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Operator: Welcome to the Rambus First Quarter Fiscal Year 2026 Earnings Conference Call. [Operator Instructions] As a reminder, this conference call is being recorded. I would now like to turn the conference over to John Allen, Interim Chief Financial Officer. You may begin your conference. John Allen: Thank you, operator, and welcome to the Rambus First Quarter 2026 Results Conference Call. I am John Allen, Interim Chief Financial Officer at Rambus. And on the call with me today is Luc Seraphin, our CEO. The press release for the results that we will be discussing today has been filed with the SEC on Form 8-K. We are webcasting this call along with the slides that we will reference during portions of today's call. A replay of this call can be accessed on our website beginning today at 5:00 p.m. Pacific Time. Our discussion today will contain forward-looking statements, including our expectations regarding projected financial results, financial prospects, market growth, demand for our solutions, other market factors, including reflections of the geopolitical and macroeconomic environment and the effects of ASC 606 and reported revenue, among other items. These statements are subject to risks and uncertainties that may be discussed during this call and are more fully described in the documents we file with the SEC, including our 8-Ks, 10-Qs and 10-Ks. These forward-looking statements may differ materially from our actual results, and we are under no obligation to update these statements. In an effort to provide greater clarity in the financials, we are using both GAAP and non-GAAP financial presentations in both our press release and on this call. A reconciliation of these non-GAAP financials to the most directly comparable GAAP measures has been included in our press release, in our slide presentation and on our website at rambus.com on the Investor Relations page under Financial Releases. In addition, we will continue to provide operational metrics such as licensing billings to give our investors better insight into our operational performance. The order of our call today will be as follows. Luc will start with an overview of the business. I will discuss our financial results, and then we will end with Q&A. I will now turn the call over to Luc to provide an overview of the quarter. Luc? Luc Seraphin: Good afternoon, everyone, and thank you for joining us. We opened 2026 with a strong first quarter, meeting our financial targets and broadening our portfolio to address the accelerating demands of AI. The quarter reflects solid momentum as we execute against our road map to support long-term profitable growth for the company. This is an exciting time for Rambus, and we are well positioned to capitalize on the market trends in the data center and AI. For decades, we have developed foundational technologies and solutions across a wide range of memory and interconnects. That heritage positions us well as systems become more diverse, memory dependent and performance-driven. To give more context, there are several market and technology trends playing out across the data center and AI that continue to work in our favor. As AI adoption accelerates and inference use cases expand, workloads are becoming more persistent and context-rich and performance is increasingly defined by how efficiently data can be stored, accessed, moved and secured. To support these workloads, AI infrastructure is becoming more complex and heterogeneous, combining a mix of traditional and AI server platforms to support orchestration, data management and real-time execution at scale. At the same time, the expansion of inference and particularly agentic AI with continuous reasoning and multistep workflows is driving more always-on activity and placing even greater demands on memory capacity, bandwidth, latency and power efficiency. Together, these trends are driving new memory and connectivity architectures to support purpose-built solutions across a wider range of use cases and form factors. This increases our opportunities for richer content and broader adoption of our industry-leading IP, reinforcing our position for sustainable long-term growth. Now let me turn to our quarterly results, starting with our chip business. Our performance reflects strong execution and ongoing leadership in our core DDR5 RCD chips. We delivered product revenue of $88 million in Q1, in line with our guidance and up 15% year-over-year. Looking ahead, we expect to deliver double-digit product revenue growth in the second quarter. We continue to see increasing customer adoption of new products and remain well positioned to support the ramp of next-generation platforms as they enter the market. We continue to execute on our strategy of delivering comprehensive industry-leading chip solutions to address growing customer and market requirements. As I mentioned in my opening remarks, we recently expanded our product portfolio with the introduction of our chipset for JEDEC-standard LPDDR5X SOCAMM2 modules, building on the same signal and power integrity expertise we have applied across multiple generations of DDR. This chipset is the first offering in our road map of LPDDR-based server module solutions and includes new voltage regulators as well as the SPD Hub to support reliable, power-efficient server class operation. As part of that road map, we are actively working with industry partners on the definition and development of LPDDR6-based SOCAMM2 solutions, which would offer a natural upgrade path for future generation AI platforms. As AI server architectures diversify to address varying performance, power efficiency and form factor requirements, some platforms are now leveraging LPDDR-based memory. While LP memory offers attractive power characteristics, it was originally designed for mobile environments with very short signal paths and tight power margins, making reliable deployment in server systems inherently challenging. The SOCAMM2 addresses these limitations through a compact CPU proximate module architecture with optimized signal routing and localized power management to enable LPDDR modules to operate in server environments. The Rambus SOCAMM2 chipset enables power-efficient, reliable operation of up to 9.6 gigabit per second in a compact module form factor. As LP-based server modules scale to higher speeds and bandwidth in future generations, they will require increasingly sophisticated interface power and control functionality. This progression is similar to what we have seen in DDR-based server modules and reinforces our opportunity to extend our road map of high-value chip content across memory types in the future. As I mentioned previously, the ongoing expansion of AI is driving demand for a broader range of memory types and form factor. To meet these needs, we continue to build on our leadership solutions in DDR5, including chipsets for RDIMM and MRDIMM and selectively expand our road map of novel solutions as they begin to play a complementary role in heterogeneous systems. With active engagements across customers and ecosystem partners, we are helping shape next-generation server modules, reinforcing the opportunity for richer chip content and sustained growth. Turning now to silicon IP. We saw strong customer traction in the first quarter with continued design wins at Tier 1 companies and growing engagement across our portfolio. We remain focused on delivering industry-leading premium IP that enables differentiated solutions for AI in the data center, including accelerators and networking chips across a wide range of architectures. There's increasing momentum for custom silicon in AI, especially among hyperscalers as they tailor hardware to their own software stacks and deployment needs, optimizing for performance, power efficiency and total cost at scale. This is driving an accelerating pace of design and expanding demand for value-added IP to support memory bandwidth, advanced connectivity and security. During the quarter, we saw growing traction for our value-added PCIe retimer and switch IP to support increasingly complex AI systems across scale-up and scale-out environments. We also expanded our memory IP portfolio with the introduction of the industry's fastest HBM4E controller, setting a new benchmark for AI accelerator memory throughput. In addition, we launched a new network security engine designed for Ultra Ethernet to protect distributed AI clusters. All of these IP offerings are in great demand and further strengthen our position as a critical enabler of next-generation compute and connectivity solutions for AI infrastructure. In summary, we executed well in the first quarter. We delivered solid results and expanded our offerings for both chips and IP to extend our leadership in our core markets. As we look ahead, Rambus is well positioned to capitalize on the megatrends in data center and AI. Our sustained technology leadership, disciplined execution and increasing traction across our portfolio of leadership products will continue to fuel our results. With that, we expect strong growth in 2026, and I'm confident in our long-term trajectory. As always, I want to thank our customers, partners and employees for their continued trust and support. Now I'll turn the call over to John to walk through the financials. John? John Allen: Thank you, Luc. I'd like to begin with a summary of our financial results for the first quarter on Slide 3. We delivered first quarter revenue and earnings in line with our guidance with solid contributions from each of our diversified businesses. We also continued our strong track record of cash generation. This performance reflects the continued strength in our business model. Our strong balance sheet and disciplined capital allocation enable us to invest in growth initiatives while returning value to shareholders. Let me now provide you a summary of our non-GAAP income statement on Slide 5. Revenue for the first quarter was $180.2 million, which was in line with our expectations. Royalty revenue was $69.6 million, while licensing billings were $70.8 million. The difference between licensing billings and royalty revenue mainly relates to timing as we do not always recognize revenue in the same quarter as we bill our customers. Product revenue was $88 million, representing 15% year-over-year growth, driven by continued strength in DDR5 products and ramping new project contributions. Contract and other revenue was $22.6 million, consisting predominantly of silicon IP. As a reminder, only a portion of our silicon IP revenue is reflected in contract and other revenue and the remaining portion is reported in royalty revenue as well as in licensing billings. Total operating costs, including cost of goods sold for the quarter were $104.6 million. Operating expenses of $69.9 million were up sequentially due to seasonal payroll-related taxes in connection with equity vesting. Interest and other income for the quarter was $6.9 million. Using an assumed flat tax rate of 16% for non-GAAP pretax income, non-GAAP net income for the quarter was $69.3 million. Now let me turn to the balance sheet details on Slide 6. We ended the quarter with cash, cash equivalents and marketable securities totaling $786 million, up $24 million from Q4 2025 with strong operating cash of $83 million, partially offset by $38 million in taxes paid on equity vesting and $17 million in capital expenditures. We increased our inventory balance by $14 million during the quarter and expect to continue building inventory strategically in the second quarter. Our strong balance sheet gives us the flexibility to increase inventory to support our product revenue growth and manage through potential supply chain constraints. First quarter depreciation expense was $8.5 million. Free cash flow in the quarter was $66.3 million. Let me now review our non-GAAP outlook for the second quarter on Slide 7. As a reminder, the forward-looking guidance reflects our best estimates at this time, and our actual results could differ materially from what I'm about to review. In addition to the non-GAAP financial outlook under ASC 606, we also provide information on licensing billings, which is an operational metric that reflects amounts invoiced to our licensing customers during the period adjusted for certain differences. We expect revenue in the second quarter to be between $192 million and $198 million. We expect product revenue to be between $95 million and $101 million, a sequential increase of 11% at the midpoint of guidance. We expect royalty revenue to be between $72 million and $78 million and licensing billings between $76 million and $82 million. We expect Q2 non-GAAP total operating costs, which includes cost of sales to be between $114 million and $110 million. We expect Q2 capital expenditures to be approximately $14 million. Non-GAAP operating results for the second quarter are expected to be between a profit of $78 million and $88 million. For non-GAAP interest and other income and expense, we expect $7 million of interest income. We expect non-GAAP tax expenses to be between $13.6 million and $15.2 million in Q2. We expect Q2 share count to be 110 million diluted shares outstanding. Overall, we anticipate Q2 non-GAAP earnings per share to range between $0.65 and $0.73. Let me finish with a summary on Slide 8. In closing, we delivered solid results in line with our objectives, driving ongoing profitability and cash generation. Our diversified portfolio remains a core strength with each of the businesses contributing meaningfully to our performance. Our patent licensing business continues to deliver consistent, predictable performance, supported by the long-term agreements we have in place. Our silicon IP business is well positioned, driven by critical interconnect and security technologies, addressing the accelerating demand for AI solutions. Our product business grew 15% year-over-year and is poised for sequential growth in the second quarter. We remain focused on delivering long-term shareholder value with year-over-year revenue growth in 2026. Before I open the call up to Q&A, I would like to thank our employees for their continued teamwork and execution. With that, I'll turn the call back to our operator to begin Q&A. Can we have our first question? Operator: [Operator Instructions] Your first question comes from the line of Kevin Garrigan with Jefferies. Kevin Garrigan: Can you just help us think about your product revenue into the June quarter? So last quarter, you discussed the low double-digit revenue impact from the onetime OSAT issue. And I think we may have been expecting a larger sequential increase for June just kind of given the strong -- how strong demand has been. So can you just walk us through the drivers for the June quarter product revenue and why the recovery might be a little bit more measured? Luc Seraphin: Thank you, Kevin. Yes, sure. So the first thing I would say is that the issue that we have talked about in the prior call is behind us. Everything has been resolved. And it's a question now for us to restabilize the supply chain, which we are doing, and we see a normalization of that supply chain. So it is behind us. And the revenue for Q2 is guided at 11% over Q1. So that's the right trajectory. And we continue to expect to grow sequentially after that in an environment where our footprint continues to be very strong. I mentioned in the earlier call that it was older generation of DDR5. The market is transitioning from Gen 2 to Gen 3, which is a good catalyst for us. So I would say we met or we guide to double-digit in the second quarter. We met what we said we would meet on the operational strain in Q1 and we will continue to grow sequentially quarters after that. We don't see any issue with the demand, and we don't see any more issues with the quality issue that we had in Q1. So we feel quite confident for the rest of the year as the market moves from Gen 2 to Gen 3. Kevin Garrigan: Okay. Great. And then just as a follow-up on your LPDDR5 SOCAMM2 server module chipset. When would you expect to start seeing revenue from this chipset? And what kind of milestones should we watch to gauge traction? Luc Seraphin: I would see this as having a very good strategic impact at this point in time. The financial impact in the short run this year is going to be very minimal just because the volumes are very small for this type of solutions. As a reminder, it only addresses a very small portion of the AI workloads. So volumes are small. The content is small as well. But it's strategically -- so I wouldn't put it in the model for 2026, but it's strategically very, very important because there is a trend to look at LPDDR in the server environment in the long run. LPDDR still has issues to address the server requirements, but it also has traction and it has benefits. So we see this as a stepping stone for us. It builds on the fact that over the last few years, we have developed our product line as chipsets. So we have the whole chipset for the SOCAMM2. We have our own teams for power management development, and these are the 2 new chips that we are proposing for this solution. So we see this as a stepping stone. It allows us to engage with us with other AI players in the industry. And we are working on next generation as well. But I don't think that the financial impact is going to be significant this year, just given the volumes. Operator: Your next question comes from the line of Tristan Gerra with Baird. Tristan Gerra: A quarter ago, you highlighted shortages and sounded a little bit maybe not cautious, but muted on the growth opportunity and you provided a fairly muted data center unit forecast. How are shortages for component potentially impacting your revenue this year? What are you seeing that's different now than a quarter ago? And given the outlook for DRAM to remain very tight next year, how should we look at your product revenue growth and specifically your RCD growth with excluding the new product layers that will be adding on to that from a year-over-year growth standpoint. So in other words, would you expect the same type of growth next year, year-over-year versus this year? And I understand you're not guiding for next year, but just wanted to get a bit more color on what you see on the market that potentially could put constraint on your growth. And clearly, that's an issue for a lot of other companies as well. Luc Seraphin: Yes. Thank you, Tristan. First of all, let me say a few words about the demand. We do see demand continue to grow for standard servers, which is good for us with agentic AI in particular. We expect the server market to grow faster this year than last year. We model it at low double-digit growth because despite the excitement around AI, there's also a large portion of the server market that is not AI related. But we do see demand growing on the server side, which is really a good catalyst for us. But as we said last quarter, we're watching the situation with supply, especially on the back end. Certainly, since last quarter, the situation has not improved. We're working with our suppliers, but the lead times are long, and there is tension on the back end. So we take this into account when we forecast our business. This is one factor. The other factor that affects or that comes into play when we forecast is the timing of launch of new platforms in the market. As you know, it's been the case in the past for us, the launch of our new products depends on the launch of new platforms in the market, and that's a dependency that we have. So we don't see the situation as materially different than what we saw in Q1. But from a supply standpoint, things have not improved. And we expect the supply situation to be tight going into 2027 as well when we talk to industry players. Tristan Gerra: Okay. That's useful. And then as my follow-up question, any additional color on the MRDIMM opportunity? I know you've talked in the past about some very initial shipments late this year, specifically with inferencing. Any additional color as to where it could be in terms of revenue in '27? I think you've talked in the past about your expectation that you probably fully realized the $600 million TAM for MRDIMM by '28. So what should we be looking at for next year kind of in between? And what's really driving that? What's going to be driving the demand? Is it going to be mostly inferencing? And any additional color you may have beyond what you've said in the past on customer interest for this technology and where it's going to ramp? Luc Seraphin: Thank you, Tristan. First, we continue to make progress in the launch of these products and the interaction with our customers on this MRDIMM. We're excited by the opportunity for the reasons we've always talked about, larger capacity, larger bandwidth in the same ecosystem. So the adoption is easier. The main, I would say, factor affecting the ramp of our MRDIMM is going to be the timing of the launch of the platforms from Intel and AMD in particular, where they do have this capability attached in the next-generation platform. So we continue to see the ramp starting in 2027 in earnest. And a SAM at this point in time, which we still value at about $600 million. As I keep saying, the SAM, once the products are in the market and we get feedback and the market gives us feedback, we're going to have a much better view of that SAM. But at this point in time, this is the right number to keep in mind. Operator: Your next question comes from the line of Aaron Rakers with Wells Fargo. Aaron Rakers: I guess kind of just building off that last question first. When you kind of think about the $600 million incremental opportunity around MRDIMM, I can appreciate that there's a lot of unknown variables at this point. But I'm just curious, as you rolled up that expectation, what assumption are you making in terms of attach rate on AMD Venice and Diamond Rapids at this point? And how might that evolve? I mean I would assume that you're being rather conservative on that attach rate at this point. And then also on that, how do you see CXL starting to play out? Luc Seraphin: At this point in time, we model a low attach rate. As I said, until my experience is until the product is in the market, it's hard to make those models more significant. There are a lot of variables coming into play. As we just said, the most important one is the timing of rollout of these platforms in the market. There's also the whole situation with DRAM pricing and the prices of modules and how our customers' customers are going to make the decisions between the combination of modules they want to have in the current memory cycle environment. So we model, I would say, a conservative percentage for MRDIMM at this point in time. But ramp will start when the platforms ramp in the market, and that's when we're going to have a better view. Aaron Rakers: And any thoughts on CXL? Luc Seraphin: Sorry, I missed the second part of your question. Sorry, Aaron. CXL, we do have very good traction on our IP business. We are not planning to launch a semiconductor product at this point in time. We do have this on our shelves, if you wish, as we designed one a couple of years ago. But we do see the -- with agentic AI, we do see demand for standard DIMMs and MRDIMMs as being the main benefactors of that. And that's where we will continue to focus our attention. Aaron Rakers: Yes. And then one final quick one. When we -- when you guys talk about the opportunity to grow sequentially in the product revenue into the back half of the calendar year, I'm curious if you were asked about seasonality in the second half versus first half, if there's anything that changes your views maybe relative to the last couple of years. And I think you've seen some decent growth second half versus first half. Luc Seraphin: Yes. Thanks, Aaron. That's a good observation. We actually do see second half shaping out slightly different than the first half, better growth in the second half. A lot of times, it had to do with the launch of new platforms that typically hit the market if they are on time in the second half of the year, and that's where you have more products there. But even if you look at the first half of this year at the midpoint of our guidance for Q2, and you look at the first half of last year, we're still growing close to 18%. So the first half, despite our issue in Q1 is still much higher than the first half of last year. And we believe the second half is going to show growth. We do see some seasonality. And typically, our second half is stronger than our first half. Operator: Your next question comes from the line of Gary Mobley with Loop Capital. Gary Mobley: If I take the sum of your license billing in your contract and other revenue in the first half of this year for the results in the guide and compare that to the same period last year, it looks like you're generating some abnormally strong growth. Is that due to any sort of variance in the patent licensing? Or should I take this to mean that your silicon IP business might actually be running north of $150 million annually right now? Luc Seraphin: So -- thanks, Gary. We can see some quarter-to-quarter variations in these 2 categories just for the nature of the business. I would say that underlying this, we see very good traction on our silicon IP business. Actually, AI has an impact on our silicon IP business, which is also very positive as people who develop custom solutions for AI are looking for new interfaces and new security solutions like the ones I mentioned in the prepared remarks. So we do have very good traction on the silicon IP business, and we continue to expect this business to grow 10% to 15% a year based on that. Our other business, our patent licensing business, it can also be changing from quarter-to-quarter. We do renew agreements on a regular basis. And sometimes these agreements are structured in different ways depending on the customers and what they want to do. So we have some strong quarters, some quarters that are not too good. But on average, this business continues to be stable at $200 million, $210 million. So I would say I would not pay too much attention on the quarterly split on these revenues, but the fundamentals are really, really good. What I would add to this is if you look at our patent licensing business, our silicon IP business or our product business, they all benefit from what's happening in the memory subsystem area. They all benefit from AI and the move from -- or the move from AI to AI inference. So -- and that gives strength to our results. And when we have a challenge like we had last quarter on the product line, then we have these 2 other product lines also that allow us to meet our numbers. Gary Mobley: Okay. As my follow-up, I wanted to ask about CPU roles in AI-optimized servers. I think there's been a lot more noise recently indicating a higher ratio of CPUs to GPUs in AI-optimized servers driven by agentic workloads, and you sort of hinted to that. To put this into a question, I'm curious if we move to a point in time where we might see a 1:1 ratio CPU to GPU. Does this alter your view on the growth rate of your SAM for your product revenue or the size of it? Luc Seraphin: So we are excited with where the market is evolving with agentic AI and inference. If you look at the types of architectures, software architectures, hardware architectures that inference requires, then you clearly see that the ratio between CPUs and GPUs is changing and is changing in favor of CPUs. So overall, that's a very good thing for us. It's just coming from the nature of what inference or what agentic AI is. So that's a good thing for us. Is it going to be a one-on-one? Very difficult to say at this point in time. Everyone is trying to optimize now the memory subsystems. Everyone is trying to use HBM where it's really good, use LPDDR where it's really good and use DDR and MRDIMMs where it's really good. And I would say that DDR and MRDIMMs will continue to be the workhorse of these inference AI solutions. But the fact that all of these systems start to coexist, HBM, DDR, LPDDR, is really good. They all try to resolve a different part of the AI workload, and this plays to our strength because this is what we've been doing forever at Rambus. But I would say that the move to AI inference and the move to agentic AI will change the ratio in favor of CPUs, and that's good for us. Operator: Your next question comes from the line of Sebastien Naji with William Blair. Sebastien Cyrus Naji: Maybe my first question, I wanted to ask about the new SOCAMM products that you announced last week. Could you maybe just comment on what Rambus' dollar content looks like for each SOCAMM module, just across the different voltage regulators and the SPD hub? Any unit economics you can give us? Luc Seraphin: Given the current competitive environment, I'd stay away from giving pricing on these things. But I would say that the content on a SOCAMM from the standpoint of Rambus, we have 3 voltage regulators and an SPD Hub. So the content is minimal. This is what I was saying earlier on one of the questions. I do believe that this is strategically important for us because in the long run, LPDDR may play a larger role, especially in next-generation LPDDR solutions in the data center. But from a content standpoint, it stays minimal and the volume stays minimal. I would leave it there. Sebastien Cyrus Naji: Okay. Okay. That's fair. And maybe just turning back to the RDIMMs. Could we get an update on the progress you're seeing with companion chips? How much revenue came from those companion chips in Q1? And then maybe just relatedly, how important is it for your silicon customers that they have all of these DIMM components bundled together coming from one provider versus having to put these together from different providers? Luc Seraphin: Yes. John, go ahead. John Allen: Sure. The newer products, Sebastien, they're contributing low double-digit percent of our total product revenue during the first quarter. We would expect it to be roughly the same in the second quarter as we see some growth in the overall revenue contribution from that part of our business. Luc Seraphin: Yes. And what I would add to this is that we -- this is steady growth quarter-over-quarter. You saw this in 2025, every quarter, we had a slightly higher percentage. We continue to do that. And we expect to continue to do that for the second half of the year with this. And we expect maybe to exit the year mid-double-digit of product revenues on -- coming from our new chips. Now to your other question, it is becoming more and more important for customers to have the whole chipset from one supplier, especially as the performance requirements increase. And the reason has to do with interoperability, making sure that all of these chips on a module work well together at very, very high speed in very, very harsh environment is becoming more and more difficult to achieve. And that's why our customers request us to have the whole solution and to help them go through these generational changes. Operator: Your next question comes from the line of Kevin Cassidy with Rosenblatt Securities. Kevin Cassidy: During the quarter, as you're building inventory, were there any orders that you had to leave on the table that you weren't able to book because you didn't have the inventory, but maybe some upside surprise? Luc Seraphin: No, we've not been in that situation. But there are a few market dynamics that we have to anticipate. One is, as I said earlier, we do see supply tightening, especially on the back end. So we want to make sure that we have -- if that situation continues, we have enough supply to supply our customers. The second thing that is happening is that there's fast transitions between generation. And you remember, we were talking about Generation 1 moving to Generation 2. We indicated in the last call that Generation 3 is ramping very, very fast. So we want to make sure that on these new generation of products, we also have enough inventory because the ramps on the customer side can be quite steep, and we just don't want to miss them. Kevin Cassidy: Okay. I understand. And maybe even when you're using your balance sheet to build more inventory, when Intel reported, they said they even were able to ship some previously written down inventory. It seems like the demand for CPUs is so strong and also DRAM that maybe older generations are -- will get a little bit of a revival. Is that anything possible? Or it sounds like you're saying everything is shifting to Gen 3 very quickly. Luc Seraphin: From a demand standpoint, it's certainly the bulk of the demand for DDR products is shifting to Gen 3. But what you're describing in terms of using inventory of old products to serve demand is something that we continuously do and look at. That's part of our inventory management processes. Operator: Your next question comes from the line of Mehdi Hosseini with SGI (sic) [ SIG ]. Bastien Faucon-Morin: This is Bastien filling in for Mehdi. My first question is on LPDDR, SOCAMM2 chipset. Would you mind clarifying the content of the chipset? It seems that the solution consists of 1 SPD and 3 voltage regulators. Do you expect to add any PMIC content there? And what does the pricing look like of the SPD and voltage regulator relative to the DDR, DIMM? And I have a follow-up. Luc Seraphin: Sure. So yes, on the SOCAMM solution, we have 1 SPD Hub and 2 types of voltage regulators, 3 voltage regulators in total, but 2 types, one 12 amp regulator and two 3 amps regulators. So that's the content. So as I said, the content is minimal. You're talking about PMIC. There's no power management IC per se. That function is done by the voltage regulators in this generation of product. But the way -- that's why we say it's very strategic for us. The way we look at this is that when LPDDR6 is available, that LP memory will offer even more speed and even more power capabilities, then it will require possibly more complex chips for power management, and we will work on those. And one can imagine as well that as the market evolves in the longer run, the market will probably need as well as the equivalent of RCDs in the long run. And this is exactly in our strategy, and that's why I'm talking about the stepping stone. We want to make sure that we are early in these new technologies. They do not cannibalize the old technology. They are complementary to them. And in the long run, they have the potential to grow quite nicely, and they build on strengths that we have, which has to do with signal integrity and power integrity. Now in the short run, for the SOCAMM2 and LPDDR5X, as I said, the volumes and the content -- the dollar content is going to be very low, but that's a very interesting and strategic stepping stone for us in that area. Bastien Faucon-Morin: That's really helpful. And I guess my second question is on DDR5. How should we think about the timing of the ramp of Gen 4 and Gen 5 as they go to higher volume manufacturing? Luc Seraphin: So Gen 4 is going to start to ramp this year, but Gen 4 is a kind of a niche generation, if you wish. It doesn't have the same traction as Gen 1, Gen 2, Gen 3 or Gen 5. I think everyone is now waiting for Gen 5. We're going to start shipping products that correspond to Gen 5 towards the end of the year. But just like for the MRDIMM, Gen 5 is completely dependent on the timing of the ramps of the next-generation platforms for Intel and AMD. This is where they're going to be adopted. And that's why we do see initial volumes this year, but the bulk of the volume just like for MRDIMM is going to start in 2027. Operator: Your next question comes from the line of Mark Lipacis with Evercore ISI. Mark Lipacis: A question on the DIMM attach rate. Is it different for CPUs used to perform orchestration in agentic AI versus CPUs used in standard servers versus CPUs that might be put next to the GPUs and the XPUs and the custom ASICs. Should we think about the attach rates differently for these... Luc Seraphin: It's a very good question, very difficult question also, Mark. I would say that the way we look at it is, if you look at inference and agentic AI, the functions that have to be performed by these standard CPUs are closer to standard CPUs. I think the highest attach rate that you would find is really close to the GPUs, HBM platforms. That's where you have the heaviest load, if you wish, for these CPUs. That's how at this point in time, I would compare it. I would say, if you take a DGX box with GPUs and HBM, then the CPU there are the CPUs that use the most memory in terms of capacity and bandwidth. I would say that when you go to inference, then it's probably a little less, but it's difficult for us at this point in time to model that. Mark Lipacis: Sorry, I guess my phone dropped. I don't know if my question came through. But Luc, I was wondering, is -- should we think about the DIMM attach rate differently for CPUs that would be used in orchestration for agentic AI versus CPUs used in standard servers versus CPUs that are used for inferencing that get put next to the GPUs and the ASICs and the XPUs. Is there a different density there for the DIMMs? Luc Seraphin: So it's a very good question, Mark, but a very difficult question to answer. I would say the way we look at it at this point in time is that the highest use of memory capacity and bandwidth really resides close to the GPUs and the GPU, HBM clusters, if you wish. That's where you have the most need for very high capacity and very high bandwidth, which, on average, could be higher than what we found in inference and other solutions. But we have not modeled that at this point in time. It's hard to model. But we do see in aggregate, the fact that inference is being added to training as a very good traction for the use of standard DIMMs or MRDIMMs in general. The attach rate is difficult to model at this point in time. Mark Lipacis: Got you. Okay. That's fair enough. And then the tightness in the back end that you're noticing, is this -- do you know or can you explain what the cause of that is? Is that because of the idea that a lot of the back end happens in Southeast Asia and they procure a lot of energy from the Middle East? Is that it? Or is it capacity? Is it more like just the whole industry is in a great recovery time and the capacity utilization rates are really ticking up. Do you have a sense of the cause of the tightness in the back end? Luc Seraphin: There's a couple of reasons. One is the demand, especially in the data center has become very high recently. So there's increased demand there. And the second reason is that a lot of semiconductor suppliers have moved their back-end supply chain away from China to other countries in Asia, and that has put a strain on the total capacity of these back-end suppliers. So it's the combination of the 2. We've not seen an effect yet, not yet, of the war. There are discussions about some basic elements like gas that are going to be affected, but we don't see this yet. The main reason at this point in time is increased demand, especially in the data center, combined with semiconductor companies moving their supply chains outside of China. Mark Lipacis: Okay. That's really helpful. And the last question, if I may. The -- as you think about your market share in this year, are you of the view that you are a share gainer or you keep share flattish or down? Like what is your view on your ability to gain share? Luc Seraphin: Yes. So we continue to gain share in '24 to '25. We were -- we exited '25, we were mid-40% share. There's no indication that we are not going to continue on that trajectory. This year, the market is really at a high level, transitioning from Gen 2 to Gen 3, and our footprint in Gen 3 is really, really good as well. So there's no sign of any erosion of the share. If we add the other components, then we'll grow faster than market because we add content as well to what do we ship to the market. So again, we're very pleased with where we were in 2025. As you know, Mark, we tend to talk share on a yearly basis. They can fluctuate from quarter-to-quarter, but we don't see any sign of erosion of our share going into 2026. Operator: At this time, there are no further questions. This concludes the question-and-answer session. I would now like to turn the conference back over to the company. Luc Seraphin: Thank you, everyone, who has joined us today, for your continued interest and time. We look forward to speaking with you again soon. Have a good day. Operator: Thank you. This now concludes today's conference.
Operator: Ladies and gentlemen, thank you for joining us, and welcome to the LendingClub Q1 2026 Earnings Conference Call. [Operator Instructions] I will now hand the conference over to Artem Nalivayko, Head of Investor Relations. Please go ahead. Artem Nalivayko: Thank you, and good afternoon. Welcome to LendingClub's First Quarter 2026 Earnings Conference Call. Joining me today to talk about our results are Scott Sanborn, CEO; and Drew LaBenne, CFO. You can find the presentation accompanying our earnings release on the Investor Relations section of our website. On the call, in addition to questions from analysts, we will also be answering some of the questions that were submitted for consideration via e-mail or through the Say Technologies platform. Our remarks today will include forward-looking statements, including with respect to our competitive advantages, demand for our loans and marketplace products for future business and financial performance. Our actual results may differ materially from those contemplated by these forward-looking statements. Factors that could cause these results to differ materially are described in today's press release and earnings presentation. Any forward-looking statements that we make on this call are based on current expectations and assumptions, and we undertake no obligation to update these statements as a result of new information or future events. Our remarks also include non-GAAP measures relating to our performance, including tangible book value per common share and return on tangible common equity. You can find more information on our use of non-GAAP measures and a reconciliation to the most directly comparable GAAP measures in today's earnings release and presentation. Finally, please note all financial comparisons in today's prepared remarks are to the prior year period unless otherwise noted. And now I'd like to turn the call over to Scott. Scott Sanborn: All right. Thank you, Artem. Welcome, everyone. We had a great start to 2026, delivering 31% year-on-year growth in originations to $2.7 billion, while achieving record pretax earnings of $67 million and a return on tangible common equity of 14.5%. We're not just growing, we're growing profitably. In addition to the strong financial results, we're also delivering our key strategic priorities, including expanding into the new home improvement vertical, driving AI-enabled operating efficiency and introducing the upcoming rebrand to Happen Bank. Our new brand better reflects what we have become and why we exist to clear the way for people going places. Happen Bank is centered around our members who we call the motivated middle, millions of high FICO, high income consumers who are digitally savvy, value conscious and focused on making progress. They are active users of credit and are looking for products that deliver reliable value, are easy to understand and are effortless to use, products that clear the way for what's next and help them make it happen. That's exactly what we're designed to do, and it's why we've been successful in attracting and retaining this desirable audience. Feedback from members, prospects, partners and employees has been enthusiastic because the brand speaks not only to our broad ambitions but also to our promise. Beyond that, it also signals a clear visual and emotional differentiation from tired conventional banking norms. The motivated middle used credit intentionally as a strategic tool to achieve meaningful life goals, and they're just as intentional and disciplined in how they pay it back. Our focus on this customer supported by our advanced underwriting models and enormous data advantage has allowed us to sustain more than 40% credit outperformance relative to our competition for more than 5 years. That translates to meaningful value for our members and compelling returns for our marketplace investors. These strong returns are supporting growth in our marketplace with new buyers coming on board across all of our sales channels. Despite the noise in the environment, we remain oversubscribed with an ability to sell more loans than we are generating. And average loan sales prices improved further in the quarter as it has in 8 of the last 9 quarters. Our strong funding and proven ability to underwrite loans through a seamless experience is extensible to other categories where the motivated middle is able to make responsible use of credit. Through our major purchase finance business, we're increasingly present with them at the point of decision, whether they're getting braces for their kids or trying to start a family with fertility treatments, we provide seamless embedded financing supported by our proprietary underwriting to generate affordable payment options for the member and immediate funding to the provider. That model has proven successful in driving meaningful growth with strong credit outcomes. In fact, major purchase finance delivered its third consecutive quarter of record issuance. We're now bringing our powerful capabilities to bear in the $0.5 trillion home improvement market, where we believe we have a clear right to win. As of this month, we started underwriting and issuing home improvement loans through our inaugural partnership with Wisetack, an embedded platform that reaches over 40,000 contractors. The benefits are clear. Homeowners get instant offers in real-time approvals that allow them to make their projects happen, and contractors get timely funding and better close rates, especially on larger projects. Home improvement represents a powerful new opportunity to attract, delight and engage the motivated middle in moments that matter and allows our members to use credit responsibly to add value to their home. Beyond Wisetack, we're seeing strong interest from additional partners, which gives us confidence in the category's growth over time. As we add new partners, the Mosaic code base we acquired last year will allow us to deliver our proprietary capabilities through rapid onboarding, integration and management of direct relationships with contractors and partners. Our lending business delivers meaningful value to the motivated middle, an average 700 basis point savings on credit card refinancing and average $2,500 lifetime savings on auto refinancing and affordable point-of-sale financing for life's major purchases. Our deposit offerings deliver similar value. Our award-winning level of checking and savings accounts are designed to align positive financial outcomes for members with positive financial outcomes for LendingClub, a win-win dynamic that's all too uncommon in traditional banking. For example, level up checking rewards borrowers with 2% cash back for on-time loan payments, encouraging good financial behavior and benefiting credit performance. We've seen a 6x increase in checking account openings over our prior product with 60% of those accounts coming from borrowers. We're also seeing a tenant year-over-year growth in the number of loan payments coming from LendingClub checking account. Our level of savings account rewards ongoing savings behavior with a higher rate. It might surprise you to know that nearly 1 in 4 of these accounts are being opened by borrowers. Furthermore, for borrowers who have paid off their loan, they've built an average savings of about $19,000, which represents tremendous financial progress for members who originally came to us with roughly that same amount in credit card debt. You can see how our lending and banking products work together in a system aligned by design to deliver more value for both members and our business. Now let me turn to how we're leveraging AI for improvements in both efficiency and customer experience and the tangible benefits we're already seeing. Over 90% of loan issuance is now fully automated, requiring no human intervention. We have reduced the time needed to submit a debt consolidation application by nearly 60%, we delivered record low production cost per issued personal loan in the first quarter. We have numerous AI initiatives underway across the organization and our pace of AI-enabled change is accelerating and we expect that to result in continuing improvements in both experience and operating efficiency. In close, our year is off to an outstanding start. We're delivering strong growth and profitability, continuing to outperform on credit, expanding into new markets and preparing to launch a brand that reflects the true scale of our ambition. At the same time, we remain mindful of the broader environment. Our emphasis on disciplined underwriting, responsible growth and focused and efficient execution positions us well to navigate uncertainty while continuing to deliver for our members and shareholders. Before turning it over to Drew, I want to thank the LendingClub team for making it happen. It's an exciting time to be at the company with a new brand on the way, an incredible new headquarters building in San Francisco and a lot of momentum in the business. Employees are buzzing, and we're seeing that excitement reflected in our results. Okay. Over to you, Drew. Andrew LaBenne: Thanks, Scott, and good afternoon, everyone. 2026 is certainly off to a dynamic start. Let's get into the details of our first quarter. . Turning to Page 11 of our earnings presentation. Loan originations grew by 31% to $2.7 billion, above the high end of our guidance range. All of our consumer businesses showed strong growth, supported by the compelling experience and value we deliver. Our industry-leading credit performance remains a key differentiator where we have continued our outperformance across 5 years of quarterly vintages. This is a key reason we were able to sell loans without any need to provide credit enhancements or loss protection. Now let's turn to revenue on Page 12. Net interest income increased 18% to $176 million, another all-time high, supported by a larger portfolio of interest-earning assets and continued funding cost optimization. Turning to noninterest income. As a reminder, with our move to fair value option for all newly originated held for investment loans, noninterest income now includes the loan origination fees, which were previously deferred under CECL and have a positive benefit to revenue. Conversely, the impact of loan sales prices in credit now reduces noninterest income in the fair value adjustments line. Impacts from credit previously would have been captured as provision expense under CECL. As we previewed last quarter, total fair value adjustments were approximately double fourth quarter 2025 levels driven by 4 factors. First, more volume receiving a day 1 fair value adjustment as we transition 100% of all newly held for investment originations to fair value option at the start of the year. Second, a greater mix of longer duration major purchase finance loans, which carry a higher discount rate and therefore, a higher day 1 fair value adjustment. Third, larger date to fair value adjustments, driven by a higher average balance of loans carried under fair value during the quarter. Lastly, the higher benchmark rates observed later in the quarter also increased fair value adjustments which were not expected when we provided our outlook in January. These higher benchmark rates increased the discount rate on our held-for-sale portfolio to 7.3% from 7.1% at year-end. For the held for investment portfolio, the discount rate was 7%, reflecting the specific product composition of that portfolio. With all this in mind, noninterest income was $76 million, up 12% year-over-year and down sequentially due to the move to fair value option despite marketplace sales prices improving and solid credit performance. The sequential reduction was more than offset by lower provision, which I will cover later. A useful way to evaluate revenue performance under this accounting transition is risk-adjusted revenue or revenue less provision for credit losses which grew 58% to $252 million due to the revenue growth I just described and the materially lower provision for credit losses under fair value options. For net interest margin on Page 14, I will refer to the sequential changes which provide better context on the quarter. The net interest margin expanded to 6.3%, up 30 basis points over the prior quarter primarily driven by 2 factors: first, lower interest expense contributed approximately 20 basis points, reflecting a 13 basis point benefit from lower deposit costs plus an additional 7 basis points from a lower day count this quarter. Second, we aligned our interest income recognition on the previously purchased held for investment fair value portfolio to the same methodology as the newly originated loans under fair value. Previously, credit impact was coming through the average yield and will now come through fair value adjustments. This benefit was approximately 14 basis points of net interest margin and explains the sequential yield increase in our loans held for investment at fair value. With the market now predicting no additional fed rate cuts this year, we expect our net interest margin on a go-forward basis to return to around 6% as we progress through 2026. Now let's move on to credit where performance remains excellent. As Scott mentioned, we continue to outperform the industry with delinquency rates well below our competitive set. Provision for credit losses was less than $1 million, reflecting the impact of our move to fair value option accounting for newly originated held for investment loans, combined with strong credit performance on the remaining legacy portfolio under CECL accounting. Our net charge-off ratio for the total held for investment portfolio improved meaningfully to 3.5%, down from 6.1% driven by continued strong performance as well as portfolio aging dynamics, which will normalize over time. It is important to note that these charge-offs and delinquency metrics now include all held for investment loans on the balance sheet, inclusive of both fair value and CECL portfolios for all reported periods. We're continuing to improve the profitability of the company, and that is allowing us to invest in critical initiatives to drive future growth. These include developing new marketing channels, supporting the rebrand and building out home improvement. Overall, expenses on Page 15 were $185 million, up 28% year-over-year. The majority of the increase was due to higher marketing spend reflecting both our continued investment in paid acquisition channels to drive originations growth as well as the impact of fair value option under which marketing expense for held for investment loans is now fully recognized at origination rather than deferred and amortized. Of the $10 million sequential increase in marketing spend, the impact of the accounting change was approximately $7 million. Compensation and benefits expense was up 12% year-over-year, reelecting headcount growth to support new business verticals, including home improvement and continued expansion in our core businesses. Other noninterest expense also increased 13% year-over-year. Our pretax profit margin reached a new high of 27%, reflecting a strong pull-through of revenue growth to the bottom line. We're excited about our step-up in profitability and our capacity to reinvest in the future growth initiatives while growing profit margin. Overall, pretax net income was $67 million, which more than quadrupled compared to a year ago and reflects a new high watermark for the company. Diluted earnings per share was $0.44 above the high end of our guidance range and more than quadrupled from the prior year. Our return on tangible common equity was 14.5% and our tangible book value per share increased to $12.49. Turning to the balance sheet. Total assets grew to $11.9 billion, up 14% year-over-year. We ended the quarter at $10.2 billion in deposits, which was also an increase of 14% compared to the prior year, and we continue to see healthy deposit trends across our product offerings. Our balance sheet remains a competitive strength, allowing us to generate recurring revenue through retained loans while maintaining the flexibility to scale marketplace volume as loan investor demand grows. We ended the quarter well capitalized with strong liquidity and positioned to fund future growth. I'd also like to provide a brief update on the $100 million share repurchase and acquisition program we announced at our Investor Day in November. Since inception and through the first quarter, we have utilized $38 million and reduced our average diluted share count by 1.5 million shares compared to the previous quarter. Now let's turn to our outlook. We entered 2026 with a tremendous amount of momentum. Even considering the new rate outlook, our outperformance to date gives us confidence to maintain our full year guidance with the assumption of a stable consumer and rate environment. As a reminder, we were assuming 75 basis points in cuts when we entered the year, which was a tailwind for both loan sales prices and net interest margin, which we no longer expect to benefit from. For the full year, we continue to expect originations of $11.6 billion to $12.6 billion and diluted EPS of $1.65 to $1.80 consistent with the 13% to 15% near-term return on tangible common equity target we shared at Investor Day. For Q2 2026, we expect to deliver loan originations of $3.0 billion to $3.1 billion, representing 23% to 27% year-over-year growth. On earnings for Q2 2026, we expect to deliver diluted earnings per share of $0.40 to $0.45. We're pleased with our execution. Our strategy is working, and we remain encouraged by the underlying fundamentals of the business. With that, we'll open it up for Q&A. Operator: [Operator Instructions] Your first question comes from the line of Tim Switzer with KBW. Timothy Switzer: So the first one I have is, on the announcement you guys had along with earnings about launching the home improvement loans. And your comment in there -- I know you guys have started in April, but your comment about there's additional interest from other potential partners, a significant amount. Could you maybe talk about like how large these partners are relative to Wisetack and like how quickly do you think these opportunities could be realized? Scott Sanborn: Yes. So as we mentioned, post our announcement, we have gotten quite a bit of inbound interest. I'd say there is a desire in the market for a combination of a stable bank balance sheet because there were certainly some experiences by some partners during the rate and inflation cycle that they lost funding partners. So stable bank balance sheet, combined with the flexibility of a fintech to pursue deeper integrations as well as maybe customize the product for the specific use cases and delivery channels. So we've been pleased with that. Getting the first deal live is obviously the biggest tech builds and now that those kind of pipes are laid, I'd say, implementing additional partnerships, we're anticipating will be roughly less than half the work of what we had to do to get here. I think in terms of on sizing, we haven't given any guide outside of the broader guide we gave at Investor Day of how much we think major purchase finance will contribute over the medium term. What I would say, it's is a pretty seasonal business. So we're in -- Q2 and Q3 are the big season. So it's our push internally to at least try to get a couple of these live going into Q3, so we can really learn, right? Does the product we're starting with is are applying our models to the category. But over time, we need not only the distribution but also the product features and constructs to really fully penetrate this market, things like the ability to make multiple disbursements over time or to multiple parties, the ability to have a promotional product, all of that. So I'd say the bigger contribution will really be next year. This year will be kind of laying the pipes, get them opened up and making sure we have the right product and experience for those partners to really be ready for the key period next year. Timothy Switzer: Got it. Okay. Yes, that was interesting, Scott. And then [ switching ] subjects here a little bit, looking at the marketing expense outlook, how should we think about that as you go over the course of the year? I know it's a little seasonal, but how should we think about it, I guess, as a percent of originations year-over-year? How does that change? And then are you able to put quantify at all expectations in terms of how much the rebrand and the investments associated with that and the marketing and all that will cost this year. Maybe to help us just give an idea of how some of that could fall off in '27? Scott Sanborn: Yes. So I'll start with the rebrand. We haven't broken it out separately, but what we did say and is in our outlook is there are several investments we're making this year to really lay the foundation for future growth. Obviously, the engineering and business team we're carrying on home improvement is one, which we've got to get the volume coming in to offset that. And the second is the rebrand this year, the costs around the rebrand, we'll call them primarily sort of operational in nature. We've got thousands of e-mails and call center scripts and web pages and mobile app and all of that needs to be repurpose together with some communication to the consumer. I know, Drew, you want to take kind of the broader question on marketing efficiency for the year. Andrew LaBenne: Yes. Outside of the rebrand spend, marketing should ramp roughly with volume as we go up. And as a reminder, Q2 and Q3, at least in our core personal loan business, are the strongest quarters seasonally speaking. So as you saw in our guide, we expect volume to increase and marketing to increase at similar ratio to what we're spending today. . Timothy Switzer: Great. Okay. All right. That's good to hear. And then last one for me. In terms of like the credit outlook, I know it's a little early, but have you guys seen any change in customer behavior since Iran war started and you start to see oil prices creep up? . Scott Sanborn: No. We haven't seen anything in leading indicators with the customer, again, that we're underwriting reminder we moved up credit back in '22 and are maintaining that discipline right now. That's not to say it doesn't require active management, meaning we're not static. We're always evolving and optimizing, but no broad-based kind of leading indicators we're seeing, as you can see in all the data that we're putting out there today, the consumer underwriting is continuing to look great. But acknowledge your point, which is we're still early, how long does this persist? And what what's the kind of blast radius outside of oil prices? And how might that affect the broader inflationary cycle and impact on consumers is something that we'll be carefully watching. Operator: Your next question comes from the line of Bill Ryan with Seaport Research Partners. [Operator Instructions] William Ryan: First question, I want to go back to some comments you talked about loan sales pricing improving in the first quarter. And obviously, there was a lot of action in the private credit markets during the quarter. So if you can maybe talk about that over the course of the quarter. What was the trend? Did it end a little bit better than it began the quarter at? How did it vary at all? And then what did the mix of buyers? Did that change at all during the course of the quarter? Andrew LaBenne: Yes. So Bill, what I'd say just overall is that there's been a lot of noise out there, but loan buyers have been very steady as we've gone through time. So private credit, insurance ramping up. We've definitely seen stability there, and we expect to see stability as we go into Q2 as well in terms of the amount of loans and the demand -- the 1 point I'd make on price is that all the deals that we priced in Q1 were priced before the Iran war. And so since benchmarks have moved up since then, if no change to rates from here, we would expect prices to come down solely because of the changes in benchmarks, the 1.5-year, 2-year [ point on ] treasury. And that's factored into our guidance for Q2 and for the full year as well. William Ryan: Okay. And following up on that, the retained versus sale mix, how should we be thinking about it going forward? I think obviously, you retained a bit more this quarter relative to, I think, what consensus expectations were. Is that something you're going to kind of manage with the earnings outlook that you provided? Andrew LaBenne: Yes. I think when you're looking at retained -- you're just talking about HFI retention versus the extended seasoning portfolio, right? William Ryan: Correct. Andrew LaBenne: Yes, correct. So we will put more into HFI similar to the amounts and probably a little bit increasing to what we did this quarter. Pure marketplace sales, excluding extended seasoning also increased by a small amount from Q4 to Q1. And so as we're growing issuance, we're going to look to increase both of those buckets going forward. Operator: And your next question comes from the line of Vincent Caintic with BTIG. Vincent Caintic: Going back to maybe the questions about guidance. So if I look at guidance for the second quarter and the full year, it kind of implies that earnings power remains relatively flat each quarter for the rest of this year. I was wondering if you could help us out maybe talking about that in more detail, maybe about the components of earnings growth. Like should we -- is that primarily the expense ramp-up that we should be expecting kind of with the rebrand and everything? Or is -- or if you could maybe talk about revenues or so forth as that's rolling through. Andrew LaBenne: Yes. Great. Well, listen, I think, obviously, Q1, we had some really strong results out of the gate. Some of that was aided by very solid consumer credit on the back book as well. As we go into the rest of the year, what we're looking at right now is we had come into the year assuming we were going to have 3 Fed cuts. We now assume we are going to have 0 for the remainder of the year. And obviously, that can change based on world events based on the new Fed chair, a lot of other things, but our assumption going forward is no Fed cuts. And so that's a headwind to revenue that we have to fight through. And we're -- on the flip side, we're seeing very solid unit economics in terms of what we're originating going forward, which is helping to offset that headwind. Having said all that, we're going to continue making investments in all the things we talked about in the prepared remarks. And we're only one quarter in. We still feel pretty good about the range we put out there for EPS for the full year. Vincent Caintic: Okay. Got it. And then switching gears, maybe you could talk about your share repurchase and the right capital level. So it's nice to see the share repurchase to start this quarter. if you could talk about, is this the sort of pace we should be expecting and remind us what your target levels for capital are. Andrew LaBenne: Yes. Great. No, I think -- well, this is actually our second quarter of repurchasing now -- I guess it was our first full quarter of repurchasing, but we've been in it since after Investor Day in November. And so listen, we love picking up shares at an attractive price, and we'll evaluate that going forward with the Board each quarter in terms of how we deploy capital. As far as target capital levels, we haven't put anything out there. But obviously, we've said the amount of share buyback, sort of the amount of capacity we have for the share buyback, which we view as excess capital. So we still have room in the ratios from where they're at today. The other thing I'd note is that there's some new capital rules under discussion and an NPR with the regulators that we'll see if they're passed as is. And if they are, we probably don't assume they really go into effect until 2027. But 2 of those rule changes, one, the risk weighting on consumer assets and 2 the risk weighting on senior securities are both very beneficial to our capital levels going forward. And if passed as proposed, those would free up $100 million plus of rent cap in the future, which is nothing to sneeze at. Operator: And your next question comes from the line of Kyle Joseph with Stephens. Kyle Joseph: Just wanted to follow up on the originations, as we think about some of the new products, I know you mentioned that there's an impact on the fair value mark because of some of the larger loans. But just thinking about any other impacts as the product shift primarily focused on gain on sale margins? Like what are the margins on HELOC. How do those compare to kind of the personal loan side? And how should we think about that impacting the model? Andrew LaBenne: Yes. Yes. So duration is a factor, right? If you're having an upfront mark or upfront discount on a 1-year duration versus a 3-year duration, you're roughly going to be 3x as much in terms of the mark that you're taking on that loan. So duration matters. I'd say also product structure matters as well in terms of the marks, right? If I have a product that has a larger MDR, but a lower coupon such as we could potentially see in home improvement, you're going to see that MDR come through the origination fee. but you're going to see the mark on that coupon -- on that loan with the coupon come through a fair value. So there's different dynamics for the different products and mix will certainly play a factor as well in terms of how those marks evolve in the portfolio over time. Kyle Joseph: Got it. Very helpful. And then just a quick follow-up on the NIM. I know you guys talked about some tailwinds this quarter from the transition to fair value, but kind of hovering back towards that 6%. But do you still get the uplift if we're looking at it on a year-over-year basis, just trying to kind of triangulate where you're telling us NIM should be trending over the next few quarters? Andrew LaBenne: Yes. Well, the first thing top line to take away from the comments is if the Fed is on pause for [indiscernible] rates going forward, we will trend down towards 6% throughout the year based on what we know today. What's happening year-over-year is, first of all, a very positive benefit in terms of deposit funding cost. how we responded to fed cuts and how that's flown through the total interest-bearing deposits and liability line, 31 basis point improvement year-over-year on that. And then the one-timer on the loans HFI at fair value, that 12.62% yield, we will -- that effect will continue, but that portfolio with the legacy portfolio is shrinking. So that benefit will come down over time. That's all factored into the move back down to 6, all else being equal. Operator: And your next question comes from the line of David Scharf with Citizens Capital Markets. David Scharf: Just a couple more to add here. First off, I just want to make sure on the fair value mark, going forward, obviously, you highlighted higher benchmarks is going to be a little bit of a headwind versus the 3 rate cut assumption prior. But on the flip side, is there any -- was there any change to the actual credit related fair value mark? Obviously, the amortized cost portfolio outperformed on provision notably. And just trying to get a sense how we should think about potential positive marks just on credit going forward within the net change in fair value line? Andrew LaBenne: Yes. I'd sum it up as all credit is looking good. The back book which is really the legacy CECL portfolio is where we saw the most outperformance, the newer vintages, which are a little bit of CECL portfolio, but mostly the fair value portfolio. It's still early days on those and credit looks good, but it -- it takes about 6 to 7 months on book before we get more firm read on the vintage in total. But in the quarter, yes, there was no substantial moves. David Scharf: Got it. No, no, that's helpful color. And then just lastly, on marketing and marketing channels, you've talked about expanding investment in more channels. You highlighted it back in the Investor Day. I hate to toss around the buzz phrase of the week of the month of the quarter. But could you talk a little bit about how you're thinking about agenetic either commerce or lending and specifically, whether the company how it's approaching investments with AI-type search versus traditional? And specifically, I was just typing in how do I get a $10,000 personal loan and it just gives you the typical Google paid search listing of whoever shows up, then I said what's the best $10,000 loan for me and it did the typical [ NERDWallet ] shows up. But going forward, when somebody types in, a year from now, what's the best $15,000 personal loan for me into either Chat or Claude, can you talk us through either some of the risks or opportunities you see in terms of these AI engines making more qualitative assessments and not just traditional search assessments? Scott Sanborn: Yes. So it's a great question. And while it is a buzzword, it is also -- that does not take away from the fact that the changes underway are very real, and we are pursuing them, as I mentioned in the prepared remarks, across really all departments and all aspects of the company. Specific to marketing, I would say we feel, on balance, pretty well positioned there because if you think about our value proposition, our big obstacle is inertia, right? It is not the direct people we're competing with, it's all the consumers who aren't taking action. Like why would you leave your money in a money center bank account when we're going to pay you 400x more? And why would you carry a balance on a credit card when we're going to save you 700 basis points, right? So inertia is really the thing we're trying to overcome. So if the agents evolve not only to replace Google search, but potentially to act on behalf of consumers, we think we're a net beneficiary. But you're right, it is as a percentage of web traffic right now, it is quite small. That said, it is high intent. And so as that percentage grows, we need to be there for it. All of the protocols are not established exactly what the -- as I'm sure you know, there are many, many, many firms that are engineering themselves around how to optimize for Google's ever-changing algorithm that same thing will be true for agentic search, and we are going to be going after that the same way we will sort of core organic search and think we're set to benefit. Right now, that means likely increasing the amount of content we produce to get out there. We're already in the site. We're obviously in the places you mentioned. We're in NerdWallet Best Of, I think, on both sides of our balance sheet. So we're already there. But we need to be getting some of our content out on our own to help with that. So we'll be -- we're pushing behind that throughout this year. That's definitely on our plan. Operator: And your next question comes from the line of Giuliano Bologna with Compass Point. [Operator Instructions] Giuliano Anderes-Bologna: Congratulations on the great results. I think I'd be curious about, and I realize you've touched on marketing, but I'm curious when you think about reopening the marketing channels that were previously dormant and seeing the yield kind of improve over time in those channels, I'm curious where you think you are in that kind of evolution of reopening dormant channels? And how much more room there is to continue pushing those channels and to continue expanding into those channels and getting -- improving your marketing efficiency? Scott Sanborn: Yes. Thanks, Giuliano. So I would say we are exactly on track. We've completely rebuilt the team. We have overhauled the technology infrastructure, the data, tracking attribution. And as I think I shared before, kind of marching in order of fastest path to revenue based on how quickly out of the gate will get to success. So for something like direct mail, we're on the X version of the response models creative. That's like a core part of the program. Paid search is, I'd say, up and humming and we're still in the development mode for things like digital and connected TV and testing our way into those. But I'd say that we still feel like there's a decent amount of upside in front of us in all of those channels. What I'd also say is we're feeling good about our product initiatives and product road map. I touched on the call that we're seeing strong conversion rate and great customer feedback and how we're continuing to evolve the product experience to really streamline it, make it much, much easier. The lower friction process is just pulling more people through the door, and the people we want to have, we're continuing to optimize in this environment, especially with some concerns about inflation for having control over the use of proceeds of the loan, not opting for cash, but paying off cards, paying a contractor, paying a dentist, paying a fertility doctor as opposed to just depositing money into the accounts. So our ability to make those experiences faster and easier, I think, is benefiting us as well. Giuliano Anderes-Bologna: That's very helpful. And as a slightly different question, you've obviously pushed some growth in the held-for-sale or [indiscernible] book. Is there any expectation around starting to sell down that book or keeping it flat versus growing going forward? And along the same lines, I'm curious how you think about balance sheet growth in '26. Andrew LaBenne: Yes. So definitely expect to sell out of that portfolio. And in fact, we sold $200 million out in early April to a bank that took advantage of the CECL accounting change that we had been discussing for a while. So that was a good win to -- we thought that would be a lever for banks. That was our first and hopefully more to come down the road, although I'll remind everyone, it's a process to get the banks in. So in summary, yes, Giuliano, we plan to sell out of that portfolio. I think we'll try to keep it roughly around a similar size to make sure we have inventory going forward, but it won't be -- most of the production that we keep on balance sheet will either go into HFI or it will come back on as [ A notes ] from the structured certificate sales. Now in terms of balance sheet growth, I think we're -- Correct, we're tracking right now to where we expected to be. We obviously put some growth goals out for the medium term at Investor Day and I don't see any reason why we're off track from those medium-term goals. Giuliano Anderes-Bologna: That's very helpful. And then maybe just 1 quick final one. I'm curious, obviously, with the transition to fair value. Is there much thought or kind of desire to increase interest rate hedging? And I'm just curious what your objective is there and how you're thinking about that? Andrew LaBenne: Yes. We actually did some moves on hedging this quarter and in fact, we did all -- almost all of them before rates went up with the Iran War. So that was good timing. A few of -- we now have $2 billion out in notional split between caps and swaps. And we also [ dedesignated ] our swaps, so we are under hedge accounting treatment to be mark-to-market as well. So that helps with the quarterly volatility, but really that's not what we're solving for, what we're solving for is to hedge our economic risk on the balance sheet, meaning we're hedging to keep our NIM as constant as we can at different rate environments. Operator: And your next question comes from Crispin Love with Piper Sandler. Crispin Love: Just on credit, net charge-offs improved in the quarter and your credit commentary seems positive and it has been for some time. But can you just discuss some of your expectations here and just recent performance -- recent quarters has been outperforming our expectations. And then I believe you've discussed in the past that net charge-offs may normalize to the 5% or so range. So curious on the current outlook and if that's changed at all in the current environment. Andrew LaBenne: Yes. What I'd say, generally speaking, as you saw it in the back -- the CECL back book, our charge-offs are coming in better than we expected. I note we're seasonally in the best part of the year as well in Q1 and then Q2 with tax season. So that certainly helps the metrics. And as I said in the commentary, as we've been adding to the portfolio, there is some timing on the age of the portfolio that's beneficial. So I do think, over time, we will move back up towards 5%. It will take probably through the rest of this year. And it also just depends on how we -- how and what pace we add to the balance sheet. . Crispin Love: Great. Appreciate that. And then just on AI and AI-powered automation. You were definitely early here, but I'm curious on how you're hiring and hiring needs have changed or shifted due to AI? What skill sets are you looking for most to drive the -- drive the AI at the company forward, types of people, kind of certain skill sets that you're adding or able to pull back from. I'm just curious on your philosophy here and if anything has changed, then just on the broader efficiencies you can gain. Scott Sanborn: Yes. I mean there's -- definitely, there are certain roles that are evolving quite materially. I mean, just giving a simple one because it's easy to wrap your head around would be the old way you did QA in a call center was you sampled a few calls against the checklist. The new way you do QA is AI listens to every single call, scores every single call. You know exactly why everybody called. And so the job becomes much more analytical and also much more incumbent on them not to give individual coaching, but to actually identify real customer bottlenecks and friction points. So we're actually -- there are places where near term, it creates more work in order to create less work down the road. I'd say, within places like engineering and in some of our other key areas like compliance or audit, what we're finding is it isn't so much the new talent. I mean things are changing so quickly. Assuming you're going to hire somebody who is great at applying AI to function X, but they don't know the company, they don't know our systems, they don't know our tools. What we're finding is it's more effective to identify the internal champion and kind of create capacity for them. So backfill them, if you will, so that they've got the ability to focus more on how to apply it in our environment. So we're certainly doing more of that across the company. Operator: There are no further questions at this time. I will now turn the call back to Artem Nalivayko, for a few additional questions. Artem Nalivayko: All right. Thank you, Kevin. So Scott and Drew, we have a few additional questions here that were submitted by retail investors via the Say technologies and email. The first question is on originations. So the question is, when do you plan to get back to your historical peak originations levels? Scott Sanborn: Yes. Well, we expect to get beyond our historical -- I would point you, if you haven't had a chance to see it to our IR website to look at the Investor Day materials, where we lay out a medium-term target of getting to $20 billion in annual originations, together with kind of a waterfall byproduct and initiative of how we expect to get there. So I'd say we're on our way, and we're on our way while really maintaining this credit outperformance, which we think is critical both for us and our balance sheet, but also for the marketplace buyers. Artem Nalivayko: Okay. Great. Second one, you've touched on a little bit already, which is the product road map. Any additional insights beyond home improvement that you wanted to share. Scott Sanborn: Yes. So as I mentioned on the call, we're live in home improvement. We're not done. I mean we'll never be done anywhere. We're always innovating and optimizing and exploring new ideas. But there's still quite a bit to do even on the product front there to get the right set of products to meet the individual needs. So that will really tie up a good part of our energy this year. Beyond that, you can imagine we are -- this line of business will attract a certain type of motivated middle and that's homeowners. Right now slightly less than half of our customers are homeowners coming through home improvement, there will be more given that we'll be increasing the percentage of homeowners having products that speak to homeowners, things like mortgage and HELOC will make sense for us. We plan over time to be a credit-centric bank that offers consumer lending, consumer credit products across the spectrum. That one is the logical next step. We've already started doing some testing there and have been very, very pleased with the consumer response but we're staging our investments. So that will be something we'll likely talk about once we get home improvement really up and humming. Artem Nalivayko: Okay. And the last question, any appetite for acquisitions this year and next...? Scott Sanborn: So we are always looking and connecting with the market on ways to accelerate our road map and better serve the customer that we serve. We've looked at really quite a bit over the last 12 months. We are staying disciplined on price. It's got to -- the economics have to make sense for shareholders and for the company. You've seen the transactions that we have executed Mosaic, [ Cushion AI ], Tally, have all been companies that we talked to prior to -- not all many cases prior to them achieving difficulty in us being able to acquire them, I think, at favorable prices. So I'd say we're always looking. We're open to accelerating the road map, but it's got to make financial sense. Artem Nalivayko: great. Thank you. So with that, we'll wrap up our first quarter 2026 earnings conference call. Thank you for joining us today. And if you have any questions, please e-mail us at ir.lendingclub.com. Operator: This concludes today's call. Thank you for attending. You may now disconnect.
