Lisa fought really hard to bring Kyla into our organization. She has transformed multiple companies on the digital and AI transformation road maps and believes when we interviewed her that she could really help layer the simplicity to ingest the data, to understand it and to communicate back to it in a way that we don't believe any other company in the home space can do it for one simple reason. There is no other company in the home space, not Home Depot, not Wayfair, not anybody else that will have as many touch points across those 11 years and as many entry points into the life cycle as we have. And we're not done making acquisitions. And so whether it's buying a brokerage and knowing that, that's a hot origination today or doing a HELOC on blockchain with somebody today or selling somebody a crib today, we know that all those moments create opportunities to bring them into our systems and keep them through life. Jonathan Matuszewski: Really helpful, Marcus. And then just a quick follow-up. As we think about the core business, I think you mentioned some progress on improved repeat spend. So I just wanted to ask about kind of customer loyalty. And maybe if you could frame it in terms of just an update on the welcome rewards program. Where is that today in terms of enrollment? How productive is that customer? And what's possible ahead with all the changes you're making to merchandising and whatnot? Marcus Lemonis: Got it. Well, first and foremost, the e-commerce business is not our core business anymore. Our core business is the Everything Home business and everything that's around it. Particularly when you look at the revenue and margin contribution, the e-commerce business, coupled with our retail business is our omnichannel business. That's pillar 1. And those other pillars really matter significantly to make sure that we are addressing everything that, that homeowner wants. As it relates to our welcome rewards, our welcome rewards program will be ingested by our Bilt program. Amy A. Sullivan: So as we think about the Bilt program, I would think of that as sort of the halo over all of the loyalty programs in our system. And so we want to be able to recognize that if someone is a buybuy BABY customer or a Cabinets To Go customer that that's how they entered the system. But we want them to be able to earn in the whole ecosystem of Beyond Rewards, which will be powered by Bilt, so that those points can be leveraged and traded from anything from a crib purchase over to Bed Bath & Beyond to how you think about mortgage and our financial services businesses as well. So we're less focused on Beyond Rewards as a stand-alone reward program and more appropriately focused, I would say, on building out this entire ecosystem that I believe she will find far more value in as she shops all of our brands. Marcus Lemonis: Jonathan, one thing before you go. It is really important, and it's a big shift because over the last 24 months, all we've been talking about is taking revenue down and getting rid of SKUs and getting rid of negative margin vendors and getting rid of people. And it's been a painful process, which is why our stock is, in my opinion, wildly undervalued. But based on what was happening, we understood that. As we did these transactions with these other sellers and we asked them to take all stock, we were asking them to put their business, their lifelong business in the hands of our business. And they understood that what we were ultimately trying to build was something that had never been done before. And I love reading articles about how ambitious it is or how it's not possible or how it isn't going to work and it really is very simple for me. If you start by understanding data, and how to properly catalog it and how to properly look at it and how to properly communicate with it. And then you surround it by businesses in the same eco space. We're not going to be off doing random things just because we have data. Then really, what you've done is you've taken good brands with a lower cost structure, with good talent, playing in the same space and you've allowed them to play in a totally different sandbox. What that ultimately means is that the customer should be the big winner because as they do business with us in one business, they should be earning rewards. And the one thing that we said to the founder of Bilt when we did this deal, and Amy and I sat in their offices, I'm only going to do this deal if we can build the model where if they buy a lot of stuff from us as a renter, they can earn enough points to have enough of a down payment to buy their first home. I have been obsessed for the last 12 months about the lack of affordability of buying a home in America. And I don't see any company doing anything about it. Part of what we want to ultimately do is bring low-cost, high value. And whether that's bringing a credit union to the forefront, where there'll be mortgages, HELOCs, checking and savings or bringing Bilt to the forefront where they'll be able to enjoy rewards at tens of brands, 20s of brands. That ultimately is, I think, what's been missing from the general marketplace. Brands trying to stand on their own, never going to work. Brands trying to stand inside of a simple, flatter ecosystem, we think that's ultimately why this matters. But it really is data center. We want to be known going forward as a data and technology company that happens to cut its teeth in the home space, the largest TAM in America, by the way. Operator: Your next question comes from the line of Bernie McTernan with Needham. Bernard McTernan: I was wondering if the better-than-expected results, at least relative to our estimates for 1Q impacts how you're thinking about the year at all? And maybe within that, just any impact you're seeing either on the consumer or suppliers or anything you're hearing in the industry just in terms of higher gas prices impacting the macro? Marcus Lemonis: We haven't seen gas prices change our demand trajectory, but we are holding steady with the guidepost that we provided earlier in the year, which is low to mid-single-digit revenue growth. It is important that everybody understand one part very clearly. As we get into Q2, we will have onetime operating expenses that will be directly associated with eliminating redundancies and purging systems and terminating leases and doing all the unpopular things that are required. Brian has committed that we will clearly, in our second quarter, show people what the core revenue is and the core margin is and the core operating expenses are. And we will highlight clearly what expenses. For example, in the second quarter, we will run through the P&L about $12 million to $13 million of expenses through the Kirkland P&L because we haven't had it in our hands until April 1. But I'm happy with what we're seeing there. I also want to be clear that when we did the deal a while ago, there were 300 stores. There are now 240 stores. We may end at 210 stores. I am not taking any chances or any kind on deploying any of my shareholder assets on anything that I don't think we can get a return on. And what I'd rather do is be upfront about what we're getting out of it. When we look at The Container Store, there are already three leases that we have shaken hands on, had a nice gracious exit, and we will be exiting those locations. We are getting out of distribution centers, we are getting rid of lots of old contracts. And so as you look at the next couple of quarters, it is important to know that there will be incremental expenses. I believe that if you looked at what we had laid out in the guidepost, Q2 will have about $13 million of onetime expenses. I would expect that Q3 will probably have between TCS around $13 million or $14 million as well. We don't see as much in the Lumber Liquidators, Cabinets To Go business. Jason Delves, who's the CEO of that company, runs a pretty tight ship and he's feeling a little -- I think he's getting a little FOMO knowing that he's got to get rid of some things as well. And then as we start to think about all the deals we're doing going forward, we're requiring a lot of those businesses make those changes when we sign the deal. And so as you see other deals get announced here, you're probably going to see immediate and radical changes happening at the same time that we announced it. With Kirkland's and TCS, we don't -- we didn't own Kirkland's until April 1, and we don't technically own TCS until July 1-ish, around that date. We're lining it all up, but we will have to purge the system. Nothing daunting or nothing monumental and nothing that we can't handle, but we want everybody to know that there are some onetime things that we will lay out for people. Bernard McTernan: Understood. And as a follow-up, with all these acquisitions set to close in relatively short order, how should we expect them to start impacting the larger company strategy? Like as you mentioned, there's a bunch of things that need to be done once deals close. So what's the time line that we should expect, yes, to be a positive influence in that Connected Home strategy? Marcus Lemonis: I think in Q2, as an example, based on when we close and the time of year that it is, we'll see about $80 million of increase coming out of Kirkland's, $75 million to $80 million coming out of Kirkland's. It's a second half of the year business. We're still seeing nice revenue growth on the e-commerce business that low to mid-single-digit growth there. The only thing that you should expect to see in Q2 is about $13 million of onetime expenses. So whatever your consensus was, whatever your number was, and I don't know what it is on this call, I would add about $13 million to it. We're hoping to be a little bit better than that. And then the same thing what happened in Q3 with the closing of TCS, I would expect that we will have a forecast that looks pretty good in probably 30 to 45 days that will give you an outlook, a range, a guidepost, assuming the economy doesn't get any better with about 6% to 7% revenue growth on a CAGR for '27, '28 and '29. That's what we're hoping to show you guys in the next 45 to 60 days. And I think it will be about what you would expect it to be. The TCS business is about $0.5 billion. The Kirkland's business on an annualized basis is about $350 million, $325 million depending on how many stores we end up keeping. The Lumber Liquidators, Cabinets To Go business is about $500 million. The installation business that we're talking about, the renovation installation business is about $60 million. And so we'll build all of that for you as we build this live together. But they'll fold in, in cadence. And I would expect that by August, September, we should have everything closed that you've heard about today, that doesn't mean there won't be more tuck-in acquisitions that would fit into Pillar 1, 2 or 3 based on what Amy wanted, Brian wanted or Jason wanted. Operator: We have reached the end of the Q&A session. I will now turn the call back to Marcus Lemonis for closing remarks. Marcus Lemonis: I don't have any closing remarks. We are happy that we were able to report Q1, and we're looking forward to exciting quarters ahead. Thanks for joining us. Operator: This concludes today's call. Thank you for attending. You may now disconnect.
