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Operator: Ladies and gentlemen, welcome to HCA Healthcare's First Quarter 2026 Earnings Conference Call. Today's call is being recorded. At this time, for opening remarks and introductions, I would like to turn the call over to Vice President of Investor Relations, Mr. Frank Morgan. Please go ahead, sir. Frank Morgan: Good morning, and welcome to everyone on today's call. With me this morning is our CEO, Sam Hazen; and CFO, Mike Marks. Sam and Mike will provide some prepared remarks, and then we'll take questions. Before I turn the call over to Sam, let me remind everyone that should today's call contain any forward-looking statements, they're based on management's current expectations. Numerous risks, uncertainties and other factors may cause actual results to differ materially from those that might be expressed today. More information on forward-looking statements and these factors are listed in today's press release and in our various SEC filings. On this morning's call, we may reference measures such as adjusted EBITDA, which is a non-GAAP financial measure. A table providing supplemental information on adjusted EBITDA and reconciling to net income attributable to HCA Healthcare, Inc. is included in today's release. This morning's call is being recorded, and a replay of the call will be available later today. With that, I'll now turn the call over to Sam. Samuel Hazen: Good morning, and thank you for joining the call. First, I want to recognize our colleagues for continuing to demonstrate a remarkable ability to adapt to changing conditions and deliver positive results for our patients, communities and stakeholders. The start of the year presented a dynamic environment for HCA Healthcare. From a volume perspective, we did not experience the typical lift related to seasonal respiratory conditions. Compared to the first quarter of last year, our respiratory-related admissions were down 42%, and our respiratory-related emergency room visits were down 32%. Additionally, winter storm that hit a few of our markets adversely impacted our volumes in the quarter. On the positive side, however, we experienced a greater net benefit than anticipated from state supplemental programs. As a reminder, these programs are complex, they're variable and difficult to predict. This benefit mostly offset impacts from the shortfall in volumes. Regarding payer mix for the quarter, the underlying shifts resulting from the changes in the health insurance exchanges were generally in line with our expectations. This area remains fluid. As we stated in our fourth quarter call, we have considered a range of potential scenarios as the effects continue to evolve. As mentioned over the last several quarters, our teams have been focused on a broad resiliency plan designed to generate cost savings where appropriate, enhance network execution and strengthen organizational capabilities. I am pleased with our resiliency efforts to date, and we expect they will continue to help offset some of the expected impact from the payer mix shift. Additionally, we were pleased with the volume results exiting the quarter. The reparatory related and winter storm impacts were mostly contained to January, with February and March volumes rebounding nicely. For the first quarter, revenue increased 4.3% compared to the first quarter last year. Adjusted EBITDA increased almost 2% and diluted earnings per share, as adjusted, increased approximately 11% versus the prior year period. We continue to deliver for our patients and important metrics including improved quality measures, increased patient satisfaction and reductions in the average length of stay. I remain excited about our digital transformation program and AI agenda. They progressed during the quarter with rollout of some key initiatives to more facilities. Our clinical teams continue to advance efforts to enhance quality, safety and services to our patients, with progress on broad initiatives across nursing care, hospital-based physician services and support functions. We continue to invest significantly in network development with our capital spending and with selective outpatient facility acquisitions. As compared to the first quarter last year, our networks expanded their overall sites of care by more than 4%, increased hospital beds through capital spending by almost 1% and added 4% to emergency room capacity. To summarize, we view the respiratory-related volume shortfall and the increase in supplemental payment net benefits as first quarter events. As such, we believe our assumptions for the remainder of the year related to volumes, payer mix and costs continue to remain in line with our original guidance. HCA Healthcare has an impressive capability to remain disciplined in dynamic environments. This is a resounding strength of our teams and what they have built over time. It is rooted in our culture and it helps us to execute on our mission to provide high-quality care to our patients while delivering strong financial results. With that, I will turn over the call to Mike for more details on the quarter. Mike Marks: Thank you, Sam, and good morning, everyone. Let me start by providing same-facility volume comparisons for the first quarter of 2026 versus the first quarter of 2025. Admissions increased 0.9%, equivalent admissions increased [ 1.3% ], inpatient surgeries were down 0.3% and outpatient surgeries declined 1.7%. ER visits increased 0.3%. As Sam mentioned, we had a much milder respiratory season in the quarter. This produced a drag on our quarterly volume growth in admissions and ER visits, up 70 basis points and 140 basis points, respectively. In addition, the winter storm in January impacted a wide swath of our markets, including Texas, Tennessee, North Carolina and Virginia, reducing admissions and ER visits by an estimated 30 basis points and 50 basis points, respectively. The impact of these 2 factors was consistent across all payer categories, and in total, adversely impacted adjusted EBITDA by an estimated $180 million. Regarding payer mix, commercial equivalent admissions, excluding exchanges, increased 0.6%. Medicare increased 1.9% and Medicaid increased 0.3%. We believe the variance in volume relative to our expectations was almost entirely driven by the respiratory season and winter storm. We view these factors as being temporal and not structural. Overall, taking all of this into consideration, our volume growth in the quarter was generally in line with our 2% to 3% volume growth assumption for the year, albeit at the lower end of the range. Adjusted EBITDA margin decreased 50 basis points versus prior year quarter. Salaries and benefits as a percentage of revenue improved 30 basis points and supplies improved 20 basis points. Other operating expenses as a percentage of revenue increased 90 basis points, primarily due to an increase in cost related to the Medicaid state supplemental payments, professional fees and technological investments. As Sam noted in his comments, volumes continued to improve throughout the quarter, and we noted a similar progression of operating leverage and cost trends. Regarding Medicaid supplement payment programs. While we expected an increase in net benefit of $80 million, we realized an increase in net benefits of approximately $200 million to adjusted EBITDA versus the prior quarter. This was primarily due to the grandfathered approval of Georgia, the reinstatement of the Atlas program in Texas and the year-over-year benefit of the Tennessee program that was approved in the third quarter of 2025. We are adjusting our full year range to reflect the decline in supplemental payment program net benefit between $50 million to $250 million versus prior year. This updated guidance does not include any potential impacts from additional approvals of grandfathered applications. We continue to monitor the ongoing developments related to these programs, and particularly Florida. We continue to feel positive about the prospects for the approval of the Florida program, which covers the period of October 1, 2024, to September 30, 2025. If approved, we believe it should result in additional revenues, which may be significant. Now let me provide additional information regarding the exchange environment. As we stated in our fourth quarter call, the complexity of the exchanges is significant, and we're tracking several areas within the company. For the quarter, we estimate our same facility exchange equivalent adjusted admissions declined approximately 15% versus prior year quarter. This represents our comprehensive evaluation of patients that presented with exchange coverage that ultimately will not be covered for their episodes of care. Using the same analysis, we estimate same facility uninsured equivalent admissions increased approximately 16% versus prior year quarter. Over half of this implied increase relates to the movement from exchanges and normal uninsured growth. The remaining portion reflects a slowdown of conversions to Medicaid from patients who were not willing to fill out applications. We estimate the adjusted EBITDA impact from the exchanges to be approximately $150 million in the first quarter of 2026 versus the prior year quarter. Given our experience to date, we still believe our full year range of $600 million to $900 million expected impact on adjusted EBITDA is appropriate. However, the exchange environment remains dynamic and has not fully settled. We will continue to track the fluid nature of this reform and will provide further commentary on our second quarter call. Moving to capital allocation. Capital expenditures totaled $1.1 billion in the quarter. Additionally, we purchased $1.57 billion of our outstanding shares, and we paid $183 million in dividends for the quarter. Cash flow from operations was $2 billion in the quarter, representing a 22% increase in the first quarter of 2026 versus the prior year quarter. Our debt-to-adjusted EBITDA leverage remains in the lower half of our stated target range, and we believe our balance sheet is strong and well positioned for the future. As noted in our release, we are reaffirming our estimated guidance ranges for 2026. I will now hand the call back to Frank Morgan for questions. Frank Morgan: Thank you, Mike. [Operator Instructions] Andy, you may now give instructions to those who would like to ask a question. Operator: [Operator Instructions] And our first question comes from the line of Ben Hendrix with RBC Capital Markets. Benjamin Hendrix: I appreciate the color on the respiratory, SDP and other components. Maybe you could just give us a rundown broadly of how your results compare to your internal expectations for the quarter? Mike Marks: Thanks, Ben. This is Mike. I mean our results were a bit short in terms of adjusted EBITDA to our internal expectations. Besides our internal expectations is being pretty consistent with the midpoint of our guidance in terms of growth, pretty consistent actually with consensus coming into the call. Really 2 main drivers in terms of the shortfall to internal expectations. The first one is this kind of shortfall in the seasonal volume uplift from respiratory in the winter storms, which was mostly offset by the net benefit from the supplemental payment programs. A little detail here on seasonal volumes [indiscernible]. I've already kind of quantified the volume side of that. So let me talk about the expense side. As we were -- as we were coming into January, our respiratory season was actually strong at the beginning of the year. However, later in January, it became apparent that the respiratory season was actually ending abruptly. And we were then hit with a significant January winter storm across several of our states. Both the quick ramp down of the respiratory volume as well as the winter storm delayed our ability to flex down our seasonal cost in the quarter. We were ultimately able to do so as we move through the quarter, but there was a delay. So let me switch now to the supplemental payment program activity. As noted, Medicaid supplement payments net benefits was better than expected. As we came into the quarter, we did anticipate an increase in the supplemental payment net benefit in Q1 of $80 million, largely due to the increase in the Tennessee program that was approved in Q3 of 2025. So the $200 million of net benefit in the first quarter was about $120 million higher than our internal expectations in the quarter, and again resulted from the approval of the grandfathered Georgia program as well as the reinstatement of the Atlas program in Texas. So in summary, Ben, when I think about first quarter, largely, we were just a bit short in total. But when you take the temporal factors of the lack of the seasonal volume uplift and the pickup in net benefit supplemental payments, those are really the main drivers in the quarter. Benjamin Hendrix: Appreciate that color. And then kind of just a quick follow-up. Can you just give us an update on the moving pieces that kind of get you back to the initial guide? Maybe walk us through the components of the EBITDA bridge as you see them today after such a dynamic first quarter? Mike Marks: Sure. If you go back to the release, the really only change to our key assumptions for the 2026 guidance relates to the supplemental payment programs. We estimate that the Georgia approval and the reinstated Atlas program I previously discussed, will provide approximately $200 million of incremental net benefit for the full year that was not originally included in our guidance. I would note that the $120 million for Georgia and Texas that we talked about for the first quarter had a prior period impact in it. And so the component that applied the first quarter and for the full year of '26 really make up that $200 million. And so that's why we're adjusting our assumption for full year net benefit to now be a decline of $50 million to $250 million. And just to note, that assumption does not include any additional approvals of grandfathered applications. When I think about the rest of our assumptions, Ben, if you think about the impact of the exchanges, we still believe that, that $600 million to $900 million range is appropriate based on what we've learned in first quarter. Our resiliency assumptions that were in guidance also, we believe, are still reasonable and appropriate. And so at the end of the day, we just felt like that it was appropriate not to change our total guidance range, even with the $200 million improvement in first quarter. A chunk of that really goes back to this temporal nature of the headwinds that we saw in first quarter being related to the seasonal volume impacts in the winter storm and the related cost impacts. And so as we think about how we progress through the quarter, Sam mentioned that as we exited the -- exited the quarter in March, there are volumes were improving largely back to our original plan. We also saw the same thing in our cost structure. As we got through March, our cost trends really reflected good performance in March, and we're largely on plan. And so that's the walk-through on guidance. Operator: And our next question comes from the line of A.J. Rice with UBS. Albert Rice: Just to put a fine point on what we're just going on the numbers flying back and forth. Is the right way -- am I hearing you say, you basically had $180 million of negative impact from flu and weather in the first quarter? You picked up $120 million of benefit from DPPs in the first quarter that was not expected. So the net was a $60 million drag net of the unusual items or weather and flu. And then on the $180 million versus the $200 million of DPP in the full year impact. So you're ending up roughly $20 million if you maintain your guidance for Q2, Q3, Q4 better because of the incremental impact of DPP over the course of the year. I just want to make sure that's the right take from what you're saying. Mike Marks: Yes. I think that's -- you're generally in the zone. I mean we view the $180 million headwind in the quarter as being temporal and not structural. So we don't think that will repeat. The $200 million improvement for the full year '26 from supplemental payment benefits reflect Georgia and Texas. And then just broadly, we're not changing our full year guidance on earnings. And I think that's the way to read that. I think I would acknowledge there's a little bit of softness [indiscernible] consensus. It may be not fully explained, but it's pretty close from the moving factors in the first quarter. And then A.J., when we look at the rest of the year, and we think about the demand that we're seeing in the marketplace, we believe that we will be able to run between 2% to 3% volume growth in the next 3 quarters of prior year. Our original assumption around the exchanges, around revenue and our cost trends, we think that the balance of the year is another way of saying is largely back on our original plan. Albert Rice: Okay. And maybe a follow-up -- go ahead. Samuel Hazen: No, it's Sam. I mean, we do, I'll call it, a business analysis of the company in the first quarter. It's pretty much where we expected, save the respiratory dynamic. So we believe the business outcomes of the company in the first quarter are in line with the guidance we provided just 90 days ago. And so we're at a point where we're judging that. We're trying to influence what we can on the edges and put ourselves in a position where we get to where we need to be by the end of the year. I mean that's sort of the short story on what happened here. There's always puts and takes with the supplemental program. We've talked about that for years. What we're trying to judge is the business functioning and performing as we thought. And generally, that case, save the one item associated with the respiratory activity. Albert Rice: Okay. Could I just -- as a follow-up, your $400 million resiliency program, I know you've got a lot of AI initiatives and -- but some of that is other stuff. Can you just sort of update us on where you're at with the AI initiatives? And is that $400 million a pretty firm number? Is there a range around that as to what you might ultimately realize this year? Samuel Hazen: Well, in the quarter -- this is Sam. A.J., in the quarter, as Mike indicated, we get operating leverage. When we get volume, whether it's respiratory volume or surgical volume, we get operating leverage. So we lost a little bit of that in the first quarter. But again, when you sort of normalized for that, as we exited the quarter, we felt good about the leverage we were seeing in the subsequent months. And so when you merge that with the maturing of our resiliency program over the course of the year, we think we can get where we need to be with our cost objectives for 2026. Are there opportunities on maybe more possibly? Could we fund pressures that we haven't anticipated? Of course. I mean, that's what a dynamic business environment represent. I will tell you that our artificial intelligence agenda is getting implemented. We have productivity with our physicians, with our ambient listening capabilities and the documentation associated with that. We're rolling out our nurse handoff program, as I mentioned. We've got new initiatives that are rolling out to more facilities. That's got more patient safety and nurse engagement, some productivity to it. We're really excited about what the artificial intelligence program can do to complement our caregivers in our company and help us provide better care, do it more cost effectively and run the business better. We're seeing it in case management. We had good outcomes with case management, as we talked about with average length of stay. So all of this is coming together. Does it have some upside in some areas? Yes. Could there be some pressures in other areas? Of course. So when we put it together, we feel like we're on the program that we estimated at the beginning of the year. Operator: And our next question comes from the line of Ann Hynes with Mizuho Securities. Ann Hynes: I just had a quick follow-up from a comment you made in the prepared remarks, and then I have a question. Just on the Florida DPP, I do think there are some anxiety in the market because it's taking so long to approved. Do you have any color on maybe from a timing perspective when that could be approved? And then my real question is just on ACA, just with the increasingly uninsured and the bad debt, is that coming in line with your initial expectations? And can you remind us, does your guidance assume a deterioration in the collectibles of co-pays and deductibles of the insured? And what change is embedded in your guidance? Mike Marks: That is a multipart question, Ann. It was impressive. So when I think about -- let me start with Florida. And I do think that the size of the Florida program as such, the enhanced size that CMS is thoroughly reviewed this program, as you noted. But based on our sense of things as we sit here today, we do feel positive about the prospects of approval for the Florida program. And if approved, as I noted in my prepared comments, we believe it would result, not only in additional revenues, but those that may be significant. So that's a quick update on Florida. And obviously, we'll be watching this just like you will, and we'll keep you informed as that moves. As it relates to the exchanges and what we're seeing related to patient amounts do, I would say like this, as we came into our modeling, our models included some shift from silver, bronze. And what we're seeing is we study our patients so far is that there has been a bit of a shift from silver to bronze in the patient selection of metal tier. I wouldn't say, however, that, that shift is significant at this point, but there is some. We're also noting that even within silver, if you compare the benefit designs in 2025 to 2026, that the amount patients to within silver are also increasing as we are studying the 2026 activity. And so all this is leading us to conclude that we are seeing a growth in patient amounts due on the exchanges. And as we've noted in the past, we see a lower collection rate on patient balances from the exchange plans as compared to traditional managed care patients in this shift. I do think we'll have an impact on patient collections on uncompensated care. But from a context standpoint, I don't think that the -- the impact of the shift and the growth in the patient out dues is going to be overly material, given the relatively minor portion of our patient cash collections that relate to exchange patients. We did include in our original estimate of $600 million to $900 million, this increase in patient amount due on the exchanges. It's within the range of our models based on what we're seeing. On the broader part with the exchanges, to your point, we did anticipate movement out of the exchanges to uninsured. And so if I think about the kind of the payer mix implications within the model, as you go back to that discussion, we thought that we would lose about 15% to 20% of volume, of people leaving the exchanges. And we -- we think we saw about a 15% decline in first quarter, so at the lower end of that. You may recall that our assumption was about 15% to 20% of beds who lost coverage on the exchanges would migrate to employee-sponsored insurance and the rest who uninsured. As we're studying the patients during the first quarter that previously had exchange coverage, we are noting that the patients converting to employee-sponsored insurance or generally within the estimated range that we built into our guidance model. Interestingly, patients migrating to uninsured are just a little bit less than expected as we are seeing some individuals converting to Medicare or Medicaid due to the age or to changes in life circumstances. But I would note that this is a slight improvement and was not significant. And overall, that the payer mix deterioration from the exchanges is generally in line with our expectations for the quarter. [indiscernible], and obviously, this is going to continue to mature. So we'll have more mature insights. So I'll just end with this. I mean if you think about the growth in the uninsured that I highlighted in my prepared comments, a little more than half of that 16% growth was from the movement from exchanges, and that's in line generally, with our expectations. The other factor that did show up as growth in uninsured volume was the slow down in Medicaid conversions that we highlighted. Broadly, those are the components that I would say that are in our uncompensated care results for the quarter and largely are in line with our expectations and plans. Operator: And our next question comes from the line of Brian Tanquilut with Jefferies. Brian Tanquilut: Maybe, Mike, just a quick view, maybe to follow up with your comments on Ann's question to you. How do you want us to think about the sequential move then from Q1 EBITDA to Q2, factoring in the recovery in volumes and then your expectations on HICS and how that's all going to play out? Mike Marks: Yes. We don't generally give guidance by quarter, other than just kind of pointing back to normal seasonality, Brian. Clearly, as you noted from our comments, and we do view the volume shortfall in first quarter as being temporal and not structural. So I mean that's an important note. Broadly on the exchanges, you get a sense for what we saw in the first quarter, it is dynamic community. I think about what we're going to learn on the exchanges. I mean, we're going to continue to learn more as we go along. I think -- what that looks like is studying how much of the anticipated 2026 full year volume decline like came through during the first quarter, which is a bit difficult to today. We -- as we studied this, we know that certain individuals were in their grace period throughout the quarter, and they may drop coverage after the first quarter. We made an estimate for those patients in both our equivalent admission statistics and our financials. But I still think based on the data we've seen to date, we do believe that our assumption of a 15% to 20% volume decline continues to be reasonable. So those would be the thoughts that I can give you now related to the progression through the year. Operator: And our next question comes from the line of Whit Mayo with Leerink Partners. Benjamin Mayo: So the health plans are all on an organized campaign today on prior authorization. I just was wondering if you could talk about any of the -- any payer behavior changes, particularly post discharge denials? Anything new that you saw emerge within the quarter or year-to-date? And I know you've been working with a number of plans to sort of streamline all this back and forth stuff. So just any color would be helpful. Mike Marks: Sure. Thanks, Whit. We continue to experience increased activity levels with our payers on denials and underpayments pretty broadly across payers and across products. I mean I might continue to call out Medicare Advantage as being a specific driver within the product mix. As you know, we've been working really hard over the last several years to strengthen our revenue cycle. We've added resources, technologies and a lot of capabilities around speed resolution to really go after the root cause of the denials. That work has continued to pay dividends. Given the results of the work of the company, I think as you look at first quarter with -- even with the pretty significant increase in activity around denials and under payments that we are seeing, our recoveries, our work around speed resolution, our work around appeals and getting these overturned or such that we were able to mitigate and not see a lot of year-over-year impact to earnings. But the denials and underpayments are still really high. And so it's a key part for our industry to continue to work together on. As you noted, we have launched over the last really 18 months now, a series of partnerships with many of our strategic payer partners. These partnerships really focus on digital integration to try to share more digital and structured data back and forth between us and our payers, eliminate faxes, eliminate paper. A lot of work around administrative simplifications for both us and our payers to deal with the really significant administrative cost burdens that are associated with kind of the health care in America. And then lastly, management of disputes. I would say that those are good in early work products, but we have a long way to go as we continue to move that forward. So that's a bit of an update on denials and underpayments [ improvement ]. Operator: And our next question comes from the line of Andrew Mok with Barclays. Andrew Mok: Wanted to follow up on the slower conversion to Medicaid. Just curious which states you're seeing that slow down, whether you view that as a temporary or issue or durable trend? And when you take a step back on the broader uninsured ACA population this year, did you make any changes to your bad debt accrual process? Mike Marks: Thank you. So when I think about Medicaid and the slowdown in the conversions, we think, and it's still early, there can be potentially some other contributing factors. But we largely think about this as people, who, this year, are less willing to fill out Medicaid applications. And so we suspect that, that could be driven a bit by concerns around immigration and like. So that -- we're studying that. I'm not quite sure if that's the full reason why. But that is a piece of the story here in terms of the year-over-year growth in the slowdown in Medicaid conversions that's impacting our uninsured volume increases. Broadly, yes, our budget is -- our plans for 2026 reflected the payer mix shifts and the patient amount due collections that we anticipated being impacted by the exchanges. And so that was reflected both in what we anticipated related to uninsured volume growth and related to the potential impacts in terms of patient due collection. So that was built into generally our models for 2026. Operator: Our next question comes from the line of Matthew Gillmor with KeyBanc. Matthew Gillmor: I wanted to ask about the hurricane-impacted markets. I think guidance didn't assume any continued improvement from those markets. Can you just give us an update in terms of how things are playing out and if there's any signs that those markets are improving, particularly in North Carolina? Samuel Hazen: So this is Sam. North Carolina, here's the short story. Demand is above our expectation. It's costing us more to serve that demand because North -- Western North Carolina has a significant workforce deficit. We're having to bring in labor, nursing, nonnursing to support the demand. We have a very aggressive recruitment campaign and compensation program to service that demand, and we're hopeful, over time, we can mitigate the cost. So we've seen more volume. It's cost us more to serve it. So we're a little bit behind our expectations in North Carolina on the bottom line. Mike Marks: The other thing, Sam, that we're seeing is the payer mix change. In North Carolina, the -- it clearly has been disrupted in terms of that workforce disruption is also impacted in a less favorable overall payer mix. Broadly, when we think about the hurricane-related markets, in our guidance, we indicated that we did not think that we would see any kind of material improvement in year-over-year earnings from the hurricane markets. I mean, our Tampa facility [ Argo ] Medical Center has largely recovered in [indiscernible] but we don't think we're going to see any net material increase in year-over-year earnings from the hurricane markets due to the reason that Sam articulate. Operator: And our next question comes from the line of Ryan Langston with TD Cowen. Ryan Langston: On the impact from winter weather, should we expect any loss procedures in January to come back through the year? I think you said February, March volumes more in line or just wondering if you picked those January volumes up already. I'm sorry if I missed this, but can you quantify the impact from weather to the same-store inpatient and outpatient surgery growth? Mike Marks: So when I think about the winter storm specifically, in my prepared comments, we indicated that, that was 30 basis impact on year-over-year volume growth on admissions and a 50 basis impact on year-over-year ER visits. So just to keep that in mind. From a recovery standpoint, we do believe that from the winter storm, that we largely recovered the surgical component of that with the end of the quarter. What was not recovered and what drove the net volume impact here was really the emergency visits and the related emergency admissions, where there was really not a second chance to recapture that volume. And so I don't think that the winter storm was really an impact on our surgical volumes in the corporate and material. Samuel Hazen: Yes, it's not going to be notable over the rest of the year that we -- and we'll likely recover some volume, but it will be sprinkled into our mix in a fashion that we won't be able to really discern it. Operator: And our next question comes from the line of Justin Lake with Wolfe Research. Justin Lake: I wanted to follow up on your comments around exchange patients sitting in the grace period in February and March that you might not get paid for. My understanding is that managed care will let you know who these patients are in real time and that their coverage is suspended. Is that right? And just to be clear, how do you treat these patients within the exchange volume decline of 15% in the first quarter? And maybe share a little more color on how you accounted for this utilization during the quarter from an accounting revenue recognition perspective. Mike Marks: Sure, Justin. So if you think about the verification process that we have with our payers, we have some payers where we do receive some premium status information through our verification process. But the information that we are able to access is not consistent and is not standardized across exchange payers. As a result, we generally do not have reliable third-party visibility at the time of service whether a premium has been paid. When the information is available, it certainly helps us inform further patient engagement to encourage these patients to maintain their coverage. Generally, though, I would not characterize the eligibility and verification information we received at the time surface as comprehensive consistent are largely accurate as the verifiable data. Let's talk a minute, Justin, about the grace period and how that's flowing through. Patients that received premium assistance, whether they are auto reenrollees, new exchange enrollees or switching plans, generally have a 3-month grace period after the coverage is effectuated. For the first month of the grace period, the payer is required to cover the care. For the remaining 2 months, the payer is not required to cover any care episodes, unless the premium was called out by the enrollee. So our work, as we studied the quarter, was to first look at every patient that came in with exchange coverage and try our best to understand whether or not they attrited in -- they had an attrition during the quarter, at which point we recognize that revenue impact during the quarter, or to make an estimate of those that we believe will lose and come out of the grace period with attrition, where we will not get paid for that, and we'll know that in second quarter and beyond as they get past their grace period. For that last part, we've made an accounting evaluation and a business evaluation that we included in our analysis about equivalent admissions and revenue. And so when we articulate that 15% drop in equivalent admissions, it contains both of those components and same thing with the impact on our revenue and earnings. Operator: Our next question comes from the line of Scott Fidel with Goldman Sachs. Scott Fidel: If you could talk about what you saw with acuity and case mix in the quarter. Maybe putting aside the lighter respiratory, which we know when probably drive a lower case mix. And then in terms of -- maybe in terms of patients and then some of the types of procedures and service lines, how that impacted the Q&A in case make as well. Samuel Hazen: So this is Sam. We saw increased acuity as reflected in our case mix. It was modestly up on a year-over-year basis. Inside of that, we did have the respiratory dynamic that we alluded to. But within the respiratory dynamic, we had a fairly acute component last year that was more pace mix driven than maybe we've seen in the past. But yes, we still jumped over that. So when you look inside of our business, in the first quarter this year, we had really strong cardiac activity. So our cardiac procedures grew significantly. Trauma was up 2.5%, also driving acuity. We had rehab services grow at a very good pace. So a lot of the elements that we've had momentum and from a service line standpoint, over the past few years, continued into the first quarter, again, influenced somewhat in total by these other factors that we alluded to. So we continue to find opportunities in the market to develop more comprehensive programs as our communities grow and service our communities more effectively closer to home. That will continue to be a part of our journey here. One other metric that I think is important with respect to case mix is our receiving of patients through our patient logistics centers grew by 2.4%. That tends to have a higher acuity level as well as rural hospitals, other community-based hospitals are using the deeper service offerings that we have in some of our tertiary and quaternary facilities. So all in all, we were generally satisfied with our case mix. Scott Fidel: And can I just ask a follow-up, just around the payer buckets on acuity [indiscernible]. Were they relatively consistent or would the exchange sort of disruption, did you see any sort of movement around the different payer... Samuel Hazen: What's interesting, the case mix was pretty consistent. The respiratory effects were pretty consistent. So we had consistency across all aspects of our payer classes when it came to sort of the overall story for the company. Operator: And our next question comes from the line of Kevin Fischbeck with Bank of America. Kevin Fischbeck: Okay. Great. Can you just talk a little bit about the $150 million impact from the exchanges this quarter and how that compares to the $600 million to $900 million annual number? Did you guys assume that, that number would build as the year goes on? Or are you saying that you're kind of trending towards the lower end for the year on that dynamic? And then also on the Medicaid side, is this dynamic something that you just kind of started noticing in Q1? Or has it been building for a while? And is it a dynamic that you think is peaking in Q1 or will get better or worse from here? Mike Marks: Yes. On the -- let's start with HICS, Kevin. If I think about the $150 million for the quarter, I mean, it's a quarter estimate. And obviously, that would put us a bit at the lower end of the full year range. But I think it's a bit early. I mean, it's dynamic. You can imagine, as we've gone through the quarter and we're trying to understand and analyze all of the moving parts around the exchanges, it's probably a little early to declare that the full year would be at the lower end of the range. So I'm not quite ready to say that. But I would say that we were pleased that in the quarter, we think that this $150 million reflects not only what we saw in the quarter, but our estimates of the attrition rate and a life that we've built in to our counter team. So a little early to try to give you a broader sense for the full year yet. But I would say, like we do think that this range of $600 million to $900 million is sort of a reasonable estimate for the year. So let me leave that there. On the Medicaid conversion slowdown issue, it's pretty nascent. We maybe saw a smidge of it at the very end of last year as well, but it really popped up on us here in first quarter. Given its nascency, again, a little early to call whether it's a sustained trend or something that just popped in first quarter, and we're watching it, as you can imagine, and we'll keep you up to things as we go forward. So that would be the... Samuel Hazen: Yes. I would say, though, Mike, just adding to that, I mean, our Parallon teams have a robust process for qualifying patients who need support through our financial counselors and other efforts. And so those continue. We're just dealing with some dynamics here that we haven't experienced before. And it's like Mike said, too early to really suggest that it's peaked or not peaked. We just need a little bit more time to judge it. Operator: And our next question comes from the line of Sarah James with Cantor Fitzgerald. Sarah James: And I'm sorry to circle back on to it. But amidst that March volumes were recovering towards the range of 2% to 3%, is that [indiscernible] possible for full year to hit the existing guide of 2% to 3% volume? Samuel Hazen: We couldn't hear what you were saying on the front end, but we think we know what you said, and that is how are volumes exiting the quarter and what does that do to our full year guidance. February and March were generally in line, when you put the 2 together, with our full year guidance. January was the quarter -- I mean, the month in the quarter where we saw a decline in activity. So when we're making a judgment about the rest of the year, we're judging what we think is going to happen in the last 3 quarters of the year. And we think our guidance around volume of 2% to 3% in the rest of the quarters is appropriate. And what we see with demand in the market, what we see with trends coming out of the quarter and what we see with capital projects and other initiatives to develop our networks, we feel that that's still a reasonable target. And so that's where we are at this point. Operator: And our next question comes from the line of Stephen Baxter with Wells Fargo. Stephen Baxter: Thank you for all the color on the moving parts in the quarter. If we think about -- I guess the only sort of year-over-year number you haven't given us yet is on resiliency. And I guess I'm wondering, is there any reason to think that just kind of a quarter of the full year impact that you talked about wouldn't be a reasonable placeholder for the first quarter? And then if we go through and kind of look at those moving parts, it does imply that the core growth in the quarter was probably closer to 2.5% or 3%. And I think you have a bit higher of a full year guide embedded here. Just wondering if you could help us understand what you think the shortfall was on the core kind of normalizing for all these moving parts? Mike Marks: When I think about the resiliency plan, and we're still confident in the full year $400 million guidance. So I'll leave that there. I mean I think that's a good estimate for the full year. When I think about core growth, I mean, we -- our first quarter's EBITDA growth was, call it, 1.9%. And the midpoint of our full 2026 year guidance is kind of, call it, 2.8%, 2.9%. And so that gives you a sense. I think we -- we've articulated the drivers in the first quarter. And so we largely think that it indicates that -- we believe we're going to be largely on plan for the next 3 quarters in terms of the overall makeup of volume and revenue and earnings back to our original plan here over the next 3 quarters, and that's how we think about it. Operator: And our next question comes from the line of Jason Cassorla with Guggenheim. Jason Cassorla: Maybe just to follow-up on the outpatient side. Historically, you've talked about some of the pressures you saw on Medicaid, but you more than made up of that on the revenue side of the fence. It looks like revenue was up just shy of 3% in the quarter for outpatient compared to the 9% or so you did last year. Sorry if I missed this, but can you give us any impact on the weather on the outpatient side? And then maybe how trends, revenue and volume-wise trended in the quarter, I guess, compared to -- with your ASPs compared to your remaining outpatient footprint would be helpful. Mike Marks: Sure. Let's start with the EV side the outpatient business. And yes, between respiratory and the winter storms, there was an impact on our ER volumes. And it's about 140 basis points impact on ER visits from respiratory, about 50 basis points of impact from the storm. If you think about that compared to the 23% growth in ER visits, it gives you a sense that you're back kind of a normal trends when considering things like the winter weather storm and in the respiratory season shortfall there on ER. Sam mentioned this, but we did have good growth in year-over-year things like EMR, EMS visits and trauma visits. So that was good. On the surgery side, our outpatient surgeries declined 1.7%, and that was 2.1% in hospital-based outpatient and 1% in our ambulatory surgery centers. On the hospital side, we saw a little bit of weakness in our ortho-related cases. On the ASC side, it was really more of the low acuity service lines like ophthalmology and ENT that drove the statistical decline. I would say, we were pleased with our revenue performance in our ASCs for sure. And when I think about payer mix for surgery, really for first quarter, the 2 big drivers of weakness on the payer side was Medicaid and of course, the exchanges, which we anticipated. So those would be kind of a run down. Samuel Hazen: Let me give a little backdrop here. When you look at our outpatient revenue and the composition of it, about 1/3 of it is emergency room. About 1/3 of it is outpatient surgery. And the other 1/3 is imaging, primarily driven by cardiac and so forth. And so when you think about the storm, it affects, obviously, the emergency room and our outpatient surgery and our imaging, all 3 categories. The respiratory is mainly the emergency room. So all of it sort of comes together in this composite view. And that's how we sort of dissect the outpatient business. So as we push into the rest of the year, we don't really have the implications of either of those for our outpatient platform, and we're confident that we'll be able to generate the revenue expectations for the balance of the year. Operator: And our next question comes from the line of Benjamin Rossi with JPMorgan. Benjamin Rossi: Across your network development efforts, I guess, what's your current cadence of ramping new beds in OR capacity? And how much of your 2026 growth is depending on projects already coming online versus future years? And then could you just give us an update on how you're generally thinking about M&A as a potential growth lever this year? And how inbound and outbound conversations with opportunities in your pipeline have developed to start the year? Samuel Hazen: So as I mentioned in our prepared remarks, we did see a number of outpatient acquisitions closed in the first quarter. Those were primarily related to opportunities in urgent care and ambulatory surgery and in our freestanding emergency room business unit. We had a number of acquisitions there. If we think about the going-forward aspects of acquisition, we continue to believe that's where most of our opportunities will be. It's in the outpatient arena and that complementing our hospital networks. And so our pipeline has a number of promising projects in it. And I'm hopeful that we'll get to close those as we push into the balance of the year. With respect to capital spending, we do have a significant pipeline of projects that have already been approved that are in development. That's almost $5.5 billion to $6 billion of approved projects that will come online over the next 24 to 30 months throughout sort of different periods within that time period. A lot of those projects are long-lived projects. And by that, I mean they're adding hospital capacity, which is difficult to do because they're big projects, they're disruptive projects to our facilities, and it takes a while to get them done. And then at the same time, we try to build those future growth that we anticipate in the markets. So there is a component of our growth expectation in '26 that's related to projects that have come online in '24, '25 and '26. And so we sort of blend that into our expectations every year. And we do have a slightly accelerated expectation in '26 as compared to the previous 2 years related to capital projects that are coming online. So we remain encouraged with the opportunities to invest in our networks. Our occupancy levels continue to be at high levels for us, and that presents opportunities for investment and growth. And as we build out our networks with outpatient facilities, as communities grow and as our overall hospital positioning increases, we think that gives us a good opportunity to grow our share and deliver positive returns. And we've had a tremendous pattern, I think, of producing positive returns on capital, and we still continue to believe we can deliver on that. Frank Morgan: Andy, let's take one last question. Operator: And our final question comes from the line of Craig Hettenbach with Morgan Stanley. Craig Hettenbach: Yes. Just a question on kind of contracting just for this year, just kind of what you're seeing in the rate backdrop as well as any visibility into 2027? Samuel Hazen: This is Sam. For 2026, we're pretty much fully contracted at our targeted levels. As we push into '27 and '28, we're in a contracting cycle as typical with our payer contracts, and we're about 1/3 of the way through on '27 and modestly into '28. And right now, we're on target. We believe we're going to be able to get into a range that works for our business as we finalize these contracts with the payers. As Mike alluded to, we got other issues that we're working with them on, that we think can be additive to them, additive to us, beneficial to our patients and their customers in a way that makes the system work better. And so we're confident that we'll get to the good answers on these contracts that we're in negotiations on currently. Operator: That concludes our question-and-answer session. I will now turn the call back over to Mr. Frank Morgan for closing remarks. Frank Morgan: Andy, thank you for your help today, and thanks to everyone for joining us on the call. We hope you have a great weekend. I'm [indiscernible] this afternoon if we can answer additional questions. Have a great day. Operator: Ladies and gentlemen, this concludes today's call, and we thank you for your participation. You may now disconnect.