Operator: Ladies and gentlemen, good afternoon. My name is Abby, and I will be your conference operator today. At this time, I would like to welcome everyone to the Cadence First Quarter 2026 Earnings Conference Call. [Operator Instructions] Thank you. And I will now turn the call over to Richard Gu, Vice President of Investor Relations for Cadence. Please go ahead. Richard Gu: Thank you, operator. I'd like to welcome everyone to our first quarter of 2026 earnings conference call. I'm joined today by Anirudh Devgan, President and Chief Executive Officer; and John Wall, Senior Vice President and Chief Financial Officer. The webcast of this call and a copy of today's prepared remarks will be available on our website, cadence.com. Today's discussion will contain forward-looking statements, including our outlook on future business and operating results. Due to risks and uncertainties, actual results may differ materially from those projected or implied in today's discussion. For information on factors that could cause actual results to differ, please refer to our SEC filings, including our most recent Forms 10-K and 10-Q, CFO commentary and today's earnings release. All forward-looking statements during this call are based on estimates and information available to us as of today, and we disclaim any obligation to update them. In addition, all financial measures discussed on this call are non-GAAP, unless otherwise specified. The non-GAAP measures should not be considered in isolation from or as a substitute for GAAP results. Reconciliations of GAAP to non-GAAP measures are included in today's earnings release. [Operator Instructions] Now I'll turn the call over to Anirudh. Anirudh Devgan: Thank you, Richard. Good afternoon, everyone, and thank you for joining us today. I'm pleased to report that Cadence had a strong start to 2026 with accelerating AI demand and disciplined execution, delivering one of the best Q1s in company's history. Our record backlog of $8 billion was ahead of plan, reflecting strong customer confidence in our AI-driven portfolio and its pivotal role in enabling delivery of their increasingly complex chip and system design road maps. Given the accelerating momentum of our business, we are raising our 2026 revenue growth outlook to 17% and expect to achieve the Rule of 60 for the first time. John will provide more details in a moment. Agentic AI era is here, and Cadence is leading the transformation of semiconductor and system design. At CadenceLIVE Silicon Valley 2026, we took a major step towards fully autonomous chip design, pioneering the industry's most advanced and comprehensive agentic full-flow platform. We introduced AgentStack, the head agent framework for our AI Super Agent, which enables knowledge sharing across the design flow and extend autonomous designs from chips to 3D-IC to systems. Building on our revolutionary ChipStack AI Super Agent for RTL design and verification, we introduced two new breakthrough AI Super Agents, ViraStack for analog and custom design and InnoStack for digital implementation and signoff. Together, these solutions span the entire chip design flow, creating a connected continuous learning platform that brings the industry closer to comprehensive automation. As the industry begins transitioning to agentic AI, the need for physically accurate and highly mathematical EDA solutions become even more critical. Our agentic AI solutions are built on decades of domain expertise, proprietary data and tightly integrated physically accurate engines, delivering high fidelity results. We continue to view our platform as a 3-layer cake, with accelerated compute and data as the base layer, principal simulation and optimization as the critical middle layer and agentic AI as the top layer. As I've said before, we believe the greatest value comes from the tight coupling of these layers, reinforcing each other to deliver much better results. As these super agents invoke our simulation, verification and implementation engines at scale, we expect them to materially expand EDA consumption and drive higher usage across our platforms. We announced a strategic collaboration with Google to optimize the ChipStack AI Super Agent with Gemini on Google Cloud. By combining LLM reasoning with GCP scalable compute, this collaboration delivers a cloud-native platform for next-generation chip development. In Q1, we furthered our long standard partnership with MediaTek through a wide-ranging expansion across our new agentic AI offerings and core EDA, 3D-IC and system analysis solutions. Physical AI is emerging as the next big wave of intelligence as AI moves into autonomous systems, autos, drones and robotics, and Cadence is uniquely positioned to lead this transition. The addition of Hexagon's D&E leading structural and multi-body dynamics technologies transforms our system analysis portfolio to a leadership position in physical AI, enabling customers to build and train fundamentally new AI word models by narrowing the critical sim-to-real gap. At CadenceLIVE Silicon Valley, we announced an expanded partnership on AI and robotics with NVIDIA. By combining our agentic AI-driven solutions with NVIDIA's advanced technologies, we are accelerating engineering workflows and boosting productivity across chip design, physical AI systems and hyperscale AI factories. Now let me provide an update on our businesses. Our IP business continued its strong momentum, with 22% year-over-year revenue growth driven by accelerating demand of AI, HPC and automotive workloads. Growing complexity of advanced node designs and chiplet-based architectures is driving strong demands of our differentiated Star IP portfolio across interface, memory and foundation IP. We achieved meaningful competitive wins and customer expansions at marquee accounts, reflecting the breadth of our portfolio and more importantly, the differentiated performance of our solutions. We closed a record deal with a leading global foundry, marking our largest IP engagement with this customer to date and reinforcing our leadership at the most advanced nodes. With strong market tailwinds, focused strategy and expanding customer proliferation, we remain very well positioned for continued growth in IP. Our core EDA business delivered another strong quarter, with revenue growing 18% year-over-year, driven by increasing proliferation of our solutions at market-shaping customers. Our AI-driven solutions, and increasingly, our agentic offerings are becoming an important part of customer renewals and expansions. Demand for our hardware accelerated in Q1, resulting in our best quarter ever, led by AI HPC customers and increasing demand in automotive and robotics. Palladium Z3 continues to be the gold standard for emulation and drove multiple competitive displacement. Momentum on verification software grew, particularly in Xcelium and Verisium SimAI, And ChipStack generated tremendous customer interest, with a large number of evaluations underway. Led by AI-driven Cadence Cerebrus solution, our digital platform continues to gain share, especially at the most advanced nodes. A global semiconductor design leader significantly increased their Innovus usage and adopted our digital signoff solutions, and a marquee AI infrastructure company expanded their usage of our signoff solutions in their leading-edge ASIC designs. In custom and analog, our AI-driven Virtuoso Studio continued its strong momentum in design migration and layer automation as it gets increasingly deployed by analog and mixed signal leaders seeking greater productivity. Our System Design and Analysis business delivered 18% year-over-year revenue growth as AI-driven multiphysics simulation and 3D-IC become essential to addressing growing system challenges. We have strong momentum in 3D-IC, where our unified multi-die integrated design to analysis flow is helping customers address their rising chiplet and advanced packaging complexities. We also saw strong momentum in Sigrity and Clarity with multiple memory and advanced IC packaging customers expanding their deployments as they move to higher-speed interfaces. Customer adoption is increasing as they look to address signal integrity, power integrity and thermal challenges earlier in the design flow through deployment of a full Cadence signoff flow. In closing, I'm pleased with our strong execution and the broad-based momentum of our business. As the agentic AI era unfolds, Cadence is leading the charge to realizing much higher design productivity, increasing design complexity, and the growing need for productivity is creating a compelling long-term opportunity for Cadence. With our differentiated solutions and expanding agentic AI portfolio, I believe we are very well positioned to lead this transition and continue delivering meaningful innovation and value to our customers. Now I will turn it over to John to provide more details on the Q1 results and our updated 2026 outlook. John Wall: Thanks, Anirudh, and good afternoon, everyone. I'm pleased to report that Cadence delivered excellent results for the first quarter of 2026, with accelerating momentum and broad-based strength across all our businesses. Robust design activity, coupled with our solid execution, drove 19% year-over-year revenue growth and 45% operating margin for Q1. First quarter bookings were ahead of expectations, resulting in a record backlog of $8 billion. Here are some of the financial highlights from the first quarter, starting with the P&L. Total revenue was $1.474 billion. GAAP operating margin was 29.3%. Non-GAAP operating margin was 44.7%. GAAP EPS was $1.23, and non-GAAP EPS was $1.96. Next, turning to the balance sheet and cash flow. Our cash balance was $1.407 billion, while the principal value of debt outstanding was $2.925 billion. Operating cash flow was $356 million. DSOs were 67 days, and we used $200 million to repurchase Cadence shares. Before I provide our updated outlook, I'd like to highlight that it contains the usual assumption that export control regulations that exist today remain substantially similar for the remainder of the year. For our updated outlook for 2026, we expect revenue in the range of $6.125 billion to $6.225 billion; GAAP operating margin in the range of 27.5% to 28.5%; non-GAAP operating margin in the range of 43.5% to 44.5%; GAAP EPS and in the range of $4.39 to $4.49; non-GAAP EPS in the range of $7.85 to $7.95; operating cash flow in the range of $1.875 billion to $1.975 billion, and we expect to use approximately 50% of our free cash flow to repurchase Cadence shares in 2026. With that in mind, for Q2, we expect revenue in the range of $1.555 billion to $1.595 billion; GAAP operating margin in the range of 28.5% to 29.5%; non-GAAP operating margin in the range of 44.5% to 45.5%; GAAP EPS in the range of $1.07 to $1.13; and non-GAAP EPS in the range of $2.02 to $2.08. And as usual, we published a CFO commentary document on our Investor Relations website, which includes our outlook for additional items as well as further analysis and GAAP to non-GAAP reconciliations. In conclusion, Cadence is off to a strong start for the year. We are raising our 2026 revenue outlook to approximately 17% year-over-year growth. As always, I'd like to thank our customers, partners and our employees for their continued support. And with that, operator, we will now take questions. Operator: [Operator Instructions] And our first question comes from the line of Charles Shi with Needham. Yu Shi: Anirudh, I think I have a pretty high-level question, but this is probably top of the mind for a lot of investors. We obviously learned agentic AI is probably good for EDA, good for license consumption, et cetera. But we're still hearing some concerns around AI's ability to actually write the software, and there are some doubts around whether AI can actually write better EDA base tools like base tools, I mean, Virtuoso, Innovus, those kind of tools. So -- and obviously, there are always many EDA start-ups happening at the same time. And so the question is, is AI's ability to write software worries you about the defensibility of the EDA base tool business? Obviously, once again, we understand agentic AI is good for consumption of the base tool business, but I want to get your thoughts. Anirudh Devgan: Yes. Charles, thanks for the question. So I mean, there are multiple parts to this. Of course, I'm super excited about agentic AI applied to chip design and EDA. And your question is more specific to the base tool and whether AI can write those base tools. So first of all, I'm very confident in our position in the base tool and our competitive advantage, okay? And just to remind everyone, I mean, we have about 15,000 people now in Cadence and about 10,000 are in R&D. We have more than -- half of them have advanced degrees. I think more than 1,000 of them have PhDs from the top universities. So we will, anyway, deploy AI internally like we are to write our software better. But I'm not worried that some other party will be able to write any better base tools. So -- and our competitor of the base tool is anyway best-in-class, and I don't see any reason that will change going forward, okay? Now what I'm super excited that we launched in CadenceLIVE is the agentic part and the interplay of the agentic tools with the base tools, the AI orchestration combined with physical accurate base tool. And that creates new opportunities for us, both in terms of TAM expansion. Because what agentic AI allows us is to sell products in spaces we didn't have products before, like RTL generation, verification plan generation. And those products, I think will be consumed more on a subscription plus consumption model. So this is an entirely new category for Cadence. And then in turn, like you said, agentic AI will drive more of our base tools. So I feel pretty good about this kind of 3-layer framework we have talked about and confident going forward. Operator: And our next question comes from the line of Jason Celino with KeyBanc Capital Markets. Jason Celino: Maybe just a clarifying question. So I noticed that the operating margin guide is coming down by a little bit. Curious if -- like what are the main drivers of that, John? I know we're layering in kind of the Hexagon acquisition, but on like an absolute basis, it's relatively small layering in that OpEx. So maybe you can just help us understand the guide on the margin? John Wall: Yes. Sure, Jason. Thanks for the question. What you're seeing there is primarily the impact of including the Hexagon design and engineering business in the current outlook. The strategic opportunity there is very large, but the 2026 P&L reflects the timing of integration that we announced in the press release when we closed the deal, that we expect $160 million of revenue this year. That's in the guide now. We expect it to be dilutive to the tune of about $0.28. The margin impact on the $160 million is kind of in the 5% to 10% range. But the dilution comes from -- because we paid 30% of the acquisition price in shares and 70% in cash, so the interest component on the -- or the lost interest income on the cash causes a lot of the dilution impact in the short term. We'd expect it to be accretive in 2027. The -- yes, so I think the way to think about it is financially, 2026 is an integration year. And the guide includes the acquired cost base, the financing impact, the acquisition-related integration costs and kind of near-term dilution. And that's why revenue moves higher, while EPS and operating margin are lower than the February guide. So yes, $160 million. And I think in Q1, the impact was slightly less on the EPS that we had about $20 million of revenue from Q1 from Hexagon. So only about $0.01 kind of dilution impact. So EPS would have been like $0.01 higher if we didn't have Hexagon. Operator: And our next question comes from the line of Vivek Arya with Bank of America Securities. Vivek Arya: Anirudh, in the last year, all we have been hearing nonstop are different news about chip shortages and growing kind of price of chips and just the pricing power that many of your customers have. And my question is, what affect do shortages and the fact your customers have more pricing power, what effect does that have on their engagement with Cadence. Does it restrict chip starts? Does it shift them towards higher ASP products? Just what impact do semiconductor shortages have on your growth and engagement trajectory? What has changed? And what are you observing in your customer behavior? Anirudh Devgan: Yes. Thanks, Vivek, for the question. So I would say a few things. So first of all, I mean the environment is pretty healthy, both for the system companies and semi companies. So that's always good. Like you know, I mean, some of the hyperscalers and AI semi companies who are already doing well last year, but now the memory companies are doing well, even analog companies are doing well. So we, of course, want to see our customers doing well, and that creates a positive environment for engaging, especially with these new solutions we have. So that's actually a pretty marked improvement over the last 3 to 6 months. So that's number one. Number two, the shortages it doesn't directly -- I mean, the customer is still committed to long-term R&D road maps. And sometimes, they may like do -- like I've seen in a few cases, the customers, for example, may do multiple foundries or nodes to make sure there is capacity at a particular node or foundry. So that would directly lead to more design activity for us. So in general, if the customer is healthy because the revenue is going up, they will do not only more in the current designs to accelerate them, but also may start new designs. I think that's the second thing, I would say. And third thing, which is more exciting for us is, as we have these agentic solutions, it can give more productivity for our customers, and we can deliver more value ourselves. And the more value we deliver, the more opportunity we have to capture part of that value. And the customers are very open to those discussions as there is more automation. So we are actually -- like I mentioned, there's a lot of engagement with ChipStack and also the new AgentStack, InnoStack, ViraStack. There is no pushback at all. If we can deliver productivity, the customer is more than willing to engage. So that I would say, Vivek are the -- at least the 3 broad areas I see in the current environment. Operator: And our next question comes from the line of Jim Schneider with Goldman Sachs. James Schneider: I was wondering if you could maybe unpack your commentary on the agentic solutions, specifically around your indication they would drive increased consumption for base tools. Can you maybe talk a little bit about the pricing for those tools, how the agentic solutions are being priced specifically? And then on net, how -- if you could frame for us maybe how you might be able to capture more revenue value overall on net between agentic and conventional licenses? Anirudh Devgan: Yes. Thanks for the question. So I think the opportunity is significant, I believe, and especially with agentic because what -- and this happened over the last, let's say, 6 to 12 months, in my opinion, and more so in 6 months is -- not only the agentic tools have evolved, but agentic tools are able -- we can embed skills in them so they can do a lot more automation. For example, we launched ViraStack, which is analog automation. Analog has been a long problem to automate, right? It's very difficult to automate. But now with these agentic flows and skills, we can automate that. So what does that mean in terms of pricing or how these things are consumed? So first of all, like I said, this kind of automation was not possible before. So all this work used to be done by the customers themselves, right? And in that case also, I talked to one big customer. Like, for example, they said for analog or even for digital, every new design, they require 2x more engineers. And anyway, it's not -- it's like unrealizable headcount growth because they can't hire 2x more engineers every time. So the way we plan to monetize and the early signs are positive is that, first of all, we'll sell new tools that we never sold, which is more like this was manually done by customers like doing analog design or doing RTL. So that will be priced as a subscription plus consumption model, very similar to other kind of leading AI tools. So that's a completely new category for Cadence. And that will kind of bend the headcount curve for our customers, but the expected headcount curve was never realizable anyway. So this is the history of automation, as you know, in EDA. We always need to do that. But this time, we can do that with the agentic kind of AI flow. And then once the agent runs, like when a user designs a chip and this is pretty common, right? Like let's say that chip has 100 blocks, just to keep it simple. And there are 100 engineers, 1 engineer is running 1 block. So 1 engineer will run like 1 or 2 experiments, he or she, to see which settings or which design is better. But when the agent runs those blocks, they may try 10 or 100 variations of those things. And anyway, AI does a lot more exploration than a human would do. So not only agent can give more productivity, it by nature runs more of the base tools. So that's why if you look at -- our usage of base tool is going up pretty significantly in this kind of environment. So this is the 2 ways. And in those environments is a traditional business model, but -- in the base tools, but there will be more demand for it. And then the new business model, which is more automating which was manual with agentic flows. John Wall: Yes. And I would just add, Jim, that what we saw from Q1 is -- I mean, the overall pricing environment has improved. Pricing obviously remains value-based with us. We provide tremendous value to our customers, especially with our agentic flow, and we stand to benefit from our customers' success in that area. Also, any shift that you see from customers' labor spend to automation, that's likely to be irreversible and likely to accelerate over time. Operator: And our next question comes from the line of Siti Panigrahi with Mizuho. Sitikantha Panigrahi: Great. I want to switch to the IP business. Anirudh, you talked about IP entering now third year of strong growth. Could you give an update like what you saw in Q1? And are the HBM, LPDDR6 and all that remaining still the key drivers? Or -- and the new foundry like Rapidus, Intel Foundry, are they contributing meaningfully to the IP demand yet? And John, just to clarify also on your EPS guidance, you said $0.28 dilution, but you lowered only $0.20. Just want to clarify that your organic basis, you raised by $0.08 EPS. John Wall: I'll take the last part first. Yes, yes, we did. We raised by $0.08. Anirudh Devgan: And Siti it's a great start to the year, okay? And not just in IP across the board. And I was looking at with our team. I think this is one of the strongest raises we have had in Q1. We only gave you guidance in February. So 2 months later, I think this is one of the strongest raises we have had. Now all the businesses are doing well and especially IP is off to a great start, okay? And I think it will do well going forward from what I think I see. And there are at least 3 big reasons in my mind for IP growth. And like I said, it's the third year now. So we don't like to talk about things too early. But after 3 years of strong growth, I think that is a good trend. So the first thing is our IP quality and performance is just better. We have a new team, just the performance just -- because these things are standard-based IPs, right, like DDR or PCIe. So the spec is same. But if our power area is better than the competitor or what the customer can do, then they will buy our IP. So the most promising thing to me is because of the strength of our R&D team, our PPA is better, and that is leading to a lot of competitive wins at pretty significant major customers. And I highlighted some of them in CadenceLIVE. So these are like really big kind of marquee names. So that gives me strength that the team is operating well. So that's number one. Number two, our portfolio is expanding, like we have highlighted with like HBM. And some of it is organic, some of it is acquired, like HBM, we acquired from Rambus and then we improved it. But UCIe, which is a critical chip-to-chip technology was all developed organically, okay? So the second reason is that our portfolio is expanding. The third reason is these new foundries, okay? And it's very encouraging to see. Of course, we want to make sure we are best-in-class in TSMC, which is the leading foundry. But now there are at least 3 other major foundries with, as you know, Samsung, Intel and Rapidus at advanced nodes and then Global and others at mainstream nodes. So the amount of design activity with AI and number of increasing foundries requires more IP. So that's why I'm actually pleased to note today like in the prepared remarks that we had a pretty significant IP deal, one of the largest ones at a leading global foundry, okay? And just to clarify, that is not Intel, okay? We are actually pleased with our discussions with Intel, with Lip-Bu and team on 18A and especially on 14A. I think Intel realizes they need to invest more in 14A and this time, be more ready because the availability of IP and EDA solutions as 14A is critical as they go talk to their customers. So we are making very good progress with Intel, and we'll have -- soon, we'll have more to say on our engagement with Intel. But I'm also pleased with this engagement with the other global foundry. So overall, IP growth seems robust and I'm very pleased where we are. And we're already always very strong in EDA. But historically, last few years, we have not done as well in IP. But right now, I think we are very well positioned and also well positioned in SDA. Operator: Our next question comes from the line of Joe Quatrochi with Wells Fargo. Joseph Quatrochi: Maybe just to kind of follow up on the discussion earlier on EDA. I mean, I guess when you take a step back and you think about EDA's share of R&D expense and clearly, we're seeing an acceleration of R&D expense across a number of different companies. How should we think about EDA's contribution to that or percent of that? And where could that go given the value maybe you're providing from AI? Because we're also seeing, right, memory costs are increasing, things like that, that also need to flow through that R&D line. Anirudh Devgan: Yes, good question. And we have to observe it closely, right? You know us, we'd rather like print things than kind of predict what will happen because it's better to show than to. But as you know, historically, we have said EDA used to be 7% of R&D and now it's more like 11% of R&D. So it has gone up and R&D spend itself will go up significantly. But I think there is a real potential, especially with agentic AI for that 11% to go up. And all the big CEOs I talked to, they are not only willing, they want to see that happen. They want to invest in more automation and compute to make it happen. So I'm pretty sure right now, I think it will go up. Now how much it will go up, we will see, right? But I think there is a meaningful opportunity for automation to be a higher percentage of R&D plus R&D itself to go up. Operator: Our next question comes from the line of Ruben Roy with Stifel. Ruben Roy: John, I want to go back to the operating margin discussion. It's great to see that you guys are targeting Rule of 60 by the end of the year here. Just thinking about that, though, it's driven on revenue acceleration. Obviously, we've got the Hexagon integration costs here. But how are you thinking about the operating model relative to operating margin as you get over $6 billion in revenue? Does the operating model look a lot different than it did at $5.3 billion? Is this sort of 43% to 45% range, how we should be thinking about the operating margins? Or -- and I ask that because, obviously, you're investing in agentic AI and other sort of new product areas. Just wondering if you can give us a little bit of an idea of how you're thinking about the operating margin structure at this revenue run rate longer term as you integrate Hexagon. John Wall: Yes. Sure, Ruben. Thanks for the question. Yes, I think when we look at our like organic incremental margin, it's closer to 60% these days than 50%. And as we get our arms around these acquisitions, it typically takes us 12 to 18 months to improve the profitability up to kind of something close to our expectations that Cadence that -- and I would liken the profile to the way BETA. So in '24 and '25, you kind of had an operating margin profile where we had the dilutive impact of the BETA acquisition in '24, but then margins improved dramatically in '25 as we got the synergies and we got the benefits of making that more profitable. I would expect a similar pattern for '26 and '27 when it comes to Hexagon. We have a slight headwind in the short term, but there's plenty of opportunities to improve the profitability there. And also with the benefits that we're seeing in terms of customer engagement accelerating on the agentic AI front, I think there's even more opportunities to stretch that incremental operating margin going forward. Operator: Our next question comes from the line of Harlan Sur with JPMorgan. Harlan Sur: If I take your 2Q guidance and look at your implied second half guidance, the average quarterly revenue run rate in the second half is actually slightly below the 2Q level. Is there some lumpiness in the Hexagon business in the second half, maybe moving customers to multiyear license agreements? Or is it due to some lumpiness in the core business, maybe a more first half weighted hardware or IP shipment profile? John Wall: Yes. Thanks for the question, Harlan. Yes, sure. Look, the first half is very strong. And the second half, I'd describe as containing appropriate prudence. The -- your comment on Hexagon's D&E business is correct. They are more kind of first half weighted in terms of their profile. When I looked at last year's revenue for Hexagon, I think Q3 and Q4 were their worst 2 quarters of the year. They tend to have a lot of early year kind of dated contracts. But overall, I think the second half -- I mean, it doesn't -- Hexagon doesn't impact the first half, second half that much. It's really -- I think we had such -- as Anirudh said, Q1 guide represents one of the highest raises we've had at this time of the year. And we normally like to wait until we have 2 quarters under our belt to raise the guide. We couldn't help but raise the guide given the strength of Q1 bookings and the strength we saw across the board. So we just wanted to wait until July to update the second half. Operator: Our next question comes from the line of Lee Simpson with Morgan Stanley. Lee Simpson: I just wanted to ask about physical AI. I mean you've made some pretty good acquisitions. You now announced collaborations, especially with NVIDIA. So I'm just trying to get a sense for the momentum here and what really is still the early years in this breakout. And I think, in particular, the take-up of your emulation tools, especially as it relates to closing the sim-to-real gap in robotics and probably even self-driving chips as well, whether or not that's going to really lead to an outsized value capture for Cadence? And when do we actually see this in the numbers as well? Anirudh Devgan: Yes. Thanks for the question, Lee. So I mean, like I talked about it forever now that we look at this thing as a 3-layer cake, right? And there are multiple slices of the cake and the first slice was data center AI or infrastructure AI. And the second big slice is physical AI. And of course, I've said this for 5 years now, where I believe physical AI will be bigger than data center AI by a long chart because you're talking about like trillions of dollars of product opportunity. And it will reconfirm the data center layer -- data center slice because to deploy, for example, an AI model in the car, you need to train it on the data center anyway. So I think it will even help the data center slice. Now for our portion, yes, we made this acquisition we are super excited about, and we have this training flow for word models and also more complete simulation environment. So what is exciting about Hexagon is with a combination of our previous technologies like Millennium and Cascade and BETA, we do have finally a complete solution for physical AI in the middle layer kind of principal simulation and optimization layer. And then that can be used to do these word models, which will be different in the top layer. But the other thing I want to emphasize, apart from the SD&A and the AI part, that physical AI itself will drive a lot of silicon design. So it is also good for EDA and IP. And this is -- you're starting to see that. Of course, companies like Tesla mentioning that they don't have enough silicon because of physical AI. So physical AI not only is good for SD and AI, it is also really good for silicon. And it also is in the sweet spot of Cadence because Cadence always had both analog and digital solutions, and that's why we're always good with all the major semiconductor companies for automotive and now with all the system and OEM companies for automotive. And as that translates to drone and robots, it will also turbocharge the silicon business. That's why I have been always been excited about physical AI, not just for the AI and SDA part, but also for EDA and IP. Operator: Our next question comes from the line of Gianmarco Conti with Deutsche Bank. Gianmarco Conti: Perhaps on hardware, another strong quarter, of course. But as we think about the next refresh cycle for Palladium and Protium, historically, you've roughly been on a 2-year cadence. And should we expect Z4, X4 within the next 12 to 18 months? Or is the bar to upgrade higher now given how recently customers absorbed the first generation? And perhaps related, are you seeing any of your own agentic AI tooling materially compress the internal hardware development time lines to the same extent that customers are reporting that same 10x productivity on RTL? Anirudh Devgan: Yes, absolutely. Great question. So first of all, like I said, we have most of our headcount is engineering, right, whether it's R&D or customer support. So we always want to use our own products in both our hardware groups, which is a significant design team. We do both software, hardware and all the system design in Palladium and Protium. And also, just to remind you in our IP team. It's a great -- we are working very well together, our IP team and EDA team because IP, we have so much demand. And instead of, again, increasing headcount, we are always sensitive about how much headcount. We'll increase, and we are increasing headcount in all areas, including IP, but we can make them a lot more productive with agentic AI. Now on the hardware part, Yes. I'm very pleased. I mean it's a remarkable start to the year. Our competitive position is amazing. We are the only company that does its own chip, as you know. We have at least a 10-year lead in that in Palladium. And then Protium also is doing now in which we use the FPGA solution. Now just to be clear, we always design next-generation systems. And because we control the whole stack, including the system design and silicon design, one thing to remember is we will do it much faster than what the FPGA cadence will be. FPGA companies will also do next-generation FPGA designs. But because we are our own chip, we do our own design, it will be much faster than FPGA. So what that means is the lead of palladium over FPGA systems will only continue to increase as we introduce new products, okay? But I'm not going to get into like when we're going to introduce new products because the current products are doing amazingly well. Of course, we are designing Z4 and Z5. But what you have to remember is the current Z3 system has the capability to design 1 trillion transistor systems, okay? And right now, the biggest systems in the world are 100 billion to 200 billion transistor. So we have a lot of leeway. The industry is supposed to reach 1 trillion transistor by 2030. One thing I'll assure you is we'll have a Z4 system before 2030. So there is no issue of whether Z3 can handle the capacity and requirements. So we're just happy to work with our customers. At the same time, we want to assure our investors and customers, we have a very, very good road map on hardware systems. Operator: Our next question comes from the line of Jay Vleeschhouwer with Griffin Securities. Jay Vleeschhouwer: Anirudh, now that you've completed Hexagon MSC acquisition, it would appear that you are the fourth largest non-EDA simulation company, let's call it, industrial simulation with multiphysics. Your share is perhaps 1/10 of that total market, again, aside from EDA simulation. So the question is, now that you've assembled all these pieces, invested over $5 billion over the last 5 or 6 years, can you speak in some detail about what your principal technical and/or go-to-market objectives or executables are going to be for the next year or so? Synopsys talked about what they're doing with Ansys, perhaps you could do the same for your pieces. It also seems you're becoming a little bit more vertically integrated in go-to-market with the acquisition of a long-time channel partner. So maybe talk about some of those critical elements here to grow your revenues and share in that business. Anirudh Devgan: Yes, Jay, that's a lot there, right? There's a lot there. So let me try to unpack some of it. I'm sure we can talk more if I don't get to all the pieces there. Well, first of all, we are satisfied with the scope of our SDA business now after this acquisition. So I mean, this is rough numbers. So I think it will be roughly $1 billion of run rate. And what is more exciting to me is that it is focused in the 2 important areas of SDA. I'm a fan of SDA for a while now, I don't know, maybe 8 years now. But not all SDA is created equal, okay? To me, we want to do the part of SDA that is either growing well or is closely related to EDA. So the part of SDA that is closely related to EDA is, of course, 3D-IC, okay? So we have an inevitable position in 3D-IC with Allegro being the leading packaging platform, and then we completed that with Clarity and Sigrity and Celsius, so all the thermal electromagnetics. So and Integrity. So I'm pretty happy with the 3D-IC portion, which is like the closest to chip design, the part of SDA that is closest to chip design and the part that is growing the most because of AI. Now the other part now with Hexagon is all this physical AI and for design of cars and robots. So that with this acquisition is complete, and we can do a much better integration of that part of SDA. And there are multiple things happening there, okay? There are at least 2, 3 key things. So first thing is we will integrate the whole solution. I know you asked me this before, when will you integrate? So I think now that we have all the pieces of critical mass, this is the right time to integrate because we have CFD now, we have structural, we have multibody dynamics, we have pre and post, okay? So we have a lot of effort to make a full flow solution, integrate them. And I kind of hinted at that at CadenceLIVE. The other thing, the way to integrate these solutions, which is true for EDA, but will be true in this area is agentic flow. So you will see from us an agentic flow to do system design. And that part of the market has not seen that much -- it's even worse automation than chip design that had a lot of automation. But there will be agentic flow, which will integrate all these things in a better way. The second thing we will do is that there is a lot of room for improvement of these solvers especially in our history of improving the base solvers, adding GPU acceleration, adding phys AI or AI surrogate models. So for example, there's a potential for at least the order of magnitude improvement of performance of these new solvers. So that's the second thing we'll do in terms of R&D. And third thing, what I'm also pleased with Hexagon is we did get like a good go-to-market team. That's one area we have not been as strong because we were -- most of the others was mostly organic. And we did move some of our people into go-to-market. But with Hexagon D&E business, we get a much stronger go-to-market team. And then as we mentioned, we also acquired some resellers to strengthen go-to-market, okay? At this point, I'm very confident of our R&D solution, and it will get improved by agentic solutions. It will get improved by speeding up the solvers, but we also need to invest in go-to-market and Hexagon gives us a good start. So you will see that, too. So these are the 3 kind of focus areas of improvement of SDA. Operator: Our next question comes from the line of Kelsey Chia with Citigroup. Wei Chia: Anirudh, you mentioned that the AgentStack helps address talent gaps for chip designers. It sounds like the AgentStack adoption is just accelerating from here. Based on your conversation, is that the case? Or are you seeing cases where customers prefer to build or use their own agentic stack versus adopting Cadence's? And so is Cadence able to sort of charge for AgentStack or the increased base licenses as an incremental add-on within an existing fee or contract? Or is that monetization tied to renewals? Anirudh Devgan: Yes. Thank you. There's a lot of good questions there, okay? So make sure I -- and I'll start and John can add to that. Now first of all, I think just to be clear, the customers will always write their own agents as well, if I understand the first part of your question. Even in our pre-agentic flow, we would have given a lot of flexibilities to our customers. We had a Tcl/Tk or a Python interface to our tools, and they would always have their own flows. I mean this is natural for big customers. I mean these are who's who of tech companies. So they always want to have some differentiation from one flow to the other. So -- and that will happen in the agent word itself. So I think most of our customers are writing some of their own agents. But the key thing is that the critical agents, okay, like these big super agents we talked about, like RTL design and verification, analog design and physical design, these are like super categories. And also the value of the agentic flow is not just in the agent itself, it's always the coupling of the agent with the base tools because we operate the agent at a much lower level of interaction, this API calls, which is not possible for customers to do. So what has happened as an example, as we showed InnoStack or ViraStack and ChipStack to our customers, they realize, oh, there's no point writing these kind of agents, okay? So they would rather use the super agents we have because not only we are good in agentic flow, we are good in the coupling to the base tools. Now they will still write some agents to customize things which are specific to them, and we naturally welcome that. And then the AgentStack allows the environment to -- for the customer to write its own agent, but also the customer to write its own skills. We want the customers to write their own skills in InnoStack, which may be specific for a part of design. So this has always been our strategy to be more open to customer kind of customizing their own environment, okay? And I think the second question is on renewals versus new -- I mean it's a combination of that always, John, maybe you want to comment on that. John Wall: Yes. Yes. Thanks, Anirudh, and thanks, Kelsey. Our subscription model remains the anchor arrangement with our customers. The add-on monetization then comes incrementally through agentic workflow products that are kind of usage-based or consumption-based for capacity and through our token and card models. What's different about agentic AI is that it doesn't replace the core EDA engines. It calls them more often and it calls them intelligently. So the monetization opportunity is twofold really. So you've got like the new agentic workflow products and then you've got the increased usage of the underlying base tools through more exploration, more verification, more optimization and more compute. Now that said, we're obviously being disciplined in our 2026 outlook. We're not assuming a sudden step function in AI monetization in the guide, but we do believe agentic AI expands the long-term growth opportunity for Cadence. Operator: Our next question comes from the line of Andrew DeGasperi with BNP Paribas. Andrew DeGasperi: I just had a 2-part question. One is marquee -- I think you called out in the prepared remarks that a marquee AI infrastructure company expanded the use of signoff solutions. I just want to clarify, was this a cloud provider? And then second, at CadenceLIVE, you discussed about physical AI in terms of the time line of adoption being around 2 years. But yet you called out that automotive and robotics companies have adopted hardware. I was just wondering, does this mean that, that physical AI time line has been brought forward? Or is this just a natural evolution of how these new markets will adopt EDA? And if so, when do we see that kind of software benefiting from that? Anirudh Devgan: Yes. I think with physical AI and also agentic AI in general, I mean, yes, I've said for a long time, 2 contract cycles, and that is generally true. Though I think because of this new category of TAM expansion, which is more labor productivity related along with the base tools, I think there is a potential that the monetization of agentic AI could happen sooner than 2 contract cycles, okay? I don't want to predict too much. And like John said, we are not putting it in our guide. But I think definitely, the more opportunities there because of all the shortages, because all the build-outs, because of physical AI. So we are -- and like the previous question, we always can add in the renewal, but we always have capability to do add-ons, which we have already seen, okay? So that's what I would like to say. On the signoff, we are very happy. Innovus has been the leading solution for implementation, especially at TSMC and now increasingly with Samsung, Intel and Rapidus. But signoff is very -- is coming on strong at TSMC and other customers. And we are working with all the leading AI players. And I think the one we mentioned specifically is a major kind of AI infrastructure/ASIC company, and we are glad to see that adoption. Operator: Our next question comes from the line of Gary Mobley with Loop Capital. Gary Mobley: John, I think, if I'm not mistaken, 2026 is going to be a low renewal period. By that, I mean, existing long-time customers scheduled to renew this year, kind of like 2022 was. And so was the strong bookings in the first quarter a reflection of some add-on sales as salespeople are trying to meet their quota? And do we expect that type of behavior to last through the balance of the year? John Wall: Thanks for the question, Gary. Yes, I mean, 2026 is kind of lighter than 2025 for actual renewals on an annual value basis. But we often see that that's -- that those are some of the strongest growth years for us because of all the add-on activity. Yes, we were really, really pleased with the Q1 booking strength, and it was right across the board across all lines of business. So yes, so Gary, I mean, it bodes well for the year. But look, it's just one quarter. As you know, we like to wait for a couple of quarters before taking up the guide in the second half. And although the last few years, Q1 has been strong, and this one has been very, very strong. So we had to take up the guide at the end of Q1. Operator: Our next question comes from the line of Clarke Jeffries with Piper Sandler. Clarke Jeffries: I just wanted to ask around the largest IP arrangement today with a global foundry. Was it really the extension of that agreement to additional nodes, the scope of more content or the addition of agent ready AI flows that made the biggest difference to get that to the largest arrangement you've ever seen? Anirudh Devgan: Yes, that's a particularly IP contract. So that one particular is focused on IP. And the 2 things that drove it is that it is a new node, new advanced node, more specifically 2-nanometer and more content in IP because we have a much broader portfolio. Operator: Our next question comes from the line of Joshua Tilton with Wolfe Research. Joshua Tilton: Maybe just a 2-parter, a little unrelated, so I apologize. But anything to call out on what drove such a strong quarter for China? And then maybe just a second part to that. Can you help us just bridge what is driving such a great organic raise for the full year relative to the organic beat in the quarter? I know you mentioned the record backlog, but is there anything one level deeper you can give us, especially in the context of -- it sounds like you're trying to tell us that even though you raised by a pretty solid amount that there still seems to be some conservatism in the guide for the second half. So any help there would be greatly appreciated. John Wall: Sure, Josh. Thanks for the question. I'll take this one. So Josh, yes, China, it was 13% of Q1 revenue, and that was just kind of broadly consistent with what we were expecting. Yes, we still expect China to be about 13% for the year. I think it can be lumpy from quarter-to-quarter. So I think the year-over-year comps probably look generous because Q1 in 2025 wasn't that good in China. So the -- it being 13% revenue in Q1, probably the growth rate looks strong. But it's just -- it's a really important region for us that -- yes, and we're very, very pleased with the 13%. In relation to the guide, yes, I mean, we're -- look the, Q1 was a very strong start to the year. We exceeded all our metrics. And I guess when we back out the Hexagon, the $160 million of Hexagon and the $0.28, we're basically raising the year by $65 million at the midpoint for revenue and about $0.08 for EPS. Also on the cash flow front, that operating cash, the way we paid for Hexagon, the reported guide includes approximately $180 million of pre-close Hexagon tax liabilities that are economically part of the acquisition consideration, but are classified in operating cash flow. I think just the geography and the accounting forces us to put it through operating cash. If you adjust our operating cash guide, for that underlying -- for that pre-close Hexagon tax liability that we're paying, the operating cash flow outlook is approximately $2.1 billion, which would be about $100 million above our original guide. So there's a lot of strength we saw across the businesses. So the $65 million is what we took revenue up by, but we're seeing $100 million extra in cash that there's potentially strength in the second half, but we thought it was too early to raise the second half right now. Operator: And our final question comes from the line of Blair Abernethy with Rosenblatt Securities. Blair Abernethy: Just want to ask about the Millennium platform. How is the adoption going there, Anirudh? And just in general, the health in some of your non-semi verticals like automotive, aerospace, industrial equipment and so forth. Just any commentary around that would be great. Anirudh Devgan: Yes, absolutely. So yes, Millennium is doing great. I don't know if you saw Jensen was there at CadenceLIVE and did a nice autograph on Millennium box. So we are pleased with the partnership with NVIDIA there. And I mean, there are 2 ways to -- 2 kind of high-level applications. We are working on this kind of CFD or SDA application for a while, and that's going well, especially in auto and also in drones, okay? So there's a lot of -- you know what Cascade acquisition we made is very good at very high accuracy CFD, which also applies to aerospace and defense. So there is autos, but also A&D is Millennium uptick, and we have several customers. Some we can talk about, some we can't, okay? So that's in the traditional Millennium. And the other part, this year, like I mentioned in CadenceLIVE, we have all kinds of EDA application now on Millennium, which is super exciting. And the most exciting part of EDA application in Millennium is 3D-IC signoff because right now, the biggest issue is the complexity of these 3D-IC systems, not just to design them, which we can do in Integrity and Innovus, but to sign them off. So there's this huge system that need to do thermal simulation, electromagnetic simulation, power delivery simulation. And they are more naturally like a matrix without getting too technical, they are closer to a matrix multiply numerical solver, which is great for GPU acceleration. So right now, I see Millennium as applying to more traditional areas like autos and then new areas like aerospace and drones and then applying to 3D-IC signoffs. So we are super excited about the Millennium opportunity along with our traditional hardware systems. Operator: And I will now turn the call back to Anirudh Devgan for closing remarks. Anirudh Devgan: Thank you all for joining us this afternoon. It's an exciting time for Cadence as we begin 2026 with product leadership and strong business momentum. And on behalf of our employees and our Board of Directors, we thank our customers, partners and investors for their continued trust and confidence in Cadence. Operator: And ladies and gentlemen, thank you for participating in today's Cadence First Quarter 2026 Earnings Conference Call. This concludes today's call, and you may now disconnect. Goodbye.