Operator: Greetings. Welcome to Simpson Manufacturing Company's First Quarter 2026 Earnings Conference Call. [Operator Instructions] Please note, this conference is being recorded. I will now turn the conference over to Kim Orlando, Investor Relations. Thank you. You may begin. Kimberly Orlando: Good afternoon, ladies and gentlemen and welcome to Simpson Manufacturing Company's First Quarter 2026 Earnings Conference Call. Any statements made on this call that are not statements of historical fact are forward-looking statements. Such statements are based on certain estimates and expectations and are subject to a number of risks and uncertainties. Actual future results may vary materially from those expressed or implied by the forward-looking statements. We encourage you to read the risks described in the company's public filings and reports, which are available on the SEC's or the company's corporate website. Except to the extent required by applicable securities laws, we undertake no obligation to update or publicly revise any of the forward-looking statements that we make here today, whether as a result of new information, future events or otherwise. On this call, we will also refer to non-GAAP measures such as adjusted EBITDA, which is reconciled to the most comparable GAAP measure of net income in the company's earnings press release. Please note that the earnings press release was issued today at approximately 4:15 p.m. Eastern Time. The earnings press release is available on the Investor Relations page of the company's website at ir.simpsonmfg.com. Today's call is being webcast and a replay will also be available on the Investor Relations page of the company's website. Now I would like to turn the conference over to Mike Olosky, Simpson's President and Chief Executive Officer. Michael Olosky: Thanks, Kim. Good afternoon, everyone and welcome to today's call. With me is Matt Dunn, our Chief Financial Officer. As we begin, I'd like to step back and briefly anchor our performance this quarter and the broader ambitions that guide how we build and grow Simpson. Across the organization, we remain focused on being the partner of choice for our customers, and innovation leader in the markets we serve and strengthening our values-based culture, all while delivering strong financial performance. We are making meaningful progress on these ambitions despite continued market challenges. A defining hallmark of our values-based culture is the depth of experience and long-term commitment across our organization. As we celebrate our 70th year as a company, that continuity matters. It reflects a culture that has allowed us to perform, adapt and grow through many different construction cycles. Throughout the year, we'll be highlighting employees whose long-term dedication and impact reflect the values and culture that have defined Simpson for 7 decades. I'd like to take a moment to recognize a few members of our team. First is Sheryl Wyatt, Plant Director for our Southeast operations. She is celebrating 42 years with Simpson. Sheryl started her career in our customer service organization, gaining firsthand insight into our customers and how we support them. She advanced through several manufacturing and operation roles and today leads our highest volume and most cost-effective manufacturing facility. I'd also like to recognize Cyndi Chandler. Cyndi started her career with Simpson in Texas and has spent 41 years with the company. She currently leads our business in the United Kingdom, where she made meaningful profitability improvements. Over her career, she has consistently led teams through complex change from reshaping our U.S. national accounts approach, to launching operations in Chile and most recently, successfully strengthening our customer relationships across the U.K. Finally, I'd like to recognize our brothers, [ Genaro and John Sid ] from our Southwest operations. With 48 and 42 years of service, respectively, [ Genaro and John ] bring a combined 90 years of experience spanning production planning, leadership and quoting. They are a great example of the deep operational knowledge and customer focus that underscore what makes us unique. These are just a few examples of the people behind the results and we're grateful for the experience, leadership and commitment they bring to work every day. Now turning to our financial results. We delivered net sales of $588 million, up 9.1% from the prior year quarter. As outlined in our investor presentation, net sales growth was primarily driven by our 2025 pricing actions, which contributed approximately 6% and foreign exchange of approximately 3%. These gains were partially offset by an approximate 1% decline in volume as a result of softer housing start activity during the quarter. In North America, net sales were $461.9 million, up 9.8% from the prior year quarter, including a $31 million benefit from pricing actions. As we look across our North American business, performance remains mixed by market segment and varies by geography, consistent with broader construction trends. However, we continue to see areas of resilience and growth for our strategy, business model and customer relationships position us well. The component manufacturer business delivered a strong quarter with volumes up double digits, driven primarily by new customer wins. This business continues to represent one of our most attractive long-term growth opportunities. Even amid broader residential housing softness, customer engagement remains solid, particularly around productivity-enhancing solutions. Truss manufacturers remain focused on labor efficiency, throughput and operational visibility, resulting in increased demand for our solutions across software, plates, equipment and design services. We are making great progress in expanding and enhancing our offerings with value-added functionality. We are also improving our ability to respond quickly with new software features as customers' needs evolve. Adoption of our solutions continue to advance, strengthening our role as a strategic partner to our component manufacturing customers. The OEM business delivered another strong quarter with double-digit volume growth. This segment remains an area of relative strength and strategic importance, supported by long-term trends toward prefabrication and off-site construction methods, including engineered wood systems and mass timber. While project timing can vary, customer engagement remains high and our pipeline of opportunities continues to build. Our ability to pair innovative products with deep engineering expertise, testing capabilities and field support remains a key differentiator. As customers pursue increasingly complex performance-driven projects, we believe our OEM segment is well positioned to grow faster than the broader construction market over time. Our residential business volume increased modestly year-over-year, supported by continued cross-selling of connectors, fasteners and anchoring solutions. While builders are focused on cost control, cycle time reduction and lowering inventory levels, we renewed builder agreements, launched new products and increased our service offerings to support both our builders and our LBM partners. These initiatives, combined with high service level across the industry's broadest and deepest product line have enabled us to perform relatively well in a market pressured by soft housing starts. In our commercial business, first quarter volumes were down slightly year-over-year, reflecting mixed construction activity by segment and geography. Demand for cold-formed steel and anchoring systems remains relatively resilient. Customers continue to value our technical expertise, project coordination, broad portfolio of code compliance solutions and reliable product availability on large complex projects, particularly where early engagement helps reduce risk and improve execution. While overall activity remains uneven, our differentiated capabilities position us well for continued share gains. Our National Retail business experienced low single-digit decline in shipments, while point-of-sale volumes declined in the mid-single digits versus the prior year. The retail environment remains competitive and reflective of broader housing and repair and renovation trends with customers remaining value focused and selective in discretionary spending. Our teams remain focused on disciplined execution, strong in-store support and close collaboration with retail partners to optimize merchandising. We continue to make progress through pay optimization initiatives, targeted product innovation and the expansion of decorative hardware via our Outdoor Accents offerings. While near-term volumes remain pressured, our emphasis on service, reliability and in-market execution continues to strengthen retail relationships and support long-term growth opportunities. In summary, while near-term market conditions remain difficult, our diversified portfolio, strong customer relationships and focus on engineering and value-added solutions resulted in solid performance across the North American business. In Europe, first quarter net sales totaled $121 million, up 6.3% year-over-year, driven by foreign currency translation. On a local currency basis, net sales were down 5.4% with a decline in volumes partly offset by price increases. The market has been off to a slow start this year but we continue to expect flat to low single-digit market growth over the next couple of years. Even in this environment, we've had several meaningful customer wins, including multiple mass timber projects. We also made progress improving profitability in select countries and continue to optimize our footprint to support long-term performance. While our raw material positions remain strong, we are seeing input cost headwinds that have required us to pass through surcharges and price increases. Taken together, these dynamics reinforce our confidence in our ability to continue improving profitability in Europe. Our consolidated gross margin declined 130 basis points year-over-year to 45.2%, driven by higher material, factory and tooling and labor cost as a percentage of net sales, including start-up costs from the ongoing ramp of our Gallatin facility that opened late last year. Our 2025 price increases, which we now expect will contribute approximately $130 million in annualized net sales helped offset these costs, including those attributable to tariffs. Gross margin was also negatively affected by product mix, partially offset by our productivity initiatives. Our operating margin was 19.5%, up 50 basis points year-over-year, which included onetime costs of $2.3 million related to our strategic cost savings initiatives. Adjusted EBITDA totaled $139.4 million, a 14.1% increase year-over-year. As outlined in our last call, our financial ambitions remain: one, driving above-market volume growth relative to U.S. housing starts; two, maintaining an operating income margin at or above 20%; and three, consistently driving EPS growth ahead of net sales growth. In summary, our first quarter results reflect disciplined pricing and cost management reinforced by strong execution and an unwavering focus on supporting our customers. As we look ahead, we expect conditions in both the U.S. and Europe to remain challenging and we do not anticipate sustaining the same level of revenue growth through the remainder of the year. As for our outlook on the markets, we now believe 2026 housing starts in the United States will be down low single digits compared to 2025. And in Europe, we expect flat to modest growth in the market for 2026. Looking ahead, our culture, customer focus, innovation and financial discipline position us well to execute and maintain a strong competitive position. With that, I'd like to turn the call over to Matt, who will discuss our financial results and outlook in greater detail. Matt Dunn: Good afternoon, everyone. Thank you for joining us on our earnings call today. As we celebrate our 70th year as a company, I'd like to echo Mike's comments and extend our gratitude to our many long-standing employees who have made Simpson the company it is today. I'd also like to mention that unless otherwise stated, all financial measures discussed in my prepared remarks refer to the first quarter of 2026 and all comparisons will be year-over-year comparisons versus the first quarter of 2025. Now turning to our results. Consolidated net sales grew 9.1% to $588 million. In the North America segment, net sales rose 9.8% to $461.9 million. Europe delivered a 6.3% increase in net sales to $121 million, driven by $13.2 million in favorable foreign currency translation and price increases, which were partially offset by lower sales volumes, partly from adverse weather conditions across the region. Globally, wood construction product sales were up 8.3% and concrete construction products sales were up 14.7% as a larger percentage of these products are imported and included in tariff-driven price increases. Consolidated gross profit increased 6.1% to $265.9 million, resulting in a gross margin of 45.2%, down 130 basis points. In North America, gross margin was 47.8%, below the 49.8% reported in the prior year, reflecting the impact from tariffs and higher factory overhead and labor costs as a percentage of net sales, along with some unfavorable product mix in the quarter. As Mike noted, start-up costs in our Gallatin facility represented an approximate 100 basis point headwind to our first quarter gross margin, which we expect to moderate as we progress through the year. In Europe, gross margin increased to 36.3% from 35.2%, driven by higher pricing and lower material costs, partly offset by higher factory and tooling costs as a percentage of net sales. From a product perspective, our gross margin was relatively flat at approximately 46% for wood products. For concrete products, gross margin was 40.2% compared to 49.5% 1 year ago, with the decrease due to tariffs, partly offset by recent pricing actions. Now turning to expenses. As a percentage of net sales, first quarter operating expenses were 25.6%, an improvement from 27.5% last year. SG&A headcount was down approximately 9.1% year-over-year, which reduced personnel-related costs. In total, operating expenses increased 1.7% to $150.7 million, driven primarily by $4.2 million of foreign currency translation and onetime costs in Q1 2026 of $2.3 million related to our strategic cost savings initiatives. These increases were largely offset by lower professional fees and variable incentive compensation. To further detail our SG&A, our research and development and engineering expenses