Operator: Ladies and gentlemen, thank you for standing by. My name is Colby, and I'll be your conference operator today. At this time, I would like to welcome you to the Primis Financial Corp. First Quarter Earnings Call. [Operator Instructions] I will now turn the call over to Matthew Switzer. You may begin. Matthew Switzer: Good morning, and thank you for joining us for Primis Financial Corp.'s 2026 First Quarter Webcast and Conference Call. Before we begin, please note that many of our comments during the call will be forward-looking statements, which involve risk and uncertainty. There are many factors that could cause actual results to differ materially from the anticipated results or other expectations expressed in the forward-looking statements. Further discussion of the company's risk factors and other important information regarding our forward-looking statements are part of our recent filings with the Securities and Exchange Commission including our recently filed earnings release, which has also been posted to the Investor Relations section of our corporate site, primisbank.com. We undertake no obligation to update or revise forward-looking statements to reflect changes in assumptions, the occurrence of unanticipated events or changes to future operating results over time. In addition, some of the financial measures that we may discuss this morning are non-GAAP financial measures. Our non-GAAP measure, relates to the most comparable GAAP measure, will be discussed when the non-GAAP measure is used [indiscernible] readily apparent. I will now turn the call over to our President and Chief Executive Officer, Dennis Zember. Dennis Zember: Thank you, Matt. Thank you for all of you that have joined our first quarter conference call. We're excited to report that in the first quarter, we earned $7.3 million or $0.30 per share which compares to $22.6 million and $0.92 per share in the same quarter of '25. And as I'm reading that, excited to report earnings shrinking that much. The fact of the matter is, on an operating basis, we earned $0.33 per share in the first quarter, which excluded a small tax adjustment related to 2025 results. And when you compare that to second quarter a year ago, it's up 126% operating earnings, where we reported $0.14 in the same quarter of '25. And Matt may mention this, but the first quarter of '25 included a substantial gain on the deconsolidation of Panacea, which is what I'm excluding. Our key operating ratio has obviously improved alongside that earnings number I just gave you. On an operating basis, our ROA improved to 84 basis points compared to 40 basis points in the same quarter of '25. Driving that were a couple of items: margin, mostly; and as well as operating expense control. On net interest margin, our net interest margin benefited from the securities restructure as well as the mix of earning assets and climbed to 3.43% in the first quarter compared to $3.15 in the same quarter of '25. We continue to put up nice growth numbers that are manageable, but really distinguish us amongst our peer group. Loans ended at $3.4 billion, up 11.7% compared to the same quarter in '25. That excludes about $40 million or so that [indiscernible] that we moved into loans held for sale, related to a flow agreement with Panacea. So really, our growth was probably stronger than this. Deposit growth over the same period is really what you should look at. That came in at just better than 8% with very little of that from the digital platform, which is pretty steady state, at about $1 billion. The growth in checking accounts in our company was even more notable, with noninterest-bearing checking accounts growing to $541 million, which is almost 19% higher than where we were in '25. Checking accounts continue to be a more meaningful element of our deposit mix and were 15.9% of total deposits compared to just [ 14.2% ] in the first quarter '25. It's very important to note that weaker deposits in this strong fashion and never once felt pressured in our 4 bank or on our digital platform, to be more aggressive on rate. We're doing it with technology, with service, with people, with getting in front of us, focusing on commercial deposits and had real success. All of the energy and momentum on our fund sheet really starts at our core banking. There has never been a time since I came to Primis that our core bank has had this opportunity on both sides of the balance sheet. Honestly, we're winning business that several years ago, we just wouldn't have been in the running for or maybe even had a conversation about. Virtually nothing that we're doing to win this business has to do with rates or fees. We're leaning hard into our technology, our service, our people, our existing customers who are turning out to be amazing centers of influence for us. For so long, it felt like all we were doing here is working on our factory and stuff in the factory. But today's stuff is rolling off, that [indiscernible] line faster and faster. I'm very encouraged by what our people are accomplishing. Primis' warehouse has fully replaced life premium finance at this point , has been some well received in the marketplace. We finished the quarter with about $460 million outstanding. For a few days in the quarter, at the near the end of March, we credited $0.5 billion outstanding. This is before any [indiscernible], is before the busy [indiscernible] for retail mortgage. Importantly, warehouse is still producing important impressive yields and margins, efficiency ratios in the [ 20s ], the amount of scale and impact on our overall operating ratio in this business, it's not really something that's been fully banked or recognized in our current numbers. That's really -- they've been just scaling the business so quickly over the past year. But as we -- I believe we could probably double this business in the next 12 to 18 months. And I believe the incremental impact from that [indiscernible] is going to be very meaningful. Retail Mortgage had an absolute blowout for. [indiscernible] it was impacted by some Middle East activities and an impact on rates and fair value adjustments. And that's true. We might have reported $0.5 billion, looking at $0.5 billion more at that. But [indiscernible] pretax income in the Mortgage grew to $2.1 million in the first quarter compared to $766,000 same quarter a year ago. In the quarter, our earnings [indiscernible] up to 57 basis points on closed volume compared 46 in the same period a year ago. So on a profitability basis, we're up maybe 19%, 20% -- a little better than 20% on closed volume. Our recruiting pipeline has never been as strong, and we're consistently we double each month [indiscernible] flow volume, new files. So we have real [indiscernible] very positive about what the second half of the year would look like. Right now, we believe Primis Mortgage is on track to be a top 50 mortgage company nationwide in '26. And lastly, before I turn it over to Matt, I want to emphasize what's really proven [indiscernible] for us and our desire to build this into a top-performing bank. In our day-to-day here, we are [indiscernible] on growing checking accounts, like I mentioned earlier, to about 20% of total deposits. Secondly, we're determined to drive massive amounts of operating leverage from our consistent, reliable balance sheet growth [indiscernible] to decreasing OpEx. And I know I've been saying this for several quarters. And so as the quarter ended, I was pretty delighted, start playing with the numbers and see what I'm about to tell you here. If you look at the last year, first quarter of '25 from -- first quarter '25, all the way back to the first quarter of '24, we were reporting growth in core revenue of about $45 million -- excuse me, we were reporting core revenue of about $45.6 million, which is higher by 33.7%, call it, 34% over a year ago. Reported operating expenses straight off of [indiscernible] income statement, no adjustments, came in at $33.8 million, which is only 4% higher than the same time a year ago. That's 34% growth in revenue, only a 4% growth in OpEx. I had in my comments that [indiscernible] that we could do that for a couple of more years. But I refrain with Primis, so I tick that out. But this is an extraordinary level of operating leverage and really the driver of our results. Nobody approve things we've done in this area and that revenue may not be outpacing OpEx going forward. We had several strategy, of course, to continue getting this result. And one of those is AI. And I don't want to steal Matt's comment or his hard work on this. I know he's going to comment further on this. But any [indiscernible] is the same kind of opportunity and catalyst that you would expect me to report if we were doing M&A transactions. We already have all the tools we need for this. We expect hardly no additional investments except short, but -- except the deep training that we're going to give our staff to be effective with this. And we believe that in the year, we are going to be the undisputed leader amongst banks under $10 billion, using AI to drive operating results [indiscernible] sales efficiency, customer satisfaction experience and, importantly, fraud prevention. When you combine that with our work towards converting our core bank to a fully digital core, we are on the edge of being a uniquely positioned bank with technology that has figured out how to keep our [indiscernible]. With that, Matt, I'll turn it over to you. Matthew Switzer: Thank you, Dennis. As a reminder, a discussion of our financial results can be found in our press release and investor presentation, located on our website and in our 8-K filed with the SEC. Beginning with the balance sheet. Gross loans held for investment increased approximately 14% annualized from December 31 to March 31, led by growth in Panacea and Mortgage Warehouse. Average earning assets increased 6% annualized in the first quarter, with a slower growth rate versus period end growth due to the ramp in mortgage route later in the period. Average deposits were up 4% annualized in the quarter, while average noninterest-bearing deposits were up 7% from year-end. Net interest income was approximately $32 million, a substantial improvement from $26 million a year ago. Our net interest margin in the first quarter was 3.43%, up from [ 3.2% ] last quarter and 3.15% in the year ago period. And we have expectations for further margin expansion as we progress through 2026. We completed a reduction of $27 million of subordinated debt at the end of January, so that was only partially reflected in the quarter. We also have approximately $400 million of loans repricing in the second half of 2026 and early '27 with a weighted average yield of 4.81% that will add to loan yields. [indiscernible] core bank hosted posits remains very active at 159 basis points for the quarter, flat from the fourth quarter. Cost of total deposits was 223 basis points in Q1, down 3 basis points each quarter. Our focus on growing NIB deposits is a key part of our strategy to continue driving funding costs lower. Our provision this quarter was $1.5 million, partially driven by growth in the loan portfolio described above. Approximately $0.7 million of the provision was due to specific reserving on impaired loans, while another $0.4 million on the activities in the consumer portfolio. Core net charge-offs remained low at 6 basis points in the first quarter of 2026. Noninterest income was $13.6 million in the quarter versus $12.8 million in the fourth quarter after adjusting for the sale-leaseback gain, investment portfolio restructuring and Panacea loan pool sale in the fourth quarter. Mortgage revenue was solid in Q1 at $10.8 million versus $10 million in the fourth quarter and would have been even better in the first quarter, if not for the impact of market volatility late in the quarter. Year-over-year, Retail Mortgage production was 122% higher in the first quarter of '26 versus the first quarter of '25, showing strong momentum as we head into the busy homebuying season. Also included in that production was $26 million of attractive construction to permanent loans in the first quarter, up from $4 million in the first quarter last year. On the expense side, when you exclude Mortgage and Primis division volatility and nonrecurring items, our core expenses were $22 million in the first quarter versus $20.8 million a year ago. Absent the increased occupancy expense from our recent sale leaseback transaction, core expenses on this basis would have actually been down year-over-year. We've been focused on controlling expenses to maximize operating leverage and feel like we are in a good spot on that front so far in 2026. I would also like to take a moment to briefly touch on how we are thinking about AI. As mentioned in the earnings release, we have canvassed the bank looking for opportunities to deploy AI tools to reduce repetitive and time-consuming tasks and generate efficiencies. Our first pass has identified hundreds of hours of opportunity and there is almost certainly more that can be found as we start tackling these projects. We view this as a key part of our strategy to keep expense growth to a minimum, while maximizing operating leverage. Equally as excited from where I sit, our in-house talent in this area, combined with the robust tools built into our existing products such as Microsoft CoPilot should allow us to get the vast majority of efficiencies without expensive consultants. In summary, we are excited to report a solid first quarter in line with our expectations and believe we are still on track to hit our profitability goal in '26. With that, operator, we can now open the line for Q&A. Operator: [Operator Instructions] And your first question comes from Woody Lay with KBW. Wood Lay: Wanted to start on Mortgage. And as you mentioned, it was a blowout quarter in what's typically a seasonally weaker quarter. We're now entering the stronger quarters ahead. What are your expectations for production in the near term? And then also in the Mortgage expenses, was there additional hiring that was done in 1Q '26 or elevated legal expenses, anything that sort of prop that up? Matthew Switzer: Nothing unusual on the expense side. Dennis Zember: I think what -- I think we probably -- I think maybe when you came into the year thinking we might have -- we closed $1.2 billion last year. but had a lot of momentum in the fourth quarter. I thought we'd probably have like a $1.6 billion, $1.7 billion mortgage company. And then through the first quarter, felt like it was a little higher, maybe $1.8 billion, maybe even $2 billion. But we -- I feel like we're probably still maybe around [ 100 ]. I mean we're going to -- April is very strong sort of reflecting what we thought. I think for the -- I said we're probably still somewhere in the $1.8 billion range on close volume. And I think what was important is as we've been growing, what's important is like we were at 46 basis points a year ago. We're at 57 basis points now on closed volume. What's impacting that is obviously a lot more scale on the fixed expenses as we get closer to $2 billion. A lot more focus on Matt mentioned construction [indiscernible]. We have a base construction term focus here that's honestly very centered on government for getting higher yields there. And really, we've been building that for the last year. These are probably 6 to 9 months.deals, and so that's starting to flow. So what's important, I think, is that we think we're going to do [ $1.8 ] billion or so this year as things look right now and maybe trend somewhere closer to probably a touch over 60 basis points. We -- the Middle East event probably hit us for a few basis points, 5 or 6 basis points, on profitability. So we might have been overseas had we not had a fair value [indiscernible]. That's going to happen in Mortgage, [indiscernible] Wood Lay: Yes. That's helpful color. And then maybe shifting over to the net interest margin outlook, Matt, you noted some of the loan repricing tailwinds through the remainder of the year, growth is expected to remain strong. You're going to have to fund that growth. Do you think you can continue to post strong growth and see margin expansion? Or will it be -- are we looking more at flat margin with the incremental growth? Matthew Switzer: I think we'll see a little bit more margin expansion because of the debt payoff, I mentioned, and we also had a little bit of a drag in the margin quarter from moving those loans to held for sale. We reversed some deferred costs that ran through the margin. It was only like 1 basis point. So we'll see some march expansion next quarter and a little -- and then probably inch up from there. I mean I would not expect margin to hit 3.6%. But would we hit high 3.4s to 3.5% as we go through the year, most likely. Wood Lay: Got it. And then maybe just last for me on the credit. I appreciate the comments on pay downs of those 90-day past due on past -- subsequent to quarter end. But just on some of those larger relationships that are still on NPA, any update on those and when we could see possible resolution? Dennis Zember: [indiscernible], you asked that, Matt, looks trade like you answer that one. I mean there's 2 bills real estate -- commercial real estate deals office. And both had pretty good quarters on new leases. So I mean -- I think it's trending positive there. I think the -- 2 things are trending positive. One, there is more leasing activity. Sales cycle on new leases in an office part like this is longer than we want it to be, but still, the fact that they're talking to a lot of folks and that there's pathway is positive. The second is cap rates are improving, and they're not falling like we'd like them to, but they are improving. And so I think [indiscernible] goes by, we're a little safer on their current. So they're not -- these are not -- I mean it could change any time. But right now, they're things are trending more positive there. Does that answer your question? Operator: Your next question comes from the line of Russell Gunther with Stephens. Inc. Russell Elliott Gunther: I wanted to start -- maybe just a quick follow-up on the margin commentary. I appreciate the directional guide, but maybe some of the underpinning assumptions. It would be helpful to get a sense for kind of where new commercial loan origination yields are today? And then, Matt, within the guide, how are you thinking about deposit costs for years? Is there room to move those lower? Or is there kind of a flat to upward bias within your margin expectations? . Matthew Switzer: I'll start with the last piece. I think on the deposit side, it's probably flat, up or down a couple of basis points, but not -- I don't expect any substantial moves in the cost deposits in the near term. On the production side, we're -- in the core bank, probably [indiscernible] Dennis Zember: Yes, we're probably regularly 5 years. And we're still probably all in, we're probably close to 5-year [ 275]. [indiscernible] Mortgage warehouses probably with phase is probably 1 month so for plus [ 315 ], [ 320]. Panacea is outstanding. I mean they are -- I mean they really -- I mean, the niche that they've established for themselves, their marketing, their profile, the opportunity to do business with them is reflected in the pricing, I think the rates they're getting on their production is exceptional to. They're probably 5-year treasury plus [indiscernible] on that kind of credit. On funding, Matt and I regularly debate this. I mean we could -- across the bank right now, I feel like we could probably take digital down 25 or 30 basis points, probably not lose that much. We can probably take the core bank down 5 or 10, it's already very low. But there some savings that we could get on the deposit side. The problem is it puts us in a place where we're not very strong on the on the growth side. And again, we're not leaning into rate on digital or anything else, but we also don't want to not be competitive. And right now, when we're looking at Panacea, Panacea could do $200 million for us this year. Warehouse could grow $300 million, $400 million. The core bank is the best [indiscernible]. That could be a couple of hundred million. We just don't want to get in a position -- I mean we don't want to go hardest 30 basis points of deposit cost and then just rely on home loan bank advances. That's -- we don't want to be that bank. Russell Elliott Gunther: I appreciate the color there. And Dennis, kind of took my next question in terms of how that loan growth shake out from a vertical perspective. So I appreciate that. Maybe I would then switch gears to the expense front. How are you guys thinking about directionally the overall expense base inclusive if we could, of the kind of mortgage banking vertical as well? Matthew Switzer: Inclusive of -- that was kind of hard to split out unfortunately because it's so tied to volume. I mean -- as you know, it's going to be an almost direct percentage of whatever their bill volumes going to be in the next quarter. I mean, I like to think of Mortgages net noninterest income and noninterest expense for the year. Now that doesn't include like spread income, which we also included our profitability. I mean, it's probably going to net us $5 million or $6 million for the year, so you can kind of back in to take your whatever -- your assumption is in noninterest [indiscernible] number mortgage and kind of back into expense from there? . Otherwise, when we kind of and then past volatility to it as well. So we're really focused on that more expense number, which is around $22 million. I think I think we'll stay in that kind of $22 million to $23 million range for the year. Russell Elliott Gunther: Okay. Understood. I appreciate it, Matt. And then just last one for me guys, would be an update on your kind of ROA glide path, like you mentioned in your remarks, I would expect to hit your targets, which I think are 1% ROA by the end of the year. What aspirations do you guys have from there and sort of a time line to achieve? Matthew Switzer: [indiscernible] do something. Dennis Zember: No, please. move the gold again. I can take . [indiscernible]. Russell Elliott Gunther: I understand. Yes, I get that. Dennis Zember: Yes. I mean -- I mean 1% is a good [indiscernible] we've not consistently been there, but 1% is not going to I mean, given our growth rate, that problem -- our growth rates and our dividends, that will probably keep the bank capital levels flat. But I mean we want to build book, we want to build capital ratios. We want to position ourselves to be strategic. And so we've got to be higher than that. I think mortgage at scale, I've said it's 57 basis points. Mortgage at scale probably is another 20% higher than that. That's going to be a big deal in the ROA. That's probably another 10 basis points for the ROA. Warehouse is probably going to add another 10 basis points once it gets to scale. The AI thing that Matt is working on and our rest of our bank, I mean, over time, I mean we're not looking at that if [indiscernible] is something that's going to reduce headcount. What it's going to do is take the experts we have and just make them be able to manage twice as much. And that's we can magnify that when we have growth rates like we have. We know -- I know I'm going to need these staff is, these staff return. I mean admirationally, we are be given these lines of business, on top of our core bank, we ought to be [ 125 ] or better and probably looking at more ROTCE to be something that we get there 15%. I think your 15% ROTCE, you kind of can control your feature. People don't like your stock and you can just buy it back. If they do like your stock, then you can do other strategic things. But really, until you get to that point, you're -- all you do is working to get to that point. [indiscernible]. Matthew Switzer: That's good. Operator: [Operator Instructions] Christopher Marinac with Brean Capital Research. Christopher Marinac: Dennis, the last couple of days, banks have talked about the competitiveness of digital deposits being more expensive than the brokered funds. And I'm curious what you think about that. It seems that you're in a much better place. You've been doing the digital banking much longer. And I'm just curious kind of how you look at that? And is that digital area going to grow less as a result of the rate environment? Dennis Zember: [indiscernible] you asked that question. I remember speaking on a panel somewhere, and I was talking about how we had these 25,000 or 30,000 digital customers all across the country. That have never been in the branch, probably never seen one of our bankers do. And I was talking about how that we sometimes produce their social media or we -- we communicated with them, we find out that they have a dog of [indiscernible]. And we will do things that are very community bankers. We will send up some slag a dog collar band, or we'll reach out to when we're in -- I've gone to see customers when I'm in [indiscernible]. I found additional customers was out there and went and had breakfast with them. The reason that -- I'm not going to sit here and say that these deposits are more expensive. Honestly, they should be. We have 25,000 or more digital customers that were banking with 6 people. So they should be more comfortable -- I mean more expensive. There are very little cost associated with it. But we have separated them from being just straight rate driven by being community bankers. The same thing that we do in bank to make our customers not be solidly right focused. We're doing that on the digital platform. I'm not going to sit here and say that we're the only people that are doing that, but I will tell you that we're probably more effective at that than our competition. And we've been doing that for now for 3 years since we've got the real big slug of deposits in here. Our average digital customer has -- average digital customer is probably down 150 basis points from where their peak was. The average digital customer has been here probably more than 30 months, closer to 36. Their average age is over 50. Average deposits probably appreciate $30,000, $40,000. They have the cell phone numbers of the fingers that work them. Everybody has talked to a banker. I mean it's just things like that, that have separated these customers from being solely rate-focused. Now I would tell you, in the core, the core base cost of deposits is probably $180 million $175 million -- $159 million. I mean, the digital is sitting there at like $375 million or so. Like I said, we could probably push that down 25% or 30%. So let's just say we could get them to [ 3.5 ]. So yes, it's obviously more expensive. But it's growing at that level. And yes, I don't know, I don't want to ramble about it. But I'm very proud. I'm very proud of how our bankers pushed a community bank attitude and approach on to these 25,000 customers, and that's paid off. Chris outside very long and ratable answer. Christopher Marinac: That is okay. My other question just goes back to the mortgage business. As you continue to thrive in mortgage, both in terms of production and gains plus the mortgage warehouse, -- is there a natural cap that will happen to how much of that business you want for the whole company? Will the bank just grow or route and kind of naturally cap how much mortgage will be down the road? Dennis Zember: See, that's the kind of thing you don't worry about when you're starting. Matt and I check all the time that we are claim to fame is that we find problems and we face some set they create new problems. I mean mortgage really should not be. We don't want to be a mortgage company here. We want to run an amazing mortgage company, but we don't want to be a mortgage company. It really probably should be more than 20% of our bottom line. No question about it. I mean, some of it is we have a dynamic team in mortgage and autonomy leader. And we have that for the core bank as well, too, in [indiscernible], but I mean the core bank, we're a little we don't -- we're still not fascinating with CRE. We're doing it, but that's not our hallmark. We're in some nongrowth, really fast growth areas in the core bank. So over time, where we've got to find a way probably to grow the core bank faster so that Mortgage, Warehouse, Panacea, all of those stay as tape to the bank and not the whole story. I mean we're not -- we don't want to change the growth profile or the growth dynamics. I mean our core bank is -- what our core bank right now is doing is amazing. And I don't want to step on the gas any harder and get a different kind of business. Some strategy will open up to us. We've not been in an M&A strategy or a position to do that, maybe that will open up one day. And that's probably the catalyst we need to build on the core bank and let these other items that we do are so good and just run so well a complement to that. Operator: Thank you. And there are no further questions at this time. I'd like to turn the conference back over to Dennis Zember for any closing remarks. Dennis Zember: Thank you all for joining our first quarter conference call. If you have any questions, Matt and I are a happy to get on phone with you. Otherwise, have a good weekend, and we'll talk to you soon. Operator: This concludes today's conference call. You may now disconnect.
Operator: Greetings. Welcome to Gaming and Leisure Properties, Inc. First Quarter 2026 Earnings Conference Call and Webcast. [Operator Instructions] Please note, this conference is being recorded. At this time, I'll now turn the conference over to Joe Jaffoni with Investor Relations. Thank you, Joe. You may begin. Joseph Jaffoni: Thank you, Rob, and good morning, everyone, and thank you for joining Gaming and Leisure Properties first quarter 2026 earnings call and webcast. The press release distributed yesterday afternoon is available on the Investor Relations section on our website at www.glpropinc.com. In addition to the press release, GLPI also posted a supplemental earnings presentation, which highlights the events of the quarter. Recent developments, future considerations can be accessed at glpropinc.com. On today's call, management's prepared remarks and answers to your questions may contain forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995. Forward-looking statements address matters that are subject to risks and uncertainties that may cause actual results to differ materially from those discussed today. Forward-looking statements may include those related to revenue, operating income and financial guidance as well as non-GAAP financial measures such as FFO and AFFO. As a reminder, forward-looking statements represent management's current estimates and the company assumes no obligation to update any forward-looking statements in the future. We encourage listeners to review the more detailed discussions related to risk factors and forward-looking statements contained in the company's filings with the SEC including Form 10-Q and in the earnings release as well as definitions and reconciliations of non-GAAP financial measures contained in the company's earnings release. On this morning's call, we are joined by Peter Carlino, Chairman and Chief Executive Officer of Gaming and Leisure Properties. Also on today's call are Brandon Moore, President and Chief Operating Officer; Desiree Burke, Chief Financial Officer and Treasurer; Steve Ladany, Senior Vice President and Chief Development Officer; and Carlos Cantrell, Senior Vice President, Corporate Strategy and Investor Relations. Thank you for your patience with that. It's now my pleasure to turn the call over to Peter Carlino. Peter, please go ahead. Peter Carlino: Well, thank you, Joe. Happy to be here this morning and always a lot more fun to make these calls when things are looking good, and we've had a terrific quarter. Our AFFO and AFFO per share both growing in mid- to high single digits through this first quarter. And as we did -- as we entered 2026, we sit in a very enviable position with a clear and well-documented line of sight toward a very healthy multiyear AFO growth both in our acquisition and development pipelines. With the acquisition of Bally's Lincoln in February as well as progress on several of our development projects. Our future capital commitments stand at roughly $1.8 billion, nearly all of which we expect to deploy by year-end 2027. And despite what was a relatively challenging year in the regional gaming markets, 2026, as you've been seeing the earnings reports and off to a very, very solid start and our rent coverage remained strong with the vast majority of our leases covered at 1.8x or higher. We feel pretty good about the opportunity that exists in the market today. We remain pretty active and feel pretty well about our balance sheet, their ability to transact in an accretive manner. As I've offered many times over the years, I would remind you that there is no transaction that we have to do, we are never pressured just to do something new. I used to say over at PENN National Event our customers may be in the gambling business, but we are not. So our focus remains on thoughtful transaction underwriting, careful capital deployment. Looking always at the health of our balance sheet and continuing to position the company for multiyear AFFO and dividend growth. So with that, I'll turn this over to Des. Desiree Burke: Thanks, Peter. For the first quarter of '26, our total income from real estate exceeded the first quarter of '25 by over $24 million. This growth was driven by approximately $33 million in cash rent increases resulting from acquisitions and transformation. For Bally's, the acquisition of Bally's Real estate increased rent by [ 7.5. ] The Chicago lease increased cash income by $5.5 million and in the Bally's Baton Rouge development increased cash rent by $2.6 million. For the PENN, [indiscernible] funding increased cash income by $5.4 million, the [indiscernible] cash income by $3.8 million. The Dry Creek, Ione and Cordish Virginia loan cash income by $3.5 million. And then the recognition of escalators and percentage rent adjustments on our leases added approximately $4.6 million. In addition, the combination of our noncash revenue growth steps, investment in lease adjustments and straight-line rent adjustments partially offset these increases, resulting in a collective year-over-year decrease of $8 million for the noncash items. Our operating expenses decreased by $49.8 million, mainly due to the noncash adjustments in the provision for credit losses. Included in today's release is our full year 2026 AFFO guidance of between $1.212 billion and $1.223 billion or $4.08 to $4.12 per diluted share in OP units. The guidance does not include the impact of future transactions. However, we did include additional development funding of approximately $590 million to $640 million, which will be funded relatively even by quarter throughout the remainder of '26, bringing our total development spend between $750 million to $800 million for 2026 full year. The acquisition of PENN's Aurora facility for $225 million is also included in our guidance, and we expect that late in the second quarter. And the anticipated settlement of $363 million of our forward equity is also still expected on June 1st. From a balance sheet perspective, our leverage ratio was at 5x at the low end of our target level. We are still under the impression that given our balance sheet position, our 7-year runway to fund our development projects and our annual free cash flow over that time frame, we have optionality to fund our accretive commitments. As a reminder, our significant development projects do pay us cash rent upon funding. And with that, I'll turn it back to Peter. Peter Carlino: And with that, I'll ask the operator, would you open the call to questions. Operator: [Operator Instructions] And our first question is from the line of Anthony Paolone with JPMorgan. Anthony Paolone: Maybe can you start with talking a bit more about what your investment pipeline does look like how does it feel in terms of what you're seeing out there, yields, all those various dynamics. Steven Ladany: Well, the pipeline that is outlined that has been disclosed, obviously, I think you're not talking about that. So assuming you're talking about what we're seeing behind the scenes that we've not yet announced I'd say we're having a very active dialogue on a number of fronts. The marketplace continues to be very productive I'd say it ranges from anything the large-scale divestiture portfolios coming out of, whether it be strategic decisions or M&A type of processes all the way to tougher the trial discussions we continue to have. So there are a number of fronts. They're very active dialogue. But I think as far as where we're at in the process, we're obviously not in a position to be able to announce anything at this time. I will say from a cap rate perspective since you brought that up, I think the market is normalizing, and normalizing in an area that's accretive to us. I don't think the 7.5% cap rates that have been previously printed in the not-so-distant past are indicative of what you will see going forward. I think the market has normalized some. I think credit markets continue to be somewhat turbulent for the gaming operators. And therefore, I think the realization of where cap rates probably play out for our benefit is more indicative of the [ 8% ] area that you saw Lincoln done and some of the other transactions we've announced more recently. Anthony Paolone: Okay. And then just my second one, as we look to '26, is there a sense or can you give us a sense as to which of the leases may not see bumps in 2026 because coverage falls below maybe the 18%. I don't know if maybe if things are still rolling down before they turn the corner. I'm just trying to get a sense as to where we should assume a bump share. Desiree Burke: The only lease that we currently do not expect escalation on would be the Pinnacle lease. We do have percentage rent adjustments that are coming in on the Pinnacle leases as well as a few other leases, and that should be a small decrease for 2026. I think we talked about that last quarter, it's below $4 million for a full year, but we would only see about half of that this year. And that is baked into our guidance, and that is just an estimate at this point. Operator: Our next question is from the line of Ronald Kamdem with Morgan Stanley. Unknown Analyst: This is Jenny on for Ron. The first on development funding. You raised your 2026 guidance to $750 million to $800 million. Can you walk us through like what drives that increase? And what projects may be moving faster than expected? Desiree Burke: Sure. So from a project perspective, we did raise the guidance right by $150 million on the high end for the full year. That's mainly due to our Chicago project where we have greater visibility and a clear spend cadence as the project has progressed and the podium has topped off. It does not mean that we're changing timing of when we think the properties may open. It's just the timing of our spend is coming in quicker than what we had originally anticipated. Unknown Analyst: Perfect. I think... Steven Ladany: Jenny, the only thing I'll add there is that in Chicago, they will be topping out both the podium and the tower next week. So pretty pleased with the progress there and still on track for first half '27 opening. Peter Carlino: We're always talking about that putting money out that gets current interest is a happy experience. So we're -- that's a very positive event for us. Unknown Analyst: That's exciting. I think the second question maybe on Life Virginia. I think you bought the land in the first quarter. Maybe talk a little bit more on the expect -- like when do you expect the remaining funding to be started in the second half '26. And just more details on that, the timing of funding and the first construction drawn will be great. Desiree Burke: Yes. So I mean, that is included in our guidance, and that is included in the $590 million to $640 million for the remainder of the year. We haven't provided specific guidance on month-by-month by projects. So I'm not exactly certain what else I can add to answer that question. Brandon Moore: And Jenny, just as a reminder, the structure that we have for the Cordish deal is a little bit different than we had for the Chicago transaction and our other development projects where the quarters equity dollars are all being spent first. So I think we'll get better visibility into this as the Cordish money goes in and the development gets underway. Operator: The next question is from the line of Steven Pizzella with Deutsche Bank. Steven Pizzella: First, obviously, there's a lot in the pipeline that you covered. But can you share your insights into some of the performance of the recent development openings? Steven Ladany: Yes. Sure, Steve. Look, obviously, it's been pretty productive here over the last 6 to 12 months, you go all the way back to Hollywood Joliet. As you heard from PENN yesterday, I think they're very pleased with the early returns there, clearly been incredibly additive relative to the prior facility. Live Petersburg, the Cordish Development in Virginia opened on January 22nd. That has been incredibly strong, doing a little bit over $15 million a month in each of the two months that that's been opened. So I think from an indication standpoint, clearly, shaping up to be a very good market for that permanent development. The other project that we opened from a development standpoint in December of '25 was Bally's Baton Rouge. I think the story there is very much the same. When you look at kind of the progress relative to the old boat, I think the key there is what we're seeing is market expand fairly nicely in Baton Rouge, just driven by that new supply and some of that incremental investment. So I think those things, in general, those data points give us a lot of comfort for some of the things that we're doing on a go-forward basis here. Steven Pizzella: Okay. Very helpful. And then -- go ahead. Steven Ladany: Yes. And then as Peter just mentioned, obviously, if you listened to PENN's call yesterday, I know you did. The hotel expansion at M has been very well received. Obviously, they're outperforming in that market and appear to be taking some share due to that expansion in capital investment. Brandon Moore: Yes. I'll also add, we opened in February, our first tribal investment with Ione, which had a very strong opening. And that appears to have grown that market. So I think we're very positively inclined with the first set of development projects that have come online and the general performance out of those facilities. Steven Pizzella: Okay. Great. Very helpful. And then just a bigger picture question, if I may. How do you value protections and the long-term relevance of the site versus a potential free cash flow of an asset or the free cash flow conversion? Steven Ladany: Sorry, Steve, I think you might have cut out for a little bit there. Could you just repeat that. Steven Pizzella: Just asking about you value the location of the real estate compared to like your protections and the long-term relevance of the study versus the potential free cash flow of an asset or the free cash flow conversion? Desiree Burke: We really do value it on a free cash flow basis. We look at the competition in that location drive times, whatnot, how we think that location will perform over the long run and what kind of risk there are in the future. and then we drive what we think the fair coverage would be on a property, and it's all cash flow generated rather than value of land and building. I don't know if that exactly answers your question, but... Brandon Moore: I think the location helps you get better visibility into the cash flow, right? So as Desiree said, we're valuing off of cash flow. The location can because these things are licensed and fairly sticky, the location isn't like a CVS where you can move across the street. So we do focus on the location, but as Desiree said, really focused on valuing the cash flow. Operator: Our next question is from the line of John Kilichowski with Wells Fargo. William John Kilichowski: And I'd like to start, Peter, I hope you're -- or it's good to have you back up your back is feeling better. My first question is on the Caesars Master Lease to had a pretty sizable move down in coverage this quarter. I was wondering if you can give us any color on what's going on with those assets? And maybe if you're seeing any green shoots there that might show a bottoming in coverage for the rest of the year? Carlo Santarelli: Yes, John, this is Carlo. I think you might have conflated two things. The Caesars Master Lease or Bally's Master Lease, too. I think if you're asking about Bally's, we pointed out at the time of the the Twin River Lincoln acquisition, the pro forma coverage for that lease was going to be a very robust 2.2x after the addition of Lincoln. With respect to yes, the Master Lease with Caesars coverage went to 1.59% in the quarter, still a very fine solid coverage in our view. We've long had a very strong relationship with Caesars Management. There were certainly some items in the fourth quarter that I think did negatively impact results, some hold in at Link City, also West Tower room renovations at a property there as well for them. So I think we feel pretty good that we have our hands around that situation. And as I said, at almost 1.6x, it's a pretty solid coverage. William John Kilichowski: I was complaining too, so I appreciate you breaking those out for me. And then my second one is just on the city of Chicago is talking about moving ahead with video gambling and Bally's as mentioned an impact to the business. I'm curious on your thoughts on how that may impact Bally's Chicago around rent or coverage? Desiree Burke: So we did underwrite the VLT possibility in Chicago. So it does definitely impact rent coverage, but it was underwritten in us determining the $940 million that we were willing to provide two Bally's for that project. Can't give you exact numbers as to what -- how it will impact. But certainly, that the VLT legislation shouldn't have an impact if it does go through. They are hearing different things about sweepstakes, Brandon. I don't know if you wanted to add anything on that, but... Brandon Moore: Yes. All the sweepstake stuff is it definitely impacts on. I mean, I think the point in Swiss takes is there's a pretty robust sweepstakes market going on in Cook County today. So the question of whether or not VGTs are going to have a significant impact on bricks-and-mortar gaming is somewhat open. We know we'll have some impact. And as already said, we underwrote this is that VGTs were in Cook County. And we also, for that matter, underwriters, if Hawthorne had a full gaming facility. So our underwriting in Chicago is fairly conservative. And while we would prefer VGTs not to be in Cook County, we don't view that as being overly adverse to our underwriting with that project if it should come. Operator: Our next question is from the line of Greg McGinniss with Scotiabank. Greg McGinniss: Just given some of the challenges that we've seen across gaming this year, firstly, how do you see operators responding? What are your thoughts on rent coverage in 2026? And secondly, does it change the nature of the conversations that you're having with casino owners in terms of types of deals that they're looking for? Unknown Executive: Greg, thanks for the question. I mean, I think we could start with we've been incredibly encouraged with what we've seen in the first 4 months across the regional gaming footprint this year. I think you saw yesterday very solid earnings from PENN, very solid earnings from Boyd in the Midwest and South region, Churchill earlier in the week also solid. So I think what we're seeing from a regional perspective has been encouraging after I think, a malaise over 2025 as the industry more or less digested very strong, both margin and top line comparisons, and we certainly saw that period more or less current rent coverage is a little bit. So I think our rent coverages are still in incredibly solid place, and we do believe what we've seen early in this year is incredibly encouraging in terms of the progress regional gaming is making. I'm sorry, I think there was a second part to your question. Greg McGinniss: Yes. Curious on how -- if that's had any influence on the types of conversations that you're having with casino owners, developers folks looking to make investments that kind of thing. How you change... Steven Ladany: Yes. Look, I think the one thing that's at least been more appearing to us is that the operators, developers, et cetera, who would be paying the rent have been significantly more focused on ensuring that they have a level of cushion and a higher rent coverage starting out of the gate. So I think whereby the market in the past may have been a little more nonchalant with respect to their starting point on a rent coverage basis. I think, due to some of the struggles that have taken place in things like maverick. You've seen that portfolios and pieces of portfolios that have been leased that had extra cushion on the rent coverage side have retained value for the owners, whereby whereas the assets that have significantly lower coverage have struggled to redeem the same type of credit recovery. So I think folks are focused on starting with higher rent coverage out of the box. Operator: Our next question is from the line of Brad Heffern with RBC Capital Markets. Brad Heffern: There's been a lot of investor concern about the rise reduction markets and the impact on gaming. How do you guys view that? And is that something that you think about when you're underwriting new projects? Brandon Moore: I think predicts in markets underwriting, we lump in with iGaming, I would say. We view it similarly. I think obviously, iGaming has got a more specific path and traction through the state regulation than the predictive market, which at a federal level, on the state level or completely unregulated at a federal level, I will say, lightly regulated at best. I think that there are a lot of challenges to the prediction markets right now. And while I won't tell you we're not concerned about the prediction markets, I don't think we're overly concerned about the prediction markets at the moment, given the challenges. And the fact that, look, there were there was gaming legislation, I think, in 9 different states, maybe a couple more that we were sort of actively monitoring this in and it really doesn't look like any of them are going to pass, including Illinois and New York they're still alive, but they don't look promising. Colorado may being the one that is a little bit more open. But the point being, I don't think the proliferation of iGaming is going to accelerate this session, which I think is good for us overall. And I think the predictive markets, we'll have to wait and see. We're keeping a close eye on it, but I wouldn't say we're really concerned at the moment. Brad Heffern: Okay. Got it. And then on Rockford, obviously, that loan is coming up for the initial maturity date soon. Do you expect that to be extended? And then what do you think happens ultimately ratio there? Do you think it just gets paid off or may be converted into ownership of the improvements. Desiree Burke: So Rockford, we've obviously begun discussions with those, but we haven't made a final determination as to what we're going to do with that one at this point. Operator: Our next question is from the line of Smedes Rose with Citi. Bennett Rose: I wanted to ask you, there's been a lot of, obviously, discussion in the media about Caesars potentially growing private and then that's led to various discussions around changes that might happen at the corporate level with that company. And I'm just wondering, just in terms of your leases, could you just maybe talk about how I guess, sort of durable they are in terms of do they attach going forward? Or are they easy to -- well, not easy, but could they sort of be gotten out of, if you will, if someone wanted to do that? Peter Carlino: Or that are legal. Brandon Moore: Yes. Good morning, Smedes. I think it depends on the structure of the transaction. So overall, generally speaking, our leases do have a concept in the of the discretionary or qualified brands for [indiscernible]. If you looked at our -- the leases that we have publicly available, but most of our leases all have the same concept, and in which case, it's possible that a transaction could be structured where GLPI would not have a consent right to it. That being said, there are a number of different things that have to be true for that to be the case. And I don't think we have enough visibility into the potential structure of that transaction to ultimately determine whether or not a consent will be required for GLPI. Clearly, if it is, we'll do what's in the best interest of our shareholders and evaluating that. But at the moment, we don't have enough information. I think our conversations with Caesars on this topic have been relatively few, but we have a close relationship with that management team. And if that transaction does go through, and that management team survives. I think, overall, we view that as a neutral transaction to us. It could be positive if there are things to fall out of it, but I don't think we're overly concerned about it. But the impact on our lead is, I would say, is TBD at the moment. Bennett Rose: Okay, okay. Fair enough. I just wanted to ask you bigger picture. So just in general, you started out the call talking about your in as dialogue across a number of different opportunities. Do you feel like owners you're speaking with have other sources of capital that are readily available to them? Or do you think that's become more scarce like over the last several quarters in terms of either direct competitors to you or maybe just more traditional regional bank lending and things like that? Steven Ladany: No. Look, I think there's the haves and have nots, right? To be totally honest and candid, there are certain parties that I think would probably struggle to find inexpensive capital that would be easily accessible based on their circumstances, whether it be their leverage or their operational profile or maybe even just the fact that they're very small or only have 1 or 2 assets. It's harder to get larger banks to finance those types of endeavors. Some of the transactions, though, to be totally candid, the larger operators, even the private ones that are larger family owned, et cetera, they have plenty of access to capital. It really comes down to broader decision-making and whether it's a strategic fit to do a sale leaseback versus to do a traditional bank loan or bond or what have you. So the dialogue depends on the counterparty and some of the counterparties have definitely have access to capital and others do not. Operator: Our next question is from from the line of Barry Jonas with Truist Securities. Barry Jonas: Peter, great to have you back. Hope your back is better. One store... Peter Carlino: [indiscernible] Barry, but we're back. I don't recommend back surgery to anybody, by the way. Barry Jonas: We'll follow that. I want to start with Bally's. They appear to be looking to do a bit more M&A, including the large deals internationally still -- so maybe more as it relates to the corporate area that influence how you think about future deals and underwriting with them? Brandon Moore: I don't think -- I think our answer is unchanged in the sense that we have always underwritten deals at the property level and the Bally's had a great transaction for our property level asset that we thought was accretive to us and our shareholders. I don't think we'd let Valleys work in international work to say is from that. That being said, clearly, that's another capital allocation decision that they've made with the various projects they have in place. And I guess our focus is more on what is [indiscernible] that we have with Bally's and their ability to execute on those. And at the moment, we're not concerned with the Bally's ability to fund and complete Chicago, for example. But I think it's more impactful in that way than it is on the overall risk as we look at sort of more property level performance. Barry Jonas: Understood. And then just for a follow-up. I appreciate the general comments on the pipeline. But any updated thoughts in terms of international or non-gaming opportunities and where that ranks in terms of the opportunity set? Steven Ladany: Well, I'll take international and somebody on gaming. So on the international front, we have had conversations around international properties as recently as this last quarter. But as we've said many quarters in the past on these calls, there's always a -- there's a tax implication aspect of it. There's a repatriation implication aspect of it. And there's just the legal and customs aspect that we have to get comfortable with, depending on the jurisdiction that we're looking at the domiciled business in. So we continue to look there. I would love to tell you that we could get comfortable and get something done in international capacity non-Canada just because that seems to be where others have gone. And so I'd like to do some new cutting-edge things somewhere else, but I'm not willing to tell you that I think that's coming anytime soon. So we're going to keep working. We'll keep trying to do our diligence and try to look for opportunities that would equate to an accretive transaction for us here in the United States when we bring all the money back and pay all the taxes. Peter Carlino: By the way, that answer is a perfect response to the non-gaming as well. We look at a lot of stuff, as I like to say, we kiss a lot of frogs, but we're still looking for a princess in that category. Operator: Our next question is from the line of Todd Tom with KeyBanc Capital Markets. Todd Thomas: Brandon, can you just talk a little bit more about the normalizing cap rates that you discussed what's driving that specifically? And in your comments, it sounded like it was about 50 basis points. I mean, is that sort of the right range to kind of quantify the change that you're seeing in cap rate expansion? Brandon Moore: Well, I'll let Steve -- Steve, I believe, answered that the first time. I will say, I think what's led to the normalizing of cap rates, what Steve is referencing is, obviously, we have a lot of data points behind the scenes, things that are coming to fruition, has happened all the time where things bubble up to the surface where people are interested in understanding the valuation of what they have. And I think Steve's pointed and he can hit it again, but was just that the rates we're seeing are beginning to tighten in a range, and we think we have a pretty good feel of where the right cap rate is for transactions. And I'd say that at least the cap rate that we'd be willing to execute on transactions, but Steve... Steven Ladany: Yes, yes. I'm sorry. I wasn't trying to peg a 50 basis point number out there. I don't think it's as precise as that, to be honest with you, each transactions and negotiation, you're sitting across from a counterparty and you're trying to figure out what makes sense for you, and what makes sense for them, and what's their need and what's your desire and it all has to kind of go into the blender. My point was, I think if you were to say what do I think the average market clearing, regional gaming assets sale leaseback on a regular way down the middle of the fairway transactions going to go for right now. I think it's going to have an 8 in front of it. It's not going to have a 7 in front of it. I'm not trying to be more specific than that as far as 50 basis points or 62.5, but I think the reality is that's just kind of where the markets trended at the moment. It doesn't mean that it can't pivot on a dime 6 months from now. We're telling you the markets moved again. But we would obviously anticipate and hope that our cap rate where we trade, our implied cap rate would grind tighter as well as the market being grinding tighter at that point. So where we're at today. I think from a cost of capital spread it where we're at, I think we're comfortable that the market is probably yielding any dates. Todd Thomas: Okay. That's helpful clarification. And then, Desiree, I had a question about the guidance adjustment. The nominal AFFO has increased about $30 million at the midpoint, I think, mostly at the low end, but it looked like it was a little more than it would seem to be due to the higher capital deployment on its own. And you talked about Chicago, but I was just curious if there was -- if there were some other changes around either earlier cadence of funding that had an impact or something else altogether. Can you just talk about some of the changes there around the guidance specifically? Desiree Burke: Sure. So really, it is mainly due to the funding changes because that's going to increase obvious their income. That's going to have an offsetting impact in our interest income. On the high end, we did see some increase in sulfur rates, obviously, this quarter, so that some of the benefit gets eaten up by the soft assumptions in the high end of our guidance that were not -- that we had already had a little bit of additional interest expense put into the low end of our guidance. So that's why you're not seeing an even change. I will also tell you there's some rounding involved because the stronger the round is coming into the guidance, it takes a lot less AFFO to increase that per share amount. Todd Thomas: Okay. That's helpful. Did anything change there in terms of G&A and the stock-based comp component? Did anything change there with regard to the mix as far as reconciliation there. Desiree Burke: Not at all. Operator: Our next question is from the line of Haendel St. Juste with Mizuho Securities. Haendel St. Juste: Desiree, can you talk a bit more about the positioning of the balance sheet in the current macro, lots of, obviously, volatility. You've got $1.8 billion of capital deployment you've outlined over the next 18 months. Leverage today is at the low end of your target range. It looked like it would be at the high end on a pro forma basis. So are you willing to that market tick up? How are you thinking about balance sheet management over the next 18 months and perhaps the need for new equity? Desiree Burke: Sure. So we sit here today with $275 million of cash that has not been deployed into that run rate of 5x, right? So as that become income earning, the leverage ratio will not increase for that portion or for the $363 million of forward equity that we have outstanding. We also have free cash flow into the tune of $230 million per year. So we have the majority of that still coming for this year and then the rest, as we said, we can do either debt or equity depending on what we expect to do. But I still expect us to be at the end of this when all of our transactions are completed the remaining $1.8 billion is funded. We get full credit for the AFFO that those transactions derived will still be at the low end of our 5 to 5.5x guidance or leverage, sorry. Haendel St. Juste: Got it, got it. I appreciate that. And then more broadly, the growth for this year is mid-single digit. I think next year is kind of the same. Is this something you think is sustainable beyond the next months? I'm curious how you're thinking about the sustainability of the long-term cash flow growth from the portfolio here in the next 2 years or more of an aberration or something you feel you can sustain over the longer term? Desiree Burke: Yes. So look, I can clearly see through '27 and see the growth there just as you can at '28 and beyond depends on which transactions that we come up with over the next year or two. We certainly will have growth related to escalation on our transactions, but outside of that, until we do an accretive transaction, I can't really predict 2028 and beyond. Operator: The next question is from the line of Rich Hightower with Barclays. Richard Hightower: So I want to go back to Smedes' question on the potential Caesars deal and how it might affect GLPI. There's obviously a parent guarantee in place on your Master Lease. And I appreciate the idea that it's really 4-wall coverage, that's the primary focus in any scenario. But what's your legal understanding of the ability of the parent guarantee to travel with the lease under a variety of potential deal structures? And how should we think about that from the outside? Brandon Moore: I think if you should think of it as the parent guarantee being one of the requirements that has to be in place for us to be forced to take a new tenant. In other words, in order to meet the definition of a qualified or discretionary transfer. There have to be -- certain things have to be true with respect to the transfer, but also with the transaction, including the pro forma leverage and the existence of a replacement parent guarantee. So again, I don't think we know enough about the anticipated structure of that transaction in order to determine whether or not, for example, the parent guarantee is at an entity level that would be -- would meet our lease requirements and be acceptable to us. We just don't know yet. But you should assume that, that does, in fact, travel with the next tenant. Richard Hightower: Okay. That's really helpful. I guess more broadly and maybe it relates to the cap rate comment as well. But are you seeing -- and I'll use the Bally's in New York project as an example here, but are you seeing other sort of previously competitive capital providers, and I'm really thinking of sort of the private credit universe that appears to be having its own issues in various ways. Are you seeing those potential competitors pull back from the market. Does that imply anything about GLPI's ability to step in as a cattle provider to a project like that or any other development going on? And does that affect market pricing for the capital as well? Steven Ladany: Sure. I'll give it a shot. To date, we haven't seen the credit type of folks pulling away. Now I can't speak to their ability to show up at the finish line, but I can just tell you on the -- at the early onset they seem to be just as much engaged in participating as anybody else. So I don't think there's a huge seismic shift in the competitive landscape. They are not new folks seemingly pouring in. So it's the same handful of people are looking at transactions. I think it all kind of goes back to relationships at the end of the day. and underwriting. And so they're kind of both critically important and they work together. You can obviously have successful underwriting and maybe not the greatest relationship, but that just means you did a transaction. And conversely, you have a great relationship in poor underwriting and then you have a friend that is not doing so great in either us. So I think we continue to try to operate in a position where we hope to be everyone's first call if there's something they're looking to do or something they're trying to be creative around. and then we look to try to make sure we overlay our underwriting success with that. And so, so far, it's worked out well for us. I think it will continue to have -- at least have a seat at every table, whether we -- whether it plays out the way we want it to or not is yet to be seen. Brandon Moore: Well, I think in New York, you kind of picked out the 1 unique animal in the bunch, which is -- that is a unique market that has a lot of interest of people that want to have a piece of that. So I think Valleys is an enviable position in New York where they're having a lot of different capital sources to discuss and talk to -- whether or not, we have an opportunity there for a piece of that. will be relationship-driven more than economically driven, I suspect. But I don't think we're doing it at a cap rate that's any lower than what Steve has indicated because, quite frankly, that wouldn't be accretive to us and not a smart use of our capital. So we'll see how New York feed out. I think that's somewhat unique. Peter Carlino: May be several layers of opportunity there. to say the least. And we expect at least to be at the table as Steve and Brandon have outlined. Unknown Executive: [indiscernible] should follow our way we hope. Richard Hightower: Got it. I also appreciate the hat-trick in terms of management's responses from all three of you, thanks. Operator: Next question is from the line of Chris Darling with Green Street. Chris Darling: So with Acorn Ridge now open, I'm wondering if you've had any discussion around the conversion of loan into a formal lease structure. And then separately, whether it's Acorn Ridge or any other tribal investment, can you talk about your level of visibility into the underlying financial performance of those properties and sort of regular cadence of any updates you might get? Desiree Burke: It has a term, right? So the Acorn bridge loan has a 5-year term with I think it's 2-, 6-month extension. So we're not in discussions about converting it to ultimately to a lease at this point. As far as performance goes, we do get quarterly certifications, which will include coverage ratios at least as far as how it's going to cover the rent. In this case, it's interest. So we're really just going to be looking at the AFFO vis-a-vis what interest payments we have as far as the stability of the operations of the project, but we will get information on a quarterly basis. Steven Ladany: And I think that with respect to Acorn Bridge, we have dialogue with the chairwoman there. And she's very very level-headed with respect to this and said like, look, get 6 months of operations under our belt. And then as a tribe, we'll start to kind of reevaluate what we want to do as far as future capital spend or financing markets, et cetera. So we're cheering on and anxiously awaiting future dialogue. Chris Darling: Okay. That's helpful. And then maybe taking a step back more broadly, as you think about underwriting new investments in the tribal space, are there any jurisdictions that are more or less attractive to you? Curious how you think about that. Brandon Moore: I think different jurisdictions lead to different opportunities. And by that, I mean, in a jurisdiction like California, you have a very large number of tribes and the opportunity for expansion, what you're seeing in California is despite the fact that there are a lot of tribal casinos, the tribal can is opening appear to be growing the markets that they're in. So there's a lot of opportunity in California just given the sheer size. Other -- in California doesn't have with their compact, a very stringent taxing regime. So even when the tribes enter into compact, they're not paying a lot of tax. In other states, they're paying more tax and have different different compacts. And so I think just sheer numbers, California, New York has some tribes, the Midwest has several tribes, Oklahoma. I'd say it's more relationship driven at this point. And we're looking at travel needs and trying to figure out which transactions that suit our underwriting. I will say there are a lot of opportunities. We're getting a lot of inbounds. We're getting a lot of questions around what we can offer. And so we'll have a lot -- we have a lot to digest. We'll continue to get a lot to digest, I think, this year and try to figure out how much capital we want to allocate to this form of financing and where. But I don't think it's necessarily driven by state line per se. It's just more the number of tribes in different areas is obviously a lot different in California than, for example, Alabama, which has one drive. Operator: The next questions are from the line of Daniel Guglielmo with Capital One Securities. Daniel Guglielmo: Just one for me. Do you all have a minimum dollar size for redevelopment projects that you'd be willing to fund it feels like operator CapEx budgets are down for '26 versus '25, but improving properties has been working. So we're curious if smaller, less invasive projects at more properties are coming. Steven Ladany: Daniel, just to clarify, do you mean that this is a capital improvement project at an asset we already own? Daniel Guglielmo: Yes, yes. Steven Ladany: I don't think there's any number. We would fund down to whatever the tenant needs, assuming that it's a project that they think will be accretive to them, and we'll generate pro forma business for them that surpasses the cost of our capital. So I think we would look to be supportive of the tenant in any of these opportunities. Operator: The next question is from the line of Chad Beynon with Macquarie. Chad Beynon: You guys have clearly differentiated yourself with more of a drive to regional focus versus destination. And we've talked about it a couple of times on the call how strong the regional market has been year-to-date. Some operators actually improving margins, which we haven't seen for a few years. So does this indication or validation in your thesis maybe dissuade you into leaning in kind of back into Las Vegas beyond the top side and really just kind of doubling down in your current thesis and drive-to and regionals? Peter Carlino: I don't think we ever were leaning into Las Vegas, I mean and as has been well said, we look at these projects one at a time, almost location, not critical, but we have no special focus on Las Vegas at all. Look, I've been an enthusiast for the regional market for 20 years and trying to make the case that it's the better place to be safest place to put capital by far. I think we've demonstrated that in some -- a lot of events in the recent events in Las Vegas highlight that -- where we put our capital makes a lot more sense, but... Brandon Moore: Chad, I think it's -- go ahead, Desiree. Desiree Burke: No. You go ahead. Brandon Moore: Chad, I think it's -- I think -- as always, it's the strength of the cash flows. It's not the building, it's not necessarily the geography. It's the strength and safety of the cash flows. And I think if you look over time, acknowledging we don't share an upside any more than just the escalators we receive for a well-covered lease, the regional business has provided a lot of stability. And -- if you look back over the last few years, you've come off of very solid peaks. And as you mentioned, first quarter has been a very nice indicator that things are strengthening here again. Desiree Burke: And I would add, we've been saying this for a long time, but even back at PENN and our pending in 2008 of financial crisis, our properties held up the regional much better than what happened in Las Vegas. You saw that coming out of COVID as a regional properties [indiscernible] that much better than those in Vegas. That trend is continuing. So I agree with a few of the thesis. I think everybody should see it on their own at this point in time. Chad Beynon: Great. And maybe just to hit on one market to keep it on here. Peter, I know 20 years or so ago, you were looking at Atlantic City. We just returned from the East Coast Gaming, Congress, and it sounds like a lot of the operators down there are pretty scared in terms of what could happen with New York. Is that a market that you think could recover with capital? And would you be interested in helping out some of those operators either on the developmental did or pivoting our strategies? Peter Carlino: A pretty risky looking at what's on the horizon. New York is going to have a big impact. And I've long said that sooner related, New Jersey is going to have to break down and put something up in North Jersey. If they, let's say, want to lose all that business to the New York properties. That's just my view about it. So it's not a happy time to be in Atlantic City today. So look, there are always going to be some winners there without a doubt, but it's not a market that's looking for more investment. Operator: Next question is from the line of David Katz with Jefferies. David Katz: Covered a lot of details already. But look, when we look at the the market for regional properties today. If we can be sort of upfront about it, there's yourselves and one other who's closest like you? And then obviously, other capital sources that may be available, right? Peter Carlino: Dave, you could say the name. David Katz: I can, I can. I just usually don't as a policy and same with [indiscernible] Look, the nature of the question is, are you seeing a change in that competitive landscape, specifically for regional properties. We're in a moment where our collective expectation is that there's things coming to market. What does the competitiveness look like for you today versus where it was 6 to 12 months ago? Steven Ladany: To be honest, I think there's less competitors right now. And I think there's just been -- there have been a couple of gyrations in the market. There have been a couple of people that have dipped their toes in and either decided it wasn't for them or it got burned. And so we've seen the -- some funds, I guess we won't name names either. But we've seen some funds that have bought some some properties, which later than divested of those pieces or currently going through the Maverick bankruptcy and trying to figure that piece out. So I think that as -- I think as the market evolves, there's always going to be someone who's going to take a look. We love this business, right? There's a reason why we're in this business, and we think we're undervalued. So if it only makes sense that others will probably see that light and we'll decide they want to get involved as well. I think the complexity has been in the regional markets is there's a lot of diversity. You have to understand who the operators are. You have to understand the assets, and it's multiple assets with different competitive landscapes and market dynamics that go into a portfolio. And that's -- that's where it gets complex for someone sitting in an office and you name the big city to decide that like I can just roll this thing up at a certain percent, and this is going to make me a wizard. I think it becomes more difficult than that. And I think the reality is because of that, there'll constantly be people that will come in and then out of the space. So right now, I think there's 3 to 4 or 5 people that are probably looking at any larger portfolio that comes to market. And at the end of the day, it's probably the same 3-ish people that we'll put in some kind of indication. Operator: Next question is from the line of Robin Farley with UBS. Robin Farley: Speaking of not leaning into Las Vegas, I wonder if you could just update us on potential timing or what your latest thoughts are on opportunity for you at that site. Brandon Moore: I'd love to tell you our answers change. But as we sit here today, I think that the stadium is progressing quite nicely. And if you've looked at the cameras sitting on top of MGM Grand, you'll see that the stadium, the concourse level is up, and they're probably going to be putting on the first roof cuts here in the next 6 weeks. Integrated resort was always behind and not in the sense of being behind a bad way, but it just -- it was going to follow the construction of the concourse. And so I think we're getting to the point where Bally's will have some decisions to make about how much they want to do, and how they're going to do it. We have $125 million commitment remaining. Whether or not we expand that commitment is to be determined as we see the leasing of the site in the RED space start to fill out, and we get at a better picture of the revenue that will be generated on that side. We and Bally's will be discussing what level of investment above and beyond the $125 million, if any, will be appropriate from GLPI. But unfortunately, I don't think we have much different answer right now, but I do think in the next 6 months, that will change. I think the integrated resort will come into clarity in the next 6 months or so. Operator: Our final question is from the line of John DeCree with CBRE. John DeCree: I think we covered mostly everything. So I apologize if this is a touch redundant. I think you'd already answered investment sizing question as it relates to development. But with the Caesars buyout talk, we've got questions about portfolio transactions. So from your perspective, an investment sizing question, large portfolio of assets. Do you think there's a market there for real estate today? I think much of what we've seen so far is a single asset and from GLPI would -- is there an investment size that would be too small or too large, rather would you kind of consider anything that might come to market even if it's chunky. Brandon Moore: It might depend on whether or not it's going into another Master Lease with another tenant or how it's being done. I mean are there assets that are too small for us to look at there may be if they're accretive, and they're generating good capital, and we can put them into a lease with an existing tenant. I don't think there's anything we necessarily would not look at. If you're talking about the Caesars portfolio specifically, it's not clear to us which of any assets may fall out of that portfolio as a result of the impending or proposed transaction. We just have to take a look at it when the time comes. John DeCree: Brandon, maybe more broadly, if there was a multibillion-dollar transaction, unrelated to Caesars if there was a seller of a package of assets, is that something that would be in your wheelhouse, or is there a dollar amount where you say that we don't want to deploy that much capital or the market might not be there for that? Brandon Moore: I think as long as it's accretive, we do it. I mean, look, we did the Pinnacle transaction a few years out of the gate, which was roughly $4 billion. I don't think that there's any number that's necessarily too high of all of the portfolio assets we see right now. We just have to underwrite it. And if it's accretive based on our cost of capital at the time, I think we would look at it and do it. So no, I don't think there's anything too big or too small at the moment that we wouldn't look at. Peter Carlino: Yes, I've always felt there's never a shortage of opportunity for funding for a good deal. So I think Brandon answered it pretty well. As the small client, we [indiscernible] say, we'll hit some singles and even every now and then take a month if the spread is worth it. So nothing we won't look at. Operator: At this time, I'll turn the floor back to Peter Carlino for closing comments. Peter Carlino: Okay. Well, with that, I think the morning has been productive from our point of view. And we thank you for tuning in today. See you next quarter. Thanks very much. Operator: This will conclude today's conference. You may disconnect your lines at this time. Thank you for your participation, and have a wonderful day.