Operator: Good day, ladies and gentlemen, and welcome to the Amkor Technology First Quarter 2026 Earnings Call. My name is Diego, and I will be your conference facilitator today. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the call over to Jennifer Jue, Head of Investor Relations. Ms. Jue, please go ahead. Jennifer Jue: Good afternoon, and welcome to Amkor's First Quarter 2026 Earnings Conference Call. Joining me today are CEO, Kevin Engel; and CFO, Megan Faust. Our earnings press release was filed with the SEC this afternoon and is available on the Investor Relations page of our website, along with the presentation slides that accompany today's call. During this presentation, we will use non-GAAP financial measures, and you can find the reconciliation to the comparable GAAP financial measures in the slides. We will make forward-looking statements today based on our current beliefs, assumptions and expectations. Please refer to our press release for a disclaimer on forward-looking statements and our SEC filings for a discussion on the risk factors and uncertainties that may affect our future results. I will now turn the call over to Kevin. Kevin Engel: Thank you, Jennifer. Good afternoon, everyone. Thank you for joining us today. Amkor delivered a strong start to the year, achieving record first quarter revenue of $1.68 billion, up 27% year-on-year. We saw growth across all end markets, and we're encouraged by the breadth of demand we're seeing across our technology platforms. Communications delivered the strongest growth and mainstream posted its fourth consecutive quarter of both sequential and year-on-year growth. Leading chip companies continue to trust us for their advanced packaging and test needs. We are clearly benefiting from our partnerships and our leading technology as we execute on a growing set of advanced packaging programs. Earnings per diluted share were $0.33, significantly higher than last year, reflecting disciplined execution, and continued progress on our margin initiatives. Overall, this was a quarter that reflected momentum in demand, disciplined execution by our teams and continued preparation for the advanced packaging ramps we expect in the second half of the year. As we discussed last quarter, overall semiconductor demand is robust. The industry backdrop remains dynamic. We are closely monitoring export controls and evaluating trade policies. We see supply dynamics around advanced silicon, advanced substrates and memory and are managing these risks with agility alongside our customers and suppliers. Some customer supply materials are being delayed, causing nonlinear loading. This has been expected, and we are prioritizing production where materials are available to minimize impact. Uncertainty related to the geopolitical events in the Middle East have increased over the last few months. To date, we have not seen any supply disruptions related to these dynamics. However, conditions in the region are putting additional pressure on material pricing. We're working closely with our customers to offset these increases across the supply chain. Now let me share an update on our strategic initiatives. First, elevating technology leadership. We continue to invest in advanced packaging platforms, including HDFO, flip chip and test. These are critical to next-generation AI and high-performance computing. As discussed last quarter, we are engaged on several HDFO programs this year and the newest data center CPU program is expected to begin ramping this quarter. Our preparations in Korea remain on track to scale this program into high volume in the second half of the year. Overall, we see increasing opportunities for the compute market from a diverse customer base. Second, expanding our geographic footprint. In 2026, our priorities include meeting construction milestones of our Arizona facility and expanding manufacturing space in Korea. In Arizona, we are excited to see the progress as we wrap up foundation work and move towards building steel construction. Construction of Phase 1 is planned to be completed in 2027. In Korea, the new test building is on track for completion at the end of this year. This will provide incremental space to support data center demand going into 2027. Third, enhancing our strategic partnerships in key markets. We continue to strengthen collaboration with customers across the ecosystem, including foundries, fabless companies, IDMs and OEMs. As part of our partnership engagement model, our customers are making contributions that help align technology road maps, support our capital investment and enable rapid ramps as new capacity comes online. Across all 3 pillars, we remain focused on margin improvements driven by operational excellence, increased utilization, favorable pricing and a sustained mix shift towards higher-value advanced packaging. Our mainstream factories in the Philippines are seeing improving demand, and we're continuing to optimize cost in Japan. Utilization of our advanced sites in Korea and Taiwan is increasing, improving profitability. In just over 3 weeks, we will host our 2026 Investor Day. This will give us an opportunity to provide a deeper view into our strategic pillars. We will explain Amkor's position as the semiconductor industry turns to advanced packaging for value creation. We are well positioned for this shift, and we are at the beginning of a multiyear value creation journey. We're excited about our future. We look forward to sharing more of our story at the event on May 21. I'll now turn the call over to Megan to provide more details on our first quarter performance and near-term outlook. Megan Faust: Thank you, Kevin, and good afternoon, everyone. Amkor delivered record first quarter revenue of $1.68 billion, increasing 27% year-on-year. Revenue was above the midpoint of guidance, driven by stronger-than-expected performance across all end markets, except computing, where we saw softness in PCs and laptops. The communications end market was the largest contributor to our year-on-year growth, increasing 42%. We saw healthy demand across premium tier smartphones, especially iOS due to our strong footprint in the current generation. Android demand also remained healthy. For the second quarter, communications revenue is expected to be stronger than seasonal increasing mid- to high single digits sequentially, driven by continued strength in the iOS ecosystem. Revenue in the computing end market increased 19% year-on-year. Record revenue within AI data center applications was driven by broad-based strength across multiple customers. This was partially offset by softness in PCs and laptops. Computing is expected to grow mid-single digits sequentially in the second quarter, driven by the ramp of the new HDFO data center CPU device that Kevin mentioned. Automotive and industrial revenue increased 28% year-on-year. ADAS and infotainment demand drove record revenue for advanced technology in this end market. The recovery in the mainstream portion of automotive and industrial continued with Q1 marking the fourth consecutive quarter of sequential growth. Revenue within the automotive and industrial end market is expected to grow mid-single digits sequentially in Q2. Consumer revenue increased 4% year-on-year due to broad-based improvement in demand across customers. Revenue in Q2 is expected to grow low teens percent sequentially driven by wearable products. Gross margin of 14.2% exceeded the high end of our Q1 guidance range primarily due to favorable product mix. Gross profit for the quarter was $239 million, up 52% from last year due to increased volume and focused cost management. Operating expenses were $139 million for Q1. Operating income was $100 million, and operating income margin was 6%, an improvement of 360 basis points year-on-year. Our effective tax rate for the quarter was 12.8%, lower than our full year target of 20% due to discrete tax benefits recognized in the quarter. Net income was $83 million and EPS was $0.33, EBITDA was $285 million and EBITDA margin was 16.9%. As we have grown revenue by delivering high-value advanced packaging technology to our customers, we are benefiting from the operating leverage in our model. In addition, our actions to structurally manage costs are showing up in our results, demonstrating our ability to drive sustained margin improvement. As of March 31, we held $1.8 billion in cash and short-term investments and total liquidity was $2.9 billion. Total debt was $1.4 billion and our debt-to-EBITDA ratio was 1.1x. Our strong balance sheet provides the financial flexibility and liquidity for this next investment cycle. Now turning to our second quarter outlook. Building on the strong momentum in the first quarter, Q2 revenue is expected to be between $1.75 billion and $1.85 billion, representing a 7% sequential increase at the midpoint. Gross margin is projected to be between 14.5% and 15.5%. We expect operating expenses of approximately $120 million which includes a gain on the sale of real estate of approximately $20 million. Our full year 2026 effective tax rate is expected to be around 20%. Net income is forecasted to be between $105 million and $130 million, resulting in EPS between $0.42 and $0.52. Our 2026 CapEx estimate remains at $2.5 billion to $3 billion. As a reminder, 65% to 70% is projected for facilities expansion, including Phase 1 of our Arizona campus. About 30% to 35% is projected for HDFO, test and other advanced packaging capacity. The remaining spend is projected for R&D and quality programs. We anticipate elevated CapEx spend for facilities expansion through 2027 as we complete Phase 1 of our Arizona campus. At that point, we will begin recognizing depreciation and other start-up costs as we build and train the workforce ahead of production in 2028. Similar to our Vietnam ramp-up phase, these preparation costs will be recognized in OpEx until programs are qualified for production at which point they will transition to cost of goods sold. As a result, we anticipate this will start to dilute operating income margin by approximately 1% to 2%, beginning in 2027 and improving in 2028. Once at full scale, we expect Arizona will be a significant driver of operating income margin expansion reflecting the benefits of high-value advanced packaging at what is planned to be our most automated factory. To wrap up, we are pleased with our first quarter performance. and the momentum we are building in 2026. We remain confident in the full year outlook we provided last quarter, with revenue growth driven by acceleration in computing, and strong growth in advanced automotive. Our focus and discipline as we execute on our strategic pillars positions us well to continue generating improved financial results and sustain shareholder value. I would like to emphasize Kevin's remarks regarding our upcoming Investor Day. We are embarking on a multiyear value creation journey, investing today to drive materially stronger earnings power in the future. We look forward to sharing more with you at our event on May 21. This concludes our prepared remarks. We will now open the call up for your questions. Operator? Operator: [Operator Instructions] And our first question comes from Jim Schneider with Goldman Sachs. James Schneider: Given your commentary on some of the customer supply materials being delayed as well as some pricing pressure that you expect could happen. Can you maybe kind of discuss what on-net you expect to happen in terms of gross margins in the back half of this year? I mean it seems like there are some things very much in your favor, increased loadings, better mix. Maybe talk about from the Q2 baseline you just guided to what the sort of puts and takes are in terms of net impact on gross margins in the back half? Kevin Engel: So maybe let me -- and thanks, Jim. So let me start maybe with a little bit more detail on the material supply dynamics, and then Megan can cover the margin and profitability perspective. So I think when we look at the materials, obviously, we've highlighted that memory, advanced silicon, substrates, we are seeing dynamics there. Different -- slightly different dynamics. I'd say the one that we were able to kind of really see from a supply perspective is the advanced silicon. Sometimes when it comes to memory, we're not quite sure how customers are moving demand around depending on their supply, but we definitely see that from advanced silicon. So basically, what dynamics going on there is we have these situations where there's forecasted material, the wafers or the memory doesn't show up. And then we luckily we're in such a demand profile situation such that we have other material that we can typically load, so we haven't really seen a utilization impact, but that is creating a dynamic to where some of the demand is getting pushed forward. So we're definitely seeing that. And overall, we feel that this supply dynamic for Q2 will be similar as Q1. And we'll continue to manage that way. But Megan, can you talk a little bit about the margin profile? Megan Faust: Sure. So given that environment, we're also in what we would say a constructive pricing environment. So we have been working with our customers to manage some of these pricing pressures. So considering that aspect, we expect that would cover most of those cost increases. So as we look out to the second half of the year, we're still seeing our gross margins being able to rise in that mid- to high teens level given the increase in utilization as well as the ramp expected for our compute segment surrounding the data center. That will have a favorable impact on product mix in addition to that being more high-value advanced packaging. So those 3 elements, pricing, utilization and product mix are all going to support that lift in the second half. Kevin Engel: Yes. And maybe let me add a little bit more on pricing to give you a little color there. So when we go back to Q1, we started some pricing activities then that was early on focused on Japan. We had talked about some of the dynamics for Japan in the past. But what we've been doing over the last quarter is we're working with most, if not all, of our customers to look at pricing dynamics throughout the course of the year. I think, in general, customers understand that the environment is such that costs are going up, and we're seeing some ability and willingness from customers to help us in those dynamics. So we expect to see pricing will kind of increase as we go throughout the year. So that will just help offset some of these cost increases that we're seeing on the material side. James Schneider: That's great color. And then just to clarify, in terms of the computing ramp you're expecting in the back half, should we expect that to inflect in Q3? Or is that more of a kind of Q4 weighted event? Kevin Engel: So it's going to continue to ramp throughout the year. I'd say the ramp, specifically for the CPE device will start this quarter, but we'll start seeing meaningful revenue contribution in the third quarter and then just continues to ramp beyond that even going into 2027 and beyond. Operator: Your next question comes from Ben Reitzes with Melius Research. Benjamin Reitzes: I wanted to clarify your comments around the 1- to 2-point hit that comes at some point in 2027 due to the ramp of, I believe, Arizona. And when exactly should we think about that timing to [ op in ]? And then how should we be thinking about the offsetting revenue impacts there? Because I assume that there's quite a bit, but I'm not sure what -- if it hits right on time or if there's a delay. And I know you only guide 1 quarter at a time here or not that far out, but I'm wondering how you would advise us to model that as we look into '27, which is going to be a really strong year for the space. Kevin Engel: Yes. So thanks. Megan will go through a little bit of the details on the timing. I wanted to kind of step back a little bit and give you our color here. We wanted to make sure that the investment community understood the way we were looking at the dilution and the cost impacts. And part of that is thinking about obviously the building depreciation versus the equipment depreciation. And obviously, the equipment depreciation cycle is only a 7-year cycle. So that will have a larger impact as we really bring in equipment. So we wanted to just make sure that the investment community understood these dynamics and understood the timing and then, Megan, can you give me some more color there? Megan Faust: So Ben, as far as the exact timing for when in 2027, that's expected to hit, it's a bit too early. Our estimates can shift based on the timing of equipment delivery as well as the speed of qualification process. So as a reminder, this impact is really following the same framework as what we experienced in Vietnam, where those costs will begin in OpEx. And then once we call our first program, those costs move to cost of goods sold, and then those will be in margin. So as far as that 1% to 2% impact on operating income margin that was anticipated to be a full year impact based on our estimate of currently when we believe those costs will begin. And then we see that improving in 2028, which is when we're going to start scaling. And that leads to your second part of the question. We will see some modest revenue in 2028. That will then scale in 2029, where we believe exiting '29, we will have meaningful revenue such that moving into 2030, we would experience the full impact from the Arizona facility. And all that obviously is subject to customer qualification, et cetera, but that's what our current plan shows. Benjamin Reitzes: Okay. And then just with regard to the CPU ramp. This is a new product and whatnot. You've talked about it being higher margin. How should we think about -- you already mentioned, Kevin, that it's going to sustain and get bigger in '27. Do you see a strong pipeline for the CPU business, both ARM and maybe even x86, and just how would you characterize that win? Is it the first one? Is that the only one you have visibility on? Or is this a category that could become a meaningful contributor even beyond the big one that you got? Kevin Engel: Yes. Thanks for that. I would say, in general, strong tailwinds, obviously, the one device that will ramp first, we see a lot of opportunity there. Again, really ramping even beyond 2026. Other customers, we are engaged. So there are other activities going on there even in some of the more advanced package types, kind of again, kind of looking more into 2027 for the more advanced packages. But if we look at our -- this HDFO platform in general, whether this is a SWIFT technology, similar to TSMC's CoWoS-R or whether it's CoWoS-L, Amkor's S-Connect technology. The customer engagements are broadening. So those platforms now we have over 5 customers that we're engaged with, different levels of qualification. And then obviously, just to go back to the 2.5D, the silicon interposer type technologies. Again, while we're ramping down the legacy volume customer, we continue to see more customers engaging there. So that customer base, we had talked about before being half a dozen, I would say, we're over half a dozen now. So across that whole platform, that's where we're really looking at the -- when we look at our investments in equipment for this year, vast majority of that investment is going into these types of platforms in Korea and then some of the other wafer-based activities in Taiwan. Operator: Your next question comes from Randy Abrams with UBS. Randy Abrams: Yes. Okay. I wanted to ask a follow-up question on your loading level. Was it picking up across mainstream events. If you could give a sense of utilization or headroom to grow to take on projects both in Korea, Vietnam, just ahead of Arizona. And then if we look at the Phase 1, it looks like it adds about 10% to your network in terms of floor space. Should we think that's approximate revenue power or doing advanced packaging, should we take a different approach to revenue as you bring on Arizona? Kevin Engel: Okay. Yes. Thanks, Randy. So first, utilization. So at a high level, our Q1 utilization was in the low 70s, and if you compare that to Q1 last year, we were in the 50s, so pretty significant improvement year-on-year. When we think about Q2, we'll still be in the 70s. It will be a slight improvement, but a little bit of an increase from Q1. And then when we kind of think about how that split, I think, we talked about this a little bit last quarter. The advanced lines are filling up. And some of these areas, are getting to levels of high utilization. And then we still have some factories more on the mainstream side where utilization is low. I think we're seeing improvements in the Philippines and mainstream, but some other factories where we have some additional space to improve utilization. Then when we think about these more advanced programs prior to the U.S. factory coming online. For Korea, space is something that we're monitoring very closely. You may recall, we're building a new facility there now. That facility will be completed at the end of this year. So that will give us some headroom going into 2027 to continue to ramp. And then when we look at Vietnam, we talked a little bit about this in the past. We're migrating some of our SiP products from our Korea facility over to Vietnam. That will help provide additional room in Korea and then we'll also obviously improve our utilization in Vietnam. So we have continued room in Vietnam to grow from a space perspective. That building, we even have some clean room space that's yet to be facilitated. So we have headroom there. And then just to summarize again, Korea, we're expanding aggressively. I think that's an area where we see just a tremendous amount of demand going through this year and into next. Randy Abrams: Great. I appreciate the color on that. And then for the Arizona, maybe just a follow-up to the first question, Arizona, if you could run through a bit on the scale that could add? And then the second question I wanted to ask on the -- just a bit more on the computing. I think one side with the traction that Intel seeing on EMIB, if you could talk about opportunity, timing or potential to take on either foundry or internal business. If that's an opportunity. And then just curious a bit more on the CoWoS-L or S-Connect, how that's coming together with a lot more projects seem to be moving in that direction. Kevin Engel: Okay. Okay. Yes, Randy. So for Arizona, you're thinking right. I think we had mentioned roughly from a revenue perspective, we can be in the $1 billion run rate kind of range about 10% of our 2025 revenue to over 10%. So I think you're thinking around the right levels. Then when it comes to EMIB, I don't want to talk too much about that. Obviously, we had talked about how in the past that there is a collaboration with Amkor and Intel related to providing some additional outsourced modeling for EMIB, I'd say that activity is continuing. I don't think I want to go too much more into detail there. And then on the CoWoS-L, as I mentioned a little while ago, we do have 1 CPE product that we're working on with our customer. I think I would say we're still a little bit early in the development cycle with that customer, so it's going to take some time. I would say that's more likely a 2027 discussion. But because of this, the constraints in general in the supply chain and in the packaging space, these customers are very motivated to try to move as quickly as they can to develop these new technologies new supply chain options. So we really feel that's a positive benefit for us. Operator: Your next question comes from Peter Peng with JPMorgan. Peter Peng: Just on your advanced -- AI advanced packaging, I think last quarter, you mentioned that it can grow year-over-year. To what extent is that a demand number? Or is that a supply constrained number? I just want to get a sense of how much you guys can improve that number over the course of this year. Kevin Engel: Okay, Peter. So yes, I'd say we're still on track for tripling. I'd say the opportunities are there to grow beyond that. I'd say there are several dynamics that can affect it. Like you said, potentially silicon supply, memory supply, also just our ramp profile. Obviously, we're bringing in equipment as rapidly as we can to support these ramps. So I think either one of those could affect it. We'll see how the year progresses. But I think at this point, we're still very confident in that tripling. Peter Peng: Got it. And then I think last quarter, you guys mentioned that the compute is going to grow 20% and then the high end of the automotive is going to grow pretty strong and then rest of the business is kind of this low single digits. But if you kind of look at your communications, right, you guys are setting up for a strong growth. So one is, do you still see low single digit as a reasonable assumption for the remainder of the business? And if so, does that imply that you guys are probably baking in some sort of deterioration in your communication markets for the second half of the year? Kevin Engel: Yes. So I would say, if we look at communications today, a little bit stronger than we were thinking last quarter. So I'll say that. I think we guided single digits. I don't know that we've said low or mid, but we said single digits. I'd say now we're feeling a little more confident that, that market is going to be higher into low double digits. So I think that's positive. We are obviously looking at first half versus second half, the dynamics there. Typically, that second half lift is very high. We're anticipating potentially a slightly less boost in the second half related to that this was a very strong cycle we're coming off of the first half. We're seeing a little bit of strength, a little bit more than we would have anticipated. So we're a little bit hesitant to say that the first half, second half dynamic will be the same for this year. Operator: Your next question comes from Craig Ellis with B. Riley Securities. Craig Ellis: Yes. Kevin, I'll start with one there and just dig a little bit deeper into what you guys are seeing. So I think, in the data that we track, it sure looks like the supply chain built above seasonal for both smartphones, mid- to high end and PCs mid- to high end through the first quarter and our read is that, that's persisting in the second quarter. And some of that relates to memory and other component availability and there are some other things that are at play. So the question is this, can you quantify the extent to which the communications business, it may be tracking a little bit better and are you hearing any concerns from your customers about the build intensity in the back half of the year. And I was a little bit surprised to see that notebooks weren't a little stronger. Intel's client computing group comes to mind as an area of strength there. Is there something programmatic that's happening inside of that business? Or what do you see going on? Kevin Engel: Okay, Craig. I'll actually start with that one, and I'll ask Megan to help me a little bit on the communications side. So on the PC, yes, I'd say there's something a little bit different going on there. If we look at the unit volumes that we're seeing from the customers that we're supporting, it's still holding in there. So we've talked in the past about how the transition to ARM-based PCs, how more of a preference towards a premium tier that we think that will buffer us somewhat from the material constraints. And I'd say we're seeing that. One of the biggest dynamics that we're seeing is we have a customer where they were rebalancing their supply chain a bit and so we saw increases in a different market and then slight decreases in the computing in the PC space. So overall, that customer is growing significantly, but they decided to prioritize a slight different market. So I'd say that's a bigger dynamic than actual PC unit volume. So I definitely don't want to signal that we're seeing strong PC sales. So that's the first one. Megan, can you comment a little bit on comms? Megan Faust: Yes, Craig. So if I understood the question around comms, I mean, we did -- we are seeing both with our Q1 actuals and our Q2 guide the communications market coming in stronger than we expected last quarter. And just to reiterate Kevin's comments about the full year shape for comms because of that strength coming off a very successful last fall launch, we don't anticipate that the second half growth over the first half will be as pronounced because we see the first half being, I'm going to say, much stronger. And then for the full year, we do see a better outlook on comms rising into the high single-digit plus. Did that answer your question, Craig? Craig Ellis: Yes, it does. And then the follow-up, I'll direct to you, Megan. So we're looking for $2.75 billion in CapEx this year. It looks like we spent about $275 million in the first quarter. So how should we think about the linearity through the year with the balance of the CapEx investment? Megan Faust: Yes, sure. So the first quarter came in a little bit lower than what we were expecting. I will point you to the balance sheet. Our CapEx payable did increase $200 million. So that's really just timing of when those payments will be made. But as far as the shape of the year, it looks like it's going to be more of a 30% first half, 70% second half year for CapEx. Operator: Your next question comes from Denis Pyatchanin with Needham & Company. Denis Pyatchanin: I think sort of maybe partially answered in the previous question, but maybe for your end markets, could you please like rank order the expected growth or visibility going through the rest of 2026. And for all of these end markets are high memory prices showing any impact on demand at all? Kevin Engel: Okay. Thanks, Denis. So we don't want to start. So if we look at the -- trying to rank them a little bit. So the compute segment or market, as an example, we're still seeing plus 20% in that kind of a rate for the full year. Again, a couple of things there. As we mentioned, tripling on the advanced side for the data center and then muted on the PC side related to the dynamics we just spoke about. For auto industrial, we had talked about pretty strong growth there, definitely on the advanced side, a little bit modest growth on the mainstream. So that's the wire bond type packages and again, what's going on there, the dynamics you're aware of, increases in ADAS, in car computing, those types of applications. And then the more traditional drivetrain type of CPU, those types of products, they're just a little bit more muted, but at least recovering. Then when we look at the rest of the market, we had signaled again single-digit growth. We've been talking about how comms is looking a little bit better, potentially approaching double digits. So we feel better there. But in general, still a lot of different dynamics. It's hard to gauge how memory is going to impact things. I'd say a lot of customers obviously are talking about memory, prioritizing, looking at different supply chain options -- optionality for them. But in general, we're still seeing pretty strong demand. If we look at impacts related to material supply. I would try to give that a range of around $50 million to $100 million for and again, that likely is just a pushout of materials, and then we would expect a similar level in Q2. But again, we'll see how that develops over time. Denis Pyatchanin: Great. And then regarding the operating margin impact from the Arizona facility, maybe so if we look at the positive side going into 2028, how big of an impact can we expect there? Like what are your expecting CoWoS product margins? Are they significantly higher than the current corporate average? Maybe like on a related note, what are we thinking about the financing mix for the overall $7 billion outlay. Megan Faust: Sure, I can take that. So as far as the business that we are operating in our Arizona facility, that will be at a, I would say, meaningfully higher than our corporate average. So as far as impact on '28, we don't want to give too much detail here. We'll save that for our Investor Day and long-term outlooks. And then your second part of that question was about funding. So we had outlined a $7 billion investment for the 2 phases in Arizona. We have several, I would say, opportunities to help fund that. Just as a reminder, we do have government incentives in the form of chips grant funding of $400 million as well as the 35% investment tax credit. So together, that's a pretty meaningful support of $2.8 billion. In addition, we are working with our customers on different forms of support. And so that is a second part. We have some that have been executed and others that are currently in discussion. And then on the Amkor side, we have quite a bit of liquidity. We have, I would say, debt capacity. And so we're evaluating what we may need to do there as well in the future. But as far as our 2026 investments, our current liquidity provides ample flexibility for us to manage that. Operator: Your next question comes from Joe Moore with Morgan Stanley. Joseph Moore: You talked about export controls as a factor you're considering. Can you talk about what the variables might be there? Is that more around the AI-centric stuff or anything else that we should be aware of? Kevin Engel: Joe, I think what we were trying to signal more there was around pricing that basically between -- so -- well, I guess, 2 dynamics. One related to the Middle East and what's going on there. And as oil prices continue to rise and just commodity pricing in general, whether it's precious metals, things like that. Those are putting pricing dynamics in play for our suppliers. So that's one dynamic that we're watching very closely. And then the other one is just in general, whether it's trade discussions going back and forth between the U.S. and China related to different AI products. But I'd say that is at least become more normalized now for us. So we see the demand in fluctuations, but for us, there's -- whether it accelerates from a restriction perspective, or it loosens, I think, we're ready to kind of balance that. It's not a not a dynamic that has a huge impact on what we're looking at today. Operator: Thank you. And at this time, I'm showing no further questions. I would like to turn the call back over to Kevin for closing remarks. Kevin Engel: Thank you. Now for a recap of our key messages. Amkor delivered a strong start to the year, achieving record first quarter revenue of $1.68 billion, up 27% year-on-year, with growth across all markets. Utilization is improving, even as material supplies are constrained in the industry. Over the past couple of quarters, we have been preparing for growth in our advanced packaging portfolio. We are ready to support a strong Q2. Key product ramps are coming in the second half of the year. Our footprint is expanding to meet customer needs going into 2027 and beyond. Thank you for joining the call today and we look forward to seeing you at our Investor Day. Goodbye. Operator: Ladies and gentlemen, this concludes today's conference call. You may now disconnect.
Operator: Good morning, ladies and gentlemen. Welcome to Galp's First Quarter 2026 Results Presentation. I will now pass the floor to Joao Goncalves Pereira, Head of Investor Relations. Joao Pereira: Good morning, everyone, and welcome to Galp's First Quarter 2026 Q&A session. I'm joined today by our Co-CEOs, Maria Joao Carioca and João Marques da Silva as well as the full executive team. But before passing the mic for some quick opening remarks, let me start with our usual disclaimer. During today's session, we will be making forward-looking statements that are based on our current estimates. Actual results could differ due to factors outlined in our cautionary statements within the published materials. Having said this, Joao, would you like to say a few words? Joao Diogo da Silva: Of course. Thank you, Joao, and good morning, everyone. Galp had a strong start to 2026 in a quarter marked by higher volatility and geopolitical tensions in the Middle East. Galp has no direct exposure to the region. Our operations are mainly Atlantic-based. Still, we are closely monitoring developments, and the impact can be felt globally. Due to disruptions across parts of the value chain, our Midstream team has actively managed crude and refined product supply, well done. This allowed us to so far to secure a healthy position for Galp and for Portugal. In our Commercial business, we have also reinforced campaigns and discount mechanisms to help our customers to manage the impact of higher fuel prices. And overall, during the quarter, we have continued to run our operations efficiently. In March, our Upstream and Industrial assets showed strong availability, allowing us to benefit from higher commodity prices. Maria Joao, over to you. Maria Joao Carioca: Thank you, Joao. Good morning, everyone. The quarter's solid operational performance that Joao just highlighted flowed through to the P&L and actually further supported Galp's robust financial position. I would highlight the fact that net debt remained stable quarter-on-quarter despite the balance sheet working capital impact from the sharp increase in commodity prices. We're focused on managing ongoing market volatility and supply disruptions, but this has not at all hindered our continued execution in the strategic initiatives that are currently underway across our portfolio. We continue to strive for both pace and discipline in our execution. In Namibia, procurement activities are progressing, and that allows us to remain on track to start drilling activities on the next exploration and appraisal campaign by Q4. At the same time, discussions with NV shareholders regarding the merger of our downstream businesses continue to evolve positively. So we continue to have a potential agreement still expected by midyear. Overall, 2026 is indeed shaping up to be a challenging but also a rather exciting year for Galp. Operator, we are now ready to take questions. Operator: [Operator Instructions] And our first question today comes from the line of Matt Smith, Bank of America. Matthew Smith: I wanted to focus on the Upstream business first. I think you mentioned Bacalhau contributed 10,000 barrels to performance in the quarter, which would make the underlying Brazil performance look extremely strong versus recent history. So I was just hoping you could give us a bit of color there and any context how that's running versus your full-year guidance, that would be useful. And then I just also wondered price dislocations has been a hot topic for April. Is there any color you could give us in terms of the realizations that you're achieving on your crude post quarter end? And then I guess, on the other side of the same coin, what Refining margins have done since the quarter end? That would be useful. Maria Joao Carioca: Thanks, Matt. Thanks for the question. So let me try and tee it off with some comments on Bacalhau and I guess, overall on the performance of our Brazil Upstream business. So overall, rather good performance. I think it maps out against what we had in terms of the guidance we had given. We've given 125,000 to 130,000 barrels, and we've delivered at the very top end of that guidance. Bacalhau has indeed been a part of that [ up end ] guidance. I would, nevertheless, stress that we're still ramping up the unit. So it's good indications. We now -- we've had 2 producers already registering significant flow rates, and the third producer is already connected. And that has indeed been delivering according to our expectations of a good reservoir. But in any case, we're ramping up. So it's still commissioning. It's still, I'd call them maybe hiccups to expect. Plateau is still expected later in 2026. So overall, very good indications, good performance, but I would nevertheless remain conservative and remain within the estimated time frame for plateauing and for the overall ramp-up to take place. So other than that, our legacy business in Brazil continues to perform rather well. You know that there are ongoing works in Tupi to continue to maintain the current good performance of the wells. You know that this is still ongoing set of partnerships that have been the cornerstone of our performance. So no major comments there, just general good performance. On the realizations of our different businesses, but I believe your question referred particularly to equity crude. I think, as you know, about 70% of our exports flow through to China. We, in any case, normally deliver on index to dated Brent circa 2 months ahead. So the fluctuations that you saw throughout this period did not necessarily capture the full breadth of the impacts we suffered. In any case, in equity crudes, we registered a discount of approximately $5 per barrel. And this just fundamentally reflected the fact that what we were seeing throughout the period in terms of the costs underlining our activity, particularly when you saw it during the period concerning freight costs was indeed a lot of fluctuation and a lot of volatility. Thank you. Joao Diogo da Silva: Allow me to complement on the Refining margins, your question. Of course, when we compare ourselves with the highs of March, we are observing an average of between $10 to $12 per barrel. On the last couple of days, additional volatility, margins increased up to the [ 20s ]. But more importantly, what we are expecting is to operate at full availability during the next couple of quarters. Reminding that [ Siemens ] refinery outputs are 45% on mid-distillates. Jet will account for less than 10% of that. And if we look at the downtrend from March, it reflects a bit of margin squeezing by rising input costs, and I'm speaking about utility, freight cost inflation. But we are also looking at some decrease on the oil product prices, mainly on diesel and jet as pricing is reflecting a probable resolution on the conflict. And finally, Europe margins declined more versus other regions, again, representing a different higher utility gas prices situation. And I'll stop here. Operator: Your next question today comes from the line of Alejandro Vigil from Santander. Alejandro Vigil: Congratulations for the strong results. The first question is about the guidance of '26. You started the year with very conservative guidance. If in the current context of higher energy prices, you are considering some increase in this guidance. And particularly more important, the implications in terms of shareholder distributions, you're expecting some additional cash flow to shareholders driven by these high energy prices. And the second question is about the Moeve joint ventures in the Iberian downstream. If you are close to closing these transactions, if you are seeing some releverage opportunities in the joint ventures that you are setting with Moeve? Maria Joao Carioca: Alejandro, on the updating of guidance, we acknowledge, obviously, that the macro that was underlying our existing guidance is, to a large extent, no longer directly applicable. It no longer holds. We've seen significant changes in terms of most commodity prices and most underlying adjacent costs. But in any case, what we are at this stage acknowledging is that the situation continues to be of high volatility, way too many moving pieces. So we don't feel that this is the time to pin down the new guidance. We will be looking and most likely doing so as we publish our second quarter results. Right now, sensitivities are for us, the tool that's guiding us through the period. So what we're looking is fundamentally approximately numbers that you've seen in the past for Galp, but it's approximately $160 million for each $5 of Brent impact and a bit under that. But well, if you take each $5 of Refining margin, I'd say that the sensitivity is approximately $200 million. So we're navigating the volatility using uncertainties, and we're certainly looking into what are the underlying large trends in the market to support this. And then once we see some more firm ground, we will look to revise the guidance. The second part of your question on distributions, I think it follows through from my initial comments. So again, we will not be revising distribution. It's really early to assess all the full impact of everything that's going on. So we do see that our distribution policy, the 1/3 OCF in itself already embeds flexibility to capture part of what is the current circumstance. And I think this will give a great segue for Joao to comment next on Moeve, particularly because this business is in itself rather transformative. Our expectation is that it will be value accretive, and there will indeed be elements of releveraging that Joao will comment on. But those again speak to our not moving our distribution policy at this stage. Joao Diogo da Silva: Alejandro, well, just giving you some [ sequence ] from Ms. Joao's words, we've highlighted a number of times that both companies are to be designing as self-funded ring-fencing industrial versus retail businesses differences. At this point, well, I need to say that we've seen a lot of traction in the market. That's what we've been receiving from the investor side, from the financing side and these companies to be independently run with financial flexibility. Of course, we will be looking at the optimal finance structure and leverage all the way down. So that's what we are expecting. That's the flexibility that we need to enhance. And you are absolutely right, the macro scenario will, of course, releverage some opportunities. Operator: Your next question today comes from the line of Biraj Borkhataria from RBC. Biraj Borkhataria: Two, please. Just the first one is just on Bacalhau. If once we get to a full ramp-up phase, how should we think about the Upstream sort of DD&A and OpEx per barrel at the blended rate, given the mix of assets there? And second question is just on the Venture Global offtake that you have. Could you let us know how much of those volumes you've hedged for 2026 and how much is sort of exposed to the upside and widening spreads? Maria Joao Carioca: [Technical Difficulty] the low 2 digits. I'm not sure you picked up my -- the initial part of my answer. I think there was some technical issue here. So I'll just very quickly repeat through. On Bacalhau, right now, the numbers you're seeing are fundamentally numbers that reflect the fact that we're still ramping up. Now having said this and going straight to your question, what we're seeing in terms of DD&A expectations is in the low 2 digits, of course, once you plateau. And this should bring us to operating costs that are not too dissimilar to what we have right now, maybe slightly above what we have right now as we truly perform in the upper 2s, lower 3s right now. And what we expect for Bacalhau is to be fundamentally in the 3 to 4 operating cost figures. I'll let Joao comment on the hedging numbers for LNG. Joao Diogo da Silva: And Biraj, really quick one. So consider between 70% to 75% hedged on the venture contracts in 2026. Operator: And the next question comes from the line of Josh Stone from UBS. Joshua Eliot Stone: Just building on the last question, I wanted to ask about the Midstream and the outlook there, just given the widening of gas spreads and your ability to capture that. So just talk about, one, how the business actually performed if you adjust out the time lag? And two, what you're thinking about the outlook? And secondly, I wanted to ask on Refining because you spoke back about some Refining margin trends. And based on -- I presume that's based on an indicator. I'm curious as to how do those indicators match with what you're seeing on the ground in terms of Refining profitability. And with the extreme backwardation we've seen, has that had created any disconnect between like on-the-ground profitability versus the indicators you're looking at? And maybe as part of that, can you can talk about the role of hedges and your hedging position in Refining? Joao Diogo da Silva: Thank you, Josh. you should consider on our latest guidance to our Midstream above 500 million into 2026. We still see some supportive but narrower gas spreads. Consider that the trading gas is contributing around 70% of our total performance. And that largely, as I've just mentioned, a large portion of that is already locked for 2026, around 70%. Of course, we have some flexibility on the portfolio, and we have an increased footprint in Brazil. And that's basically what we have. On the Refining side, our crude procurement is based on the physical products. And you know that -- well, we have mainly selling products at the market condition in the Iberian Peninsula. Of course, we are long on the gasoline side, and that's one of the products that we are long in. But namely, we are counting on a fully operational refinery to capture the market conditions, and I'll stop here. Operator: Your next question today comes from the line of Guilherme Levy from Morgan Stanley. Guilherme Levy: The first one, thinking about the recent view on onshore wind, I was keen to hear more about the rationale to increase exposure in renewables at the moment, how to think about the long-term positioning in this division? And if we should be expecting more opportunistic deals like this one over the coming quarters? And then secondly, going to your Commercial segment, I know that in your opening remarks, you commented about campaigns and discount mechanisms to move the impact of higher prices to consumers. I was keen to see if you are seeing some sort of slowdown in sales, even though you have implemented those measures, or not so far? Joao Diogo da Silva: Thank you, Guilherme. Maybe I'll start on your second one. And it's true, we are observing different behaviors on the Spanish side and on the Portuguese side. Of course, the different framework that the Spanish market has changing prices on a daily basis, influences demand and pricing in a different way. On the Portuguese side, on the retail -- namely on the retail, we change -- we have weekly prices. And those discounts and those campaigns are reflecting an additional help that we think our customers need today. That's why we've launched the recent campaign on the [ Mundo Gulf ]. But more than that, since early this year, we've started a more broader campaign cross-selling oil, gas and power and also in the retail side. We have observed, namely in March, an increase on the volumes. And it was like a push before the prices going up on the Portuguese side, and that's something very normal. That will be, of course, neutralized on the April volumes. It was more on the Spanish side, if we compare the two markets, the Spanish market, namely on the March volumes, had a more substantial increase than the Portugal one. But of course, we are operating in a high prices context, and that's something that will affect the average ticket volumes that we have. Substantial contribution from the nonfuel business also around 22% of the overall Commercial business. Going back to your first question and on the offshore, on the wind rationale and thinking ahead, I need to tell you that, of course, this recent acquisition allows us to have a much more balanced portfolio. Wind now represents around 25% of our generation mix. And of course, if we think further, it will enhance eventual long-term strategic optionalities and partnerships that we may have. I need to remind you that we are challenging -- almost every day, we challenge ourselves if we are the best owners of this business and of course, if we have the best structure to manage this business. But all in all, we are trying to diversify and to optimize our Renewables business, and that's where we stand today. And that's where we will be standing on the next couple of months. Operator: Your next question today comes from the line of Sasikanth Chilukuru from Jefferies. Sasikanth Chilukuru: I had two, please. The first was in Refining and getting back to the hedges. I was just wondering if you could further elaborate on your hedging strategy in Refining. It would be helpful to understand the rationale, the hedge profile for the current year and into 2027 and the type of hedging structures you're using there. The second one was on Bacalhau and the ramp-up. I was just wondering if you could comment on the cash taxes paid there and the impact that this field has at the group cash tax rate this year and for 2027? Maria Joao Carioca: Thank you for your question. So let me maybe complement what João has already shared with us on our hedging strategy. So we have hedging strategies in place for both Refining and Midstream. I would highlight the fact that there's no hedging in place for Upstream. But on Refining, in particular, which I believe was your question, the policy we have -- and again, this is a hedging policy that's been syndicated with the Board. It goes through Board oversight. It goes through all of our risk management and internal control processes. So it's under strict limits and triggers. Now the limits we have on board right now, the ones we're acting against are for Refining, circa 1/3 of our throughput. So if you look at what we have in place right now for 2026, and that's fundamentally flat throughout 2026. What we have in place is about 28 million barrels. That's locked at approximately $8 per barrel, again, flat throughout the year. Into 2027, we don't have any significant positions. We don't have any hedging into 2027 for Refining, again. Now on Bacalhau, the regime under which Bacalhau is, is still a shared regime. So it's 50-50 between concession and PSC. So that gives us a relatively benevolent tax regime vis-a-vis the remaining assets we have in Brazil. So we acknowledge that this is overall a lower SPT rate than what we have, for instance, in Tupi, and that is going to be obviously a part of what we believe will be the approximately 400 million of OCF that Bacalhau will be delivering once it plateaus. Operator: [Operator Instructions] And our next question today comes from the line of Michele Della Vigna from Goldman Sachs. Michele Della Vigna: Congratulations again for the strong performance. Two questions, if I may. First, on exploration, it's going to be very exciting in Q4 in Namibia. I was also wondering if you could update us on your thinking about Sao Tome and the attractiveness of that basin. And secondly, I wanted to come back to the carry that you're getting for -- in Namibia for both exploration and then the Mopane development and how that is likely to be accounted, whether that will be -- effectively, whether your CapEx will be net of that or whether that will be considered as a financing and the gross CapEx will reflect the full spend on Mopane? Maria Joao Carioca: Thank you, Michele. So on exploration, I know that exploration is all that the industry is talking about these days, quite a change from a few years ago. But on exploration, in particular, we are very focused on Namibia right now, as you well put it. So we're trying to make sure that all the conditions are in place and everything is going according to plan to a large extent. So we do expect to have news towards the end of the year. On Sao Tome, as you know, that's a much earlier-stage basin. So nothing too significant going on here. So it's still in our forward-looking plans, and there are no major developments in recent days or recent times that I would highlight at this stage. As for Mopane carry, how will you reflect it, I'm afraid at this stage, that is still being fully assessed with our auditors and our accounting. So of course, we'll be looking for a very clean disclosure. And so ideally, we would be reporting CapEx just for that component that reflects our responsibilities once the deal is closed. So once that is closed and confirmed, we actually hold 25% of full responsibilities, and that will be what we will be trying to show as explicitly as possible in our financial statements. The exact way in which we'll be doing that is still under discussion, while the deal isn't fully closed yet. So we're still waiting for Namibian authorities to close that component and then for the GOA to be fully detailed. So we will get back to you on that, of course. But for now, it's the 25% financial responsibilities, and we will be showing that through our accounts. Operator: Our next question today comes from the line of Matt Lofting from JPMorgan. Matthew Lofting: Most of mine have been asked. I'll just ask a couple of follow-ups downstream related. I think you mentioned earlier sort of a near 10% jet fuel yield that Galp can generate at Sines. That's high or sort of high end relative to industry averages. So I wondered if you could just talk about what enables Galp to generate that kind of jet yield from Sines and whether you see any additional upward flex in the context of almost inevitable tightening in jet supplies in Europe now over the coming weeks? And then secondly, when you sort of think forward, uncertain backdrop, but if we do see a sort of prolonged knock-on effect from Middle East conflict for middle distillate supplies in Europe over the coming months. To what degree could the combination with Moeve enhance Galp's ability to produce and source middle distillate supply for Iberia and Europe as a whole? Joao Diogo da Silva: Thank you, Matt. So going back -- and we need to go back in history to understand that. We've made a couple of investments that allow us to be today as we are producing such a yield. I'll go back to 2012, where we've done a couple of investments on the idle cracker. And that's why we are getting such a yield on the jet side. Of course, we will be trying eventually to reduce additionally the jet volumes blended into the diesel pool. We are, of course, also increasing the average inventories, but that's a different thing, managing the whole context that we have from the Middle East. On the Moeve combination, of course, we are getting scale, additional scale. We are getting complementary assets also, but it's still very early for us to speak about that. Of course, that we were thinking about the SAF and the SAF production units that we have been building through the last years, ourselves and Moeve. And that's a very important asset to look at on the synergies. But it's still very, very early to say that. Complementary optimized logistics, supply chains, that's what we are looking at, turnaround efficiencies, higher trading firepower. So that's where we are when we look at the transaction. Thank you. Operator: We will now take our final question for today. And the final question comes from the line of Paul Redman from BNP Paribas. Paul Redman: I had two questions. Firstly, I just wanted to ask about Namibia. Is there any update on the drilling campaign? And I wanted to ask about timing of FIDs and development. Is there any opportunity to accelerate Mopane? The previous plan had been Venus first and Mopane second. Could there be a world in which that changes and Mopane could be brought forward? And then secondly, I know it's early, and clearly, you have a lot of strategic moving parts at the moment. But this quarter, you kept net debt flat despite a EUR 200 million working capital build, EUR 160 million at [ year ] out for 2P. So if I ran this forward on the 1Q scenario, your balance sheet is going to materially delever through 2026. that's even before we get to the world of if Rovuma LNG gets sanctioned, you get cash in from that. So I wanted to ask how you're thinking about the balance sheet at the moment? And then how you're thinking about allocating capital going forward? Is this -- could you see more M&A? Is it all back to shareholder? So just kind of get your early thoughts on how to think about it. Maria Joao Carioca: Paul, thank you for your questions. So let's start with Namibia. Maybe just an overall status and next step, so I think it's relevant to say that at this stage, where we are concerning the partnership is, good pace moving forward. I think one of the critical steps that was concerning the preemption rights, that timeline has expired. No preemption rights were exercised. So right now, we're just looking on to the local authorities to make sure that government approval comes as swiftly as authorities find it viable to come through. I think that the tone continues to be a very positive one. I think if you're looking into Namibia, just recently, the discussions on the basin, the conference that took place are all very, very positive and very mindful of the current context and the implications that has for a new location such as Namibia. So once we get that approval, we then will be in a condition where we will be able to discuss the more operational aspects. So the details on the GOA, the operatorship transfer. So all in all, what we are expecting for Mopane, in particular, is still that we will be able to initiate the next campaign in 2026. If the first drills are positive, we will then look into the DSTs. So I remind you that the work we're doing -- that we will be doing now in this stage will fundamentally be work towards making sure that we have the optimal development concept. So without that development concept mature, that's clearly too early stage to be discussing any significant changes in what were the underlying time lines both for Mopane but also for Venus, of course. And I will remind you that for Venus, until the operation is closed, we're not yet in the consortium. So I'm not going to comment extensively. I think it's public, and we have visibility over the fact that everything is moving and we're working clearly towards having an FID in mid-2026. So that is, of course, well in advance of the current stage that we have for Mopane. I will again remind you that Venus has always been at least 2 years ahead of Mopane. So these time lines, we may be able to work through some aspects, but it's to have a fundamental turnaround and shift would be a significant departure. So yes, we'll be looking to accelerate. Yes, once we get everything closed and Total comes in full steam, that is hopefully a fast track towards Mopane. But at this stage, doesn't fundamentally change the sequential timeline that we had. On the second part of your question, so jumping from Namibia and Upstream to the overall portfolio, as I understand, your question was overall, how do we see the portfolio moving forward? I think, again, Paul, we have a distribution policy that's been pretty stable and that we cherish as such fundamentally because we believe that our financial strength has been very value accretive in what we've been doing with the portfolio. I think we've demonstrated extensively that we're not sitting on the portfolio. We're actively managing it, both upstream, downstream and even in the way we're delivering on renewables. That speaks of a portfolio that leverages on our current financial strength, leverages on our balance sheet and fundamentally has allowed us to do what we believe to be a unique case in the sector. We're delivering growth with a very clear line of sight, and we intend to stay that way. We have a very strong engine in upstream, and that engine is being upholstered as we speak and strengthen. So that's where we want to be. It's -- if we continue to deliver on this investment case, this is a unique investment case, and that's what's going to drive us forward. And that's what we're going to be looking at in terms of capital allocation. Thank you. Operator: Thank you. This concludes the Q&A and today's conference call. Thank you for participating. You may now disconnect.