decreased by 6.1% to $18.6 million on lower personnel cost due to less headcount and footprint optimization. Selling expenses were relatively flat at $54.5 million as a result of our strategic cost savings initiatives. On a segment basis, selling expenses in North America were down 3.3% and in Europe, they were up 11.9%, primarily due to FX. General and administrative expenses increased by 4.5% to $77.6 million due to onetime costs of $2.3 million related to our strategic cost savings initiatives. As a result, our consolidated income from operations totaled $114.6 million, an increase of 12% from $102.3 million. Our consolidated operating income margin was 19.5%, up from 19.0% last year. In North America, income from operations increased by 12.8% to $118.3 million due to higher net sales and reduced operating expenses. Our operating income margin in North America was 25.6% compared to 24.9% last year. In Europe, income from operations decreased 23.8% to $7.1 million due to lower volumes. Our operating income margin in Europe was 5.9% compared to 8.2% last year. Our effective tax rate was 24.1%, approximately 140 basis points below the prior year period. Accordingly, net income totaled $88.2 million or $2.13 per fully diluted share compared to $77.9 million or $1.85 per fully diluted share. Adjusted EBITDA was $139.4 million, an increase of 14.1%, resulting in a margin of 23.7%. Now turning to our balance sheet and liquidity. As of March 31, 2026, we had $74.2 million drawn on the revolver, resulting in $525.8 million of remaining availability. Our debt balance was $370.5 million, down $3.8 million from December 31, 2025 and cash and cash equivalents totaled $341 million, resulting in a net debt position of $29.5 million. Our inventory position as of March 31, 2026, was $549 million, which was down $45.2 million compared to December 31, 2025. Pounds of inventory on hand in North America were down double digits with a nearly double-digit increase in cost per pound driven primarily by raw materials. We generated cash flow from operations of $35.9 million for the first quarter. Our capital allocation strategy remains focused on both supporting growth and delivering returns to our stockholders. In Q1, we invested $17.7 million in capital expenditures, returned $12 million in dividends to our stockholders and repurchased $50 million of our common stock. As announced in October, the Board authorized a new share repurchase program for 2026, permitting the repurchase of up to $150 million of our shares through year-end 2026. This authorization underscores our confidence in the long-term prospects of the business and our ongoing commitment to returning capital to shareholders. Next, I'll turn to our 2026 financial outlook. Based on business trends and conditions as of today, April 27, 2026, our guidance for the full year ending December 31, 2026, is as follows. We continue to expect our consolidated operating margin to be in the range of 19.5% to 20.5%. Additional key assumptions include our outlook for U.S. housing starts to be down in the low single-digit range, a lower overall gross margin based on imposed tariffs and increased depreciation costs, a higher realization of the annualized contribution from our 2025 price increases, an expected $3 million to $5 million of footprint optimization costs in Europe and a projected $10 million to $12 million benefit on the sale of vacant land in the back half of 2026. Our effective tax rate is estimated to be in the range of 25% to 26%, including both federal and state income tax rates based on current tax laws. And finally, our capital expenditures outlook is expected to be in the range of $75 million to $85 million. In summary, we delivered solid results in the first quarter with growth in net sales, EBITDA and operating margin despite a housing market that remains challenged. Pricing actions are contributing as expected and are projected to add roughly $130 million in annualized net sales, helping offset some tariff-related cost pressures. Overall, while we were pleased with our Q1 results, we do not expect this level of revenue growth to carry through the remainder of the year, given our tempered outlook for the housing market in 2026 and the timing of 2025 price increases. We remain focused on disciplined capital deployment and our commitment to return at least 35% of free cash flow to shareholders. With that, I will now turn the call over to the operator to begin the Q&A session. Operator: [Operator Instructions] Our first question is from Daniel Moore with CJS Securities. Dan Moore: Congrats on the quarter. I guess we'll start with the -- this modest change in expectations around housing starts for the year, certainly not a surprise. And I realize we're talking weeks, not months. But just talk about the sort of the cadence of demand and volumes in North America that we've seen since the start of the war in Iran and spike in oil prices. Just wondering if -- what sort of impact you're seeing in real time? And how do you kind of see that playing out as we look through to the remainder of Q2? Michael Olosky: Dan, thanks for the question. So we started coming into this year thinking the market was going to be roughly flat. And as you know, the census data is a little bit delayed. But when we look at the market, Dan, we're doing 2 things. We're getting basically feedback from 6, 7 different firms on how the year is going to play out. Consensus from those 6 or 7 firms is kind of low single-digit number. And then we're certainly cross checking that with a lot of our customers. And what we hear from the customers in the spring, it's been a bit of a soft selling season, which kind of confirms that low single-digit market growth rate expected for the year. Dan Moore: Very helpful. In terms of pricing, Q4, about a 5%, 6% benefit, again, 6% benefit this quarter. Have you taken or contemplated any additional price increases given continued inflationary pressures? And how should we think about the impact of pricing in Q2 as well as the back half of the year? I know you mentioned kind of $130 million all in. Just any comments on cadence is certainly helpful. Michael Olosky: Yes, Dan. So when we look at pricing going forward, in Europe, we are seeing rising inputs in a lot of different areas. We have started doing the surcharges and done some price increases there, which we mentioned in our prepared remarks. We're certainly experiencing some rising costs across other parts of our business in North America. We are working really hard to take cost out and try to drive productivity with the expectation that we maintain our gross margins over the longer period of time. Matt Dunn: Yes. And Dan, this is Matt. Just to answer your specific question, we haven't taken any additional price increases in North America beyond the 2 that we announced last year. And again, as we look forward, we're seeing those cost increases, whether it be fuel or potentially steel but haven't contemplated or announced anything. And again, we're just really focused on maintaining and kind of preserving our gross margins. So potentially have to look at that if things change. But right now, nothing in the works. Dan Moore: Okay. And taking a step back from the macro, good color and detail about increased penetration, particularly in some of those newer end markets, trusses, some of the outdoor decorative. Just if you want to sort of dig in and give a little bit more color in terms of how things are progressing from a share gain perspective? And how you -- what you -- what your expectations are for sort of outpacing the housing starts for the year from a volume perspective, assuming it does come in, in that low single-digit range. Michael Olosky: Yes. And again, Dan, let me start with the market just one more time. So again, delay in the census data. So we're not exactly sure how the first part of the year has played out. We're going to get, I think, the first round of data in another couple of weeks. So that will give us a little bit of a better feel. We do believe we are slightly ahead of the market based on off of a trailing 12 months. And when we look at driving above-market growth, it comes back to those market playbooks that we have. We're almost in 5 market segments. We also have product playbooks all around trying to drive innovation, drive new customer gains, get additional shelf space and get more content on the houses. When we look at some things we're particularly excited about, again, the component manufacturing business growing double digit. Again, new customer wins there. We're very happy with how the truss business is developing. The producer tool has been out in the market for a while. It is cloud-based. So we've already been able to do multiple releases to respond quickly to some customer needs and questions around it. We're still feeling pretty confident about our director, a new design tool that's going to be rolled out later this year. We're actively using AI to help us develop new software and new quality assurance in the truss space. So we're feeling pretty good about that and we're getting, again, good feedback from our customers. And then in the OEM segment, we've been talking about mass timber for a while. These mass timber jobs just keep getting bigger and bigger. And they want a broad set of solutions from us that we're able to offer and the Gallatin facility is going to help us respond quicker. And we've done some other things to help us do really these high-strength heavy-duty connectors packages for some of these big mass timber buildings out of our Riverside facility and we're happy with the progress we've made there. So again, we're feeling good about it. And at the end of the day, we want to make sure that we're driving above-market growth at that 20% operating income level. Dan Moore: Great to hear. Last one, just a housekeeping. I think you said timing around the gain on sale of land, H2. Has that been pushed out at all? Just trying to get a sense from a modeling perspective. Matt Dunn: Yes, Dan, this is Matt. It's definitely going to be in the back half. It's included in our guidance for the year. That really -- we didn't specify a quarter when we gave guidance 3 months ago but we've got more visibility now that it's going to be in the back half. TBD, whether it's Q3 or Q4. We'll try to refine that once we get closer. Operator: Our next question is from Trey Grooms with Stephens. Trey Grooms: Congrats on the quarter. Nice showing. So thanks for the color on -- so thanks for the color on the outlook you gave on housing, makes a lot of sense. But how are you thinking about some of the other end markets? And sorry if I missed this. But are you still expecting demand for commercial to be kind of flattish? And then as we -- you kind of look into retail or R&R for that to be kind of flat to up a little bit? Or any changes there? Michael Olosky: Yes. When we look at our end markets, we're looking at basically a -- we're looking at several firms that help us get the U.S. housing starts number. That's the low single-digit range. When we look at the market numbers for the National Retail business, or repair and renovation, when we look at that particular area, we're thinking basically flattish to maybe up 1-ish percent, in that range. In the commercial area, we're looking at starts and we have a firm that helps us with that. There, we're thinking low single-digit range. And then our OEM business, we really just kind of benchmark that versus the IPX and that we expect to be low single digits. Trey Grooms: Yes. Okay. Got it. So no real change there. So -- and then maybe looking at geographically, I know you guys have seen some mix headwinds, I guess, geographically, some mix headwinds from some underperformance in California and Florida, I guess, over the last few years. It sounds like some of the commentary we're hearing from -- out there in the market from homebuilders, et cetera, it sounds like Florida might be recovering somewhat. Anyway, any details maybe you guys could give us on what you're seeing geographically and maybe some of this mix headwind, if you will, kind of starting to subside if Florida is started to pick up? Michael Olosky: Yes, Trey, good question. So if we talk about just market specific, the state level data on starts is -- there's a lot of variability depending upon the sources you look at. But if you just look big picture, Florida and California, they are down significantly from their peak housing starts about 3-ish years ago. When we look at our business in California, a lot of engineering into it, especially from a seismic perspective. We continue to talk with customers that are saying they've got a strong backlog. A lot of projects are about ready to get kicked off in that area but we have not yet started to realize that in our sales revenue. In Florida, from what we've seen, really no significant change for us at this point and it's still a little soft. Trey Grooms: Okay. All right. Sounds good. And