Operator: Good day, and welcome to Phillips Edison & Company, Inc.'s First Quarter 2026 Earnings Call. Please note that this call is being recorded. I will now turn the call over to Kimberly Green, Head of Investor Relations. Kimberly, you may begin. Kimberly Green: Thank you. I am joined today by our Chairman and CEO, Jeffrey S. Edison, President, Robert F. Myers, and CFO, John P. Caulfield. As a reminder, today's discussion may contain forward-looking statements about the company's view of future business and financial performance, including forward earnings guidance and future market conditions. These are based on management's current beliefs and expectations and are subject to various risks and uncertainties as described in our SEC filings. Our discussion today will reference certain non-GAAP financial measures. Information regarding our use of these measures and reconciliations of these measures to our GAAP results are available in our earnings press release and supplemental information packet, both of which have been posted on our website. Please note that we have also posted a presentation, and our caution on forward-looking statements also applies to these materials. Following our prepared remarks, we will open the call to Q&A. Given the number of participants on the call today, we respectfully ask that you be limited to one question. Please rejoin the queue if you have follow-up questions. With that, I will turn the call over to Jeffrey S. Edison. Jeff? Jeffrey S. Edison: Thank you, Kimberly, and thank you everyone for joining us today. We are pleased to report another quarter of strong results, which reflect the strength of our high-quality portfolio and the consistency of our execution. The Phillips Edison & Company, Inc. team delivered NAREIT FFO per share growth of 4.7%, core FFO per share growth of 6.2%, and same-center NOI growth of 3.5%. We are pleased to increase our full-year 2026 guidance. Our growth rates for NAREIT FFO and core FFO per share are in the mid to high single digits, consistent with our long-term targets. We are operating in a time where there are many ongoing uncertainties, both domestically and globally. Interest rates have been volatile. The global trade picture is shifting, and conflicts overseas continue to affect markets. Technology, especially AI, is changing how companies work. Add in an active election cycle and high energy costs, and it is no surprise that there is a general feeling of uncertainty. In times like this, the market tends to reward businesses that have stability. And that is exactly where Phillips Edison & Company, Inc. plays: grocer-anchored, necessity-based, everyday retail. Phillips Edison & Company, Inc. offers resilience while also offering steady growth. We believe Phillips Edison & Company, Inc. is built to deliver growth across changing economic cycles. Our long-term growth targets remain unchanged. We are maintaining our focus on driving value at the property level. Our retailers are healthy and continue to look long term. We are seeing a resilient consumer, and our top grocers and necessity-based retailers continue to drive solid foot traffic to our centers. One of the dynamics we are watching closely is the gap between private and public market pricing of assets. This influences our capital decisions, including how we fund growth and where we invest, and it is why the Phillips Edison & Company, Inc. team stays disciplined about accessing the most efficient capital. Our platform can raise capital in the public markets, through institutional joint ventures, and through asset recycling. We believe markets in 2026 will reward companies with a focused growth strategy and the ability to fund growth responsibly. Phillips Edison & Company, Inc. is well positioned to continue to do both. In summary, we are pleased with first quarter results and our outlook for 2026. We operate in a resilient part of retail. We are located in the neighborhood close to your home. We are disciplined about our investments. And most importantly, we have the best teams in the business. With our shares trading at a discount to our long-term growth profile, we believe Phillips Edison & Company, Inc. represents an attractive opportunity to invest in a leading operator that can deliver mid to high single-digit annual earnings growth. We will continue to drive more alpha with less beta. With that, I will turn the call over to Robert F. Myers. Bob? Robert F. Myers: Thank you, Jeff, and thank you for joining us, everyone. Our first quarter results were marked by solid leasing activity and success in growing cash flows. We continue to see high retailer demand with no current signs of slowing. Necessity-based categories, quick service and fast casual restaurants, health and wellness, beauty, fitness, and med tail continue to be excellent drivers of demand. Seventy-four percent of Phillips Edison & Company, Inc.'s rents come from necessity-based goods and services. Phillips Edison & Company, Inc.'s leasing team remains focused on capturing demand and driving continued high occupancy while pushing very impressive comparable rent spreads. Our pricing power remains market leading. During the first quarter, leased portfolio occupancy remained high at 97.1%. Leased anchor occupancy remained strong at 98.4%, and leased inline occupancy remained high at 95%. Our rent spreads reflect an extremely positive retailer environment. During the first quarter, Phillips Edison & Company, Inc. delivered comparable renewal rent spreads of 21.2%. Solid retention during the quarter means less downtime and lower tenant improvement costs, which translates to better economics for Phillips Edison & Company, Inc. Looking at comparable new rent spreads, they remained strong at 36.2% during the quarter. Inline leasing deals executed during the first quarter, both new and renewal, achieved average annual rent bumps of 2.7%. This is another important contributor to our long-term growth. As it relates to bad debt, we actively monitor the health of our neighbors. Bad debt was lower than expected in the first quarter at around 60 basis points of revenue. We continue to expect bad debt in 2026 to be in line with 2025, which came in at just 78 basis points of revenue for the year. Our retailers remain healthy. We have a highly diversified neighbor mix with no meaningful rent concentration outside of our grocers. Turning to development and redevelopment, Phillips Edison & Company, Inc. has 19 projects under active construction. Our total investment in this activity is estimated to be approximately $74 million with average estimated yields between 9% and 12%. During the first quarter, six projects were stabilized with over 87 thousand square feet of space delivered to our neighbors. This reflects incremental NOI of approximately $1.7 million annually. We are focused on growing Phillips Edison & Company, Inc.'s development and redevelopment pipelines, which is an important driver of growth. In addition, the Phillips Edison & Company, Inc. team continues to find accretive acquisitions that add long-term value to our portfolio. Our year-to-date acquisition activity through this week reflects $185 million. This includes five grocery-anchored shopping centers, three everyday retail centers, and land for future development. Currently in our pipeline, we have approximately $150 million in assets that we have been awarded or are under contract that we expect to close by the end of the second quarter. Our pipeline reflects a combination of grocery-anchored neighborhood shopping centers, everyday retail centers, and joint venture opportunities. I will now turn the call over to John. John? John P. Caulfield: Thank you, Bob, and good morning and good afternoon, everyone. Our strong first quarter results demonstrate what we have built at Phillips Edison & Company, Inc.: a high-performing grocery-anchored and necessity-based portfolio that generates reliable, high-quality cash flows. First quarter 2026 NAREIT FFO increased to $92.9 million, or $0.67 per diluted share. First quarter core FFO increased to $96.4 million, or $0.69 per diluted share. And same-center NOI increased 3.5% in the quarter, primarily due to higher revenue driven by increases in average rents and economic occupancy. Turning to our balance sheet, this quarter we extended our weighted average duration on our maturity and increased our percentage of fixed-rate debt, which is important in times of interest rate volatility. In February, we completed a public debt offering of $350 million aggregate principal amount of 4.75% senior notes due 2033. The proceeds were used to repay term loans that were maturing in 2027 and a portion of our revolver. With $810 million in liquidity at the end of the quarter, we have the capacity to execute our growth plan. Our net debt to trailing twelve-month annualized adjusted EBITDAR was 5.3x at quarter end and was 5.1x on a last quarter annualized basis. At the end of the first quarter, Phillips Edison & Company, Inc.'s outstanding debt had a weighted average interest rate of 4.4% and a weighted average maturity of 5.8 years when including all extension options, and 94% of our total debt is fixed-rate debt, which includes Phillips Edison & Company, Inc.'s share of debt for our JVs. We are pleased to increase our 2026 guidance. Key drivers of our increased guidance include a continued strong operating environment, strong year-to-date acquisitions activity, and our recent bond offering. Our updated guidance for 2026 NAREIT FFO per share reflects a 5.9% increase over 2025 at the midpoint, and our updated guidance for 2026 core FFO per share represents a 5.8% increase over 2025 at the midpoint. We are pleased with these strong growth rates. We are reiterating our full-year 2026 guidance of 3% to 4% same-center NOI growth, and we are pleased to reaffirm our full-year 2026 guidance of $400 million to $500 million in gross acquisitions at Phillips Edison & Company, Inc.'s share. The Phillips Edison & Company, Inc. team is not just maintaining a high-quality portfolio; we are building one. We continue to have one of the best balance sheets in the sector, which has us well positioned for continued external growth. As Jeff mentioned, we remain disciplined about accessing the most efficient capital. These sources include additional debt issuance, dispositions, joint ventures, and equity issuance when the markets are more favorable. Year to date, we have sold $29 million of assets at Phillips Edison & Company, Inc.'s share. We plan to sell between $102.1 billion in assets in 2026. In summary, we are very pleased with our results this quarter, and our ability to raise guidance for the remainder of the year. We continue to see a resilient consumer, and we believe our portfolio will outperform as necessity-based retailer demand remains strong. Looking beyond 2026, we continue to believe that Phillips Edison & Company, Inc. can consistently deliver 3% to 4% same-center NOI growth and achieve mid to high single-digit core FFO per share growth on a long-term basis. We also believe that our long-term AFFO growth can be higher as more of our leasing mix is weighted towards renewal activity. We believe our targets for core FFO per share and AFFO growth will allow Phillips Edison & Company, Inc. to outperform the growth of our shopping center peers on a long-term basis. We will now open the call for questions. Operator? Operator: Thank you. As a gentle reminder, please limit yourself to one question. You may re-queue. Your first question comes from Andrew Reel with Bank of America. Please go ahead. Andrew Reel: Good afternoon. Thanks for taking my question. We can appreciate your necessity-focused tenant base is positioned to weather some macro uncertainty, but just curious to hear any latest color on your conversations with some of these discretionary or off-price mom-and-pop tenants in the current environment—maybe any incremental changes in their tone or plans versus, say, six months ago—and how do those conversations compare to what you are hearing on the necessity side? Jeffrey S. Edison: Great question, Andrew, because it is one that we are very focused on as we try to read what kind of feedback we can get there. Bob, would you like to give a little color to that and what we are seeing? Robert F. Myers: Absolutely. Thank you for the question, Andrew. This is something that we monitor all the time, and probably our best indicator—not only are we on the ground, locally smart—we also have visibility that would suggest that we have the best renewal pipeline and new leasing pipeline in about the last six to nine months. An interesting fact is we just approved 28 deals in the last nine days. The feedback that we are getting—with high retention and leasing spreads at 21.2% this last quarter—reflects strength, and we are not seeing any pullbacks, even from the local tenants or from national retailer demand. All the retailers that we meet with at ICSC are looking for new sites in 2026, 2027, and 2028. Occupancy costs continue to remain very strong at 10%. We feel very good about where we are at currently. Operator: Thank you. Your next question comes from the line of Haendel St. Juste with Mizuho. Please go ahead. Haendel St. Juste: I wanted to ask about transactions. Obviously, you had a very active start to the year—$185 million in the quarter—and another $150 million in negotiation and under contract. What are you seeing or picking up in your conversations? Are there any changes in either the volume of buyers out there, underwriting, or competition that suggest people could be pulling back in light of the choppy macro? And thoughts on deployment of capital over the next few months—any willingness to scale back a bit to see if there are changes in pricing as a result of the choppy macro? Jeffrey S. Edison: Great question, Haendel. It is a simple supply-demand issue. We are seeing a very ample supply of product coming on the market. Yes, there are more buyers, and we have had some major transactions take place in the business that we have not seen for a while that are of substance—billion-plus kind of acquisitions. You continue to see a strong appetite, and it is all driven by what Bob was talking about in the last question: we are in a really good operating environment. In that operating environment, there continue to be a strong group of buyers out there. But we are also seeing a lot of product. Our opportunities year to date are up 70% over last year at this time. So we are seeing a lot of product, but we do have competition. Bob, anything else you want to add? Robert F. Myers: The only other thing I would add is we continue to sell our product. We have investment committee every week, and we are reviewing anywhere between five and ten new projects a week. We have reviewed 195 deals this year compared to 115 last year. The deals that we are underwriting are up about 26%, and the deals that have been presented to investment committee are up 40%. If anything, we are continuing to see more product hit the market than less. I think there are real sellers. Yes, there is more competition. There are more buyers out there. But you have seen the success we have had with the ten acquisitions that we acquired year to date—we are buying these at a cap rate of about 6.5% to 6.75%, and we are still solving for our unlevered returns above 9%. We do not see anything really slowing down. If you look at the $150 million pipeline and the $185 million that we have closed, we are in a great spot to be in the range of our guidance between $405.1 billion, if not more, based on the opportunity set that we see. Haendel St. Juste: And no change in the cap rate for the pipeline versus the $185 million already done? Robert F. Myers: It is consistent with that 6.5% to 6.75%. Haendel St. Juste: Got it. Thank you. Operator: Your next question comes from the line of Michael Griffin with Evercore ISI. Please go ahead. Michael Griffin: Thanks. On the leasing pipeline, particularly as it relates to renewals, it seems like you have really seen continued strong demand. In your conversations when leases are coming up for negotiation—thinking particularly about some bigger boxes and grocers—is there any opportunity to shorten the number of option periods or embed rent step-ups? I realize you are able to get those with the inline tenants, but with the bigger boxes, is there any way in those lease negotiations to get more leverage on the landlord side to drive earnings growth or rent bumps throughout the course of a new term? Robert F. Myers: Great question. Certainly, most of our grocers that we have inherited over the past 25 to 30 years already have embedded options for the next 30 years, and they are typically flat. Sometimes you get lucky and they might be 5%. If we ever have the opportunity to renegotiate with them—or in a case where they are paying percentage rent—where we can blend the rent together and reset the terms, or if we decide to give an anchor that is a grocer an inducement, in a lot of cases we are able to negotiate added term and some sort of bumps that go along with that. We are capitalizing on as much of that as we can. Probably the biggest value is just through consents on restrictions, no-build areas, or, given the relationships of being the number one grocer owner in the market, it gives us flexibility to create a lot of value. So we are picking up value in other places. And then, as you mentioned, with our inline tenants that we are negotiating new leases with, we limit the amount of options; if we do give options, we want to see, you know, 20% with good 3% to 4% CAGRs year after year. It is a combination of that and, during our renewals, cleaning up items that are nonmonetary clauses—think caps and restrictions, no-builds—where we are able to unlock value. I am glad we are doing it because we are 97.1% occupied, so we continue to find leverage through those avenues. Operator: Your next question comes from the line of Caitlin Burrows with Goldman Sachs. Please go ahead. Caitlin Burrows: Given the strong operating environment, your comments that you bought land, and that you want to increase development and redevelopment, what is your latest take on your own development and redevelopment and the industry more broadly? Jeffrey S. Edison: Thanks for the question, Caitlin. We have announced we have about $70 million of development work that we are on right now for this year, and we continue to be able to do that at very attractive returns. It is an important part of our business. It is not the major part of our business, but it is one that we are looking for opportunities in all the time. Bob, any other thoughts? Robert F. Myers: The only thing I would add is that we purchased two parcels so far this year, and they are right beside our grocers. A great example is one that we acquired in North Port, Florida. It is about 5.8 acres. We are going to create five different pads. Our center is Publix-anchored right across the street; it does $1 thousand a foot and it is full. There continues to be a tremendous amount of demand, and we already have a lot of this pre-leased. We continue to find those high-opportunity sites. The other land parcel that we acquired is an old bank, and banks are wonderful opportunities to repurpose and bring in a Starbucks or Chipotle or Swig—somebody that is hot and in demand. We are able to generate somewhere between 9% and 12% returns on those ground-up development opportunities, which is consistent with us. We have increased our development pipeline over the past few years from $40 million to $50 million to $74 million this year, as an example. We want to continue to lean into those opportunities and continue to look for ways to create value at each of our properties. Operator: Thank you. Your next question comes from the line of Ronald Kamden with Morgan Stanley. Please go ahead. Ronald Kamden: Just a quick two-parter. On the 95% inline occupancy, thoughts on getting to 96% to 97%? What sort of blocking and tackling needs to get done to get there? And then a quick follow-up: I think I see your local neighbors concentration ticked up to 26% versus 25% last quarter. Was that intentional, and where are you comfortable with that local neighbor exposure? Robert F. Myers: There has not been any real movement on the local side between 25% or 26%—that is right on top of each other. On the 95% inline question, one of the initiatives we put in place this past year was a bounty targeted space approach. We identified our top 100 spaces that would create the highest ABR on an annual basis. We put our leasing team on that and put different incentives in place. Through April, we have executed 28 deals on those particular spaces with another 24 at LOI or lease out, so we are almost 50% of the way there. That is your needle mover. With very high retention numbers of 90% to 93%, complemented by these targeted space initiatives, that is how you get the other 100 to 150 basis points. We are seeing a lot of success, and I am really excited about where we will finish the year. Operator: Your next question comes from the line of Cooper R. Clark with Wells Fargo. Please go ahead. Cooper R. Clark: Thanks for taking the question. Retention came down year over year while new rents were up significantly. How much of this was you proactively deciding to take back space and not renew certain tenants, given the ability to drive strong pricing power with potentially healthy operators? Any color on how to think about that dynamic and retention levels moving forward? Robert F. Myers: Great question. Our retention rate this quarter was 88%. That had 100% to do with a 64 thousand square foot box that we knew was going to vacate about three years ago. We already have three tenants lined up to backfill it at significantly higher levels of rent. If you exclude that one-time situation, our retention for the quarter would have been 92.4%. It is not a crack or an indication. A normal part of our business is capturing spaces where we see better opportunities to do mark-to-market rent adjustments. We will always be focused on merchandising and finding the right necessity-based goods and services retailer so we can continue to get attractive leasing spreads and drive consumer demand. Operator: Your next question comes from the line of Michael Goldsmith with UBS. Please go ahead. Michael Goldsmith: Good afternoon, and thanks for taking my question. You took up the FFO guidance, but none of the underlying components moved higher. Can you provide a little bit of context for what drove the higher earnings expectation? Is it acquisition timing, termination fee income, or anything else? Just trying to get a sense of what is driving the greater confidence in earnings here. Jeffrey S. Edison: Thanks for the question, Michael. It is a variety of things. John, do you want to go through the pieces? John P. Caulfield: Good afternoon, everyone. We started the year at a great pace, with a strong operating environment like Bob has been talking about, strong year-to-date acquisition activity, and our recent bond offering. In the quarter, our bad debt was near the lower end of our range, and we were pleased that the bond was at an interest rate lower than we budgeted. It is still early in the year, and one thing we are watching is the SOFR curve, which is higher than where we started the year. When we look at bad debt, we maintained that range. We considered each of the ranges. We like the ranges where they are. Overall, after a good first quarter, we are more optimistic about the year than where we started, and that gave us confidence to raise our ranges for FFO. It is early—it is Q1—we will have opportunities to refine, but we are very happy that our growth rates are in the mid to high single digits for 2026, which is consistent with our long-term growth targets. That gives us a good and more confident outlook for the year. Operator: Your next question comes from the line of Todd Michael Thomas with KeyBanc Capital Markets. Please go ahead. Todd Michael Thomas: Hi. Good afternoon. Jeff, you indicated in prepared remarks that you are closely watching private and public market valuations. Can you elaborate on that comment—what you see as the spread today relative to where you are trading, the acquisition cap rates you are achieving, and so forth? And what actions does the company take as a result? Jeffrey S. Edison: Great question, and one we have spent a fair amount of time looking at. Our view is that in the private markets today—there are some fairly major transactions that have taken place—there is a 50 to 75 basis point difference between where the public markets are and where the private markets are. That makes the private markets a better source of capital. If you look at the major transactions that have happened in our space this year, the winners are the private equity capital across the board. For the public companies, we have to continue to find the cheapest source of capital so we can continue to take advantage of the opportunities in the marketplace. That means you are always looking at everything: joint ventures, issuing equity, selling assets—all of which are part of figuring out where you can get the cheapest source of capital so you can continue to fund your growth going forward. That is what we are focused on. The market comes up and down and changes over time, but that is our focus. Todd Michael Thomas: You reiterated the disposition volume for the year. Do you lean into dispositions a little bit more as the year progresses, or lean a bit more on joint venture capital than you have year to date? Any changes around the edges given that spread you are seeing in the market? Jeffrey S. Edison: I think yes, there is a little bit more lean-in because it is attractive, and you will see some leaning in. Operator: Your next question comes from the line of Floris Van Dijkum with Ladenburg. Please go ahead. Floris Van Dijkum: Thanks for taking my question. Following up on the capital allocation, I noticed that you closed on two unanchored centers during the quarter, and you have one that has happened subsequent. Maybe talk a little bit more about the return expectations and why you think this makes sense for Phillips Edison & Company, Inc. to pursue these centers, and why investors should be excited about venturing away from your typical grocery anchors. Jeffrey S. Edison: Thanks, Floris, for the question. We have made it clear over the last twelve months that we are really excited about very specific opportunities to take advantage of everyday retail where we think we can get outsized returns. It is a much more inefficient market than our core market, and we think there is a place for that in our portfolio, where we can use our market knowledge and our locally smart ability to know markets to take advantage of that. We think it is a great opportunity for the company to get outsized returns for part of our portfolio, and we are going to continue to look for those opportunities. It is hard, and it is a big market—you have to find the inefficiencies—but that is what we are really good at. We are the best at taking those properties and turning them into really strong assets. In our buying, we are targeting properties where we can take the Phillips Edison & Company, Inc. machine and create a lot of value. The first two are great examples of what we will be able to show the market we can do with them. Bob? Robert F. Myers: Thanks, Floris. I am really excited about this strategy. Over the last two and a half years, we have closed on 12 assets for about $221 million. We are finding opportunities to buy properties from less sophisticated owners where we can put our national accounts team on them. The criteria we set: exceptional demographics—$110 thousand median incomes in three miles, 100 thousand people in three miles—plus configuration and sight lines. I like to see about 45% local tenants, 55% national, which gives us the opportunity to continue to increase spreads and rents. Looking at the subset of 12, they have 5% CAGRs, a great complement to our 3% to 4%. In some cases, we have acquired some that are 8% to 10% CAGRs. We have already moved the needle 310 basis points in occupancy on this subset of 12. Our new leasing spreads in this category have been 45%, and our renewal spreads are 27%. There are inefficiencies we have found while not overpaying for assets. In this space, we have acquired at a 6.9% cap and are solving for 10% to 11% unlevered returns. Our average purchase price is about $321 a foot. It allows us to lease it the Phillips Edison & Company, Inc. way, which we do exceptionally well with our operating results and the team on the ground. Operator: Your next question comes from the line of Juan Carlos Sanabria with BMO Capital Markets. Please go ahead. Juan Carlos Sanabria: Thanks. Only my best friends call me Juan, if that is okay. Just curious—going back to Caitlin's question on new supply—are there any pockets of the country where you are seeing new greenfield development? Maybe pockets of the Sunbelt that you would call out or are watching? Jeffrey S. Edison: Overall across the country, it is a really small amount. There are specific cases where grocery stores are looking for specific locations where you are seeing some growth. You are seeing Publix grow north from their existing platform; you are seeing H-E-B add additional stores in Texas. But they are specific and very small. Part of our business is to make sure that we know what is going on in every market we are in. Even if there is one being built in a specific market near one of our centers, if it is a competitor we have to beat it—we have to figure out how we are going to win. We are just not seeing much at all in our markets. I think that is creating the operating environment we have where there is a ton of opportunity to be aggressive on leasing, reach very high occupancy levels, and drive rents. That is what we are proving out with our performance. Operator: Your next question comes from the line of Analyst with Barclays. Please go ahead. Analyst: Thank you so much for taking the question. I noticed that you maintained $5 million to $8 million of collectibility adjustments guidance. Could you elaborate on the specific categories or tenant types driving that assumption today? Have you seen any early signs of stress in first quarter trends for 2026? Jeffrey S. Edison: Thank you for the question. John, do you want to take that? John P. Caulfield: Good morning. One of the advantages of our business model is the diversification that we have across our neighbors. The components are pretty consistent with what they have been, but the overall volume is a little lower. For us, when people ask about a watch list and look for national names, it is actually at every center. Especially when you are as highly occupied as we are, we are always looking for new leasing opportunities or places to get in there, and for that we have one in every center. The absolute count of neighbors that we are focused on actually declined this quarter compared to last. Considering the volumes of acquisition that we are adding every quarter, to see that number broadly come down was a very positive sign. I am still the cautious one of the group, but we feel really good about the year while still leaving those pieces. As Bob was talking about categories earlier, there is not any one particular space. We continue to see great demand and strong performance at each one of our assets. Operator: Your next question comes from the line of Paulina Alejandra Rojas-Schmidt with Green Street. Please go ahead. Paulina Alejandra Rojas-Schmidt: Good morning. You have indicated that your health ratio, or OCR, for your inline tenants sits at about 10%, and you have mentioned that you see room to gradually push that up to 13%. Walk us through the thinking behind that—whether it is anchored on prior high watermarks or other benchmarks. What does a shift like that mean downstream for tenants on an EBITDA basis for the average inline tenant? Jeffrey S. Edison: Great and very complicated question, Paulina. The 10% is a generic number because each specific retail category has a different health ratio that is healthy for them. We are using broad numbers here, but it is very specific to the type of retailer what a healthy number is. We also get the advantage of inflation and the growth in sales, which allows us to keep it at 10% while we are growing rents because of the growth in sales. Bob, would you like to talk a little about your views on the health ratio and how we are doing on the leasing side? Robert F. Myers: Absolutely. Most importantly, we want to make sure that our neighbors are profitable. We have seen a lot of success over the last two or three years with not only our retention rates, but also renewal increases being 18% to 21%. The visibility that we have, with 125 renewals out for signature, shows no slowdown or cracks. We have been able to hold that 9.5% to 10% health ratio pretty static over the last three years while maintaining those renewal spreads. I do think there is room to move to 10% to 13% or 14% over time, very merchant-specific, over the next several years. Another helpful factor is that we are starting with ABRs on average of our inline neighbors at $27. It is a lot different increasing rents at $50 than it is at $27. There is a combination of a lot of things that goes into that health ratio, but bottom line for us, it is about keeping our neighbors healthy, profitable, and being a good partner. Operator: Your next question comes from the line of Michael William Mueller with JPMorgan. Please go ahead. Michael William Mueller: Hi. Another quick JV question. How much are the investments being made in those programs going to be influenced by your equity cost—particularly if your equity cost improves a lot, where on-balance sheet looks much more attractive? Jeffrey S. Edison: Our JV strategy is primarily to expand what we can buy. We are buying things in our JVs that we would not buy on the balance sheet, and that is an important part of why we set this up. If our cost of equity changed dramatically, we would still be buying the same stuff with these particular JVs because that is the level of ownership we want in those properties, and we think we can add value there. We also get a fee structure that is complementary. For us, it is expanding where we can buy and what we can buy without putting the full 100% exposure from the balance sheet. That has worked out very well historically, and it is working out great in the JVs we have going right now. Operator: This concludes our question and answer session. I will now turn the conference back over to Jeffrey S. Edison for some closing remarks. Jeff? Jeffrey S. Edison: In closing, I want to reiterate how pleased we are with our first quarter results. Our grocery-anchored neighborhood shopping centers are driving solid foot traffic and market-leading pricing power. We continue to see a strong operating environment. While the macro environment remains volatile, Phillips Edison & Company, Inc. is well positioned to perform through cycles. We offer both stability and steady growth. Phillips Edison & Company, Inc.'s disciplined execution and operating strength reinforce our increased guidance for core FFO per share growth. With our shares trading at a discount to our long-term growth profile, we believe Phillips Edison & Company, Inc. represents an attractive opportunity to invest in a leading operator that can deliver mid to high single-digit annual earnings growth. The Phillips Edison & Company, Inc. team remains focused on executing our strategy and generating stable long-term value. We will continue to drive more alpha with less beta. I would like to thank our Phillips Edison & Company, Inc. associates for their continued hard work and also thank our shareholders and neighbors for their continued support. Thanks for being on the call today. Have a great day. Operator: Ladies and gentlemen, this concludes today's conference call. Thank you for joining, and you may now disconnect.