Operator: Welcome to the Groupe SEB 2026 First Quarter Sales Presentation. Today's conference will be hosted by Stanislas de Gramont, Chief Executive Officer; and Olivier Casanova, Senior Executive Vice President and Chief Financial Officer. [Operator Instructions] Now I will hand the conference over to the speakers. Please go ahead. Stanislas De Gramont: Good afternoon. Thank you for attending this call. I'm Stanislas de Gramont. I will be managing this presentation together with Olivier Casanova, our CFO. We will start with a short presentation, I think, and then we'll carry on with answering your -- all the questions you may have. Olivier, you want to get started? Olivier Casanova: Okay. Thank you, Stanislas. So moving on to the key figures for the quarter. Our sales stood at EUR 1.885 billion, up 2.7% on a like-for-like basis. ORfA stood at EUR 72 million, up 42% and operating margin was up 1.2 percentage points at 3.8%. So moving on to the highlights on the next page. As I said, 2.7% organic growth. Of course, we have been operating in Q1 in an environment with a lot of uncertainty on the macroeconomic and geopolitical front. And of course, it has deteriorated in the latter part of the quarter. We'll come back to that, no doubt in the Q&A. In this environment, however, we have delivered balanced growth between activities and region, driven in large part by our innovation portfolio. ORfA has increased year-on-year, of course, supported by a favorable base effect because the Q1 ORfA of last year was low by historic standards, but also supported by organic sales growth and a decrease in operating expense. And finally, we have launched the rollout of our Rebound plan, and it is progressing in line with the announced schedule. So moving on to the top line. So as I said, 2.7% organic growth. We have a currency effect of minus 3.8% and no change in scope because La Brigade de Buyer, which was acquired in -- at the beginning of 2025 was consolidated for a full quarter. So let's describe briefly the currency effect. Of course, we have a negative impact from the depreciation of the CNY and the U.S. dollar. We all remember that they were actually quite firm in the first quarter of last year. And the CNY has depreciated year-on-year 6% and the U.S. dollar 11%. Secondly, we have also suffered from the depreciation of the Turkish lira and the Japanese yen. We can expect, in particular, for the U.S. dollar and the CNY, of course, a lower impact later in the year given the depreciation that we experienced in '25. Now let's look at the split of our turnover by business unit. So our Professional business unit had EUR 231 million sales in Q1, up 1.1% on a like-for-like basis and Consumer sales stood at EUR 1.654 billion, up 2.9% on a like-for-like basis. So overall, as we said, a balanced organic growth, 1.1%, as I mentioned, on Professional. And you can see that on the Consumer side, it's also quite balanced by region with 2.5% growth in EMEA, 2.2% growth in Asia and a hefty 6.7% growth in the Americas. So now I turn over to you, Stanislas, to cover these results in detail. Stanislas De Gramont: Thanks, Olivier. Let's look now at the detailed description of our activities per activity -- sorry, sales performance per activity. Starting with the Professional business, where we experienced a slight organic growth with an activity that is up 1% organically, which is very much in line with our Q4 2025 trend. What we can see on the less positive side is that a persistent client wait-and-see attitude, of course, in the United States. This has not changed materially since the last quarter or the last quarter of last year, but also in the Middle East for obvious reasons, and that's intensified by the geopolitical context, of course. Yet we see a continuation of the positive commercial momentum, consolidating our leadership in China with Luckin Coffee, our biggest customer out there, but also new contracts in tea chain segment with a customer called Cha Panda, which is progressively expanding -- where we are progressively expanding our coverage. We also see new customers coming in, in North America, a chain called Scooter's of restaurants, that's a very good customer for us. And last but not least, Europe has shown positive performance, driven in particularly by the service business, which is more than elsewhere compensating the wait-and-see attitude on new machines purchase. We see and we are expanding our new growth levers. You know that by now that we've opened our Chinese hub in Shaoxing for production and development of new coffee machines, new ranges of coffee machines. And the 2 first new models we've developed called Peak and Elevation have seen great reception, particularly in the small businesses and offices segments, be it in Asia or in Europe. Now when it comes to the Consumer business, Olivier was saying that we have a balanced organic growth with total Consumer up 2.9%, EMEA up 2.5%, Asia up 2.2% and Americas up 6.7%. And before going into the details of these performance, it's interesting to look at the innovations that drive this performance. The big hit of last year, the washer category with X-Clean 10, which category we've reached EUR 100 million in 2025. We launched and are expanding last year -- we launched last year and are expanding this year, AeroSteam, which is the first vacuum garment steamer. We have a great expansion of our Titanium wok in Supor in China. The big success of Q4 last year that is continuing into Q1 is Cookeo Infinity, which is combining great multi-cooker programming and cooking programs together with air fryer function and the storing function. And the last 2 newcomers in the market that have been launched in France in March are Pizza Pronto, which is an electric pizza oven outdoor and Coffee Crush which is a revolutionary bean-to-cup coffee machine, which again, has started in France in March and is really giving promising results at the start. But beyond products and product innovations, we've also moved forward in the way we interact with consumers. We've made 2 kind of great activities. We had -- we organized in early April in Paris, a SEB Fashion Domestic Show with a digital show and staging, showcasing our consumer innovations, staging products as iconic pieces with lights, music, narration, a very original way to portray and to display our products. We've done great stunts on collections and immersion with product demos, with interactive experiences, with a gallery of innovations in best sellers, outdoor spaces, conviviality and tastings. And last but not least, we had great following and attendance by influencers. We've generated premium content on site that have boosted the visibility of those innovations. We had over 60 influencers with a cumulative reach of 16 million people. And in the very day of the event, we had already 1 million views on content generated that day. So that's what we did generally to introduce our innovations in France. But we also did a very specific dedicated event for the Coffee Crush launch, which started actually 2 months before the event with a prelaunch phase with influencers. We co-created content with them, the Crush Crew, as we call them, with a claim that is all the taste, less space. This machine is only 15 centimeters wide. So it is the most compact bean-to-cup coffee machine. And during that event at the end of March, we gathered 75 influencers with a total reach cumulated over 20 million. And since launch, we've generated over 5 million views. And last but not least, we've launched it in France, but we are now fast rolling out in over 50 markets by the end of 2026. So you've heard us say in the last few months that we will evolve our go-to-market, and we will intensify and accelerate our innovation strategy. And I think these are prime examples of what is changing in the way we connect and interact with consumers. Now back to numbers. EMEA had a pretty good quarter at 2.5% growth like-for-like, with Western Europe up 4.8% and other EMEA countries down 1.8% or is organic. In Western Europe, we had some positives with a good flow of loyalty programs. In fact, it is more than the flow of loyalty programs. Q1 last year was historically weak. So we are back this quarter on a regular flow of loyalty programs for the first quarter, maybe a little bit high, but still in line with what we usually do. That's the positive and the negative. Our German market remains challenging, and that continues the 2025 trend, which we are working very hard to fix. And the great super positive is France that delivered 21% growth, 5%, excluding loyalty programs, gaining market share and strengthening our digital activation strategies. So all in all, Western Europe that has been holding up quite well. Whilst in the other EMEA countries, we've experienced a slight decline in organic sales. Comps driven mainly for Eastern Europe. We had a very, very strong Q1 last year. We see growth in Turkey. That's great. And we have, of course, significant direct disruptions in the Middle East. Middle East is circa 2% of the total group revenue, but around 10% of that region, and that weighs somewhat materially on the performance of that subregion. If we go west to the Americas, we've confirmed in Q1 the improvement of sales in North America. We are up 4.7% like-for-like, driven by market share growth in cookware and in linen care in the U.S. And those market share gains are driven by innovation in a somewhat deteriorating market. Mexico shows negative sell-in impacted by still high inventories from retailers and fans, but positive sell-out, leaving a room for an improvement through the year. When it comes to South America, we've experienced a return to growth, up 10.9% in the subcontinent, driven by range expansion into new categories, coffee-based products, floor care, blenders, a less pronounced decline in fan sales. You know that we are still comping strong numbers. And of course, this La Niña effect is fading away, a favorable comparison base in Brazil, which was pretty slow last year in Q1 and a very healthy continuous double-digit growth in Colombia. If we go East, China growth momentum is maintained at 2.3%, that continues 2025 trend. The environment is highly promotional still in China, and we are managing the balance between sales growth and profitability growth. Our growth is multi-category driven by cookware. I mentioned the Titanium wok as one of the key innovations for the year, but also kitchen utensils, garment steamers, rice cookers with new heating systems, which are catching up very well in the market. And we are confirming notable success for Supor in social commerce. We are #1 in Douyin. Douyin is, as you know, the Chinese name for TikTok. Going around the other Asian countries. Overall, it's a positive quarter with continued growth in Japan and continued growth in South Korea, where the market is still very complex. We have good momentum in most Southeast Asian countries, especially online and in social commerce, 2 strong platforms, Shopee and Lazada, where we are driving the bulk of our growth up there. And we're expanding our ranges of products in Australia with blenders, spot cleaners and others. Now how does that materialize in [ profitability ]? Olivier Casanova: Okay. Thank you. So first, let's say, a reminder, which we, of course, provide every year for the first quarter. As you know, this is historically providing a limited contribution to the full year results given the seasonality of sales. And secondly, of course, we need to be cautious and not draw too many conclusions on the full year trajectory. And of course, in addition, last year was a particularly, let's say, low quarter for Groupe SEB. That being said, we are delivering EUR 72 million of ORfA in the first quarter, up 42% on Q1 last year. This translates into 3.8% operating margin, up 1.2 percentage points. This is the result of positive organic sales growth, which is driving increased contribution at the gross margin level. We are benefiting, as we had announced from positive currency effect in the quarter. Of course, the positive contribution of short currencies. You remember that those benefits, let's say, took some time to filter through our P&L last year. But finally, in Q4, we benefited from this positive contribution. And as expected as well, we are seeing in Q1 this year, a better offsetting of the long currencies depreciation through price increases. In addition to these elements, we are benefiting this quarter from decreasing operating expenses, which is, let's say, principally the result of selectivity in terms of growth driver engagement, but also reduced structural costs, in particular, on G&A, which is evidence to some extent also from the [indiscernible] initial benefit of the Rebound plan. Stanislas De Gramont: [Foreign Language] Olivier, I will now go on the outlook with 2 parts. The first one is still fairly qualitative, but I think it's worth mentioning. It's on the Rebound plan. We are deploying that plan and the deployment is in line with our objectives and deadlines. As you remember that the Rebound plan was with 2 dimensions. One was to reinvent our growth model and you see that there is an acceleration of the innovation. You see that there is an evolution of our marketing transformation, and we are deploying this marketing transformation throughout our market companies. We have an ambitious target of reducing our SKU ranges by 20% to 30%, depending on the categories. We've identified 80% of the candidates and are now in the execution phase of that project. And when it comes to the second dimension, which is about reducing our cost, we've launched almost all initiatives related to indirect purchasing. And we already see in the first quarter some initial benefits in the P&L. So that's great. I mean that is what supports the first quarter that is ahead of expectations in terms of profits. And when it comes to the dimensions of industrial efficiency and overheads, we started our negotiations with employee representatives the day after the announcement on the 25th of February. And today, those negotiations are in line with the set schedule we've set ourselves. So we confirm what we've said as a time line for the Rebound plan. Now when it comes to the outlook for 2026, we've added a comment -- the outlook is the same as the one for 2026 as the one we shared back in February. We've added one comment, which is about the uncertain and deteriorating macroeconomic and geopolitical environment. Even with that, we confirm our ORfA growth in 2026 together with a more normative free cash flow generation. And we also confirm our ambition to lower our financial leverage in 2026 with the objective of returning to the group standards of around 2x, excluding acquisitions by 2027. [Foreign Language] It's been pretty fast. It's now your turn to come up with your questions that we'll be delighted to answer. Thank you very much. Operator: [Operator Instructions] The next question comes from Ope Otaniyi from GS. Opeyemi Otaniyi: Just 2 from my end on sort of what you're seeing from consumers, but also maybe addressing sort of anything that's changed from -- on logistics and costs just given the current crisis. So do you mind just giving a sense of what you've seen through the quarter in terms of consumer behavior and how you see that translating into sort of underlying demand? And then just given the Middle East crisis, could you sort of comment on how to think through costs for the rest of the year, sort of any impact on logistic costs as well or any commodity inputs as well? Stanislas De Gramont: Thank you for your question. Not surprising question. I think it's in everybody's mind. Well, let's say that the first quarter hasn't really seen any impact either on the cost or on the consumer demand or consumer confidence, except, of course, the direct exposure to the Middle East, which I commented in the EMEA segment. The second comment as I would make is we are -- we don't have clarity as anybody else on what is the scenario and what is the impact of that crisis. It depends on the length of the crisis. It depends on the depth of that crisis. And maybe what I can say is that we are confirming our perspective for the full year, having considered the likely scenarios, which are currently being evaluated by the various institutes or economist reports. Maybe the third thing I'd like to add is a lot of our profit because you can ask, well, you would be -- it would be fair to ask but why are you still confident? I think the bulk of our profit improvement comes from our own actions. First, we have a favorable base effect, and we know that we have some negative contractual effects last year that will not materialize or are not -- do not seem to be materializing this year to any extent. So that's the base effect that is probably supporting part of our profit development. Our innovations, we see that our market even in more difficult market conditions when we have powerful innovations that are well activated, we're able to generate some sales and margins development. So I would say the third argument that makes us stick to our forecast is that most of the improvement will be driven by our own actions. Opeyemi Otaniyi: And maybe just -- I appreciate maybe Q1 and Q2 sort of maybe not the most important quarters, but do you mind just commenting on working capital and what you've seen in terms of logistic costs and sort of inventory levels? Stanislas De Gramont: Yes, sorry. Maybe I should have added, but that's -- I made it in my comment of the first quarter performance. We have the Rebound, of course, which will be a contributor to that recovery or that development of the profit base. Sorry, I skipped it because I said it in the last sentence of the [ expose ]. Now logistics, today, what we see is fuel surcharges, be it on the sea freight or on the road transport. Those surcharges are well identified. We know how much they impact. It's a bit early again to share a number. But what we -- the actions we put in place are more than enough to compensate and offset those negative impacts. That's for the cost -- the direct cost side. On the current product access and ability to ship products, we do not see at this stage any impact on our ability to ship products from Asia to Europe or to the United States. And we don't foresee in the current scenario [ maybe ] because the Strait of Hormuz is not a route that we use to ship our products. Does that answer your question? Opeyemi Otaniyi: No, that's yes. Operator: The next question comes from Natasha Brilliant from UBS. Natasha Brilliant: Just to come back to the previous question, just on kind of current trading. You said that Q1 hadn't really had any impact so far. But just to confirm, any color you can give us on the first few weeks of Q2? And if there's been any change, that would be helpful. Second question is just on the Professional business. I think you mentioned some new contracts in China and some new clients in the U.S. So if there's any more detail you can share on those and if you have any visibility on other contracts in the pipeline? And then my last question is just on the Rebound plan and as you start to implement it, if you can tell us what the cost has been so far in Q1? Stanislas De Gramont: I will -- okay, thank you very much. I think that the general comment on all these 3 questions is they're probably a bit early to be able to give you more color. I can answer the first one that today, we don't see any material change in Consumer sentiment in the first 3 or 4 weeks of April. I've been speaking to a couple of customers in the last few days in a couple of countries, and they don't see any material impact. Of course, there's seasonal impact, but nothing where they can say, there's a shift. On the Professional contracts, we don't disclose our contracts. We use those examples to illustrate the fact that the activity, albeit slightly growing only still is collecting and is gathering new contracts in our core business. And we have a pipeline that is not bigger, not smaller than usual on large contracts. And for the cost of the Rebound plan, it's very early. I mean the bulk of the savings that we've collected so far are on indirect purchasing, and they are mostly savings with no cost attached to it. The bulk of the cost of the Rebound plan is linked to the social activities, and those have not been booked yet. Olivier, do you want to complement on that point? Olivier Casanova: As you said, we've indicated during the full year results call that we expect to be booking most of these, let's say, provisions in the second quarter before the June close. We expect at that time to have sufficient clarity on especially the social terms in order to be able to book the provision. So far in Q1, it's still too early, as Stan mentioned. Operator: The next question comes from Marie-Line Fort from Bernstein. Marie-Line Fort: I just want to come back on the currency impact on your first quarter earnings. I know it's not really representative. I just want to know what is the phasing all over the year because you started to benefit to better currencies on Q4. On the top line, currencies will fade in negative terms on your top line as soon as Q3, probably. How do you see the momentum in terms of currency and positive impact on your earnings? That's my first question. The second question is about your -- the indirect savings that you made in Q1. Could you confirm the envelope that you are targeting for the full year? I've got in mind EUR 50 million, 5-0. Could you just confirm these figures? And my last question is about Coffee Crush. Just wanting to know where the machine is produced. The machine is sold at very low prices. Is it still margin-wise, same-wise -- same margins at the consumer? Or would it be dilutive on margin? And also, when do you plan to increase the coverage over the European market? Stanislas De Gramont: Okay. I'll start with the third one, and then Olivier will answer the last 2 -- the first 2, sorry. Coffee Crush is margin dilutive to the Consumer business. It is made in China. It is sold at EUR 350, EUR 320 and EUR 300, which is -- which delivers pretty good margins. It will be expanded in 50 countries beyond France by the end of 2026. So it's a very good business. And it is made today outside of SEB in OEM manufacturer in China. Olivier? Olivier Casanova: So on the currency impact, if I split between long and short. So on the short side, of course, if the CNY and the U.S. dollar remain at the current level, we should continue to benefit from a positive impact throughout the year as we've indicated in the past. On the other -- the long currencies, in particular, currencies from emerging markets, we are seeing maybe less depreciation than we were expecting. Of course, it's impossible to say whether that's going to last or not. But if it does, we'll probably see, let's say, a lower impact than expected. But as you know, in those countries, we are able to compensate the depreciation by price increases. So if there is less depreciation, by definition, there will be less compensation. So net-net, we are probably operating in a slightly more favorable environment in terms of currencies, but I think we need to be very prudent given, let's say, the high volatility in the current geopolitical and macroeconomic environment. On indirect savings, we said that the bulk of the EUR 200 million savings that we are expecting to generate should come from the effort on the structural cost base and that indirect savings will represent a smaller portion. So you say EUR 60 million. I don't recall precisely stating a number, but it's not a million miles away. I think we are confirming that this is very much our objective. We'll see. It's a bit too early to say whether we can exceed that objective, but it's certainly being confirmed by all the more detailed work that we have been carrying on. And as we said, we have already implemented the vast majority of these actions. They are currently already starting to produce some positive results. Operator: The next question comes from Alessandro Cecchini from Equita. Stanislas De Gramont: We can't hear you. Operator: The next question comes from Fraser Donlon from Berenberg. Fraser Donlon: Just checking, you can hear me? Stanislas De Gramont: Yes. Fraser Donlon: So the first question was just about the loyalty programs. Could you maybe help understand what would be the organic growth in Western Europe ex LPs? I know sometimes you gave that number in the past. And then how should we think about the phasing impact on loyalty through the rest of the year? If you could just give a reminder there. And then the second question was just thinking about the changes to tariffs on aluminum and steel products in April. Could you kind of highlight how we should think about that basically for the kind of Tefal products primarily? Stanislas De Gramont: Change of aluminum and steel tariffs in April. So Olivier will take both questions, Fraser. Olivier Casanova: Okay. Thank you. Fraser. On the loyalty program, I mean, the first thing that we should maybe restate is that loyalty programs are, of course, part of our business. They're an integral part of the Consumer business. They are just one of the different ways in which we are doing business. The reason why we sometimes highlight the importance of this loyalty program is that it's the same with large contracts for Professional. They can provide some distortion in the reading of the number. And it's true that last year, our loyalty program were particularly low. And this year, as we said, they are, let's say, back to a more normalized level, and they provide a significant positive tailwind for this quarter. I think the thing to bear in mind is that France is where we have the largest impact. And France, excluding loyalty program, is up 5%. And this is evidence of market share gains in many product categories, thanks to our strong product pipeline. On the second topic, which is the input cost, well, first, yes, we have seen some tensions on raw material. You name aluminum, but of course, we have the same with plastics and, let's say, a few other input costs. The extent of this increase, of course, will depend to some -- on the length of the current crisis in the Middle East. And so we are monitoring this situation, of course, very closely. We have identified already some, let's say, counter-measures and some of them are being implemented, and we will adjust as the situation develops. But as we mentioned, we don't think that they are of a nature at this stage to change our forecast for the full year. On aluminum, more specifically, you will remember that we have a rather prudent hedging policy. And in particular, on purchases for Europe, we are very well hedged above 80% at the beginning of the year. So that is, of course, limiting the negative impact on our results from aluminum increases. Operator: [Operator Instructions] Stanislas De Gramont: Maybe it's Alessandro from Equita? Operator: No, we don't have him back. Stanislas De Gramont: Okay. Operator: The next question comes from Geoffrey d'Halluin from BNP Paribas. Geoffrey d'Halluin: I will have one question regarding to the U.S. tariffs and the Section 232. I guess there is a new proposal from early April, which has been put in place. Just wondering if you have any thoughts and if you could be impacted by this new proposal, please? Stanislas De Gramont: Olivier? Olivier Casanova: Okay. So thank you for the question. It's a fascinating topic, of course. We have to distinguish 2 things: the reciprocal tariff on the one hand and the Section 232, which is applicable for aluminum and steel derivatives. So on the reciprocal tariff, first -- the first topic for us, of course, is to obtain the benefit of the reimbursement after the U.S. Supreme Court decision earlier this year. So we can confirm that we have put a request for reimbursement after the opening of the CAPE platform on the 20th of April, and those claims have been accepted. So we will wait, of course, until -- wait for the reimbursement to hit our bank account before we can, let's say, disclose more details, but that, of course, should be although an exceptional, but it should be a positive for us this year. With regards to the 232, there has been a change in the way this is calculated. It was until the recent change calculated, it was a 50% surcharge calculated on the aluminum or steel content. It's been replaced by a new method of calculation, which is 25% on the overall product. That change is almost neutral for us. So there is no big difference in terms of the -- given the content of aluminum and steel in the product. The final change is the, let's say, removal of the reciprocal tariff and the implementation of a 10% surcharge for all countries. That probably has a moderate net positive impact for us, but we remain very cautious because, of course, these things are fluctuating and we are, of course, monitoring the impact this has on selling prices. So I think net-net, let's say, no material adverse impact, potentially slightly positive. Operator: There are no more questions at this time. So I hand the conference back to the speakers for any closing remarks. Stanislas De Gramont: All right. Thank you very much for your questions. No surprising questions. I think this is a solid quarter, one that we were expecting to drive through. We've started the year saying that we would be managing our business with a strong priority of recovering profitability. I think, as Olivier said, the first quarter is only a mere 10% or 8% of the total year. But still, I think it represents the way we want to drive the year. We feel the context is getting more and more uncertain and deteriorated, yet we are on track to implement the right level of actions in terms of margin protection, in terms of cost savings, and we're confident that we will be able to navigate this year with what we see today. Thank you very much for your support. Thank you very much for your analysis, and I wish you all a great result season. Thank you.
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.]
Operator: Good day, and thank you for standing by. Welcome to the First Quarter 2026 Domino's Pizza Earnings Conference Call. [Operator Instructions] Again. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Greg Lemenchick, Vice President of Investor Relations and Sustainability. Please go ahead. Gregory Lemenchick: Good morning, everyone. Thank you for joining us today for our first quarter conference call. Today's call will begin with our Chief Executive Officer, Russell Weiner; followed by our Chief Financial Officer, Sandeep Reddy. The call will conclude with a Q&A session. The forward-looking statements in this morning's earnings release and 10-Q, both of which are available on our IR website, also apply to our comments on the call today. Actual results or trends could differ materially from our forecast. For more information, please refer to the risk factors discussed in our filings with the SEC. In addition, please refer to the 8-K earnings release to find disclosures and reconciliations of non-GAAP financial measures that may be referenced on today's call. This morning's conference call is being webcast and is also being recorded for replay via our website. We want to do our best this morning to accommodate as many of your questions as time permits. As such, we encourage you to ask 1 question only. With that, I'd like to turn the call over to Russell. Russell Weiner: Thanks, Greg, and good morning, everybody. Q1 represented another quarter of positive order count and market share growth for Domino's in the U.S. While I was pleased with our start to the year, performance for the rest of the quarter did not meet our expectations, resulting in same-store sales of 0.9%. We are very clear on the drivers of our results, and we'll do everything within our control to address them by adjusting our plans in the second half of the year. Looking back at Q1, pressure intensified throughout the quarter, in particular, in March because of growing consumer uncertainty. Consumer sentiment hit COVID level lows and ongoing inflation continued to impact purchase decisions. Weather also affected our business in the quarter, including the beginning of our carryout special boost week. Competition within the QSR pizza space also increased in Q1 as the national pizza players offer deals comparable, if not identical, to the renowned value Domino's has made famous. While this created some short-term pressure, we believe Domino's wins in the sustained value environment. Our advantage is profit power, the ability to offer compelling ongoing value while driving profit growth for Domino's franchisees. Our industry-leading advertising budget drives the order counts needed to make this value model work profitably over time. Our pizza competitors simply don't have that same capability. As a result, we believe that when competitors match our value, it places significant pressure on their franchisee economics. Over time, we expect this pressure to contribute to more store closures on top of the roughly 450 closures our 2 public pizza competitors have already announced for 2026. I believe these dynamics will translate into more sales, more stores and more profits for Domino's franchisees. In Q1, we continued to make strong progress on our Hungry for MORE strategy. I want to call out a couple of areas, particularly within the operational excellence pillar that we believe will play a major role in driving our future success. We fully launched our new app, including improvements to our world famous pizza tracker, which has tracked more than 2.5 billion orders since 2008. This new modernized app is much easier for our customers to use and will allow for more personalization over time. And the updated tracker provides more precise ready time based on new AI technology, live activities for iOS users and a more detailed view of each orders progress. The closer we can deliver our products to the time we promise our customers, the more they come back in the future. The updated tracker helps us do just that. In addition to the consumer-facing app, we made progress in our back-of-house DomOS orchestration agent that makes production more efficient and effective. This orchestration agent allows in order to be prepared hot and fresh for our customers in the most efficient way possible. For example, if there's not going to be a driver back in time to pick up a pizza when it exits the oven, this technology can alert a store to hold that order so it isn't made until a driver is there. Our goal at the end of the day is just in-time pizza making, which will result in a more consistent, higher-quality product for our customers. As I finish up, I want to highlight why I remain so bullish on our business now and in the long term. On our February earnings call, I shared my view on the QSR pizza category growth and my confidence that we can outperform the competition and capture meaningful market share in 2026 and beyond. That view remains unchanged. I'll start with 2026. We are committed to doing everything we can to deliver 3% same-store sales in the U.S. for the year. While I already addressed why we believe we missed our plan in Q1, those were reasons, not excuses. Our team is hard at work making the adjustments we believe are necessary to drive an even bigger impact in the current macro environment. I'm especially energized by the product innovation we're bringing in the second half of the year, particularly around pizza, which goes beyond what we originally planned. It's bold, exciting and has real potential to elevate our brand. Now to my belief in the long term, which is as strong as it has ever been. You've heard me talk about how we've taken 11 points of market share over the past 11 years in the U.S., let's go a little bit deeper, let me tell you how we gained that market share. We did it by driving more sales, more stores and more profits. First, sales. Our same-store sales have grown on average more than 5% annually over that time period. Next, stores. We've opened more than 2,000 net new stores over the last 11 years amidst a backdrop of significant competitive closures. And finally, profits. Our average franchisee has increased profits almost $80,000 per store. This means the Domino's franchise system is earning $740 million more in profits than it did just 11 years ago. This has been and will remain our formula for success. More sales, more stores and more profits drive more market share, more market share, drive scale, which strengthens our competitive advantage. That is the Domino's effect, working for over a decade, delivered again in Q1 and one we expect to continue well into the future. I'll now hand the call over to Sandeep. Sandeep Reddy: Thank you, Russell, and good morning, everyone. Income from operations increased 4.2% in Q1, excluding the impact of foreign currency and a gain on the sale of the company's corporate aircraft. This increase, which came in below our expectations, was primarily driven by higher U.S. and international franchise royalties and fees as well as gross margin dollar growth within supply chain. Excluding the impact of foreign currency, global retail sales grew 3.4% in the quarter due to positive U.S. comps and global net store growth of more than 900 stores over the past 12 months. In Q1, retail sales grew by 2.8% in the U.S., driven by same-store sales and net store growth. The U.S. QSR pizza category grew again in the quarter, and we continue to take share. Same-store sales grew 0.9% for the quarter, driven by our marketing promotions and continued growth in our aggregator business. Our business was impacted by a challenging macro environment, which continues to pressure consumers as well as increased competitive activity. Our comp was driven by a balance of positive order counts and a positive average ticket. Ticket benefited from 0.9% of pricing, partially offset by a negative mix impact. Our carryout comps were up 2.4% and delivery was down 0.3%. Shifting to U.S. unit count. We added 19 net new stores, bringing our U.S. system store count to more than 7,200. International retail sales grew 4%, excluding the impact of foreign currency in the quarter. This was driven by net store growth over the last year, inclusive of 161 stores in Q1 that was slightly offset by same-store sales decline of 0.4%. Excluding the headwind on our comp sales from Domino's Pizza Enterprises in the quarter, we would have met our expectations. Moving to capital allocation. Through April 21, we repurchased approximately 446,000 shares for a total of $170 million year-to-date in fiscal 2026. As of April 21, we had approximately $1.29 billion remaining on our share repurchase authorization. This is inclusive of the additional $1 billion share repurchase authorization that the board approved in April. I wanted to take some time to remind everyone of the incredible profit and cash flow generation of our earnings model. If you go back to 2015, Domino's generated approximately $400 million in operating income and approximately $230 million in free cash flow. In 2025, that grew to approximately $950 million and $670 million, respectively. Over the same time period, we have returned approximately $7.7 billion to shareholders through share repurchases and a dividend that has grown annually by more than 20% on average. We have done all of this while maintaining a leverage ratio in our expected range of 4 to 6x. We expect to deliver meaningful cash to shareholders in 2026 and beyond, in line with our capital allocation priorities, and will look to drive the best possible returns for our shareholders as we evaluate our options. Now turning to our updated outlook for 2026, which excludes the impact of the 53rd week. First, U.S. same-store sales. As a result of the challenging start to the year and increased macro pressure, we now expect our U.S. comp to be up low single digits in 2026. As Russell noted, we're actively optimizing our marketing calendar to meet the moment and ensure we're well positioned despite the current macro environment. Second, we now expect our international same-store sales growth to be low single digits, primarily as a result of the macro and geopolitical uncertainty across the world. Third, we continue to expect 175 plus net stores in the U.S. and approximately 800 net stores in our international business. As a result of our revised same-store sales outlook, we now believe our global retail sales growth will be up mid-single digits for the year. Due to our lower sales expectations, we now expect operating income growth of mid- to high single digits, excluding the impact of foreign currency, refranchising gains and the gain on the sale of our corporate aircraft. As I close, I want to be clear that our team is fully aligned and working with urgency to deliver our 2026 outlook and that our belief in the long-term algorithm of the Domino's business through 2028 has not changed. Thank you. We will now open the line for questions. Operator: [Operator Instructions] And our first question comes from David Tarantino with Baird. David Tarantino: Russell, I just wanted to ask your thoughts on the comps outlook for the remainder of the year. It looks like you're guiding to continued positive comps even though the comparisons look like they get quite a bit more difficult. So I'm just wondering if maybe you can unpack why you think the business might be able to accelerate on an underlying basis? And I know you mentioned some innovation that's coming and adjustments to your plans. And maybe as part of the adjustments, does that mean perhaps a bit more focus on value? Or I guess, what -- if you could elaborate on that, that would be great. Russell Weiner: Thanks, David. I'd like to say, even though Sandeep talked about a revised guidance, my objective, his objective, everyone at our company, our objective continues to be for the year in the U.S. 3% same-store sales. And we had a pretty light first quarter last year and folks asked whether or not we thought we could hit 3% for the year, and we did, and that remains our focus, that remains our objective. You're right, though, we have absolutely looked at our calendar and asked ourselves within what we can control, how do we change things? How do we see what out there in the environment? And it's not just value, I think we can do a little bit more on pizza innovation as well. And so starting as soon as May you're going to see things on the calendar or in media from Domino's that weren't on our calendar to start the year. So our plans moving forward will look very different than they were starting the year, and that's because we adapt to what's going on in the broader environment. Sandeep Reddy: And David, I'm just going to add on the guidance specifically on positive low single digits. I want to emphasize the positive. I think we're really confident that even with the macro environment and the volatility that we see in the macro environment, with all the leading in that Russell just talked about, we are still confident of driving positive low single digits. That's point number one. Point number 2 is, we're still growing stores. We are expecting 175 stores. We grew 172 stores last year as well. And we are expecting to drive retail sales growth definitely well above the same-store sales growth that we're talking about, continuing to drive market share growth in a category that we believe will continue to grow. Operator: Our next question comes from Greg Francfort with Guggenheim. Gregory Francfort: I just want -- maybe just wanted to follow up on that. And Russell, anything you're seeing competitively in the environment right now that maybe as your competitors are acting a little bit more rationally or anything you can see from that front? And then do you expect with your competitors maybe closing stores later this year? Is that something you could see from an [indiscernible] basis? Russell Weiner: Thanks, Greg. On the competitive side, I think what they're doing is they're seeing what has made Domino's successful. And if you look at Q1, one of the things I talked about in my opening remarks is a lot of the promotions they had there were really out of our playbook, kind of their version of best deal lever, our mix and matches, and to that, we say bring it on because we're built to do that stuff over time. Now you add that to some of the macros, and was that a little bit of a headwind for us in Q1, yes. But I think it really delves really well into your second point, which is the closures that they've already announced for the year. Greg, I know the kind of volumes that need to be done in order to make deals like the ones we have out there profitable. And I do not believe that our competition can drive those kinds of volumes because their advertising budget, ours is as big as the biggest 2 competitors combined, just can't do that. And so believe me, I was not pleased with our results for the quarter. But I do think that there was potentially a little bit more structural damage behind the scenes. And you'll see that, I think, in future quarters and future years coming up in store closures and then in kind of lighter franchise profits for our competitors. Sandeep Reddy: And Greg, what I'll add is, Russell talked about the 450 stores that are national competitors that are publicly traded or have quoted. But really speaking, if I go back into '25, they closed about the same number of stores last year too. So our playbook has been to continue to squeeze their profits, they close stores, we take sales, we take share. What is happening in '26 is no different. It's a continuation of the same play and that continuation of the same play should continue well beyond '26. And that's why I think what Russell said on the profit power is super critical. We are able to actually continue to drive this playbook forward. Operator: Our next question comes from David Palmer with Evercore ISI. David Palmer: I just want to present maybe a common investor view and push back, and that is that it's not a pushback that Domino's will gain share in the pizza category and especially from the near-end big 3 players. It's really that Domino's operates in the pizza category and that you've talked about 1% to 2% growth for that category in the past, and that, with your share gains, which I think people can believe in, will get you to that 3% comp growth while growing units. So the concerns about the pizza category in light of the fact that other categories are more available on in delivery channels now, and I guess the concern is that maybe 3% is not appropriate in light of that, even though your long-term delivery has been strong and, in fact, better than 3%, the concern is that the reality is different today. Could you just speak to any of that and how it informs your strategy? Russell Weiner: Thanks a lot, David, for the question. I've been here, this is my 18th year at Domino's, and I feel like every year when I get in front of our team and I talk about category growth, it's 1% to 2%. And we've talked -- if you remember last quarter, I had a lot of questions -- I'm sorry, first quarter last year, a lot of questions about the pizza category, which got off to a slow start last year, but guess what, ended up at 1% to 2% for the year. And so this is a trend that has been pretty consistent, and we just don't see falling off. And maybe just getting to your delivery question, I'd answer it in a little bit different way. Look, delivery, certainly other folks are getting into this game have gotten into this game. But you've got to remember, we're now -- we've changed our strategy, and we're on the aggregators. And essentially, this last quarter, on delivery, we held serve on total delivery. That is something, in the past, domino's would not have done because of the structure of our consumers. And what we talk about a lot is lower income consumers, which we have a QSR pizza and Domino's have a good amount of those customers, when it comes to delivery, when times are tight, what happens is we don't lose those customers, we may lose an occasion, those people come back. And so this quarter, with all the headwinds out there with consumer confidence being low, this normally would have been a quarter where we took our total delivery business that I think even a bigger hit. But the fact is us being on aggregators with a higher-income customer, the incrementality of that, our full delivery strategy results are probably a little different than they would have been in the past. And I'd point to as well is this carryout business that just continues to grow for us, it's a bigger portion of the pizza category, bigger portion of the QSR category, and we can continue to grow that in addition to opening up all those new stores, which helps us with carryout as well. And so David, net-net, history hasn't changed. We're a couple of months -- a few months into a year. And I'm really bullish about our ability to grow in a category that can continue to grow. Sandeep Reddy: And I'm just going to dimensionalize some of the numbers that Russell talked about. I think the delivery category in QSR pizza is a $17 billion category, of which the aggregator business is, call it, $5 billion roughly. And -- but now to Russell's point, we're playing in both the 1P as well as the aggregated piece, which is why we were able to actually drive the kind of results that we were able to drive in Q1 despite a very tough environment. But the really important thing over here is we have a 33% share in the delivery business today. But if I actually look at the carryout business, the carryout category size is $21 billion. That's about half of all of QSR pizza. Our share there is just 20%. We have significant runway of growth on the carryout business that we can actually tap into. And I think that's the exciting part about the strategy. And it goes back to what we talked about at our Investor Day in 2023. The aggregators was certainly a very important piece of it, but is significantly underpenetrated in carryout and that's a big part of how we actually look at the 3% same-store sales growth objective we have. Operator: Our next question comes from Brian Bittner Bittner with Oppenheimer. Brian Bittner: So you talked a lot in your prepared remarks about some of the sources of pressure you experienced in the first quarter, and the first quarter was something in that 300-basis-point trend change from where you were in the fourth quarter. But you also said in the first quarter that you did take market share and that the industry remained in solid shape, the QSR pizza category. So when you look at that trend change that occurred for Domino's comps in 1Q, was it more driven by taking less share than you've been taking? Or did the QSR pizza category see some type of trend change for the entire industry? Can you just kind of maybe unpack the current trends we're seeing in the business right now versus where we were? Sandeep Reddy: So Brian, I think when we look at Q1, there was a lot of noise in Q1. And I think we talked about some of the weather issues that we had earlier in the quarter. But then starting in March, we saw a significant macro and competitive pressures weigh on the business as well. Through all that noise, we still saw the QSR pizza category grow. And through that noise, we actually grew faster than the pizza category. And we did take share to the point that we made in the prepared remarks. What I think is important to note is Russell talked about the fact that competitive activity is stepping up did have a short-term impact in the quarter. But in the long term, we believe that the competition is not going to be able to drive the profitability they need to sustain that. So we look at share really on a much longer-term basis. And on a longer-term basis, we've continued to gain significant share. And even in a quarter that was a bit tough for us in Q1, we gained share. So we feel really good about what the long term holds for us, and we'll keep on running the play we are. Operator: Our next question comes from John Ivankoe with JPMorgan. John Ivankoe: I'm interested to hear that some of your previously unplanned innovation is around pizza. And certainly, I'll be very curious to see what type of pizza innovation that you can do at this time. That's the first point. Secondly, there are significantly growing categories around premium chicken and also sandwiches. Your operating platform does permit both of those. So to what extent is there an opportunity for you to extend both in terms of your capability of your stores and your supply chain into some non-pizza categories, which are actually quite large like premium chicken and sandwiches? Russell Weiner: Yes. Thanks, John. We've got a multiyear product innovation strategy and funnel. And so what we're able to do in times like this is to say, okay, what's going on in macro, and what can we do to inflect any kind of negative externalities that we're seeing right now. And I think we're going to do that with some of this pizza innovation. And this is stuff that's either moved up in the calendar this year or didn't even exist on our calendar before that got started. And as I said, I'm really excited about those. And I guess you'll have to just wait and see, but I promise you, you will be as well. You're right about the overall product portfolio we've got. Of 40-plus percent of what we sell is not pizza. One of the first things I did actually when I was at the company in 2008, we launched sandwiches. And so we've had sandwiches well back for a very long time. We've got a wide variety of chicken products. As you know, we're also globally testing something called Chicken Dip in the U.K. And so far, DPT is very excited about the performance of that. And so product innovation pipeline is something that is very robust here. We do think what we've got right now with our pizza oven, all of our products can go through that, and we can make the most delicious food there. But obviously, things are on the table if needed, but that's where our focus is. Operator: Our next question comes from Peter Saleh with BTIG. Peter Saleh: Great. Maybe I just want to come back to the health of the consumer in 1Q. Can you maybe talk a little bit about that performance by income cohort as you've talked about it in the past? And just curious if you think the shortfall this quarter was really due to the competitive pressure in pizza, which might be a little bit more transitory? Or do you feel like this was an overall QSR kind of pressure in the quarter? Russell Weiner: Yes. The -- when we look at the consumer this quarter, the kind of the uncertainty there when you look at the surveys or kind of at COVID level lows, and that is particularly magnified when you look at the lower income customer. And so I do -- pretty confident both in pizza and QSR. You're going to see pressures there. And that's why not only in pizza but in the rest of QSR, you saw a lot of value out there. Companies are going to give consumers what they're looking for. And so clearly, they're looking for that, and that's why the competition is leaning in on value. The thing I'd say about the quarter, certainly wasn't the quarter that we had initially expected. But if you look at the composition of our 0.9%, a couple of things. One is from a retail sales point, and maybe this gets to Brian's question a little bit beforehand, we're up 2.8%. And so when we grow, it's not just in same-store sales, it's total source -- I'm sorry, it's total retail sales. And then when you look even beyond the composition of the same-store -- within the composition of same-store sales, and you look at every income cohort for us, and I don't think this is going to be the same for the rest of the QSR, we grew, including in the lower income cohort. So there are definitely some bright spots when you think about what the rest of the year has in store for a pressured customer. Operator: Our next question comes from Chris O'Cull with Stifel Financial Group. Christopher O'Cull: Russell, you mentioned that you expect competitors to close additional stores. Just wondering if the company has a sense of the sales lift franchisees are getting in markets where competitors stores have already closed. And are there certain geographies where you're seeing more closures by the competitive set? Russell Weiner: Thanks, Chris. Yes. No, certainly, we're seeing a lift when there are closures. A couple of things. One is, I think in general, we expect to see our fair share, so you take our share of piece of sales in that area. That's kind of what we expect to see when they close. Now the thing to remember is these closures happen because of business pressures over time. So when the stores close, they're not million-dollar stores in AUV, they're probably close to half of that. So while the flow-through continues to come at those levels, it happened, and the attrition happens over time. What I was trying to say before is, I think the attrition will continue. So whether it's in store closures or just in less sales that lead to less profits that lead to eventual closures, this is something we've been doing for a long time. And I think it's just proof that this strategy is working. 