maybe a housekeeping to some degree, maybe, Matt, on the inventories, down pretty significantly in the quarter despite some -- you had some good sales improvements, actually stepped down sequentially. And I understand that you guys usually build some inventory in the 1Q and then kind of work it down in seasonally stronger quarters. Any color you could give us on kind of how we should be thinking about that, given it's kind of lower level as we're kind of entering the building season, how we should be thinking about that seasonal trend? Matt Dunn: Sure, Trey. I mean we're doing a lot of work to drive productivity on raw material -- sorry, finished goods and work-in-process inventory. And so that's playing out a little bit when you look at our inventory drop in dollars. It shows up in pounds even more broadly as you think about the cost of things is more expensive, so it doesn't quite show up in the dollars to the level it shows up in the pounds. We're down quite significantly on pounds. So I would say the bulk of that drop, though, is really on the raw material side, so think of steel and steel coils. And so as we're kind of working through the inventory there, as you know, we tend to buy kind of in lumpier chunks when the market meets our needs and kind of the sweet spot for where we want to be. So it's going to be a little bit lumpy on raw material steel and that those prices are starting to move a little bit as we look forward. So I would expect that we'll probably bump back up a little bit on raw material throughout the course of the year. But at the same time, we're working on productivity on the finished goods and the work in process. So maybe somewhat a little bit offset but hopefully not get quite back to the -- certainly not back to the peak we were on pounds. On dollars, it's a little bit tougher to say because the price per pound is going up. But I think where we kind of started 2026 would be sort of like a high watermark and we would probably stay below that. Operator: Our next question is from Kurt Yinger with D.A. Davidson. Kurt Yinger: Just wanted to go back to pricing. Can you just talk a little bit about kind of the difference between the new $130 million versus the $100 million previously? Is that, I guess, just an updated view on what you'll capture? Or does that encapsulate maybe some of these surcharges and whatnot you've discussed in Europe? Matt Dunn: Yes, Kurt, this is Matt. We -- previous guidance was about $100 million annualized. And if you recall from our previous quarter release, we realized about $60 million of that in 2025, which would have implied additional $40 million in 2026. We're upping the annualized number to $130 million. So that would imply $70 million in 2026 incremental. And it's a combination of some of the pricing we've enacted in Europe, particularly related to the surcharges but also some price increases. And then a little bit of product mix in North America, which is driving more pricing. So if you think about the products that had higher price increases, that's primarily fasteners and anchors, they'll continue to grow a little bit faster than the connector business, which provides some additional dollars when you just look at the pricing impact. It doesn't necessarily drive better gross margin or better op income. But when you look at pricing quantification on dollars realized and pricing, it does benefit there. So it's really a combination of those 2 things that's kind of upped it to that $130 million number. Kurt Yinger: Okay. That makes a whole lot of sense. I appreciate that. And just on the cost side, I mean, it doesn't sound like the change in 232 tariffs is really having any impact on you guys but I would appreciate if you could just touch on that. As well as on the freight side with the self-distribution angle, how is transportation and freight costs, I guess, shared among you guys and customers? Is that a situation similar to Europe where there are surcharges but those are just passed along? Can you talk a little bit about that? Matt Dunn: Yes, you're right. On the 232 tariffs, the announcements that came out, I think, early April don't really have much of an impact for us. The tariffs that we were paying are pretty much staying the same. If you think about the fuel rates and things that are impacting surcharges there, I mean, we're seeing it some from our suppliers, passing along surcharges, changing rates weekly sometimes. A lot of our shipments travel prepaid freight. So we have not put any surcharges in place. So from time to time, we have to adjust the amount of a purchase that is able to travel with prepaid freight for free. So meaning sometimes we have to up the minimum purchase. I don't believe we've done any of that yet but that's some of the things that we're considering. But we are seeing an impact in our 2026 outlook from increased fuel costs and we haven't acted on passing any of that through. But we're kind of actively monitoring it and kind of see what -- where it shakes out, what level it goes to and then evaluate the best way to, again, try to make sure that we're preserving our gross margin. Kurt Yinger: Okay. Got it. And then just on the volume side, I mean, a really good quarter for the North American residential business, it seems. Is there anything to call out there that might have been a transitory boost? And maybe looking at the full year, I mean, it sounds like you kind of trimmed the expectations for housing starts. But if we look at the comps, the first half is very difficult, gets easier in the back half. Just given the positive performance here in Q1, I guess, is there any reason to believe that wouldn't be sustainable just as comps get a little bit easier? Michael Olosky: So Kurt, we're very pleased with the development our residential business team has made. We continue to leverage the business model. And with that shift we made about 3 years ago of going from a product-focused sales team to a market-focused sales team, that's enabled us to really cross-sell the complete product line. And we've continued to develop our warehouse network so that we're closer to customers and we can make sure that we get to a very, very, very large percentage of our customers. They place an order today in the morning, we ship it in the afternoon, they get the next day. And I think all that added up, Kurt, just continue to get more content on houses and pick up more shelf space with our lumber yards and Pro dealer customers. Matt Dunn: Yes. Kurt, I think as you look at your comments around back half comps and things, certainly, our volume comps get a little bit easier in the back half when you compare to what we did in the last half of last year but also including a little bit of expectation that the market is potentially going to be a little softer as we go throughout 2026 as we kind of updated in our guidance. So I mean part of the challenge now is, we're flying a little bit blind on what is the market doing because there's been delays in reporting and even going back to 2025 actuals, I think they're still subject to revision from the Census Bureau later this week when they publish the February and March starts numbers. So we believe we're outperforming the market a little bit on volume. We certainly expect to continue to do that. But what that market is going to look like quarter-on-quarter that we're comparing to is a little bit up in the air. We kind of got to see where we shake out here in the first quarter when we get the numbers to see where we were. And then the outlook for the year has gotten a little bit worse from our perspective, kind of backed up by most of the market forecasters out there that are saying it's going to be a little bit softer in '26. Kurt Yinger: Okay. That makes sense. And just lastly, on the national retail side. The weakness there, it seemed like over '25, there were some points where sell-in didn't necessarily match sell-through but POS has kind of turned now. Do you think that's just a function of the overall project environment in a lot of the categories that you're serving or more so maybe a skew to customers going with a more value-sensitive approach in terms of products? I guess any thoughts on kind of the performance there early this year? Michael Olosky: I wouldn't say that we're seeing a shift in the value performance story. So Kurt, if somebody is coming into one of the national retail customers, especially at Pro, I mean, they know exactly what products they're looking for. So I wouldn't necessarily say that. I think we've had some time over the last probably 6 months where point-of-sale data and our sales into the national retailers was a little bit disconnected. It's kind of flipped and gone the opposite way in the first quarter. But we continue to work with them to help them develop the business by merchandising activities. We continue to push our outdoor living solutions product line, which has had pretty good growth over several years now. We're working hard with the Pro dealer -- the Pro desks with our national retail customers. We provided some estimating services and we're doing other things to help them really cross-sell the full product line. We think over time, that will all play out in the short term. We do occasionally see some inventory shifts with those guys and that's been reflected in the numbers in the last 6 months or so. Matt Dunn: Yes. And I think, Kurt, this is Matt. I think just to cap it off, I think it's good to see that trend reverse a little bit in terms of sell-in versus sellout. We've seen several quarters in a row where our POS units were quite a bit better than our sell-in. So 1 quarter doesn't make a trend but good to kind of stop that trend and then we'll kind of see where it goes from here. Operator: Our next question is from Tim Wojs with Baird. Timothy Wojs: Nice job on the results and the inventory number. So I guess maybe just my first question, just, if I remember right, you guys were expecting about $30 million of annualized cost savings from some of the SG&A actions you took last year. What was the -- I guess, what was the realization in the first quarter? I don't know if I missed that. Michael Olosky: Yes. Matt Dunn: Yes. So if you remember, Tim, the $30 million was about 2/3 SG&A and 1/3 in COGS. So that was kind of how we framed up the $30 million net. And then we said in the last quarter that we expected $10 million to $15 million on a annualized basis below last year's SG&A spend actuals. In the first quarter, SG&A was actually up $1 million but you got to peel it back a little bit. There's 2 big drivers there. One, exchange rate was a $4.2 million hurt on that. So that's the translation of European expenses back to dollars. And we also had about $2 million of onetime related cost to our cost savings initiatives that were in the first quarter. So -- and if you take those 2 kind of the face value and say we are up 1, we were down about $5 million net-net. And I think an important point is what we mentioned in the script on headcount, our SG&A headcount is down about 9% when you look year-over-year. So I would say the realization in the first quarter, if you kind of adjust for FX and the onetime costs is in the, call it, $3 million, $4 million, $5 million range. And if you kind of project that across the course of the year, you can kind of get pretty close to that number we said would be the net number we expect to be down by the end of the year versus last year's actual. Timothy Wojs: Okay. Okay. Great. No, that's really helpful. And then on the component manufacturing business, just, I think last quarter, it might have been up low single digits and now it's up double digits. Is that just kind of the lumpiness that can be kind of inherent in that business? Or it was a pretty significant amount of adds in the component business specifically? Michael Olosky: Yes. It is a little lumpy, Tim, as you know, because it takes a bit of effort to convert a customer. So we continue to add customers and we've added a couple over the last months of 2025 that are now starting to build in 2026. Timothy Wojs: Okay. Okay. And then is there any way to just, on that business, just kind of give us a kind of a ballpark figure to maybe how big it is today? Michael Olosky: No. We have not commented on the size of the component manufacturing business or the different market segments. Matt Dunn: Other than we've said publicly that the market size and kind of our rough share position. So I know you've heard that before, so then you can kind of ballpark it somewhere. So... Operator: Our final question is from Andrew Carter with Stifel. W. Andrew Carter: Just wanted to ask in terms of the residential volume performance, up slightly. I know you're taking your guidance down to low single digits. But I think based on the sources you have, customer conversations, I would assume that your guidance is -- you would soon be assuming that there was a pretty deep decline in the first quarter that improves throughout