Operator: Thank you for standing by. My name is Tina, and I will be your conference operator today. At this time, I would like to welcome everyone to the Nauticus Robotics Inc. 2025 Fourth Quarter Earnings Call. [Operator Instructions] It is now my pleasure to turn today's call over to Kristin Moorman, Corporate Development Lead. You may begin. Kristin Moorman: Thank you, and good morning, everyone. Joining me today and participating in the call are John Gibson, CEO and President; Jimena Begaries, Interim CFO; and other members of our leadership team. On today's call, we will first provide prepared remarks concerning our financial and operations results. Following that, we will answer questions. We have now released our results for the year ending December 31, 2025, which are available on our website. In addition, today's call is being webcast, and a replay will be available on our website shortly following the conclusion of the call. Please note that our comments we make on today's call regarding projections or our expectations for future events are forward-looking statements. Forward-looking statements are subject to a number of risks and uncertainties, many of which are beyond our control. These risks and uncertainties can cause actual results to differ materially from our current expectations. We advise listeners to review our earnings release and the risk factors discussed in our filings with the SEC. Also, please refer to the reconciliations provided in our earnings press release may discuss non-GAAP metrics on this call. I will now turn it over to John. John Gibson: Good morning. Thank you, Kristin, and thanks to everyone for joining us today on the call. 2025 was a defining year for us, one where we not only strengthened our foundation, but also began to clearly demonstrate the value of what we've been building. We made meaningful progress across every dimension of the business. Financially, we improved our balance sheet and increased our flexibility. Operationally, the integration of SeaTrepid expanded our capabilities and gave us a stronger, more diversified platform on which to execute. And technologically, we made the most important transition from development into real-world deployment, where our solutions are now delivering measurable results. We are getting a lot of time in the water. At the same time, the market is moving in our direction. Demand for autonomy is accelerating as customers seek safer, more efficient, more cost-effective offshore solutions. We're seeing growing need across commercial, infrastructure and government applications, and we believe Nauticus is well positioned at the intersection of those trends. One area we are particularly excited about at the moment is defense. The global defense industry is becoming an increasingly attractive market for us to pursue not just in the near term, but for the foreseeable future. Governments and defense organizations are placing greater priority on autonomous and remotely operated systems that can improve mission effectiveness, expand operational reach and reduce risk to personnel. Our technology, our software and our offshore operating expertise align very well with those needs, and we believe this creates a compelling and durable opportunity for Nauticus. We're also beginning to extend the opportunity internationally. Our efforts in the UAE with the Master Investment Group reflect growing interest in our technology in regions that are investing heavily in maritime security, critical infrastructure and subsea capabilities. We view that as an encouraging step in expanding our presence in strategically important markets. We have aligned our leadership and organization to capture these opportunities. Jason Close is focused on driving growth and market expansion. Bob Christ is advancing our presence across government and defense channels, and we've strengthened our software leadership with KJ, who is helping to unlock the full potential of Nauticus ToolKITT as a scalable multi-platform autonomy solution. In parallel, we have also enhanced our financial flexibility through the availability of our equity line of credit. We believe that access to capital provides us with an additional tool to support growth initiatives and pursuit attractive opportunities as they emerge while remaining disciplined in how we allocate capital. As we enter 2026, we do so with momentum, a clear strategy and growing confidence in the markets ahead of us, especially in defense. We just attended the Sea-Air-Space Conference in Washington, and we're very pleased to meet with many customers there, where we see a strong fit with our capabilities and meaningful long-term opportunity. Before we get into the results, let me briefly address the reverse stock split that was executed this week. As you know, we completed an 8-for-1 reverse split of our common shares. This action does not change the underlying value of the company or our shareholders' ownership as it's intended to support our listing compliance and provide a more stable trading framework for our shares. Importantly, it has no impact on our capital, our strategy or the progress we're making in executing our business plan. With that, I'll turn it over to Jimena to walk through the financials. Jimena? Jimena Begaries: Thank you, John, and good morning, everyone. In 2025, we took steps to strengthen our balance sheet, successfully addressed our NASDAQ compliance requirements and advance on the integration of SeaTrepid. We believe these actions position us for more consistent execution as we move into 2026. I will now discuss our financial results for 2025. Revenue for the year was $5.3 million, which is up $3.5 million from 2024. The increase in revenue was largely due to the acquisition of SeaTrepid in early 2025. Operating expenses for the year were $29 million, which is up $3.9 million from 2024. The increase was partially driven by higher activity levels associated with revenue growth. Cost of revenue as a percentage of revenue improved by approximately 300 percentage points, reflecting an efficient integration of the businesses. Depreciation expense also increased year-over-year due to the addition of the SeaTrepid asset base. G&A costs for the year were $14.3 million, which is an increase of $0.7 million from 2024. This increase was primarily due to nonrecurring transaction costs related to the SeaTrepid acquisition, which impacted the first half of the year. In the second half, G&A trended towards pre-acquisition levels as we reduced nonessential spending. Net loss for the year was $40.8 million. This is a $94.1 million decrease in net loss from 2024. This variance is largely attributable to $127.6 million loss on extinguishment of debt recognized last year. Adjusted net loss for the year was $31.1 million compared to $26.1 million for 2024. This is an increase in adjusted net loss of $5 million. Cash at the end of 2025 was $7.6 million compared to $1.3 million last year. The increase was primarily driven by proceeds of our at-the-market offering and other equity financing, partially offset by cash used in operations. Shareholder equity at the end of 2025 was $7.0 million compared to a shareholder deficit of $20.4 million in 2024. During 2025, we have worked with our lenders to strengthen the balance sheet, including conversion of portions of outstanding debt into equity, which reduced leverage. In early 2026, we secured additional convertible debt from existing lenders, combined with continued success access to our at-the-market program, this provides liquidity to support the ongoing commercialization of Nauticus' products while maintaining financial flexibility. As we move into 2026, our focus remains on executing against our commercialization objectives and maintaining disciplined cost management. I will now pass the call back to John. John Gibson: Thank you, Jimena. Well, now I'm going to turn it over to our leads that are working on international expansion and the government opportunities. Jason Close will be leading off with updates on our UAE expansion progress, and Bob Christ is going to follow that up with the exciting opportunities that exist in government. Jason? Jason Close: Thank you, John. As we recently announced, I've stepped into a new role focused on growth and go-to-market strategy, and I'm excited to be leading this next phase of the company's expansion. A key part of that strategy is our entry into the UAE and broader GCC region, supported by our recently announced relationship with Master Investment Group. They are both an investor and a strategic collaborator. Their $3 million initial investment with the potential to scale that up to $50 million provides the runway we need to execute on our regional plans. Together, we can establish a strong regional foundation for growth. Our immediate focus is on establishing that solid foundation in the region through market activation. That includes delivering a value-driven message around our solutions, building localized marketing, strengthening our digital presence, developing commercial relationships and putting the right infrastructure in place to support manufacturing deployment and distribution. The goal is to enter the market in a structured way and position ourselves to grow the business in the region as well as globally. We see Ras Al Khaimah as a strategic hub for long-term expansion. It's an active and strategically important market, and it provides a base to expand more broadly across the GCC. As we progress through 2026, my focus is on continuing to build traction in the region and globally while converting this initial investment into long-term growth for the business. With that, I'll now hand the call over to Bob Christ, our Technical Advisory and Government Lead for an update. Robert Christ: Thanks, Jason, and good morning, everyone. We actively participated in the November 2025 Underwater Minerals Conference in St. Petersburg, Florida. There are unprecedented movements on the permitting issue for Subsea minerals. While the UN subdivision, the International Seabed Authority has been studying the subsea minerals environmental issue for 40 years without issuing a single production permit, the current U.S. administration has moved rapidly towards a full regulatory regime for permit issuance under NOAA codes 15 CFR 970 and 971. What this means is that the first ever marine minerals permit within International Waters is expected to be issued in Q3 or Q4 of 2026. We anticipate a gold rush of activity, and we plan on being on that leading edge. On the governmental front, one example, the situation in the Strait of Hormuz moves is aligned with our infrastructure integrity assurance and automatic target recognition capabilities. We have recently hosted several defense contractors at our Florida testing facilities and talks are ongoing. These are new channels of opportunity for Nauticus. The integration of Nauticus ToolKITT onto our Comanche ROV systems has allowed us new autonomous capabilities to differentiate ourselves from competition in the offshore ROV services space. Further, the increase in oil prices has made the offshore wind industry more economically viable, driving further activity from clientele. We anticipate a brisk year in all of our Western Hemisphere offshore oil production -- producing regions as well as domestic U.S. offshore wind. I am very optimistic for this year's first full year SeaTrepid operation under Nauticus umbrella. With that, I'll hand the call back to John. John Gibson: Thank you, Bob. Thank you, Jason. I sincerely wish we had all of our assets in the Middle East right now. We are uniquely situated to achieve many of the goals and challenges that they face. But let's continue. I'd like to turn it over to our sales and operation leads to discuss activities in their departments. First up is Daniel Dehart, our field operations lead for a recap of the 2025 commercial season and plans for the upcoming year. Daniel? Daniel Dehart: Thank you, John. 2025 was a year of meaningful progress and important milestones. The actions we took throughout the year have positioned Nauticus for a stronger and more execution-focused 2026. A key highlight was the acquisition of SeaTrepid, which immediately expanded our operational capabilities, diversified our customer base and established a more consistent revenue stream. Our ROV systems completed successful projects for new clients, reducing our customer concentration, generating revenue while also serving as a platform to deploy our Nauticus ToolKITT software in commercial operations. This marks the first time Nauticus ToolKITT was installed on a light work-class system in the field, delivering enhanced autonomy and operational efficiency. This served as proof of concept as it is opening new opportunities for other manufacturers' ROVs. KJ will provide more details in a few minutes. The Aquanaut system also achieved a major technical milestone successfully operating at depths of 2,300 meters offshore. The vehicle was certified to 3,000 meters, but no deeper tests are planned without a commercial contract. Throughout the year, we transitioned from primarily research and development into funded workflow testing, a critical step toward commercial deployment. The progress made in perception-based autonomy, particularly in vertical inspection applications such as mooring lines, chains and risers represents a significant advancement in the system's capabilities. Another important development was the establishment of a dedicated cost-effective testing environment. In collaboration with Sea Robotics in Stuart, Florida, we secured access to a private lake that has significantly increased our operational tempo. We are now averaging approximately 40 hours per week of in-water testing compared to limited pool access previously. This expanded testing capability has already supported multiple funded projects, including autonomous leak detection and mooring line inspections and allows us to better simulate real-world offshore conditions. The test site has also allowed us to remediate the technical deficiencies that prevented securing 2025 revenue. Customer engagement remains active. Many of the opportunities we advanced in 2025 are now translating into client interest in 2026. Demand for autonomy remains strong. As we look ahead, 2026 will be focused on execution, converting technical progress into commercial outcomes, expanding our customer base and continuing to build on the operational foundation established this past year. We believe we are significantly better positioned to deliver results and create long-term value. With that, I will now turn it over to Steve Walsh, our sales lead for a recap of 2025 and an update on our offshore commercial pipeline for this year. Steve Walsh: Thanks, Daniel, and good morning. 2025, we delivered over 190% year-over-year revenue growth, increasing from $1.8 million in 2024 to $5.3 million. This performance was driven by both new customer acquisition and deeper engagement across our existing customer base. Our customer portfolio spans the full spectrum of markets we serve from super major oil companies and offshore wind operators to small dive companies and municipalities. This breadth highlights the versatility of our offering and provides a strong foundation for sustainable growth. Importantly, this growth is real, repeatable and increasingly driven by long-term partnerships rather than one-off projects. Today, more than ever, customers are demanding continuous reduction in cost, which will be enabled by a broader deployment of Nauticus solutions. To achieve these benefits requires the adoption of the new workloads, utilization of smaller vessels and fewer personnel, which will result in more efficient execution and higher quality data. Delivery of reduced costs through the adoption of these technologies will drive deeper commitment to Nauticus. As we move into 2026, our focus is to build on this momentum by strengthening existing relationships while expanding our presence within key accounts. At the same time, we are pursuing targeted opportunities beyond the Gulf of America where we see strong alignment with our core strengths and proven operating model. Our approach remains disciplined. We are expanding where we have visibility, established relationships and a clear path to profitable growth. These efforts include opportunities along the East and West Coast of the United States as well as in select international markets where we have successfully operated in the past. The combination of sustained revenue growth, expanding customer relationships and disciplined geographic expansion positions us well as we enter 2026. With that, I'll turn it over to KJ Easton, our new software lead for an update on Nauticus ToolKITT progress. Kjerstin Easton: Thank you, Steve. I joined Nauticus earlier this year with a background leading engineering teams in autonomy, AI and real-world deployment. Over the past several weeks, I've been working closely with our engineering and operations teams to understand where our technology is delivering value today and how we translate that into commercial growth. Over the past year, our software platform has made meaningful progress across reliability, operator workflows, autonomy behaviors and post-mission analysis. These improvements are now being exercised in real-world operations. In 2025, we saw a significant increase in in-water testing, and that exposure has improved system robustness and performance. One of the clearest takeaways for me since joining is that our core advantage is not tied to a single vehicle, it's the software platform itself. Nautica's ToolKITT is a modular autonomy layer that can be deployed across multiple types of vehicles with improvements on one platform carrying over directly to others. As we look ahead to 2026, our focus is on translating that capability into repeatable revenue-generating solutions. We're prioritizing applications with clear demand today, particularly inspection and survey workflows such as mooring lines, risers and leak detection. On ROV platforms, we're starting with foundational capabilities like station keeping and navigation, where incremental autonomy can improve efficiency and reduce operator workload. This also creates a path to expand Nautica's ToolKITT across existing third-party vehicles, allowing us to scale through software without requiring customers to replace their systems. We're seeing encouraging signals from field use. Operators report that Nautica's ToolKITT reduces repetitive fatiguing aspects of piloting, allowing them to focus more on inspection quality and data collection. That shift towards supervised autonomy, improves both efficiency and consistency. We're also beginning to see early commercial traction. Our deployment on third-party ROV platforms has opened conversations with service providers and operators. Relationships such as these validate that our software can integrate into real customer workflows beyond our own vehicles. Internally, we're focused on reliability, testability and consistent deployment in the field, strengthening testing infrastructure, deployment workflows and the operator experience to move from demonstration to repeatable operations. Overall, we see a clear path forward, deliver near-term value through targeted autonomy on existing platforms while building toward a broader multi-vehicle autonomy ecosystem powered by Nautica's ToolKITT. We believe this will improve the economics of subsea operations, reducing cost, increasing safety and enabling more scalable deployment. I'll now hand over to Ameen Albadri, our engineering lead, for an update on Aquanaut and electric manipulators. Ameen Albadri: Thank you, KJ. In 2025, we made significant progress advancing the Aquanaut system, working closely with key suppliers and industry experts to further improve performance and readiness for commercial deployment. Our continuous in-water testing is generating valuable data, allowing us to enhance system reliability, optimize operations and drive improvements in maintenance efficiency. Regarding manipulators, we continue to progress our efforts with FET on the Olympic Arm and are currently reviewing design files and manufacturing drawings. We look forward to presenting FET's progress in future calls. Internally, we finished the design of a next-generation fully electric 3 joint manipulator for deployment on Aquanaut as soon as possible. We have completed parts procurement with all components expected to be received by late Q1 into early Q2 2026, keeping us on schedule for a prototype for use on Aquanaut. Finally, our recently announced collaboration with Master Investment Group to strengthen our international growth strategy. This collaboration will support the expansion of our engineering and manufacturing capabilities in the UAE as we build a strong presence in the GCC region. We are currently in the process of setting up our regional business unit and finalizing staffing plans to support this growth. I will now hand the call back to John. John Gibson: Thank you, Ameen, and KJ and Steve and Daniel, I mean, we have such a strong team, and there are a lot of thanks to give out. We emerged from 2025 in a great position, primarily due to our employees. We have a great team here. committed to the company and committed to the success of these technologies and services. And so thank you to all of our employees. Thank you to our lenders who have been very strong in their support. We're excited about the new opportunities with the Master Investment Group and moving into international markets. I'd like to thank our Board. And in particular, I'd like to thank all of those that have invested in the company and have faith in what we're going to be able to accomplish with this platform and the potential that we believe that we're going to be able to achieve. We're confident in both our direction and our positioning. We built a stronger company over the past year, both financially, operationally and technologically. We now have a more scalable platform, a broader customer base and a clear path to improve revenues. The progress we've made is not theoretical. It's being validated in the field through customer engagement through expanding opportunities across multiple markets. What excites us most is the alignment between our capabilities and where the market is going. Autonomy is no longer a future concept. It's becoming a requirement. Customers are demanding greater efficiency, improved data quality and lower operational cost. At the same time, new regulatory and geopolitical dynamics are opening doors in areas like subsea infrastructure, offshore energy and defense applications. We are positioned to lead in this environment. Our focus in '26 is straightforward. Execute, scale and convert opportunity into revenue. We are prioritizing near-term commercial application, expanding our footprint with existing customers and extending our software platform across additional system and partners. We believe this approach is going to allow us to grow efficiently, differentiate meaningfully and create long-term value. We appreciate your continued support and interest in Nauticus, and we look forward to sharing our progress as this year unfolds. With that, operator, I'd like to open the line up for questions. Operator: [Operator Instructions] Our first question is from the line of Peter Gastreich with Water Tower Research. Peter Gastreich: Also to appreciate the detailed updates from your team. So you've had a big year with a lot of promising developments. So congratulations on that and wishing you success as you build on that foundation in 2026. But on to my questions, you have described this year, 2026 as the year that Nauticus would shift from survive to thrive. So looking across ROV services, ToolKITT software, Aquanaut deployments, where are the most executable near-term revenue opportunities? And how are you thinking about the growth cadence for this year? John Gibson: Well, thank you, Peter. There's no question the market has changed a lot since we talked last. The situation in the Middle East has certainly changed how we look at oil and gas even here in the Gulf. So where do we think that there's immediate opportunities? We've got a lot of proposals out to utilize the ROVs. We have good support from the super majors and continuing to adopt where the Aquanaut is and the untethered work and the savings and improvements in efficiency and reduction in cost, reduction in offshore labor for the Aquanaut. So we've got strong discussions going on with them. The ROVs, what we're trying to do, and I would like to focus hone for the next call. I think you won't get much of a technology update next time, it's just going to be a revenue update, the very question you're asking is we're trying to prioritize winning awards for long-term contracts on the ROVs as opposed to transactional work. The same with the Aquanaut. We're looking at now, and this has been not a shift, but just a change in market. If the oil and gas industry's adoption and diffusion rate for the Aquanaut is not picking up quickly, we do see tremendous opportunity to deploy to defense. And so we have moved our efforts over into the defense sector to say that there are potentially long-term opportunities there. We have proposals in for contracts with the government working on projects not unlike what the company depended on 2, 3 years ago. And so we are putting in active proposals and have one pending at the moment. I hope that we prevail them. And so look at us to be stronger on the defense side. And hopefully, we're announcing awards in the coming quarters. Look at us pursuing longer-term contracts, and we talked about the international and some of the international contracts are more attractive in terms of long-term deployment assets as opposed to the transactional work you see in the Gulf of America. And so I'd say ROVs, big demand. I had not really outfitted at the moment to do the ocean mineral type work with them, but easy enough to do and modification of the Comanches that we have. The Aquanaut, the behaviors look at us chasing defense opportunities. It's where we're going to go. We have got to secure long-term profitable contracts to really make the company successful. And so we need to cut back on some of these 10-day, 5-day, 15-day opportunities to see if we can't seek long-term engagements. Peter Gastreich: Okay. Next question is about the MIG. Clearly, that's something that should be transformational for your company. I just want to ask there, what milestones should investors be watching out for this year? And have there been any initial customer introductions made as a result of that? Or is the conflict in the Middle East leading to some disruptions from that perspective? John Gibson: Well, there was a time when I would have been a larger repository on this than today. I don't have the 50 staff working for me to keep up with global issues. But the Middle East conflict is awfully complicated. My anticipation would be oil prices are likely to remain high even if the Strait of Hormuz open up, Peter. We don't really understand the level of damage yet to the infrastructure and whether or not production can come back from the Middle East. That's going to take some time for an assessment to come in. What that is doing, and it will get -- I'll get back to the Middle East is we do see a resurgence of wind work up in the Northeast as people begin to look at alternatives. And so I think that's going to be robust for us as we go forward. We are picking up wind-related maintenance contracts. The other thing that is happening in the Middle East, and it's happening everywhere now is port security looks to be a really robust market. And we're investigating behaviors needed for the Aquanaut not to be engaged in port security. And I think the main thing is there's a big shift going on right now in corporate thinking. What we need is business development leads in the defense sector. And so we're actively recruiting defense leads for business development for defense. We just got back from the Sea Aerospace Conference in D.C. And I can tell you, we're one of the few existing tested sea trial worthy technologies rather than artist renditions, which is the predominance of the show. And we're hugely differentiated in having Aquanaut as an underwater drone with manipulators that is something that is just not at the show. We're well positioned technically on that. And I think that's the reason that we gained such a strong relationship with the Master Investment Group. The opportunity in terms of looking at the securitization of infrastructure and evaluating and inspecting there in the Gulf region, I think excited the Master Investment Group and us. They are working on introduction. So I'm hoping to get back over. And there's a delay in what we anticipated to happen there and our ability to execute in the near term as a result of the conflict. I would have said we would have been over in the UAE working on engagements with customers there and demonstrating the Aquanaut and putting more feet on the ground faster. How long that delay lasts, I don't know. Travel there speculative and our ability to ramp up is just -- is an unknown still, but I think that they are incredibly well connected. They are very excited about what we're going to do in terms of manufacturing additional units. And it's a hugely exciting opportunity that we just have to remain patient on. We're here for the long term, not for the short term. And this is a tremendous long-term engagement with a great partner, and we're going to continue to pursue working there in Ras Al Khaimah. But I think they are extremely excited about what's possible and committed to the company, and we are committed to that region. It's a great firm. It's a great opportunity. They're a great leader for helping us address the issues that are in the Middle East and in the Gulf. And they have a very strong commitment to manufacturing there in UAE, which is driving their strategy in developing the region. Peter Gastreich: And it sounds like when compared to previous expectations that this ocean mineral strategy is really accelerating. Is that correct? I mean, it looks like materially accelerating versus the past. And if that's the case that you're moving forward with the strategy more quickly. Are there any considerations for depth tests or anything like that, that will come with that? John Gibson: For us to be in the ocean minerals, we have to do some modifications to our equipment to increase its depth rating because a lot of what people want to look at is in the 5,000 to 5,500 meter range. And so to be honest, I'm not interested in doing any more testing of equipment. I'm interested in revenue. And so the whole focus here is on revenue generating cash flow for the company. And so while we will pursue ocean minerals, it's going to take a contract with revenue for us to invest in those vehicles. We're not going to do it on spec. And so as soon as somebody comes to us, we can give them a definitive time line, and we know exactly what to do and how long it will take. And if we have funding for that and a contract to support it, then we will pursue it. And we have money available to us to do that. But we need to see -- what we need to focus on now is revenue, not on testing and not on greater depth. We have a sufficient depth range to be out securing contracts now, Peter. That's what we need to do. Peter Gastreich: Okay. Great. And as you think about deploying the ELOC, $250 million ELOC, what types of uses are you actively evaluating? And how should investors think about the pace of that deployment this year? John Gibson: Well, there's no question. I think it can be advantageous to us on some of the behaviors, sensor packages, et cetera, that may be required for the defense sector. And so it's -- they likely don't require a lot of capital, but it would be capital that we could acquire via the ELOC in order to go after specific contracts with the defense sector. And so at the moment, that looks so hot now and in the long term with the increased government spending there that we've got to ramp up on both development internally to match the needs and the missions there as well as on sales because I think that's what's going to strengthen us. So look at ELOC at the moment more for the defense sector with a little bit of capital on spec there and then also for ocean minerals, if we can secure a long-term contract. Operator: Our next question is from the line of Alex Latimore with Northland. Alexander Latimore: Good information all around. I have just a few questions. I'm just going to start with some broad strokes here at the top. You guys have gone over it a bit here, but I just want to see if there's any extra clarification to kind of refine that. But what are your biggest customer opportunities in terms of maybe those long-term revenue contracts in 2026? And then in 2027, what are the most visible there? John Gibson: It's a good question. I appreciate the long-term question because we intend to be in this for the long term. So thank you, Alex. The big opportunities, I mean, when you look at offshore oil and gas, it's super majors primarily and large independents and national oil companies. That's really the only market. You don't have a lot of players there. It's a very narrow market, we have great relationships there. The adoption rate is the biggest issue with those guys. It's making a shift. And with high oil prices, they actually slow down in new technologies. They get on a treadmill of just trying to improve production. And so it's harder to get an audience. They keep doing what they've done instead of changing to better techniques. So in some ways, that is an inhibitor to the adoption of new technology. But anticipate it's national oil companies, and we are talking to them and to their prime contractors where we can be an assistant and improve their solutions. Super majors and it's the very large independents that we're having discussion with on the oil and gas side. We got good discussion with the wind energy over those. In fact, there's potential for trying to address long-term contracts in the wind energy side and maintaining the infrastructure in the Northeast, even in Europe. And so we're discussing those. But the defense sector, when you start looking at the prime defense contractors working with them and for them, it could be very exciting for us. And so we just spent the week with all of the big names in the defense sector in the U.S., and we're going to get a chance to go over to the Middle East and visit with the Middle Eastern defense sectors as well shortly with introductions from the Master Investment Group. I'd say defense is a place we're going to have to spend some business development time and that there's good long-term contracts. A lot of interest from the geophysical sector on us being able to deploy subsea nodes and recover the data from those subsea nodes. We've got several proposals that we're working on in that sector as well. That's, again, longer-term activity, but it's long-term contracts, which is much better than being in the transactional business. When you start on those, it can last for a year or more as opposed to 10 or 12 days. And so we're focused on that. Port security is really interesting. We only need one port to tie up an Aquanaut full time. And so we're discussing opportunities in the port sector as well. But look at defense, it's something where we're going to increase our sales activity. It's great for us long term, '27, particularly. The oil and gas industry, '27, I think, is going to be even stronger than '26 in the market, particularly after we understand what the production capacity is remaining in the Gulf and refining. And while it's longer term, we have a great discussion going on here. It's reasonably easy for us to outfit the Aquanaut and I should have mentioned this for Peter's question on the ELOC to do pipeline inspection and cable inspection on the bottom. We've looked at technologies and they simply bolt on to the Aquanaut. We have the right vehicle and the right capability. It's just a matter of implementing the sensor package and tracking that's required. And we think that's a very straightforward problem to solve. It's not difficult or interesting. It's straightforward. Not trivial, but straightforward. Alexander Latimore: Okay. Great. That's awesome. That's great color. On the defense side, I want to just touch on the opportunity. I know there's a lot of initiatives going around in terms of UUVs. We have the CENTCOM doing maritime border monitoring, you have mining in the Strait of Hormuz, maybe port surveillance in the UAE as well. The Strait of Taiwan is a big concern recently. I'm wondering, can you work around all those problems? And then out of those or maybe something I'm also not touching on, what is the most visible near-term defense opportunity there? John Gibson: The most near term, yes, we have a DIU proposal in that we hope we prevail on. And if that gets awarded, it will tie up a lot of our resources to be a good, strong contract for us. But when you ask about the defense-related side, there are a lot of people pursuing that in different ways. A lot of them have to do more with AUVs that are single propulsion units that do inspection primarily. They've got a little greater speed than what we have. But what we offer is incredibly unique. And I think we're just now getting out to talk to the prime contractors around how to make proposals to their customer, which is the Navy, the Marines, et cetera. We have the ability to do manipulation. This is unprecedented in the AUV market today. We are the pinnacle there in terms of our experience and what we built. We have a new generation of those coming out. We have payload capacity that can actually be accessed so that we can both recover and deploy. And that's also incredibly unique in the sector as well. There's no real competition in that particular space. What you have to do is think about where recovering and deploying can be advantageous and where the use of manipulators can be advantageous. And I think we've got a lot of opportunities that are opening up in defense where deployment recovery is critical, having payload capacity and being a drone. We're not really an AUV. We have the ability to stop, hover, orbit. You can't deploy something if you're constantly moving. And so you have to have the ability to actually -- if you're going to place something with great accuracy, you need the ability that we have to do a bottom lock and hover and orbit and put it in place. So I think that's where we're headed. And we've got to do a good job explaining this to the defense sector, but we are super unique. Alexander Latimore: Awesome. And then on the MIG partnership, can you talk about what the sequence of events looks like between that closing and then the first Aquanaut coming off the production line? And then when do you expect the initial batch of 10 to be ready as well? John Gibson: So while we're excited about the Master Investment Group, and that question is perfect, what we need to do is get the cost per unit down. And what we were doing with the Master Investment Group is saying we don't want to build one, we want to build 10 because if we can purchase in volume and we have the support to do that, then we can greatly reduce the cost of these units, and that improves a profitability and opportunities in the market. And the other one is we needed to move up in the supply chain queue as well. When you're ordering onesies and twosies, you've got a lead time of 12 to 18 months. If you're ordering 10, then you can move that lead time to much, much shorter. So we wanted to get volume pricing. We wanted to get improvement in our position in the queue and greater leverage with the suppliers that we're purchasing from. I think Master Investment Group brings us all of that. They also bring us great relationships in the Gulf and we really thought that would be beneficial to us as well. But how long will it take? I would say the first unit that we would have come off, I would look at an 18-month window for producing the next-generation Aquanaut there in the Middle East. I think that's a very realistic time line. And I think the budgets for these will be greatly improved by having multiple units as opposed to trying to do one at a time here in the shop, which ends up very difficult to support when you build one technology at a time. They tend to vary from unit to unit. What we want to do is build in exactly alike so that we can have the parts that are needed to have robust deployment and high reliability in the field. Alexander Latimore: Great. Great. One final question for me here. This might be my own curiosity, but I'd just love to hear about it. How hard is it to find an underwater deposit for mining? And then also on your side, is there CapEx to set up an underwater mine? Or just anything there would be good. John Gibson: Well, I'm both -- I love underwater mining. And I'm probably a bit jaded, right? I spent 10 years in the mining industry on the Board of Directors, one of the largest lithium companies. So I've got a lot of experience here. And the oil and gas experience is also [indiscernible]. Your biggest issue here is identifying a density of resource that makes the mining profitable. And we right now are in the exploration phase in ocean minerals. We're not in the production phase in ocean minerals. There's a lot of work to do to do production. And that production equipment is going to be $1 billion equipment. It's not going to be a $10 million AUV for you to go down and move the amount of material you'll have to move in order to collect minerals off the seafloor. So on the exploration side, you have a tremendous ability to use an Aquanaut like vehicle to assess the density of the ore and the mineability of the ore and the cost of removing the ore. So I think we're a great exploratory technology. ROVs can do a similar thing, but you're going to need specialized equipment in order to mine that. And then where the Aquanaut will be [indiscernible] is you're going to have to monitor the plumes that are created when you're doing the mining. You're going to have to look at the contamination in the water as a result of mining operations. They're going to need AUVs like Aquanaut in the water to monitor that in order to meet the environmental regulations. So I think we've got a strong presence in the monitoring, business water sampling, assessing the amount of particulates that we're putting into the water column to protect the flora and fauna. So it's ocean minerals still emerging. I think it's a great -- we're at the front end of the tail of that instead of getting up to the big spending in that area. And that big spending is going to be the guys that actually do the production equipment and the mining. Operator: Your next question comes from the line of Robert [indiscernible]. Unknown Analyst: I just have a few questions regarding the $5.3 million in revenue for 2025. If that's correct. I just want to understand how that revenue is broken down. I'm looking at 3 buckets here, like the ROV, AUV, the Olympic Arm, which I don't think is revenue producing and then the KITT software. So could you let us understand how the revenue was produced last year? John Gibson: I can do that, Robert. Predominance of that revenue was ROV related. The revenue, in my opinion, we had a shortfall in revenue and the shortfall was a direct result of pulling the Aquanaut from the field, and we had work where the ROV was allocated to work with the Aquanaut. And so we had -- our scheduling and logistics for the ROV revenue were tied to us doing Aquanaut work when we canceled the Aquanaut work as a result of finding a technical issue with it, then that also hurt our ROV revenue. So we're suboptimal on the ROV revenue for 2025. And we're very suboptimal on the Aquanaut revenue in 2025 because we pulled it due to a technical issue, which was easily resolved, but you don't want to have really a negative event with an Aquanaut when you're moving into an emerging market. And so rather than taking a risk with it, we pulled it back and checked everything and sure enough we fixed the problem, everything looks good, and we're ready to go with both the Aquanaut. But having that Aquanaut failure hurt us because of the planning. When you pull it and you haven't taken other jobs. It was hard to backfill for them when we had a plan to go out and work with the Aquanaut. And so the ROV was suboptimal. On the manipulators, no revenue associated with manipulators. We're currently working with Forum Energy Technology on the next generation. We've got a good royalty agreement with them. I believe they're a great manufacturer and a partner. I don't have an update for you here. I've got an update for you on the next call as to where we are with FET on the manufacture of those manipulators. And then we have a new generation of manipulator that is designed specifically for the Aquanaut that we think will be ready here in just a few weeks, we'll have the first one ready so that we can begin trying to test and deploy on Aquanaut so that we can get that capability to the field with the new generation of manipulator. And manipulators are a hot market. Aquanaut is hugely differentiated. Any kind of electric manipulator in maritime is even more differentiated than the Aquanaut at this point. Unknown Analyst: Okay. And then what about the KITT software? How much revenue was produced? John Gibson: Let's see how to answer that. It's another really good question. I love your questions that make me have to stop and think, Robert. That's a good and bad thing. So some of the difficulty there is not difficulty. It's what we experienced was this. One of the places we thought we had really good opportunity looks like it is an acquisition target. And so as a consequence, they kind of slowed down and stopped talking to us. And we still see them as a huge opportunity, but got timed out due to mergers and acquisitions of the people we're talking to. The second one that we still are in pursuit of is an international opportunity and conversations are live, and we continue to think any day, we're going to get it done. But we've been thinking any day now for a couple of months. And so I'm now getting a little jaded on how easy it is to close some of these international opportunities. But a lot of excitement over it. And we think that the software revenue will emerge this year, and we continue to pursue that. We're excited to have KJ on Board. I think she knows exactly where to go. I also talk to another business development leader that we're actively recruiting that believes that they know exactly where to place this in international markets too, other than the ones that we're currently pursuing. So I would look to seeing software revenues for certain this year. And hopefully, we can reduce the complexity of signing these agreements. But the challenge with software is it's not a software sale like you think of where you go to CompuServe or whatever is open now Micro Center and buy a copy of word. They're making a long-term commitment on their assets to deploy this. And so there's a lot of upfront questions that have to be asked and qualifications for them to do acceptance on a contract, you're asking them to depend upon you for their operating systems for their equipment. So the sales cycle is longer, but these agreements are sticky, sticky. After you get it in there, it will last for 5, 6 more years and you'll have revenue coming in from it for the long term. So they're definitely what we need to pursue because it annuitizes our revenue stream. Unknown Analyst: Sure. And I'd like to learn more about that in the next call, John. So it's safe to say that $5.3 million primarily, I mean, overwhelmingly was the ROVs. John Gibson: Yes, sir. Unknown Analyst: And I think that if I read in the 10-Q -- 10-K that the majority of the revenue came from 6 customers. Is that accurate? John Gibson: That's correct, which was an increase in the number of customers, but we had quite a number of customers, but a lot of them are that transactional work, which is lower margin. We're trying to shift where I'll take customer concentration if I can get long-term contracts. And I'll live with the fact that, that creates risk. I'd just like to see long-term contracts where we've got stability in cash flow. Unknown Analyst: I agree. And so those 6 customers, was that by way of the SeaTrepid acquisition? John Gibson: Yes, primarily. I mean they are customers that we also use the Aquanaut with. And so it's both -- it's the same customer that's looking at both those solutions. It's one of the reasons we valued SeaTrepid is they're calling on the same customers we're calling on for Aquanaut and vice versa. Unknown Analyst: Yes, that makes sense. Okay. Then my last question on the Aquanaut. How many now are through testing and deployed? I think you mentioned 2, John. Is that? John Gibson: We have 2 of them that are in the water and the certification testing is done. We are most likely going to go back into the Gulf of America on work in early night. Unknown Analyst: Okay. Do have either one of those Aquanauts have produced revenue to date? I know [indiscernible]. John Gibson: Daniel, go ahead. Daniel Dehart: Yes. In testing, we have some funded testing on -- that we've used for both the Aquanaut in a more controlled environment. And we have done revenue-generating projects previously in the Gulf for one of the vehicles. But this year, we are having both ready and available to go to revenue-generating projects in 2026. Unknown Analyst: Yes. And you're trying to avoid the 10- to 15-day testing projects, you want that long-term contract on the Aquanaut? John Gibson: And unfortunately, Robert, as they are beginning to make that transition from ROVs to an Aquanaut, they almost all will have that 10 or 15 days to test it. And so our real challenge is getting one to do enough 10- or 15-day test for them to sign a long-term agreement. And that's really the goal. After they've done enough of it, they can just go, we're going to switch over from an ROV to taking an Aquanaut for the full season. And that is the principal target of what we're trying to accomplish. They get confident that they can switch out of using a large vessel and an ROV and they can use an Aquanaut on a sustained basis for the whole season. But unfortunately, we're still in a new technology adoption cycle on Aquanaut and so they want to see it for 10 or 15 days, and then they'll commit -- they talk about the commitment long term. Unknown Analyst: No, I understand. Yes. Okay. And then the pricing around the Aquanaut, I mean, as you mentioned, you're trying to lower the cost with a larger order through MIG versus like a $10 million for a single Aquanaut with a lead time of 12 to 18 months? John Gibson: Yes. I think we've got an opportunity to cut the price of an Aquanaut by 50%. If we build them the same and we order multiple, I think we've got a really good opportunity on volume pricing and design changes that will get the cost of the unit down. Margin on it is going to be excellent. So it's -- you're looking at the vessel reduction. The other thing we haven't talked about on this call, which is still a great opportunity for us, particularly in the defense sector as well as in oil and gas is a combination of leak detection but doing it with vessel less work so that we actually launch from shore, and we're continuing to work towards that solution because we can completely take the vessel out of the equation, which is a $15,000 to $30,000 a day cost for customers. And I think we can capture a large portion of that and then to ourselves and launch from the shore. Unknown Analyst: No, I saw that. I think that's pretty awesome. That's unique. John Gibson: No, it's super unique. I mean it's -- but there's some cool technology out there, too, though, where these guys are beginning to get ranges for some of these small torpedo like not drones. They're not -- they're not competitive with us. But I mean, those guys can go 500 miles, right? I mean that's incredible range out of these really small vehicles with only 1 or 2 sensors on board. We're carrying 22 sensors and manipulators and potentially a payload. So it's very different markets that we're trying to address. Unknown Analyst: Yes. What I don't want to get into the weeds, but what's the distance on the current Aquanaut? I think I read it 150, 150 miles. John Gibson: It's -- we actually -- it's about 240 kilometers. So if you think about it operating from shore, it can go out 40, 50 kilometers and do 100 kilometers worth of work and then come back and still have enough reserve. You don't have to worry about going to patch it with the vessel. And so you want to make sure you've got enough reserve that you can recover at any time without any issue. So imagine this is my best case scenario. Let's take one of the larger fields off of Louisiana, Bay Marchand. It's about 7 to 10 kilometers offshore. It's got thousands of wellbores that need to be addressed from a leak perspective. 7 kilometers offshore, we can travel all day long, come back in, download the data at night and never put a vessel in the water and be close enough to go out there and catch it with a [indiscernible] Ranger if we needed to and tow it back because it's not very far. So it's just a highly efficient operation to conduct for customers. And I think it greatly reduces their cost and improves their quality because they can assess their assets more often at lower cost, reducing their liability. Unknown Analyst: Okay. Well, I look forward to further conversation on that on a future call. John Gibson: Appreciate that. We probably should make that the last question, operator. We've been running for an hour. Operator: Yes. And with no further questions in queue, I will now hand the call back over to CEO, John Gibson, for closing remarks. John Gibson: Again, thank you, all of you that are on the call. Particular thanks to employees. I mean we've got such a dedicated group, and we are getting things done here. I look forward to a call where all we talk about revenue. And so let's plan on that being our next call. I would say the best chance for that is probably our Q2 call because that we get back out in the water in May, and we'll have an understanding of where the revenues are coming from and what we're going to be doing. And so I'm excited to come back to you and focus on revenue and what we're doing in terms of business development and not just the tech update. With that, thank you very much for joining us, and we look forward to speaking again at the Q1 call. Operator: Thank you again for joining us today. This does conclude today's conference call. You may now disconnect.