11 years, 11 points of market share, and 11 points of market share in a category that's growing. This was not a increase in a declining category. This was sales averaging more than 5% annually over those 11 years, 2,000 new stores over those 11 years, and franchisee profits increasing over those 11 years, and that's why we're so bullish on the future. I mean, last year, Q2, Q3, Q4 were all really strong quarters. Q1 wasn't where we thought it would be, but that doesn't mean it's a predictor of the future. The predictor of the future is what we've done in the past, what we have and will have on the calendar and our ability economically with our franchisees to continue to push within a category that we expect to still grow, gain that market share and continue to gain sales. It's not at all something that should not continue. Operator: Our next question comes from Dennis Geiger with UBS. Dennis Geiger: I wanted to ask another on value and value positioning and sort of a little more on what you've seen maybe from some of the recent promos. But more importantly, as you think about competition from the large pizza brands, maybe even from C-store and then the non-pizza QSR players that you kind of touched on, do you feel over the near term that you've got to do even more on the discounting front or more generous offers? Or do you do you weight out the competitive intensity, I guess, as you touched on the fact that it's not sustainable longer term? Just curious on that front, how you approach it over the coming quarters or so? Russell Weiner: Yes. Thanks, Dennis. When I think of competitive intensity, I think of us as the driver of competitive intensity. Renowned value is one of the core pillars of our Hungry for MORE strategy as well as the E, which is our -- everything we do is enhanced by our franchisees. So we drive renowned value and still drive profit, and profits were up last year. with our franchisees. So I think on this one, we're actually the ones in the lead. We're the ones that can drive profitable volume growth through this and other folks that are kind of trying to follow that lead, certainly, in the short term, they may keep more of their customers. But in the long term, I think this makes it more difficult for them to compete more difficult for them to have those franchisee conversations about promoting the next offer. So we can continue this well on into the future in a way that gives consumers what they're looking for, and gives our franchisees what they deserve, which is profit growth. Operator: Our next question comes from Lauren Silberman with Deutsche Bank. Lauren Silberman: Just a level set of on, I guess, what are you defining as low single digit to the 0% to 3%? And then my actual question is just on the gas prices, obviously, we've seen a big increase. How does that impact Domino's across a few different fronts? If you can comment on U.S. and international, maybe, one, on consumer demand; two, and just the impact on the supply of delivery drivers, and then any thoughts on the commodity cost outlook? Russell Weiner: Maybe I'll take the gas prices one, maybe you can talk a little bit about guidance. Thanks for the question, Lauren. The gas prices right now, what we're seeing there is really more of the impact on consumer disposable income. And as long as that continues, I think that will continue to be a driver of both consumer confidence and what our customer is able to afford if gas prices are higher, which is why the companies that are going to exceed during this -- to succeed during this time frame are the ones who can continue to drive profitable value because that is not going to change. On the availability of drivers, we are staffed to levels that I'm very, very happy with, and that's been consistent for a long time, and we're not seeing anything there. Sandeep, on the guidance? Sandeep Reddy: Yes. So I think what I said positive low single digits. That's exactly what it is. Anything positive in the low single digits would be what the guidance implies. And this applies to the U.S. as well as the international business. And that's why we just clarified that language in the guidance update. Operator: Our next question comes from Andrew Charles with TD Cowen. Andrew Charles: Great. Carryout had been a bright spot of U.S. business in recent years, appealing more to value-conscious consumers. And while the carryout same-store sales at 2.4%, we're still positive. I'm curious if you could speak to the narrowing performance between delivery and carryout year? You called out some weather impacting carryout Boost week, but what further kind of led that narrowing performance? Sandeep Reddy: Yes. So Andrew, I think we're actually -- when we talk about the total comp and the total impact of the business, the impact was both to the delivery as well as the carryout side, the macro impact that we talked about coming in March, the competitive pressures that we talked about coming in as well and the weather impact earlier in the quarter. So all of that actually had that impact. But I think just keeping in perspective that the carryout business still grew 2.4%, and we did grow sales stores pretty materially as well. So the retail sales growth continued to be compelling. Our our share growth on carryout continued to be very good. And we're happy with the fact that we're growing, we just would like to grow more. And I think that's why all the initiatives that Russell talked about that the team is working very hard on are going to be impactful to the carryout business as well as we move forward. Russell Weiner: I think I would just add to that, too, is we're talking a lot about our belief in continued category growth, but also continued Domino's growth. And I pointed to past success before. But I'd also point to that the people who have the most insight into the ability of Domino's to grow in the future and the folks who are spending their money betting on that growth are franchisees. And the pipeline is really, really, really strong. And so if you're looking for what are the people who are investing their own money and expertise and time would they think about the future perspective, it's not just here, the CEO and the CFO talking about what the future looks like, it's our franchisees are talking with their investments as well. Sandeep Reddy: And then Andrew, I'll come back, sorry, I should have mentioned this the first time. I mean, the fact that we have a 20% share on carryout is super exciting. I just look at it as a huge opportunity. We have a right to win and actually gain share pretty significantly over there and get to, at the very least, the 33% share that we have on delivery and more as we get past it. So we're super excited about the carryout business. I think we've -- all the things that Russell talked about in terms of technology innovations are going to impact the carrier business as well, which I think is going to be a very significant driver of continued share growth as we move forward. Operator: Our next question comes from Christine Cho with Goldman Sachs. Hyun Jin Cho: I'd like to discuss the international business. You mentioned that you're still expecting low single-digit same-store sales growth for the year. But have you seen any impacts from the war? And how does that compare to what you experienced in '23 and '24? Additionally, Sandeep, I think you mentioned that excluding DPE, your international business would have met expectations. Can you elaborate on that a little bit? And with the new CEO are now in place. Are you seeing any leading indicators that the turnaround is progressing in the right direction? Russell Weiner: Yes, I think -- and we can tag on this one, Sandeep. On the international business being in over 90 countries, things impact things in a different way. When you look at our business specifically in the Middle East, One is we've -- we're in constant contact with our franchisees over there. And so far, they've not seen an impact from the war. And even they did, I'm not saying this is something we still don't hold dear, but it's just for perspective. That part of the world is probably about 2% of our operating income. Andrew Gregory, the new CEO of Domino's Pizza Enterprises actually starts in August, Christine, but we are still working very closely with their team. Actually, I've got -- on Wednesday, I've got a conference call with Jack Cowen, who is the Executive Chairman of DPE, and we're leading in -- we continue to lead with a big time to turn around that business. There, it's all about getting the value equation right, to start order count driving again, which then leads to sales growth. So we're continuing to lean in with them there. And as Sandeep said, look, our job is to give reasons, but they're not excuses. If you took out DPE, the rest of our international business performed exactly as we had hoped it would for the quarter. So our job is, it's a pretty big focus right now on 1 part of the business, and that's what we're all doing. Sandeep Reddy: And then just to add a little text here to the performance and then a little bit about the guidance itself. I think when we look at the bright spots, and Russell talked about excluding DPE, we were on track. And I think the European business, and that was driven a lot by the U.K., we just had an update that they announced recently was pretty good, and we were pleased with the Americas business as well and the performance over there. So when we talk -- when I'm moving to the guidance itself, when we talk about low single digits, we're just taking into account pretty much -- the answers are driven by your questions. I mean there's macro and geopolitical uncertainty, which has developed since the time we provided our February guidance, and we're taking that into consideration as we've updated to low single digits. And we're just monitoring this very carefully, but we feel the underlying business, excluding the impact of DPE, is where we expected it to be. Operator: Our next question comes from Jeff Farmer with Gordon Haskett. Jeffrey Farmer: Just following up on an earlier question. So relative to that initial 3% U.S. same-store sales guidance that you guys had as of late February, which income cohorts or channels would you say saw trends fall for this below your expectations? Sandeep Reddy: Yes. So Jeff, I think when we go back to what Russell talked about, when we look at the broad industry, of course, with the macro environment and the pressure on the low-income consumer, there will be broadly industry-wide impact that we would expect. But specifically to our own performance, the great news was we were actually pretty consistent across all income cohorts and grew across all income cohorts, which means a pretty narrow band in terms of performance. The part that I would actually bring back, and I don't remember who asked the question and who made the comment, but the competitive activity did make a difference in the quarter, but that's a very short-term and transitory impact that we think over the long term will sort itself out. And we feel that, that's all taken into account in the guidance that we provided because we have ideas and plans that are going to be implemented as we move through the balance of the year. Russell Weiner: I'd just say that maybe another way to think about it is that short-term headwind competitively, I think, is a long-term tailwind so... Operator: Our next question comes from Danilo Gargiulo with Bernstein. Danilo Gargiulo: I want to ask a question on leverage. And specifically, Sandeep, during Investor Day, you laid out a decision tree that was informing how you were thinking about leveraging or deleveraging the business. Now with the increased uncertainty on macro and geopolitical environment, why is it the best option to continue to do share repurchases versus driving down the leverage to, say, 3 to 4x in anticipation of maybe volatility in the rate? Sandeep Reddy: Yes, Danilo. I think when I go back to where we were at the time of the Investor Day, December 23, we actually were running at a leverage of 5.4x, if I remember right. And since that time, we've continuously delevered and we've gotten down to 4.3 as of this most recent quarter. And -- but I think the more important thing I would say on the decision tree was we were very clear based on where interest rates were and interest rates were pretty volatile at that time, too, that if interest rates remain at the level at which they were we would just refinance existing debt load while growing earnings and naturally deleverage. And if interest rates did go up, we would actually reduce our leverage, but partial debt paydown. And so since that time, I think what we've seen is that interest rates have been volatile, the tenure was about 4.2 at that time, now it's probably close to 4 -- somewhere in the same range, 4.3, 4.2. And so I think that decision tree does not change. And I think the part that I wanted to really address in the prepared remarks is, we stay very consistent in returning capital to shareholders and returning value to shareholders. And we've been very committed to the dividend. We've actually raised it by 15% this year, but on average, over the last decade, has been going up about 20% annually. And share repurchases is another vehicle that we actually believe delivers great value to shareholders over a period of time. And so we're committed. We talked about the share repurchase authorization that we had approved by the Board. And we will lean in, but with discipline. We will make sure that from a decision tree perspective, we're paying very close attention to where interest rates are. We will be paying attention to where market volatility is. But we believe that by staying close to that low end of the 4 that we've talked about, we've demonstrated that we will stay disciplined. Russell Weiner: I think the repurchase, in addition to what Sandeep talked about, is driven by a belief. It's driven by belief in the Domino's brand, a belief in what we can do over the long term and a belief that's a right spend on behalf of our shareholders. Operator: Our next question comes from Sara Senatore with Bank of America,. Sara Senatore: Maybe 2 clarifications. The first is, you mentioned, excluding the headwind from the DPE comp, you would have met expectations. I guess, DPE has been a drag now for, I think, probably 3 years. Is there a point at which you think about perhaps lowering long-term algo or the growth for the international market just because it seems like it's been a drag either from a unit or comps perspective for a while? And the other follow-up is, you mentioned promotional impact is kind of transitory, which makes. Is this related to the closures? Is it possible that sort of the remaining stores are healthier? Or conversely, that maybe it's kind of the last gasp of struggling competitors? Just Russell, especially given how much perspective you have, what -- I guess, how long does this type of thing last in the context of pressured margins? Russell Weiner: Thanks, Sarah. The potential for the markets that DPE is in long term and short term is far too big for us to ever think about taking down long-term guidance. What we need to be focused on is helping them untap that potential, one that they had been doing for a long time, but they're clearly not doing now. I talked before about value. But we're in constant conversations with them. 1 of the things that Jack Cowin talked about on a couple of calls ago is that they're open to looking at changing the structure of their portfolio, maybe what markets they own versus don't own. You should know that we've got contractual powers that we can leverage as well to drive change, and we're going to be doing all of those things. But the long term for the market that DPE has is way too high for us not to continue to tap that. Sandeep Reddy: And I think just on the promotional impact being potentially transitory, yes, I mean, I think what we expect is the promotional intensity is high as potentially store closures are looming. And maybe there's some leaning in that's going on. But regardless of whether it's short term or not, I think the sustainability of that promotion is not going to work for the franchisee profitability of the competition. So either the stores will end up closing, or they'll have to stop doing the promotions because they can't afford the profits. Russell Weiner: You're talking about the U.S. business? Sandeep Reddy: U.S. business. Russell Weiner: Yes, I just want to be clear, that's about the U.S. business and really back to what I was talking about before, which is potentially, in addition to some of the kind of the external headwinds, competition was a headwind for us in the quarter, but I actually really do truly think this will be a long-term tailwind because this is doing damage to the P&L of -- I believe, of their franchisees. Operator: Our next question comes from Jon Tower with Citi. Jon Tower: Maybe just first, starting on the expectation for the macro in your guidance. Are you effectively just carrying forward what you saw in the month of March for the balance of the year. And then secondarily, obviously, the channel shift between delivery and carryout will impact mix. But what else is going on with check in your business in the U.S.? Sandeep Reddy: So Jon, I think you're right. I think your question actually framed exactly how we're thinking about guidance. I think we've taken into account the incremental pressure that we saw in the macro and to the guidance that we've updated this time, and that's the base assumption. And I think in terms of channel shifts, delivery and carryout, we expected to grow both businesses. And I think when we look at this year and all the things that we're planning on, we're looking to have a balance between ticket and order count growth. And I think that's embedded in our assumptions. And that really didn't change. I think the timing of when all those sales would come obviously shifted a little bit based on how we started the first quarter. But that's pretty much how we're thinking about the year. Russell Weiner: And I just maybe saying it in a little bit of a different way. The guidance has been updated. The goals have not been updated at all. And that's our job this year, and that's what we're doing in moving around things on the calendar. Everything that we are focused on is delivering on the goal, which is the high end of that guidance. Operator: Our next question comes from Brian Harbor with Morgan Stanley. Brian Harbour: I'm curious if you think advertising effectiveness has changed to some extent? I mean, was it less in the quarter, how people respond to that and how people respond to some of the deal-driven advertising? Is that something that you plan to change as you go through the year? Or is this more just about kind of new products? Russell Weiner: Yes, Brian, we can get better in everything that we do in all aspects of our business. And so absolutely, are we going to continue to drive the renowned value and come up with new products, but our job is to develop great stories, stories that supersede or build upon what is great value or great innovation. And so our CMO, Key Trimble, is working very closely with the advertising agency. I mean the lights on every evening here. And I know not only some of the products on the calendar, but I know some of the stories on the calendar. You may know, my first job here at the company was Chief Marketing Officer. And I am really excited about the stories we're going to tell. It's not just spending the most amount of money at all, but it certainly helps, it's on top of the money is having the most compelling stories, and we're going to do both of those things in the second half of the year. Operator: Our next question comes from Chris Carroll with KeyBanc Capital Markets. Christopher Carril: Can you expand a bit more on the margin outlook for both the supply chain business and your company-owned stores for the balance of the year, maybe puts and takes around the food cost basket, potential impact from higher energy costs and maybe for the supply chain and how you're thinking about productivity gains at this point? And then specifically, just on the company-owned store margins, I think they seem to come in a little bit lower than anticipated in the 1Q. So just curious how you're thinking about the various dynamics impacting the company store margins in the 1Q as we are thinking about the balance of the year here? Sandeep Reddy: So thanks for the question, Chris. So let me start with the supply chain margins. And I think this is a story that's been really very, very strong for the last few years. And I think we're really proud of the work the team is actually doing on the supply chain side to actually navigate some of the cost pressures that we're seeing in the current environment as well. And we've actually been driving a lot of procurement productivity and the team keeps on pushing hard to actually get more value out of that business. And that's showing up in the profit growth that you're seeing on the margins over there. But also, I think we're driving gross profit dollar growth on the back of the volume that we actually are continuing to drive and expect to drive. So I'd say that's the supply chain business. And our expectation for the year is to see positive margin outlook on the supply chain business, as we talked about in February. And so I'm going to now go to the company stores. And the company stores, there's a subtle tweak that we made in the earnings release. We actually did not talk about that as one of the KPIs from a profit perspective and a profit margin perspective, we have the disclosure in the 10-Q. The reason this was the case was this was really -- it's becoming less and less material. Last year, we still had Maryland in the portfolio, but we did refranchise it. And as we actually get to a place where the size of the portfolio of company stores is less, it's less material to the profitability of the company. And that's why we keep the disclosure in the 10-Q, but I think as the read-through to what's happening in our franchisees really isn't there when we only have 5 markets in which we are operating. And again, we had some discrete issues that we dealt with in the first quarter. We had some pressure from [indiscernible]. We had some pressure from the food basket, which actually was impacting on the business. We had some pressures in insurance as well as we outlined. But really speaking, when we look at the big picture on the total company, we feel like this is not that material to what's going to happen to the company. We believe that operating margins will continue to expand this year at the company level and where we feel pretty good about where that's going as we manage the puts and takes between the revenues and investments we need to make in the P&L to dive profit growth for the company. Russell Weiner: And maybe just to add to that, Sandeep, the company store profit is not reflective of the profit for our franchisees, which continues to be strong. Operator: And our final question comes from Jeffrey Bernstein with Barclays. Jeffrey Bernstein: Great. Just wanted to talk again about the U.S. competition. I know Rusty, you noted the intensification, but yet good to see your increasing confidence taking share. I was hoping to maybe look a little bit more at the broader QSR segment. I mean, I know your largest pizza peers are increasingly aggressive on value, but it seems like the QSR peers with their values and deals and they have lots more outlets. And I know I'm guessing they're better positioned in terms of their franchisee health to be able to offer extended value without having to see closures. So maybe that's a potential risk to the historical 1% to 2% pizza category growth if we see again all the big burger and chicken players more sustainably pushing value, which seems to be on their agenda. Any color there would be great. Russell Weiner: Yes, Jeff, certainly, what you're seeing throughout the industry is competitors, both pizza and not non-pizza, giving customers what they want. We actually talked about this last year, if you remember, there's a lot of value pressure last year. And one of the things I said was you need to give customer not just value for value's sake, but they need to value the things that you're putting value on. And that's why we were so excited about and continue to be so excited about promotions like Best Deal Ever, because there, it's not, "Hey, I want a large pizza, you're going to give me a small pizza at a discount." it's we're going to give you the large pizza at the discount. And what I think you're starting to see this year is competition in pizza and non-pizza realizing they need to do the same thing. At the end of the day, I think what that allows us to do is not only continue continue to put pressure on our competition and continue to grow there, but also just this value environment is not going to change, I don't believe, for the rest of this year. When I look at our Q1 results and we look at some of the macros, we didn't see non-pizza be a significant impact, if we did, we would have called it out. But yes, I think we're going to just have a year where we're going to continue to compete. And I'm really glad we have the resources and our franchisees have the resources to do that. Gregory Lemenchick: Thank you, Jeff. That was our last question of the call. I want to thank you all for joining our call today, and we look forward to speaking to you all again soon. You may now disconnect.
Operator: Good morning, ladies and gentlemen. Welcome to Galp's First Quarter 2026 Results Presentation. I will now pass the floor to Joao Goncalves Pereira, Head of Investor Relations. Joao Pereira: Good morning, everyone, and welcome to Galp's First Quarter 2026 Q&A session. I'm joined today by our Co-CEOs, Maria Joao Carioca and João Marques da Silva as well as the full executive team. But before passing the mic for some quick opening remarks, let me start with our usual disclaimer. During today's session, we will be making forward-looking statements that are based on our current estimates. Actual results could differ due to factors outlined in our cautionary statements within the published materials. Having said this, Joao, would you like to say a few words? Joao Diogo da Silva: Of course. Thank you, Joao, and good morning, everyone. Galp had a strong start to 2026 in a quarter marked by higher volatility and geopolitical tensions in the Middle East. Galp has no direct exposure to the region. Our operations are mainly Atlantic-based. Still, we are closely monitoring developments, and the impact can be felt globally. Due to disruptions across parts of the value chain, our Midstream team has actively managed crude and refined product supply, well done. This allowed us to so far to secure a healthy position for Galp and for Portugal. In our Commercial business, we have also reinforced campaigns and discount mechanisms to help our customers to manage the impact of higher fuel prices. And overall, during the quarter, we have continued to run our operations efficiently. In March, our Upstream and Industrial assets showed strong availability, allowing us to benefit from higher commodity prices. Maria Joao, over to you. Maria Joao Carioca: Thank you, Joao. Good morning, everyone. The quarter's solid operational performance that Joao just highlighted flowed through to the P&L and actually further supported Galp's robust financial position. I would highlight the fact that net debt remained stable quarter-on-quarter despite the balance sheet working capital impact from the sharp increase in commodity prices. We're focused on managing ongoing market volatility and supply disruptions, but this has not at all hindered our continued execution in the strategic initiatives that are currently underway across our portfolio. We continue to strive for both pace and discipline in our execution. In Namibia, procurement activities are progressing, and that allows us to remain on track to start drilling activities on the next exploration and appraisal campaign by Q4. At the same time, discussions with NV shareholders regarding the merger of our downstream businesses continue to evolve positively. So we continue to have a potential agreement still expected by midyear. Overall, 2026 is indeed shaping up to be a challenging but also a rather exciting year for Galp. Operator, we are now ready to take questions. Operator: [Operator Instructions] And our first question today comes from the line of Matt Smith, Bank of America. Matthew Smith: I wanted to focus on the Upstream business first. I think you mentioned Bacalhau contributed 10,000 barrels to performance in the quarter, which would make the underlying Brazil performance look extremely strong versus recent history. So I was just hoping you could give us a bit of color there and any context how that's running versus your full-year guidance, that would be useful. And then I just also wondered price dislocations has been a hot topic for April. Is there any color you could give us in terms of the realizations that you're achieving on your crude post quarter end? And then I guess, on the other side of the same coin, what Refining margins have done since the quarter end? That would be useful. Maria Joao Carioca: Thanks, Matt. Thanks for the question. So let me try and tee it off with some comments on Bacalhau and I guess, overall on the performance of our Brazil Upstream business. So overall, rather good performance. I think it maps out against what we had in terms of the guidance we had given. We've given 125,000 to 130,000 barrels, and we've delivered at the very top end of that guidance. Bacalhau has indeed been a part of that [ up end ] guidance. I would, nevertheless, stress that we're still ramping up the unit. So it's good indications. We now -- we've had 2 producers already registering significant flow rates, and the third producer is already connected. And that has indeed been delivering according to our expectations of a good reservoir. But in any case, we're ramping up. So it's still commissioning. It's still, I'd call them maybe hiccups to expect. Plateau is still expected later in 2026. So overall, very good indications, good performance, but I would nevertheless remain conservative and remain within the estimated time frame for plateauing and for the overall ramp-up to take place. So other than that, our legacy business in Brazil continues to perform rather well. You know that there are ongoing works in Tupi to continue to maintain the current good performance of the wells. You know that this is still ongoing set of partnerships that have been the cornerstone of our performance. So no major comments there, just general good performance. On the realizations of our different businesses, but I believe your question referred particularly to equity crude. I think, as you know, about 70% of our exports flow through to China. We, in any case, normally deliver on index to dated Brent circa 2 months ahead. So the fluctuations that you saw throughout this period did not necessarily capture the full breadth of the impacts we suffered. In any case, in equity crudes, we registered a discount of approximately $5 per barrel. And this just fundamentally reflected the fact that what we were seeing throughout the period in terms of the costs underlining our activity, particularly when you saw it during the period concerning freight costs was indeed a lot of fluctuation and a lot of volatility. Thank you. Joao Diogo da Silva: Allow me to complement on the Refining margins, your question. Of course, when we compare ourselves with the highs of March, we are observing an average of between $10 to $12 per barrel. On the last couple of days, additional volatility, margins increased up to the [ 20s ]. But more importantly, what we are expecting is to operate at full availability during the next couple of quarters. Reminding that [ Siemens ] refinery outputs are 45% on mid-distillates. Jet will account for less than 10% of that. And if we look at the downtrend from March, it reflects a bit of margin squeezing by rising input costs, and I'm speaking about utility, freight cost inflation. But we are also looking at some decrease on the oil product prices, mainly on diesel and jet as pricing is reflecting a probable resolution on the conflict. And finally, Europe margins declined more versus other regions, again, representing a different higher utility gas prices situation. And I'll stop here. Operator: Your next question today comes from the line of Alejandro Vigil from Santander. Alejandro Vigil: Congratulations for the strong results. The first question is about the guidance of '26. You started the year with very conservative guidance. If in the current context of higher energy prices, you are considering some increase in this guidance. And particularly more important, the implications in terms of shareholder distributions, you're expecting some additional cash flow to shareholders driven by these high energy prices. And the second question is about the Moeve joint ventures in the Iberian downstream. If you are close to closing these transactions, if you are seeing some releverage opportunities in the joint ventures that you are setting with Moeve? Maria Joao Carioca: Alejandro, on the updating of guidance, we acknowledge, obviously, that the macro that was underlying our existing guidance is, to a large extent, no longer directly applicable. It no longer holds. We've seen significant changes in terms of most commodity prices and most underlying adjacent costs. But in any case, what we are at this stage acknowledging is that the situation continues to be of high volatility, way too many moving pieces. So we don't feel that this is the time to pin down the new guidance. We will be looking and most likely doing so as we publish our second quarter results. Right now, sensitivities are for us, the tool that's guiding us through the period. So what we're looking is fundamentally approximately numbers that you've seen in the past for Galp, but it's approximately $160 million for each $5 of Brent impact and a bit under that. But well, if you take each $5 of Refining margin, I'd say that the sensitivity is approximately $200 million. So we're navigating the volatility using uncertainties, and we're certainly looking into what are the underlying large trends in the market to support this. And then once we see some more firm ground, we will look to revise the guidance. The second part of your question on distributions, I think it follows through from my initial comments. So again, we will not be revising distribution. It's really early to assess all the full impact of everything that's going on. So we do see that our distribution policy, the 1/3 OCF in itself already embeds flexibility to capture part of what is the current circumstance. And I think this will give a great segue for Joao to comment next on Moeve, particularly because this business is in itself rather transformative. Our expectation is that it will be value accretive, and there will indeed be elements of releveraging that Joao will comment on. But those again speak to our not moving our distribution policy at this stage. Joao Diogo da Silva: Alejandro, well, just giving you some [ sequence ] from Ms. Joao's words, we've highlighted a number of times that both companies are to be designing as self-funded ring-fencing industrial versus retail businesses differences. At this point, well, I need to say that we've seen a lot of traction in the market. That's what we've been receiving from the investor side, from the financing side and these companies to be independently run with financial flexibility. Of course, we will be looking at the optimal finance structure and leverage all the way down. So that's what we are expecting. That's the flexibility that we need to enhance. And you are absolutely right, the macro scenario will, of course, releverage some opportunities. Operator: Your next question today comes from the line of Biraj Borkhataria from RBC. Biraj Borkhataria: Two, please. Just the first one is just on Bacalhau. If once we get to a full ramp-up phase, how should we think about the Upstream sort of DD&A and OpEx per barrel at the blended rate, given the mix of assets there? And second question is just on the Venture Global offtake that you have. Could you let us know how much of those volumes you've hedged for 2026 and how much is sort of exposed to the upside and widening spreads? Maria Joao Carioca: [Technical Difficulty] the low 2 digits. I'm not sure you picked up my -- the initial part of my answer. I think there was some technical issue here. So I'll just very quickly repeat through. On Bacalhau, right now, the numbers you're seeing are fundamentally numbers that reflect the fact that we're still ramping up. Now having said this and going straight to your question, what we're seeing in terms of DD&A expectations is in the low 2 digits, of course, once you plateau. And this should bring us to operating costs that are not too dissimilar to what we have right now, maybe slightly above what we have right now as we truly perform in the upper 2s, lower 3s right now. And what we expect for Bacalhau is to be fundamentally in the 3 to 4 operating cost figures. I'll let Joao comment on the hedging numbers for LNG. Joao Diogo da Silva: And Biraj, really quick one. So consider between 70% to 75% hedged on the venture contracts in 2026. Operator: And the next question comes from the line of Josh Stone from UBS. Joshua Eliot Stone: Just building on the last question, I wanted to ask about the Midstream and the outlook there, just given the widening of gas spreads and your ability to capture that. So just talk about, one, how the business actually performed if you adjust out the time lag? And two, what you're thinking about the outlook? And secondly, I wanted to ask on Refining because you spoke back about some Refining margin trends. And based on -- I presume that's based on an indicator. I'm curious as to how do those indicators match with what you're seeing on the ground in terms of Refining profitability. And with the extreme backwardation we've seen, has that had created any disconnect between like on-the-ground profitability versus the indicators you're looking at? And maybe as part of that, can you can talk about the role of hedges and your hedging position in Refining? Joao Diogo da Silva: Thank you, Josh. you should consider on our latest guidance to our Midstream above 500 million into 2026. We still see some supportive but narrower gas spreads. Consider that the trading gas is contributing around 70% of our total performance. And that largely, as I've just mentioned, a large portion of that is already locked for 2026, around 70%. Of course, we have some flexibility on the portfolio, and we have an increased footprint in Brazil. And that's basically what we have. On the Refining side, our crude procurement is based on the physical products. And you know that -- well, we have mainly selling products at the market condition in the Iberian Peninsula. Of course, we are long on the gasoline side, and that's one of the products that we are long in. But namely, we are counting on a fully operational refinery to capture the market conditions, and I'll stop here. Operator: Your next question today comes from the line of Guilherme Levy from Morgan Stanley. Guilherme Levy: The first one, thinking about the recent view on onshore wind, I was keen to hear more about the rationale to increase exposure in renewables at the moment, how to think about the long-term positioning in this division? And if we should be expecting more opportunistic deals like this one over the coming quarters? And then secondly, going to your Commercial segment, I know that in your opening remarks, you commented about campaigns and discount mechanisms to move the impact of higher prices to consumers. I was keen to see if you are seeing some sort of slowdown in sales, even though you have implemented those measures, or not so far? Joao Diogo da Silva: Thank you, Guilherme. Maybe I'll start on your second one. And it's true, we are observing different behaviors on the Spanish side and on the Portuguese side. Of course, the different framework that the Spanish market has changing prices on a daily basis, influences demand and pricing in a different way. On the Portuguese side, on the retail -- namely on the retail, we change -- we have weekly prices. And those discounts and those campaigns are reflecting an additional help that we think our customers need today. That's why we've launched the recent campaign on the [ Mundo Gulf ]. But more than that, since early this year, we've started a more broader campaign cross-selling oil, gas and power and also in the retail side. We have observed, namely in March, an increase on the volumes. And it was like a push before the prices going up on the Portuguese side, and that's something very normal. That will be, of course, neutralized on the April volumes. It was more on the Spanish side, if we compare the two markets, the Spanish market, namely on the March volumes, had a more substantial increase than the Portugal one. But of course, we are operating in a high prices context, and that's something that will affect the average ticket volumes that we have. Substantial contribution from the nonfuel business also around 22% of the overall Commercial business. Going back to your first question and on the offshore, on the wind rationale and thinking ahead, I need to tell you that, of course, this recent acquisition allows us to have a much more balanced portfolio. Wind now represents around 25% of our generation mix. And of course, if we think further, it will enhance eventual long-term strategic optionalities and partnerships that we may have. I need to remind you that we are challenging -- almost every day, we challenge ourselves if we are the best owners of this business and of course, if we have the best structure to manage this business. But all in all, we are trying to diversify and to optimize our Renewables business, and that's where we stand today. And that's where we will be standing on the next couple of months. Operator: Your next question today comes from the line of Sasikanth Chilukuru from Jefferies. Sasikanth Chilukuru: I had two, please. The first was in Refining and getting back to the hedges. I was just wondering if you could further elaborate on your hedging strategy in Refining. It would be helpful to understand the rationale, the hedge profile for the current year and into 2027 and the type of hedging structures you're using there. The second one was on Bacalhau and the ramp-up. I was just wondering if you could comment on the cash taxes paid there and the impact that this field has at the group cash tax rate this year and for 2027? Maria Joao Carioca: Thank you for your question. So let me maybe complement what João has already shared with us on our hedging strategy. So we have hedging strategies in place for both Refining and Midstream. I would highlight the fact that there's no hedging in place for Upstream. But on Refining, in particular, which I believe was your question, the policy we have -- and again, this is a hedging policy that's been syndicated with the Board. It goes through Board oversight. It goes through all of our risk management and internal control processes. So it's under strict limits and triggers. Now the limits we have on board right now, the ones we're acting against are for Refining, circa 1/3 of our throughput. So if you look at what we have in place right now for 2026, and that's fundamentally flat throughout 2026. What we have in place is about 28 million barrels. That's locked at approximately $8 per barrel, again, flat throughout the year. Into 2027, we don't have any significant positions. We don't have any hedging into 2027 for Refining, again. Now on Bacalhau, the regime under which Bacalhau is, is still a shared regime. So it's 50-50 between concession and PSC. So that gives us a relatively benevolent tax regime vis-a-vis the remaining assets we have in Brazil. So we acknowledge that this is overall a lower SPT rate than what we have, for instance, in Tupi, and that is going to be obviously a part of what we believe will be the approximately 400 million of OCF that Bacalhau will be delivering once it plateaus. Operator: [Operator Instructions] And our next question today comes from the line of Michele Della Vigna from Goldman Sachs. Michele Della Vigna: Congratulations again for the strong performance. Two questions, if I may. First, on exploration, it's going to be very exciting in Q4 in Namibia. I was also wondering if you could update us on your thinking about Sao Tome and the attractiveness of that basin. And secondly, I wanted to come back to the carry that you're getting for -- in Namibia for both exploration and then the Mopane development and how that is likely to be accounted, whether that will be -- effectively, whether your CapEx will be net of that or whether that will be considered as a financing and the gross CapEx will reflect the full spend on Mopane? Maria Joao Carioca: Thank you, Michele. So on exploration, I know that exploration is all that the industry is talking about these days, quite a change from a few years ago. But on exploration, in particular, we are very focused on Namibia right now, as you well put it. So we're trying to make sure that all the conditions are in place and everything is going according to plan to a large extent. So we do expect to have news towards the end of the year. On Sao Tome, as you know, that's a much earlier-stage basin. So nothing too significant going on here. So it's still in our forward-looking plans, and there are no major developments in recent days or recent times that I would highlight at this stage. As for Mopane carry, how will you reflect it, I'm afraid at this stage, that is still being fully assessed with our auditors and our accounting. So of course, we'll be looking for a very clean disclosure. And so ideally, we would be reporting CapEx just for that component that reflects our responsibilities once the deal is closed. So once that is closed and confirmed, we actually hold 25% of full responsibilities, and that will be what we will be trying to show as explicitly as possible in our financial statements. The exact way in which we'll be doing that is still under discussion, while the deal isn't fully closed yet. So we're still waiting for Namibian authorities to close that component and then for the GOA to be fully detailed. So we will get back to you on that, of course. But for now, it's the 25% financial responsibilities, and we will be showing that through our accounts. Operator: Our next question today comes from the line of Matt Lofting from JPMorgan. Matthew Lofting: Most of mine have been asked. I'll just ask a couple of follow-ups downstream related. I think you mentioned earlier sort of a near 10% jet fuel yield that Galp can generate at Sines. That's high or sort of high end relative to industry averages. So I wondered if you could just talk about what enables Galp to generate that kind of jet yield from Sines and whether you see any additional upward flex in the context of almost inevitable tightening in jet supplies in Europe now over the coming weeks? And then secondly, when you sort of think forward, uncertain backdrop, but if we do see a sort of prolonged knock-on effect from Middle East conflict for middle distillate supplies in Europe over the coming months. To what degree could the combination with Moeve enhance Galp's ability to produce and source middle distillate supply for Iberia and Europe as a whole? Joao Diogo da Silva: Thank you, Matt. So going back -- and we need to go back in history to understand that. We've made a couple of investments that allow us to be today as we are producing such a yield. I'll go back to 2012, where we've done a couple of investments on the idle cracker. And that's why we are getting such a yield on the jet side. Of course, we will be trying eventually to reduce additionally the jet volumes blended into the diesel pool. We are, of course, also increasing the average inventories, but that's a different thing, managing the whole context that we have from the Middle East. On the Moeve combination, of course, we are getting scale, additional scale. We are getting complementary assets also, but it's still very early for us to speak about that. Of course, that we were thinking about the SAF and the SAF production units that we have been building through the last years, ourselves and Moeve. And that's a very important asset to look at on the synergies. But it's still very, very early to say that. Complementary optimized logistics, supply chains, that's what we are looking at, turnaround efficiencies, higher trading firepower. So that's where we are when we look at the transaction. Thank you. Operator: We will now take our final question for today. And the final question comes from the line of Paul Redman from BNP Paribas. Paul Redman: I had two questions. Firstly, I just wanted to ask about Namibia. Is there any update on the drilling campaign? And I wanted to ask about timing of FIDs and development. Is there any opportunity to accelerate Mopane? The previous plan had been Venus first and Mopane second. Could there be a world in which that changes and Mopane could be brought forward? And then secondly, I know it's early, and clearly, you have a lot of strategic moving parts at the moment. But this quarter, you kept net debt flat despite a EUR 200 million working capital build, EUR 160 million at [ year ] out for 2P. So if I ran this forward on the 1Q scenario, your balance sheet is going to materially delever through 2026. that's even before we get to the world of if Rovuma LNG gets sanctioned, you get cash in from that. So I wanted to ask how you're thinking about the balance sheet at the moment? And then how you're thinking about allocating capital going forward? Is this -- could you see more M&A? Is it all back to shareholder? So just kind of get your early thoughts on how to think about it. Maria Joao Carioca: Paul, thank you for your questions. So let's start with Namibia. Maybe just an overall status and next step, so I think it's relevant to say that at this stage, where we are concerning the partnership is, good pace moving forward. I think one of the critical steps that was concerning the preemption rights, that timeline has expired. No preemption rights were exercised. So right now, we're just looking on to the local authorities to make sure that government approval comes as swiftly as authorities find it viable to come through. I think that the tone continues to be a very positive one. I think if you're looking into Namibia, just recently, the discussions on the basin, the conference that took place are all very, very positive and very mindful of the current context and the implications that has for a new location such as Namibia. So once we get that approval, we then will be in a condition where we will be able to discuss the more operational aspects. So the details on the GOA, the operatorship transfer. So all in all, what we are expecting for Mopane, in particular, is still that we will be able to initiate the next campaign in 2026. If the first drills are positive, we will then look into the DSTs. So I remind you that the work we're doing -- that we will be doing now in this stage will fundamentally be work towards making sure that we have the optimal development concept. So without that development concept mature, that's clearly too early stage to be discussing any significant changes in what were the underlying time lines both for Mopane but also for Venus, of course. And I will remind you that for Venus, until the operation is closed, we're not yet in the consortium. So I'm not going to comment extensively. I think it's public, and we have visibility over the fact that everything is moving and we're working clearly towards having an FID in mid-2026. So that is, of course, well in advance of the current stage that we have for Mopane. I will again remind you that Venus has always been at least 2 years ahead of Mopane. So these time lines, we may be able to work through some aspects, but it's to have a fundamental turnaround and shift would be a significant departure. So yes, we'll be looking to accelerate. Yes, once we get everything closed and Total comes in full steam, that is hopefully a fast track towards Mopane. But at this stage, doesn't fundamentally change the sequential timeline that we had. On the second part of your question, so jumping from Namibia and Upstream to the overall portfolio, as I understand, your question was overall, how do we see the portfolio moving forward? I think, again, Paul, we have a distribution policy that's been pretty stable and that we cherish as such fundamentally because we believe that our financial strength has been very value accretive in what we've been doing with the portfolio. I think we've demonstrated extensively that we're not sitting on the portfolio. We're actively managing it, both upstream, downstream and even in the way we're delivering on renewables. That speaks of a portfolio that leverages on our current financial strength, leverages on our balance sheet and fundamentally has allowed us to do what we believe to be a unique case in the sector. We're delivering growth with a very clear line of sight, and we intend to stay that way. We have a very strong engine in upstream, and that engine is being upholstered as we speak and strengthen. So that's where we want to be. It's -- if we continue to deliver on this investment case, this is a unique investment case, and that's what's going to drive us forward. And that's what we're going to be looking at in terms of capital allocation. Thank you. Operator: Thank you. This concludes the Q&A and today's conference call. Thank you for participating. You may now disconnect.