the year. Is that fair? Or anything -- any of my assumptions are flawed? Matt Dunn: Yes. I mean I don't know if I'd say deep decline. I think when the numbers come out, I think we'll -- we expect to see that the market was down in the first quarter from a housing starts standpoint. And then I think keep in mind, the back half of last year was the worst part of last year compared to the front half of last year, which actually, I think, had slight growth when you look at the front half from a market standpoint. So the comps are a little bit different. So I think it would be -- if you're doing the math on how do you get it down low single digits for the market, the front half has a tougher set of comps. So I think potentially the front half could look worse and then the back half could look a little bit better but probably more a function of what you're comparing to than a change in the starts rate. W. Andrew Carter: Got you. And then kind of wanted to kind of build on that component manufacturer question, truss, the kind of reacceleration you had in the quarter. You mentioned customer wins. I mean, how often do those occur? Do those -- do you get those, like a shot at that annually? I mean, is that double-digit run rate something you can carry through the year just because you have the customers? Is there any kind of unlocks you get as you roll out the rest of the software program later in the year? Just any thoughts on that cadence? Michael Olosky: Yes. I think -- so if you step back and you look at those customers, we've been working with them for a long time in a variety of other businesses, especially all the larger Pro dealers. So, I mean, they know us very well. But a lot of those smaller to midsized guys, we've known these customers for a long time. They know the Simpson service and the approach that we take to working with customers. And we've also been talking with them over the last 12 to 18 months about the development we're making with the software. We've been giving regular updates to it. We've been showing some demos and just letting people see how it develops. And I think you kind of add all that up, that is what has helped us continue to grow as they want to work with a long-term partner that operates like Simpson. We do our level best to take great care of the customer. We believe that our plans to have a cloud-based solution that is very customer-friendly and contracting terms that are a little bit more customer-friendly, it's going to create some additional opportunities for us. And now they see the investment that we've made in this space really over the last couple of years. And I think that's opened some doors and that's made some people realize that we would be the partner of choice going forward for them. W. Andrew Carter: And final question, kind of Europe. I think you said something about flat to low single digits over the next 2 years. Correct me if I'm wrong, I thought that was kind of the expectation for this year. It obviously started out down 5% organic this quarter. I guess that would be the market where you see -- you might see incremental weakness from energy prices, et cetera but it's also 2/3 commercial, so longer cycle. So any update on that market? Or could you -- do you see further risk of that declining? Just any help there? Michael Olosky: When we look at the composite index that we built based on the countries we operate in and the mix, as you said, between residential and commercial. And we use, again, experts that pull those forecasts in to help us get the numbers. Our thoughts going in were flat to low single digits. And the fact that they had a tough first couple of months because of weather really hasn't changed that. I think there is some optimism in the market in Europe. To be quite honest, 0% to 2% or 3% will be better than we've had the last 3 or 4 years and certainly better than what we've had in the U.S. the last 4 years. So we're hoping that plays out. In the meantime, we're focusing on the things that we can control and that's just trying to pick up new applications, shelf space, more content on jobs. Operator: With no further questions, that will conclude today's conference. You may disconnect your lines at this time and thank you for your participation.
Operator: Good afternoon, ladies and gentlemen, and welcome to the Sanmina Second Quarter Fiscal 2026 Earnings Conference Call. [Operator Instructions] This call is being recorded on Monday, April 27, 2026. I would now like to turn the conference over to Paige Melching, Senior Vice President of Investor Communications. Please go ahead. Paige Bombino: Thank you, John. Good afternoon, ladies and gentlemen, and welcome to Sanmina's Second Quarter Fiscal 2026 Earnings Call. A copy of our press release and slides for today's discussion are available on our website at sanmina.com in the Investor Relations section. Joining me on today's call is Jure Sola, Chairman and Chief Executive Officer. Jure Sola: Good afternoon. Paige Bombino: And Jon Faust, Executive Vice President and Chief Financial Officer. Jonathan Faust: Good afternoon. Paige Bombino: Before I turn the call over to Jure, let me remind everyone that today's call is being webcasted and recorded and will be available on our website. You can follow along with our prepared remarks in the slides provided on our website. Please turn to Slide 3 of our presentation and take note of our safe harbor statement. During this conference call, we may make projections or other forward-looking statements regarding future events or the future financial performance of the company. We caution you that such statements are just projections. The company's actual results could differ materially from those projected in these statements as a result of factors set forth in the safe harbor statement. The company is under no obligation to and expressly disclaims any such obligation to update or alter any of the forward-looking statements made in this earnings release, the earnings presentation, the conference call or in the Investor Relations section of our website, whether as a result of new information, future events or otherwise, unless otherwise required by law. Included in our press release and slides issued today, we have provided you with statements of operations for the second quarter ended March 28, 2026, on a GAAP basis as well as certain non-GAAP financial information. A reconciliation between the GAAP and non-GAAP financial information is also provided in the press release and slides posted on our website. In general, our non-GAAP information excludes restructuring costs, acquisition and integration costs, noncash stock-based compensation expense, amortization expense and other unusual or infrequent items. Any comments we make on this call as it relates to the income statement measures will be directed at our non-GAAP financial results. Accordingly, unless otherwise stated in this conference call, when we refer to gross profit, gross margin, operating income, operating margin, taxes, net income and earnings per share, we are referring to our non-GAAP information. I'd now like to turn the call over to Jure. Jure Sola: Thanks, Paige. Good afternoon, ladies and gentlemen, and welcome, and thank you all for being here with us today. First, I would like to take this opportunity to recognize our employees and Sanmina leadership team for doing a great job. So to you, Sanmina's team, again, thank you for your dedication, hard work and delivering excellent service to our customers. Please turn to Slide 4. Ladies and gentlemen, I can tell you that I'm very pleased with our performance for second quarter. We delivered strong results for the second quarter. Revenue came in at $4.01 billion and strong non-GAAP operating margin of 6.4% and non-GAAP diluted EPS of $3.16. Cash flow from operations was also strong at $399 million. Overall, we are executing according to our plan with a strong execution in both Core Sanmina and Sanmina AI Group ZT Systems. To tell you more about it, let's go to our agenda call today. We have Jon, our CFO, to review details of the second quarter results for you. I will follow up with additional comments about the results and future goals, then Jon and I will open for question and answers. And now I'd like to turn this call over to Jon. Jon? Jonathan Faust: Great. Thank you, Jure, and good afternoon, ladies and gentlemen, and thank you for joining today's earnings call. Before I review our financial results for the quarter, I want to acknowledge the entire Sanmina team for their focused execution and thank them for delivering a solid second quarter and first half of fiscal 2026. Now please turn to Slide 6, where I will speak to the financial highlights. As Jure mentioned, we are very pleased with our results for the quarter. As you can see, we exceeded our outlook across the board. Our revenue of $4.0 billion came in well above our outlook range, driven by strong execution and customer demand for the ZT systems business resulting in some accelerated compute shipments previously expected in the second half to shift into the second quarter. Also, we delivered growth across the majority of our end markets for the Core Sanmina business, which Jure will cover in more detail later in the call. Our non-GAAP operating margin of 6.4% and our non-GAAP diluted earnings per share of $3.16 also exceeded our outlook, driven by the additional revenue, mix and disciplined cost management. These results put us on the right path towards achieving our revenue growth, margin expansion and diluted earnings per share growth objectives for the fiscal year. Now please turn to Slide 7, where I will speak to our non-GAAP P&L performance. As I just mentioned, we delivered revenue of $4.0 billion, which was up 102% versus the same period a year ago. Our Core Sanmina business revenue grew 7.3% versus the same period a year ago, in line with our expectations. Our ZT Systems business revenue was $1.88 billion, exceeding our expectations. As I explained just a moment ago, this was driven by strong execution and customer demand resulting in some accelerated compute shipments previously expected in the second half to shift into the second quarter. This is an important proof point of our partnerships with customers and their confidence in us to support them going forward as we grow the ZT Systems business with new program launches later in the calendar year. Our non-GAAP gross profit was $360 million or 9.0% of revenue. This was down 10 basis points versus the same period a year ago, driven by mix. Our non-GAAP operating expenses were $103 million or 2.6% of revenue. These strong revenue results along with ongoing cost discipline and operating leverage enabled us to achieve non-GAAP operating profit of $257 million or 6.4% of revenue, up 80 basis points versus the same period a year ago. This represents our third quarter in a row of non-GAAP operating margin at 6% or above. Our non-GAAP operating income and expense was a net expense of $25.9 million. Our non-GAAP diluted earnings per share was $3.16 based on approximately 55 million shares outstanding. This strong non-GAAP diluted earnings per share performance represents a 125% increase versus the same period a year ago and showcases the operating leverage in our business model. Now please turn to Slide 8, where I will speak to the segment results. IMS revenue came in at $3.58 billion, up 123.5% versus the same period a year ago driven primarily by growth in the cloud and AI infrastructure end market, including the strong contribution from the ZT Systems business. Core Sanmina IMS revenue was $1.70 billion for the quarter, and grew 6.0% versus the same period a year ago. ZT revenue was $1.88 billion for the quarter. Total IMS non-GAAP gross margin was 8.5%, up 80 basis points versus the same period a year ago. This was driven primarily by favorable mix, including the impact from the addition of the ZT Systems business. CPS revenue came in at $461 million, up 12.2% versus the same period a year ago. And CPS, non-GAAP gross margin was 11.6%, down 230 basis points versus the same period a year ago. This decrease was primarily driven by depreciation and other expenses related to investments to support new programs, which we expect will deliver margin accretive growth in future quarters. In addition, component shortages impacted the timing of revenue and profitability for one of our product businesses, which we believe will be resolved in the second half of the fiscal year. Now please turn to Slide 9, where I will speak to the balance sheet highlights. We continue to have a very strong balance sheet with prudent leverage and ample liquidity, giving us the fiscal agility to support our growth objectives. Cash and cash equivalents were $1.58 billion. At the end of the quarter, we had no outstanding borrowings on our $1.5 billion revolver, leaving us with substantial liquidity of approximately $3.7 billion, which will support the expected growth of the business. We ended the