Hermann Haraldsson: Good morning, and welcome to our Presentation of our Q1 2026 Report. Yes, let's just go to the agenda slide. We will have the usual agenda for the presentation, and I will present the highlights of the quarter and the strategic update before handing over to Michael for the financials. So next slide, please. We have said that 2026 would be a year of growth acceleration and the first quarter tells us that we are back on track for that. We delivered 4% constant currency growth. And while January and February were soft, momentum changed in March, which saw a significant increase. This correlated with the launch of our spring/summer assortment where we went into the season with around 35% more styles than last year and an assortment that we believe is the most relevant and inspiring we have offered for some time. And we can see that our customers are responding. So that's very positive. On profitability, the underlying margin continues to improve. Our adjusted EBIT margin increased slightly versus last year despite significant FX headwinds. Looking ahead, we are in a strong position to push harder in the second half. Our inventory is clean and healthy, and we have already committed to a significant ramp-up for the autumn/winter season to fully capture the growth momentum that we are building. We will do this from our new base as the headquarter transition to Copenhagen was completed in February. This was done without disruption and gives us the foundation to build our culture and the best team in our industry. Today, we are also initiating a new SEK 200 million buyback program. Cash generation remains solid, and we will continue to distribute excess cash in a disciplined way. And finally, on the outlook, we confirm our revenue guidance of 3% to 8% constant currency growth. But given the solid start of the year, the higher end of the revenue range is now considered being more likely. The adjusted EBIT margin guidance is raised 30 basis points to 5.6% to 6.8% to reflect the favorable currency moves. And Michael, he will take you through the details later. So now please turn to the next slide. We believe that the improvement we saw in March is due to the strategic adjustments we made to Boozt.com going into 2026. We have elevated the brand. We are providing more inspiration, and we're using AI to improve the whole customer experience. And most importantly, we have rightsized and improved our inventory in many ways. Following a year where we had to focus on cleaning our inventory, which had become too deep and without enough freshness and newness, we are now gradually building a more inspirational and a more aspirational assortment. In the first quarter, we added more than 100 new brands to Boozt.com, including well-known names like Birkenstock and Hunter in fashion and Peugeot in home. We have also widened our buying within our current brand portfolio, making slightly more fashion bets. With more than 135,000 styles launched as part of the spring/summer campaign, we brought 35% more options than in SS25 to shop, and our customers responded well by buying 40% more style variations than last year. For the second half and the autumn/winter season, the buy plan is even more ambitious. We are adding more brands and more breadth across categories, including the return of Max Mara and GAP to the site and new additions like Paul Smith. In total, we are on track to add more than 200 new brands during 2026 across our different categories. The point is simple; our customers are responding to a better and broader assortment. This gives us confidence in the acceleration that we are planning for the second half. Next slide, please. Looking at the women's category, we are also seeing a better trend here. After a number of quarters with a decline in customers engaging with the category, we are starting to see a stable improvement. Active customers buying women's fashion on Boozt.com grew 3% in Q1, but the underlying development was even more encouraging. January and February were difficult, cold weather and limited inventory held us back, but it actually got a bit warmer in the region. And as we saw the first signs of spring, women reacted very well to the SS26 launch, supporting our acceleration in March. We expect this momentum to continue as we broaden our assortment even further in the second half of the year. It goes without saying that this also has a spillover effect onto the rest of the business. When women engage with fashion, they often also move into beauty, kids, sports and home. So you might say that a healthy women's category drives the entire platform. Next slide, please. As we scale that volume, it is essential that we do so efficiently and keep the cost base lean. AI has become a key part of how we do that, allowing us to handle increasing volumes without a proportion increasing costs. A clear example is in customer service, where AI now handles 40% of all inquiries. By automating the routine cases, we have been able to reduce our staffing requirements, allowing us to operate with a more focused team while maintaining a high service level. In the supply chain, we have removed 20% of the manual workload by automating product categorization, among other things, which also ensures better data consistency. And in the warehouse, we have effectively added 5% to 10% in capacity within our existing footprint through the use of AI. So it's all about using technology to make our current infrastructure work harder and more efficiently. These are just a few examples, but they give a good idea of how broadly we work with AI to increase efficiency across the entire value chain. So next slide, please. On the customer side, we are using AI to remove friction and make the shopping experience more relevant. This is already live and already contributing. All products now have AI-generated descriptions and tags. And for the spring/summer collection, we're also using AI-generated model pictures. We're also seeing a direct commercial impact from AI-supported style suggestions. When customers see outfits mixed and matched by AI, they add more to the basket, increasing the average order value. As we've said before, AI is going to get us to a shopping experience that is very close to the experience you get when you engage with an outstanding shopping assistant in a physical store. The only thing that is missing is the ability to feel and touch the products. Our Virtual Shopping Assistant is also off to a good start. While adoption rate is still in the very early stages, the conversion rate for customers who engage with the assistant is 130% higher than those who don't engage. So even though the sample size is still quite small, results are quite encouraging. On product discovery, our recommendation click-through rate has improved from 1.5% to 5%, a meaningful step in making it easier for customers to find what they are looking for. By delivering more relevant suggestions and testing a number of AI tools, we ensure that finding the right product remains as intuitive and easy as possible for the consumer. But to wrap it up, AI is making us a more efficient business and better retail at the same time. That is not always easy to achieve, and this is why we keep investing in it. The next slide, please. We work continuously to build out our non-fashion categories, adding both strong brands and more breadth to that part of the assortment. These categories performed well in the quarter, which is also evident from the increase in customers buying from more categories. If we look at the chart, the trend is solid. Every group from 2 to 6 categories is growing in high single digits, up between 7% and 9%. This is a positive step-up from what we saw last year, and it shows that our focus on cross-selling between departments is paying off. This is fundamental for us. We know that when a customer buys more than just fashion, when they add items from home or kids, they stay with us for longer and they return fewer items. The strategy is working, and it gives us a very strong foundation for the rest of the year. With that, I will hand it over to Michael for the financial review. Michael Bjergby: Yes. Thank you, Hermann, and good morning, everyone. I will start out by presenting our financials for the quarter, followed by comments on our updated outlook for the year. I'll start on Slide #11. So as Hermann said, we grew 4% in constant currency, and this was despite of lower inventory. We thereby maintained our growth momentum from Q4, and we improved our general return profile. There are a few notables in the growth patterns that I believe are worth highlighting. First of all, our strategy with increased focus on our main premium side is firmly executed and showing results as expected, growing Boozt is growing 6% in constant currency and Booztlet is declining. Secondly, the Nordics grew quite nicely with good stable growth in Denmark and Sweden, and we saw Norway grew 13%, where we continue to see that we have very strong potential for further growth and where we believe that we are underrepresented. Finland did not grow, and here, consumer behavior appears quite weak generally. As mentioned, a couple of times, March was materially stronger than January and February, and I just want to mention that this is both because constant currency growth was stronger, but also because we now see less currency headwind. This is something that will benefit us for the rest of the year and something that will show in the reported numbers already from April. Please go to the next slide for comments on our profitability. I think it's critical to understand that the quality of earnings are actually much stronger than they appear in the headline figures. The underlying gross margin is actually up and -- but impacted by FX, 70 basis points and also timing of other revenue as well as some COGS adjustment. And this is timing. As FX effects disappear, the reported gross margin will go up, and we saw that in March. So we had a positive reported gross margin in March, and that is a trend that we see continuing into April now, and we also expect for the rest of the year. So the EBIT margin was slightly up. This was driven by less marketing spend. We have produced offline and improved efficiency, and this particularly related in this quarter to Booztlet due to reduced focus and reduced need for clearance at our outlet site. The marketing spend was completely in line with plan and expectations as when we started the quarter, so nothing out of the ordinary. Next, please -- next slide, please. In Q1, the return on our capital improved as our inventory is moving faster and performing better. As you can see on the chart to the right, our quarterly inventory turnover improved to 0.4. And this, we believe, reflects both a broader, fresher and more relevant stock profile. When you have a stock profile like that, that's a very solid foundation for us to increase stock and take bets. So we actually strive to increase stock as soon as possible, but we are also very firm and very strict on the quality that we require, and there is not much high-quality stock available at this point for the spring/summer trading. As such, the larger inventory ramp-up will be seen in the second half of the year where the increased buying budget is committed. Now please move to Slide 14 and our cash development for the year. The free cash flow was negative and in line with expectations. It's driven by the normal working capital seasonality where we have significant payments of VAT provisions, et cetera. And this was combined with an increase in inventory where we're building up for the spring/summer trading. On the bridge on the slide, you can see that the change from the same quarter last year, which is quite a representative quarter. The main difference is really related to exit tax payment in Sweden; CapEx increase due to the relocation of headquarter and then a bit of a larger increase of inventory than what we had last quarter. I want to mention also that our last 12 months' free cash flow is SEK 754 million, so far above 100% cash conversion. Please move to Slide 15. So we ended the quarter with a cash position of SEK 239 million, and we also acquired shares for SEK 97 million in Q1. And as such, we continue to have a very strong balance sheet, and we have financial room to maneuver as we take on commercial opportunities in the market. Today, we have also find liquidity and space to initiate a new share buyback program of SEK 200 million that we are returning to our shareholders, and we will continue to be disciplined in our return of excess cash. This completes my financial review, and I'll now turn to our outlook on Slide #17. I'll start out with some comments on the currency because this obviously had a relatively large impact due to the macro volatility, which had an impact on our main currencies and particularly the NOK has appreciated against the SEK supported by increasing oil prices. This has changed the expected FX impact on our financials for the year, and as such, we are increasing our EBIT margin guidance. In the first quarter of 2026, we still had significant headwinds, both on revenue and EBIT margin. But if we assume that the current exchange rates hold, then that effect is diminishing quite materially for the rest of the year. That will be visible in our reported gross margin and our reported EBIT margin already from March. The full year impact is now expected to be around 1 percentage point negative on revenue growth and a small negative impact on EBIT margin, and this is based on [ bank's ] fixing rates as of yesterday. By the end of Q1 2026, we have also hedged more than half of our NOK exposure. We found that the current levels are attractive compared to last year. Although when we hedge, it did come with some implied cost because the forward rate is lower than the spot rate due to the interest rate difference between Norwegian kroner and the Swedish krona. The hedging also means that our sensitivity on our EBIT margin and our profit is lower now, which makes our updated EBIT margin guidance relatively robust. Please go to Slide 18 for the outlook of the underlying business. So as mentioned, the spring season has started well for us, and the business is progressing in line with plan. As we said from the beginning of the year, we are targeting a growth acceleration during 2026, and we have an inventory buying plan and commercial initiatives lined up to deliver exactly that. With the current momentum, we, therefore, consider the high end of the guidance range more likely. And on top of this, we also have almost 1 percentage points less negative impact from currency than what we expected in February. The EBIT margin guidance is upgraded by 30 basis points, which corresponds to almost SEK 30 million in absolute EBIT. So with this, I will now hand the word back to Hermann for some final remarks. Hermann Haraldsson: Thank you, Michael. It has been a strong start to the spring/summer season, but we are far from claiming victory. The macro and consumer environment is uncertain, and our most important quarter of the year is still a long way off. But for now, Boozt is in a stronger position than we have been for a long time. Consumers are responding. Our inventory is excellent and commercial initiatives are yielding results. So now it is up to us to work hard to build further momentum as we move into the summer months. So this concludes our prepared part of the presentation, and we will now open up for questions. So operator, please. Operator: [Operator Instructions] The next question comes from Daniel Schmidt from Danske Bank. Daniel Schmidt: Just a couple of questions from me. And I clearly hear you when it comes to sort of the sales momentum that you are experiencing currently, especially for March and April. And of course, that builds confidence to take more risk on inventory, but you have done that before and misjudged the market. I think you mentioned a year ago that you came into 2025 with too high inventories in the hope that the market would pick up. So what measures are you taking this time to not make that same mistake? Hermann Haraldsson: Well, experience is a good teacher, Daniel. I think if you noted that we have made quite a big change in our assortment strategy, buying more options, buying more breadth. I think we became too cautious going into '25, so buying more narrow or more depth. And unless when you do that, we're, of course, relying on existing customers to basically buy more. And by selling 40% more variants. And actually, we didn't mention that during the call -- during the presentation, but we had 250,000 new customers. So the growth is very much driven by new customers. And that gives us confidence that by changing our assortment strategy and also -- we have also changed quite heavily in our marketing setup. This gives us confidence that we are on the right track. And again, experience tells us that if we have too much stock, Booztlet is the best channel to clear that and get cash. So that gives us confidence to be -- take a bit more kind of risk or fashion risk or stock risk, you might say so. But in general, our stock is too low at the moment. And if you don't have the stock, you don't sell anything, right? So I think that kind of we are seeing that the actions we made end of last year and beginning of this year, they are paying off. Daniel Schmidt: And what do you mean by significant ramp-up? What would that sort of entail in terms of inventory risk? Hermann Haraldsson: Well, we are talking about that we want to get back to double-digit growth in the second half. So probably, hopefully, that kind of -- at the end of the year, we see double-digit growth figures again. And of course, if you want to grow double digit, then you have to buy inventory for that. We are getting a higher inventory turnover. So that's kind of -- so we probably don't need to buy kind of much more than for the double-digit growth that we're expecting. But we, of course, have to buy in advance. And we are adding something like 100 new brands in the second half as well as 35% new styles or new options. So of course, we have to ramp up because we just have -- don't have enough at the moment. Daniel Schmidt: Okay. And just your comments on current trading, basically March and April, are very upbeat. Is that you alone specifically, you think, given what you've done with the assortment being more aspirational [ inbiz.com ] offering? Or is it also the market that you are, in general, seeing a better momentum in? Hermann Haraldsson: In all modesty, I think it's very -- it's quite company-specific because we don't see a tailwind with regards to the consumers. At best, the kind of the headwind that we've been facing over the last 2, 3, 4, 5 years is still the same. We're seeing consumer confidence figures actually in Denmark going down last month. So we're not seeing increasing headwinds. And of course, we're hoping for tailwind, but it's based on the things that we have done. And as I said before, when you launch 35% more options on the site and customers are buying 40% more variants and options, and you're getting more new customers than you have been getting for a long time. I think that tells the story that it's very much company-specific what we're doing. Daniel Schmidt: And is that -- given that you're sort of widening the offering and already done so, even though we didn't see this in this quarter when it comes to other revenues and you right timing effects, is that something that should drag along other revenues to pick up basically as we go into the coming quarters? Hermann Haraldsson: Yes. Daniel Schmidt: Do they correlate basically? Hermann Haraldsson: Yes. Yes. Yes. Daniel Schmidt: Yes. And that sort of builds your confidence that, that particular line will also pick up in the second half? Hermann Haraldsson: Yes. And it's baked into the EBIT guidance, yes. Daniel Schmidt: And are you also saying that when you say that there's not much quality inventory out there for the summer and spring season that even though you are seeing a pickup, you can't expect too much in the near term in terms of growth when we look at Q2? Hermann Haraldsson: Yes. That is why we are maintaining the revenue guidance with Q1 being better than expected, then, of course, it's more likely that we would end up in the high end of our guidance, but we just don't have enough stock for the first half of the year to go faster than we have expected. Daniel Schmidt: Yes. And then just a final question. When you talk about AI and the inventory capacity, you've seen additional 5% to 10% inventory capacity at the warehouse through AI. How does that work? What have you done basically? Hermann Haraldsson: Yes. That's -- it's actually quite a complicated thing, but it has something to do with kind of the stocking and the cross stocking because you know we have a bulk stock warehouse where we -- so we kind of -- yes, it's about refilling and making the stock available to when we need it. So -- and it's a long story, but when we have the transfer cells that we introduced made it possible for us to -- I wouldn't call it just in time, but something similar that basically present the relevant stock to the warehouse when we need it for sale. And this is -- and these are, of course, tweaks because we need to start building more automation as we grow. But that's within the plan that's baked also into the CapEx that we're guiding on. Daniel Schmidt: Yes. Okay. Hermann Haraldsson: Thanks, Daniel. Operator: The next question comes from Erik Sandstedt from Kepler. Erik Sandstedt: Erik Sandstedt with Kepler. Three questions, please. Firstly, in terms of the brands, you're adding a lot of new brands to the platform now. But could you just help us understand why some of these brands are coming on board now rather than earlier? Is this driven more by sort of improved acceptances from the brands or changes in your own proposition? I'm just a bit curious why so many brands are being onboarded now. Hermann Haraldsson: It's a good question. The -- of course, we are have become a very big platform in the Nordics. And we have a lot of customers, I think, something like 2.8 million customers in -- over the last 12 months. So if you want to sell fashion or apparel, et cetera, in the Nordics, it's difficult to kind of pass by us. But of course, we did -- we've tried to make a more clear distinction between Boozt and Booztlet. So making Boozt.com a more mid- to premium site, less discounting and more kind of premium. So of course, that means that brands are seeing it being more attractive to be in Boozt.com. Also when they see how we've been able to improve the customer experience, more inspiration, more guidance on the site. But kind of it all adds up. So it has a lot to do with us being much more clear on the profile of both Boozt and Booztlet. Erik Sandstedt: That's interesting. And then on marketing, I'm just wondering to what extent the Q1 margin improvement here is basically driven by lower Booztlet-related marketing. You also talked about structural efficiency improvements and so forth. But how should we think about this dynamic if inventory levels now build again? Will you need to market more? Or is there a risk that you have sort of underinvested a bit in marketing in this quarter? Michael Bjergby: Yes. Thank you. This is Michael. So we have invested exactly as we planned. But as you said, it is correct that we have spent less on Booztlet than what we did last year. So the decline is mainly coming from Boozt in the first quarter. This was completely in line with plan. So we have definitely not underinvested, but we are also at a level in Q1, which is lower than we expected to be for the full year. So as such, we do expect to ramp up as we get into higher or important trading seasons and potentially also in Booztlet if needed. Hermann Haraldsson: If I can chip in also is that if you don't have enough stock inventory, there's no reason to spend a lot of money on marketing. So that's why we are very much data-driven on our marketing. So we spend what is needed to attract the customers. So that's why kind of -- it's not a case of pumping the EBIT. It's just by being clever on marketing that we're doing this. Erik Sandstedt: But another way to frame that is, are you mainly spending on marketing to sort of clear out stock? Or are you not also just sort of building brand? Hermann Haraldsson: No, we are totally building brand. But of course, brand building has changed a lot over the recent years. And when it used to be offline media and TV is now across a lot of channels. So we are just -- we have become much better at getting return on our marketing investment. Erik Sandstedt: Perfect. And finally, on AI, you spoke about how that's sort of driving efficiencies. And I think you touched upon the revenue side as well. But a bit curious specifically on agentic commerce, how -- is that an opportunity for you? Or is it more a way to sort of mitigate risks and how the entire market is kind of changing how consumers are interacting with platforms and brands? Hermann Haraldsson: It's both. It's an opportunity if you embrace it and it's a risk if you kind of discount it, right? So you have to embrace it. It's still small. But of course, you have to prepare for the future where agentic commerce might be big. And of course, we are doing that and they are putting a lot of resources within resources. So I think it's kind of -- it's a given that you have to -- it's a sales channel and where consumers buy. So you have to be able to kind of accommodate that. So we see this, yes, again, opportunity if you embrace it, but a risk if you don't do that. Operator: The next question comes from Sebastian Gravefrom Nordea. Unknown Analyst: I'm Michael. And also congrats on what looks like a very encouraging start to the year. Hermann, you say you're far from claiming victory at this point yet. I mean you upgrade your growth guidance, at least you indicated that you're going to end in the upper end after only a small Q1 quarter here. So I mean, I guess, in light of everything going on with energy prices and still low consumer confidence, you must be very confident with the new assortment strategy and happy with what you see here in April so far. So maybe -- could you maybe again try to elaborate a bit on the dynamics here around introducing new premiumized assortment? I mean what effects does it have on shopper behavior, engagement and potential overall -- spillover effects on the overall platform? And I guess what I'm asking is what provides you the comfort and confidence on H2 performance trending towards double-digit growth? Hermann Haraldsson: Yes. It's quite depressing to look at outside the window, seeing wars in Ukraine and in the Middle East. So kind of consumer sentiment or macros are not really helping. But what gives us confidence is that the things that we are in control of, they seem to work. And '25 was a boring year; to be honest, it was a transition year where we did some cuts on staff. We announced the move. We had too much of you could always almost claim kind of noninteresting inventory, especially for the women. So we changed that. And the learning, of course, and we knew that is that women are the key because they are buying and they are buying the best. So if we're not attractive to the women's category, they would not shop also across categories. So this is why we did actually quite a big change to our assortment and said, okay, instead of buying deep and narrow, which is kind of you tend to do when you get a bit conservative or cautious, then you just rely 100% on the data and it means that you end up buying white and blue and black, et cetera. We said, okay, we'll provide more inspiration, take a bit more fashion risk on the edges, knowing that it probably will be the stuff that will be discounted in the season, but basically if showing more freshness and more inspiration and that has paid off. And I think that the interesting KPI is that we have like 35% more variants live, but have sold 40% more. So apparently kind of inspiring a bit inspires a lot and makes them buy more. So it's kind of -- and we have kind of have done that for the spring/summer and are doing that even further in the second half. And then that combined with our site shopping experience as well as our really, really strong marketing team that gives us confidence that the things that we are in control of will make us come back to a double-digit growth. I know it was a long speech, but I get really excited about it. Unknown Analyst: And if you look at the geographical performance, it appears that rest of the Nordics ex Norway continued to be fairly sloppy. I suppose this is a Finnish market. But what is your approach really to turn this around? And is it a priority at all here? Or are your focus elsewhere at the moment? Hermann Haraldsson: Yes. If you -- there's not much time to dig into the numbers. But if you notice Boozt.com, we are growing quite well both in Sweden and Denmark. I think 7% in Sweden, 9% in Denmark constant currency. And I think that is kind of some of the most encouraging numbers because our focus has been Boozt.com. We have to get Boozt.com. It's our premium brand. It's our flagship store and getting good growth in those 2 countries, along with a very strong growth in Norway, that gives us confidence. Finland, they are still cautious and probably still a bit concerned about their big neighbor to the East. And that means that -- but again -- and Booztlet, we haven't had the need to clear stock, which -- so we have a negative growth in Booztlet. I think it's something like 33% in Denmark reported. So I think that is -- so I think that kind of the underlying numbers are quite positive for us because the changes that we've made start with Boozt.com and Booztlet only steps in when we have excess inventory. So all in all, kind of -- we are also quite happy with the Nordics, to be honest. Unknown Analyst: Okay. And what I hear you say is continue to build momentum in Sweden, Denmark and Norway and [indiscernible] today. Hermann Haraldsson: Yes. I think we will fix Finland as we get along. Unknown Analyst: Okay. And then my last question, I think and maybe this is for Michael, on the NOK appreciation. It looks like you're getting some -- obviously, some benefits in '26 as reflected in your margin guidance. However, it doesn't look like you're getting the full benefit from the recent NOK appreciation. I guess maybe you've been somewhat hedged here in the start of the year. So is it fair to assume a somewhat positive spillover into 2027 on the margins if the NOK remains at the current levels? Michael Bjergby: Thank you. Yes, that is correct that we have done some hedging that implies some losses also because the forward rate is lower than the spot rate. But -- so there will be a little bit of a positive spillover into next year if the current rates hold, but it's relatively limited in sort of the 10 to 15 basis points area. Unknown Analyst: Okay. Very clear. Great stuff. Operator: The next question comes from Benjamin Wahlstedt from ABG Sundal Collier. Benjamin Wahlstedt: So a couple of more -- let's go to the long-term questions maybe. So your USD exposure is quite limited directly, but your suppliers are most likely paying for plenty of goods in USD. What have you heard in terms of pricing intentions for the autumn/winter assortment? Do you think lower USD rates will benefit Nordic consumers or well, by extension, fashion volumes in the end, do you think? Or what are your thoughts about this? Hermann Haraldsson: The USD doesn't affect us on the autumn/winter because the buy has been done and the prices have been agreed upon. So if they have any effect, that would be at the earliest for 2027. Benjamin Wahlstedt: And have you heard anything of the guidance... Hermann Haraldsson: No. No. No. Benjamin Wahlstedt: Any sort of pricing intentions for 2027? Hermann Haraldsson: No, not yet. Not yet. Benjamin Wahlstedt: All right. And then perhaps more of a bookkeeping question. Your D&A has been rather volatile in recent quarters. Could you say anything about what you see as a reasonable run rate assumption going forward? Michael Bjergby: Yes. So our D&A is going to be relatively stable also going forward. We have, as you know, because of the IFRS 16, we have the new headquarter, which is slightly higher. And the last quarter was impacted by some one-offs. But if you consider a little bit of increase compared to the run rate in 2025, then that is a good assumption for now. Benjamin Wahlstedt: All right. So up from the Q1 '26 level? Michael Bjergby: Yes, exactly. Operator: [Operator Instructions] The next question comes from Daniel Schmidt from Danske Bank. Daniel Schmidt: Yes. Just a follow-up on -- I think you talked about it last quarter in terms of the sort of upgraded Boozt Club that you've been introducing should have some accounting effects on Q2. Am I right? Michael Bjergby: Yes, we mentioned that at the last call. We are still fine-tuning the concept, and we have not finalized the Club benefits. We are in testing right now, and we have the technical platform in place. But it's critical for us to get in the calibration right before we launch that is essential. And it's not something that is easy to unwind once we are live. So -- but I will also say that with the performance that we see right now, we are not in a rush to relaunch the Club as it is, even though we will launch at some point in time this year. However, for Q2, you should not expect a sort of an increase in depth from deferred revenue recognition from the Club. Daniel Schmidt: So it's going to be postponed a bit? Michael Bjergby: Indeed, yes. Daniel Schmidt: Yes. Okay. And you don't know really when then basically? Michael Bjergby: But we are -- as I said, we are calibrating the benefits of the Club. And that means that it may not be a revenue -- deferred revenue recognition depending on how it launches exactly because it's only if it's cash benefit directly that you have to reduce revenue. But if you are launching the benefits in a different way, then you can actually avoid it potentially. So that is what we are considering right now. Daniel Schmidt: Okay. So it's still up for discussion. Okay. Operator: There are no more questions at this time. So I hand the conference back to the speakers for any closing comments. Hermann Haraldsson: Thank you for joining the conference, and thank you for some very good questions. So this -- yes, this concludes the webcast and the presentation, and I look forward to meeting you and engaging you over the next couple of weeks. Thank you very much, and have a good day.
Leonardo Karam: Good morning. Welcome to the conference call of Usiminas in which the results of the first quarter of 2026 will be discussed. I'm Leonardo Karam, Investor Relations Officer at Usiminas. [Operator Instructions]. This conference call is being recorded and simultaneously broadcast on the Usiminas YouTube channel. We would like to remind you that this conference call is intended exclusively for investors and market analysts. We kindly ask you to identify yourself so that your question can be addressed. We also request that any questions from journalists be directed to the media relations team at Usiminas via e-mail, imprensa@usiminas.com. Before proceeding, I would like to clarify that any forward-looking statements that may be made during this conference call regarding the prospects of the company's business as well as projections, operational and financial goals related to its growth potential constitute forecasts based on management's expectations regarding the future of Usiminas. These expectations are highly dependent on the performance of the steel sector, the country's economic situation and the situation on international markets. So they are subject to change. With us here today is our President, Marcelo Chara, the Vice President of Finance, Investor Relations, Diego Garcia; and our Commercial Vice President, Miguel Homes. First, Marcelo will make a few initial remarks, then Diego will present the results. Afterwards, the questions asked in the Q&A session will be answered. Now I give the floor to Marcelo. Please, Marcelo. Marcelo Chara: Thank you, Leonardo. Ladies and gentlemen, good morning, everyone. It's a pleasure to be here with you to share the results of the first quarter of 2026. We started the year with an improvement in the results of our company, recording a consolidated EBITDA of BRL 653 million that accounts for a growth of 56% in relation to the previous quarter. As to steel sector, there was an increase of 5% in the net per ton, especially as a result of the better mix of sales, the better share in the automotive sector and a reduction of the COGS. And this was driven by the appreciation of the real and the higher efficiency in our industrial activities. In mining, we had a reduction as a result of the rainy season in the region that impacted the production and the logistics. And also due to the prioritization of mining activities with better performance. Considering the present moment, we see a challenging scenario for the next quarters, especially due to the adverse effect of the Iran war at the global economy. And this is due to the expressive increase in the natural gas and oil prices, higher inflation and lower speed in the drop of interest rates and also the maritime aspects that have been impacted. In spite of this complex scenario, we have expectation of consolidated results relatively stable. In steel sector, volumes of sales should remain at the same levels maintaining the segment in the automotive due to the high level of imports. The increase of cost, especially of energy and logistic inputs should be accompanied by the increase in the net revenue per ton. We expect sales volumes to be recovered and also considering the freight prices and fuel prices. There are positive measures that were imposed by the government with antidumping duties related to coated steel, and this should strike a balance in the future. Considering the perspective of the changes, importers responded internalizing an expressive volume of steel in February and March that increased the inventory levels of imported materials in the Brazilian market. In addition to the measures that have been implemented, there is an investment of in China, and we believe that we are going to close them in July 2027. It's important to mention that there's a risk of the oversupply at the structural level with an increase of imports of steel from Asia and China and with an increase of 78% when compared to the first quarter of 2025, especially from South Korea and Vietnam. In addition to Egypt, Internally, we continue with our focus and safety and a continuous improvement in our environmental performance in our operations, increasing competitiveness so as to reduce costs and also have a higher industrial efficiency and basically with a strong financial discipline. In relation to investments, we continue executing priority projects of the company, such as the PCI plant who is to complete it in the second quarter -- second half of 2026. But the benefits have already been captured in the first half of 2026 and also the retrofitting of the coke [ oven ] and also all the activities on the way. We would like to thank all our employees for their efforts, for the engagement as well as the suppliers, clients and shareholders and the community at large for the confidence and for the solid relationship we have been building along those years. Thank you very much. And I turn the floor to our CFO, Diego. Diego Garcia: Thank you, Marcelo. Good morning, everyone. And before beginning the presentation of the results, I would like to remind you that these are the first results that were converted in reals from dollars. Let's move on to the highlights. Steel sales were decreased by 7% in relation to the fourth quarter '25. And this is a result of the strategy of giving more importance to the most effective activities. So there was a lower production due to the stronger rain during the period. EBITDA shows a significant moment in relation to the previous quarter. This was driven by a better mix of products in the steel sector and higher profitability that more than offset the drop in volumes. This improvement in the mix is reflected in an improvement of nearly 5% of the revenue per ton in the steel sector as the increase more than offset the drop in the mining activities. The cost per ton had a slight drop due to the expenses with retrofitting, and this is the impact of the appreciation of the real against the dollar. Let's move on Leo to talk about the consolidated results. Net revenues reflects the significant reduction in the iron ore and also steel products that were not totally offset by the increase of the increase per ton. This is an improvement of the steel unit as a result of the better mix, reaching to levels that the company had reached since the first quarter of last year. Consolidated net income reflects in addition to the best operating results, the positive FX fluctuation in relation to our operations and also an accounting impact and noncash of deferred taxes due to the appreciation of the real as well. Steel sales recorded a drop of 6.9% concentrated in industry, distribution and exports and partially offset with a significant increase in the automotive area, leading to a better sales mix. And there was also a better mix in exports due to a better share in the Argentinian auto market. This better mix led to a better mix of revenue per ton. And as for exports, there was an improvement of nearly 9%. Adjusted EBITDA more than improved and it was very much in line with the first quarter of 2025. This was a result of the better mix, as we mentioned, and the best cost per ton. A better cost per ton. And here, we can see the effect of the improvement in EBIT over EBITDA. COGS was positively impacted by reduction of maintenance costs and major retrofitting, as we mentioned. In addition, we have a better mix that was offset by the lower exchange rate when converting to reals. This positive result apply especially by lower sales of prices and costs and higher volumes. In the mining sector, during the quarter, we had a significant reduction of 21% in the sales volume as it was driven by the seasonal rainfall on production and also on logistics. We also prioritized some areas with best operating performance. Net revenue reflects this drop in volume and the net revenue per ton was maintained stable at $87, the same level as last quarter. The reference price were practically stable with a slightly increase of 0.9%, but they were offset by the higher level of discounts and the different -- differentials as prescribed by the market. Adjusted EBITDA per ton reflects especially the impact of the absorption of fixed costs as a result of lower sales. And now in relation to the financial indicators for the quarter, Usiminas frozen an operating cash flow of BRL 370 million was driven by the EBITDA generation, partially offset by the increase of working capital of BRL 120 million. The working capital variation is associated to a lower accounts payable and an increase of receivable accounts and also due to a reduction in inventory levels. We had a reduction of BRL 67 million in [ trading ] in order to reduce the cost of expenses for the company. It's a movement that we want to continue implementing along the next quarter. We had a CapEx of BRL 285 million, a reduction of 23% in relation to the previous quarter. As a result, we ended the quarter with a free cash flow of BRL 84 million. We ended the quarter maintaining a net cash position at levels which were very similar to the previous quarter. This movement reflects a proportional reduction in the gross debt and also to the cash level influenced by the appreciation of the in relation to the dollar, considering the conversion in the statements. The indicator of net debt over EBITDA also remained stable, reinforcing the consistency in our capital structure. Finally, we have a debt profile, which is very comfortable without relevant maturity in the next years and with the cash and investments enough to cover the indebtedness of the company. Leo, over to you. Thank you. Leonardo Karam: Thank you, Diego. Now we're going to start our Q&A session. Our first question is for you, Diego. Now we have most questions about costs. So we are going to try to address them all, breaking them down so that we can avoid confusion. So the first question comes from Caio Ribeiro from Bank of America. And this is what they ask from XP. Could you provide more color about the cost evolution of the input of the second quarter in relation to the first quarter? Which are the main drivers? How do you expect the cash per ton to increase? [ Guilherme ] completes -- asking for more details about the impact in the context of the increase in inputs and raw materials and freight that you mentioned in the outlook. Diego, over to you. Diego Garcia: Thank you very much for the question. In relation to the inputs for the next quarter, all raw materials will have an increase. We have already been seeing in slabs and this has no impact in the previous quarter due to the timing considering the moment when the slabs were purchased, but there will be an impact for the next quarter. And we also see that higher price in cokes and also in the coal. And Marcelo has mentioned that we see an impact caused by the freight increases that would affect mining activities, especially. However, as of the second quarter, they will start causing impact on the supply of raw materials. So these are the main drivers. Leonardo Karam: Thank you. Still about costs Rafael Barcellos, Bradesco, Gabriel Barra from Citi, and [ Emerson ] from Goldman Sachs. They ask the following. So what's the magnitude of cost reduction when you reduce maintenance costs? Is this something we are going to have an effect in the next half of the year? And the retrofitting will be offset in the next quarters? Or do you see that the cost will have some level of sustainability? And is there a space for room for better performance in the operations in terms of energy and raw materials? Diego? Diego Garcia: The cost per ton was at $15 per ton. So divided by ton, we made some savings. In relation. Leonardo Karam: I'm sorry, Diego, just to specify that you're talking specifically about major repairs, right? Unknown Executive: Yes, major repairs and maintenance. Yes, these are the 2 factors that explain the savings that we had. So I mentioned, we have $15 per ton. So it's an temporal or permanent effect. This was the question. We believe that this is going to be permanent. We have no expectations of anything changing unless something unexpected change happens. So this -- the cost may come back in the future, and this will be reflected in the activities. And these are the activities we are trying to do more efficiently. And to add Diego's comments, as I had mentioned in the previous calls, we are deeply focused in improving industrial efficiency, and we started important initiatives in order to improve efficiency. We have adopted tools to optimize and make all the repairs in a more effective way, especially the planned repairs. And in terms of cash control and in terms of asset controls, we have [ mentioned ] all the dimension in order to optimize all the flows and all the related costs. And we can see the results because we have been doing this for more than 2 years. And this is a continuous process as the expectation is to continue improving efficiency along those lines. Leonardo Karam: We have here another question related to cost, but I believe it's more directed to Miguel. Caio Ribeiro from Bank of America. He asks if the price increases were enough to offset the cost pressure? Or do you think more increases will be necessary? Miguel Angel Camejo: I think your question is very important so that we can clarify and apply the dynamics that we use for our prices along the quarter. And also for the present moment. The increase of January had the purpose of improving the margins of the steel sector after a long period of lean margins, considering that we were in conditions of unfair competition as we have observed in the last 3 years in Brazil. After the beginning of the war in 28th of February, we saw the pressure on costs, as Marcelo and Diego mentioned. And this leads the need for increasing prices as of April. As of now, we are always mentioning the negotiations in relation to spot businesses and the distribution. So we are in a scenario of high volatility and uncertainties. So we are going to be analyzing very cautiously the profitability of each operation in terms of imposing new prices for the spot prices. The industrial sectors will continue this trend. We'll continue making adjustments in the spot prices as we renew the agreements. Leonardo Karam: Thank you, Miguel. Diego, still related to costs. Now focusing on the ForEx. We have questions by Gabriel Barra and Ricardo Monegaglia from Safra. He says, should we expect 2-digit levels? Or should there be any pressure should the ForEx fluctuation revert? The functional currency helped us in nonrecurring manner. Or how -- what were the changes? And what were the exchange rate used? Ricardo ask saying the following. What was the estimated impact on the COGS price for the first quarter, considering this FX rate? And can we think about the aid of BRL 50 million in the EBITDA of the quarter compared to the previous methodology? And what's the evolution that we can expect in relation to the FX fluctuations? Miguel Angel Camejo: Thank you, Gabriel and Ricardo. In relation to the margins that we are -- what we are estimating for the next quarter, as Marcel has mentioned, we are expecting an EBITDA level, which should be stable. And we are likely to have an improvement in the steel sector to offset the mining activities. In relation to the functional currency effects, the main effects that we can see is on the one side, we should consider the net position in reals in a consolidated way. Because that will lead it to FX gain of BRL 110 million. And also, there is an impact in the deferred credit, which was something very significant, amounting to BRL 450 million, which is a very large -- a large share of the net income. And that will depend on the future FX variation. If there's no variation, we are going to see the effect on the results. If the FX is maintained what we saw yesterday, for sure, we are going to have a very similar result. And then the type of FX rate used. If I'm not mistaken, -- at the end of December, it was 5.5. And at the end of the March, it was 5.2. It had an impact on the cash cost of the steel sector in dollars. So it is cash cost. It's in dollars, so there will be no changes. So when we convert into reals, we use FX, FX rate, which was lower in relation to the previous period. Leonardo Karam: So there was another question. No, that's it. Okay. The next question is still about costs. Diego, Edgard and Daniel from Itau, [indiscernible], would like to understand this line in our cost of others. So they are asking us to give more color because when we look at the history track, there may be a seasonality influencing. So what can we expect for the second quarter? Is this already considering the outlook of the cost increase that was shared with us? So from BRL 240 million, we saw a drop of BRL 89 million in the line. And what can we expect? So they want details about this reduction, and this is what [ Guilherme ] asks us. Diego. Diego Garcia: This line is very pulverized, but we're not likely to see a seasonality influence. Now answering your last question in relation to the bonus payment. So except for this, all the others are very [polarized]. Leonardo Karam: Now Miguel, about third-party slabs, [indiscernible] they say it attracted our attention, the level of purchases that you made of slabs. So how does slab price has impacted the production of rolled steel in Cubatao. So how do you use the blast furnaces of Ipatinga? And can we expect the slab price level to be maintained at the same level? So the question is, is the level of purchase likely to be maintained? Miguel Angel Camejo: Of course, you have been following the international indicators for slabs. We have been suffering a lot of pressure since the Iran war started. And based on this, we can simulate the allocation of our production between Ipatinga and Cubatao. Of course, this will be a result of the best economic decision. Obviously, so we have to meet the need of each client at a certain moment. So what to expect for the future, we can expect our production to increase in Ipatinga with the blast furnaces and a reduction of activities in Cubatao in the short term. We are going to continue monitoring the market opportunities and alternatives so that we can go back to the levels at Cubatao that we want or to look for profitable alternatives for the company. Leonardo Karam: Thank you, Miguel. Marcelo There's a question by Gabriel Barra from Citi about the Iran conflict. This is a question. The effect of conflict did not affect the quarter of the steel sector is not so affected by the war. Marcelo, could you answer this? Marcelo Chara: Gabriel, thank you very much for the question. We all know the impact of the gas, of the oil barrel, which has a significant increase. And this impacts the cost of transportation and energy in all the logistics and production chain in general. In the first quarter, we hadn't seen this reflected on the results yet. But as we update all the indicators and all the contracts related to the indicators, we are sure to see those impacts. All industrial sector will have this impact and other sectors in the economy will also have the impact. The freight will have a significant impact. So the maritime transportation imports and exports will be impacted. I would say that this is inevitable. So the cost will be impacted eventually. Leonardo Karam: Thank you, Marcelo. Miguel -- now about sales. We have many questions about sales, and I'll try to concentrate them. of Goldman Sachs, [ Guilherme ] of XP and Caio Greiner of UBS asked the following questions. Considering the stable volume of production, considering the strategy of the company, is there room for gain in market share? The focus would be in maximizing the revenue per ton and profitability. And the expectation -- what's the expectation to imports to drop? And what you expect the stable volumes? And the first quarter was lower than we expected. Do you see any deterioration of the demand and [ Guilherme ] adds about the performance of the domestic market. And if we already have a tighter scenario for some specific products, especially those related to antidumping. And Caio Greiner also asks about the strategy. Are you going to continue with the same strategy? Or are you going to go for higher market share? Are you going to prioritize the old over volume? Miguel Angel Camejo: I'm going to give answers. And Leo, you can help me if I did not answer some questions. In relation to the market, we see a very important resilience of the main consuming sectors of steel. The first would be the automotive sector with an increase in production of auto and also in the formalization of those cars. And ANFAVEA estimates a 4% increase in production. Sectors related to consumption has a very resilient level with the expectations of growth, not very high, but following the macroeconomic indicators of the country. On the other hand, we have sectors that are being affected more in relation to consumption. And they have been facing tough times, especially the sector related to the agribusiness, roads implements, agricultural machineries, which have been drops in consumption. Considering this context and since imports have been increasing in the first quarter, in spite of the measures that have been implemented by the government, especially antidumping and cold rolling mill and coated rolling mill, but we see that the inventories will be very high. And as a consequence, there will be a stability in the apparent consumption of steel that could be better in the second half of the year when the inventory levels are more normalized. And then we expect a stability in the sales in the second quarter. In relation to the share, it would be fair to think we can talk about the second half of the year. We can talk about export -- import of steel, especially those with unfair competition will have some improvements. And Usiminas will then be a very important player in increasing the share of supply of local or domestic market. In relation to the prioritization of value over volume and profitability, it's fair to think that in a scenario of high volatility after the year on war, we tend to be more demanding in our decisions. so that we can make spot negotiations and also in relation to important projects in the medium and long term. Leonardo Karam: Thank you, Miguel. There is a follow-up on the functional currency. [ Gabriel Simoes ] and Marcelo Arazi from BTG. So what would be a follow-up on the cost and the function currency, especially those which have higher consumption. For example, the change of functional currency helped to reduce the cost of the raw materials after the conversion in real. And Marcelo asks us to quantify the effect of this variation should the function of currency remains intact, if there were no changes, what would be the evolution of the cost? What would be the cost behavior? Yes, Diego. Diego Garcia: Thank you, Ricardo and Marcelo. The costs are in dollar, the slab cost, coal or they were all converted into dollars. And the costs are accounted for. And then what happens is the conversion into real that happens every month. If the currency is lower, the cost will be shown in real. But it doesn't mean that the functional currency helped to reduce the cost. So we convert into real that will show this effect. In relation to the second question, if you're going to make a quantification, it's something very complex to be done because we would have to redo of the previous quarter that used a different functional currency. We -- it's not something that is required to be done. So it's very complex to redo the previous accounting of the previous quarter. Leonardo Karam: Thank you, Diego. Miguel, now about exports. [ Rodolfo Angele ] JPMorgan and Igor from Genial asks about exports. Steel sector volumes were lower. So what do you expect for the next period? And Igor asks more details about the prices. And he says that there was a better mix, especially what happened in Argentina. So are you going to continue with this price over volume now in the external market? Are you going to apply this as well to the external market? So what are the expectations for exports? Miguel Angel Camejo: Thank you, Leo. Our expectations for the second quarter of this year is to maintain a stability, both in terms of mix and the market -- exports market. So we don't see a lot of changes, a lot of variations in this regard. The higher average price is a result of the better mix. As we anticipated in the fourth quarter of last year in the call, we ended the deliveries of oil and gas that we had in the past. We maintain a positive expectation in the sector of oil and gas, especially in Argentina. In the short term, we do not see any closures. For the second half of the year, we have been negotiated important projects that we hope to have -- to be very successful in the negotiations. Leonardo Karam: Thank you, Miguel. Still about imports. Gabriel, Barra, Citi, [indiscernible] JPMorgan, they ask the following. In spite of the expectation of normalizing the exports, galvanized products has high levels still. So how do you see the competitive dynamics in this specific segment? Should we expect an accommodation of exports in the short run? And Igor says he understand that there was a raise of importers in order to go for the volumes before the measures were applied. So how long do you believe that the market will absorb this excess volume? And lastly,[ Thais ] asks about cold rolling products. So we saw that the volumes dropped, but we still have some inventories in the chain. So some volumes in other regions were also coming in. And we heard about volumes coming in, in other regions. Could you provide some more information about this? Miguel Angel Camejo: Gabriel, Igor Guedes. For sure, imports of the first quarter were very high, increasing by 30% when we compare to the previous quarter. This suggests a very big pressure in the inventories in the chain. And this will cause impact in the apparent consumption of steel, especially in the domestic market in the next months. The inventory levels cannot be calculated very accurately. But there is an expectation of increasing consumption. But -- so we believe it will take some levels. We believe that this inventory levels will be normalized in the second half of the year. And at that moment, the steel industries, including Usiminas will have more chances of opportunities in relation to the steel consumption in Brazil. What was the other question, Leo, please help me. The question was very relevant. In addition to the increase in imports, we can see an increase of imports, especially in the Southeast Asia. It's very relevant to understand that the world oversupply will be maintained. Even though the Chinese steel in March stands at BRL 120 million per year and generate an imbalance in different countries. This situation generates an indirect impact in the Southeast Asia countries that is to direct those oversupply to Brazil. So it's very important to continue monitoring together with the government, and we must take the right measures so that we can avoid the indirect impact generated by the Chinese oversupply. Leonardo Karam: Miguel still for you. A question about automotive. [ Diego Mora ] from Goldman Sachs says Ricardo Monegaglia from Safra has 2 questions. The stronger sales mix is sustainable. What are the negotiations of the agreements related to prices? What were the agreements for the automotive industry in April? And what are the impact of the coated and galvanized products in relation to agreements? In the first quarter, we had a big influence of the automotive sector. So how do you expect this to play out in the future? Miguel Angel Camejo: So let's start from the agreements. The agreements have showing reductions of 2% or 3%, similar to what we negotiated with the agreements that we had in January. We expect the automotive sector to continue the way it is. March was a very relevant month in production, especially in the first 15 days of April, we see this materializing. And ANFAVEA expects an increase of 4% for the year. However, it's very important to mention that both the steel sector and the automotive sector and other sectors of the economy and the Brazilian industry have been facing challenges in relation to imports, both for final products and also in relation to business models that will that are coming to Brazil. So we have a lower impact and lower impact in the production chains in Brazil. It's important, therefore, to continue with our agenda of reindustrialization and also with the public policies to reinforce the productive chain in different sectors. The galvanized products in the auto sector and also the coated products account for 70% of our installed capacity. So 30% of this is impacted by spot businesses and also other industrial sectors. that follow their own agreements. In relation to the favorable mix of the first half of the year, the expectation is to maintain this favorable mix for the second half of the year. In the second half of the year, we have to understand the dynamics of different sectors, the potential reduction of imports in Brazil after the implementation and also the inspection of the measures that were to be implemented by the government. Leonardo Karam: Thank you, Miguel. Miguel and Diego now. In relation to the outlook that we provided, Rafael Barcellos with Bradesco and Ricardo Monegaglia with Safra asked the following. What is the magnitude of price increase and cost in the steel sector as we're projecting in the outlook? So it's the same questions. They want to know the magnitude. They want to know about the cost and the price for the next quarter. Miguel Angel Camejo: I'll start, Diego. In terms of price, we have already mentioned, there was an increase in price as of April 1 for the distribution and the spot prices, as we mentioned previously. As -- in relation to the industry, the industrial agreement as of April will follow the trend of the mix of spot prices as we observed in the first quarter of the year. In the automotive sector, we continue with the agreements that we mentioned previously according to the negotiations that have been completed. So we are looking at the raw materials, especially plates and also Coke and coal. And this will have an impact that we will try to handle. However, I cannot provide you with exact numbers or precise magnitude. Leonardo Karam: Still about outlook related to prices, Guillermo [indiscernible] from JPMorgan and Carlos from Morgan Stanley, they said, what is the domestic performance along the second quarter? And do you see a more positive impact for the dumping -- for the local industry during the antidumping measures? So when will the price pass-through will happen? And how has this been impacted by the imported products? And [indiscernible] asks for more color about the increases in April that you have already mentioned. And if you expect any price changes for May and June, do we expect movements to happen, Miguel? Miguel Angel Camejo: In relation to the positive scenario for the local industry based on commercial measures, we do not see the impact of the measures that were defined in the beginning of the year. Why? Because as we mentioned previously, there were there was an increase of the import of there was an increase of the inventory level. So the results will take a bit longer. So there was a drop in the local production. So as the local mills cannot increase their share in the apparent consumption of steel in the country. Of course, the measures will then have the expected results. In relation to prices, we implemented a 5% increase in the spot sector as of April 1 and we're going to continue monitoring the pressure of costs in the international market, the cost of energy. And based on that, we will see the -- what will happen to the new adjustments for the next months. We still do not have the adjustments already defined, but we are monitoring all the situation very closely. And this will also be related to higher volatility in our local costs. Leo, did I miss anything? Leonardo Karam: No, I think you answered his questions. I said that the cost would be the most successful question, but no, there's a very long section about the commercial aspect. Carlos asks if you could mention this percentage of increase in April for the spot price as distribution and industrial segment industrial agreements. Miguel Angel Camejo: For the distribution sector, the adjustments implemented was at 5% as of April 1, the industrial agreements that start as of April should follow the dynamics that was observed in the spot price in the first quarter that had a very similar level of 5% or 6% in the distribution sector. Not all the agreements are updated on April 1. Some of them will have the update only on July 1. Leonardo Karam: Thank you, Miguel. We're moving towards the end, and I still have a lot of questions here with me. So I'm going to try to select the main ones. Miguel, about price parity. As Brian and Marcelo has asked about what's the import parity for the rolling and coated product? And what are we to expect for the future? The calculation of the parity is very interesting and why is that? Miguel Angel Camejo: Because different from what we saw in the past, when we talked about parity, the calculation used to be made based on market prices and outside of unfair competition and oversupply situation. When we compare, for example, the domestic market price against the price -- domestic price in Europe and the United States, we still are at lower levels that have defense -- commercial defense so as to balance the commercial market in the -- internally. So you can make recalculations. So it could be about 15% nowadays. But with impact on this price which is a price, which is impacted by the oversupply conditions of the international market. Leonardo Karam: Now, Miguel, commercial defense, Gabriel Barra, [indiscernible] of UBS ask the following: Gabriel asks about the hot rolling product. When the antidumping was not implanted, can we see this reflected in imported volumes? Do you think there will be other drop in hot coils and what are the measures to be implemented along the year? Marcelo completes asking about the share. If you have seen alternative routes for the imports of steel, such as Korea or Vietnam. And the price -- have the prices being more competitive than those are Chinese products. And could this increase the parity of the industries and [indiscernible] completes, asking about the vision about the implementation of the antidumping measures. After the implementation of antidumping measures, we will see an increase of prices and how you see the import parity of coated products? Yes, please. Miguel Angel Camejo: It's very relevant to implement the antidumping measures for hot rolling product. So we see what we saw in the cold rolling and coated products that have been very important. We still do not see a reduction in the results. So we are likely to see this when the -- there was a raise for anticipating those purchase of those materials. In terms of Vietnam and Korea, as an alternative route, we have observed a significant increase of imports from other origins China, especially Korea, Vietnam and other countries from the Southeast Asia. In commercial conditions, very similar to those offered by China. So this is a result of the high pressure that China has in the local market, leading those countries or leading those industries to have unfair competition in their exports. So this is very relevant, and we are very attentive to those cases so that we can activate the tools that we have for commercial defense so as to avoid the impacts that we have seen in the last 3 years, with a high increase of Chinese imports. So it's very important to keep monitoring and working with the local authorities, so that we can make -- adopt the right measures of defense. In relation to the price, I think I answered previously in relation to the parity and how we see the prices to play out in the future. Leonardo Karam: Thank you, Miguel. There is a follow-up. But I think you have already answered. Luis from -- asks about the price of Asia, you have heard Asia about Vietnam and Korea. So we are moving towards the end. So let's try it a bit quick. Diego, about deferred, Gabriel Barran says, the income was very favored by deferred tax credits and FX effects. How can we expect the effective tariff or liquid for the next quarter. How can you see that? Gabriel? Miguel Angel Camejo: The impact of the tax credit with deferred taxes will depend on the type of FX rate because the accounting base is in dollars and when the real is appreciated against the dollar, there's an increase. And then this credit is increased. We have the inverse movement we would have a negative result on this. So that will depend the kind of effects. In relation to the financial result, and this is more linked to the net position in reals will also depend on the evolution of net cash in reals that we have. So we are going to continue monitoring this, so that we can minimize the effect. Leonardo Karam: Marcelo, one question for you about compacters. Gabriel Barra from Citi, and Ricardo from Safra ask the following: what are the analysis of compact analysis can be done in phases, which is the most likely scenario and the friable, what the duration of the life of the mine. Is there any decision to be made still this year and the environmental permitting and all the documents at MUSA, what would be the expected timing for those -- and for the FID and approval? Marcelo, can you answer that? Marcelo Chara: Thank you, Leo, Rafael, Gabriel and Ricardo. I'm going to try to summarize. As we have been mentioning, the permitting is working well. According to the time line, considering magnitude and complexity of the project. In 2026, we believe we can have the confirmation, so that we complete all the permitting process. In relation to the friables, we have been making a new sizing of all the reserves and by using different strategies, we have been able to extend the useful life of the friables. And this is very important for us, the strategic view in addition to optimizing the assets that are already existing for the operation of friables. I would say that these are the main components. And as we evolve and we continue with the process of permitting, so at the end of 2026 and the beginning of 2027, we expect to have a proposal and also to analyze the alternatives. And this is a highly complexity project. And we have different alternatives. We have very good engineering team in order to optimize each of the possible steps. And we are very likely to have a very competitive and efficient split. So this proposal can be callinated in phases. Leonardo Karam: Thank you, Marcelo. Marcelo and Diego. We have questions about projects. So Gabriel Coelho Barra . Gabriel asks about the advances of the PCI project. Can it give an additional upside in the margin still this year. Can you comment on the evolution of other projects of the efficiency of the company, such as Coke batteries and gas holders. And how can we think about the PCI implementation leading to lower cost per ton. What can we expect in terms of efficiency after the implementation? And would it would reduce the purchase of still called for by third parties -- from third parties? Miguel Angel Camejo: The PCI project is a project that is in the final stage. And as I mentioned in the remarks, we are already capitalizing on it because there's a part in the blast furnace that has already been completed and that helps us to make the distribution of fuel and blast furnace in a very efficient manner. So we have been able to implement our PCI and our blast furnace 3 is where this investment is mostly concentrated. So we have already started to capitalize on this on the efficiency of the field as of this quarter, the second quarter and we are likely to capitalize it on full as of the fourth quarter without a doubt. And this will allow us to reduce the purchase of external Coke because this is going to be a replacement from this coal to Coke because this is a field that we are going to be applying internally. And the other projects are moving in alignment to our plan in a very efficient manner. For example, our Coke plant has two main sectors. One of the sector is undergoing hot repair. We have already advanced by 50% in this activity. So this will improve our environmental performance and we also have a very good thermal efficiency and there is a complete construction destruction of the other section of the Coke plant. And next month, we'll be able to see the construction works. So we had auction process and also the technical part, the technical dimensions in order for the implementation to happen. And the engineering side is also very advanced. So in 2 years' time, 2.5 years' time, we will have a very good improvement. And also for gas holders, we will see a very important evolution of the gas holders that will allow us to recover a large quantity of internal gas and we improve the overall efficiency. The sum of all those projects -- we'll be capitalized in a progressive manner in the next quarter until the full completion. In the calls, we are going to share with you the progression of all those activities. And Marcelo, in fact, the hot repair and the PCI plant used up most of the CapEx for the quarter. Leonardo Karam: Okay. Last question now, we are running out of time. It's about sales at MUSA. Caio Ribeiro with Bank of America, they ask the following: and the mining sector, then with increase of cost and freight, will there be a decrease in the shipping to the external market. MUSA operations were affected in the volumes because of the rainfall. And in the second and third quarters, which are dryer periods, do you believe that you can recover the volumes at the same levels that we had in 2025? Yes, Diego? Diego Garcia: In fact, we exported to Asia, but those cost increases impacted our profitability, but it's still profitable. As we can see in the results of MUSA. The diesel cost impact has not had a significant increase. So the higher consumption was associated with internal movement. So in terms of volume, as we mentioned at the beginning of the presentation, we expect a recovery volumes, especially due to higher production. And we are going to prioritize the area with higher grades so that we can continue exporting. Leonardo Karam: Thank you very everyone. We end the Q&A session now. We would like to thank you for taking part in this event. And if you have any questions, we would like to remind you that the IR team is available to take your questions. Have a good day, everyone. [Statements in English on this transcript were spoken by an interpreter present on the live call.]