Operator: Hello, everyone, and welcome to Noble Corporation Plc First Quarter 2026 Earnings Call. Please note that this call is being recorded. After the speakers' prepared remarks, there will be a question and answer session. If you would like to ask a question during that time, please press star and then one on your telephone keypad. Thank you. I would now like to hand the call over to Ian MacPherson, Vice President of Investor Relations. You may now go ahead. Ian MacPherson: Thank you, Operator, and welcome, everyone, to Noble Corporation Plc First Quarter 2026 Earnings Call. You can find a copy of our earnings report along with the supporting statements and schedules on our website at noblecorp.com. We will reference an earnings presentation that is posted in the Investor Relations page of our website as well. Today’s call will feature prepared remarks from our President and CEO, Robert W. Eifler, as well as our CFO, Richard B. Barker. We also have with us Blake Denton, Senior Vice President of Marketing and Contracts, and Joey Kowaja, Senior Vice President of Operations. During the course of this call, we may make certain forward-looking statements regarding various matters related to our business and company that are not historical facts. Such statements are based upon current expectations and assumptions of management and are therefore subject to certain risks and uncertainties. Many factors could cause actual results to differ materially from these forward-looking statements. Noble Corporation Plc does not assume any obligation to update these statements. Also note, we are referencing non-GAAP financial measures on the call today. You can find the required supplemental disclosure for these measures, including the most directly comparable GAAP measure and an associated reconciliation, in our earnings report issued yesterday and filed with the SEC. Now I will turn the call over to Robert W. Eifler, President and CEO of Noble Corporation Plc. Robert W. Eifler: Thanks, Ian. Welcome, everyone, and thank you for joining us. I will open today’s call with a brief summary of our Q1 highlights and recent contract awards, followed by an update on the market. Richard will then cover the financials before I wrap up with closing remarks and we move to Q&A. During the first quarter, we earned adjusted EBITDA of $277 million and generated free cash flow of $169 million. We again distributed our $0.50 quarterly dividend and yesterday our Board declared a $0.50 per share dividend for the second quarter, maintaining our consistent and highly differentiated return-of-cash strategy. Overall, it was a solid start to the year, and I would like to thank our outstanding men and women of Noble Corporation Plc around the world for your fantastic teamwork in helping us to realize our first-choice offshore performance standards. While it is an understatement to say that energy markets have seen extreme volatility over the past couple of months since the outset of the Iran conflict, we are fortunate to have experienced limited operational disruption, confined to just one jackup in the Middle East, the Mick O’Brien, which we sold in January but have continued to operate under a bareboat agreement. All of our crew and related personnel were safely evacuated from the rig during the early days of the conflict, and Richard will expand on the rig’s current status. Outside of the war-impacted region in the Middle East, commercial momentum throughout the offshore drilling market remains brisk, irrespective in many ways of the recent oil price surge. However, the recent reawakening of energy security concerns around the world and the corresponding move higher in the oil futures strip are clearly supportive of the already steadily improving demand trends evident in the deepwater and harsh environment offshore markets where we operate. Over the past three months, we have secured new contract awards totaling approximately $565 million. First, the Noble Courage received an extension with Petrobras of slightly more than three years, which will keep that rig committed in Brazil through 2030. This extension represents net incremental backlog of $330 million, with the current dayrate reduced from $290 thousand to $280 thousand from April 1, 2026 through late 2027, followed by the extension of slightly over three years at just over $309 thousand per day. Next, I am pleased to announce that the Noble Deliverer has been awarded a five-well contract from Woodside in Australia, which will support that rig’s reactivation. This contract is valued at $121 million based on an estimated 300 days of firm scope, excluding options, and also does not include revenue for additional services or potential rig upgrades. In Guyana, the Noble Developer has been awarded a one-well contract with ExxonMobil at $375 thousand per day, which is scheduled to slot in after the rig’s current program right around year-end. Next, the Noble Black Rhino has recently commenced an exercised option well for Beacon in the U.S. Gulf of Mexico with an estimated duration of 100 days. In Ghana, the Noble Venture has been awarded a one-well contract with Planet One in Ghana at a dayrate of $430 thousand, expected to commence late this year with an estimated duration of approximately 45 days, with two unpriced options. And finally, in Southeast Asia, the Noble Viking has received an additional one-well contract in Malaysia, which is expected to extend the rig through October this year. With these awards, our current backlog stands at $7.5 billion. Now I will share a few observations on recent developments in the market. In short, all measurable and anecdotal indicators of deepwater rig demand are flashing green. I would submit that this is not a reflection of $100 oil, because most of what we are seeing in the market today has been in motion for months or longer. But, of course, recent events absolutely have elevated energy security priorities around the world, and improved upstream cash flows will only serve to enhance the already strong and expanding demand picture and deepwater thesis. In parallel, the volume of deepwater contract fixtures has spiked in the early part of this year, partially but not entirely due to the execution of Petrobras’ wide-reaching contract extensions. The first quarter saw 32 rig-years of UDW fixtures, which was roughly double the average quarterly run rate of last year. And with the conclusion of Petrobras’ extensions in April, this month alone has already had more than 40 additional UDW rig-years fixed, bringing year-to-date backlog additions significantly above the entirety of last year’s contracting volumes for the full year. Petrobras has comprised over half of 2026 year-to-date deepwater rig-years fixed, and non-Petrobras contracting activity has also continued at a healthy level. Notably, despite this recent surge in contract fixtures, the pipeline of open demand in the form of tenders and pre-tenders has actually continued to expand rather than deplete. Last quarter, we observed slightly over 100 rig-years of open floater demand, which was a 33% year-on-year increase. This figure has now eclipsed 110 rig-years. All this tendering activity has developed alongside an increasingly tightening supply-demand balance. Total UDW contracted utilization is currently 105 rigs, or 95% of marketed supply. This is approaching recent peak contracted demand levels of two years ago, albeit with markedly different directional momentum, especially considering the renewed length of backlog across the South America region juxtaposed against open demand throughout the rest of the world that is now more than 55% higher compared to the previous high watermark two years ago. The contracted UDW count of 105 includes 14 rigs on future contracts that are not yet working today, six of which happen to be Noble Corporation Plc rigs. We have been anticipating the convergence of future contracted utilization and present utilization as a critical factor that could substantially eliminate industry white space and result in a comprehensively tight market. This convergence becomes increasingly tangible as these 14 future contracted assets ramp up over the next six to twelve months with average contract durations of two years per rig. Taken together, all these market dynamics are resulting in upward dayrate pressure. Therefore, we believe it is likely that we will begin to see floater rates move higher as we move through the rest of this year. So overall, with the continuing positive development of our backlog as well as the state of the drilling market more broadly, we are even more optimistic about the years ahead than we were last quarter. Now I will pass the call over to Richard for the financial review. Richard B. Barker: Thank you, Robert, and good morning or good afternoon all. In my prepared remarks today, I will briefly review the highlights of our first quarter and then discuss the outlook for the remainder of 2026. Starting with our quarterly results, contract drilling services revenue for the first quarter totaled $742 million, adjusted EBITDA was $277 million, and adjusted EBITDA margin was 35%. Q1 cash flow from operations was $273 million, capital expenditures were $104 million, and free cash flow was $169 million. I would like to touch on a few discrete cash flow-related items during the first quarter. Firstly, we received $210 million in cash proceeds from the jackup sale to Borr Drilling, in addition to the $150 million seller’s note, which is recorded in other assets on the balance sheet. Secondly, we completed the lease buyout on the first two of the four Black ships’ BOP systems for $36.5 million. The buyout of the remaining two BOP systems is expected to occur during Q2 and Q4 this year for approximately $18 million each. In total, the lease buyout for all four systems is expected to cost $73 million. The cash outflow for these payments is not part of capital expenditures, but instead is part of financing activities on our cash flow statement. Lastly, during the first quarter, we redeemed $55 million principal amount of the 8.5% senior secured notes at 103, as an opportunistic and efficient use of capital. As summarized on page five of the earnings presentation, our total backlog as of April 26 stands at $7.5 billion. As a reminder, our backlog excludes reimbursable revenue, as well as revenue from ancillary services. Our current backlog includes approximately $1.8 billion that is scheduled for revenue conversion during the remainder of 2026 and $2.4 billion scheduled for 2027. Referring to page nine of the earnings presentation, we are maintaining full-year 2026 guidance for total revenue between $2.8 billion and $3.0 billion, which includes approximately $150 million in reimbursable and other revenue, and adjusted EBITDA between $940 million to $1.02 billion. Capital expenditures guidance for this year has increased by $25 million, and this is due to the contract award supporting the reactivation of the Noble Deliverer. The lower side of our adjusted EBITDA range is fully contracted by current backlog. Although we have banked a somewhat stronger than expected first quarter in terms of adjusted EBITDA, this is offset by a few discrete items, including a recent notice of early contract termination on the Mick O’Brien, the lower near-term dayrate revision resulting from the Courage’s blend-and-extend, and slightly later estimated contract commencement dates for the Jerry D’Souza and Endeavor driven by customer schedules. Regarding the Mick O’Brien, recall that we closed the sale to Borr Drilling in January and have continued to manage the rig through the completion of its current contract in Qatar, with a corresponding bareboat that we pay to Borr into early December 2026. On April 12, we received notice of early release from the customer, Qatari LNG, and we are now in the process of winding down operations. The contract termination is effective after 30 days, and this will result in an estimated negative impact of approximately $15 million due to our remaining bareboat obligations through early December as well as stacking costs for the rig. To sum up, we have had a very solid start to 2026 from a financial point of view. With continued contract wins in the quarter and solid project execution, we continue to solidify the expected path to a healthy inflection in both EBITDA and free cash flow starting in 2027, as we outlined in detail on our call last quarter. With that, I will now pass it back to Robert for concluding remarks. Robert W. Eifler: Thank you, Richard. Starting this summer with the Voyager, Jerry D’Souza, and Interceptor startups, followed by the Valiant and Endeavor later this year, and then the Great White, Deliverer, and Venturer throughout next year, we have a sharp organizational focus on project execution. This is a large slate of projects to deliver in a “normal” time, and these are, of course, hardly normal times given the various dislocations resulting from the Strait of Hormuz impasse. But overall, I am pleased to report that all of our projects are progressing very well so far, and we are incredibly excited to be preparing for commencement on these important drilling campaigns for our customers. These programs span virtually all of the major non-OPEC offshore basins around the world and are increasingly critical to current and future energy supply. To wrap up, as the outlook for our business continues to improve, Noble Corporation Plc is very well positioned to grow into the next leg of the offshore drilling cycle with a strong balance sheet, $7.5 billion of backlog, and repricing opportunities across some of the most capable drillships and jackups in the world. If anything, we feel better about 2027 today versus last quarter, given the Deliverer contract as well as the improving market dynamics confronting our open drillship capacity. Meanwhile, we will continue to drive shareholder value through our robust return of capital program. With that, I will turn it back to the Operator for questions. Operator: We will now open the call for questions. If you would like to ask a question, again, that is star followed by one on your telephone keypad. Kindly limit your question to one question and one follow-up. Your first question comes from the line of Arun Jayaram of JPMorgan Securities LLC. Your line is now open. Arun Jayaram: Good morning, gentlemen. Robert, one of the themes of OFS earnings thus far has been the potential impact from rising energy security concerns on the CapEx cycle and, in your case, what this means for offshore rig demand. Historically, when we have seen a sharp move up in commodity prices, it tends to accelerate activity. I was wondering if you could elaborate on how some of these energy security concerns could impact deepwater. Are there projects that the majors have been sitting on that they may not have pursued in a lower commodity price environment that may come back into the fold at strip? Robert W. Eifler: Thanks, Arun. It is a good question and the topic on everyone’s mind right now, including ours. I would say a couple things. First, I would reiterate that all of the positive indicators that we mentioned in our prepared remarks and that we are focused on right now started before the conflict in Iran. So this growing narrative around deepwater is very real. There are certain regions that respond more quickly to oil prices in deepwater than others. Traditionally, the U.S. Gulf of Mexico has been one of those, so we are hopeful that we see something that comes perhaps as an early indicator out of the U.S. I think it is less likely that at this point today our customers have rewritten their budgets or made huge five- or ten-year moves—that would obviously be a question for them. From what we see and hear, we do not have necessarily really tangible evidence today of positive changes that have hit us, but we do hear positive narrative as you do, and we are pretty hopeful. We do not really see any way that this does not turn out positively for our business on top of everything else that we have already seen. These are not the end-all be all indicators, but the numbers we used a moment ago are really striking when you think about the amount of deepwater backlog that has been printed so far this year by Noble Corporation Plc and our competitors and compare that against the amount of outstanding activity that we see—including not just open tenders, but direct negotiations and everything that comes along with our business. Arun Jayaram: Got it. And maybe just a housekeeping question. You are buying in your lease options on the BOPs, which you talked about in the prepared remarks. Can you help us think about the impact on OpEx from buying in those BOPs—impact in 2026 and then 2027 on a go-forward basis when you buy in all four of those leases? Richard B. Barker: Yes. We are buying in the leases during the course of this year. On an annualized basis, it will have a benefit to EBITDA of about $25 million. In 2026, probably about half of that will be realized. Operator: Your next question comes from the line of Scott Gruber of Citigroup. Your line is now open. Scott Gruber: Good morning, Robert and Richard. Kind of following on Arun’s question around how customers may respond to higher oil prices. I know it is early days, but in the conversations you are having, are customers starting to indicate incremental interest in exploration? People were talking about it even before the conflict, but is there a sense there will be incremental interest in more exploration or in infill activity with quick paybacks? Any additional color on what conversations indicate for potential incremental activity? Robert W. Eifler: Thanks, Scott. For sure, yes, there is an increase in narrative and discussion around exploration work. I do not know that we can put our finger on a specific example that has a direct cause and effect related to Iran. But generally we are seeing conversations gain momentum, and across the board, the realization that deepwater is going to play a really important part in the supply stack post everything that has happened here. Our hope is that some of the demand we have seen, whether it be from India or elsewhere, is more likely to solidify than before the Iran issue, but today I am not sure that there is a direct link so far. Scott Gruber: Understood. And on the Developer/Deliverer—on that rig, you bumped full-year CapEx by $25 million for the reactivation cost. Is that the total cost of restart, or is there more spend required next year? And does the incremental spend include upgrade investment that would add to the dayrate, or is that just a pure restart cost? Richard B. Barker: The $25 million is the total required for the Woodside contract. If there are any incremental rig upgrades beyond the contract scope, then there will be incremental capital to that. But think about the $25 million as what is needed for the Woodside contract. Operator: Your next question comes from the line of Eddie Kim of Barclays. Your line is now open. Eddie Kim: Hi. Good morning. You highlighted the high UDW contracted utilization currently at 95% and that the market is beginning to tighten, which results in higher pricing over time. We have not quite seen that move up in dayrates yet; it feels like leading edge pricing is still in the low $400 thousands. Based on the current backdrop and the amount of tendering and activity you expect over the next year or two, do you think by sometime in 2027 we could be back up into the mid to high $400 thousands, where leading edge pricing was a year or two ago? Is the market currently setting up for that based on what you see today? Robert W. Eifler: I would say we definitely see the market tightening, because of the convergence I mentioned and because of the demand behind that 95% figure. Tight mindshare leads to higher dayrates. We will see what happens, but we are optimistic about a really tight market. Eddie Kim: Got it. Follow-up on the Petrobras blend-and-extends. It seems like they handed out a lot of extensions. Were you at all surprised by the number of rig-years they extended, or was this in line with your expectations? Robert W. Eifler: It is in line with our expectations. We had thought Petrobras on total rig count would be flat, and they are going to end up dropping by a couple of rigs at least in the near term. We are still hopeful that through time their number remains flat and there is some possibility it could go up. Petrobras is very savvy, and this is in line with their behavior through time. They have secured their rig supply and probably done it at a pretty good time. Operator: Your next question comes from the line of Keith Beckman of Pickering Energy Partners. Your line is now open. Keith Beckman: Thanks for taking my question. We have talked about the strong contracting we have seen to start the year, a lot of it driven by Petrobras in Brazil. Are there other regions where you have stronger confidence now for more significant tender conversion throughout the rest of the year? Any regions in particular you would highlight that could see stronger contract conversion? Robert W. Eifler: I mentioned the U.S. earlier, which sometimes responds quickly—we do not have anything tangible to report there, but fingers crossed. The real meat of your question sits in two places. First, Asia, where we had growing demand even before the Iran conflict, and we think that is likely to solidify going forward because of renewed security concerns—good outcomes for the Viking and follow-on work, also in Australia. Second, West Africa, where a lot of the growth we have been forecasting has been. Higher oil prices help that region; if not incremental work, then projects already on the table are more likely to come through in time. Keith Beckman: Thanks. And my second question is the outlook for a few rigs—the Black Rhino, the Globetrotter I, and Apex—systems that could still pick up some work as they roll off or are already off contract. Could the Black Rhino still find work in the Gulf, or might it head elsewhere? And any potential work scope for the Globetrotter I or Apex at this time? Robert W. Eifler: The Black Rhino could easily stay in the U.S.; that is most likely to be 2027 work, but our fingers are crossed about potentially some 2026 work popping up. It is also bid outside of the region, so it is too soon to tell where it will end up. The GT1 is in the same place it has been—we are chasing primarily intervention work. We believe in that market, and everything that has happened makes us believe at least as much, if not more, in that market. We are hopeful to have news on that rig in the next couple of quarters. It remains focused on intervention work, and there are a couple of jobs out there—like one in the Black Sea—that fit that rig well. We are not bidding it into very many drilling programs, but there are a couple things we are chasing right now; that would be a 2027 start. The Apex is an older unit, and we are evaluating options for that rig right now. There are some opportunities, and we will make a decision over the next couple of quarters as well. Operator: Your next question comes from the line of Fredrik Stene of Clarksons Securities. Your line is now open. Fredrik Stene: Thank you for the prepared remarks and the market commentary. I wanted to circle back briefly on Brazil and the Remacom. You got the extension on the Courage, which keeps that rig working till end 2030. But I was wondering about the Faeq Kozak as well. That is rolling off later this year or early next year, and nothing has been announced. Does that mean it has not been part of Remacom? Can we expect it to be extended nonetheless, or did you feel like the terms that were potentially agreeable for Petrobras are not agreeable for you and that you might see that rig working elsewhere? Robert W. Eifler: The Faeq Kozak is not part of the blend-and-extends that have been announced. We did have it very close on a different program. There are opportunities in South America for the rig that we are chasing, but we are also starting to bid that rig elsewhere. It is not impossible for that rig to continue working for Petrobras, but it is not part of the current blend-and-extend discussions. Fredrik Stene: Thank you. Then one for Richard. In addition to buying out two of your BOPs, with two more following later this year, you also brought back some of your 2030s secured bonds. I think you said you bought back $55 million, which would suggest a price of 103—good versus market pricing. Should we read more into this given the core structures of the bond—early stages of a potential refi—since you are still siloed in a way with Legacy Noble/Legacy Diamond debt structures? Richard B. Barker: There was a specific clause in the legacy notes that allowed us to buy back 10% at 103. The bond was trading at 105–106, so we think it was a very value-accretive move to retire that debt. The Legacy Noble bonds are callable now; the Legacy Diamond bond is callable later this year. At the right time, we will refinance the capital structure and collapse that back down into one silo. Through that process, we would expect to realize material cash interest savings on an annual basis. Both bonds are trading well in excess of par today, but we will find the right time to move. Operator: Your next question comes from the line of Doug Becker of Capital One. Your line is now open. Mr. Becker, your line is now open. Doug Becker: Thank you. Robert, as the market evolves, do you see an opportunity for some upgrades on the drillships to improve their competitiveness even further? Robert W. Eifler: Good question. As a reminder, we feel we have one of the most competitive fleets globally right now. All of the drillships will have MPD here in the not too distant future, and we believe we have more of NOV’s automation equipment installed on our rigs than the entire rest of the world combined. We are really proud of where we sit on rig technology. We have upgraded or will upgrade a couple of the rigs for direct capacity, which is a pretty easy upgrade for a couple of our rig classes. I could see us doing something like that for certain programs. By and large, we are happy with where everything sits now. We constantly communicate with our customers around technology they value and work with them in the normal course of business to find technology that works for our rigs. There is always some discussion around who pays for that, but we are seeing a real push by customers to have the best technologies as a lot of things are proving their value, whether in safety—red zone management—or in efficiency—MPD, automation, and other things. We think that trend will continue. Some of that will come from customer-supplied CapEx; some possibly from us. But we are starting from a high place as a company. Doug Becker: Richard, a quick one. You mentioned the low end of the range was de-risked through contracting. What would we need to see to get to the high end of the range for this year? Richard B. Barker: A few parts to get to the high end. In Q1, we had great uptime performance and fantastic cost control across the company—there are opportunities to drive cash flow that way. Specific to the Black Rhino, if opportunities come to fruition for that rig in the back half of the year, that would lead us toward the higher end of the range. Operator: Your next question comes from the line of Analyst of BTIG. Your line is now open. Analyst: Good morning, and thanks for taking my questions. First, on your comments that the U.S. Gulf is a basin that typically reacts quickly to changes in oil prices—have you heard anything yet from customers in the region? And thinking about your fleet, implications for the Black Rhino? Robert W. Eifler: I wish I had a great story for you. Our customers continue to preach discipline and will continue to be disciplined. The U.S. is a place where some smaller independents can be a little more price sensitive in the near term than some majors. Related to Richard’s statement, to the extent something pops up for the Black Rhino, that is upside in 2026 for us. We are hopeful this environment eventually translates to a little incremental work. Analyst: Thank you. And turning to the jackup fleet—now with the closing of the sale behind us—anything you want to highlight on the longer-term outlooks in Norway and the UK? A lot of 2026 is spoken for, but thinking about 2027 and beyond. Robert W. Eifler: For the CJ70s in 2027, we feel really good about having four of those rigs contracted, with multiple paths to having all five contracted. We are probably a little bit short of scarcity in that market on programs that genuinely require CJ70s, but broadly we would characterize our view as flat to up for CJ70s. We are cautiously optimistic. Operator: Your next question comes from the line of Joshua Jayne of Daniel Energy Partners. Your line is now open. Joshua Jayne: Thanks. I wanted to touch on inflation and supply chains. You highlighted a number of project and rig startups you will have over the next twelve months and the focus on execution. What are you seeing with respect to global supply chains—not just the Strait, but outside of it—and how are you managing things to ensure projects start on time with no delays? Robert W. Eifler: Thanks. It is something we are extremely focused on. Logistics are strained—some of that started before Iran—but fuel prices are up now and that adds a bit of cost. Cost-wise, we are not seeing material effects directly correlated to the war. Transportation costs are up, yes. Everything else we are buying for these projects has been built effectively, so we feel reasonable, although there is risk given everything happening. We are really focused on timing right now, and that is where we are seeing a lot of pressure. We are going multiple layers deep to track the equipment we need and ensure we get everything on time so we are ready for our customers. We are optimistic and working hard to stay on time. There is a lot of pressure on the groups trying to pull everything together. Joshua Jayne: Understood. And a follow-up on autonomy. There was a release in March where Noble Corporation Plc, in conjunction with Halliburton and Exxon, automated rig operations and subsurface interpretation, real-time hydraulics. Can you speak to that and where you think we are going over the next couple of years with respect to advances in autonomy on the rig floor? Robert W. Eifler: That is going to continue; that is the path of everything. Noble Corporation Plc does not do anything specifically subsurface. We are focused on having the most efficient rigs and some of the logistics around that. We work very closely with other service companies and with our customers. A hallmark of where things are headed is that everyone is much more collaborative today so maximum efficiency is achieved by service companies and operators working together early, collaborating on shared technologies like what you referenced—there are a number of examples like that. That is the path of drilling today. We have said before we have shifted from the concept of drilling ourselves out of a job to drilling ourselves into a job. We have seen that work directly in Guyana, where they have had FID under circumstances that were probably not possible even three or four years ago given the efficiency then. Technology and automation are really enablers for deepwater work going forward. The further deepwater comes down the cost curve, the more there is for the entire industry. We are very optimistic about that. Operator: Your next question comes from the line of Analyst of Melius Research. Your line is now open. Analyst: Good morning, Robert and Richard. Robert, thinking about the various regions around the world that you participate in, which one or two over the last ninety days have started to show more urgency on moving FIDs forward or getting FIDs done as this deepwater cycle steps up? Robert W. Eifler: Asia, for sure—we have seen a real change in the amount of demand and urgency there. And then Terracom, where there is an enormous amount of work: in Guyana, and Venezuela seems more open, and a number of other shallower-water trends that are creating a lot of demand through that region. It is all pretty interesting. Analyst: And on managed pressure drilling—you mentioned all of your rigs will be outfitted with MPD. What percentage of wells now are being drilled with MPD, and how much of the well is drilled with MPD? Robert W. Eifler: To clarify, it will be all the drillships that have MPD. I may not have a precise percentage; it is a high percentage. There are certain technologies that can be used outside of MPD, but over the past ten years, MPD is going the path of the top drive—almost ubiquitous. We are happy with where we are on having the rigs outfitted. It is a $25–$30 million expense depending on where your piping is, and you have out-of-service time, so we are happy to have that pretty much paid for. Operator: Your next question comes from the line of Noel Parks of Tuohy Brothers. Your line is now open. Noel Parks: Good morning. One artifact of tightening in the rig market could be lengthening of contract term. I have not really seen that yet, but I have noticed more prompt contract extensions, maybe suggesting operators who were betting on lower-for-longer dayrates are losing that bet. Are you seeing that? Robert W. Eifler: On length of contract: two or three years ago, the last time we hit this inflection, average contract term was still less than a year. An important point we made is we are seeing more big development projects driving demand. I think the average contract term was at least two years on some of the recent contracting. That is a huge change compared to where we were. Think about approaching a similar utilization point as the last time dayrates hit $500 thousand, but with more term and a lot more open demand—like double the open demand—than before. We are pretty optimistic. Noel Parks: You mentioned producers’ capital discipline is still in place. Comparing to 2022’s uncertainty, how are they deciding during the current turmoil—looking past it and thinking about what comes next? Robert W. Eifler: Our customers are very long-term minded. There has been a big movement toward exploration in deepwater, which to me is the most important test of the market. That started before Iran and has not slowed. We hope it is solidified by what is happening now. We would not expect our customers to waver from their commitment to discipline, and our optimism does not require them to abandon discipline. Operator: Your next question comes from the line of Analyst of JPMorgan. Your line is now open. Analyst: Good morning, and thanks for the time. Can you elaborate on the moving pieces with the Mick O’Brien? You called out a $15 million impact. How much is the bareboat piece versus stacking costs? And when the rig goes stacked, does that end the relationship between the two entities and the rig is free to seek work elsewhere, or are there any other items we should be aware of? Richard B. Barker: It is an early termination for the rig. The $15 million is about six months of the bareboat charter plus stacking costs—that is essentially the $15 million. That is the extent of the impact; we do not see any other impact to our financials. Once we get to early December, the rig will move over to Borr. Operator: As of right now, we do not have any pending questions. I would now like to hand the call back to Noble Corporation Plc management for closing remarks. Ian MacPherson: Thanks for joining us today, everyone. We appreciate your interest, and we look forward to speaking with you again next quarter. Have a great day. Operator: Thank you for attending today’s call. You may now disconnect. Goodbye.
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.]
Operator: Welcome to the Groupe SEB 2026 First Quarter Sales Presentation. Today's conference will be hosted by Stanislas de Gramont, Chief Executive Officer; and Olivier Casanova, Senior Executive Vice President and Chief Financial Officer. [Operator Instructions] Now I will hand the conference over to the speakers. Please go ahead. Stanislas De Gramont: Good afternoon. Thank you for attending this call. I'm Stanislas de Gramont. I will be managing this presentation together with Olivier Casanova, our CFO. We will start with a short presentation, I think, and then we'll carry on with answering your -- all the questions you may have. Olivier, you want to get started? Olivier Casanova: Okay. Thank you, Stanislas. So moving on to the key figures for the quarter. Our sales stood at EUR 1.885 billion, up 2.7% on a like-for-like basis. ORfA stood at EUR 72 million, up 42% and operating margin was up 1.2 percentage points at 3.8%. So moving on to the highlights on the next page. As I said, 2.7% organic growth. Of course, we have been operating in Q1 in an environment with a lot of uncertainty on the macroeconomic and geopolitical front. And of course, it has deteriorated in the latter part of the quarter. We'll come back to that, no doubt in the Q&A. In this environment, however, we have delivered balanced growth between activities and region, driven in large part by our innovation portfolio. ORfA has increased year-on-year, of course, supported by a favorable base effect because the Q1 ORfA of last year was low by historic standards, but also supported by organic sales growth and a decrease in operating expense. And finally, we have launched the rollout of our Rebound plan, and it is progressing in line with the announced schedule. So moving on to the top line. So as I said, 2.7% organic growth. We have a currency effect of minus 3.8% and no change in scope because La Brigade de Buyer, which was acquired in -- at the beginning of 2025 was consolidated for a full quarter. So let's describe briefly the currency effect. Of course, we have a negative impact from the depreciation of the CNY and the U.S. dollar. We all remember that they were actually quite firm in the first quarter of last year. And the CNY has depreciated year-on-year 6% and the U.S. dollar 11%. Secondly, we have also suffered from the depreciation of the Turkish lira and the Japanese yen. We can expect, in particular, for the U.S. dollar and the CNY, of course, a lower impact later in the year given the depreciation that we experienced in '25. Now let's look at the split of our turnover by business unit. So our Professional business unit had EUR 231 million sales in Q1, up 1.1% on a like-for-like basis and Consumer sales stood at EUR 1.654 billion, up 2.9% on a like-for-like basis. So overall, as we said, a balanced organic growth, 1.1%, as I mentioned, on Professional. And you can see that on the Consumer side, it's also quite balanced by region with 2.5% growth in EMEA, 2.2% growth in Asia and a hefty 6.7% growth in the Americas. So now I turn over to you, Stanislas, to cover these results in detail. Stanislas De Gramont: Thanks, Olivier. Let's look now at the detailed description of our activities per activity -- sorry, sales performance per activity. Starting with the Professional business, where we experienced a slight organic growth with an activity that is up 1% organically, which is very much in line with our Q4 2025 trend. What we can see on the less positive side is that a persistent client wait-and-see attitude, of course, in the United States. This has not changed materially since the last quarter or the last quarter of last year, but also in the Middle East for obvious reasons, and that's intensified by the geopolitical context, of course. Yet we see a continuation of the positive commercial momentum, consolidating our leadership in China with Luckin Coffee, our biggest customer out there, but also new contracts in tea chain segment with a customer called Cha Panda, which is progressively expanding -- where we are progressively expanding our coverage. We also see new customers coming in, in North America, a chain called Scooter's of restaurants, that's a very good customer for us. And last but not least, Europe has shown positive performance, driven in particularly by the service business, which is more than elsewhere compensating the wait-and-see attitude on new machines purchase. We see and we are expanding our new growth levers. You know that by now that we've opened our Chinese hub in Shaoxing for production and development of new coffee machines, new ranges of coffee machines. And the 2 first new models we've developed called Peak and Elevation have seen great reception, particularly in the small businesses and offices segments, be it in Asia or in Europe. Now when it comes to the Consumer business, Olivier was saying that we have a balanced organic growth with total Consumer up 2.9%, EMEA up 2.5%, Asia up 2.2% and Americas up 6.7%. And before going into the details of these performance, it's interesting to look at the innovations that drive this performance. The big hit of last year, the washer category with X-Clean 10, which category we've reached EUR 100 million in 2025. We launched and are expanding last year -- we launched last year and are expanding this year, AeroSteam, which is the first vacuum garment steamer. We have a great expansion of our Titanium wok in Supor in China. The big success of Q4 last year that is continuing into Q1 is Cookeo Infinity, which is combining great multi-cooker programming and cooking programs together with air fryer function and the storing function. And the last 2 newcomers in the market that have been launched in France in March are Pizza Pronto, which is an electric pizza oven outdoor and Coffee Crush which is a revolutionary bean-to-cup coffee machine, which again, has started in France in March and is really giving promising results at the start. But beyond products and product innovations, we've also moved forward in the way we interact with consumers. We've made 2 kind of great activities. We had -- we organized in early April in Paris, a SEB Fashion Domestic Show with a digital show and staging, showcasing our consumer innovations, staging products as iconic pieces with lights, music, narration, a very original way to portray and to display our products. We've done great stunts on collections and immersion with product demos, with interactive experiences, with a gallery of innovations in best sellers, outdoor spaces, conviviality and tastings. And last but not least, we had great following and attendance by influencers. We've generated premium content on site that have boosted the visibility of those innovations. We had over 60 influencers with a cumulative reach of 16 million people. And in the very day of the event, we had already 1 million views on content generated that day. So that's what we did generally to introduce our innovations in France. But we also did a very specific dedicated event for the Coffee Crush launch, which started actually 2 months before the event with a prelaunch phase with influencers. We co-created content with them, the Crush Crew, as we call them, with a claim that is all the taste, less space. This machine is only 15 centimeters wide. So it is the most compact bean-to-cup coffee machine. And during that event at the end of March, we gathered 75 influencers with a total reach cumulated over 20 million. And since launch, we've generated over 5 million views. And last but not least, we've launched it in France, but we are now fast rolling out in over 50 markets by the end of 2026. So you've heard us say in the last few months that we will evolve our go-to-market, and we will intensify and accelerate our innovation strategy. And I think these are prime examples of what is changing in the way we connect and interact with consumers. Now back to numbers. EMEA had a pretty good quarter at 2.5% growth like-for-like, with Western Europe up 4.8% and other EMEA countries down 1.8% or is organic. In Western Europe, we had some positives with a good flow of loyalty programs. In fact, it is more than the flow of loyalty programs. Q1 last year was historically weak. So we are back this quarter on a regular flow of loyalty programs for the first quarter, maybe a little bit high, but still in line with what we usually do. That's the positive and the negative. Our German market remains challenging, and that continues the 2025 trend, which we are working very hard to fix. And the great super positive is France that delivered 21% growth, 5%, excluding loyalty programs, gaining market share and strengthening our digital activation strategies. So all in all, Western Europe that has been holding up quite well. Whilst in the other EMEA countries, we've experienced a slight decline in organic sales. Comps driven mainly for Eastern Europe. We had a very, very strong Q1 last year. We see growth in Turkey. That's great. And we have, of course, significant direct disruptions in the Middle East. Middle East is circa 2% of the total group revenue, but around 10% of that region, and that weighs somewhat materially on the performance of that subregion. If we go west to the Americas, we've confirmed in Q1 the improvement of sales in North America. We are up 4.7% like-for-like, driven by market share growth in cookware and in linen care in the U.S. And those market share gains are driven by innovation in a somewhat deteriorating market. Mexico shows negative sell-in impacted by still high inventories from retailers and fans, but positive sell-out, leaving a room for an improvement through the year. When it comes to South America, we've experienced a return to growth, up 10.9% in the subcontinent, driven by range expansion into new categories, coffee-based products, floor care, blenders, a less pronounced decline in fan sales. You know that we are still comping strong numbers. And of course, this La Niña effect is fading away, a favorable comparison base in Brazil, which was pretty slow last year in Q1 and a very healthy continuous double-digit growth in Colombia. If we go East, China growth momentum is maintained at 2.3%, that continues 2025 trend. The environment is highly promotional still in China, and we are managing the balance between sales growth and profitability growth. Our growth is multi-category driven by cookware. I mentioned the Titanium wok as one of the key innovations for the year, but also kitchen utensils, garment steamers, rice cookers with new heating systems, which are catching up very well in the market. And we are confirming notable success for Supor in social commerce. We are #1 in Douyin. Douyin is, as you know, the Chinese name for TikTok. Going around the other Asian countries. Overall, it's a positive quarter with continued growth in Japan and continued growth in South Korea, where the market is still very complex. We have good momentum in most Southeast Asian countries, especially online and in social commerce, 2 strong platforms, Shopee and Lazada, where we are driving the bulk of our growth up there. And we're expanding our ranges of products in Australia with blenders, spot cleaners and others. Now how does that materialize in [ profitability ]? Olivier Casanova: Okay. Thank you. So first, let's say, a reminder, which we, of course, provide every year for the first quarter. As you know, this is historically providing a limited contribution to the full year results given the seasonality of sales. And secondly, of course, we need to be cautious and not draw too many conclusions on the full year trajectory. And of course, in addition, last year was a particularly, let's say, low quarter for Groupe SEB. That being said, we are delivering EUR 72 million of ORfA in the first quarter, up 42% on Q1 last year. This translates into 3.8% operating margin, up 1.2 percentage points. This is the result of positive organic sales growth, which is driving increased contribution at the gross margin level. We are benefiting, as we had announced from positive currency effect in the quarter. Of course, the positive contribution of short currencies. You remember that those benefits, let's say, took some time to filter through our P&L last year. But finally, in Q4, we benefited from this positive contribution. And as expected as well, we are seeing in Q1 this year, a better offsetting of the long currencies depreciation through price increases. In addition to these elements, we are benefiting this quarter from decreasing operating expenses, which is, let's say, principally the result of selectivity in terms of growth driver engagement, but also reduced structural costs, in particular, on G&A, which is evidence to some extent also from the [indiscernible] initial benefit of the Rebound plan. Stanislas De Gramont: [Foreign Language] Olivier, I will now go on the outlook with 2 parts. The first one is still fairly qualitative, but I think it's worth mentioning. It's on the Rebound plan. We are deploying that plan and the deployment is in line with our objectives and deadlines. As you remember that the Rebound plan was with 2 dimensions. One was to reinvent our growth model and you see that there is an acceleration of the innovation. You see that there is an evolution of our marketing transformation, and we are deploying this marketing transformation throughout our market companies. We have an ambitious target of reducing our SKU ranges by 20% to 30%, depending on the categories. We've identified 80% of the candidates and are now in the execution phase of that project. And when it comes to the second dimension, which is about reducing our cost, we've launched almost all initiatives related to indirect purchasing. And we already see in the first quarter some initial benefits in the P&L. So that's great. I mean that is what supports the first quarter that is ahead of expectations in terms of profits. And when it comes to the dimensions of industrial efficiency and overheads, we started our negotiations with employee representatives the day after the announcement on the 25th of February. And today, those negotiations are in line with the set schedule we've set ourselves. So we confirm what we've said as a time line for the Rebound plan. Now when it comes to the outlook for 2026, we've added a comment -- the outlook is the same as the one for 2026 as the one we shared back in February. We've added one comment, which is about the uncertain and deteriorating macroeconomic and geopolitical environment. Even with that, we confirm our ORfA growth in 2026 together with a more normative free cash flow generation. And we also confirm our ambition to lower our financial leverage in 2026 with the objective of returning to the group standards of around 2x, excluding acquisitions by 2027. [Foreign Language] It's been pretty fast. It's now your turn to come up with your questions that we'll be delighted to answer. Thank you very much. Operator: [Operator Instructions] The next question comes from Ope Otaniyi from GS. Opeyemi Otaniyi: Just 2 from my end on sort of what you're seeing from consumers, but also maybe addressing sort of anything that's changed from -- on logistics and costs just given the current crisis. So do you mind just giving a sense of what you've seen through the quarter in terms of consumer behavior and how you see that translating into sort of underlying demand? And then just given the Middle East crisis, could you sort of comment on how to think through costs for the rest of the year, sort of any impact on logistic costs as well or any commodity inputs as well? Stanislas De Gramont: Thank you for your question. Not surprising question. I think it's in everybody's mind. Well, let's say that the first quarter hasn't really seen any impact either on the cost or on the consumer demand or consumer confidence, except, of course, the direct exposure to the Middle East, which I commented in the EMEA segment. The second comment as I would make is we are -- we don't have clarity as anybody else on what is the scenario and what is the impact of that crisis. It depends on the length of the crisis. It depends on the depth of that crisis. And maybe what I can say is that we are confirming our perspective for the full year, having considered the likely scenarios, which are currently being evaluated by the various institutes or economist reports. Maybe the third thing I'd like to add is a lot of our profit because you can ask, well, you would be -- it would be fair to ask but why are you still confident? I think the bulk of our profit improvement comes from our own actions. First, we have a favorable base effect, and we know that we have some negative contractual effects last year that will not materialize or are not -- do not seem to be materializing this year to any extent. So that's the base effect that is probably supporting part of our profit development. Our innovations, we see that our market even in more difficult market conditions when we have powerful innovations that are well activated, we're able to generate some sales and margins development. So I would say the third argument that makes us stick to our forecast is that most of the improvement will be driven by our own actions. Opeyemi Otaniyi: And maybe just -- I appreciate maybe Q1 and Q2 sort of maybe not the most important quarters, but do you mind just commenting on working capital and what you've seen in terms of logistic costs and sort of inventory levels? Stanislas De Gramont: Yes, sorry. Maybe I should have added, but that's -- I made it in my comment of the first quarter performance. We have the Rebound, of course, which will be a contributor to that recovery or that development of the profit base. Sorry, I skipped it because I said it in the last sentence of the [ expose ]. Now logistics, today, what we see is fuel surcharges, be it on the sea freight or on the road transport. Those surcharges are well identified. We know how much they impact. It's a bit early again to share a number. But what we -- the actions we put in place are more than enough to compensate and offset those negative impacts. That's for the cost -- the direct cost side. On the current product access and ability to ship products, we do not see at this stage any impact on our ability to ship products from Asia to Europe or to the United States. And we don't foresee in the current scenario [ maybe ] because the Strait of Hormuz is not a route that we use to ship our products. Does that answer your question? Opeyemi Otaniyi: No, that's yes. Operator: The next question comes from Natasha Brilliant from UBS. Natasha Brilliant: Just to come back to the previous question, just on kind of current trading. You said that Q1 hadn't really had any impact so far. But just to confirm, any color you can give us on the first few weeks of Q2? And if there's been any change, that would be helpful. Second question is just on the Professional business. I think you mentioned some new contracts in China and some new clients in the U.S. So if there's any more detail you can share on those and if you have any visibility on other contracts in the pipeline? And then my last question is just on the Rebound plan and as you start to implement it, if you can tell us what the cost has been so far in Q1? Stanislas De Gramont: I will -- okay, thank you very much. I think that the general comment on all these 3 questions is they're probably a bit early to be able to give you more color. I can answer the first one that today, we don't see any material change in Consumer sentiment in the first 3 or 4 weeks of April. I've been speaking to a couple of customers in the last few days in a couple of countries, and they don't see any material impact. Of course, there's seasonal impact, but nothing where they can say, there's a shift. On the Professional contracts, we don't disclose our contracts. We use those examples to illustrate the fact that the activity, albeit slightly growing only still is collecting and is gathering new contracts in our core business. And we have a pipeline that is not bigger, not smaller than usual on large contracts. And for the cost of the Rebound plan, it's very early. I mean the bulk of the savings that we've collected so far are on indirect purchasing, and they are mostly savings with no cost attached to it. The bulk of the cost of the Rebound plan is linked to the social activities, and those have not been booked yet. Olivier, do you want to complement on that point? Olivier Casanova: As you said, we've indicated during the full year results call that we expect to be booking most of these, let's say, provisions in the second quarter before the June close. We expect at that time to have sufficient clarity on especially the social terms in order to be able to book the provision. So far in Q1, it's still too early, as Stan mentioned. Operator: The next question comes from Marie-Line Fort from Bernstein. Marie-Line Fort: I just want to come back on the currency impact on your first quarter earnings. I know it's not really representative. I just want to know what is the phasing all over the year because you started to benefit to better currencies on Q4. On the top line, currencies will fade in negative terms on your top line as soon as Q3, probably. How do you see the momentum in terms of currency and positive impact on your earnings? That's my first question. The second question is about your -- the indirect savings that you made in Q1. Could you confirm the envelope that you are targeting for the full year? I've got in mind EUR 50 million, 5-0. Could you just confirm these figures? And my last question is about Coffee Crush. Just wanting to know where the machine is produced. The machine is sold at very low prices. Is it still margin-wise, same-wise -- same margins at the consumer? Or would it be dilutive on margin? And also, when do you plan to increase the coverage over the European market? Stanislas De Gramont: Okay. I'll start with the third one, and then Olivier will answer the last 2 -- the first 2, sorry. Coffee Crush is margin dilutive to the Consumer business. It is made in China. It is sold at EUR 350, EUR 320 and EUR 300, which is -- which delivers pretty good margins. It will be expanded in 50 countries beyond France by the end of 2026. So it's a very good business. And it is made today outside of SEB in OEM manufacturer in China. Olivier? Olivier Casanova: So on the currency impact, if I split between long and short. So on the short side, of course, if the CNY and the U.S. dollar remain at the current level, we should continue to benefit from a positive impact throughout the year as we've indicated in the past. On the other -- the long currencies, in particular, currencies from emerging markets, we are seeing maybe less depreciation than we were expecting. Of course, it's impossible to say whether that's going to last or not. But if it does, we'll probably see, let's say, a lower impact than expected. But as you know, in those countries, we are able to compensate the depreciation by price increases. So if there is less depreciation, by definition, there will be less compensation. So net-net, we are probably operating in a slightly more favorable environment in terms of currencies, but I think we need to be very prudent given, let's say, the high volatility in the current geopolitical and macroeconomic environment. On indirect savings, we said that the bulk of the EUR 200 million savings that we are expecting to generate should come from the effort on the structural cost base and that indirect savings will represent a smaller portion. So you say EUR 60 million. I don't recall precisely stating a number, but it's not a million miles away. I think we are confirming that this is very much our objective. We'll see. It's a bit too early to say whether we can exceed that objective, but it's certainly being confirmed by all the more detailed work that we have been carrying on. And as we said, we have already implemented the vast majority of these actions. They are currently already starting to produce some positive results. Operator: The next question comes from Alessandro Cecchini from Equita. Stanislas De Gramont: We can't hear you. Operator: The next question comes from Fraser Donlon from Berenberg. Fraser Donlon: Just checking, you can hear me? Stanislas De Gramont: Yes. Fraser Donlon: So the first question was just about the loyalty programs. Could you maybe help understand what would be the organic growth in Western Europe ex LPs? I know sometimes you gave that number in the past. And then how should we think about the phasing impact on loyalty through the rest of the year? If you could just give a reminder there. And then the second question was just thinking about the changes to tariffs on aluminum and steel products in April. Could you kind of highlight how we should think about that basically for the kind of Tefal products primarily? Stanislas De Gramont: Change of aluminum and steel tariffs in April. So Olivier will take both questions, Fraser. Olivier Casanova: Okay. Thank you. Fraser. On the loyalty program, I mean, the first thing that we should maybe restate is that loyalty programs are, of course, part of our business. They're an integral part of the Consumer business. They are just one of the different ways in which we are doing business. The reason why we sometimes highlight the importance of this loyalty program is that it's the same with large contracts for Professional. They can provide some distortion in the reading of the number. And it's true that last year, our loyalty program were particularly low. And this year, as we said, they are, let's say, back to a more normalized level, and they provide a significant positive tailwind for this quarter. I think the thing to bear in mind is that France is where we have the largest impact. And France, excluding loyalty program, is up 5%. And this is evidence of market share gains in many product categories, thanks to our strong product pipeline. On the second topic, which is the input cost, well, first, yes, we have seen some tensions on raw material. You name aluminum, but of course, we have the same with plastics and, let's say, a few other input costs. The extent of this increase, of course, will depend to some -- on the length of the current crisis in the Middle East. And so we are monitoring this situation, of course, very closely. We have identified already some, let's say, counter-measures and some of them are being implemented, and we will adjust as the situation develops. But as we mentioned, we don't think that they are of a nature at this stage to change our forecast for the full year. On aluminum, more specifically, you will remember that we have a rather prudent hedging policy. And in particular, on purchases for Europe, we are very well hedged above 80% at the beginning of the year. So that is, of course, limiting the negative impact on our results from aluminum increases. Operator: [Operator Instructions] Stanislas De Gramont: Maybe it's Alessandro from Equita? Operator: No, we don't have him back. Stanislas De Gramont: Okay. Operator: The next question comes from Geoffrey d'Halluin from BNP Paribas. Geoffrey d'Halluin: I will have one question regarding to the U.S. tariffs and the Section 232. I guess there is a new proposal from early April, which has been put in place. Just wondering if you have any thoughts and if you could be impacted by this new proposal, please? Stanislas De Gramont: Olivier? Olivier Casanova: Okay. So thank you for the question. It's a fascinating topic, of course. We have to distinguish 2 things: the reciprocal tariff on the one hand and the Section 232, which is applicable for aluminum and steel derivatives. So on the reciprocal tariff, first -- the first topic for us, of course, is to obtain the benefit of the reimbursement after the U.S. Supreme Court decision earlier this year. So we can confirm that we have put a request for reimbursement after the opening of the CAPE platform on the 20th of April, and those claims have been accepted. So we will wait, of course, until -- wait for the reimbursement to hit our bank account before we can, let's say, disclose more details, but that, of course, should be although an exceptional, but it should be a positive for us this year. With regards to the 232, there has been a change in the way this is calculated. It was until the recent change calculated, it was a 50% surcharge calculated on the aluminum or steel content. It's been replaced by a new method of calculation, which is 25% on the overall product. That change is almost neutral for us. So there is no big difference in terms of the -- given the content of aluminum and steel in the product. The final change is the, let's say, removal of the reciprocal tariff and the implementation of a 10% surcharge for all countries. That probably has a moderate net positive impact for us, but we remain very cautious because, of course, these things are fluctuating and we are, of course, monitoring the impact this has on selling prices. So I think net-net, let's say, no material adverse impact, potentially slightly positive. Operator: There are no more questions at this time. So I hand the conference back to the speakers for any closing remarks. Stanislas De Gramont: All right. Thank you very much for your questions. No surprising questions. I think this is a solid quarter, one that we were expecting to drive through. We've started the year saying that we would be managing our business with a strong priority of recovering profitability. I think, as Olivier said, the first quarter is only a mere 10% or 8% of the total year. But still, I think it represents the way we want to drive the year. We feel the context is getting more and more uncertain and deteriorated, yet we are on track to implement the right level of actions in terms of margin protection, in terms of cost savings, and we're confident that we will be able to navigate this year with what we see today. Thank you very much for your support. Thank you very much for your analysis, and I wish you all a great result season. Thank you.