quarter with inventory of $2.1 billion, net of customer advances, which is up 75% versus the same period a year ago, driven by the ZT Systems acquisition. Inventory turns, net of customer advances were 6.9x for the quarter, up from 5.9x in the same period a year ago. Our non-GAAP pretax ROIC was 34.7% for the quarter, well above our weighted average cost of capital and an improvement from the 23.0% from the same period a year ago. We continue to have one of the strongest balance sheets in the industry with a net leverage ratio of 0.56x. This ratio is calculated in a balanced manner by annualizing our non-GAAP EBITDA results for the first half, which only includes 5 months for ZT Systems, but also some shipments advanced from the second half, as using the pro forma trailing 12 months for ZT Systems wouldn't accurately represent the current run rate of the business. As we have previously communicated, our long-term target net leverage range is 1.0x to 2.0x. We still expect our leverage to increase into our long-term range over time as we invest in working capital to support the growth of the ZT Systems business and the core Sanmina business. That being said, we remain committed to maintaining a healthy balance sheet, which means carefully managing the liquidity needed to invest in the business and capitalize on strategic opportunities that further strengthen our position in the market. Now please turn to Slide 10, where I will speak to our cash flow highlights. As a result of the team's disciplined working capital management, our second quarter cash flow from operations came in very strong at $399 million. Capital expenditures were $57 million for the quarter, below our outlook, primarily due to timing. As I've mentioned before, we will continue to make strategic investments in the technologies and capabilities needed to strengthen our position in the market and to support our long-term financial objectives. Free cash flow was $342 million for the quarter. During the quarter, we repurchased approximately 1.1 million shares for approximately $160 million to offset the remaining dilution for the year. Our strong cash flow performance gives us the flexibility to continue to invest in the business and return capital to our shareholders. Now please turn to Slide 11, where I will speak to our capital allocation strategy. When it comes to capital allocation, it's incredibly important to have a clear strategy and a well-defined set of priorities when making decisions. As we've shared with you before, our first priority is to invest in our business to drive long-term organic growth and margin expansion. We evaluate all investments with discipline and take a structured ROI-based approach. Second, we continuously evaluate strategic acquisition and partnership opportunities, which need to meet our ROI expectations to help accelerate our growth. Third, we carefully manage our balance sheet and liquidity position with a focus on our long-term net leverage target as well as our long-term goal of achieving investment-grade ratings. And finally, when appropriate, we return capital to shareholders through share repurchases, subject to maintaining a strong balance sheet and liquidity position. We have and will continue to execute on this strategy by utilizing these options, which enables us to take advantage of opportunities to grow our business. We believe that our stock is a great long-term investment, and as such, share repurchases remain an attractive capital allocation option. With that said, today, we announced that our Board of Directors authorized an additional $600 million of share repurchases. This authorization has no expiration date as we intend to continue to repurchase shares opportunistically and in the context of the capital allocation strategy I just outlined. Now please turn to Slide 12, where I'll provide an update on the ZT Systems business. The Sanmina and ZT Systems leadership teams have been working together to ensure a successful and seamless integration of the business with a clear objective to realize the full value of combining the 2 companies. In order to do this, we are following a 3-phase plan. The first phase is focused on executing the immediate post-transaction integration actions, which are largely complete at this point. While we'll always look for opportunities to streamline processes, improve the way we work and drive efficiencies for our customers, the core of the ZT Systems business has now been integrated and we've made most of the necessary capital investments in incremental power, liquid cooling and test cell capacity to be production ready for the next generation of accelerated compute. The second phase, which is well underway, is focused on securing customer business and ensuring continuity. Since closing the acquisition, we have won and shipped new accelerated compute business which is evident in our strong results for the quarter. In addition, we have secured next-generation accelerated compute business with both hyperscale and OEM customers and are currently in the process of finalizing customer production schedules. And the third and final phase, which we've already started working on, is about driving growth and expansion. We expect to do this by driving additional synergies through vertical integration and increasing our addressable market by expanding on our existing engineering capabilities to support all platforms. Today, the focus of ZT Systems business is full systems integration at scale. But in the future, by combining it with Sanmina's existing capabilities, will also have the ability to build subassemblies and leverage our components, products and services technologies. Now please turn to Slide 13, where I will provide our outlook for the third quarter. Our outlook is based on current customer forecasts and takes into account ongoing market uncertainties stemming from the macroeconomic and geopolitical landscape. We expect revenue between $3.2 billion and $3.5 billion. We expect core Sanmina revenue to be in the range of $2.2 billion to $2.3 billion. And we expect ZT Systems revenue to be in the range of $1.0 billion to $1.2 billion. As a reminder, ZT Systems revenue is down compared to the prior quarter due to the accelerated compute orders that shifted from the second half into the second quarter. At the midpoint, total Sanmina would be $3.35 billion which reflects 64% growth versus the same period a year ago. We expect non-GAAP operating margin of 6.4% to 6.9%. We expect other income and expense to be a net expense of approximately $30 million. We expect our non-GAAP effective tax rate to be between 21% to 23%. We estimate an approximate $5 million noncash reduction to our net income to reflect our India joint venture partners' equity interest. We expect non-GAAP diluted earnings per share in the range of $2.55 to $2.85 based on approximately 55 million fully diluted shares outstanding. At the midpoint of $2.70, that represents a 77% increase compared to the same period a year ago. We expect capital expenditures to be $95 million as we continue to invest strategically to support our future growth expectations. And finally, depreciation of approximately $50 million. Now please turn to Slide 14, where I will provide our outlook for the full fiscal year 2026. We expect revenue to be in the range of $13.7 billion to $14.3 billion. Within this range, we continue to expect the core Sanmina business to grow in the high single digits and the ZT Systems business to end up well within the $5 billion to $6 billion annualized range that we communicated when we first announced the acquisition in May of last year. We expect non-GAAP operating margin to be between 6.3% to 6.6%. And finally, we expect non-GAAP diluted earnings per share in the range of $10.75 to $11.35 based on approximately 55 million diluted shares outstanding. So in summary, I'm very pleased with our results for the second quarter and for the first half. There is still a lot of work to do in the fiscal year, but we're on a great trajectory for both the core Sanmina business and the ZT Systems business. And while this is a year of transition for the ZT Systems business, our 3-phase plan is working, and the proof points I shared earlier are direct evidence of that. The core Sanmina and ZT Systems teams have done a great job with the integration and execution of our objectives for the ZT systems business, which is helping to position the company for future success. Based on what is in front of us, we are increasingly confident in our ability to achieve revenue of $16 billion plus in 2027. And with that, I would like to turn the call back over to Jure. Jure Sola: Thank you, Jon. Ladies and gentlemen, as you heard from Jon, we delivered strong results for the second quarter. Most important is that fiscal year '26 is tracking better than our expectation at the start of the fiscal year '26. Please turn to Slide 16. Let me talk to you about -- now about the revenue by end market for the second quarter of '26. Communication Networks Cloud & AI Infrastructure came in at $2.77 billion. As you can see, there was a nice growth. Actually, it's almost 280% growth. Sanmina core contributed to that, $891 million. That's up 22% year-over-year. And as you heard from Jon, ZT System delivered $1.88 billion. So very strong demand in our Communication Networks & Cloud AI Infrastructure. Industrial & Energy, Medical, Defense & Aerospace, Automotive & transportation group delivered 31% or $1.24 billion. Overall, that was flat, which was expected. We knew that industrial was going to be slightly down, and that's what happened. But overall, this is a great quarter when you look at the revenue now being over $4 billion. Core Sanmina revenue grew 7.3% year-over-year. I can tell you that the bookings for second quarter were strong. Book-to-bill was better than 1.1. We're seeing a very positive trends in our end markets to tell you more about it, please turn to Slide 17. Communication Networks & Cloud AI Infrastructure is well diversified in this segment. What we consider high-performance communication networks, that business for us has been pretty strong, driven by IP switching and routing, optical system, pluggables, broadband access and 5G wireless infrastructure. As you heard from Jon, Cloud & AI Infrastructure continue to do well, driven by accelerated compute, general-purpose compute and storage. So key takeaways for this is that AI is driving growth for entire end markets, but we're also seeing some positive growth from a traditional telecommunication business. Bookings continue to be strong. We won several new programs. We do see a strong pipeline for new projects, especially as we look at in the calendar year '27 and '28, and we are positioning our company to be ready for that. We're well positioned to drive the growth in this segment. Please turn to Slide 18. Let me talk to you about Industrial and Energy. This segment for us is very promising, driven by power generation and distribution of power. We have multiple customers in this segment that we expect it to do well. Semiconductor capital equipment starting to move in the right direction and demand continues to go up. We have a good customer base there, and we expect to see nice growth. Transformers. We're investing in that business, both from an engineering and design. We have multiple customers working on that, and we expect to see nice growth, especially in '27. Power and storage and management is also a very strong business for us and safety and surveillance equipment. So the key takeaways on this is that we're doing well. We expect growth to accelerate in the second half. We're expanding energy business for AI data centers, all the way from engineering design to full system and vertical integration. Please turn to Slide 19. Let me give you some highlights on Medical. In this segment, we are well positioned around disposables, wearable consumer business. Laboratory diagnostics, research equipment and hospital & medical offices. Key takeaways here are very stable in market. We expect growth to accelerate in second half and we are leveraging our regulatory knowledge and experience to expand customer base and the new programs to drive the growth, well positioned here. Please turn to Slide 20. Let me give you a few comments on Defense & Aerospace. We're well positioned here. Sanmina/SCI has been in this business forever. We are building business here around the defense and commercial aerospace. We do all everything from design to full system integration. Key takeaways here is we expect the growth in traditional USA Defense & Aerospace business to continue. We are expanding customer base in satellite market, which have some big opportunities, and we continue to see strong demand in fiscal year 2027 and beyond. But as we look at the second half of '26, it's really positioned us to a good year, but most importantly, we see a lot of growth in the future. Please turn to Slide 21. Few comments about Automotive & Transportation. We're well positioned here. We have some solid customers still around automotive EV business, self-driving cars and transportation. Key takeaways, again, overall, we have stable customer demand here, a great customer base. We continue to win key programs from new and existing customers and programs that transitioning from NPI into full-scale production for us. Please turn to Slide 22. Let me talk to you right now about our Sanmina's capabilities. We do have a diverse set of capabilities where we provide end-to-end solution for all our key markets. Our capabilities are industry-leading from engineering, designed to full system for our key markets, including data center, AI infrastructure end market. We typically get involved early stage of product development. We help the customer bring the product to the market. We provide high technology printed circuit boards. In this segments, we have some of the leading technology in the industry both here in North America and Singapore. We fabricate and assemble some of the most advanced board and test. We built mechanical racks and enclosure and design. We're investing fair amount in liquid cooling. We fabricate and build cooling manifolds, busbars. We also have a strong compute and storage system around ODM and joint development, and we're expanding that. We do provide custom memory for key customers. We've also been growing and investing in custom optical modules, as I said, from the engineering to full system integration and direct global order fulfillment for our customers. So when you look at Sanmina's capability, that's what really allowed us to establish a diverse customer base and market leaders with average relationship with our customers over 15 years. So very proud of that. Please turn to Slide 23. Here, you can see Sanmina manufacturing footprint, which is strategically positioned to support our customers globally. We are aligned with the customer requirements, and we have a strong U.S.A. presence. We are leveraging our established global infrastructure and have the right capacity in place for the growth as we talk about next year, '27 and '28. Our global and regional supply chain is connected by 1 IT system, which is managed by Sanmina Smart MES. Sanmina's IT systems are very agile and responsive. We have industry-leading capabilities, especially in the market today when there's a lot of material shortages. Please turn to Slide 24. In summary, as you heard from Jon, and I'm repeating myself again, our team executed well and delivered a great second quarter results. Revenue outlook for fiscal year '26 coming in strong at $13.7 billion to $14.3 billion, midpoint of $14 billion year-over-year growth of approximately 73%. We also well diversified, as I just explained to you earlier, cross and with all end markets. We have strong USA presence and global regional manufacturing footprint for the future. New programs will drive the growth for us in fiscal year '27 and '28. And as Jon said earlier, we're well positioned to deliver $16 billion plus in fiscal year 2027 based on the forecast that we have in front of us right now. And again, we feel good about opportunities in front of us. I can tell you that overall, our strategy is working, is to build bigger and stronger Sanmina for the future. Now ladies and gentlemen, I would like to thank you all for your time and support. Operator, we're now ready to open the lines for question and answers. Thank you again. Operator: [Operator Instructions] Our first question comes from the line of Ruplu Bhattacharya from Bank of America. Ruplu Bhattacharya: It sounds like ZT came in a lot stronger than you had expected. What drove that outperformance? Was it the MI300 series product that you shipped more of in fiscal 2Q? Or was it NVIDIA GPU business? You said something got pulled in. So any details on that? And then when we look at your fiscal '26 guidance, you're saying that ZT will be well within $5 billion to $6 billion. And I think you're guiding $1.1 billion for 3Q, which would mean that fiscal 4Q has to be at least $1.5 billion of revenue from ZT. What is giving you confidence in meeting that level of revenue given you just had a pull-in in fiscal 2Q? And I have a couple of follow-ups. Jure Sola: Yes, Ruplu, excellent question. First of all, this was a great quarter. A customer wanted to pull in some of the product that originally was on a schedule for a third and fourth quarter that had a demand and our team was able to deliver it. So that's good. We did not ship any accelerated compute of NVIDIA product. Whatever we shipped, it was all based on AMD technology. As we look at the future, I think there's a lot of exciting stuff going around the new products. We won multiple hyperscalers and ODMs for the future. So it's been an exciting quarter for us. And Jon, I don't know if anything else you want to add to that. Jonathan Faust: Yes. Just to add, Ruplu, on the front end. So I mean we're very excited, as Jure said, to do so much business in this quarter around accelerated compute, and it's new platform business, not the old legacy products that ZT had. And you and I have spoken quite a bit is this would be a good proof point for Sanmina if we won business building out these new products. So we're certainly excited about that. And then it was strong execution, too. There's a lot of demand out there for that product, and the customer want it quickly. When we came in and we guided at the beginning of last quarter, we weren't sure that we get all the components and so forth that we would need to get it done, but that came in. The team was able to build it quickly. So that's great. And hopefully, we'll see if there's going to be more of those types of orders. At this point, given the nonlinear nature, there isn't any. So -- but we'll see that could change. But our real focus, as Jure was saying, is on the future new generation platform. So we're focused on getting production ready for that and excited about the new opportunities that we won for that business. Ruplu Bhattacharya: Okay. Jon, you mentioned in the PowerPoint that the margin profile for ZT is in line with the overall company. So that would be about 6.4%. Do you see this margin profile as sustainable over the next couple of quarters as the AI or accelerated part of the business ramps higher? Jonathan Faust: Yes. It's like you're kind of insinuating or getting at, Ruplu, it all depends on the mix of the business. So right now, it's very much in line in this quarter, landing at 6.4%. If you look at our guide for Q3, it was at 6.4% to 6.9%, and that's kind of implied for Q4 because the full year comes in at 6.3% to 6.6%. And that's because we're not going to have as much of the accelerated compute as we would in the future. But like long term, as we've said before, we expect the margin profile to be roughly in line with core Sanmina and where that's been. Now this will all depend as we're finalizing some of the customer agreements and where we land in terms of consignment and so forth, that may adjust. So a little bit early to talk about expectations for '27. But we did want to give you the guide specifically for fiscal year '26. That's why we guided the full year to let you know what we expect over the next 6 months. Jure Sola: If I can add to that, Ruplu, I think it's -- as Jon said, it's a transition year, a lot of work, but we're ahead of schedule. And we're going to have a lot better year than what we expected at the beginning of the year. And most importantly, how well we're going to be positioned for the future when it comes to the demand. Demand is not going to be a problem. It's about all about timing when the hyperscalers mainly they do their scheduling and so on and so on. So it's all about getting ready for the better days in the future. Ruplu Bhattacharya: Okay. Jure, I'm going to try and sneak one more in. Can you give us some more details on the Communications segment? I mean this has been traditionally a strength for Sanmina. Can you talk about like you mentioned optical IP switching and broadband 5G. How much of the segment revenue comes from each of these buckets? And are you seeing more demand for optical transceivers? Or are you seeing demand for switches? And are you actually shipping 1.6T switches today? Jure Sola: First of all, before I forget, I'm an older guy here. Yes, we are shipping 1.6 terabyte switches in what I would call new product introduction and so on. As you know, we have multiple customers that will build switches. We do not compete with our customers, but we're building some of the most advanced switches for our partners. But back to your direct question, yes, we are very excited about our communication business because we're building some of the most advanced product that goes in there around IP routing, optical systems, optical pluggables, around 400, 800, and we're also developing 1.6 terabytes in pluggables. So those are all exciting stuff. And then as I said, traditional telecom is coming back. And we do a little bit of 5G wireless. That's a small percentage of our overall business, maybe 2%, 3% of it, but it's a couple of solid customers there. So overall, yes, everything is -- this segment for us right now is really -- is doing well in every segment inside of it, and we're well diversified from high-performance communication networks to cloud AI infrastructure. Operator: Your next question comes from the line of Samik Chatterjee from JPMorgan. Samik Chatterjee: Maybe for the first one, just going back to your reference to new wins on the ZT Systems side with customers where you're shipping preproduction systems and waiting to finalize customer schedules. Just checking in to see if you can give -- flesh that out a bit more. Are these timing sort of more driven by whether you can ship in 2026? Or are these some systems that ship in 2027? Any more visibility on the timing? And how broad-based the customer base is here? Is it all of the hyperscalers that are engaged? Or are you engaged with 1 or 2 hyperscalers? Any sort of color on the customer mix as well I have a followup. Jure Sola: Well, Samik, again, welcome for covering Sanmina. Let me kind of take some of that, and I'll turn it over to Jon because Jon has been responsible pulling ZT into Sanmina has been doing an excellent job. First of all, when you look at the market opportunity for us, let's talk about Cloud AI infrastructure around the hyperscalers is tremendous. So every hyperscaler out there, we're already starting to do some business. But our goal is to win every one of these large hyperscalers over the next 12 months, 18 months. It's been better than what we expected will be more successful than what I expected when we acquired the ZT Systems, okay? But opportunities, demand is big. And we are positioning the company, and we're putting an infrastructure in a place to be able to handle the latest technology for the future. So from my perspective, we see a lot of upside. So Jon? Jonathan Faust: Yes. Let me add a few points, Samik, and thanks again for joining, and welcome. So yes, the business that we did this quarter was we called new accelerated compute business, nothing to do with the legacy platforms, but there was very little, right, when you think about the next-generation product. Now that's scheduled to be out in September, and everything is very much on track from that perspective. We're doing everything that we're responsible for, which is getting production ready, making sure that we can build all the products at scale for all these customers but that's very much on track now. Whether or not we get a huge amounts of revenue in September has remained to be seen. And now everything is on schedule, but just to give you guys some perspective, once the silicon and so forth becomes production ready, it takes us a while to build the products, so say, a couple of weeks, right? And then we've got to ship the products all around the world. And just to be clear, like the revenue recognition for us in this business is when the customers receive it, right? So the opportunity in our fiscal 2026 isn't really huge. That's more of an FY '27 play. That's why we talk about towards the end of the calendar year. But as we said on the call or in our prepared remarks, we have started to ship some preproduction volumes. We're learning more and more about building these products, getting ready. And so more to come on the customer specifics and the schedules. That's why we wanted to put on the slide that we're working through those details. But we are happy to say that we've won several customers now, multiple customers. And our goal is to fill up all of our capacity. And if we continue to win beyond that, we'll look to invest more. Samik Chatterjee: Got it. Got it. And for my follow-up, maybe to your comments about sort of 2027 revenues from these systems. Just looking at your $16 billion guide for fiscal '27, if I still assume core Sanmina grows at high single digits, that sort of indicates ZT