Leonardo Karam: Good morning. Welcome to the conference call of Usiminas in which the results of the first quarter of 2026 will be discussed. I'm Leonardo Karam, Investor Relations Officer at Usiminas. [Operator Instructions]. This conference call is being recorded and simultaneously broadcast on the Usiminas YouTube channel. We would like to remind you that this conference call is intended exclusively for investors and market analysts. We kindly ask you to identify yourself so that your question can be addressed. We also request that any questions from journalists be directed to the media relations team at Usiminas via e-mail, imprensa@usiminas.com. Before proceeding, I would like to clarify that any forward-looking statements that may be made during this conference call regarding the prospects of the company's business as well as projections, operational and financial goals related to its growth potential constitute forecasts based on management's expectations regarding the future of Usiminas. These expectations are highly dependent on the performance of the steel sector, the country's economic situation and the situation on international markets. So they are subject to change. With us here today is our President, Marcelo Chara, the Vice President of Finance, Investor Relations, Diego Garcia; and our Commercial Vice President, Miguel Homes. First, Marcelo will make a few initial remarks, then Diego will present the results. Afterwards, the questions asked in the Q&A session will be answered. Now I give the floor to Marcelo. Please, Marcelo. Marcelo Chara: Thank you, Leonardo. Ladies and gentlemen, good morning, everyone. It's a pleasure to be here with you to share the results of the first quarter of 2026. We started the year with an improvement in the results of our company, recording a consolidated EBITDA of BRL 653 million that accounts for a growth of 56% in relation to the previous quarter. As to steel sector, there was an increase of 5% in the net per ton, especially as a result of the better mix of sales, the better share in the automotive sector and a reduction of the COGS. And this was driven by the appreciation of the real and the higher efficiency in our industrial activities. In mining, we had a reduction as a result of the rainy season in the region that impacted the production and the logistics. And also due to the prioritization of mining activities with better performance. Considering the present moment, we see a challenging scenario for the next quarters, especially due to the adverse effect of the Iran war at the global economy. And this is due to the expressive increase in the natural gas and oil prices, higher inflation and lower speed in the drop of interest rates and also the maritime aspects that have been impacted. In spite of this complex scenario, we have expectation of consolidated results relatively stable. In steel sector, volumes of sales should remain at the same levels maintaining the segment in the automotive due to the high level of imports. The increase of cost, especially of energy and logistic inputs should be accompanied by the increase in the net revenue per ton. We expect sales volumes to be recovered and also considering the freight prices and fuel prices. There are positive measures that were imposed by the government with antidumping duties related to coated steel, and this should strike a balance in the future. Considering the perspective of the changes, importers responded internalizing an expressive volume of steel in February and March that increased the inventory levels of imported materials in the Brazilian market. In addition to the measures that have been implemented, there is an investment of in China, and we believe that we are going to close them in July 2027. It's important to mention that there's a risk of the oversupply at the structural level with an increase of imports of steel from Asia and China and with an increase of 78% when compared to the first quarter of 2025, especially from South Korea and Vietnam. In addition to Egypt, Internally, we continue with our focus and safety and a continuous improvement in our environmental performance in our operations, increasing competitiveness so as to reduce costs and also have a higher industrial efficiency and basically with a strong financial discipline. In relation to investments, we continue executing priority projects of the company, such as the PCI plant who is to complete it in the second quarter -- second half of 2026. But the benefits have already been captured in the first half of 2026 and also the retrofitting of the coke [ oven ] and also all the activities on the way. We would like to thank all our employees for their efforts, for the engagement as well as the suppliers, clients and shareholders and the community at large for the confidence and for the solid relationship we have been building along those years. Thank you very much. And I turn the floor to our CFO, Diego. Diego Garcia: Thank you, Marcelo. Good morning, everyone. And before beginning the presentation of the results, I would like to remind you that these are the first results that were converted in reals from dollars. Let's move on to the highlights. Steel sales were decreased by 7% in relation to the fourth quarter '25. And this is a result of the strategy of giving more importance to the most effective activities. So there was a lower production due to the stronger rain during the period. EBITDA shows a significant moment in relation to the previous quarter. This was driven by a better mix of products in the steel sector and higher profitability that more than offset the drop in volumes. This improvement in the mix is reflected in an improvement of nearly 5% of the revenue per ton in the steel sector as the increase more than offset the drop in the mining activities. The cost per ton had a slight drop due to the expenses with retrofitting, and this is the impact of the appreciation of the real against the dollar. Let's move on Leo to talk about the consolidated results. Net revenues reflects the significant reduction in the iron ore and also steel products that were not totally offset by the increase of the increase per ton. This is an improvement of the steel unit as a result of the better mix, reaching to levels that the company had reached since the first quarter of last year. Consolidated net income reflects in addition to the best operating results, the positive FX fluctuation in relation to our operations and also an accounting impact and noncash of deferred taxes due to the appreciation of the real as well. Steel sales recorded a drop of 6.9% concentrated in industry, distribution and exports and partially offset with a significant increase in the automotive area, leading to a better sales mix. And there was also a better mix in exports due to a better share in the Argentinian auto market. This better mix led to a better mix of revenue per ton. And as for exports, there was an improvement of nearly 9%. Adjusted EBITDA more than improved and it was very much in line with the first quarter of 2025. This was a result of the better mix, as we mentioned, and the best cost per ton. A better cost per ton. And here, we can see the effect of the improvement in EBIT over EBITDA. COGS was positively impacted by reduction of maintenance costs and major retrofitting, as we mentioned. In addition, we have a better mix that was offset by the lower exchange rate when converting to reals. This positive result apply especially by lower sales of prices and costs and higher volumes. In the mining sector, during the quarter, we had a significant reduction of 21% in the sales volume as it was driven by the seasonal rainfall on production and also on logistics. We also prioritized some areas with best operating performance. Net revenue reflects this drop in volume and the net revenue per ton was maintained stable at $87, the same level as last quarter. The reference price were practically stable with a slightly increase of 0.9%, but they were offset by the higher level of discounts and the different -- differentials as prescribed by the market. Adjusted EBITDA per ton reflects especially the impact of the absorption of fixed costs as a result of lower sales. And now in relation to the financial indicators for the quarter, Usiminas frozen an operating cash flow of BRL 370 million was driven by the EBITDA generation, partially offset by the increase of working capital of BRL 120 million. The working capital variation is associated to a lower accounts payable and an increase of receivable accounts and also due to a reduction in inventory levels. We had a reduction of BRL 67 million in [ trading ] in order to reduce the cost of expenses for the company. It's a movement that we want to continue implementing along the next quarter. We had a CapEx of BRL 285 million, a reduction of 23% in relation to the previous quarter. As a result, we ended the quarter with a free cash flow of BRL 84 million. We ended the quarter maintaining a net cash position at levels which were very similar to the previous quarter. This movement reflects a proportional reduction in the gross debt and also to the cash level influenced by the appreciation of the in relation to the dollar, considering the conversion in the statements. The indicator of net debt over EBITDA also remained stable, reinforcing the consistency in our capital structure. Finally, we have a debt profile, which is very comfortable without relevant maturity in the next years and with the cash and investments enough to cover the indebtedness of the company. Leo, over to you. Thank you. Leonardo Karam: Thank you, Diego. Now we're going to start our Q&A session. Our first question is for you, Diego. Now we have most questions about costs. So we are going to try to address them all, breaking them down so that we can avoid confusion. So the first question comes from Caio Ribeiro from Bank of America. And this is what they ask from XP. Could you provide more color about the cost evolution of the input of the second quarter in relation to the first quarter? Which are the main drivers? How do you expect the cash per ton to increase? [ Guilherme ] completes -- asking for more details about the impact in the context of the increase in inputs and raw materials and freight that you mentioned in the outlook. Diego, over to you. Diego Garcia: Thank you very much for the question. In relation to the inputs for the next quarter, all raw materials will have an increase. We have already been seeing in slabs and this has no impact in the previous quarter due to the timing considering the moment when the slabs were purchased, but there will be an impact for the next quarter. And we also see that higher price in cokes and also in the coal. And Marcelo has mentioned that we see an impact caused by the freight increases that would affect mining activities, especially. However, as of the second quarter, they will start causing impact on the supply of raw materials. So these are the main drivers. Leonardo Karam: Thank you. Still about costs Rafael Barcellos, Bradesco, Gabriel Barra from Citi, and [ Emerson ] from Goldman Sachs. They ask the following. So what's the magnitude of cost reduction when you reduce maintenance costs? Is this something we are going to have an effect in the next half of the year? And the retrofitting will be offset in the next quarters? Or do you see that the cost will have some level of sustainability? And is there a space for room for better performance in the operations in terms of energy and raw materials? Diego? Diego Garcia: The cost per ton was at $15 per ton. So divided by ton, we made some savings. In relation. Leonardo Karam: I'm sorry, Diego, just to specify that you're talking specifically about major repairs, right? Unknown Executive: Yes, major repairs and maintenance. Yes, these are the 2 factors that explain the savings that we had. So I mentioned, we have $15 per ton. So it's an temporal or permanent effect. This was the question. We believe that this is going to be permanent. We have no expectations of anything changing unless something unexpected change happens. So this -- the cost may come back in the future, and this will be reflected in the activities. And these are the activities we are trying to do more efficiently. And to add Diego's comments, as I had mentioned in the previous calls, we are deeply focused in improving industrial efficiency, and we started important initiatives in order to improve efficiency. We have adopted tools to optimize and make all the repairs in a more effective way, especially the planned repairs. And in terms of cash control and in terms of asset controls, we have [ mentioned ] all the dimension in order to optimize all the flows and all the related costs. And we can see the results because we have been doing this for more than 2 years. And this is a continuous process as the expectation is to continue improving efficiency along those lines. Leonardo Karam: We have here another question related to cost, but I believe it's more directed to Miguel. Caio Ribeiro from Bank of America. He asks if the price increases were enough to offset the cost pressure? Or do you think more increases will be necessary? Miguel Angel Camejo: I think your question is very important so that we can clarify and apply the dynamics that we use for our prices along the quarter. And also for the present moment. The increase of January had the purpose of improving the margins of the steel sector after a long period of lean margins, considering that we were in conditions of unfair competition as we have observed in the last 3 years in Brazil. After the beginning of the war in 28th of February, we saw the pressure on costs, as Marcelo and Diego mentioned. And this leads the need for increasing prices as of April. As of now, we are always mentioning the negotiations in relation to spot businesses and the distribution. So we are in a scenario of high volatility and uncertainties. So we are going to be analyzing very cautiously the profitability of each operation in terms of imposing new prices for the spot prices. The industrial sectors will continue this trend. We'll continue making adjustments in the spot prices as we renew the agreements. Leonardo Karam: Thank you, Miguel. Diego, still related to costs. Now focusing on the ForEx. We have questions by Gabriel Barra and Ricardo Monegaglia from Safra. He says, should we expect 2-digit levels? Or should there be any pressure should the ForEx fluctuation revert? The functional currency helped us in nonrecurring manner. Or how -- what were the changes? And what were the exchange rate used? Ricardo ask saying the following. What was the estimated impact on the COGS price for the first quarter, considering this FX rate? And can we think about the aid of BRL 50 million in the EBITDA of the quarter compared to the previous methodology? And what's the evolution that we can expect in relation to the FX fluctuations? Miguel Angel Camejo: Thank you, Gabriel and Ricardo. In relation to the margins that we are -- what we are estimating for the next quarter, as Marcel has mentioned, we are expecting an EBITDA level, which should be stable. And we are likely to have an improvement in the steel sector to offset the mining activities. In relation to the functional currency effects, the main effects that we can see is on the one side, we should consider the net position in reals in a consolidated way. Because that will lead it to FX gain of BRL 110 million. And also, there is an impact in the deferred credit, which was something very significant, amounting to BRL 450 million, which is a very large -- a large share of the net income. And that will depend on the future FX variation. If there's no variation, we are going to see the effect on the results. If the FX is maintained what we saw yesterday, for sure, we are going to have a very similar result. And then the type of FX rate used. If I'm not mistaken, -- at the end of December, it was 5.5. And at the end of the March, it was 5.2. It had an impact on the cash cost of the steel sector in dollars. So it is cash cost. It's in dollars, so there will be no changes. So when we convert into reals, we use FX, FX rate, which was lower in relation to the previous period. Leonardo Karam: So there was another question. No, that's it. Okay. The next question is still about costs. Diego, Edgard and Daniel from Itau, [indiscernible], would like to understand this line in our cost of others. So they are asking us to give more color because when we look at the history track, there may be a seasonality influencing. So what can we expect for the second quarter? Is this already considering the outlook of the cost increase that was shared with us? So from BRL 240 million, we saw a drop of BRL 89 million in the line. And what can we expect? So they want details about this reduction, and this is what [ Guilherme ] asks us. Diego. Diego Garcia: This line is very pulverized, but we're not likely to see a seasonality influence. Now answering your last question in relation to the bonus payment. So except for this, all the others are very [polarized]. Leonardo Karam: Now Miguel, about third-party slabs, [indiscernible] they say it attracted our attention, the level of purchases that you made of slabs. So how does slab price has impacted the production of rolled steel in Cubatao. So how do you use the blast furnaces of Ipatinga? And can we expect the slab price level to be maintained at the same level? So the question is, is the level of purchase likely to be maintained? Miguel Angel Camejo: Of course, you have been following the international indicators for slabs. We have been suffering a lot of pressure since the Iran war started. And based on this, we can simulate the allocation of our production between Ipatinga and Cubatao. Of course, this will be a result of the best economic decision. Obviously, so we have to meet the need of each client at a certain moment. So what to expect for the future, we can expect our production to increase in Ipatinga with the blast furnaces and a reduction of activities in Cubatao in the short term. We are going to continue monitoring the market opportunities and alternatives so that we can go back to the levels at Cubatao that we want or to look for profitable alternatives for the company. Leonardo Karam: Thank you, Miguel. Marcelo There's a question by Gabriel Barra from Citi about the Iran conflict. This is a question. The effect of conflict did not affect the quarter of the steel sector is not so affected by the war. Marcelo, could you answer this? Marcelo Chara: Gabriel, thank you very much for the question. We all know the impact of the gas, of the oil barrel, which has a significant increase. And this impacts the cost of transportation and energy in all the logistics and production chain in general. In the first quarter, we hadn't seen this reflected on the results yet. But as we update all the indicators and all the contracts related to the indicators, we are sure to see those impacts. All industrial sector will have this impact and other sectors in the economy will also have the impact. The freight will have a significant impact. So the maritime transportation imports and exports will be impacted. I would say that this is inevitable. So the cost will be impacted eventually. Leonardo Karam: Thank you, Marcelo. Miguel -- now about sales. We have many questions about sales, and I'll try to concentrate them. of Goldman Sachs, [ Guilherme ] of XP and Caio Greiner of UBS asked the following questions. Considering the stable volume of production, considering the strategy of the company, is there room for gain in market share? The focus would be in maximizing the revenue per ton and profitability. And the expectation -- what's the expectation to imports to drop? And what you expect the stable volumes? And the first quarter was lower than we expected. Do you see any deterioration of the demand and [ Guilherme ] adds about the performance of the domestic market. And if we already have a tighter scenario for some specific products, especially those related to antidumping. And Caio Greiner also asks about the strategy. Are you going to continue with the same strategy? Or are you going to go for higher market share? Are you going to prioritize the old over volume? Miguel Angel Camejo: I'm going to give answers. And Leo, you can help me if I did not answer some questions. In relation to the market, we see a very important resilience of the main consuming sectors of steel. The first would be the automotive sector with an increase in production of auto and also in the formalization of those cars. And ANFAVEA estimates a 4% increase in production. Sectors related to consumption has a very resilient level with the expectations of growth, not very high, but following the macroeconomic indicators of the country. On the other hand, we have sectors that are being affected more in relation to consumption. And they have been facing tough times, especially the sector related to the agribusiness, roads implements, agricultural machineries, which have been drops in consumption. Considering this context and since imports have been increasing in the first quarter, in spite of the measures that have been implemented by the government, especially antidumping and cold rolling mill and coated rolling mill, but we see that the inventories will be very high. And as a consequence, there will be a stability in the apparent consumption of steel that could be better in the second half of the year when the inventory levels are more normalized. And then we expect a stability in the sales in the second quarter. In relation to the share, it would be fair to think we can talk about the second half of the year. We can talk about export -- import of steel, especially those with unfair competition will have some improvements. And Usiminas will then be a very important player in increasing the share of supply of local or domestic market. In relation to the prioritization of value over volume and profitability, it's fair to think that in a scenario of high volatility after the year on war, we tend to be more demanding in our decisions. so that we can make spot negotiations and also in relation to important projects in the medium and long term. Leonardo Karam: Thank you, Miguel. There is a follow-up on the functional currency. [ Gabriel Simoes ] and Marcelo Arazi from BTG. So what would be a follow-up on the cost and the function currency, especially those which have higher consumption. For example, the change of functional currency helped to reduce the cost of the raw materials after the conversion in real. And Marcelo asks us to quantify the effect of this variation should the function of currency remains intact, if there were no changes, what would be the evolution of the cost? What would be the cost behavior? Yes, Diego. Diego Garcia: Thank you, Ricardo and Marcelo. The costs are in dollar, the slab cost, coal or they were all converted into dollars. And the costs are accounted for. And then what happens is the conversion into real that happens every month. If the currency is lower, the cost will be shown in real. But it doesn't mean that the functional currency helped to reduce the cost. So we convert into real that will show this effect. In relation to the second question, if you're going to make a quantification, it's something very complex to be done because we would have to redo of the previous quarter that used a different functional currency. We -- it's not something that is required to be done. So it's very complex to redo the previous accounting of the previous quarter. Leonardo Karam: Thank you, Diego. Miguel, now about exports. [ Rodolfo Angele ] JPMorgan and Igor from Genial asks about exports. Steel sector volumes were lower. So what do you expect for the next period? And Igor asks more details about the prices. And he says that there was a better mix, especially what happened in Argentina. So are you going to continue with this price over volume now in the external market? Are you going to apply this as well to the external market? So what are the expectations for exports? Miguel Angel Camejo: Thank you, Leo. Our expectations for the second quarter of this year is to maintain a stability, both in terms of mix and the market -- exports market. So we don't see a lot of changes, a lot of variations in this regard. The higher average price is a result of the better mix. As we anticipated in the fourth quarter of last year in the call, we ended the deliveries of oil and gas that we had in the past. We maintain a positive expectation in the sector of oil and gas, especially in Argentina. In the short term, we do not see any closures. For the second half of the year, we have been negotiated important projects that we hope to have -- to be very successful in the negotiations. Leonardo Karam: Thank you, Miguel. Still about imports. Gabriel, Barra, Citi, [indiscernible] JPMorgan, they ask the following. In spite of the expectation of normalizing the exports, galvanized products has high levels still. So how do you see the competitive dynamics in this specific segment? Should we expect an accommodation of exports in the short run? And Igor says he understand that there was a raise of importers in order to go for the volumes before the measures were applied. So how long do you believe that the market will absorb this excess volume? And lastly,[ Thais ] asks about cold rolling products. So we saw that the volumes dropped, but we still have some inventories in the chain. So some volumes in other regions were also coming in. And we heard about volumes coming in, in other regions. Could you provide some more information about this? Miguel Angel Camejo: Gabriel, Igor Guedes. For sure, imports of the first quarter were very high, increasing by 30% when we compare to the previous quarter. This suggests a very big pressure in the inventories in the chain. And this will cause impact in the apparent consumption of steel, especially in the domestic market in the next months. The inventory levels cannot be calculated very accurately. But there is an expectation of increasing consumption. But -- so we believe it will take some levels. We believe that this inventory levels will be normalized in the second half of the year. And at that moment, the steel industries, including Usiminas will have more chances of opportunities in relation to the steel consumption in Brazil. What was the other question, Leo, please help me. The question was very relevant. In addition to the increase in imports, we can see an increase of imports, especially in the Southeast Asia. It's very relevant to understand that the world oversupply will be maintained. Even though the Chinese steel in March stands at BRL 120 million per year and generate an imbalance in different countries. This situation generates an indirect impact in the Southeast Asia countries that is to direct those oversupply to Brazil. So it's very important to continue monitoring together with the government, and we must take the right measures so that we can avoid the indirect impact generated by the Chinese oversupply. Leonardo Karam: Miguel still for you. A question about automotive. [ Diego Mora ] from Goldman Sachs says Ricardo Monegaglia from Safra has 2 questions. The stronger sales mix is sustainable. What are the negotiations of the agreements related to prices? What were the agreements for the automotive industry in April? And what are the impact of the coated and galvanized products in relation to agreements? In the first quarter, we had a big influence of the automotive sector. So how do you expect this to play out in the future? Miguel Angel Camejo: So let's start from the agreements. The agreements have showing reductions of 2% or 3%, similar to what we negotiated with the agreements that we had in January. We expect the automotive sector to continue the way it is. March was a very relevant month in production, especially in the first 15 days of April, we see this materializing. And ANFAVEA expects an increase of 4% for the year. However, it's very important to mention that both the steel sector and the automotive sector and other sectors of the economy and the Brazilian industry have been facing challenges in relation to imports, both for final products and also in relation to business models that will that are coming to Brazil. So we have a lower impact and lower impact in the production chains in Brazil. It's important, therefore, to continue with our agenda of reindustrialization and also with the public policies to reinforce the productive chain in different sectors. The galvanized products in the auto sector and also the coated products account for 70% of our installed capacity. So 30% of this is impacted by spot businesses and also other industrial sectors. that follow their own agreements. In relation to the favorable mix of the first half of the year, the expectation is to maintain this favorable mix for the second half of the year. In the second half of the year, we have to understand the dynamics of different sectors, the potential reduction of imports in Brazil after the implementation and also the inspection of the measures that were to be implemented by the government. Leonardo Karam: Thank you, Miguel. Miguel and Diego now. In relation to the outlook that we provided, Rafael Barcellos with Bradesco and Ricardo Monegaglia with Safra asked the following. What is the magnitude of price increase and cost in the steel sector as we're projecting in the outlook? So it's the same questions. They want to know the magnitude. They want to know about the cost and the price for the next quarter. Miguel Angel Camejo: I'll start, Diego. In terms of price, we have already mentioned, there was an increase in price as of April 1 for the distribution and the spot prices, as we mentioned previously. As -- in relation to the industry, the industrial agreement as of April will follow the trend of the mix of spot prices as we observed in the first quarter of the year. In the automotive sector, we continue with the agreements that we mentioned previously according to the negotiations that have been completed. So we are looking at the raw materials, especially plates and also Coke and coal. And this will have an impact that we will try to handle. However, I cannot provide you with exact numbers or precise magnitude. Leonardo Karam: Still about outlook related to prices, Guillermo [indiscernible] from JPMorgan and Carlos from Morgan Stanley, they said, what is the domestic performance along the second quarter? And do you see a more positive impact for the dumping -- for the local industry during the antidumping measures? So when will the price pass-through will happen? And how has this been impacted by the imported products? And [indiscernible] asks for more color about the increases in April that you have already mentioned. And if you expect any price changes for May and June, do we expect movements to happen, Miguel? Miguel Angel Camejo: In relation to the positive scenario for the local industry based on commercial measures, we do not see the impact of the measures that were defined in the beginning of the year. Why? Because as we mentioned previously, there were there was an increase of the import of there was an increase of the inventory level. So the results will take a bit longer. So there was a drop in the local production. So as the local mills cannot increase their share in the apparent consumption of steel in the country. Of course, the measures will then have the expected results. In relation to prices, we implemented a 5% increase in the spot sector as of April 1 and we're going to continue monitoring the pressure of costs in the international market, the cost of energy. And based on that, we will see the -- what will happen to the new adjustments for the next months. We still do not have the adjustments already defined, but we are monitoring all the situation very closely. And this will also be related to higher volatility in our local costs. Leo, did I miss anything? Leonardo Karam: No, I think you answered his questions. I said that the cost would be the most successful question, but no, there's a very long section about the commercial aspect. Carlos asks if you could mention this percentage of increase in April for the spot price as distribution and industrial segment industrial agreements. Miguel Angel Camejo: For the distribution sector, the adjustments implemented was at 5% as of April 1, the industrial agreements that start as of April should follow the dynamics that was observed in the spot price in the first quarter that had a very similar level of 5% or 6% in the distribution sector. Not all the agreements are updated on April 1. Some of them will have the update only on July 1. Leonardo Karam: Thank you, Miguel. We're moving towards the end, and I still have a lot of questions here with me. So I'm going to try to select the main ones. Miguel, about price parity. As Brian and Marcelo has asked about what's the import parity for the rolling and coated product? And what are we to expect for the future? The calculation of the parity is very interesting and why is that? Miguel Angel Camejo: Because different from what we saw in the past, when we talked about parity, the calculation used to be made based on market prices and outside of unfair competition and oversupply situation. When we compare, for example, the domestic market price against the price -- domestic price in Europe and the United States, we still are at lower levels that have defense -- commercial defense so as to balance the commercial market in the -- internally. So you can make recalculations. So it could be about 15% nowadays. But with impact on this price which is a price, which is impacted by the oversupply conditions of the international market. Leonardo Karam: Now, Miguel, commercial defense, Gabriel Barra, [indiscernible] of UBS ask the following: Gabriel asks about the hot rolling product. When the antidumping was not implanted, can we see this reflected in imported volumes? Do you think there will be other drop in hot coils and what are the measures to be implemented along the year? Marcelo completes asking about the share. If you have seen alternative routes for the imports of steel, such as Korea or Vietnam. And the price -- have the prices being more competitive than those are Chinese products. And could this increase the parity of the industries and [indiscernible] completes, asking about the vision about the implementation of the antidumping measures. After the implementation of antidumping measures, we will see an increase of prices and how you see the import parity of coated products? Yes, please. Miguel Angel Camejo: It's very relevant to implement the antidumping measures for hot rolling product. So we see what we saw in the cold rolling and coated products that have been very important. We still do not see a reduction in the results. So we are likely to see this when the -- there was a raise for anticipating those purchase of those materials. In terms of Vietnam and Korea, as an alternative route, we have observed a significant increase of imports from other origins China, especially Korea, Vietnam and other countries from the Southeast Asia. In commercial conditions, very similar to those offered by China. So this is a result of the high pressure that China has in the local market, leading those countries or leading those industries to have unfair competition in their exports. So this is very relevant, and we are very attentive to those cases so that we can activate the tools that we have for commercial defense so as to avoid the impacts that we have seen in the last 3 years, with a high increase of Chinese imports. So it's very important to keep monitoring and working with the local authorities, so that we can make -- adopt the right measures of defense. In relation to the price, I think I answered previously in relation to the parity and how we see the prices to play out in the future. Leonardo Karam: Thank you, Miguel. There is a follow-up. But I think you have already answered. Luis from -- asks about the price of Asia, you have heard Asia about Vietnam and Korea. So we are moving towards the end. So let's try it a bit quick. Diego, about deferred, Gabriel Barran says, the income was very favored by deferred tax credits and FX effects. How can we expect the effective tariff or liquid for the next quarter. How can you see that? Gabriel? Miguel Angel Camejo: The impact of the tax credit with deferred taxes will depend on the type of FX rate because the accounting base is in dollars and when the real is appreciated against the dollar, there's an increase. And then this credit is increased. We have the inverse movement we would have a negative result on this. So that will depend the kind of effects. In relation to the financial result, and this is more linked to the net position in reals will also depend on the evolution of net cash in reals that we have. So we are going to continue monitoring this, so that we can minimize the effect. Leonardo Karam: Marcelo, one question for you about compacters. Gabriel Barra from Citi, and Ricardo from Safra ask the following: what are the analysis of compact analysis can be done in phases, which is the most likely scenario and the friable, what the duration of the life of the mine. Is there any decision to be made still this year and the environmental permitting and all the documents at MUSA, what would be the expected timing for those -- and for the FID and approval? Marcelo, can you answer that? Marcelo Chara: Thank you, Leo, Rafael, Gabriel and Ricardo. I'm going to try to summarize. As we have been mentioning, the permitting is working well. According to the time line, considering magnitude and complexity of the project. In 2026, we believe we can have the confirmation, so that we complete all the permitting process. In relation to the friables, we have been making a new sizing of all the reserves and by using different strategies, we have been able to extend the useful life of the friables. And this is very important for us, the strategic view in addition to optimizing the assets that are already existing for the operation of friables. I would say that these are the main components. And as we evolve and we continue with the process of permitting, so at the end of 2026 and the beginning of 2027, we expect to have a proposal and also to analyze the alternatives. And this is a highly complexity project. And we have different alternatives. We have very good engineering team in order to optimize each of the possible steps. And we are very likely to have a very competitive and efficient split. So this proposal can be callinated in phases. Leonardo Karam: Thank you, Marcelo. Marcelo and Diego. We have questions about projects. So Gabriel Coelho Barra . Gabriel asks about the advances of the PCI project. Can it give an additional upside in the margin still this year. Can you comment on the evolution of other projects of the efficiency of the company, such as Coke batteries and gas holders. And how can we think about the PCI implementation leading to lower cost per ton. What can we expect in terms of efficiency after the implementation? And would it would reduce the purchase of still called for by third parties -- from third parties? Miguel Angel Camejo: The PCI project is a project that is in the final stage. And as I mentioned in the remarks, we are already capitalizing on it because there's a part in the blast furnace that has already been completed and that helps us to make the distribution of fuel and blast furnace in a very efficient manner. So we have been able to implement our PCI and our blast furnace 3 is where this investment is mostly concentrated. So we have already started to capitalize on this on the efficiency of the field as of this quarter, the second quarter and we are likely to capitalize it on full as of the fourth quarter without a doubt. And this will allow us to reduce the purchase of external Coke because this is going to be a replacement from this coal to Coke because this is a field that we are going to be applying internally. And the other projects are moving in alignment to our plan in a very efficient manner. For example, our Coke plant has two main sectors. One of the sector is undergoing hot repair. We have already advanced by 50% in this activity. So this will improve our environmental performance and we also have a very good thermal efficiency and there is a complete construction destruction of the other section of the Coke plant. And next month, we'll be able to see the construction works. So we had auction process and also the technical part, the technical dimensions in order for the implementation to happen. And the engineering side is also very advanced. So in 2 years' time, 2.5 years' time, we will have a very good improvement. And also for gas holders, we will see a very important evolution of the gas holders that will allow us to recover a large quantity of internal gas and we improve the overall efficiency. The sum of all those projects -- we'll be capitalized in a progressive manner in the next quarter until the full completion. In the calls, we are going to share with you the progression of all those activities. And Marcelo, in fact, the hot repair and the PCI plant used up most of the CapEx for the quarter. Leonardo Karam: Okay. Last question now, we are running out of time. It's about sales at MUSA. Caio Ribeiro with Bank of America, they ask the following: and the mining sector, then with increase of cost and freight, will there be a decrease in the shipping to the external market. MUSA operations were affected in the volumes because of the rainfall. And in the second and third quarters, which are dryer periods, do you believe that you can recover the volumes at the same levels that we had in 2025? Yes, Diego? Diego Garcia: In fact, we exported to Asia, but those cost increases impacted our profitability, but it's still profitable. As we can see in the results of MUSA. The diesel cost impact has not had a significant increase. So the higher consumption was associated with internal movement. So in terms of volume, as we mentioned at the beginning of the presentation, we expect a recovery volumes, especially due to higher production. And we are going to prioritize the area with higher grades so that we can continue exporting. Leonardo Karam: Thank you very everyone. We end the Q&A session now. We would like to thank you for taking part in this event. And if you have any questions, we would like to remind you that the IR team is available to take your questions. Have a good day, everyone. [Statements in English on this transcript were spoken by an interpreter present on the live call.]