Operator: Good morning, and welcome to Verizon's First Quarter 2026 Earnings Conference Call. [Operator Instructions] Today's conference is being recorded. If you have any objections, you may disconnect at this time. I would now like to turn the call over to Colleen Ostrowski, Senior Vice President, Investor Relations. Colleen Ostrowski: Thanks, Brad. Good morning, and welcome to our first quarter 2026 earnings call. I'm Colleen Ostrowski and on the call with me this morning are our Chief Executive Officer, Dan Schulman; and Tony Skiadas, our CFO. Before we begin, I'd like to point you to our safe harbor statement, which can be found in the earnings presentation and on our Investor Relations website. Our comments this morning may include forward-looking statements, which are subject to risks and uncertainties. Factors that may affect future results are discussed in our SEC filings. This presentation also contains non-GAAP financial measures, and you can find reconciliations of these measures in the materials on our website. Finally, as a reminder, the results of Frontier Communications are included in our financial and operating results beginning on January 20, 2026, the date we closed the Frontier acquisition. With that, I'll turn it over to Dan. Daniel Schulman: Thank you, Colleen, and good morning, everyone. When I joined Verizon, I have a simple but ambitious goal. I wanted Verizon to reclaim its market leadership. Obviously, there are a lot of things we need to do, right, to make that happen. We need to delight our customers and put them at the center of everything we do. We need to drive consistent and fiscally responsible subscriber and revenue growth. We need to keep more of our customers, as measured by our churn rate and convert that into stronger, more predictable cash generation for our shareholders. With all of that in mind, we ended last year with our strongest quarter of mobility and broadband net adds in 6 years, and we entered 2026 with a clear set of priorities, a step function improvement in guidance and a realistic plan. Today, our first quarter results show that our turnaround is not only progressing, it is gaining momentum powered by a comprehensive transformation program that is reshaping how we operate and serve our customers. I'm also very pleased that our East unions recently ratified a new 4-year contract that we believe will enable us to better serve our customers. Let me start by saying we delivered a strong quarter across our core operating metrics, and we translated that performance into solid operational and financial outcomes, some of which we haven't seen in over a decade. I'll briefly review the key highlights of the quarter, including the impact of the network outage we experienced earlier in January. Then I'll walk through 3 key themes: how we will continue to drive healthier growth second, how we will accomplish that with meaningfully better customer economics and finally, how that leads to improved cash generation. I'll close with how these results and the transformation work underway, supporting increase in our 2026 guidance for both our adjusted EPS growth and our postpaid for net adds. In the first quarter, total revenues grew 2.9% to $34.4 billion, while our reported mobility and broadband service revenue grew below our annual guided range. Our reported growth includes a onetime pressure of 80 basis points on our wireless service revenues from customer credits and other impacts related to our network outage. We ended the quarter with momentum with March mobility and broadband service revenue growing in the middle of our guidance range, with Consumer wireless service revenue approximately flat year-over-year. We anticipate Q1 mobility and broadband service revenues will be the low point of 2026. The and we are highly confident that our forecast for mobility and broadband service revenue growth is in line with our 2% to 3% guidance for the year. Importantly, the quality of our revenue is improving. We are purposely shifting our mix towards durable recurring service revenues and away from low-margin, highly promotional activity. We are prioritizing customer lifetime value over short-term revenue maximization. The benefits of that approach are obvious when looking at the combination of positive postpaid phone net adds better churn, lower acquisition and retention costs and higher free cash flow and adjusted EPS. We added 55,000 postpaid phone net adds in the quarter. That represents an improvement of over 340,000 postpaid phone net adds versus the same period a year ago and it's the first time in 13 years that Verizon has set positive postpaid phone net adds in Q1. Both consumer and business had significant improvements in postpaid phone net adds Overall, we delivered almost 0.5 million net adds across our mobility and broadband platforms. This is a strong continuation of the momentum we established in Q4 of last year, and it is happening while we are also improving the overall quality and economics of our customer relationships. I'm particularly pleased to see the early results of our transformation efforts on our customer retention. Consumer postpaid phone churn in the quarter was 90 basis points, a sequential improvement of 5 basis points from Q4. Importantly, churn improved throughout the quarter. And in March, consumer postpaid phone churn improved further to below 85 basis points. That is a significant improvement both sequentially from Q4 and within the quarter, and it reversed the upward pressure we had seen in churn over the past several years. As expected, when we stop imposing blunt price increases without corresponding value on our customers and begin to remove friction from the end-to-end customer experience, they reward us with their loyalty. At the same time, we are acquiring and retaining customers far more efficiently. Our cost of acquisition and retention in March was down approximately 35% relative to the end of Q4 and we expect to maintain a lower cost of acquisition and retention as we look forward. I would point out that we accomplished these meaningful cost reductions while still delivering increasingly positive postpaid phone net adds versus a year ago. In other words, we are no longer predominantly reliant on expensive promotions to drive our growth. We are growing, and we are doing so in a much more disciplined, repeatable and fiscally responsible manner. We, of course, retain the flexibility and conviction to defend our base and have a large war chest, if necessary, to react to competitive moves in the market. These trends in churn and unit economics are listing, our consumer lifetime value and are already flowing through to the bottom line and to our free cash flow. I'd also point out that a lower cost of acquisition will benefit our future revenue growth as the headwinds of promotion amortization finally begin to subside. Adjusted earnings per share for the quarter were $1.28, up 7.6% year-over-year, our highest adjusted EPS growth rate in over 4 years. Free cash flow was approximately $3.8 billion, up 4% year-over-year and represents a strong start to the year. Our performance is consistent with and in a few key areas ahead of the guidance we laid out for 2026 driven by a better customer experience and operating efficiency. It is also the foundation for the capital allocation priorities we have outlined, investing to maintain our network excellence and our overall value proposition, maintaining our ironclad commitment to our dividend, steadily reducing our leverage and returning capital to our shareholders. Now let me come back to the 3 themes I mentioned earlier, healthier growth better economics and stronger cash generation. First, healthier growth. The story in mobility and broadband is that we are now consistently adding more of the right customers at the right economics. The dramatic year-over-year improvement in postpaid phone net adds over the past 2 quarters with continued momentum into Q2, all reinforce that our offers and our go-to-market strategies are working. We are leaning into converged value, mobility plus broadband, a simplified customer experience and features that matter to customers rather than chasing every promotion in the market. We are also beginning to see the benefits of our transformation efforts, which make it easier for customers to do business with us and reduce friction in their interactions with us. In fact, I'm very pleased to say that our consumer customer service team delivered its best quarter on record for customer satisfaction, driven by improved resolution, fewer handoffs and faster response times. In broadband, we continue to aggressively expand our footprint, increase penetration and position those assets as a core part of our long-term growth story. We are solidly on track to have more than 32 million fiber passings by the end of this year. We are early in the journey of fully monetizing the combination of best-in-class mobility and a growing fiber and fixed wireless access footprint. But we already see in our net adds and in our improved churn that customers value having more of their connectivity needs met by a single trusted permitter. Our Frontier integration is on track and I'm extremely pleased with the level of teamwork and focus from go-to-market execution to network integration and all with a keen focus on driving convergence and delivering on our more than $1 billion of run rate operating cost synergies by 2028. Now let me turn towards our second theme, which revolves around driving better economics. The improvements in churn, acquisition costs and retention costs are not one-off events. They are the result of specific choices we have made over the past 200 days and the early benefits of a broader transformation we have launched across the company. We have put in place an ambitious company-wide transformation built around 10 major work streams. These work streams span everything from becoming an AI-first company to reducing friction in every step of the customer journey to reexamining outdated internal policies and procedures that slow us down and add to bureaucracy. We aim to simplify our products and services, apply micro segmentation to better match offers to customer needs and drive towards our goal of being the most efficient telco in the world. Each work stream has a dedicated cross-functional tiger team with clear monthly and annual targets in a disciplined governance process that reviews progress, unblocks issues and reallocate resources where needed. This program is changing how we run the company day to day. As I've mentioned before, we will not rely on empty across-the-board price increases that create short-term financial gains that erode the long-term trust of our customers. Instead, we aim to delight customers. A central pillar of our upcoming new value proposition is the end-to-end redesign of our customer experiences to ensure we delight each customer in every interaction. Our commitment to customer value and trust is becoming part of our corporate DNA embedded in how we design offers, how we communicate with our customers and how we measure success internally. We are in the final stages of extensive market research that will inform a new generation of offers built around the principles of transparency, simplicity and genuine value delivery. We have begun to embed AI and automation into our operations and customer interactions, which is already significantly improving customer experiences and lowering costs. We will encourage more volume into digital sales and service channels, which lowers cost, increases engagement and leads to higher customer satisfaction and we have begun to see meaningful cost benefits from our transformation efforts as we take out legacy structural costs from the business. Consequently, we are well on our way towards our OpEx savings target of $5 billion in 2026. Churn is the clearest measure of whether our efforts are resonating with our customers. When we achieve the kind of churn benefits we did during the first quarter, it has profoundly positive implications for our business model. Every cohort now contributes more revenue, more margin and more cash. That affects compounds over time. Lower churn also makes our marketing dollars work harder because we are not simply replacing customers who leave, we are adding to a more stable base. Our advertising is also evolving as exemplified by our Connor story brand advertisement which resonated powerfully across social media and focus on our service and our network, not promotions or handsets. The same is true for acquisition and retention economics. We were able to meaningfully drive year-over-year improvement in our postpaid phone net adds while driving the cost of acquisition and retention lower by approximately 35%. Obviously, this fundamentally changes the return on investment we make to attract and keep our customers. And as I mentioned, the less we spend on promotions to lower our amortization headwinds, enabling a step function change in our future revenue growth. These improvements come from the work our teams are doing in our transformation streams, smarter channel mix, less friction, better tools and modeling the beginning of AI and naval processes and a tighter focus on fiscally responsible offers that drive profitable growth. We expect these more efficient levels to be sustainable under our current strategy, and we see additional opportunities to further improve our trends as our transformation matures. Finally, our third theme revolves around stronger cash generation. The combination of healthier subscriber growth and better economics is evident in our first quarter free cash flow results and we are confident in our annual guidance of approximately 7% or more growth. We are seeing the benefits of a more disciplined capital program. where we continue to invest in capacity, coverage and reliability, but do so with sharper prioritization and better utilization of the assets we already have. We are also continuing to execute on our operating expense initiatives, which are delivering a substantial war chest to continue our investments in driving our end-to-end value proposition while driving continued shareholder returns. We see room for further meaningful efficiencies in the years ahead while simultaneously advancing our primary goal of delighting our customers and by doing so, driving long-term sustainable revenue growth. We have also discussed in our previous earning calls that we aim to drive incremental margin by eliminating sunsetting or creating structures to dramatically reduce our exposure to noncore assets. We are well underway in this journey, and we look forward to sharing more details shortly. All of that brings me to our updated outlook. On the back of our first quarter performance, the leading indicators we see in our business and the traction we are seeing in our transformation work streams. We are raising our guidance for adjusted EPS growth to 5% to 6% versus the prior range of 4% to 5%. We also now anticipate our postpaid phone net adds to be in the upper half of our $750,000 to $1 million range. We are reaffirming the balance of our guidance, mobility and broadband and service revenue growth of 2% to 3% with Q1 being the low point of 2026 and free cash flow growth of approximately 7% or more versus last year. We are making these changes early in the year because the data supports a higher level of confidence. We are ahead of pace on postpaid phone net adds and doing so with lower churn, better unit economics and record customer satisfaction scores. We have clear line of sight to the remaining cost and capital efficiency actions that underpin our free cash flow target. And the transformation program gives us additional levers as the year progresses. At the same time, we are far from assuming a perfect environment. We operate in a dynamic and rapidly changing landscape. Our revised guidance continues to reflect a prudent view of competitive dynamics and the macro political and economic environment. Our capital allocation priorities remain unchanged. We will continue to invest in our network, our platforms and our people to deliver the reliability and experiences our customers expect. We will, of course, maintain a strong and sustainable dividend, reflecting the cash-generating nature of our business. And as Tony will discuss, we are delivering on our commitment to return capital to shareholders. We will continue to use excess cash to strengthen our balance sheet over time, giving us flexibility as markets and opportunities evolve and we remain on track to return to our target leverage ratio in 2027. To summarize, in the first quarter of 2026, Verizon grew underlying mobility and broadband service revenue in line with our annual guidance. delivered positive postpaid phone net adds in Q1 for the first time in 13 years, reduced churn meaningfully quarter-over-quarter, and exited the quarter with consumer postpaid phone churn below 85 basis points, all while significantly lowering both acquisition and retention costs, driving our best adjusted EPS growth in 4 years and delivering strong free cash flow. We did all of this by addressing a significant network event transparently and decisively. At the same time, we have launched and are executing against the [indiscernible] transformation program that is making Verizon an AI-first simpler, more efficient and more customer-centric company. On the strength of that performance, the transformation work already underway and the trends we see in the business. We are raising our adjusted EPS growth outlook to 5% to 6%, and we anticipate our postpaid phone net adds will be in the upper half of our guided range, while we maintain our free cash flow and mobility and broadband service revenue guidance. We still have much to accomplish, and we are far from our longer-term aspirations, but the direction of travel is clear. we are growing. Our customers are staying longer. We are serving them more efficiently by executing on a disciplined transformation agenda and we are converting all of that into stronger, more durable cash generation for our shareholders. With that, I'll turn it over to Tony to provide more detail on the quarterly results, and then we will take your questions. Anthony Skiadas: Thanks, Dan, and good morning. Our first quarter results reflect a strong start to the year. We've built upon the operational momentum from the fourth quarter and continued executing on our transformation efforts to deliver on both volume and financial growth. Dan has discussed our plan to deliver long-term sustainable financial and operational growth, and our first quarter results show the early impacts of that plan. We're on track to deliver our 2026 guidance, including increased guidance for postpaid phone net adds and adjusted EPS growth. In mobility, we are pleased that for the first time since 2013, we generated a positive first quarter total postpaid phone net additions. Our first quarter results of 55,000 included significantly better performance from both our consumer and business segments. Consumer postpaid phone net losses were $35,000, a $321,000 improvement year-over-year, driven by a higher mix of new to Verizon gross adds. In total, the year-over-year improvement of $344,000 reflects our consistent and disciplined go-to-market approach solid execution of our volume growth strategy and steady progress of churn. While there is more work to be done with customer experience, which is the largest component of our transformation plan, we're pleased to see early signs of progress towards our goals. Total postpaid phone churn was down 5 basis points sequentially to 0.97% for the first quarter. Consumer postpaid phone churn was 0.90%, down 5 basis points sequentially and improved throughout the quarter as we took actions to delight and retain our customers. In prepaid, we grew our customer base for the seventh consecutive quarter. We delivered 115,000 net adds, driven by our visible and total wireless brands, demonstrating the continuing strength of our prepaid business and our segmentation approach. We look forward to optimizing the value of each of these brands as we continue our transformation. Shifting to broadband. We continue to take share in the first quarter and delivered 341,000 broadband net adds. This includes 214,000 fixed wireless access net adds and 127,000 fiber net adds. We now have approximately 16.8 million broadband subscribers. We are confident in the long-term success of our broadband strategy. Frontier accelerates our opportunity to grow our broadband subscribers as well as our converged offerings, a key enabler to growing wireless share in underpenetrated frontier markets. In the first quarter, in addition to Frontier, we've also closed a Starry transaction, an investment that will enable us to drive further broadband growth opportunities in multi-dwelling units within urban areas. Overall, we're pleased with our operating results for the first quarter as we have seen significant improvement in our net adds. We look forward to continuing our commercial momentum throughout the year. Now let's turn to our consolidated financial results. Our first quarter financial results show our disciplined execution is directly translating into operating leverage. We are driving financial growth and strong free cash flow even as we undergo a transitional year for revenue. Mobility and broadband service revenue was $22.9 billion for the first quarter, a 1.6% increase year-over-year. This result includes $20.6 billion of wireless service revenue, which was down 1% year-over-year. Customer credits associated with the network outage reduced first quarter wireless service revenue by approximately 80 basis points. As previously communicated, we continue to absorb elevated promotional amortization pressures and are lapping approximately 180 basis points of pricing impacts implemented in the prior year. We expect to improve on our first quarter's wireless service revenue performance by maintaining low churn, being disciplined around cost of acquisition and cost of retention, and continuing to drive net adds. Additionally, we continue to see strong performance with perk adoption, continued growth in premium base mix and prepaid. Given these factors, we are confident we will achieve our full year revenue guidance and expect to have an even stronger and more sustainable revenue profile by the end of 2026. Our disciplined. Our disciplined financial approach and targeted actions led to strong profitability this quarter. Consolidated adjusted EBITDA was $13.4 billion, a 6.7% increase in the prior year. adjusted EBITDA margin of 38.9% expanded by 140 basis points. This represents our highest ever reported adjusted EBITDA performance, and we expect it to be an industry-leading result. We are growing responsibly with healthy economics in both the cost of acquisition and cost of retention. We are also making significant tangible progress with our cost efficiencies. During the quarter, we realized substantial savings in key areas, including advertising, network operating expenses and workforce-related costs. A significant portion of these savings dropped directly to the bottom line while we simultaneously reinvested a portion back into the customer experience. Our integration of Frontier operations is progressing well. We are on track to deliver over $1 billion in runway operating cost synergies by 2028. While there is more work ahead to drive further efficiencies, our first quarter performance puts us on track to deliver on our $5 billion of operating expense savings target for 2026. Our focus on the customer and our cost discipline drove adjusted EPS of $1.28, up 7.6% year-over-year, even as we incurred the incremental depreciation and interest expense associated with the Frontier acquisition. Our performance reflects our responsible growth and our actions taken to streamline the business to make us more agile in serving our customers. This gives us the confidence to raise our guidance for adjusted EPS growth for the full year to 5% to 6%. Now let's turn to our cash flow and balance sheet. Our financial foundation has never been stronger. Our cash flow generation remains a cornerstone of our financial strength and a testament to our high-quality earnings. Cash flow from operating activities was $8 billion for the first quarter. We achieved this strong result even after absorbing severance payments of approximately $1.1 billion related to our restructuring efforts, incurring costs associated with the Frontier integration and delivering higher gross add volumes. We're on track to achieve our CapEx guidance of $16 billion to $16.5 billion for the full year. Capital expenditures for the quarter were $4.2 billion. We continue to invest strategically for network excellence and future growth opportunities in a disciplined way by prioritizing our wireless and fiber builds. As Dan mentioned, we expect to end the year with more than 32 million fiber passings. Free cash flow for the quarter was $3.8 billion, up 4% year-over-year. We expect our free cash flow performance to ramp as we further realize the full run rate of our operating expense savings and grow volumes responsibly. We are on track to deliver our full year free cash flow guidance of $21.5 billion or more. Our robust cash flow enables the seamless execution of our capital allocation framework, including investing in our business maintaining a strong dividend, strengthening our balance sheet and returning additional value to shareholders through stock buybacks. Our net unsecured debt to consolidated adjusted EBITDA ratio increased due to the acquisition of Frontier to approximately 2.6x at the end of the quarter. We are making good progress and have paid down about half of the frontier debt since the acquisition closed, and we expect to repay substantially all of Frontier's debt by the end of the year. We remain firmly on track to achieve our target net unsecured leverage ratio of 2.0 to 2.25x during the 2027 time frame. Lastly, we are delivering on our commitment to enhance shareholder returns. In January, we declared an annualized dividend increase of $0.07 per share, up 2.5% from our prior annual dividend rate. This marks the 20th consecutive year of dividend increases, a track record we're extremely proud of. In addition, our stock buyback program is off to a strong start. We successfully completed $2.5 billion in share repurchases during the first quarter. We are in a position of significant financial strength, generating the cash necessary to invest in our future, reward our shareholders and maintain a healthy balance sheet. In summary, our customer-centric approach has generated a step function change in our performance trajectory. We delivered positive first quarter total postpaid phone net adds for the first time since 2013 and raised our full year phone net add outlook. We achieved our best adjusted EBITDA in history, and we also delivered our best quarterly adjusted EPS growth rate since 2021 and raised our full year adjusted EPS guidance. We returned a significant amount of capital to our shareholders, including commencing our first share buyback in over a decade. Our first quarter results demonstrate that our transformation is gaining momentum, and we're delivering on our plan. This is the new Verizon playing to win. With that, I'll now hand the call over to Colleen to take your questions. Colleen Ostrowski: Thank you, Tony. Brad, we are now ready to take questions. [Operator Instructions] Operator: [Operator Instructions] Your first question will come from Michael Rollins of Citi. Your line is open, sir. Michael Rollins: Congratulations on the early progress. Curious if you could discuss the performance of accounts and ARPA with the dense in the quarter as well as what that means for the go-forward outlook for these measures including how the current promotional environment and your pricing strategy are influencing the performance. Daniel Schulman: I think I'll jump on that, Mike, and then we'll -- Tony can add color if he so desires. Look, I think if we take a step back, clearly, we're now orienting everything we do around a customer-centric approach. And just by definition, that means that we're thinking about accounts and not just lines and I would say previously, the company predominantly focused on lines, and that's just not our approach going forward. And as a result of that focus, our trajectory is moving in the right direction. Account net adds improved year-over-year in both consumer and total retail postpaid and that's in the same quarter we delivered our best postpaid net adds in 13 years, and that's not the coincidence. A customer-centric approach is driving our progress on both fronts. The net adds we're adding are higher quality than those that are rolling off. Our new accounts are being added with more lines per account or percent of new to Verizon continues to climb, and that's a leading indicator of where our account number is headed next. But we're also very focused on driving higher revenue with every line. We are no longer giving away lines for freight. Our entire approach is to grow our accounts and lines and overall ARPA. And I think there are a lot of different ways that we can do that. We can do that through convergence. Clearly, as we are more disciplined in our COR and our COA. We believe we're going to start to see the headwinds of promotion and amortization on our revenue growth rate start to flip and become tailwinds. And the majority of the ARPA declined in the first quarter came from our decision to do the right thing for customers on the network outage and to immediately give them credits because we absolutely always want to do the right thing for customers, and we value the long-term relationship with our customers. And so we feel really good about the way we reacted to our network outage. But obviously, that's a onetime event and doesn't come and follow us through the rest of the year. So I would say, in general, we expect to see account net adds continue to improve as well as ARPA as we go through 2026 and as we go to 2027. Anthony Skiadas: Yes. I'd just add a couple of things to that, Mike. We exited the quarter with good momentum. The team is focused on writing good business and the new to Verizon is up 150 basis points, which is great to see. We see a lot of opportunity with convergence, and we saw that in the quarter with bringing Frontier to the fold. And then also, we've done a lot of work on bringing value to customers, things like perks. We've seen significant uptake in perks step-ups and of course, in FWA. So as Dan mentioned, we do expect improvements in ARPA as the year progresses. And as we continue to reduce our reliance on expensive promotions, that will obviously reduce the headwind per amortization that we move ahead. So that's how we're thinking about it. Operator: The next question will come from Michael Ng of Goldman Sachs. Michael Ng: I wanted to ask about upgrade rates and the changing approach to device subsidies. What are you expecting around upgrade activity for the rest of the year? And how do you balance improved profits on some of these lower device subsidies versus opportunities to use devices to drive gross adds given that it should be a strong device for fresh year? Daniel Schulman: Yes. Well, I would say both on our cost of acquisition and our cost of retention. The improvements that we saw throughout the quarter. These are structural changes. They're not onetime or seasonal. We would expect that based on micro segmentation really understanding what our customers exactly want and what our customized offer to them will be will result in us being able to be much more disciplined in how we think about retention. Not every retention is going to be a free handset. In fact, quite the opposite. I mean, I think our industry has been too dependent on free handsets being the solution for everything. And I think all of us, and I know for sure, Verizon can be much more profitable when we start the micro segment really listen to what a customer wants and not just give them a free handset for everything. So I'll give you an example of that. If a customer calls us and says that they're having a difficulty with service in their home, previously, what we would have done is send them a free handset so that they wouldn't churn. And what happened at that point is a customer who have a new handset and still have poor service at their home. So we just spent like $1,000 and did not solve the customers' issues. If we have listened and sent a femto cell to be installed at the house, we could have done that at 1/3 the cost and made the customer happy. And so that's what's happening right now. We're listening what customers really want. We're customizing offers to exactly their needs and we are moving away from just, I think, one tool in our toolbox becoming much more sophisticated. And as we continue the micro segment, we're going to become much, much better at this. And so I think we will continue to be ferociously focused on retention an acquisition, but doing it in a smart fiscal micro segmented manner that should really improve our unit economics going forward. Anthony Skiadas: Yes. And then, Michael, just a couple of other things to add to that. So obviously, the strong capital generation that we have in the business gives us a lot of optionality and scenario planning. In the quarter, we were able to absorb about 6% higher upgrade volumes year-over-year, being more surgical, as Dan mentioned, with retention offers and also having strong cash flow. And the one thing I can say is the rate of growth in upgrades has slowed the last couple of months and into the second quarter, and that's both reflective of the work we're doing, particularly on retention and being very segmented in our approach and very disciplined and also customer choice, customers choosing to hang on to their phones for longer periods of time. Obviously, we don't guide on this, but we'll see how it plays out, but we're being very disciplined in our approach. Operator: Next question will come from John Hodulik of UBS. John Hodulik: Maybe 2, if I could. First, on the cost cutting, maybe for Tony, the -- any color on sort of how much of the $5 billion in OpEx savings we've seen thus far and how it ramps for the year? And then a lot of sort of bullish commentary on volume trends in the wireless business. How should we expect the fixed wireless and fiber broadband in terms to sort of play out through the year as you sort of digested fiber assets and get the converged offering sort of up to speed? Anthony Skiadas: Sure. So on the cost transformation, let me just start big picture. So obviously, we're making significant progress on the transformation work and the cost work and it's showing up in the EBITDA and as we said in the prepared remarks, we expect EBITDA to grow at a faster rate than adjusted EPS when you factor in both the Frontier acquisition interest expense, which is about $1 billion and also the depreciation from the asset base, which is about $1.5 billion. And obviously, we had good acceleration and really good operating leverage. And to your question, we're off to a great start on the $5 billion of cost transformation. And we're seeing proof points in the quarter. Maybe I break down between the first quarter and also what's in progress and coming ahead. So in terms of what we're seeing right now, first and foremost, on the network side and network operating costs. The team is doing a great job in continuing to decommission legacy elements in the network, and that includes copper and recycling that copper and also monetizing that copper as well as optimizing our third-party access costs with our larger footprint and there's a lot more we can do here when you think about Frontier coming into the fold. Second, from an advertising and marketing parking perspective, continued efficiencies in our spend, including use of digital. And then Dan mentioned our cost of acquisition called the retention, structural improvements there since year-end and particularly on cost of retention really being targeted with our retention spend. And then from a workforce perspective, we're exiting the first quarter. We're running leaner with the 13,000 reduction behind us as well as reduced third-party contract to outsource spend. And then in terms of what's the opportunities ahead and things that are underway, we talked about in the prepared remarks around customer experience, and that is the largest part on the largest facet of our transformation program, and that's addressing customer pain points as Dan mentioned, reducing complexity and call volumes. If you think about both the IT and the real estate, continuing to rationalize IT platforms, including AI enablement along with reducing the real estate footprint, both on the work side and the admin side. And then from a frontier perspective, the integration work is well on track. And we said we expect at least $1 billion of operating expense run rate synergies by 2028, and the synergies ramp as we execute on our integration plans. And as we continue through the cost transformation, the expectation is that we'll continue to reduce -- to further reduce costs beyond 2026. And then when you put that together, the EBITDA and the cost reductions allow us to do a number of things. First is run a lot more efficiently. Second is to absorb the transitional year that we have in service revenue. Third is to invest in the customer experience, and that includes defending our base if we need to do so. And lastly, returning a significant amount of capital to shareholders. And overall, we see a great path to both adjusted EBITDA and EPS growth for the year, and that gave us the confidence to raise the EPS guide for the year and then I'll hand to the broadband question over to Dan. Daniel Schulman: Thanks for the question, John. So convergence, obviously, it's one of our key vectors of growth. We intend to fully leverage our growing fiber footprint, as I mentioned in the last earnings call, we are still very focused on driving our fiber footprint $40 million to $50 million over the medium term. We made good progress this quarter towards that and expanding our fixed wireless access capacity. In Q1, we continue to take broadband share. We have absolutely no intention to slow down, in fact, quite the opposite. We have a huge cross-sell opportunity. Only 20% of our base has broadband. And so we see a large go-to-market opportunities for us there. Look, fiber has inherent advantages over FWA, and we're going to prioritize it where we have coverage. And therefore, you should expect a mix shift from where we've previously been. We have very positive owner's economics on both our broadband and our wireless churn is almost 30% less on converged offers and has a higher both LTV and ARPA. However, be sure we're going to continue to drive FWA. And we entered the year with more available capacity in our network for fixed wireless access than when we began 2025, and we intend to take advantage of that. Q1 is seasonally our slowest quarter, but even so, we added 31,000 broadband subscribers. And by the way, that excluded the first 20 days of January for Frontier. You can probably do the math on what our numbers could have been on broadband had we had a full quarter of Frontier in our numbers. So we're quite pleased with where we are in our broadband net additions, and we expect to see that accelerate as we go forward. We're going to continue to invest heavily in broadband. We're going to have at least 32 million passings. We're looking at more partnerships, potential acquisitions to speed the number of homes passed. There's no question. We think that fiber is a key differentiator against competitors who don't have it. And I'd also point out that our attachment rate of wireless when a customer has broadband, I think it's best in the industry at 55% right now. So expect that you'll see improvement in our broadband numbers as we go through the year, and we're looking for the optimal and most efficient way to deliver broadband to the home. Operator: The next question will come from Sebastiano Petti of JPMorgan. Sebastiano Petti: Just a quick follow-up to John's question there. Just in regards to your FWA commentary, I mean, should we still anticipate $8 million to $9 million FWA subs by 2028? Is that still a target for the management team? That's my first question. And then, Tony, the buyback is $25 billion great to see in the quarter. You're not surprised given the momentum. How should we think about the expectations for buyback in 2026? I think you previously talked about $3 billion, clearly seems conservative at this point. And I didn't see any commentary in the press release, but I mean how should we think about the, I guess, phasing or cadence of buybacks from here over the multiyear period? Daniel Schulman: Yes. I'll first jump on the FWA question. No, I don't think you should really adjust any of your thoughts around that. We're going to drive quite aggressively on the broadband front. Again, there may be more of a shift to fiber than FWA. We've had a lot of progress on FWA over the years, and we'll continue to drive it. Anthony Skiadas: Yes. And then Sebastian on your question on capital allocation. I mean, look, as we said in the remarks earlier, that the pillars are the same. Our first priority is still investing in the business, and you see us doing that with our capital program of $16 million to $16.5 million in our acquisition of Frontier as well. The dividend is still iron clad for us, and we raised the dividend $0.07 back in January, and that's the 20th consecutive year. And the third is having a strong balance sheet and paying down debt. And as we said, there's no change to our long-term leverage targets and we said we'd be there in the 2027 time frame. We've also paid down about half of Frontier's debt stack already. So we're well on our way there. And then fourth, as you mentioned, we have our share buyback curve underway. We did $2.5 billion of share repurchase in the first quarter. So we're off to a great start, and that reflects the strong cash generation and the conviction -- our conviction in the value of the stock at current levels, right? In terms of your question, I can't talk about hypotheticals. Look, if we have additional excess cash flow beyond our plan and maintain our leverage commitments and invest in the business and things like that. We would have the ability to do more. But our plan of at least $3 billion is appropriate at this time. But the overall goal doesn't change. It's generating strong cash flows and being able to execute across all 4 pillars of our capital allocation strategy and doing that simultaneously. As you saw, we returned a significant amount of capital to shareholders. It was $5.4 billion in the first quarter. And we're doing all of this while we're executing on our transformation plan as well. Operator: The next question comes from Sean Diffley of Morgan Stanley. Sean Diffley: Dan, you spoke recently about AI transforming the economy and impacting jobs. I was hoping you could elaborate a bit on how you think about the ability to take out more costs across the business. Obviously, you referenced it a bit on the OpEx commentary. But any tangible examples of AI use cases that are being implemented at Verizon? How you think about total head count growth over time? And then one on CapEx. Can you elaborate on investing in wireless versus fiber? And anything to say on spectrum acquisition interest going forward? Daniel Schulman: Sean, it's like 12 questions. Let me jump on the AI piece of it. Obviously, I'm quite outspoken about the time we live in. It's one of ferocious technological change, not just AI, quantum coming in the next 3 years, humanoid robotics coming after that. I think it's important we openly talk about it and talk about the implications or potential implications of it. I also feel it is absolutely essential that Verizon uses the tools of this era to compete. I want us to be not an AI-first company. I want us to be an AI-native company. And I think there are 3 areas Were you going to see us utilize AI to its fullest. One is around operational efficiency, taking out costs, improving productivity, delivering more value to customers. The second, really important, I'll give some examples of this is customer satisfaction improvements. How can we better serve our customers through the use of AI? And then finally, how do we fully ingest AI capabilities into our value proposition? How do we take that so that we micro segment down to every single customer? We have an initiative inside the company. We call it every customer has a name, and that is about full microsegmentation. And that is where we will fully ingest all of our data, structured, unstructured, external data into creating customized propositions for every individual customer. Our AI tech stack has 4 different layers to it right now. We have a data and intelligence layer where we're taking, again, formatting all of our data, and we have a huge amount of data that's both structured and nonstructured bring it into the right format layering on top of that, both LOMs and SLM. We've got a second layer, which is our development factory layer, which is kind of our middleware. It's where we gen up agents where we have agent building capabilities. We have a third layer to our stack, which is what we're calling runtime engines, which is where we deploy agents, we deploy business features and impact how we serve customers. And then surrounding all of that, we have a control plane, which looks at security, identity, guardrails, safety, observability, traceability, those kinds of things. We are going to be substantially complete with that entire AI tech stack by July, and we hope to be fully done by November. I would say we've recruited quite a number of AI savvy individuals into the company over the last 7 months or so. We've done more in the last 3 months than we've done in the last 3 to 4 years around this. We had a previous project on this that had a 4-year completion date. We, again, will be substantially complete on all of this by July. We are working very closely with Google and Anthropic and other best-of-breed AI players to bring this to life. This isn't our own stack. We are using best-of-breed to go and make it happen. We're very close. Obviously, with Anthropic, we are part of glass wing. We are working with Mythos and have been for some time across all of our cybersecurity efforts, and it has given us great insight in terms of what we need to do to continue to have the world's most reliable, secure and safe network. We have been now for the past 3 months, you saw some of those results happen in this quarter. Looking at working with Sierra, ElevenLabs, Google, to start to put into place of voice agents into some of our customer service operations. Again, we are testing these models, and we are fine-tuning them. But what we are seeing already is a 1,280 basis point improvement in customer SAT scores year-over-year. I mean these are quite astonishing step-ups in our ability to satisfy our customers. We're deploying quad code across our software development life cycle. This is not just around coding, but across the entire life cycle. We see opportunities to do an increase in our delivery by 40% plus, and we spend a ton of money on vendor support here, and we see our way to reducing those costs by over 70% as a result of what we're doing with AI. And in the network we have really deployed quite extensively inside our network. 85% of all of our issues right now are autonomously resolved. That means we are resolving issues for our customers even see them. We used to have in our network by the bill of material, it was over like 1 million different combinations. Think about the cost and the complexity around that using AI, we've driven that down now to about 20 kits. And so our ability to deploy save costs because of this is radically improved. We already have over $200 million of energy savings as a result of deploying AI into the network and looking how we can optimize on energy, and we're doing things now at industrial scale. And so I'm quite pleased with the amount of progress we've made in a short period of time. And I would also point out on the commercial side, we are in quite deep discussions right now with hyperscalers with alternative cloud providers, large enterprises to integrate our fiber, both dark and lit and our 5G assets to support their AI infrastructure efforts. And that can include data center connectivity, ability to help them with their training and inference. And that is the potential for multibillions in revenues, quite frankly. We'll have more specifics on that in the next 3 to 6 months. But the world is moving towards edge computing towards data connectivity, and we are in a real good place to play inside that AI infrastructure revolution that's going on. Colleen Ostrowski: Brad, I believe we have time to take one more question. Operator: Your final question will come from Michael Funk of Bank of America. Michael Funk: So Dan, one for you. Theme of the call has clearly been customer lifetime value and micro segmenting as well. So just kind of curious about the save budget as part of that micro segmenting and churn reduction effort. And how much you've improved or increased the save budget how that might impact the repricing of the back book? And one follow-up. Do you still expect your postpaid phone net adds to be 10% to 15% of the net new? Daniel Schulman: Okay. A lot of different questions in there. One on our postpaid phone net adds. Yes. I mean I still think that's probably a good estimate of the 10% to 15% of new. We'll have to see where the industry comes out, what is new, what's real in those numbers. One thing I would say though on that, that we haven't really talked about is I think it's obvious now that at least as, if not more than half of our net adds are going to come from improvements in churn. And what that means is that the amount of dollars that we will spend on driving our net add number will be reduced because the bottom of our funnel is tightening. We're at 95 bps in Q4, 90 bps overall in Q1, 85 bps at the end of the quarter. And so that obviously is an extraordinarily important element and a demonstration of how putting the customer at the center of everything you do when you stop raising prices with no corresponding value when you start improving the customer experience, which, by the way, is very difficult to do and is a differentiating thing hard for others to follow. You put out a price plan, people can follow that, you put out a promotion people can follow but the hard work of improving the customer experience that comes day by day. One initiative after another to make that happen. And that's why I really am pleased to see an all-time record of our customer satisfaction when people interact with our customer service teams on our consumer side. On cost of retention, the cost of retention and cost of acquisition have come down substantially through the quarter. We believe that those lower levels will continue to play out through the year. And that really has to do with micro segmentation and really understanding what a customer needs. The era of just the free handset, that's gone right now. We are looking at what does the customer need. They have a handset that is last year's model that's been refurbished. Do they need a new handset, many of them because of the economy are keeping their handsets longer right now. And so I believe that you're going to continue to see COR and COA at reduced levels. But of course, as Tony mentioned, we have a substantial war chest, and we will defend our base whenever we see any competitive activity on that. But we think right now that the competitive intensity in the industry is moderating quite frankly. And I think everybody is thinking about how do we look at acquisition, how do we look at retention in a much more segmented and much more fiscally responsible way than maybe we were several years ago. So I appreciate the question. Colleen Ostrowski: That's all the time we have for questions. Thank you all for your time today. Operator: This concludes the conference call for today. Thank you for your participation and for using Verizon Conference Services. You may now disconnect.
Operator: Greetings, and welcome to the Alliance Resource Partners, L.P. First Quarter 2026 Earnings Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Cary P. Marshall, Chief Financial Officer of Alliance Resource Partners, L.P. Thank you, sir. You may begin. Cary P. Marshall: Good morning, and welcome, everyone. Earlier today, Alliance Resource Partners, L.P. released its first quarter 2026 financial and operating results. We will review the quarter, discuss our perspective on current market conditions and outlook for 2026, and then open the call to answer your questions. Before beginning, a reminder that some of our remarks today may include forward-looking statements, which are subject to a variety of risks, uncertainties, and assumptions contained in our filings from time to time with the Securities and Exchange Commission and are also reflected in this morning’s press release. While these forward-looking statements are based on information currently available to us, if one or more of these risks or uncertainties materialize, or if our underlying assumptions prove incorrect, actual results may vary materially from those we projected or expected. Providing these remarks, the partnership has no obligation to publicly update or revise any forward-looking statement whether as a result of new information, future events, or otherwise, unless required by law to do so. Finally, we will also be discussing certain non-GAAP financial measures. Definitions and reconciliations of the differences between these non-GAAP financial measures and the most directly comparable GAAP financial measures are contained at the end of Alliance Resource Partners, L.P.’s press release which has been posted on our website and furnished to the SEC on Form 8-K. With that, I will begin with a review of our first quarter 2026 results and discuss our updated outlook for 2026 before turning the call over to Joseph W. Craft, our Chairman, President and Chief Executive Officer, for his comments. Overall, the quarterly results came in higher than expected due to record BOE volumes and higher commodity prices that increased oil and gas royalties revenues. Tons produced from our coal operations were on target; however, temporary weather-related disruptions caused approximately 200,000 tons of scheduled shipments to be delayed. For the 2026 quarter, adjusted EBITDA was $155 million, which was higher than expected but 3.1% lower compared to the 2025 quarter, and down 18.9% compared to the sequential quarter. Net income attributable to Alliance Resource Partners, L.P. in the 2026 quarter was $9.1 million, or $0.07 per unit, as compared to $74 million, or $0.57 per unit, in the 2025 quarter. Net income in the 2026 quarter reflected lower coal sales revenue, higher depreciation, an $11.6 million decrease in the fair value of our digital assets, and a $37.8 million noncash asset impairment charge at our Metiki mine following our decision to cease longwall production on account of uncertainty regarding future operations, as discussed in our January 29 press release. We continue to evaluate the appropriate path forward for Metiki, though meaningful uncertainty remains and greater clarity is not expected until later this year. In the interim, our priority at Metiki is to reduce costs while preserving the flexibility and optionality needed to align future operations with customer demand. In the 2026 quarter, total revenues were $516 million, down 4.5% compared to the 2025 quarter and down 3.6% compared to the sequential quarter. Lower coal sales pricing and volume sequentially primarily drove the decline, which was partially offset by higher oil and gas royalty revenues. During the quarter, weather-related river disruptions delayed certain committed deliveries; however, we expect our delayed shipments will be recovered over the balance of the year. Our average coal sales price per ton for the 2026 quarter was $56.40, a 6.5% decrease versus the 2025 quarter and a 2% decrease sequentially. As noted during prior calls, pricing is normalizing as higher-price legacy coal contracts entered into during the 2022 energy crisis continue to roll off and are being replaced at coal pricing levels consistent with our current guidance ranges. Total coal production in the 2026 quarter was 8.0 million tons, compared to 8.5 million tons in the 2025 quarter. Coal sales volumes were 7.9 million tons in the 2026 quarter, up from 7.8 million tons in the 2025 quarter and down from 8.1 million tons in the sequential quarter. In the Illinois Basin, coal sales volumes were 6.1 million tons, up 0.4% compared to the 2025 quarter and down 5.9% compared to the sequential quarter. Volumes declined primarily due to decreased tons sold from our Hamilton mine as a result of an extended longwall move scheduled during the 2026 quarter. While the longwall move at Hamilton reduced production and shipments during the quarter, increased productivity at Riverview and Gibson South helped to offset some of that impact. The longwall at Hamilton is currently anticipated to resume production in May 2026. Illinois Basin coal sales price per ton was $51.05 in the 2026 quarter, a decrease of 7.4% versus the 2025 quarter and an increase of 0.4% compared to the sequential quarter. The decrease versus the 2025 quarter was the result of the expiration of higher-priced legacy contracts. Segment adjusted EBITDA expense per ton in the Illinois Basin was $35.20, an increase of 1.3% compared to the 2025 quarter and up 3.4% sequentially due primarily to the extended longwall move at our Hamilton mine this quarter. In our Appalachia region, coal sales volumes were 1.8 million tons in the 2026 quarter, up 3.6% compared to the prior year due to a longwall move at our Tunnel Ridge mine in the 2025 quarter. Appalachia coal sales price per ton was $74.51, reflecting an expected decrease of 4.8% versus the 2025 quarter, and 11.1% versus the sequential quarter as the percentage of higher-priced Metiki sales volumes were lower, and Tunnel Ridge sales volumes increased during the 2026 quarter. Segment adjusted EBITDA expense per ton in Appalachia was $62.19, a decrease of 10.8% versus the 2025 quarter and a decrease of 1.8% versus the sequential quarter. The year-over-year improvement was driven primarily by increased production at our Tunnel Ridge operation. Alliance Resource Partners, L.P. ended the 2026 quarter with total coal inventory of 1.2 million tons, down 200,000 tons year over year and up 100,000 tons sequentially. In our royalty segments, we delivered strong results during the 2026 quarter. Total royalty revenues were $61.2 million, up 16.1% year over year and up 7.7% sequentially. In our oil and gas royalty segment, we achieved another record quarter. Oil and gas royalty revenues were $41.3 million in the 2026 quarter, up 14.6% year over year. We reported record BOE volumes of 1.0 million, up 16.1% year over year and 3.3% sequentially. Commodity pricing increased sequentially and segment adjusted EBITDA for the oil and gas royalty segment increased to $34.6 million in the 2026 quarter, up over 15% compared to both the 2025 quarter and sequential quarter. Segment adjusted EBITDA for our coal royalty segment was $12.3 million in the 2026 quarter, up 30.6% compared to the 2025 quarter due to higher royalty tons sold primarily from Tunnel Ridge. This was partially offset by lower average royalty rates per ton sold. Our balance sheet continues to be strong. As of 03/31/2026, total debt and finance leases were outstanding in the amount of $507.7 million and our total and net leverage ratios were 0.73 and 0.69 times debt to trailing twelve months adjusted EBITDA. Total liquidity was $431.2 million, which included $28.9 million of cash and cash equivalents on hand and $402.3 million of borrowings available under our revolving credit and accounts receivable securitization facilities. We also held 618 bitcoin valued at $42.2 million at quarter end based on $68,233 per coin. For the 2026 quarter, we invested $95.7 million in capital expenditures and $16.2 million in total oil and gas minerals acquisitions. We reported distributable cash flow of $77.8 million. Based on our $0.60 per unit quarterly cash distribution, distributions paid to partners were $78 million, and our distribution coverage ratio for the quarter was 1.0x. Turning to our updated 2026 guidance, I will highlight three items. First, we are maintaining our overall guidance ranges for coal sales volumes, coal sales price, and segment adjusted EBITDA expense per ton. We will complete planned longwall move activity for the year during the upcoming quarter, and with no additional longwall moves anticipated until 2027, we expect better operational visibility in 2026. As usual, we plan to update investors again when we release second quarter earnings. Second, contracting activity has remained constructive. We layered on 2.6 million net contracted tons for delivery in 2026 and 2027. As a result, our 2026 expected coal sales volumes are now more than 95% committed and priced at the midpoint of our guidance ranges. The remaining open position is concentrated in the second half 2026 and dependent upon summer burn and customer requirements. Finally, the most notable changes to our guidance are in the Oil and Gas Royalty segment, where year-to-date volumes have exceeded our initial expectations. Based on that outperformance, we are increasing our 2026 volume guidance by approximately 5% on a BOE basis. We now estimate 1.6 to 1.7 million barrels of oil, 6.6 to 7.0 million MCF of natural gas, and 875,000 to 925,000 barrels of natural gas liquids. Latest trends in crude oil pricing have improved the near-term outlook, and if current strip pricing is realized, we expect realized BOE prices to be higher than last year supporting stronger segment adjusted EBITDA. And with that, I will turn the call over to Joseph W. Craft for his comments on the market environment and our outlook. Joseph W. Craft: Thank you, and good morning, everyone. Thank you for joining the call today. Alliance Resource Partners, L.P. delivered a solid first quarter with adjusted EBITDA exceeding our internal target due to record BOE volumes and higher commodity prices that increased oil and gas royalties revenues. Our coal operations results were generally in line with our expectations despite weather-related shipment disruptions and the planned extended longwall move at Hamilton. As Cary said earlier, we expect the first quarter shipment disruptions tied to winter storm burn and subsequent high water conditions to be recovered over the balance of the year. During the quarter, our teams executed well across the portfolio, including health and safety results that rank as one of our best quarters over the past five years. In the Illinois Basin, increased production at Riverview and Gibson South helped offset the lower production we expected at Hamilton as a result of the planned extended longwall move. In late March, we also successfully completed the final phase of our multiyear Riverview to Henderson County minor unit transition, bringing the Henderson County mine up to its planned full production capacity of six super sections, and Riverview is now positioned to operate three super sections moving forward. In Appalachia, Tunnel Ridge returned to steady longwall production with production increasing approximately 28% compared to both the 2025 quarter and the sequential quarter. Operationally, these results reflect the value of the recapitalization work we have done across the portfolio over the past several years. Those investments are helping us realize productivity gains, access new reserves efficiently, and maintain a low-cost operating base to serve our customers’ needs well into the next decade. Looking more broadly at the market, several themes shaped conditions during the quarter. First, winter storm firm and the extended freezing weather across the Eastern United States once again highlighted the critical role coal plays in maintaining grid reliability during extreme weather. According to America’s Power, coal-fired generation in several Eastern regions operated at capacity factors approaching 80% during peak periods, materially outperforming natural gas and renewable resources when electricity demand was highest. While storm-related incremental coal burn did not fully offset milder conditions throughout the quarter, utility stockpiles generally remain aligned with our burn projection entering the year, and summer weather will ultimately drive spot market activity for the balance of 2026. Second, the conflict involving Iran briefly improved the previously quiet export market. In the weeks following the conflict, traders reacted quickly to dislocations in API2 pricing, allowing Alliance Resource Partners, L.P. to capitalize on a narrow window for export sales by securing 2.0 million tons of commitments to be delivered over 2026 and 2027. While API2 prices have since softened, the conflict has contributed to higher global oil prices which continues to be supportive of our oil and gas royalty segment. Beyond these shorter-term market dynamics, we continue to see longer-term structural support for coal-fired generation. Load growth remains one of the most significant forces reshaping U.S. power markets, and importantly, it is becoming more tangible. According to S&P, over 100 gigawatts of data center demand is now under contract, with a significant concentration in the Eastern United States. Execution and timing remain the key variables. The magnitude of this commitment represents a clear inflection point. The need for reliable, fuel-secure generation is becoming better understood across the grid, emphasizing the importance of cogeneration capacity, and justifying the decisions to invest capital in the existing coal fleet to keep that capacity running for much longer than anticipated three years ago. Additionally, I would highlight that we are encouraged by a few recent policy developments that also improve the outlook for coal-fired generation. EPA actions on CCR and MAT during the quarter moved the regulatory framework in a more practical direction, lowering compliance costs, increasing operating flexibility, and reducing uncertainty for coal plants. We believe these changes support the reliability and affordability of dispatchable power, and are constructive for our utility customers and for Alliance Resource Partners, L.P. We applaud these and the administration’s continued deregulation efforts. Turning our attention to our royalty segments, our oil and gas business delivered another record quarter driven by growth in volumes from increased drilling and completion activity by our operating partners and contributions from recent acquisitions. With the portfolio unhedged, changes in commodity prices directly impact our realized pricing, underscoring the segment’s operating leverage and cash flow potential. We also continue to grow the portfolio through disciplined capital deployment, investing $16.2 million in acquisitions during the 2026 quarter, and we remain encouraged by a constructive pipeline of additional opportunities. Taken together, these factors continue to support demand for reliable, dispatchable generation—an environment that favors coal producers with scale, contracted volumes, and low-cost reserves. Importantly, our oil and gas royalty segment gives us a second earnings engine that is not weighed down by drilling and operating capital cost, and benefits directly from changes in commodity prices. Demand growth for natural gas and stable demand for domestic oil production continue to reinforce our strategy of reinvesting all after-tax cash generation by our oil and gas royalties into expanding our minerals position. In closing, we believe Alliance Resource Partners, L.P. is well positioned as we invest in this growing energy landscape. Reliable baseload generation, disciplined capital allocation, and operational execution remain at the heart of our strategy. We are committed to investing in opportunities that are strategic to our core businesses, maintaining a strong balance sheet, and returning capital to our unitholders. That concludes our prepared comments and I will now ask the operator to open the call for questions. Operator? Operator: Thank you. We will now open the call for questions. If you would like to ask a question, please press 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press 2 if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment, please, while we poll for questions. Cary P. Marshall: Thank you. Operator: Our first question comes from the line of Nathan Pierson Martin with The Benchmark Company. Please proceed with your question. Nathan Pierson Martin: Joe, you noted the Iran conflict briefly opened the U.S. export thermal valve. Alliance Resource Partners, L.P. contracted nearly 2.0 million tons, I think. So should we assume now that that valve is closed, or could there be more opportunity? And then maybe can you remind us what API2 price range Alliance Resource Partners, L.P. needs to incentivize sales to that export market? Thanks. Joseph W. Craft: Yes. Currently, I would say that the domestic opportunities are preferred over the export market. So when we contracted for these volumes, API2 was in a minimum $130 up to $140. It, you know, peaked. Historically and really currently, even with domestic prices—and really it depends a lot on transportation—but primarily, that number is around $120 is where our preferred option would be on how the export market would compare to the domestic market that we see. So I would say the answer is $120. We do believe that with the uncertainty, knowing exactly what is going to happen there, that there still could be possibilities of increased export opportunities. You know, we are sort of in a shoulder period. So when we get to the summer and we have higher demand for cooling demand, there is a potential that we could see that window open again. Our current posture though is to really focus on opportunities that are available to us in the domestic market. So at this moment in time, that is where our guidance is projecting us to be for 2026 and 2027. Nathan Pierson Martin: Okay. Appreciate that, Joe. And that kind of gets into my next question. We talked about largely a more mild winter year over year despite winter storm fern and, you know, the deep freeze that followed. You know, what are you hearing from your customers as far as potential demand as we head into the summer? You made the comment that those evaluations are occurring now. I think you said summer weather will drive spot activity likely. So could we be in a position where utilities could even flex down if the summer is not very hot? Would be great to just get some additional thoughts there. Joseph W. Craft: I think that right now, we are seeing our customers pretty much—you know, we have four or five different solicitations that are currently either in the process of being evaluated or RFPs that are going to happen this month that we anticipate. So we are seeing our customers going out and looking to add to their position for 2026 and then going forward on a longer-term basis. We have reflected in our guidance what we believe any downside optionality would present itself. So right now, we do believe that there is demand for our unsold position to where we should be in a position to be able to sell our production. Weather will be dependent. I think most projections I am seeing or most forecasts are projecting that the summer would be warmer than normal, which would be constructive for demand in the second half of the year. Nathan Pierson Martin: Got it. Thank you for that. And then finally, PJM was in the headlines a couple times over the last few months regarding a possibility that the region could experience a power shortage over the next decade or so as data center growth accelerates demand there. More near term, though, I believe PJM was seeking 15 gigawatts of new power supplies in an emergency backstop there to address potential shortages as early as summer ’27, I think it was. So, Joe, would just be great to get your thoughts around what you are hearing there, conversations maybe that are occurring within that arena, how Alliance Resource Partners, L.P. could possibly participate. Joseph W. Craft: Yeah. As you said, there is a lot of discussion going on in PJM on trying to understand what the markets can do to ensure we have reliable capacity on a going-forward basis at the same time trying to lower cost as much as possible. So there have been a lot of different ideas that have been floated relative to how to ensure that the data center demand and the increased generation capacity is paid for by the data centers. As we try to understand that dynamic, PJM primarily is trying to weigh how do we protect that cost structure but at the same time ensure we keep the existing capacity—coal capacity—viable and available for future demand. So it is hard to predict. I think that we still are of the view that the capacity payments that we have seen recently are going to continue for the next several years because the demand is such that we must keep every coal plant, every gas plant, all generation online to meet that demand, because trying to build new construction to meet that demand is—it is just not moving as fast as it needs to. So when we think of the power capacity, we need everything that we have got available today. And I am speaking more from an eastern coal producer’s perspective that is selling coal to the Eastern markets. We do believe that the existing capacity must stay online. We are seeing announcements continue to try to extend the life of these plants beyond—some plants were designed to close in 2028, and we are hearing more and more that are announcing staying open to 2034 as a minimum. So we just think that is going to continue, and the pricing construct that PJM comes up with is going to have to support that conclusion in our view. Nathan Pierson Martin: All right. Very helpful, Joe. I will pass it on. Appreciate the time, and best of luck in the second quarter. Operator: Our next question comes from the line of Matthew Key with Texas Capital Bank. Please proceed with your question. Matthew Key: Good morning, everyone, and thank you for taking my questions. I wanted to start just kind of on costs in Appalachia. Obviously, the current guidance implies an improvement over the remainder of the year. However, I know you have the longwall move at Tunnel Ridge. So how should we be thinking about costs in the second quarter? And then I imagine the majority of the improvement would be more back weighted to the ’26. Is that fair? Cary P. Marshall: Yeah, Matt, that is fair. In terms of your question around Appalachia, in particular at Tunnel Ridge, we did have a longwall move this quarter. We have already completed that longwall move, so that was accomplished in the first week in April for the most part. So that longwall move is done. It will modestly impact what the quarter is around Appalachia overall, but for the most part, all the longwall moves in Appalachia are completed, so as we look at the balance of the year, we do expect those operations to continue to run well throughout the balance of the year. The longwall has started up well since then, and so productivity and production has been good as a result of that. So we do anticipate, as you mentioned, costs coming down. They will be a little bit higher as we look at Q2 than Q3 and Q4, but you should see fairly meaningful reduction in cost because you are going to have quite a bit more of Tunnel Ridge sales volumes in this quarter versus what we had in Q1. And so we are anticipating—if you just kind of take a look at the volume cadence for the rest of the year from where we were versus the first quarter—we do expect volumes to jump up maybe around 15% or so just in Appalachia, and that should remain fairly consistent for the final three quarters of the year. And so you will see a positive benefit on cost that will be coming down. So we do anticipate a fairly meaningful cost reduction in Appalachia, to the tune of it could be somewhere in that neighborhood of 15–20% quarter over quarter. Matthew Key: Got it. No, that is super helpful. And I want to just touch on major capital allocation priorities in 2026. Obviously, we expect more investment in the oil and gas royalty business this year than maybe the last couple of years. But obviously, Gavin has been a major for you guys. So I want to just see if you could provide any color on what you are seeing in potential acquisitions on the power side. Obviously, as you mentioned in your prepared remarks, there have been a lot of positive changes with the MAT adjustments and that. So does that incentivize you to make, you know, potentially a shot on goal there on the power? And how are you balancing kind of those two major initiatives? Joseph W. Craft: Yes. We are continuing to look at the oil and gas segment. As I mentioned, we are committed to returning our capital—whatever after-tax cash deployment is there—and the last couple of years, we have actually been short of that. So there is the potential to invest more in oil and gas if the right underwriting standards can be met for that. On the power side, we have been very pleased with our investment in Gavin. We continue to believe that demand for energy from coal-fired generation is necessary, like I mentioned a few minutes ago. So if there are those owners of coal plants that are interested in divesting those, we are definitely interested in participating in that on a going-forward basis. So if there are opportunities, yes, we would allocate capital to those two areas of opportunities as we look at those being opportunities for us to grow our business. Matthew Key: Got it. Well, I appreciate the color and best of luck moving forward. Cary P. Marshall: Thank you, Matt. Operator: Our next question comes from the line of Mark Reichman with Noble Capital Markets. Please proceed with your question. Mark Reichman: Thank you. Just to follow up on that last question on the capital allocation. When you think of your coal operations, your royalties expansion, and then your emerging investments—whether that be Gavin or Matrix or some of the others—how are you thinking about that in terms of you think you would go beyond just reinvesting the oil and gas minerals cash flow to fund growth? Do you think you would go beyond that? And just how do you kind of think about the returns across those different areas? Or maybe the way to frame it would be what is your hurdle rate or your criteria for each of those areas? Joseph W. Craft: Yeah. I think that, as we look at the pipeline, we mentioned that we did $16 million in the first quarter. We did $14 million in the fourth quarter. So that is sort of the opportunities that are presenting themselves in what we call the ground game. We have not seen very many packages for larger acquisitions come to the market. I think that it is difficult to understand—I think, from some of the sellers—it is difficult to understand exactly where the war premium is going to be, and so a lot of people that have large portfolios are enjoying pretty high current pricing. So is it possible? Yes, it is possible. Do we anticipate that right now? We are not anticipating that. If you could factor in the past two years in addition to this year, if we just look at those cash flows that we have available to invest—what did you have another part of the question I did not answer? Mark Reichman: Well, I was just also thinking beyond maintenance capital for coal operations, and then of course you kind of answered the oil and gas royalties piece, but then also the emerging investments. What is your criteria or your hurdle rate, or maybe how should investors think about returns across those areas? Joseph W. Craft: Yeah. I think that they are totally two different investment time horizons. On the coal side, we would expect to try to get our cash flow back on a shorter time period—get a payback period at a shorter time period—than on oil and gas. On all our oil and gas opportunities that we look at, most of them are 15–20 years economic life whereas a coal asset is probably 10. So when you think of it that way, that requires you to get a higher return on a coal investment than typically what our hurdle rate would be on oil and gas, and oil and gas is just totally dependent on the amount of PDP near-term cash flows that are identified. So the returns are anywhere from 15–20% depending on the risk profile and the timing of the cash flows that we evaluate on the mineral side. Mark Reichman: Oh, that is helpful. You know, the first quarter results actually came in above our expectations, but I do want to ask on the digital assets. You know, when Bitcoin is going up, that is great. When it is going down, it could be a bit of a distraction. And I was just wondering—I mean, it is not hugely significant to your overall operations—but how are you thinking about that business strategically? I mean, are there some strategic intelligence or advantages that you gain from operating that business beyond the gains and losses that cause you to want to sustain those operations, or just how are you thinking about the Bitcoin operations? Joseph W. Craft: Yeah. We do look at what we believe that projected price will be. We are seeing some rebound in that. I think one of the catalysts could be the Clarity Act that is being considered by Congress this summer. We are seeing, you know, Chairman Worsch in his confirmation hearing talked about how Bitcoin is an asset and a class that he factors in. We are seeing the administration being very supportive. So we do believe that the upside pricing is significant enough that we should hold on to what we have. At the same time, it is opportunistic in one sense, but I think as we look at what it costs us to mine and the position of where we are, we think there is definitely more upside than there is downside. We are looking at the ETF markets, and if you look at the cash flow that is going into the ETF markets, we have seen more inflow of cash—when it was dropping, you saw a lot of outflow—but you are now seeing more inflow into those markets. And again, we are of the view that it has got more upside than downside and therefore we are holding. Mark Reichman: Okay. And then just on the overall results, so you are expecting a stronger second half. You have already kind of talked about the drivers of that, both on the revenue side and the cost side. Is the second quarter—I mean, you are not expecting quite as strong as say the third quarter. That is just kind of a transition to the stronger second half? Cary P. Marshall: Yes, Mark. That is fair. If you look at our overall sales volume, second half should pick up. Hamilton does come online, as I mentioned in my prepared remarks, in May. And so then with no additional longwall moves either at Hamilton or Tunnel Ridge, certainly the back half of the year we are anticipating to be quite a bit stronger than the first half. And so, as you mentioned, the second quarter will kind of be a transition to that because Tunnel Ridge is beyond the longwall move—it will essentially be running virtually the entire quarter—and then Hamilton, as I mentioned, will transition and then begin operating in May. Mark Reichman: That is very helpful. Thank you very much. Operator: Our next question comes from the line of Michael Matheson with Sidoti. Please proceed with your question. Michael Matheson: Morning, and congratulations on the quarter, gentlemen. Joseph W. Craft: Thank you, Mike. Michael Matheson: Turning to my questions, I noticed that the price for Appalachia coal came in above $74, which is above your guidance, and yet guidance remains unchanged. So was pricing in Q1 just a reflection of—or rather your guidance for the remainder of the year just a reflection of—the roll off of old contracts? Joseph W. Craft: Yes. I think that on a going-forward basis, we had the Metiki situation where those sales contracts are rolling off. We did anticipate when we issued the warrant that the contract we had would be totally sold in the first quarter. Some of that has gotten extended beyond the first quarter. But what you are seeing is the lack of that higher-priced contract being in the market in the second half of the year, including the second quarter. So you are seeing, back to what Cary said earlier, a larger percent of Tunnel Ridge production, which means lower cost, but it also means lower revenue compared to what we had at Metiki—higher cost and higher revenue—before the closure of that operation. Michael Matheson: Got it. Thank you. Looking at CapEx in the quarter, on a run-rate basis, it ran about 25% higher than the high end of your guidance. Is that just seasonality, or were there special factors involved? Cary P. Marshall: When you look at the quarter, it was higher. CapEx came in a little bit over $95 million for the quarter. I will say, included within that, we did purchase about $15.5 million of coal reserves within that $95 million number. So if you back that out, it is a little bit higher than what that run rate is. But if you normalize that out, Michael, I think that will account for quite a bit of that difference. Michael Matheson: Okay. Great. Again, very helpful. One other question. I noticed that there were no outside coal purchases in this quarter, unlike much of 2024–2025. Can we expect the same for the balance of the year, or would outside purchases come back into play? Cary P. Marshall: Yeah. Our expectation is no additional outside coal purchases. That tied directly to our Metiki operation. Joseph W. Craft: Right. Okay. Michael Matheson: And one last question if I could squeeze it in. The other income line was $10 million in the quarter, unusually high for you. What drove the big increase? And what should we expect in other income going forward? Cary P. Marshall: Yeah. I think going forward—it is a good question—I think going forward, essentially more in line with where we have been historically, which has just been very minimal other income flowing through that line item, if not a little bit on the expense side of it. For the quarter, we did have a favorable actuarial adjustment that is flowing through that line item. That is about half of what that total is. It is associated with some of the black lung liabilities on our balance sheet. So we did have a favorable adjustment there. The other piece of that relates to one of our other growth investments associated with Infinitum. We did have a favorable adjustment to the valuation of our holdings of Infinitum—just a shade under $4 million associated with that. So those two are the lion’s share of what you see there. We do not anticipate those occurring on a regular basis, so I would normalize those out going forward. Michael Matheson: Great. Very helpful. Well, congratulations again, good luck in the coming quarter. Joseph W. Craft: Thank you, Michael. Operator: Our next question comes from the line of Ed Easton with The Easton Group. Please proceed with your question. Ed Easton: Good morning, gentlemen. Thank you very much for the way you run the business. I love the transparency and the way you conduct everything by just talking about it on the quarterly calls. My question is, it looks to me like most of our capital expenses—the big ones—are kind of a little bit behind us, and the operational should be going down a little bit. What would you think about buying back stock and what do you think about maybe increasing the dividend as that goes forward? Joseph W. Craft: You know, we have evaluated that over time. I think that right now, we are focused on capital allocation and, as Cary mentioned, we are 1.0x this quarter. We need to get our distribution coverage ratio more in line with an expectation of 1.2x to 1.4x on a going-forward basis before we would consider either of those—an answer to do either a buyback and/or an increase in distribution. Joseph W. Craft: Well, thank you. Ed Easton: I am very proud to be a shareholder and I like the way you run the business. Joseph W. Craft: Thank you. Appreciate it, Ed. Operator: We have no further questions at this time. I would like to turn the floor back over to Mr. Marshall for closing comments. Cary P. Marshall: Thank you, operator, and to everyone on the call, we appreciate your time this morning and also your continued support and interest in Alliance Resource Partners, L.P. We look forward to speaking with you again when we report second quarter financial and operating results. This concludes our call for the day. Thank you. Operator: Ladies and gentlemen, this does conclude today’s teleconference. You may disconnect your lines at this time. Thank you for your participation, and have a wonderful day.