doing about $7 billion of revenue and you'll be exiting the year at $6 billion. So is that the right way to think about sort of where the starting point is before some of these new opportunities come through? Just how you size that business, how you're thinking initially about fiscal '27? Jonathan Faust: Yes. It's just that it's early days. That's why we said 16 plus. And just a little bit of history to Samik. Like back when we first announced the deal in May of last year, so almost a year ago, we said that we'd expected to double Sanmina within 3 years. And then when we got to our Q4 earnings call last year, we accelerated that to within 2 years. That's where the $16 billion number comes from for fiscal year '27. Now we're saying $16 billion plus because we see all the demand is there. But we're still assuming at this point that the vast majority of that business will be consignment. It's not entirely clear just yet. We're working through some of those details with customers. That's why it's still early days, but we did want to make the point that we feel very confident. I think my words were increasingly confident, right, about the revenue profile next year. So this year, we still got to wait to see how much we might do in, let's say, the 300 series business, kind of the current version of accelerated compute but new for us. And then the growth potential from there will all come down to the customer schedules, as Jure said. Jure Sola: Yes. No, it's an exciting future. And in our business, Samik, you take one quarter at a time, but we feel very comfortable for the rest of this fiscal year and I think there's more to come in the future. Operator: Your next question comes from the line of Steven Fox from Fox Advisors. Steven Fox: I guess I had a couple of questions. Maybe first, Jon, on the cash flows. I know that you mentioned a couple of puts and takes with CapEx, and I see a onetime item in there. But you grew revenues quarter-over-quarter like $900 million, and you still generated almost $300 million of free cash flow in the quarter. Do you have a better sense now for how the combined business can sort of throw off cash on a 12-month basis? Anything you want to sort of hold your feet to the fire at this point in terms of CapEx versus working capital and things like that? It would be helpful to get a better feel for that. And then I had a follow-up, if I could. Jonathan Faust: Yes, sure, Steve. Thanks for joining. So yes, this quarter, Q2 was just a great cash flow from operations. I'll talk that first before free cash flow. So almost $400 million in cash flow from operations. And it was really due to the linearity of the business and just very strong execution, right? So we executed, manufactured a lot, shipped a lot of product and collected cash. So if you look at the details there, you'll see it in our 10-Q, our inventory levels came down, AR levels came down because we collected very well on that front. So I would kind of frame that up as linearity. And I have, to your point, learned a lot over the last, say, 6 to 9 months around the dynamics of the ZT Systems business. And once we hit more of a production steady state with customers and get out of this transition period, even more will become clear, but very excited to generate the cash that we did this quarter. Now as we look ahead into Q3 and Q4, we don't guide cash specifically, but we will start to build inventory levels, rebuild some of those inventory levels to prepare for that new accelerated compute business. That will probably start to come more in Q4. But I expect in the near term to continue to generate cash. But as I was saying in my prepared remarks, I do think our leverage ratio will come within that range as we build the inventory to support the future business. But we're very pleased with where we're at right now. Steven Fox: That's super helpful. And then if I'm reading through all the details here correctly, it sounds like you have 2 main cloud customers that have generated the upside and give you confidence in the numbers. I know you're doing business with all 5, like Jure said. But can you talk about like how we think about not just the number of cloud customers for ZT and the potential there in like between now and '27, but also like OEM business. Like I know the focus is on cloud, but can you talk a little bit about how ZT can grow with OEMs too? Jonathan Faust: Yes. It's really both, Steve. I mean ZT legacy was working with a handful of customers, and those are great customers that we want to maintain. But part of our strategy has been to expand the number of customers that we're working with, so more hyperscale, more cloud CSP customers, but OEMs, too. So we're focused on both, even the neo-clouds as well. It really all comes down to maximizing the capacity that we have at the ZT plants. And then as I was saying, just a few minutes ago, answering some of Ruplu's questions or maybe [indiscernible] if we continue to see more demand and there's a lot of demand out there, we'll look to invest to even expand beyond that. But first things first, right now, it's focus on the customers that we're winning, make sure that we do very good business for them. And that's why I say Q2 was a great proof point. The ZT Systems team executed extremely well, right, on the demand that the customers are looking for. Jure Sola: But we're building plenty of capacity. Capacity is not going to be an issue, Steve. Operator: Your next question comes from the line of Mehdi Hosseini from SIG. Mehdi Hosseini: A couple of follow-ups from my end. Jure Sola: Mehdi, also welcome to covering Sanmina. Hopefully, we'll have some good quarters together for years. Mehdi Hosseini: Sure. Definitely. I look forward to meeting in person. A couple of follow-ups for me. And just quickly on the fiscal year '27 revenue target of $16 billion plus. How should I think about ZT Systems? Should I assume that you're focused on the core customer there at AMD and you would benefit from their ability to scale? Or is there opportunity for you to diversify your customer base there? And I have a follow-up. Jonathan Faust: Yes. Mehdi, thanks for the question. As Jure said, welcome to the call. It's great to have you on board. So right now, FY '27, it's early days. I was giving Samik, when I was answering his question, a little bit of context on where the $16 billion came from, which we're now calling $16 billion plus, but it relates to some comments that we made when we first acquired ZT. So we wanted to reiterate, right, that we're still very much on that trajectory. But early days to kind of call out what we would expect exactly from them. But if core Sanmina continues to grow high single digits, that get us close to, say, like $10 billion next year. And then as you think about what ZT would have to contribute, that would be like, say, $7 billion or so, $6 billion to $7 billion. Samik was doing that same math. Now as soon as we lock down the number of customers that we're going to work with, the actual production schedules, sort out any details on rev rec and timing like that, we'll be able to give a specific guide, but we feel increasingly confident that $16 billion plus is going to be achievable for next year. And the way that we get there is kind of just how I was answering Steve's question. So we want to maintain the customers that ZT has had historically, the handful of customers that they had, but we're expanding. So CSPs, OEMs and otherwise. Jure Sola: Mehdi, let me add more to our rest of the Sanmina business. The key for us, as Jon mentioned in his prepared statement, ZT was mainly doing the final system integration. And there's a lot of opportunity for us to expand the vertical integration from fabricating the certain subsystems that go inside of the system that will help the growth of what we call Sanmina Core. I think will make us a lot more important with the customers. We'll be able to accelerate time to market and so on. So there's a lot of opportunity for us to expand that. There a lot of work in front of us, but I think the future is more exciting than historical. Mehdi Hosseini: Sure. I agreed. And actually, as a follow-up to it, given opportunities there is, especially as we think about optimizing next-gen racks, would you need to elevate the R&D to above $10 million a quarter or should we assume that the current R&D level can support the 15% revenue growth in FY '27? Jure Sola: Well, first of all, I think revenue for us is not going to be -- at least what we see today, as I look at the '27, '28 demand is there. We're going to continue to invest for -- not just for '27 and '28, we're investing for the future. We're working very close with our existing customer base, which basically is who's who. We got all the key players. So we're going to continue to invest for the growth of the business. It's a partnership. End of the day, we are an extension of our customers and building that what I call transparent relationship and building the trust is the key in our business. And if you look at the relationship with our customers well over 15, 20, we have some customers that have been with us over 35 years. So our goal as we go into the AI business and growing their opportunity is to build a strong relationship, and we'll invest whatever it takes to be an industry leader because the capabilities that we acquired from ZT are industry capabilities, the leadership there, and we are investing a fair amount to make sure that we build to be able to meet not just today's requirements, but also tomorrow's requirements. So company is in a great position to continue to do what's right for our customers. Mehdi Hosseini: Let me rephrase the question. As you -- and please correct me if I'm wrong, it is my impression that you're transitioning or at least part of the business driven by ZT transitioning from EMS to value-add ODM service provider. Would that require some additional R&D as you go through this transition? Jure Sola: Yes. Yes. Yes, definitely, definitely will. That's a part of the growth. As you -- in our business as long as you grow, you're going to be spending more R&D. It's a project by project, program by program that is looking at it, yes, but Sanmina will be investing to be able to create the right value and right solution for our customers. Jonathan Faust: Yes. And just to add to that, too, Mehdi, we've got a strong foundation of engineering capabilities. That's where we spend our R&D dollars today. But as the business grows, to Jure's point, depending on the final customer set that we have and the opportunities that we want to pursue, whether it be vertical integration or otherwise, we could invest more. So more to come. Everything that we've planned on so far is factored into the guidance that we just gave, but more to come as we look ahead into FY '27 later this year. Jure Sola: Operator, we have time for one more question. Operator: [Operator Instructions] Our next question comes from the line of Anja Soderstrom from Sidoti. Anja Soderstrom: Most of my questions have been addressed, but I'm just curious, are you seeing any sort of supply chain disruptions or input costs or difficulties to find components at all? Jure Sola: Yes, definitely, Anja, there's some material shortages around the memory, custom ASICs and things like that, that is going on. I think it's going to continue through rest of the year, and we'll see how things change. But yes, definitely, material is challenging right now as we look at the rest of the year and probably potentially in '27? Anja Soderstrom: But you don't see any risk to your revenue in terms of that? Jure Sola: Anja, in our business, we are custom manufacturing, there's always -- you have to chase parts every day. So I hope we manage that every day. We have a great IT system. We have a great relationship with our suppliers. We work very close with our customers, planning these things in ahead. But last quarter, we could have shipped a little bit more if we got able to get every part number that we needed. And yes, it's something that we have to manage every day, Anja. Jonathan Faust: Yes. Just to add to that, too, I mean, everything that we're aware of today has been factored into our guide. To the point Jure just made, our book-to-bill was over 1.1:1. We could have shipped a lot more. I mean if you think about the core Sanmina business, communication networks and cloud infrastructure, that's been growing 20% plus year-over-year for the last 6 quarters. It could be growing a lot more if there was more components and equipment and so forth like available out there. But everything that we know of as of today and the forecast from our customers, that's been factored into our guide. Jure Sola: Okay. Well, ladies and gentlemen, thanks for your time. Looking forward to talking to you 90 days from now. But for some of you that have questions, please give us a call at any time. Thank you again. Thank you. Bye-bye. Operator: Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.