Operator: Welcome to the Indutrade Q1 presentation for 2026. [Operator Instructions] Now I will hand the conference over to CEO, Bo Annvik; and CFO, Patrik Johnson. Please go ahead. Bo Annvik: Welcome, and good morning on our behalf as well. As usual, let's start with some overall highlights from the quarter. We can begin with the demand situation. Order intake continued to improve versus last year. Organically, the order intake increased with plus 1%, with slightly more than half of the companies showing a positive order intake. The strongest segments were medical technology and pharmaceuticals, energy and parts of the process industry. Net sales were unchanged from last year, both in total and organically. Contributions from acquisitions improved compared to the last quarters and was at a good level. EBITA margin came in at 13.3%, in line with the underlying margin last year, and we will comment more on this further on in the presentation. Operating cash flow was also in line with last year. Our companies continue to improve management of working capital. Inventories are lower than last year and the inventory in relation to sales is on a historically low level. In Q1, we managed to acquire 2 larger companies, and we also made one more acquisition in April, adding SEK 625 million in revenue on a yearly basis, and the pipeline is continued strong. We are obviously not satisfied with the overall performance in the quarter. However, there are good progress in several areas, which I will comment more upon throughout the presentation. Looking more specifically at the order intake and sales trends, demand was stronger than last year, but still varied across companies, geographies and segments. Book-to-bill is seasonally strong in Q1 for us, but improved from 105% last year to 107% now. As mentioned, companies with customers within MedTech, Pharma, the Energy sector experienced a strong demand and also parts of the process industry. Order intake for companies with customers in infrastructure and construction and engineering was aggregated slightly down compared to last year. In terms of sales, acquisitions contributed positively with plus 5%, a sequential improvement from the 4 -- plus 4% we had in Q4 2025. However, currency movements had a negative impact of 5% and organic sales was flat, leading to an unchanged top line development in total. We had a stronger order book coming into the quarter, but the sales development was impacted by a weak start of the year, mainly due to the challenging weather and also by the composition of the order book with a higher share of orders connected to the Energy sector and the process industry with longer lead times in general. The sales development gradually improved during the quarter, starting with a weak January and ending with a strong March. Moving into sales per market. In the Nordics, sales was up in Norway, flat in Sweden and Finland and down in Denmark. Flow technology for marine applications, water treatment and the Energy sector were drivers for the positive development in Norway, while the lower sales to Novo Nordisk was the main reason for the decline in Denmark. In the rest of Europe, starting with the Benelux, sales was lower within engineering and in some of the Life Science companies. U.K., Ireland was a good development within, for instance, railway rolling stock. And in Germany, flat overall, but slightly improved situation in the engineering sector. Switzerland and Austria was weaker, mainly due to lower sales within valve for power generation and within the Construction segment. In North America, sales improved compared to last year due to good development within medical technology. In Asia, sales declined due to difficult references from last year in the Marine segment. In terms of profitability, total EBITA decreased 2%, corresponding to an EBITA margin of 13.3% compared to 13.6% last year. However, in Q1 last year, we had some positive one-offs. So the underlying EBITA margin was 13.3%, in line with this year's EBITDA margin. The main reason for the EBITA margin not being on a higher level is the organic sales development in combination with slightly higher expenses. Underlying expenses grew around 1%. But on top of this, we also had some nonrecurring costs for downsizing. Patrik will explain more details in his presentation. But perhaps good to elaborate on the type of companies we have and why some of them haven't reduced more. If we go back to late -- the situation late 2025, then I would say that expectation was that in 2026, we would see better and better order and sales situations. And this could be based on that we had an organic order intake improvement of plus 3%, both in Q3 and Q4 last year. So most companies had a somewhat positive outlook, I would say, for 2026. And we have, as you know, quite a lot of trading companies, and they are, in general, people lean. It's difficult to find qualified replacements. Hence, there was not sort of on top of their agenda to downsize and there is a hesitation to downside if they don't really need to in order linked sort of to the situation that it is difficult to find really good replacement employees. In addition to this, we obviously also have a lot of growing companies, and they need to add people in order to manage their businesses in a professional way. So that's a bit of an explanation, I would say, to why we had a plus 1% expense increase year-over-year. Positive, though, that the gross margin was continued strong, amounting to 36%, very well managed. There will be some more challenges going forward now in quarter 2 raw material price increases. But I am optimistic that our companies will handle this in a good way. We have done that for very many years historically. Looking at the sales development per business area, 2 of them grew organically, Industrial & Engineering and Life Science, mainly as a broad result of the strengthened order book coming into the quarter. In Industrial & Engineering, for instance, railway rolling stock was a sort of positive situation with -- they have had large orders from companies like Alstom, Porterbrook in the U.K. They also had a good situation in terms of specialty chemicals. And I think it's worth to note that they had actually an all-time high order intake in March in the quarter. In Life Science, particular companies within the medical technology had a good development. We usually comment on the single-use business. I think that's still good. And we made a Spanish acquisition or first company in Spain last year, and they are into single-use and the first quarter was all-time high for them. So a good start this year for them in Indutrade. Just to give some other flavors, we have a broad portfolio of MedTech companies. It's everything from -- we sell communication equipment to Swedish hospitals, and that business has grown really well. We have a growing business in Poland. We sell medical equipment to hospitals, also consumables to hospitals. And that's also a growing situation. We have companies on Ireland, which sell medical technology to large international customers and in the quarter now sold successfully to the U.S. So it's not sort of a single company. It's a broad base of companies doing well in medical technology. Infrastructure and Construction and Technology & Systems Solutions continues to be weaker due to demand being subdued on the back of the general market uncertainty and lower investment levels in some customer segments. Process, Energy & Water had a good order book coming into the quarter, but there are generally longer lead times within the energy sector and the process industry. So the minus 3% is more of a timing effect. They now have a record high order book and a good condition for stronger development going forward. And March was actually the second best month ever in terms of order intake for Process, Energy & Water. In general, I would say that the challenging weather in the beginning of the year also impacted the sales development negatively, mainly in Infrastructure & Construction and Process, Energy & Water. If we then turn to profitability for the business areas, it was 3 business areas improving the EBITA margin in the quarter. Industrial & Engineering had the strongest margin development, supported by the gross margin improvements, leverage on the organic sales and margin accretive acquisitions. Infrastructure & Construction has for a longer time, work with restructuring measures and keep costs in a really good way and some divestments to improve its margin. In Life Science, the gross margin further strengthened due to good sales development within the MedTech cluster, as I mentioned, as well as margin-accretive acquisitions contributing positively. Process, Energy & Water was impacted by the lower sales, as I talked about earlier, and the EBITA margin development in Technology & Systems Solutions was mainly driven by lower organic sales together with slightly higher expense levels. Acquisitions, positive situation. So far this year, we have acquired 3 companies, of which 2 slightly larger company for us, with a total annual turnover of SEK 625 million. We are very glad to have welcomed Belman, CAT Ricambi and Axotan to the group. They have all good track record of sustainable profitable growth and are also margin accretive to the group. In 2025, the average company size was slightly lower than a normal acquisition year for Indutrade. And this year, so far, it's slightly higher. This shouldn't be seen as a strategic shift. We are opportunity oriented, as you know, and we act on opportunities we believe to be accretive and successful. Consequently, there will be times when we have periods of larger acquisitions and periods with smaller acquisitions being made. The acquired EBITA was on a high level in quarter 1, as can be seen on the graph to the right, just over SEK 70 million. Also looking at the EBITA margin of the acquired companies, it was on a strong level of 19.5% for the quarter and above 17% for rolling 12 months. Good to note that this includes transaction costs, so the underlying margin is even higher. Our business areas are successful in the acquisition work, being proactive and building pipeline. Our business segment leaders are spending more time on acquisitions now compared to a year ago and the current acquisition pipeline is on a high level. By that, I leave the word over to Patrik to comment more on the financials. Patrik Johnson: Yes. Thank you, Bo. Total growth for orders and sales was 2 -- plus 2% and 0%, respectively, in the quarter. Book-to-bill was positive, as Bo talked about. Orders 7% higher than sales and on or above 1% in all business areas actually, strongest performance in Process, Energy and Water. As previously mentioned, our gross margin was strong at 36% compared to 35.4% last year. Total EBITA declined 2%. Acquisitions had a strong positive impact of 7%, but this was offset by currency movements and slightly higher expense levels in combination with positive one-offs we had last year. And these ones, they were primarily connected then to earn-outs and amounted to net plus SEK 27 million, which corresponds to around 2.5% on the EBITA. If we comment a little bit more on the sort of the expense situation, the total increase in expenses, fixed currency, excluding acquisitions, was around SEK 45 million, corresponding to 2% on the total expense base. But underlying, as already mentioned, it's only half of this, around 1% -- we have had some one-offs connected to layoffs, personnel reductions in several companies. And also last year, the cost level was somewhat pushed down actually because of some LTI provision releases we had. So underlying, it is plus 1%. EBITA margin came in for the quarter at 13.3%, which is then the same as the underlying EBITA last year. We are, of course, not satisfied with the margin, but it's important to note that Q1 is historically a seasonally low margin quarter for us. Going down further in the P&L, finance net decreased with 18%, mainly due to lower interest rates. Tax costs actually increased 5%, but it's mainly due to some onetime effects underlying the tax rate, I would say, is the same as before. Earnings per share was down 4%. Return on capital employed declined slightly to 18%. Capital employed end of the quarter increased with 8% because of the higher acquisition pace since second half of last year and slightly higher working capital, also mostly connected to increased receivables at the end of the quarter. Cash flow from operating activities, seasonally low also then in quarter 1, but was in line with Q1 last year. All in all, group financial position is still very solid with a net debt-to-EBITDA ratio of 1.5x at the end of quarter. So let's elaborate a little bit more on the cash flow. As mentioned, cash flow is seasonally low in Q1, which you clearly can see from the graph, but it was stable. And after CapEx, it was actually slightly higher than last year. Our companies continue to show progress in the management of working capital. I think inventories are lower than last year and inventories in relation to sales on a rolling 12-month basis is actually now on a historically low level. Overall, working capital efficiency is also then slightly better than last year. Cash conversion continue to be on a stable high level and even slightly improved versus last year. Continuing to the EPS, earnings per share situation, and that has developed in a bit weak way the last couple of years, as you know. The driver has been a weak organic development, which is mainly due to the general weaker macro situation that we have experienced and the lower general demand from that. But also worth to note that the higher interest rates compared to a few years back and currency headwinds lately has also then had actually a significant impact on the situation. In the quarter specifically, EPS was down 4% because of the lower operational result and lower interest costs compensated slightly. And we are obviously not satisfied with this -- with the EPS development, but we are now fully focused on coming back to good growth levels in line with our targets. And with that, we will also for sure and deliver EPS growth. And then lastly, the financial position. The interest-bearing net debt increased versus last year and also slightly sequentially because of the increased acquisition pace. However, the net debt ratios are stable and low from a longer historical perspective. Net debt equity ratio at 45% versus 47% last year. Net debt-to-EBITDA was slightly higher than last year at 1.5x, but still on a comfortable level. And if you exclude earn-outs, it was on 1.3x versus 1.2x last year. The financial net debt, which is then the part of the debt that relates to borrowing that needs to be refinanced is also historically low on a level of 1x. So all in all, in conclusion, our financial position is very strong, and that creates a good foundation for continued value-accretive acquisitions and also room for organic growth investments and initiatives. I think I end there and leave back to you, Bo. Bo Annvik: Thank you. So let's summarize some of the key takeaways before we open up for questions. The demand situation improved and the order backlog was further strengthened. Good acquisition contribution, but total sales were negatively affected by currency movements and a flat organic development due to a weak start of the year and longer lead times in the order -- in part of the order book. EBITA margin was in line with the underlying margin last year. The gross margin was on a continued high level. So we expect a good leverage on the organic sales growth when the market improves. Looking ahead, as I said, we have a larger order backlog, and we saw clear improvements throughout the quarter, which is positive. But the general market uncertainty remains on a high level linked to the geopolitical situation. We have a good momentum in terms of acquisitions and a strong pipeline, providing good conditions for a gradual increased acquisition pace. Finally, we are not satisfied with the quarter, but there are positive signs in many areas, and we are fully focused and determined to deliver in line with our financial targets. By that, we end our formal presentation and open up for potential questions. Thank you. Operator: [Operator Instructions] The next question comes from Oscar Ronnkvist from SEB. Oscar Ronnkvist: So I have 3 questions. My first one would be on Process, Energy & Water, the longer lead times that you mentioned. Are those lead times are longer than sort of a normalized situation? Bo Annvik: No. I would say that we have, as you know, a mix of companies in that business area and the segment in the business area is the Energy segment. And there, we have certain companies who sell to power generation facilities and things like that. And that's a usual sort of lead time of minimum 6 months, I would say, to more 12 months and beyond. So that's -- but that's a normal situation. We've had that for many years. Segment, I would say, is -- has potentially grown more than other segments in the business area. So that's why maybe that there is a bit of a shift like this. Oscar Ronnkvist: Perfect. And the next question on the cost development going forward. So do you expect to align volumes and costs in the coming quarters? I think you gave some comments about the Middle East situation, but as you see, potential cost pressure on raw mats, et cetera. But do you expect that to align more in the coming few quarters? Bo Annvik: Yes. We haven't seen much of those price increases in quarter 1. Obviously, a lot of suppliers have brought forward information about cost increases now towards the end of the quarter and early in quarter 2. But as I said, I'm quite confident that our companies are prepared for this and will manage this and transfer those costs to price increases to the customers. So I'm hopeful that we will manage our gross margins in a good way, also going forward. Was that your question? Oscar Ronnkvist: Yes, more on the operational expenses side as well, and if you can see anything on that. I think on the gross margin, your comment about the price increases was good. Bo Annvik: Yes. No, we are -- were not cost conscious in our culture. And it's a weighing situation for primarily, I would say, our trading companies. So as I said, towards the end of last year, I think most of them had a more positive perspective outlook on 2026 and hence, sort of refrain from certain downsizing. Even if there is now uncertainties linked to the geopolitical situation, there is still some sort of underlying optimism that the markets are improving slightly. So -- but obviously, we will be sort of engaged from the Boards in our companies to manage overhead cost situations actively. So it's definitely not -- if anything, it will improve from -- sequentially from Q1, I would say. Oscar Ronnkvist: Understood. Just a final short one, but you say a strong M&A pipeline, but just wanted to hear about the geopolitical turbulence, if that has made any changes in the appetite for M&A as we saw like last year following the Liberation Day. Bo Annvik: Yes. No, we think -- we take every case, case by case. But in general, we are not in general, hesitant right now, I would say. So the plan is to continue, obviously, being professional, obviously, being cautious in case by case. But it's -- as it looks now going to be a high activity level in quarter 2 and onwards. Operator: [Operator Instructions] The next question comes from Johan Dahl from Danske Bank. Johan Dahl: Just a question on the sort of the outlook you presented in Q4. As you know, when you presented the year-end numbers, you talked about the harvesting phase in Indutrade late January, and you conclude now that January was a disappointment to you, guys. Are you able to sort of box in exactly in the beginning of the year what was the disappointment? I mean invoicing is what it is, but was that on cost? Or is that isolated to some certain events? Or was it more broad-based? Bo Annvik: It was a very slow market from a sales perspective in January. And I think you can relate to that also. It's not Indutrade specific, at least not in my perspective, it was quite broad in the industry that it was a harsh winter, I think, and bad weather in large parts of Western Europe. installation companies delaying projects. So for some reason, altogether, then sales in January started out very slow. So it was slower than the general market underlying need, I would say. So it was unexpectedly slow in January, and that created a very weak result. And we weren't able to catch up completely from that situation in February and March. But as you probably have understood by the presentation, March ended in a really strong way, both in terms of order intake sales and profitability. So -- so yes, it's a good trend to have into quarter 2, I would say. Johan Dahl: Got you. Just a follow-up on the one-offs you talked about in the fourth quarter '25. Were you able to sort of box those in the -- towards the end of the year? Has that had any follow-on effects here now during the beginning of the year? And could you also talk possibly about sort of quantifying cost savings that you have carried out here in the first quarter? Bo Annvik: Yes. I would say that those one-offs were -- they are boxed in, but it was linked to 2 specific companies. And when you experience a situation like that, we have changed management, as I've said. Obviously, the situation in those 2 companies is slower, weaker. They need to restart, and we have definitely done that. We have helped them with everything from restructuring to strategic analysis to strategic activity prioritization, growth-oriented activity, basically a new business strategy. So the new MDs are coming in towards a fairly served table in terms of what to do going forward. So we have lost momentum, but compared to what it could have been, I think the momentum going forward will still be a lot better based on all that activity we have done. So yes, that had some impact on our Technology & System Solutions business area. Now what was your other question, Johan? Sorry. Johan Dahl: If you can talk about sort of how much cost you've taken out in terms of sort of rolling 12-month basis, if it's measurable at all? Bo Annvik: Can you comment on that, Patrik? Patrik Johnson: No we are continuously working with cost and number of employees in entities that are struggling with demand. So that we are doing. I don't know if I have a sort of a relevant number on that. But I think we have -- in those on a rolling 12-month basis since sort of mid last year, we have taken down a number of employees in these type of entities with around 200 people then, which is -- you can always do more, but I mean, it's small companies and so on. So I think -- and we have some more coming here in quarter 2. So we are continuously pushing on this parameter. Operator: The next question comes from Zino Engdalen Ricciuti from Handelsbanken. Zino Engdalen Ricciuti: I joined a bit late, so sorry if you have answered this. But looking at high level on the order book, which you have been building up, could you say something about how the composition looks now and what your expectations are in terms of converting into sales? Bo Annvik: Yes. So we have a relatively higher share of the order book linked to the Energy segment and some longer lead time Life Science segments. But you will see sort of positive release effects from this in quarter 2 and the further improvement step in quarter 3 and onwards this year. So it's about to happen, a positive step in Q2 and an even bigger step in Q3. Patrik Johnson: And if I add, if you elaborate a little bit on the order book sort of development and compare it to last year, we have seen order book increases in Process, Energy & Water, Life Science and also Technology & Systems Solutions with the highest increase in Process, Energy & Water. And it's basically flat, you can say, in the Industrial business area and Infrastructure & Construction has actually a lower order book than we had last year. So this sort of this mix change, you can say then, prolongs a little bit the lead time on the order book. Zino Engdalen Ricciuti: Understood. And just on the similar topic, specifically in TSS, which saw a bigger step-up in the order intake, if it's possible to get some color on expected conversion of that. Bo Annvik: Yes, it's not that long in that business area. So it will -- it basically relates to what I said earlier in a bit of a step-up in Q2 and then even more in Q3 and onwards. So it's the same for that specific business area as well, I would say. Zino Engdalen Ricciuti: Very clear. And just a last question on the gross margin, which continued to be strong. It was just interesting to hear more about the drivers behind that. Bo Annvik: I mean it's been strong for many, many years and stable, slightly increasing, and it's part of the Indutrade DNA to really work with pricing and try to manage potential cost increases from suppliers and transfer that to customers, and watch that situation and step-by-step work more and more and more with value-based pricing versus -- yes, just some sort of more simplified pricing approach. So I also talked a little bit about that the war in the Middle East will drive up and has driven up oil prices, which will affect plastics and other raw materials. So there is going to happen even more in this area, I think, in quarter 2 and onwards, but I'm quite optimistic that we will continue to manage the situation in a good way. Operator: The next question comes from Gustav Berneblad from Nordea. Gustav Berneblad: It's Gustav here from Nordea. I thought maybe just to follow up there on the development in Technology & System Solutions. Was the margin weakness basically only driven by the weaker volumes? And should we then sort of expect them to jump back up now and we see volumes pick up in Q2 as you comment on... Bo Annvik: I think they will sequentially improve Q1 to Q2. But it's linked to that -- yes, they are suffering, I would say, as a business area from cautious demand from industrial customers broadly internationally. So it's not going to be a drastically quick pickup and they suffer a little bit from a difficult situation in these 2 U.K. companies and so on. Obviously, we have done the restructuring, as I said, and so on, but it will go -- take some time to improve the situation there to be above average Indutrade levels again. But sequentially, improvements, but not very quickly. So don't expect that they go from 14% to 18% in 2 quarters. That's not going to happen, I don't think, but they will improve. Gustav Berneblad: That's very helpful. And then maybe on the topic of medical technology, Life Science here. I mean, you comment on the single-use products being quite solid. I mean those sounds more recurring, I would assume. So it sounds like the margins here would be rather sustainable unless there are any larger orders you want to flag? Bo Annvik: I think that's a good assumption. Gustav Berneblad: Yes. Is it possible to say anything regarding start to Q2? It sounds like it was a slow start to Q1 and then finished very strongly. So should we anticipate that April started quite solid as well or... Bo Annvik: Yes. We ended the quarter 1 in a really good way. And usually, Q2 is seasonally a good sort of demand quarter for Indutrade companies. So... Patrik Johnson: You have a lot of holidays in April and May, which sort of makes the situation a little bit foggy, but we have no real news of a sort of a demand change. We hope and believe that sort of March 7 will continue with the sort of reservation for holidays, et cetera. Operator: The next question comes from Victor Forss from SB1 Markets. Victor Forss: So just starting off with the nonrecurring downsizing costs. Just wondering if you could break down the split by business area and maybe comment on whether most of those costs are in Technology & Systems Solutions or if they're spread across the board? Patrik Johnson: No, not that much in Technology & Systems Solutions, to be honest. It's a little bit better. I think most part of that is actually in Life Science. They have -- even though they are trending on a good way, I think they -- as all business areas have a few companies that need to work with costs. So that particular -- those particular one-offs I talked about, they are mostly actually in Life Science. And then the LTI costs I mentioned, but those are on a group level. So that's part of the reason why there's a sort of a deviation compared to last year on group level. Victor Forss: Okay. And should we expect any more of this going forward -- or are you sort of done with the larger part of it? Bo Annvik: There will -- I assume always be some smaller restructurings in a difficult market, but I don't expect them to sort of increase at least, if anything, on a smaller level, I would assume. Victor Forss: Okay. Perfect. And then just back to the 2 U.K. companies and Technology & Systems Solutions. Just wondering if we look at the greater picture, is essentially all of the margin pressure coming from those 2 companies still, just given the 4% organic order growth? Or is it sort of spread across the entire segment? Bo Annvik: No, there is not like a delta between 14%, 18% coming from those 2 companies, but they have a significant sort of impact. But then there is a broader set of companies who have more of a flat, I would say, sales situation and weaker EBITA margins than normally. But I'm optimistic, as I said, that they will step-by-step improve during this year and onwards. And the plan ambition commitment from that management team is to come back to the previous levels for sure. Victor Forss: Okay. And just a final one on acquisition multiples because I mean in 2024 and 2025, we saw some acquisitions coming in at higher multiples. And then looking at the acquisitions here in Q1, it seems like you're back on the sort of 6% to 7% range. Just any commentary on future multiples would be helpful. Bo Annvik: Yes. We are where we are, as you said now. And as we predict right now. I think we will be on that level for -- yes, that's where we can close successful deals currently. And I don't foresee any big multiple level increases in the short or medium term. Operator: There are no more questions at this time. So I hand the conference back to the speakers for any closing comments. Bo Annvik: Yes. Then we thank you for listening in and asking relevant and good questions. We close the conference and wish you a great day.
Operator: Welcome to the BE Semiconductor Industries Q1 Conference Call. I will now give the word to Richard Blickman. Richard, go ahead. Richard Blickman: Thank you. Thank you all for joining this call. I'd like to remind everyone that on today's call, management will be making forward-looking statements. All statements other than statements of historical facts may be forward-looking statements. Forward-looking statements reflect Besi's current views and assumptions regarding future events, many of which are, by nature, inherently uncertain and beyond Besi's control. Actual results may differ materially from those in the forward-looking statements due to various risks and uncertainties. including, but not limited to factors that are discussed in the company's most recent periodic and current reports filed with the AFM. Such forward-looking statements, including guidance provided during today's call, speak only as of this date. Besi does not intend to update them in light of new information or future developments nor does Besi undertake any obligation to update the future forward-looking statements. For today's call, we'd like to remind -- we'd like to review the key highlights for our first quarter ended March 31, 2026, and update you on the market, our strategy and outlook. First, some overall thoughts on the first quarter. Besi reported strong first quarter results and advanced packaging orders in an improving industry environment. Revenue of EUR 184.9 million, increased 28.3% versus the first quarter of 2025 due to higher shipments for high-end mobile and 2.5D AI photonics and data center applications. Q1 '26 orders of EUR 269.7 million more than doubled versus the first quarter of 2025 due to broad-based growth across all Besi's end-user markets, with particular strength in hybrid bonding, mobile and photonics applications. Orders increased 7.7% versus Q4 last year due primarily to a significant increase in bookings for hybrid bonding systems from multiple customers and end-user applications. Increased revenue growth this quarter favorably influenced Besi's profitability. Net income rose 20.6% and 63.8% versus Q4 '25 and Q1 '25, respectively, with net margin increasing to 27.9% versus the 21.9% in the first quarter of 2025. Improved profitability this quarter was due primarily to enhanced revenue growth, disciplined expense management and the benefits of operating leverage in Besi's business model. We realized a gross margin of 63.5% in the first quarter this year as increased prices helped offset increased component and energy cost inflation. In addition, our liquidity position improved significantly with net cash growing by 186.9% versus the fourth quarter last year to reach EUR 103.3 million. Growth in our net cash position reflected improved profit and cash flow generation from operations of EUR 93 million in the first quarter 2026, which more than doubled versus the comparable period of the prior year. During the quarter, Besi repurchased approximately -- for approximately EUR 14.2 million of its shares, which brings the total purchases to EUR 25.5 million under the current EUR 60 million buyback program. Next, I'd like to discuss the current market environment and our strategy. We've noticed an important improvement in market conditions since our last report, driven primarily by strong growth in AI demand and to a lesser extent, additions to mobile and automotive capacity. The latest TechInsights forecast calls for 21% assembly market growth in '26 and 75% between 2025 and 2030. We expect to significantly exceed such projected growth rates given our leadership position in advanced packaging and wafer-level assembly, particularly in flip chip, multi-module die attach, hybrid bonding and next-generation TCB systems. Favorable order trends in the first quarter of this year reflect the strength of Besi's advanced packaging market position, particularly for next-generation 2.5D and 3D AI applications. Unit orders for hybrid bonding systems more than doubled versus the fourth quarter last year and exceeded the prior quarterly peak reached in Q2 2024 with respect to total units and order value. Growth was due primarily to a larger-than-anticipated capacity build this quarter by a customer and to a lesser extent, repeat orders from a memory customer for HBM applications. In addition, we shipped 2 evaluation tools to a second memory customer for HBM applications and adoption increased to 20 customers overall. Progress also continued on our TC Next agenda with 2 new orders received and adoption increasing to 6 customers. Besi's business prospects for 2026 were also enhanced by renewed growth for high-end mobile and automotive applications in this first quarter. Our business strategy is currently focused on supporting customer adoption of our wafer-level assembly and 2.5D AI product portfolio and ramping the supply chain and production personnel necessary to meet increased order levels. We are also developing additional Vietnamese production capacity for mainstream assembly applications in order to free up incremental capacity in Malaysia for wafer-level assembly production. Further, Besi is increasing its service and support efforts in Taiwan and Korea in anticipation of increased hybrid bonding activities in such regions. Our favorable outlook for hybrid bonding growth in 2026 is also supported by a series of new products and use cases announced this year for logic, memory, co-packaged optics and consumer applications. Such announcements suggest that the pace of hybrid bonding adoption is increasing as we approach the timing for the introduction of many new AI-related products anticipated in the 2027 to 2030 period. Now a few words about our guidance. Based on our backlog and feedback from customers, we anticipate that Besi's Q2 '26 revenue will grow by 30% to 40% versus the first quarter of this year as strong revenue and order growth continue versus the prior year period. In addition, gross margins are anticipated to increase to a range of 64% to 66% Operating expenses are anticipated to be flat to up 10% due to increased revenue and customer support activities. As a result, we anticipate a significant expansion of our net income and profit margins relative to Q1 '26 and Q2 2025. As a result, we forecast for H1 '26 that revenue will increase by 49% versus the first half of 2025, assuming the midpoint of our second quarter '26 guidance with a substantial improvement in operating and net income. That ends our prepared remarks. I would like to open the call for questions. Operator? Operator: [Operator Instructions] Our first question comes from Didier Scemama from Bank of America. Didier Scemama: Richard, can you hear me? Richard Blickman: Yes, I can hear you, Didier. Didier Scemama: Sorry about it. Just on hybrid bonding, those orders in Q1, you mentioned that you're a bit surprised by those orders. I think it was not really expecting that they would be as significant as they were. Does that change anything about the profile of the ramp for this year at your main customer? Or like is that leading to higher deliveries already this year because of AP7? Just give us your thoughts on this. And then of course, I've got follow-ups on HBM. Richard Blickman: Well, what is happening, you can follow easily in the bigger picture provided by Taiwan customer is that we see an acceleration in adoption of hybrid bonding and the orders scheduled for installation in the first round in AP7 has been pulled forward somewhat from Q2 to Q1. In addition, the program has been enlarged for 2 reasons. One, for the overall, let's say, time line to fill in the anticipated 100 bonders. That number we are told may be significantly higher, plus orders placed for co-packaged optics. So overall, you can say good news and acceleration of placing orders and to some extent, also an outlook for increased number of bonders required. Didier Scemama: Understood. And so on that front, I think you mentioned in the past in previous calls that 2027, you could start to see some new AI logic customers coming on board. I mean have you got sort of line of sight on that? Richard Blickman: Well, we all know that AMD was the first to adopt hybrid bonding for several families, and they continue to do that. But then we also know Broadcom, and one of the positive developments was also the Apple M5. So we see broader adoption. At the same time, we've heard or we've been told road maps from another very big customer in the data center modules that we can expect more hybrid bonding adoption going forward. So that is why we make the statement that we see accelerated and broader adoption. Also the number of customers. Remember, a quarter ago, it was 18. Now we are at 20. So on the logic front, the adoption is broadening and increasing. Didier Scemama: Okay. Makes sense. And then on the HBM front, I think you mentioned that you had repeat orders from, I think, a memory customer. I think that customer, if I understand correctly, was the one sort of in sort of final trial phases for HBM4E 16-high adoption. And I think he was expecting some form of results in shipping those samples to their large customer. Is that validation of your view that HBM 4E is the really insertion point for hybrid bonding? And any idea as to the volume opportunity there? Richard Blickman: Well, the, let's say, evaluation programs, the customer engagement end customer has also increased very well in this first quarter. That has resulted in several more orders. And if all goes well, that should lead to mainstream adoption for certain HBM devices. It's still following the time line, which we have understood that this year will be a major qualification year. And then based on the success of the qualification, setting up production capabilities towards the end of this year for mainstream volume production in '27. That road map stands, and it's being supported ever more by orders by publications in the public domain of the progress. Also, one of the end customers is very clear also on their website on their adoption strategy of hybrid bonding for HBM. So that pace has picked up in the quarter. Didier Scemama: And just a final question. I think last quarter, you said that the rule of thumb was 150 hybrid bonding system deployed by logic customers that will mean the TAM for HBM could be 600. I mean anything that would sort of make you change your view either positively or negatively? Richard Blickman: No, that still stands. So if you compare a capacity of 50 bonders for logic and you simply look at all these beautiful websites and materials about building these 2.5D modules, you can easily see a processor surrounded by 3 or 4 memory stacks. And that explains you already one ratio. The other ratio when you have 16 dies in a stack, you need to do it 16x as opposed to 1 logic device. So you need much more capacity for HBM than you need for logic. But that has always been the case. So the rule of thumb is intact and also supported by customers demonstrating capabilities. One of the interesting recent documentation from TSMC is about the advanced packaging road map. And I invite everyone to look at that, published on CNBC. Operator: The next question comes from Alexander Duval from Goldman Sachs. Alexander Duval: Congrats on the strong orders and progress on hybrid bonding. Just wanted to ask a couple of regional questions. Firstly, when we look at the regional trends, it looks like U.S. was comparatively low relative to some other regions. So just curious to what extent it would be reasonable to expect an increase in the coming quarters as hybrid bonding orders for logic expand beyond your Asian customer base and into the U.S. customers? And then secondarily, understanding on China, it looks like robust orders there. I wondered if you could help delineate what are the key factors that were driving this? Richard Blickman: Excellent. Well, U.S. currently at the levels where it is. Remember, we had a big round for the initial capacity for hybrid bonding received already about 1.5 years ago. And that capacity is being filled in, is being qualified, is being tested. And based on the results of that customer, one can expect more bonders to be required or not. So that success is depending upon customer adoption. At the same time, we have the onshoring programs, one from TSMC to the U.S., one from Amkor, also Micron. And if all goes well, one can expect a shift from capacity built in Asia to more capacity onshore in the next years to come. What we heard is that in the next 2 years, so '26, '27, preparation, building fabs and then as of '28, volume production. We are, of course, engaged in those programs. And timing, again, is according to those customers' information, volume production as of '28. And your second question about China, yes, there are several robust orders from Chinese-based customers. Number one, what's hot is the 2.5D CoWoS-like capacity expanding at the same time, photonics, all the pluggables and also a recovery in modules for high-end smartphones, so mobile, and carefully tide turning for industrial automotive. So that's the picture of China. But I can also share that more and more future capacities are built outside China. So you see more in Malaysia, Philippines, Thailand and also coming up more strongly Vietnam. And that's where we have our facility building currently tools by the end of this year, the first bonding system, not hybrid, but epoxy bonding. And then you see a market opening up in India. Five major customers are setting up production capabilities for mid- to lower-end devices, mostly power right now, but also modules for high-end smartphones and also other devices more in the mid-market applications. So China, although you have to segment also a China local market, which is also expanding, but the non-Chinese manufacturing in China, you see a clear change to countries outside of China. Operator: Our next question comes from Ruben Devos from Kepler Cheuvreux. Ruben Devos: I just had a follow-up on the second memory customer regarding the 2 evaluation tools. Just curious around your thoughts, whether you could help us understand a bit what they're testing at this stage? Like is this a full sort of tool of record type of evaluation? Or is it more of a focus qualification around the specific application, more configuration? And how would that conversion maybe from evaluation to pilot lines look like in terms of time line? Richard Blickman: As I mentioned, the time line is '26, '27, '26 development, setting up certain pilot, although small volumes for end market qualification purposes and then more production expected for mainstream market adoption '27 onwards. Ruben Devos: Okay. And that would be a full tool of record type of evaluation, right? Richard Blickman: Yes, of course. Ruben Devos: Okay. And then just a second one regarding agentic AI. I think we've been hearing about agentic AI as a strong driver at the CPU level. Just interested to hear your thoughts whether that would have a different packaging intensity versus maybe the cycle that has so far been GPU-led? Also, have you seen any shift in the approach of your U.S. logic customer on advanced packaging with you in recent months? Is that CPU angle showing up in discussions? Richard Blickman: No, not in those details. I can't help. Ruben Devos: Okay. And just a final one. I mean, I think about like 6 weeks ago, there was some chatter around the potential relaxation of these JEDEC thickness standards for 20-high. I mean they were talking about moving from 775 micron towards 825 or even 900. Yes, of course, curious how you read those discussions? And has that changed the conversations you're having with your memory customers at all? Richard Blickman: No. First of all, it does not change the advantage of using a hybrid process over a reflow process. The benefits are more and more demonstrated that you have a faster circuitry, you need less power and that means less heat. The only reason we understand that this height should be available is for a process for 1 of the 3, which simply requires that height. The other 2 are not impacted by that change. So as we said end of February already with our year-end numbers or third week of February, and that is confirmed in the rest of this quarter, we see an increased engagement and activity and also announcements, and again, look at the Samsung website about hybrid bonding for HBM. That has not changed the adoption pace or rate of adoption because of the benefits. And you could also add those benefits are every day more proven in the logic application. And you see a broadening adoption, higher volumes, pulled in capacity requirements. So that supports also the adoption of hybrid bonding in HBM stacking. Operator: The next question comes from Charles Shi from Needham & Company. Yu Shi: First off, really congrats, Richard. I think hybrid bonding has been a 10-year work for you and for the company by now and glad to see it finally coming into fruition. But I have a few very important clarification I want to make with you here. You said the 2 evaluation units is going to a second memory customer, but I thought you already have 2 memory customers. So is this actually going to the third memory customer? Richard Blickman: No, you're right. We have -- we had 2. One is the U.S. and one Korean who started in a lab to develop a similar hybrid solution already 2 years ago, I think. But the change is that they have moved this to the forefront. So -- and that customer has 2 applications, one is logic, the other one is HBM stacking. So on the memory front, adding the third one, we now have all 3 who have our hybrid bonders to further evaluate and define the adoption of hybrid bonding for HBM stacking. Yu Shi: Got it. So the time line you provided to a previous question regarding that customer who just took your 2 evaluation units, 2026 qualification, 2027, maybe transitioning into production. Is that still the right time line to think for that -- I mean, the third memory customer who actually came in a little bit late? Richard Blickman: Well, the time line is '26. And as we explained several quarters, that has not changed. The first customer aiming towards the mid of this year, June, July. And the second one, a bit following behind, which could be end of Q3, Q4. So that will determine the adoption of volume for '27. Yu Shi: And the third customer? Richard Blickman: The third customer is ready to go, but they are all evaluating along the same, yes, let's say, parameters for one specific end customer. The whole world knows. That customer has invited all 3 to have these hybrid bonded stacks available by the end of '26 to be used in end market applications in '27. Yu Shi: Richard, that's very encouraging. So maybe I want to ask you one more question on the memory evaluation in general. We know your leading foundry customers sticking with the stand-alone tool configuration. But what's the landscape there for your memory customers between integrated and stand-alone? Which route do you think they are going to -- going after? And one of the very frequent questions I got from investors is whether there is any difference in terms of the economics, in terms of the revenue dollars you get from integrated tool setup versus a stand-alone on a like-to-like basis, meaning same configuration, same customer, are there any difference? Richard Blickman: Excellent. I'll start with the dollar numbers first. So we sell bonders and AMAT sells Kinex automated lines. And they both have a sales value. And the extra which you have is the handshake between the bonder and the Kinex tool. Customers currently, and we have shared that several times, and you also said that in Taiwan, still the overwhelming majority is stand-alone because of the initial phase where we are in. So you have multiple customers, different die sizes, different process requirements and for flexibility reasons, that customer uses stand-alone. It's undisputable that in an integrated line, you achieve better process requirements, particles, also timing between the steps and the integrity overall of die-to-die and wafer-to-wafer. Those advantages are used in front end for over 3 decades in the so-called cluster tool concepts. So the industry is evaluating the 2 aspects. Number one is the hybrid bonding process. And number two, what is the best total solution to produce devices using hybrid bonding. And as we all know, the hybrid process is very sensitive to particles, so 0 particle requirement. And by definition, in an automated line like the Kinex, you can achieve the best process environment specifications. So the verdict, you can say, in a way is on the one hand, towards high-volume production of specific devices with minimum changeover. Once you have more changeover and you require more flexibility like the Taiwanese customer, at this moment, that is still in stand-alone. But that is very likely in the future to change to an automated line concept simply because of process requirements. But for us, back to the dollars, it doesn't make the difference for the bonder. The bonder has a certain value, cost of ownership value, and that is the same stand-alone compared to integrated in a line. Yu Shi: Richard, if you want to make a call today for HBM, is it more likely to be integrated or stand-alone? That's the last question. Richard Blickman: Integrated because HBM is dedicated for high-volume production. And then it's more likely to do that automated than stand-alone. Operator: The next question comes from Robert Sanders from Deutsche Bank. Robert Sanders: Just a question on HBM again. Can you talk about the yield numbers that you see at the moment in development? And what does the end customer need to see in terms of yield before they go ahead, whether it's the memory guys or the end customer? And the second question would just be, is this going to be a partial transition at HBM4E if all things go well? Or would it be a wholesale transition? I guess the reason I'm asking is because there's a lot of installed TCB capacity that the companies would continue to like to reuse. So I'm just interested to think it will be a sort of binned chip. So only the best chips will be hybrid bonded and the rest will be used TCB and then maybe at HBM 5, it will become a full insertion? Or do you think it could be quite rapid? Richard Blickman: Excellent. Thanks, Rob. Number one, what we hear is clearly, and this is forever. There's always a quality difference over a wafer on certain devices. So you could, like we've had historically, end up with quality classes, the highest and hybrid bonders, et cetera. On your yield question, we do not receive detailed yield numbers. But what we know as a rule, if a process is not well up into the 99.9%, then it becomes a very difficult long-term perspective. So yields in interconnect are at those levels. Where are we today? Well, we should be able to achieve those levels. Otherwise, it would make no sense to do these evaluations and qualifications. So the confidence is certainly that we should reach those levels. We reached them, as we all know, with logic already quite some time where the yields are very well up in the 99.99-something percent. So the hybrid bonding process can achieve that. And for HBM stacking, one still has to prove that and that's what's currently happening. Is HBM more difficult than logic? On the one hand, you have far less I/Os, so it should be more simple. On the other hand, you have vertical stacks of 16 devices. They are per definition thinner. So the process is different. And in certain ways, on the one hand, easier than logic because bond pad pitch is less critical. But on the other hand, the vertical stacking. So they both have their specific, let's say, issues to deal with. But again, coming back to why are these customers, all of a sudden, and which we expected from the very beginning, putting far more effort into the adoption of hybrid bonding is simply because the proven performance upgrades are driving that adoption by an end customer and that's a very big customer. Robert Sanders: And any idea when the TCB market could see a downturn because of this in memory, for example? Richard Blickman: One should see. If you would imagine a certain volume to be produced, it will be less TC if one uses hybrid. So that's an offset in the same end volume. We should see that by the end of this year or as we have said already in the middle of this year, we should see more confirmation from the Samsung side. So in the end, it's the number of devices produced and whether you use Process A or Process B results in a different number of machines. Operator: The next question comes from Martin Marandon-Carlhian from ODDO BHF. Martin Marandon-Carlhian: My first question is on hybrid bonding use in GPUs. I mean the biggest GPU vendor did recently some aspect of their design for their next GPU coming out in '28, saying they would use 3D stacking. So first, do you expect it to be hybrid bonded? And second, if that's the case, when do you think you will have visibility on the timing of the ramp-up? And I have a follow-up. Richard Blickman: Excellent. Well, that's exactly one of the major game changers, and it is forecasted to be hybrid bonded. So that all fits into the acceleration, which we explained at the very beginning, anticipating on the adoption of hybrid bonding in that family of next-generation products. And the timing for that is more equipment to be ordered and installed in '27, ordered in '26 for volume production as of '28. Martin Marandon-Carlhian: Okay. Great. And a second one would be on the chip-on-panel packaging. Do you think that the shift to square panel could somewhat open new opportunities for TC Next or hybrid bonding? Richard Blickman: Well, the 310 x 310 panel is a very clear development coming to market also in the next year and 2 years. We already received orders for certain applications. So our bonders can handle the 310 x 310. Hybrid is a bit early, but we see it for many other applications being anticipated because it saves quite some waste. And you can expect with larger die sizes more module type of designs, 2.5D, but even more 3D. That panel will be used as a carrier more and more. So that trend is clearly visible. We will share some more information on the Capital Markets Day or Investor Day mid-June to give you some more examples, but that is certainly happening. Martin Marandon-Carlhian: Okay. Great. And the last one for me, just on the cost for change. I mean the guidance for the next quarter is OpEx up around mid-single digits sequentially, while sales are up 30% to 40%. So can you share a bit more color on what you did there to maintain that kind of discipline on OpEx, that would be helpful? Richard Blickman: Simply, it's controlling costs. That's our job. No, but there is no change as such in our structure. But with increased revenue, you have an enormous operating leverage, if that is also your question. Operator: Our next question comes from Nigel van Putten from Morgan Stanley. Nigel van Putten: I've got a question on photonics actually, even before moving to co-packaged optics. I think you're already seeing quite a wide range of applications in terms of your tools like hybrid bonding. I think TCB, flip chip and multi-module attach can all be involved here. But in terms of sort of focusing on the near term, so actually before CPO, are you already seeing more of a benefit as the market moves to silicon photonics and also and/or, I guess, higher throughput pluggable devices? Yes, that's my first question. Richard Blickman: Well, as we have reported, started middle of last year, a significant expansion of that market segment with multiple customers building those pluggables. And also in the pluggables, you have the next generation, which requires more bonding steps. So that unfolds in a very positive way for us. You see that also in the numbers and the details we provide. You should not mix that with co-packaged optics because that's another application and a different process. Also on that co-packaged optics, we have made significant progress. And for instance, the COUPE process, we delivered the hybrid bonding for accomplishing those kind of contacts. Also there, we will spend more details on background and development road maps in the Investor Day. But again, it's certainly an extension of the hybrid bonding applications into this rapidly developing market. Nigel van Putten: Helpful. Sorry, go ahead. Richard Blickman: Sorry, does that answer your question? Nigel van Putten: Well, I had a follow-up, but I'll wait until the Investor Day then I look forward to receiving more detail. I want to ask my second question on order intake, which has clearly been very strong last 2 quarters. I know you don't really disclose the backlog, but I calculate around EUR 400 million by March end. So that seems you could do with some digestion on the order side while still growing revenue very comfortably. However, on the other hand, I presume the backlog is for a narrower set of applications around 2.5D and hybrid bonding, while you're also now flagging mobile and automotive picking up. So essentially, how should we think about order intake in the current quarter relative to the last 2? Richard Blickman: Well, we mentioned continued momentum, a continuing trend. Don't forget, we are in an up cycle and up market. So as long as there's no signs of saturation in the end market, you can expect that to continue. We have been able to ramp our capacities in past up cycles significantly, 50% quarter-on-quarter. You see that now again ramping as well. So that's as much as we can. Yes, so far this quarter, we have seen no change. Operator: The next question comes from Nabeel Aziz from Rothschild & Co Redburn. Nabeel Aziz: I just had one on your service business. You talked about raising your presence in Taiwan and Korea for your service professionals in terms of preparing for greater hybrid bonding shipments. Have you seen a pickup in recent quarters in your service revenues in 4Q and in 1Q? And how do you see that trending through this year? Richard Blickman: Well, certainly, number one, when the tide turns positively, clearly, customers' production lines are loading and they need more support, they need more spare parts, they need more service, upgrades. And then for hybrid bonding, but also for certain refill processes, you need more specialized support to reach the 24/7 production requirements. And that simply is following a model used in front end where, within 4 hours, a defined list of spare parts for hybrid bonders that is close to 900 need to be available. And that's all in place. So you see a broad increase in the demand of service spares and retrofit kits. Nabeel Aziz: Okay. Yes. That's very clear. And I think on -- in recent years, your service revenues have been pretty stable around 15%, 16% of group revenues. So as we look forward with a greater proportion of hybrid bonding in the mix and your hybrid bonding installed base growing, should we expect the service intensity to reflect more a front-end mix kind of towards 20%-ish range of group revenues? Richard Blickman: Absolutely. So what I just explained in a few words, the level of support we have to provide to hybrid bonding front-end type of environment is significantly higher than in the back-end environment. So that 15% may very well move up towards the 18%, 19%, 20%. For front end, it's typically somewhere between 20% and 25%. Also the long-term contracts in service and support are standard in front end. So that increases and changes the model altogether. Nabeel Aziz: And then just last one. So yes, on a margin perspective, do you see the greater requirements being either a headwind or a tailwind to gross margins? Richard Blickman: A tailwind, certainly a tailwind. So support is certainly, if you organize it right, of course, but that's with everything, is potentially a higher-margin business. Operator: The next question comes from Martin Jungfleisch from BNP Paribas. Martin Jungfleisch: Congrats on the strong results. The first question is really on capacities and lead times. In the press release today, you talked about freeing up incremental capacity in Malaysia. Can you just disclose what your current hybrid bonding capacity is in terms of tools per month or year and where the expansion could potentially get you to? And also, if you could provide some updates on lead time for hybrid bonders now that the order momentum is picking up quite a bit? Richard Blickman: We were at 15 bonders theoretically per month. So that leads to about 180. With the increase in floor space and adjusted to a model required by several customers, we can now expand that to 250 per year. So that is a significant increase altogether. You won't see that for the number of bonders produced in the year, but how typically orders are placed and expected delivery by customers with a lead time for now the 100-nanometer of 6-month standard. We can satisfy any model presented to us by the big 5 using the current expanded capacity. On top of that, you need more people in the field to install to support. I mentioned earlier the spare part model supporting operations. We have put that all in place. So the infrastructure needs to be ready to support that higher volume as well. So it's not just the production floor, but that is all part of our overall model, the EUR 1.5 billion to EUR 1.9 billion in the next 3 to 5 years, which is a prerequisite to support organization for growing revenue to those levels, which is roughly 2.5 to 3x what we have currently. And for the hybrid bonders, it's significantly more. Martin Jungfleisch: Right. And the other question is mainly on EMIB from Intel. There's a bit of news flow on increased demand for Intel's EMIB packaging. Can you just disclose like what kind of relevance this business has for you and what kind of your prospects are, where you think this could go to in the future? Richard Blickman: We are involved since the very beginning in placement of these EMIB modules that could be a positive business impact. But as things with Intel develop as they do, we first need to see more evidence. But they have a significant capacity installed, which we delivered the systems placing those modules. But it's good news when it increases. Any next question? Operator: We have time for one more question. The last question comes from Madeleine Jenkins from UBS. Madeleine Jenkins: I just have one quick question on China. I know they're building out a lot of capacity at the moment on 2.5D. I was just wondering on 3D or hybrid bonding. Are you in any discussions with them about this technology? And are they indicating that they might order tools kind of in the coming years? And when would you sell to China that equipment? Richard Blickman: Number one, we only sell to China, what we -- and it's with any country, what we are allowed to sell. So we follow very strictly the regulations in this case, by the U.S. government, and we have that tested every 6 months. And we are allowed simply with the current levels and the current ingredients in the die bonders and in the hybrid bonders, it's not much different. So that is open for use in the China market currently. There's, of course, development going on and applications are still distant. There could be a philosophy to use hybrid bonding in 3D stacking to lengthen the node size life, so to increase the performance of those devices with a 3D hybrid bonded structure. We are, of course, in development of those kinds of modules. but that is still in very early stage. So the current big market in China is 2.5D mass reflow flip chip for us, which we also disclosed in previous quarters, which is more or less standard equipment, but very, very much advanced. Our flip chip has absolutely the best cost of ownership also in China. But you can expect that they will develop certain local Chinese device structures using a hybrid process. Madeleine Jenkins: Perfect. And just on that, so in terms of timing, is it a few years? Or obviously, China, they do things very quickly over there. So could it be sooner than that? Richard Blickman: Yes. They are -- as I just said, they are engaged in development, also very aggressive in a sense, in positive sense to study carefully the benefits of a hybrid process. They are much more driving that. And it's also very easy to understand. The world outside China is very much trying to extend the life of a mass reflow process because we all know those processes. So the hurdle to move to hybrid takes time. In China, it is more because they can overcome that they are not allowed to invest in the next generation with smaller device geometry so then to solve that using hybrid process, which could be a very significant market. Operator: Thank you. And with that, I will now turn the call back over to Richard Blickman for any final remarks. Richard, go ahead. Richard Blickman: Well, thank you all for taking the time and asking questions. You're most welcome if you need to understand some more details, we're happy to provide. Thank you. Bye-bye.