Operator: Good morning, and welcome to Fulcrum Therapeutics First Quarter 2026 Financial Results and Business Update Conference Call. [Operator Instructions] This call is being webcast live and can be accessed on the Investors section of Fulcrum's website at www.fulcrumtx.com and is being recorded. Please be reminded that remarks during this call may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 may include statements about the company's future expectations and plans clinical development time lines and financial projections. While these forward-looking statements represent Fulcrum's views as of today, this should not be relied upon as representing the company's views in the future. Fulcrum may update these statements in the future, but is not taking on an obligation to do so. Please refer to Fulcrum's most recent files with the Securities and Exchange Commission for a discussion of certain risks and uncertainties associated with the company's business. Leading the call today will be Alex Sapir, CEO and President of Fulcrum. Joining Alex on the call are Alan Musso, Chief Financial Officer; and Dr. Iain Fraser, Senior Vice President, Clinical Development. After providing updates on the company's key programs, there will be a brief Q&A in which the full management team will be available for questions. With that, it's my pleasure to turn the call over to Alex. Alexander Sapir: That's great. Thanks, Shannon, and good morning, everyone. We appreciate you all joining us today. The first quarter of 2026 was an important and exciting period for Fulcrum highlighted by the positive clinical data we reported from the Phase Ib PIONEER trial of Potero der in sickle cell disease. Now as a reminder, sickle cell disease is a serious genetic blood disorder with a significant unmet need, affecting approximately 120,000 patients in the United States and millions more globally. Patients with sickle cell disease face a substantial disease burden, including chronic pain and fatigue as well as serious complications, such as vaso-occlusive crises, stroke and progressive end organ damage, all of which result in a substantial reduction in life expectancy of over 20 years. Now we have known for decades that increasing levels of fetal hemoglobin or HBF and in patients with sickle cell disease leads to improvements in anemia and reductions in vaso-occlusive pain crises. And so it was for that reason that we were so pleased with the data that we reported in February, demonstrating that after only 12 weeks of treatment, 20 milligrams of Potero der taken once daily demonstrated a robust and clinically meaningful increase in HbF from 7.1% at baseline to 19.3% at week 12, along with improvements in markers of hemolysis and improvements in anemia. We also observed continued progression toward pancellular expression of HBF, which we believe is critical for achieving meaningful clinical benefit. And importantly, we saw a reduction in the number of VOCs we would have expected in this severe patient population with 7 of the 12 patients experiencing no VOCs during the 12-week treatment period. And importantly, pociredir has continued to be generally well tolerated with no treatment-related serious adverse events reported to date. And so taken together, these data reinforce our conviction in pociredir's potential to address the underlying biology of sickle cell disease. -- and support our belief that pociredir has the potential to represent a differentiated, once-daily oral treatment option for patients. Now during the quarter, we also initiated an open-label, long-term dosing trial for patients in the PIONEER study, and we recently enrolled our first patient in this new study. All patients in this long-term dosing study previously completed 12 weeks of treatment as part of the PIONEER trial. Therefore, we expect to provide a distinct -- we expect this study to provide a distinct data set offering important insights into long-term safety, durability of response and the effects of reinitiating treatment with pociredir. We also continue to support initiatives aimed at improving the care journey for people living with sickle cell disease, including our recent collaboration with medical alert and the Sickle Cell Disease Association of America, or SCDAA to help improve access to patient-specific care information in the emergency department setting. Looking ahead, we are now focused on the next stage of clinical development for pociredir, and we expect to provide an update in the design of our next trial later this quarter following our upcoming end-of-phase meeting with the FDA and receipt of the final meeting minutes. Pending FDA feedback from that end-of-phase meeting, we plan to initiate a potential registration-enabling trial in the second half of 2026. And so with a strong balance sheet that provides cash runway into 2029, we are well positioned to advance pociredir through the next phase of clinical development. Now before turning it over to Alan, I want to cover the 2 other important corporate updates. First, I want to welcome Josh Lehrer to our Board of Directors. Josh brings to Fulcrum a deep experience and passion for sickle cell disease as well as a strong track record in advancing transformative therapies in this space, including his role in the development and approval of Oxbrina. We are honored to have Josh joined Fulcrum at this important stage. And secondly, I would also like to thank Alan for his years of dedication and leadership as he looks towards retirement later in the year. Alan has played a critical role in strengthening our balance sheet and instilling financial discipline across the organization, and we are grateful for his continued commitment to Fulcrum as he remains in his role until a successor is named to ensure a smooth transition. And so with that, let me now turn it over to Alan to review our financial results and again, I want to thanks... Alan Musso: Thanks, Alex, and thank you for the kind words. It's been a privilege to be part of Fulcrum's progress, and I'm proud of what we've accomplished together. With the impressive results from the PIONEER trial, a talented and motivated team and a strong capital base. The company is well positioned to deliver transformative therapy for sickle cell patients. I look forward to continue working with the team over the coming months and ensuring a successful transition. And with that, I will now go over our results for the first quarter ended March 31, '21, '26. The research and development expenses were $14.1 million for the first quarter of 20 compared to $13.4 million for the first quarter of 2025. The increase of $700,000 was primarily driven by higher employee compensation costs, including $400,000 of increased stock-based compensation expense. General and administrative expenses were $8.1 million for the first quarter of 2026 compared to $7 million for the first quarter of 2025. The increase of $1.1 million was primarily driven by higher employee compensation costs, including $300,000 of increased stock-based compensation expense as well as higher professional services costs. The net loss was $22.2 million for the first quarter of 2026 compared to a net loss of $20.4 million for the first quarter of 2025. Now turning to the balance sheet. We ended the first quarter of 2026 with cash, cash equivalents and marketable securities of $333.3 million compared to $352.3 million as of December 31, 2025. The $19 million decrease was primarily due to cash used to fund our operating activities. And based on our current plans, we expect our existing cash, cash equivalents and marketable securities will be sufficient to fund our operating requirements into 2029, providing runway to advance pociredir through the next phase of clinical development. And with that, I'll turn it back over to you, Alex. Alexander Sapir: That's great. Thanks so much, Alan. So Fulcrum has reached an important inflection point with the positive clinical data from our PIONEER trial, reinforcing our conviction in pociredir's potential in sickle cell disease. We are focused on the next stage of development and look forward to providing an update on our plans following our upcoming end-of-phase meeting with the FDA. And with a strong balance sheet and a dedicated team, we believe we are well positioned to advance pociredir through the next phase of clinical development. And so with those brief remarks, Shannon, why don't we go ahead and open up the line for questions. Operator: [Operator Instructions] Our first question comes from the line of Joe Schwartz with Leerink Partners. Joseph Schwartz: Alan, congrats on your upcoming retirement, and thanks for your excellent stewardship of the company over the years. Alex, as you reflect on the experience gained through Pioneer, what are the most important things you've learned that you might not have fully appreciated going in? And how will those lessen to shape your Phase III design and execution? Alexander Sapir: Yes. It's a great question, Joe. And I may turn it over to Ian to see who wants to add anything. I mean, I think the 1 thing that I've really learned from Pioneer and talking with a lot of the investigators and hearing from those investigators, the conversations that they've had with their patients is that there continues to be continued high, high, high unmet need in this patient population, especially in the severe patient population that we studied in the PIONEER trial in the severe patient population that we would expect to continue in our next phase of clinical development. I would say that's learning #1. I would say learning #2 is that there is such a strong connection between fetal hemoglobin and reduction of VOCs. And we've known this for a long time, but spending time as much as I have with people like Marty Steinberg, who has spent decades researching the underlying biology of fetalemoglobin. He said that just so succinctly and he's just so simple in his explanation in that if you can increase fetal-hemoglobin you're going to see a reduction in VOCs, you're going to see an improvement in anemia because of an increase in total hemoglobin because you're seeing less hemolysis. And so I think it's really to me, Joe, it's those 2 things taken together, 1 related to the unmet need of the patient population. And secondarily is what we think is a very, very profound and robust induction of fetal hemoglobin that's really, I think, what continues to motivate me and make me excited for the next phase of this asset's journey along the clinical development time line. Iain, you've obviously been pretty deeply involved with Pioneer as well. Anything you would want to add to that? Iain Fraser: I think you captured it very well, Alex. It's the severity of the disease and the manifestations experienced by these patients coupled with the really high unmet need in terms of available therapies for the patients. And I think on a daily basis, we continue to be reminded of that. Joseph Schwartz: Okay. Great. And then as you approach discussions with the FDA, what level of evidence do you think they might require in order to consider HPF as a reasonably likely surrogate endpoint for accelerated approval? And how do you plan to position what you've seen efficacy and safety wise for precede so far in terms of that clinical profile to support your case? Alexander Sapir: Yes, it's a great question, Joe. And obviously, Ian has been very, very deep in those preparation for our upcoming meeting. So I think to answer that, let me turn that 1 over to Iain. Iain Fraser: Yes. Thanks, Alex. Thanks, Joe. I think there's really substantial published literature that demonstrates the association between higher HBF levels and improved clinical outcomes in sickle cell disease. And as we've discussed previously and again today, that biological relationship is really a key part of the underlying rationale for our program overall. Of course, the role that HBF could play in terms of the regulatory framework is 1 that is going to be a topic of discussion with regulators to understand their perspective on the appropriate path forward. Our focus remains on designing a robust study that can meaningfully demonstrate clinical benefit, and we hope to align with the regulators on the optimal strategy around that. Operator: Our next question comes from the line of Anupam Rama with JPMorgan. Anupam Rama: Thanks and Alan best wishes on the retirement man. So at the sickle cell disease research symposium, will there be any new analysis that will be presented relative to the 1Q corporate update for Pioneer? And I know second question, I know that the first patients have been dosed in the OLE portion of the Phase I what portion of the patient from PIONEER went to the OLE? And could we see that update maybe around ASH? Alexander Sapir: Yes. Maybe let me -- I'll answer the second question, and then Iain, I can turn it over to you to answer the first question. Yes. So we have enrolled our first patient in this open-label long-term dosing for pociredir -- right now, Anupam, we're targeting the 17 U.S.-based patients that were enrolled in either Cohort 3b and that was the 12-milligram cohort or Cohort 4, which was the 20-milligram cohort. And so right now, really, our focus has really been on getting those sites activated. Unfortunately, this is not your sort of traditional OLE study where patients roll right over, this is considered a new study. And so it has to go through the same mechanics of any new protocol that gets introduced to an institution. So that obviously takes a bit of time. I think it's a little difficult to project when we would have patients of those 17 patients enrolled in this open-label long-term dosing for pociredir. We don't think we'll get all of them. Some maybe lost a follow-up, some may be in other clinical trials. But I think given what we've heard from investigators in terms of the interest level and going back on therapy, we should expect to see a decent number of that 17%. If you ask me to try to predict is as possible. I'd say it's probably going to be sometime in 2027 before we would have a critical mass of patients enrolled in order to be able to see a duration of therapy that is going to be a meaningful, interesting and new data point. We've seen what happens to this therapy when patients are dosed for 12 weeks. I think what's going to be really interesting is what happens when patients goes for longer 24 weeks or 6 months. And so that would probably be the first data set that we would share with folks. And so more than likely, that probably would happen sometime in 2027 as opposed to ASH 2026. Anupam Rama: There is a second question. Iain Fraser: Yes, yes. This is Iain. I can handle that one. So we've indicated that we expect to provide a full similar parting of the entire PIONEER study. at a medical conference later this year. We have not provided details on that as yet. As we indicated in the press release, the FSCDR symposium oral abstract will include previously disclosed clinical data. Operator: Our next question comes from the line of Kristen Kluska with Cantor. Kristen Kluska: And let me also add my congrats to Alan for a great career in biotech and pharma, including the accomplishments at Fulcrum. The first question I had for you was just on broadly understanding the latest views coming from FDA. I know there's been several workshops, including at ASH. I know the team has met with some thought leaders in Washington, D.C. So bigger picture without specifically honing in on Fulcrum's path forward, what's the latest you've been hearing from these thought leaders about how they're thinking about sickle cell disease as an indication, the unmet need and just receptiveness to hearing about new drug classes. Alexander Sapir: Yes, it's a great question, Kristen. And I'll start, and Ian, you may want to add some thoughts as well. And I'll sort of -- I'll break the question up into 2 pieces. What are we hearing and what are we doing with folks on the hill -- and then what are we hearing and seeing at the I think what we -- and I personally have been spending a lot of time in Washington, D.C., Kristen is referencing a very interesting program that she attended in which we provided a congressional briefing to staffers of senators and congressmen just several weeks ago in Washington, D.C., where we really talked about the unmet need. We had a couple of patients talk about their journey and it was standing room only and towards certain parts of the meeting, there were very few dry eyes in the house. And so I think that what the politicians understand is that sickle cell continues to be a disease with very high unmet need with shortened life expectancy of 20 years, not to mention during their time here, experiencing very debilitating pain crises and organ damage, leg ulcers, I could go on and on. And so I think that it's important that the senators and congressmen on the sickle cell disease caucus on the rare disease caucus, on the dock caucus, they understand that and can help sort of lent their support in terms of how high the unmet need is in this patient population. So I'd say that's, I would say, on the -- more on the Hill side. I think on the FDA side, I would point you to Agios' recent press release that showed that they will be moving forward with filing an NDA in the coming months for sickle cell disease with mitapivat. And we think that what that shows is an understanding of how high the unmet need is and potentially some regulatory flexibility to try to get drugs to patients as quickly as we can. These drugs obviously have to be not only effective, but they need to be safe. And so we're obviously very excited and looking forward to engaging with the FDA in our upcoming end-of-phase meeting. Iain, anything you would want to add to that? Iain Fraser: No, I think you covered the key points really well, Alex. Given the severity of the disease and the unmet need, I think the recent progress in the sickle cell disease landscape is very encouraging for the field, and we look forward to moving forward our program with pociredir. Kristen Kluska: Yes. And then my other question is just focusing in a little bit more on the open-label extension. Obviously, you want to understand the longer-term impacts on both safety and efficacy. But I'm curious if there are any end points in particular, you're really trying to understand the longer-term efficacy. So are there certain endpoints that maybe take a little bit longer for the benefits to occur where a trial longer than 12 weeks potentially might give you some insight. Alexander Sapir: Yes, Kristen, that's a great question. I think to answer that, I will turn that 1 over to Iain, who has been deeply involved in the design as well as the execution of the open-label long-term dosing study that -- for which we've enrolled our first patient. Iain? Iain Fraser: Yes. Thanks, Alex, and thanks, Kristen. So as we've indicated before, at the 12-week treatment duration with pociredir the HBF levels are starting to flatten out, but we don't believe they've reached their peak level at that point. And so 1 of the outcomes of the study that we'll be very much interested in is to see the progression beyond that 12-week mark. And then downstream of the HBF as we've seen with other hematological remarks of hemolysis in particular, but also the increase in total hemoglobin that we've seen. Those are probably not maxed out either at that point and with a longer duration of increased HBF, we would expect to see further improvements in those markets. So I think it's looking at how that response plays out over a longer treatment period. Having said that, I think it is important and Alex alluded to this earlier, that these patients have been off pociredir for some time. So it's not the traditional open-label extension where they roll over immediately into that. So that will be starting from a new baseline, but it's the extended dosing duration in particular, that we're interested in tracking. Operator: Our next question comes from the line of Corinne Johnson with Goldman Sachs. Corinne Jenkins: Congratulations to Alan as well from all of us in terms of the retirement. Maybe a question for us and just kind of the competitive landscape and evolving treatment landscape in sickle cell disease. I guess, could you help us think through the role you expect pociredir play, particularly if there's more kind of oral medications that come to market over the next couple of years? Alexander Sapir: Sure, absolutely. I'll start, and then Iain, you may want to add some additional points that I maybe leave off. So yes, I think the way we think about this, [ Kristin ], is there's sort of -- and it's interesting. This market is 1 that I think will grow exponentially over the next 5 to 10 years. If you look at just the sheer number of drugs in development for the treatment of sickle cell disease. This is a market -- a very large market that has been underserved for years and years. And so I think the way that we see this market evolving is very much towards the oral treatment options. And there's really -- to us, we think about this as sort of 2 different approaches. One is sort of operating downstream on the mature red blood cells like the PK activators to -- and the second is operating more upstream when those red blood cells are being formed in the bone marrow and ensuring that those red blood cells have enough fetal hemoglobin as they're being formed because once those red blood cells have enough fetalemoglobin and our form that do get spit out of the bone marrow. Those red blood cells cannot and will not sickle. They maintain their soft flexible shape, thereby preventing vaso-occlusive crises, they have a lifespan of about 120 days versus a 30-day lifespan for a sickled hemoglobin -- and so for us, we think that really attacking the upstream underlying cause of the disease as we're doing with pociredir -- we believe that, that will ultimately be the treatment of choice as we look over the next 5 to 10 years as this market evolves, now where we are in relation to some of those other fetal hemoglobin inducers. Conservatively, we believe that we have about a 24-month head start over the next closest competitor, and that next close is oral HBF inducer would be BMS's product, BMS 986, which is a wiz a dual degrader Wiz and ZBTB 7(a) or LRF for sure. So there They'll be -- they're currently in the clinic in a Phase I study, and they expect to announce the results of that Phase I study sometime in, I think it's the first quarter, the first half of 2027. So we'll be well underway we believe with our Phase III study, while the next closest competitor, BMS, is reporting out their Phase I study results in 2027. And so maintaining that 2-year head start, so that when we come to market, we can have this market essentially without other oral HBF competitors, we believe that that's an important consideration that we want to make sure that we maintain that 24-month head start. Iain, anything else you would want to add about the competitive landscape and how we see this market evolving over time? Iain Fraser: I think you mentioned the key point, Alex. I think the focus of the PK activators is on the increases in total hemoglobin, resulting from a decrease in hemolysis and agree that the HBF mechanism, I think has emerged as a more central, more upstream mechanism to address more widely manifestations of sickle cell disease. I think we're seeing that reflected in the interest in the clinic in sponsors that are bringing forward oral HBF inducers. Operator: Our next question comes from the line of James Condulis with Stifel. James Condulis: And I'll add micrographs as well, Alan. Maybe just 1 sort of kind of on the competitive landscape and all these regulatory dynamics. Novo recently hit on a VOC endpoint. And -- just curious if you think that changes anything at all as it relates to the potential regulatory path for you? And if a drug were to be approved on VOC, does that sort of change what the FDA may be open to approving as it relates to the endpoints that are not a VOC endpoint? Just curious your perspectives there. Alexander Sapir: Yes, James, great question. Maybe just to orient everybody, they did have co-primary, total hemoglobin and VOCs and they hit on that. It was a 27% reduction in vaso-occlusive crisis. So very similar to the percent reduction in VOC that we saw with another product that's currently approved and generally not widely used a product called El glutamine that's all a 25% reduction in VOC. So I wanted just to make sure that everybody was on the call was oriented to specifically what James was talking about. Iain, maybe I'll have you sort of take the heart of James' question, which is really around if there's any potential sort of read-through with pociredir and our path forward. Iain? Iain Fraser: Yes, I think the fact that VOCs is an important clinical endpoint that I think remains the case. I don't think there's any change in that. I think as we've discussed before, the literature associating increases in fetal hemoglobin with reductions in VOCs certainly remains the case. And given the magnitude of HBF induction that we've seen in the PIONEER study to date, both at the 12 and the 20-milligram doses we would expect that, that would translate into a VOC benefit. And I think that remains an important clinical end point. Operator: Our next question comes from the line of Matthew Biegler with Opco. Matthew Biegler: Congrats to you, Alan as well. Maybe just piggybacking on some of the -- an earlier comment that you made, Alex. I'm thinking about maybe potential future combination strategies here. And you mentioned PKR activators and some of the other downstream treatments where you guys are more upstream and maybe that makes logical sense. So it sounds to me like maybe there might be a better partner for you than hydroxyurea. Have you given any thoughts to that? Alexander Sapir: Yes. It's a really good question, Matt. Ian, I may turn this over to you, but I think just maybe just a couple of initial thoughts. So hydroxyurea has been approved now for coming over 40 years. It is clearly the mainstay. I think that patients at times aren't crazy about it. It doesn't have a great sort of adherence to drug because of some of the side effects associated with it. But despite that, it is very much the main stand. So I think our long-term development strategy has always been to figure out a path forward for us to be used in combination with hydroxyurea. We don't believe that, that will be part of the design that we will reach agreement on with the FDA as part of our upcoming end of phase meeting with them. But we do see that as an important part of the ongoing clinical development program for pociredir. Yes, I think, Iain, maybe if you want to take kind of maybe just beyond HU, is there the idea of possibly combining an HBF inducer with potentially a PK activator or potentially operating on different mechanisms and potentially seeing greater efficacy than either 1 could achieve on their own. Iain Fraser: Yes, absolutely. I mean we've certainly seen that in other fields, and that certainly remains a potential in this disease, which has so many manifestations that are so severe. I think as we think of those, however, our primary objective at the moment really is to generate an interpretable data set with pociredir that will support its registration. And I think understanding in the context of monotherapy is really the first step in that journey so that we really have a full understanding of that and that we could then give serious consideration to how do we evaluate potential combination therapies down the road? Alexander Sapir: Yes, I think that's well said, Iain. Operator: Our next question comes from the line of Gregory Renza with Truth Securities. Gregory Renza: My congratulations to Alan on his service at Fulcrum and in the industry. I know, of course, the focus is on Posera there, but I'm just curious when you see the time being right to potentially advance or nominate some of the discovery programs and think about the novel HBF inducers that you may have in the library. And then maybe secondarily, as we think about the FDA meetings upcoming, can you just give us an update on the engagement plans with respect to EMA and the global development. Joseph Schwartz: Sure. I'll take the first question and Iain. I'll turn the second question over -- actually, Iain, why don't you -- if you want, do you want to take the second question first? Iain Fraser: Yes. Yes, happy to do that. Thanks, Greg. So as we've indicated before, the context of a registrational sickle cell disease study is likely to be a global study and we've indicated that we will be interacting with EMA later this year as part of that process. So that's certainly the first step on looking more globally and getting additional feedback on the program. Alexander Sapir: Yes, it's great. And then yes, I think, Greg, in terms of your first question, our discovery efforts, we're a company of about 60, 65 people, we've got 20, 25 people focused entirely on discovery. And then within their discovery work, they are focused entirely on developing the second, third and fourth generation oral HBF inducer. And so that has really been our key area a focus because we, again, going back to something that I said earlier, we do believe that this is a market that ultimately will be dominated by oral fetal hemoglobin inducers because of the reasons that I mentioned earlier. And so we're thinking about how can we develop a product that potentially could cannibalize pociredir once it's eventually hits it's the market. I think at this point, it's a little bit premature, Greg, to how to estimate when we would start seeing things coming out of our discovery efforts and conducting those IND-enabling studies. But I will say that in the coming years, what we believe we will see is a number of new INDs almost entirely focused on trying to come out with an even better oral HBF inducer than what we currently have with pociredir given how we see this market evolving over the next 5 to 10 years. Operator: And I'm currently showing no further questions at this time. Thank you, everyone, for your participation on today's call. This does conclude the conference. Thank you, and you may now disconnect.
Operator: Good morning, and thank you for standing by. My name is John, and I will be your conference operator today. At this time, I would like to welcome everyone to the Business First Bancshares First Quarter 2026 Earnings Call. [Operator Instructions] I would now like to turn the conference over to Matt Sealy, Director of Corporate Strategy. Please go ahead. Matthew Sealy: Thank you. Good morning, and thank you all for joining. Earlier today, we issued our first quarter 2026 earnings press release, a copy of which is available on our website, along with the slide presentation that we'll reference during today's call. Please refer to Slide 3 of our presentation, which includes our safe harbor statements regarding forward-looking statements and the use of non-GAAP financial measures. For those of you joining by phone, please note the slide presentation is available on our website at www.b1bank.com. Please also note our safe harbor statements are available on Page 6 of our earnings press release that was filed with the SEC today. All comments made during today's call are subject to those safe harbor statements in our slide presentation and earnings release. I'm joined this morning by Business First Bancshares CEO and Chairman, Jude Melville; Chief Financial Officer, Greg Robertson; Chief Banking Officer, Philip Jordan; and President of b1BANK, Jerry Vascocu. After the presentation, we'll be happy to address any questions you may have. And with that, I'll turn the call over to you, Jude. David Melville: Okay. Thanks, Matt. Good morning, and thank you for joining us today. We know there are plenty of things you all could be doing on a Monday morning in a world environment as complex as the one in which we find ourselves, and we appreciate you choosing to spend this time with us. This was one of, if not the best, first quarters that we have had as a company. We continue to improve earnings, strengthen capital levels and improve quality of our liquidity posture while consummating our second material acquisition in the past 3 years and making a number of nonacquisitive investments that will pay off over the course of the next few years. A highlight for the quarter was the addition of a substantial number of new teammates. As I just mentioned, we closed the Progressive transaction on January 1. In balance sheet terms, the acquisition adds over $700 million in assets and 9 branches across North Louisiana, deepening our footprint in an area in which we are already a market leader. Asset quality of the acquired portfolio is stellar as is the makeup of the expanded client base. On a very promising note, since we announced the acquisition, construction on the Meta data center project in Northeast Louisiana has accelerated and been expanded, and we expect tens of billions of dollars of private investment in a region in which we are as well situated to capture the benefits as any financial institution, large or small. The morale among our former Progressive teammates is high, and the working partnership is off to a smooth start as any acquisition that we've had the honor to participate in, which bodes well for our ability to operate as one team over the course of this year, even before conversion is executed. We also added a material number of bankers organically. In our last call, I mentioned the addition of Jon Heine, our new market President in Houston, former Market President from Veritex Bank. To date, Jon has attracted an additional 11 teammates, including 7 production officers, the majority of which are also former Veritex bankers. Also in Houston, we are honored to add Ben Marmande to lead our corporate banking activities in Texas. Ben was a long-time banker for IBERIA and then First Horizon, serving in leadership capacities across South Louisiana, and for the past 5 years as President of the FHN Financial's Houston market. These new partners have already begun building a pipeline of opportunities, and we anticipate them contributing meaningfully to our growth in the second half of the year as we seek to take advantage of M&A-led disruption in the Houston market. We announced and have begun a partnership with Covecta, a provider of Agentic AI capabilities. I include this in my discussion on new teammates because over time, we anticipate this partnership leading to both our more efficiently leveraging the talent we have on board and to our minimizing hiring as we continue to grow. We are beginning this effort focused on our consumer workflows in which we have already identified over 300 policy rules for potential automation and anticipate expanding utilization of the partnership across broader use cases throughout the bank, including deposits and credit. This effort will take time to unfold, but we are more confident with each day that the potential is actionable and will prove to be meaningful. It's important to note that as we explore the potential of Agentic AI, we remain focused on governance, validation and human oversight so that as models, policies and industry requirements change, we retain our ability to manage that evolution in a disciplined and controlled way. A very positive note for the quarter is that even as we grow the team, we remain focused on cost control with noninterest expenses for the quarter lower than anticipated. After accounting for the increased costs associated with the Progressive current run rate, our core expenses were essentially flat quarter-over-quarter as well as in comparison to last year's first quarter. We do anticipate the cost of the new hires adding incrementally to our expense rate over the second quarter, but note that the super majority of the hires were production-oriented, which should lead to further operating leverage improvements. As a key component of our positive earnings results, we are pleased to note the contribution of our noninterest income, primarily through the Financial Services group and in particular, their work providing interest rate swaps and SBA loan gains on sale. As you know, we've been working in the past 3 years in diversifying our revenue streams with investments in this arena, in part so that we might be able to continue to produce consistent earnings even in quarters in which our spread income was not as strong as we hoped. The potential of this effect was put to test in the first quarter as loan volumes were lower than anticipated due primarily to heightened loan payoffs and paydowns. In addition to the contribution to current earnings, we utilized the Financial Services Group to successfully complete a fully self-managed private placement of subordinated debt just after quarter end, raising $85 million within our cohort of correspondent banking relationships. Of the $85 million raised, we utilized $67 million to redeem existing sub debt, some of which crossed the 5-year mark and already lost about $10 million in capital treatment. The successful debt raise is important in and of itself, but I'm most excited about the way in which we accomplished it, both utilizing and contributing to our growing network of community bank partners. In closing, we feel very positive about the first quarter on a number of fronts and anticipated to be the start of a solid full year. We reiterated full year loan guidance on loan growth based on our sooner-than-expected hiring of production officers, and we continue to forecast a 1.25% ROAA end-of-year run rate. One of our guiding principles is belief in the compounding power of our incremental improvement, and we see that principle in action in our first quarter results. Thank you again for being with us. And with that, I'll turn it over to Greg. Gregory Robertson: Thank you, Jude, and good morning, everyone. As always, I'll spend a few minutes reviewing our results and we'll discuss our updated outlook before we open up to Q&A. First quarter GAAP net income and EPS available to common shareholders was $22.2 million and $0.68 and included $2.2 million merger-related expenses, $28,000 gain on former bank premises and $80,000 gain on sale of securities. Excluding the noncore items, non-GAAP core net income and EPS available to common holders was $24 million and $0.73 per share. From our perspective, first quarter results marked another quarter of strong financial performance, generating a 1.10% core ROAA and a core efficiency ratio of 62% for the quarter. Our first quarter earnings results were highlighted by continued discipline on the expense side and a meaningful contribution from our financial services and correspondent banking group that Jude mentioned. Also during the quarter, we completed the acquisition of North Louisiana-based Progressive Bank, which closed on January 1 of this year and added $774 million in total assets and 9 new locations. From a balance sheet perspective, total loans held for investment increased $494.8 million or 32% annualized on a linked quarter basis. Excluding the acquired Progressive loans, total loans held for investment declined $102.7 million or 6.2% annualized. Excluding acquired Progressive loans, organic commercial and commercial real estate loans decreased $58.6 million and $23 million, respectively, compared to the linked quarter. Texas-based loans ended the first quarter at 35% of total loans. This was anticipated due to the closing of the Progressive Bank transaction in early January. The lower-than-expected loan growth was driven primarily by an overall increase in loan paydowns and payoffs. Specifically, total paydowns and payoffs during the first quarter totaled $579 million, which compares to the total new and renewed loan production of $476 million during the quarter. If you recall, in the previous quarter, we experienced slightly higher new and renewed loan production at $500 million, while paydowns and payoffs during the quarter were lower at just $332 million. Total deposits increased $766.4 million due to increases in interest-bearing deposits and noninterest-bearing deposits of $513.3 million and $253 million, respectively. The increase in interest-bearing deposits was largely driven by approximately $325 million in commercial money market accounts and $185 million in personal money market accounts. Excluding acquired Progressive deposits, organic deposit growth was $81.5 million or 4.4% annualized on a linked quarter basis. Lastly, on the funding side of the balance sheet, we took advantage of the improved liquidity position from softer overall net loan growth and repaid FHLB balances and broker deposits. Total FHLB borrowings decreased $170.4 million and broker deposits were reduced by $112.5 million from the linked quarter. Moving on to the margin. Our GAAP reported first quarter net interest margin decreased 6 basis points linked quarter to 3.65%, while the non-GAAP core net interest margin, excluding purchase accounting accretion, decreased 4 basis points from 3.64% to 3.60% for the quarter ended March 31. A driver to the lower-than-expected margin performance during the quarter was loan discount accretion falling lower than expected at $1.1 million, which is primarily caused by the lower actual rate marks from the Progressive acquisition. We would expect quarterly loan discount accretion to be in the low $1 million range for the balance of 2026. On a linked quarter basis, cost of deposits decreased 18 basis points, while total loan yields decreased 27 basis points. Core loan yields, excluding loan discount accretion for the first quarter were 6.54%, down 24 basis points from the prior quarter. Total cost of deposits for the month ended March was 2.33%, which compared to the weighted average of the first quarter was 2.34%. We are pleased with our ability to hold the line in new loan yields during the quarter with a weighted average new and renewed loan yield of 7.20% for the quarter. I would like to make a note of a few takeaways on Slide 19 in our investor presentation. We continue to see 45% to 55% overall deposit betas as achievable regarding any future rate cuts. I would also like to point out overall core CD balance retention rate was 81% during Q1. This impressive statistic reflects on our team's continued focus on maintaining core deposit relationships. Our baseline assumption is that we do not receive any further rate cuts in 2026. We have worked hard to manage our balance sheet in a relatively neutral position and believe we can achieve modest margin improvement in a slightly down or up rate environment. Moving on to the income statement. GAAP noninterest expense was $57.5 million and included $2.2 million in acquisition-related expense. Core noninterest expense for the first quarter was $55.2 million, up $5 million from the prior quarter and included a full quarter impact of the Progressive expense base mentioned earlier. Core expenses for the first quarter did come in lower than we expected, mostly due to the timing of certain investments and marketing spend not hitting in the quarter, which we do expect to recognize going forward. We also did recognize a small amount of the Progressive cost saves during the quarter. As a reminder, we should recognize remaining potential cost saves post conversion, which is scheduled for late third quarter this year. First quarter GAAP and core noninterest income was $14.1 million and $13.9 million, respectively. GAAP results did include $80,000 gain on sale of securities and a $28,000 gain on former bank premises. Core noninterest income results for the first quarter were slightly better than we expected, primarily due to continued strong swap fee revenue and gain on sale from SBA activity. Lastly, I'd like to provide some context to the credit migration during the first quarter. Total loans past due 30 days or more, excluding nonaccruals as a percentage of total loans held for investment decreased from 0.64% to 0.42% at March 31. The ratio of nonperforming loans compared to loans held for investment increased 29 basis points to 1.53% at the end of the first quarter, while the ratio of nonperforming assets compared to total assets increased 29 basis points to 1.38% compared to the linked quarter. That concludes my prepared remarks. I'll hand the call back over to you, Matt, and we'll open it up for questions. Matthew Sealy: Yes. Thanks, guys. I think we will go ahead and open up to Q&A now. Operator: [Operator Instructions] Our first question comes from the line of Feddie Strickland with Hovde Group. Feddie Strickland: Just wanted to start on credit. I just wanted to ask, you mentioned in the release you expect the migration we saw this quarter to be resolved over the next couple of quarters. And can you just help us understand kind of the full opportunity set maybe here and how much we could maybe see NPAs come down by year-end, assuming no further migration? Gregory Robertson: Yes. Thanks, Feddie. Good question. So we think in the near term, let's talk about just specifically what we think will happen in Q2 and then more so during the later parts of the year. I'll caveat all that by saying we've kind of been talking about some of these credits for almost a year now and the process through moving them to resolution is sometimes precarious and moves at different speeds. So Q2, we think about 30% of the current NPA list will go through to resolution. So as we move past that, we would see it kind of breaking up into thirds as we go through the rest of the year. So I think another pretty decent amount of it in the third quarter and hopefully some resolution with maybe only a few pieces hanging over past year-end. Feddie Strickland: Got it. And then the increase this quarter, I apologize, I cut out for a second when you were mentioning this in your opening comments. Was that the Houston medical facility? Or which credits contributed to the higher NPAs this quarter? Gregory Robertson: We had about $25 million increase this quarter, which were mostly attributable to we have a relationship with one client. It's about $16 million of exposure. Those are varying types of collateral and the timing of that resolution on that, some of it could be imminent. Some of it could last 2, 3 quarters to resolve it. So that was the majority of the increase this quarter. The previously mentioned medical facility was already in the list. Feddie Strickland: Got it. And just one quick follow-up on the margin. I saw you paid down the FHLB in the broker this quarter, but you also issued the sub debt. Should we expect the margin to -- I guess, the GAAP margin to still directionally move higher in the second quarter? Or is more flat your expectation? Gregory Robertson: No. We think we're going to -- we think low to mid-single-digit margin expansion as we move forward. Part of that will be reliant on moving some of those NPAs back into accruing assets as well. But that's a little trickier to forecast. But we do think that just the core margin should tick up low to mid-single digits. If you look at the spread we had during the quarter, spread was relatively flat quarter-over-quarter. And we think with the increase in loan volumes, we should get a little bit of pickup. Operator: Our next question comes from the line of Matt Olney with Stephens. Matt Olney: Just want to follow up on the credit discussion. I think, Greg, you mentioned expectations of some resolution in the next few quarters. That's great to hear. Any thoughts as far as loss recognition, what kind of allowances do you have on some of these credits? Just trying to anticipate if we should anticipate the charge-offs being a little bit higher in the near term. Gregory Robertson: Yes. So far -- Matt, it's a good question. So far, we are seeing reserves versus loss recognition going forward to remain pretty consistent with what the Street has forecast for us from a loss standpoint. All of that is kind of incremental as we move on. But so far, what we're seeing, we feel like we'll be in line. If you look at the main driver that gives us a little comfort with that is moving past dues back down below 50 basis points. We feel like that the stuff that we've been talking about is kind of in the list, and we'll just move forward with hopefully no change from that. Matt Olney: Okay. And then going back to the loan balances. Greg, I think you mentioned some higher paydowns this quarter. Any more color on those paydowns, whether by loan type or by market? Or just any color as far as what you're hearing from your customers given some of the volatility in the market right now? Gregory Robertson: Yes. I think it was -- the majority of our paydowns were in the Texas franchise. And I think that's -- you could really draw a line back to some of our larger growth years, the '22, '23 years -- '22, '23; some of those projects came to end. Some of them, we just made the decision, whether it rate or credit to move away from relationships. So it's kind of a mixed bag. But I think that's the general guidance is it's more commercial stuff probably in the Dallas first and the Houston markets. David Melville: Yes. I think it's not a small thing that we've really dramatically downshifted our exposure to construction. And so we're not -- we don't have the same large dollar construction projects funding up as we -- as some of these older construction projects come off the books. And so there's not [indiscernible] replacement there for that particular type of credit, which we feel comfortable with. We want to have a diversified portfolio and minimize our concentrations. And then I would also say that Greg mentioned our loan yields staying pretty flat quarter-over-quarter, which we certainly are prioritizing the need to get paid for what we do over just loan growth. And so I would echo his thoughts about that was part of the rationale there, but just from a competitive standpoint, seem to be disciplined on pricing, which I think is the right choice to make. Operator: Our next question comes from the line of Michael Rose with Raymond James. Michael Rose: Just wanted to kind of dig back on to the expenses as we move from here. So on the one hand, obviously, this quarter on a core basis, good expense control. But I think, Jude, in the press release, you talked about some additional hires by the end of the quarter. And then in your prepared comments, I think you mentioned even a few more. I assume you're continuing to hire. So how should we expect those expenses to -- from a timing and magnitude perspective to layer in? And then as you kind of think about the layering in of the cost saves from Progressive, understanding that the systems conversion will happen late in the quarter. Just trying to frame out the expense outlook over the next few quarters. Gregory Robertson: Yes. Thanks, Michael. I think in the near term, Q2, we would expect the mid- to upper 50s and then migrating slightly from there. I think the cost saves, if we continue to have success hiring teammates, some of the cost saves will be offset by the hiring. But I think we would see that trickle up into the upper 50s as we move through the end of the year. David Melville: But we still remain confident in our projections on the cost saves around the Progressive acquisition, achieving most of them in the fourth quarter. Greg, I think out of the $21 million Progressive run rate, we expect to achieve about $11 million -- that's on an annualized basis on cost. So certainly, still anticipate recognizing the benefits of that -- those efficiencies, primarily in the fourth quarter. Michael Rose: Perfect. And then maybe just following up on some of the initial and the final marks on the portfolio. It looks like the accretion is going to be less kind of as we move forward. So can you just walk us through maybe some of the purchase accounting adjustments from initial to when it actually closed? Gregory Robertson: Yes. I think it was just mainly that when we announced the yield curve was a lot different by the time we closed. So the interest rate mark piece of it was less, credit still the same. So we felt like from a total dilutive standpoint for us, I think it is a little bit different, but I think it's all relative. We had forecasted about 44 basis points of tangible book value dilution, $0.44 and it ended up being ex AOCI about $0.04. So we feel really good about the way everything kind of shook out now. David Melville: So it will be less accretion going forward ,but the trade-off is that we had less dilution than we modeled. So it's a good thing, yes. So I did want to mention real quick since we're talking about tangible book value. We last raised capital in October of '22. And beginning with the end of '22 going to now, we've grown tangible book value at about 16% annualized rate. So we remain focused on growing tangible book value, and we've done so during that period. We've consummated two acquisitions and grown assets by about $2 billion. And so the news on the accretion front versus tangible book value dilution on the Progressive deal is good. And then we look forward to continuing in future quarters to grow tangible book of ours. And so we're pleased with that result. Gregory Robertson: Michael, will be about $1 million going forward for accretion per quarter. Michael Rose: Yes. Heard that. And maybe if I could just sneak one last in on the -- just as it relates to the tangible book value growth and the focus there. The buybacks this quarter were a little bit higher than I think I was looking for. How should we balance that now with a little bit higher starting capital just from the change in marks from the deal? Could we expect you guys to continue to be active with repurchases? Or is now a time to kind of recoup and build tangible book value and capital? David Melville: Yes. I think it's a balance between the two, the market -- if we feel the market is undervaluing are worth, then we do have the -- we've now built our capital levels and our tangible book value to a level that we can take advantage of that perceived discrepancy. And so we felt like in the first quarter, we had probably a little more opportunity there than we might have guessed at the beginning of the quarter. So I think our average TBV multiple of the buybacks was about 1.19x. And so we felt like that was certainly an undervaluation relative to the worth of the franchise, and we'll continue to look for opportunities there. We're not going to -- we don't have mandatory buybacks and not going to do it just for the sake of doing it. But when we do see opportunities in that kind of sub-$120 level, we do believe we're in a position to take advantage of it. And that will be a higher priority than seeking out M&A opportunities in the near term. Operator: [Operator Instructions] Our next question comes from the line of Gary Tenner with D.A. Davidson. Gary Tenner: I want to ask about your -- I just want to ask about your commentary around loan growth. I think you're kind of sticking to the mid-single-digit growth outlook at this point. And I'm just wondering how much of that is -- kind of what's the balance between that projection on the production versus payoff perspective? Do you have a lot more visibility into kind of a reduction in payoffs just as construction projects are maturing? Or maybe just walk us through kind of how you're looking at the next couple of quarters from a net growth perspective? Gregory Robertson: Yes, I think from a net growth perspective, as we get further away from kind of the impacts of bringing on '22 and '23 deals in those years, as we move through the year, we should see payoffs slightly reduce. I think the way we're thinking about net loan growth as we go forward with the addition of the new teammates, we're thinking about high single digits to 10% maybe in the second and third quarter, which would end up offsetting kind of the slow first quarter with the mid-single digits, 6% to 8% -- 5% to 6% range loan growth on an annualized basis. David Melville: I'll just add, this is -- things aren't always smooth lines. And you'll remember in the third quarter of last year, if I remember correctly, that we had elevated paydowns and lower growth in the third quarter, but then we had a -- I don't want to say a record fourth quarter loan growth, but it was a strong quarter, fourth quarter. And if you balance the two, it ended up being kind of at this about 6% range. And we had more paydowns in the third quarter than we did in the fourth quarter. And I would anticipate that same effect helping us from a net loan growth over the remainder of the year. Greg is right that there will be a point at which those larger dollar construction projects don't -- aren't material in terms of their continued impact on the portfolio. And then again, we've hired, I think, to date, about 11 new producers and more production-oriented staff, and we'll continue to look for talent as we see the opportunity. So -- and none of their pipelines, obviously, have been manifested in terms of actual loan growth yet. And so we anticipate seeing some of that in the second quarter, but really the third and fourth quarters being reflective of that additional strength. Gary Tenner: Got it. Appreciate that. And just on the construction segment topic just for another second, where do you see that segment kind of bottoming out or stabilizing as a percentage of the overall portfolio? You're right over 10% right now. Where do you see that trending? Like where is your appetite and comfort level with that? Gregory Robertson: I think we're getting close to the bottom now. I think you can see it bounce in the high single digits to 10% range on a go-forward basis would be comfort spot. Operator: Our next question comes from the line of Matt Olney with Stephens. Matt Olney: Just want to go back to the net interest margin. And I'm trying to appreciate if there's any more noise in that margin in this quarter. I went back to my notes last quarter, and it looks like there was that interest reversal that impacted the margin by about $1 million in the fourth quarter from that Houston loan that we discussed. Was there any kind of interest reversal again this quarter with the uptick of nonaccruals? Yes, I'll just leave it there. Gregory Robertson: Yes. Yes, you're right. There was some noise. I think when you think about relative to the nonaccruals, there was about $1.2 million in interest reversal. That was probably attributable to 6 or 7 basis points impact on the margin. That was due to the movement of about $25 million in loans to NPL during the quarter and the reversal. Kind of as we go forward, I think we'll start inching back toward reclaiming some of that as an earning asset. But as I mentioned, I think earlier, the timing of how that comes back to an earning or converts back to an earning asset is a little bit tricky because we're still having to resolve these in real time and the twists and turns sometimes of a conflict resolution of some of these credits, it's a little bit unpredictable. But we see some opportunity on the horizon with that for sure. Operator: And at this time, we have no further questions. That concludes our Q&A session. I will now turn the call back over to Jude Melville for closing remarks. David Melville: Okay. Well, again, I appreciate everybody being with us and the questions and the attention and energy that you're giving to our calls. We again feel very positive about the first quarter and not only the performance in the first quarter, but also some of the investments and additions that we've made in the first quarter, which will lead to even more positive results in the future. We like our footprint. We like our people and I just look forward to turning the wheels over the course of the year and showing some of that incremental progress, which will lead to increased ROAA and ultimately, tangible book value. We just keep doing what we do. So I appreciate our team for all their effort. And again, I appreciate your attention this morning. Feel free to reach out if you want to talk any more detail about anything. Thank you all. Have a good week. Operator: This concludes today's conference call. You may now disconnect your lines at this time. Thank you for your participation, and have a pleasant day.
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