Fredrik Ruben: Right. It's 9:00. Good morning, and welcome to this earnings call where we will cover the first quarter in 2026, summarizing our business in January, February and March. I'm Fredrik Ruben. I am the CEO of Dynavox Group. Linda Tybring: And I'm Linda Tybring. I'm the CFO of Dynavox Group and will cover the financials. Fredrik Ruben: All right. And before -- for some of those of you who have participated in this call before, you might be familiar with, but we'll start with a quick recap about what Dynavox Group does. And then we will summarize the main takeaways from the quarter. We will then dive deeper into the financials, and thereafter, there will be a Q&A session. And you can submit your questions during the Q&A session in the function here in Teams or you can ask them live by raising your hand in Teams and of course and of course unmute yourself, when we will invite you to speak. And of course, you're always welcome to offline questions sent by e-mail to the above e-mail, which is Linda's, linda.tybring@dynavoxgroup.com. So a brief overview of Dynavox Group. First and foremost, it's important to reiterate our mission and our vision, which I know is very dear not only to our now over 1,000 colleagues around the world, but also to our ecosystems of partners and investors. And our vision is a world where everyone can communicate, and we will contribute to this via focusing on our mission, which reads to empower people with disabilities to do what they once did or never thought possible. And this also summarizes 2 of our main user stories. The first one, the do what you once did, that may refer to a person who led a normal life until a diagnosis such as ALS, which rendered her then unable to control the body or communicate like before. The other one, the never thought possible can refer to a child with a condition such as autism or cerebral palsy, where thanks to our solution, she can do much more than the world around him or her ever thought possible. On the picture here, you have Linnea. She's a 12-year-old girl from Gothenburg here in Sweden, and she was diagnosed with cerebral palsy at early age, and she's a great example of this. And Linnea presented at the Women in Tech Conference here in Stockholm earlier this week together with our colleague, Griet, that you see on the picture. And thanks to our solution, she was able to fulfill one of her dreams to give a lecture about assistive communication in front of thousands of people, and Linnea has been a user since she was about 2 years old. The market that we service is hugely underserved. Some 50 million people have a condition so grave, they simply cannot communicate unless they have a solution like ours. And every year, some 2 million people are being diagnosed, and yet we estimate that only 2% of those are actually being helped and the rest literally remain silent. And the main reason for this spells lack of awareness, also among the professionals and the prescribers that are tasked to assist these users and combined with poor healthcare reimbursement systems. We operate this company on a global footprint. Today, almost 3/4 of our business stems out of the U.S., largely because of a reasonably well-functioning funding system that was established some 20, 30 years ago. And our comprehensive solutions are sold in more than 65 markets around the world, which 12 are markets where we sell directly, while the others are serviced by a network of some 100 reseller partners. Our staff is distributed in a similar way as our revenue, meaning some 50% of our staff are based in North America with our U.S. headquarters in Pittsburgh in Pennsylvania. And then our second largest office is our headquarters here in Stockholm, but we also have branch offices in several European countries as well as in Suzhou in China, in Adelaide in Australia. And as of today, as I mentioned, we're just over 1,000 employees in total in the group. We provide a comprehensive portfolio of solutions that ranges from the content and the language system, such as the world's leading library of communication symbols, they're called PCS, and a leading solution of off-the-shelf custom-made synthetic voices of the highest quality and a large diversity, of course, of languages, ages, ethnicities and so forth. We also make highly sophisticated communication software that's tailored to the type of user, and that can, of course, vary greatly based on the needs. Three, we develop and design devices with cutting-edge technology, and they're typically medically certified and very durable, and that includes communication aids that are controlled via eye tracking and accessories such as the Rehadapt mounting systems. If we move on, we have a services portfolio to help our users through the complexity of obtaining and getting funding or reimbursement for their solutions. And then last but not least, we're there to help our users, the therapists, the caregivers through a global system of support resources. And we operate this model globally. And it's important to note that each piece on this picture is critically important and also a significant differentiator for us, making us absolutely unique. Our go-to-market model is predominantly as prescribed aids. So that means some 90% of our revenue comes from public or private insurance providers. And that also means that we have solid paying customers and have always been resilient towards changes in the overall economic climate. But now we will go back and focusing on the main topic of today, namely our earnings report for the first quarter in 2026. If I just look at the highlights, we delivered a solid start to the year with continued revenue growth in the quarter. The growth compared to the same quarter previous year sums up to 15% after adjusting for currency effects. North America, our largest market, was hit, however, by unusually severe winter weather in January and in February. And that led to closures among schools and institutions. And this, of course, impacted our ability to meet with customers and deliver products. These effects are, however, expected to normalize and the deferred business to be regained during the remainder of this year. The month of March isolated, for example, was back at historic growth levels in North America. Our business in markets outside of North America continued on the good trajectory from the previous quarters. The demand -- the underlying demand for our solutions remains high, and that's proving the solidity of our underlying business, and we see robust underlying growth across basically all markets where we operate. EBIT came in at SEK 57 million, and that's a 35% increase compared to the same quarter last year despite continued FX headwinds and, of course, the named weather impact in the U.S. Our Product and Solutions development hub, which was formed last year here in Stockholm is now fully operational. And then the global rollout of our new ERP system is now almost concluded. And now with also our Swedish parent company successfully transitioned earlier this month here in April, leaving only a few small local entities remaining. On 1st of April, we also completed the acquisition of our Italian reselling partner, SR Labs Healthcare, and we welcome new colleagues to the team. That's very exciting. And then last but not least, we announced a couple of changes to the executive management team. On March 1, we welcome Marie-Josée Leblond or MJ, as we refer to her as the new Chief Digitalization and Information Officer. And also, we welcome Luis Mustafa, who joined as our new Chief Operating Officer. He's replacing Tony Pavlik, who is about to enter retirement. We also announced that Linda here will leave her position as our CFO, but will remain in full capacity until the end of January, next year, 2027, hopefully boding for a smooth and structured transition after we have recruited her replacement. And now I actually do hand over to Linda, who indeed is still here and on top of things to take us deeper into the financials. Linda? Linda Tybring: Thank you, Fredrik. Yes, still live and kicking. Let's take a closer look at the Q1. Revenue for the first quarter, which is typically our seasonally weakest quarter, came in at SEK 588 million, a 15% year-on-year growth after adjusting for currency effects. Recent acquisition contributed with 3% and the organic growth was 11%. Currency fluctuations had a 14% negative impact on revenue. Sales continued to grow across all markets and the gross margin ended up at 69% (sic) [ 67% ], a decrease of 0.9 percentage points. Gross margin benefit from favorable currency effect, but was offset by higher component costs and higher cost base following increased staffing to support the continued growth journey. Fredrik Ruben: I'll make one correction. The gross margin was 67%. Linda Tybring: 67%? Okay. Did I say something wrong? Fredrik Ruben: Yes. Linda Tybring: Okay. Sorry about that. Before we move on, I would like to take a little bit deeper dive into our typically seasonality patterns. Over the past couple of years, we have seen a recurring pattern over the quarters that is slightly connected to our access to public and private reimbursement system. We maintain some 675 contracts with private and public payers. And Fredrik mentioned before, 90% of our revenue comes out of that. In January, many payers, specifically in U.S., are resetting their insurances, which means that the funding process slowed down in the beginning of the year, which impacts our revenue in the first quarter. The pace is then picking up, and we normally see an acceleration over the following quarter that end with the sprint in Q4, when the fiscal year closes. Hence, the fourth quarter is typically our strongest. As you know, there is no rules without exception. And as you can see in the chart, we had an exceptionally strong Q1 last year. This was due to good business momentum and the successful product launch that we did in Q3 2024. And we then allow existing orders to be replaced. Consequently, deliver and revenue was pushed forward to the following quarter. This is a pattern that we recognize and have seen before in conjunction when we do product launches. So to sum up, we have a clear seasonality pattern impacting our revenue distribution. This is also why our financial growth target is set to annual average growth of 20%. We clearly see variations over the quarters. So moving back to the Q1. EBIT for the quarter was SEK 57 million, and the EBIT margin was 9.8%, which is a growth of 56% FX adjusted. Our OpEx increased by 7% organically. The OpEx increase relates mainly to continued investments in sales and marketing staff, but also within our IT organization. During the quarter, we continued investing in system and tools, including a new ERP platform to strengthen scalability. These nonrecurring investments totaled to SEK 9 million, a decrease of SEK 5 million versus last year. Acquisition contributed with SEK 14 million increase of our operating expenses versus prior year, and we saw a decline in long-term incentive cost of SEK 5 million year-on-year. Costs for research and development after capitalization and amortization decreased by SEK 24 million compared to the same quarter last year, mainly driven by higher costs in prior year related to organizational restructuring, higher capitalization related to launch of new products and lower amortization contributed further. In addition, the currency effects both from lowering exchange rates versus prior year and together with transactional timing effect had a negative impact of SEK 7 million on our EBIT for the period. If we look at the basic earnings per share, it totaled to SEK 0.33 (sic) [ SEK 0.36 ] per share to compared with last year SEK 0.23 per share, which is close to 60% improvement. For the quarter, cash flow after continuous investment was positive with SEK 56 million, more than doubled. It's encouraging to see that our work on improving processes and operations have had positive effects on our cash flow compared to last year. Cash at hand by the end of the quarter was SEK 243 million. Net debt was SEK 865 million. The total unused credit facility at the end of the quarter was SEK 300 million. And the net debt over last 12 months EBITDA was 1.7x. Fredrik? Fredrik Ruben: Yes. Linda Tybring: Back to you. Fredrik Ruben: Thank you, Linda. Okay. So before we open up for questions, I'd like to reiterate some of the main takeaways and bring further nuance to our performance and outlook. So we continue on our strong growth trajectory, a trend that started early spring of 2022, so that's almost 4 years ago. We grew revenue by 15% adjusting for currency and despite the North America being temporarily impacted by severe weather in January and February. And we see that sales continue to grow across all our markets. Our profitability and cash flow improved notably, reflecting strong operating leverage as investments-related to cost -- as investment-related costs continue to taper off. We also note that the currency headwinds have decreased, as we enter now into Q2 with the SEK versus the U.S. dollar fluctuations seemingly having stabilized. We delivered a very strong cash flow, further underscoring the improved operational efficiency, which we have put a lot of energy into achieving. We continue to expand our direct market presence by closing the acquisition of our Italian reseller partner. Our overall exposure to import tariffs to the U.S. remains limited since our products are classified as medical certified assisted devices, and that exempts them from tariffs under the Nairobi Protocol. We continue to monitor, obviously, all macroeconomic and policy changes development closely. And while currency effects and the broader macro environment, I mean, can create volatility quarter-to-quarter, Dynavox Group is well positioned to continue delivering long-term sustainable growth in a severely underpenetrated market while, of course, advancing our mission to provide life-changing solutions to those who need them the most. And we reiterate our current financial targets, which were communicated in February of 2024 with a time horizon of 3 to 4 years. And the first target reads to, on average, grow revenue by 20% per year adjusted for currency effect, including obviously then contributions from acquisitions. And in local currencies, the first quarter growth was 15%, which means we continue on the growth trajectory. And as Linda talked about earlier, we have clear seasonality variations over the years. We -- the market that we serve remains hugely underserved, but also quite immature. And with the example of growth levers such as sales teams expansion, adding direct markets and then, of course, operational excellence, we continue to build on our growth journey. The second target reads to deliver an annual EBIT margin that reaches and exceeds 15%. So we feel that we have proven to build strong growth within -- with incremental improvements in profitability this quarter too. We need to continue to invest in future growth with improvements in scale, but the recipe for achieving this is rather simple, continued revenue growth, high and stable gross margins and then operating expenses that increase at a lower pace than the revenue growth. And as a consequence, we see good opportunity to further leverage how revenue growth translates to reaching and exceeding a full year EBIT of 15%. And then lastly, we expressed our dividend policy, and we have an attractive cash flow profile. And given the growth opportunity, we need to maintain a capital structure that enables strategic flexibility to pursue growth investments and also, of course, acquisitions. But it's still expected to, over time, generate excess cash. And our policy is, therefore, to distribute at least 40% of available net profits to the shareholders via either dividends, share purchases or similar programs and when so allows and when we deem it's the right prioritization. And as you could see for the Annual General Shareholders Meeting that is happening on May 8 this year, the Board of Directors earlier proposed that a cash dividend of SEK 0.5 per share shall be distributed for the shareholders. All right. With that said, we are now inviting our Corporate Communications Director, Elisabeth Manzi, who will help to moderate and also enable us to take questions from the audience. Hi, Elisabeth. Elisabeth Manzi: Hello. Thank you very much. [Operator Instructions] So we do have people -- a couple of people who have raised their hands, and I will then start with the first one, who is Daniel Djurberg. Daniel Djurberg: Yes, I have a question on the growth. And importantly, you said that March growth level was back at historical levels in the U.S. I was wondering, is it possible to quantify what is the historical growth level in the U.S. and/or possibly also quantify the negative effect from the winter storms in terms of deferred revenues or the impact on the organic growth level is seen in the U.S., it would be super helpful. Fredrik Ruben: I understand that. I can't quantify it precisely. But what I can say, if you look at historic growth levels, I mean, we are leaving a period where we've had -- we've been actually quite well above our FX-adjusted target of 20%. And we saw obviously that in total, the revenue growth, FX adjusted for the quarter was, how should I say, only 15%. And that is a consequence of weak order growth in January and February and then to some degree, partially mitigated by a strong March, but not all the way back to kind of where we think that the business should operate at. But I don't have specific numbers in dollars or SEK to help you quantify them, I'm afraid. Daniel Djurberg: Okay. And would it be fair to assume that you have deferred revenues coming from Q1 into Q2 then? Or... Fredrik Ruben: Yes. Our assumption is that none of the lost revenue, if you will, that didn't happen due to weather impact, et cetera, are actually lost. They will happen later on in the year, whether it happens in Q2 or further down in the year, I cannot specify that because there are -- these are quite slow and I don't know, call it, bureaucratic systems. And of course, if you miss the first date, it might take some time before you get a second chance. But typically, we do not see that weather or these kinds of short-term impacts have lasting impact. So there will be a rebound one way or the other. Daniel Djurberg: Perfect. And if I may ask you also on Europe, showing off 40% organic growth. Can you comment a little bit on the variation seen in various segments like Nordics, Germany, France, Italy, et cetera, and if needed to secure a little bit higher growth also in Europe? Fredrik Ruben: I think if you take Europe as an example, it's actually quite difficult to quantify the difference between organic and acquired growth because of the fact that when we acquire companies, we acquire our own resellers. It's not like we buy a completely new business unit where there's new revenue. So in totality, if you adjust for FX in Europe, the underlying growth was 32%. But of course, part of that was us acquiring a reseller, but it's the same products being sold in the market by the same people. It just happens to be that they are now employees of ours and not owned by a third party. So -- but if I would kind of answer your question on where do we see growth, there is still a fair amount of -- these markets differs from quarter-to-quarter and market-to-market. The market that we currently feel maybe the most excited about is for sure, Germany, where we are going direct since -- it's September 1, right, Linda? Linda Tybring: Yes. Fredrik Ruben: Yes. So that's a market where we believe there is a lot of potential in many, many ways. And that's also a market that did perform well. Daniel Djurberg: Fantastic. And I will just finish off with the ERP, it was SEK 9 million in the quarter. Should we expect a similar level in Q2? Or will it be even a bit lower than this SEK 9 million? And will Q2 be the last quarter with any highlighted negative impact? Fredrik Ruben: It's very much within that... Linda Tybring: Yes. It will fall off during Q2. And our hope is that the majority of our existing entities will be over in the coming months. Daniel Djurberg: Congrats to a strong ERP implementation then. Linda Tybring: Thank you. It's a fantastic work by all the members in the team, I would say. It's a true team effort. Elisabeth Manzi: So thank you very much, Daniel. And I also have a question here from Mikael Laseen, who's asking, "Gross margin was 67% in Q1 versus around 69% in H2 2025. Could you break down the key drivers behind the decline and comment on how we should think about the gross margin ahead?" Linda Tybring: A couple of things. Comparing with H2, then you have a higher revenue as part of that, which means some of the set cost is still the same going into Q1. So we're going into a new quarter. We also added more people to be able to handle the growth. I think the gross margin will continue to be stable. Of course, we also -- we wrote that in the report, seeing some challenges when it comes to components and freight. But we should remember, it's a small part of our gross margin considering that it's close to, I mean, 67% and 78% (sic) [ 68% ]. Fredrik Ruben: I think we sometimes try to help that what's the portion of fixed cost as part of our COGS? Linda Tybring: About 20% is fixed cost. Fredrik Ruben: And that should scale quite well, as revenue go up and then, of course, the remaining is related to how many products we ship, et cetera. Linda Tybring: Yes. Elisabeth Manzi: Good. Thank you. And then we have someone else who would like to ask a question. So I do invite Jakob Lembke. Jakob Lembke: I have a few questions. I'll start maybe on North America. If you can elaborate on the weakness you saw in January and February, let's say, how much sales declined in those months? Fredrik Ruben: And this is the same response as to Daniel then. No, we don't quantify exactly the weakness, and it's not -- it's actually a little bit difficult to quantify what was the consequence of that, et cetera. But we can just summarize that in totality of 2 highly impacted months of January and February and then a normal month in March didn't bring us all on top of the bar. At the same time, we don't see any changes in reimbursement. We don't see any changes in demand. So we believe that the effects are more or less temporary and exactly how temporary something is. In a different setting earlier this morning, we also quantified the fact that if you think about our North American business, we deliver every day. We ship devices almost -- I mean, up to USD 1 million per day. And of course, if you have a day when roads and streets and institutions are closed, we will not ship anything that day. The question is how much can we kind of make up for when the business is back to normal, and that is difficult to quantify. But that's how vague I can be on that, Jakob. Jakob Lembke: Okay. Then a follow-up on that, I guess, is just the growth you're seeing now in North America, is that in line with your sort of targets or above your target sort of implying that catch-up effect? And also if you're seeing the same trends into March -- or into April from March? Fredrik Ruben: I think we do a pass on commenting on the current quarter, but I just want to reiterate the fact that we believe that this is a business that should deliver an FX adjusted or in local currencies growth of 20%. U.S. is a market where we do not have resellers to acquire, et cetera. So it is kind of same-store sales also going forward. We believe in that. I think we can definitely say that 2025 was a very strong year, and we obviously then delivered way above the 20% FX-adjusted growth. We still -- we reiterate our target, and we believe in it. Jakob Lembke: Okay. And then another one, just -- I don't know, can you see that -- let's say, that in California, the growth is exactly in line with the targets or normal and that in maybe Massachusetts, it's way down. Do you see those sort of variations? Fredrik Ruben: Now you're putting us on the spot here, as I actually don't have that. What we did learn was that the winter weather, that was unusually in that, was affecting 50% of the U.S. states. You had sub-zero Celsius degrees in Texas and some of our biggest states. So it was a nationwide, but I don't have a number on top of my head whether California was kind of untouched. I think we need to also understand that our operation, which is based out of Pennsylvania, that was probably in one of the epicenters of the storm. So it's not necessarily just on the client side, it's also our capabilities. Jakob Lembke: Okay. And maybe one more is that you seem quite confident that you will regain all of these sales, but on the other hand, you don't really know sort of how much you have been impacted. So just maybe some more comments on that you are confident in regaining this and how you can be that? Maybe, I don't know, can you see internally that you have a larger backlog now or more processes ongoing or something like that? Fredrik Ruben: Sure. One of the reasons why we can't tell whether a specific order was not happening because of weather because there is no such kind of check in the box in our CRM systems, et cetera. So we don't know whether it was that or something else. What we can say is that nothing has changed. The reimbursement rules and laws are the same, reimbursement levels are the same. The underpenetrated market remains as underpenetrated now, as it was a year ago, et cetera. So none of the fundamental fact -- and there's no new competitor or other type of macroeconomic impact that affects us. So all things alike, we should be able to deliver on the target. And we do indeed remain confident. But I also want to stress the fact that we express our targets on a full year basis. There will be fluctuations between quarters and months, et cetera, and that's part of the business. And we also have then the more seasonality patterns that Linda talked about. So we look at this business on a full year basis, and hence, we do reiterate the target. Jakob Lembke: Okay. Maybe just a final question... Linda Tybring: Well, final? Jakob Lembke: Yes, sorry. Just on the R&D expense, both the sort of gross expense looks lower and then there's also higher capitalization. So just the question is, what is behind that and if that is representative going forward? Linda Tybring: I mean mainly the big discrepancy is that we don't have the restructuring costs that we had last year, the same period. But then we also launched more products, which means that you have a higher capitalization. We launched the product in beginning of April. And then we are also rolling out there some -- not end of life, but from an amortization is actually lower amortization in the quarter as well. Fredrik Ruben: I think you can read between the lines that the new R&D organization that we have here in Stockholm is not just kind of fully staffed, they're obviously also delivering and hence, there is more innovation coming out of that. And that's obviously quite reassuring. Linda Tybring: Very good point. Elisabeth Manzi: Thank you very much, Jakob. And I think this was also the answer to a question that Mikael Laseen had on the capitalization of R&D. So I hope you also got that answer, Mikael. But we do have some more people that would like to ask questions. So I invite [indiscernible] to join. Unknown Analyst: Just one short one on sales. I know it's repeating, but how does like the paying pattern look like from customers? I mean, if sales accelerated in March, shouldn't trade receivables be up more? Linda Tybring: Yes, absolutely. But you had a strong Q4 as well, and it takes a little bit longer to see that. And so we've also received payments during the quarter for our trade receivables, since Q4 is higher in that perspective. Unknown Analyst: Got you. And then you touched a little bit on the R&D being down, but I also noticed the selling and admin expenses being up quite a bit in percent of sales from previous quarters, comparing quarter-over-quarter and year-over-year. What's the reason behind that? And yes, some color on that would be really helpful. Linda Tybring: Yes. A couple of things. When it comes -- you have to remember going into a new year, you kind of enter into -- with the same OpEx level as you had in Q4, which means that if you have lower sales, the ratio will then go up. But of course, we continue to invest in sales and marketing to be able to continue to grow. That's one of our key. And we have also invested more in our IT organization. Unknown Analyst: Can you say anything about how big part of selling expenses and admin expenses? They are fixed or variable? Linda Tybring: Majority of our OpEx is salaries. I would say almost 80% of our OpEx is salaries. Fredrik Ruben: And maybe to add on that, commissions is obviously, specifically, in North America. But then you need to kind of take it down to just the field reps, et cetera. We typically say that commission as a part of salary is in the range of 5%... Linda Tybring: Yes, 4% or 5%. Unknown Analyst: But then if you sold less in Q1, shouldn't selling expenses have been down a little bit then? Fredrik Ruben: But we have more people. Linda Tybring: But we have more people. Elisabeth Manzi: Thank you, Philip. And then I would like to also invite [ Nicola Kalinowski ], who is on the line. Unknown Analyst: Yes, just a few questions of a clarifying nature from my end. Would you say that the U.S. -- or the bad weather in the U.S. in Q1 has also caused a delay in the recruitment or, say, onboarding of new U.S. solutions consultants? Fredrik Ruben: What a good question... Linda Tybring: Yes, that's a good question. I would say no. It hasn't. Unknown Analyst: Yes. Fair enough. Fredrik Ruben: No, you got feeling, I agree. We have no chart to prove that, but that's... Linda Tybring: You have to remember a lot of our -- I mean, majority of our salespeople are remote in that perspective. Fredrik Ruben: Yes, true. So they don't necessarily have to come in physically for interviews, et cetera. It's a remote machine to a large degree, already from the start. Unknown Analyst: Yes. That sounds very good. And just -- this is maybe a more difficult question, but has there been any notable direct or indirect impacts from the situation in the Middle East in your case at all? Is there anything we should keep in mind going forward that you think, just so we don't miss anything? Fredrik Ruben: I can look at kind of more of a macro. I think the uncertainty that we are looking at, that affects us all. We are, of course, waking up every morning to new news, et cetera, and then you start to kind of -- how will this impact us. As our infrastructure look like, the markets that we are exposed to, but of course, cost base. I think Linda covered a little bit on freight costs and inflation components that might have some impact. I don't know if you want to quantify that more, but it's nothing... Linda Tybring: It's not material... Fredrik Ruben: Major material, yes. Unknown Analyst: Yes. So there's nothing direct to keep in mind, at least? Fredrik Ruben: No. And I think you should also -- if you -- just from a very practical perspective, our products are typically produced in Southeast Asia. Taiwan is a big market. They are shipped predominantly by boat to the U.S. West Coast. Hence, they don't go through any straits. I mean, they pass Hawaii. That's how exciting that trip is. So there is no kind of physical impact on our ability to produce and receive products. But of course, it's likely so that the part of our COGS that is represented by freight costs will, to some degree, go up. Elisabeth Manzi: Thank you so much, Nicola. and then we have a question from Erik Larson. He's asking, "How do you think about the balance sheet here, acquisitions versus giving back to shareholders?" Linda Tybring: I mean we are -- the Board is proposing to AGM, which is in 2 weeks that we are doing a dividend of... Fredrik Ruben: SEK 0.5. Linda Tybring: SEK 0.5 per share. So we are definitely -- that's part of our dividend policy, and we have said that net available profit of 40% should be either paid back in dividend or share buybacks. Fredrik Ruben: And I think we can say, if you look at the cash flow in this quarter, for example, it's very strong. It pretty much more than doubles compared to the same period last year. We have what we feel is a totally acceptable debt leverage. We have additional credit and RCFs that we can use. But more importantly, the type of acquisitions that we're doing, they are small. We don't buy massive companies, which will affect us. It's largely these reseller acquisitions, and these are small companies, and that's a business which, a, has a very low risk in terms of acquisition. We know exactly how to do it, and it's -- we pay it more or less through our own cash flow, at least over quarters. So we feel quite confident in our ability to going forward, being able to share whatever is left or the excess cash with our shareholders in some clever way. Elisabeth Manzi: Good. And we also have another question on acquisitions from an anonymous user here. But the question is the acquisition of SR Labs Healthcare in Italy was completed shortly after the quarter. Given your stated strategy of increasing local presence to organically scale the business, are there other key European markets where you still rely on resellers and where we should expect similar direct acquisitions during the remainder of 2026? Fredrik Ruben: Good question... Linda Tybring: Good question. Fredrik Ruben: We're probably not going to open up our M&A playbook fully. With that said, I think it's also important to us that we feel that the big markets with well-functioning reimbursement systems are still very underpenetrated. So we have very little reason to go far away and kind of try to find new money elsewhere because most of our growth for a long foreseeable future will probably happen in the established markets. And then I think it's a function of GDP, population and the reimbursement system. And if you look at the markets where we currently operate, the Nordics, U.S., obviously, and Canada, adding now France, Italy and maybe most notably Germany, that's where we feel that there is ample opportunity to grow. So our stress levels to just for the sake of doing it, add more markets, is if there is a good opportunity, we will do it. Otherwise, we feel that we can keep ourselves busy and run both fast-growing and profitable company. Linda Tybring: And remember that when we acquired this company, it's important of the organic growth after acquired them. Fredrik Ruben: Correct. I think that's maybe one thing that should be deciphered from this report. When we acquire a company, like I mentioned, it's mainly just the difference between what we sold to that reseller and what then they sell out on the street in that specific market, that's actually what's gaining and it's quite small. Elisabeth Manzi: And I do believe the question was actually from Jessica at Redeye, who also has another question. You reiterate that the rules have not changed for financing. Furthermore, the weather affects the sales. What, if any, would indicate that there are more competitors taking market share? Fredrik Ruben: We don't feel that. I think if there is anything, I think, that the biggest competitor that we have is lack of awareness and then bureaucracy is probably a competitor, too. But we cannot say that there is any changes to the dynamic on the players of the market, and we don't see that there is any changes in market share or anything like that. So that's as good of an answer, Jessica, that I can give at this point. Elisabeth Manzi: And also a question from Jessica. Last year, you communicated every quarter that the demand was constant throughout the quarter. Am I understanding it right now that this was not the case in Q1 due to weather and other? Fredrik Ruben: Yes. Linda Tybring: Yes. Fredrik Ruben: 100% correct. With a small nuance, demand indicates that -- I think the demand is definitely -- it's the ability to turn demand into orders that was impacted. Elisabeth Manzi: Yes. And Mikael Laseen has another question. Could you elaborate on how you are leveraging AI across your offering, specifically to enhance speech generation, language, personalization and user experience and whether you also see opportunities to streamline clinical workflows and the reimbursement process? Fredrik Ruben: Sure. If I start with the product and et cetera, AI has been -- machine learning has been part of our DNA for decades. Obviously, we, in the same way -- specifically now with a partly brand-new organization on product and development here in Stockholm, we also see the magnificent impact of Claude Code and the likes to basically speed up the ability to increase quality, but also launch new features. In all honesty, though, I don't think that is the biggest impact on us. The biggest impact that we currently feel and see in -- with AI is more on the administrative functions, the reimbursement systems, which is -- it's a perfect example for how to operate AI. You have complex, high volumes of bureaucracy, et cetera, where, of course, up until now, we need to have human eyes and humans sitting in phone lines, reading 50,000 pages of fax every month. The advancement that we're doing on applying AI to that, I am genuinely excited and it's -- the engineer in me is quite excited. That being said, we can also apply it on how we operate more efficiently within the company, with a new ERP system, with a much more kind of data-driven platform. There's, of course, all kinds of operational improvements that we can do on anything from accounts receivable to financial reporting or data. Linda Tybring: Which we already see... Fredrik Ruben: Which we already see. Yes. So I would say that to summarize, AI within our products, well, that's what we do. We can just do it faster, but I think we have a high degree of -- we're quite mature and have a good understanding, whereas to me, at least the bigger impact is operating leverage on the internal processes, doing more with less. Elisabeth Manzi: Good. Thank you for that answer. Jakob Lembke has a follow-up question here also. When you say that growth has normalized, does that mean that we should expect you to grow in line with target in coming quarters or that you should go faster than your target to recover the lower growth in Q1? Fredrik Ruben: We believe that we will meet our financial targets on a full year basis, and that is 20% in local currencies. And if you start the quarter with 15%, that obviously means that there is -- there needs to be some sort of acceleration there. Elisabeth Manzi: Good. And let's see, there was actually another question here, and I think it might be also from Jessica. I asked about the demand during the full quarters. If the awareness increased day-to-day, which is totally reasonable in such an area of which you operate, then the demand for new sales would increase from any given time to any given time. Fredrik Ruben: Yes. I mean you're right, Jessica. I think what -- if you compare this quarter with last quarter, the underlying demand is obviously higher. We also have more people on the street to kind of educate the market, et cetera. Maybe I'm kind of a little bit stuck on the word demand because in my world, the demand is enormous. It's just our -- the market isn't really there to capture it. And that is unfortunately, to a large degree, our responsibility because this is not a market that kind of happens by itself. We have to be out there, educate, train and to some degree, handhold the prescribers of these products, at least for the first couple of times they work with the patient. But in absolute terms, the activity level, which is maybe a better term, is higher this quarter versus the past quarter. It -- just as you note, it's higher in March than it was in January. But this is not a pattern that is different this year. This is our kind of standard operating model. Elisabeth Manzi: And last curiosity question here relating to the AI also from Jessica. How effective is your clone within the organization? Does it actually help solve problems and support employees? Fredrik Ruben: So Jessica is referring to the fact that I have taken the leading flag of creating an AI version of myself that is available to every staff member. I think that we should read that as a conviction that AI has to happen, and I want everyone in our organization to fully embrace it. And the way for me to lead by example as the CEO is to make an AI clone of myself. I would doubt that a huge part of our current or future revenue or profitability growth is a consequence of that. But hopefully, indirectly, by having an organization where everybody feels that automating, digitalizing and applying AI to pretty much every piece of work in this company is not optional. It's something we have to do, and it's part of us being able to meet our targets. That's how I see it. But as of today, no, it's not a magnificent revenue nor profitability driver. Elisabeth Manzi: Very well. Fredrik Ruben: Yes. Elisabeth Manzi: I think that was all. Fredrik Ruben: Okay. Thank you. I love that there is so much questions. Glad that technology seem to be with us today. So now we're going back and delivering -- continue to deliver every day. The next time that we will meet in this fashion will be on the 22nd of July when we will present our quarters and our earnings -- or quarterly earnings for the second quarter of this year. Thank you very much. Linda Tybring: Thank you. Elisabeth Manzi: Thank you.
Operator: Good morning, and welcome to the Sigma Foods First Quarter 2026 Earnings Conference Call. [Operator Instructions] As a reminder, today's call is being recorded. A replay will be available on Sigma Foods Investor Relations website later today. I will now turn the call over to Hernan Lozano, Sigma Foods IRO. Hernan Lozano: Thank you, operator, and good morning to everyone joining us today. Further details regarding our first quarter results can be found in our press release and earnings presentation that were distributed yesterday. Both documents are available in the Investor Relations section of our website. Before we begin, please note that today's discussion will include forward-looking statements. These statements are based on current expectations and assumptions that are subject to risks and uncertainties. Actual results may differ materially. Sigma Foods undertakes no obligation to update these statements. It is my pleasure to participate in today's call together with Rodrigo Fernandez, Chief Executive Officer; and Roberto Olivares, Chief Financial Officer. Our agenda today is straightforward. Rodrigo will begin with a strategic and operational overview of the quarter. Roberto will then review our financial performance in more detail, and we will conclude with a Q&A session. With that, I'll turn the call over to Rodrigo. Rodrigo Martinez: Thank you, Hernan, and good morning, everyone. 2026 started on a strong note with record first quarter volume and revenues as well as the second highest comparable EBITDA for the period. Results were supported by disciplined execution, early signs of improvement in certain raw materials and stronger currencies benefiting our operations outside the U.S. Sigma operates from a position of financial strength. Our investment-grade balance sheet has no material debt obligations over the next 2 years as we proactively refinance those maturities through a successful issuance of the local notes during the first quarter. From a capital allocation perspective, we recently held our first Annual Ordinary Shareholders Meeting at Sigma Foods, where shareholders approved total cash dividends of $150 million for 2026. This reflects our strong cash generation, which supports our balanced approach to drive growth while returning capital to our stockholders. Disciplined investment in high-return strategic projects is fundamental to continue growing our core. Let me highlight several key developments on this front. In Mexico, we continue expanding yogurt capacity to meet strong demand. Our yogurt team has done an outstanding job recently climbing to the #1 position of this product category nationwide. In the United States, we're advancing the expansion of our cheese operations in California, supporting the continued growth of our Hispanic brands as they gain traction in mainstream channels. In Europe, we're encouraged by the steady improvement in profitability and the progress of our capacity recovery in Spain. The expansion of La Bureba facility is almost complete and our new packaged meats plant in Valencia is on track to start operations in 2027. Both projects are key to restoring lost capacity and further strengthening our competitive position through efficiencies. Turning briefly to the global macro environment. Conditions remain fluid given the broad effects of the ongoing conflict in Iran. The recent spike in oil prices increases uncertainty and pressure for consumers across many markets. We are actively managing to mitigate short-term headwinds related to energy, plastic packaging and transportation, among others. At the same time, we're encouraged by positive external developments around meat, raw material cost and foreign exchange trends. Combined with the diversification and scale of our operations, these factors provide flexibility as well as we navigate the current environment. Overall, the balance of external headwinds and tailwinds remain supportive of our 2026 guidance, which remains unchanged. With that, I will now turn the call over to Roberto for a more detailed review of our first quarter financial results. Roberto Olivares: Thank you, Rodrigo, and good morning, everyone. Our consolidated results reflect solid execution, complemented by a favorable currency translation effect. Total revenues increased 13% year-on-year. Supported by volume growth and higher average prices in Mexico, Europe and Latin America. Similarly, comparable EBITDA increased 18% year-on-year, driven by robust growth in Mexico, Europe and LatAm. Regarding performance by region. Mexico was a standout once again this quarter, delivering record first quarter volume, revenues and EBITDA. Growth was mainly driven by strong results in the dairy category across all channels as well as solid packaged meat performance in proximity retail channels. By brand segment, our value-oriented brands continued to grow at a higher pace than the rest of the portfolio. Europe delivered solid progress with volume increasing 4%, supported by double-digit growth in the fresh meat business, which benefited from temporarily lower live hog prices in Spain. EBITDA was $25 million, marking Sigma Europe's highest first quarter figure since 2021. Regarding the Torrente plant floating insurance, let me remind you that we received 2 types of reimbursements, property damage and business interruption. During first Q '26, we received reimbursements exclusively related to business interruption, which replicate the plant's operation and therefore, are considered part of our operating results. Only property damage reimbursements are considered extraordinary items for purposes of comparable EBITDA. For the avoidance of doubt, we did not receive any property damage reimbursements in first Q '26. On the strategic front, we continue advancing to obtain regulatory approval for the previously announced fresh meat transaction in Spain as soon as possible. In the United States, the consumer environment remains softer relative to other regions. Yet continued progress in Hispanic brands across mainstream channels helped offset lower demand in national brands. Sequential improvements in volume, revenues and EBITDA were in line with expectations as pricing actions continue to better align with cost. We expect this trend to accelerate in the second quarter as seasonal effect kicks in. Latin America continued its positive trend recovery trend, delivering year-over-year growth in volume, revenues and EBITDA, supported by ongoing operational initiatives and improved execution. Turning to the balance sheet. We continued strengthening our debt profile during the first quarter, successfully issuing approximately $580 million in local notes and extending our average tenure to 8 years by refinancing short-term term maturities. These notes received the highest local credit ratings from Fitch and Moody's and attractive demand of roughly 3x the initial target. We benefit from a diversified financial structure that provides flexibility to meet our funding needs across different currencies, maturities and credit instruments. Net debt totaled $2.8 billion at the close of the first quarter, up $127 million year-to-date. The increase was mainly driven by higher net working capital, reflecting supplier payments related to year-end CapEx projects and seasonal inventory investments. Importantly, net working capital investments was 18% lower compared with the first quarter of 2025. Regarding leverage, our net debt-to-EBITDA ratio ended the quarter slightly above our long-term target of 2.5x, reflecting the previously discussed working capital dynamics. This concludes our prepared remarks. I will now turn the call back to Hernan for Q&A. Hernan? Hernan Lozano: Thank you, Roberto. [Operator Instructions] We will now open the line for questions. Operator, please. Operator: [Operator Instructions] Our first question comes from Fernando Olvera of Bank of America. Fernando Olvera Espinosa de los Monteros: Keeping this to one question, I want to ask you, I mean, based on the volatility of whole prices that you highlight in the initial remarks, can you give us some color of the potential impact that this could have on margins and how relevant are from your cost structure, the freight cost? Roberto Olivares: Fernando, this is Roberto. Thank you for your question. Regarding the Iran conflict and the potential and the impact that it has on the market, the potential effect will depend on the conflict duration. Yes, we have some exposure to -- in some categories, particularly in the packaging category. So we have some plastic packaging. We have the freight costs as well as some utilities. In regards to utilities, particularly in Europe, where we are seeing that the markets are -- have more volatility, we're mostly hedged for the year. We have around 80% of the utilities hedged in Europe. And in regards of the other categories, the impact so how that we have seen has been manageable through other efficiencies and initiatives within the company. Let me just put this into relative context. We are seeing as well favorable raw material dynamics, particularly in the Turkey segment as well as fresh field. And also the FX has continued to help during this year. So we do not expect any material impact coming from the conflict. And as we mentioned, we remain confident to reach our guidance for the year. Operator: Our next question comes from Enrique Maguero of Morgan Stanley. Enrique Maguero: My question will be on Mexico EBITDA margins. We were a bit surprised to see a margin decline in Mexico this quarter, given the current Mexican peso level and the raw material benefits you just mentioned as well. So on that matter, if you could just dive a little bit deeper on the drivers behind this margin decline in Mexico. It would be very helpful. So for instance, if you saw any tailwinds from the stronger Mexico peso this quarter, if you should -- maybe if we should see that only later on, any relevant raw material or SG&A components this quarter as well? And still on Mexico margin, if you could comment on how you're seeing the latest developments on raw materials? And how does that affect your initial expectations on Mexico profitability for the year as well would be very helpful. Rodrigo Martinez: Let me start and then Roberto can complement. We see Mexico very strong. And something important to mention is that dairy has been growing at a higher pace and the margins between dairy and packaged meats, both are very positive, but there is a mixed part on that. And if you want to complement, Roberto? Roberto Olivares: Yes, sure. And not only will be a mix in categories, but also in brands, we have been seeing value brands growing a little bit more than premium and mainstream brands. So that will also have an effect on mix. On the part of raw materials, as we have mentioned, we have seen particularly since the start of the year, Turkey bad decreasing sooner than we expected. And positively, we've recently seen Turkey ties start to move. In the last couple of years, the market of Turkey tie has decreased so far MXN 0.02, but it's signaling that we do expect the Turkey market to decrease in the coming months. That will -- particularly Turkey will potentially have a benefit in COGS. We, as always, will take a more balanced approach in terms of margin and volume. We want to incentivize volume. So particularly this year, as we're seeing the consumer a little bit softer than in previous years. So we will take a balanced approach to see how much of that potential improvement in COGS will be go up down to the margin. Enrique Maguero: Let me just give a quick clarification about the tie price increase. This is a very recent development over the last couple of days. Rodrigo Martinez: Correct. Operator: Our next question comes from Froylán Méndez Solther of JPMorgan. Fernando Froylan Mendez Solther: Is there anything that makes the first quarter in terms of margins and cash generation seasonally weaker versus the rest of the year? Because my question comes because if we extrapolate the margin performance seen in the first quarter, it would be hard to think that guidance is achievable. And my second question, if I may, you mentioned improved penetration of Hispanic cheese in the mainstream channels. Should this be margin accretive? Are you able to price Hispanic products in the mainstream channel as, let's say, more premium product that should command a higher margin? Rodrigo Martinez: Let me just very briefly start that we do see a good start of the year. And as Roberto mentioned, we're actively managing to mitigate impacts from the conflict, so that shouldn't be a problem. We do see lower raw materials cost going forward. We do see favorable FX trends within the geographies. We do see by the end of the quarter, positive strength within each one of the geographies. So with that, we feel comfortable with the 2026 guidance. Roberto Olivares: And I will only complement for that there's usually a seasonality effect in terms of EBITDA generation, particularly coming from the U.S. and Europe during the second quarter is a stronger quarter for the U.S. And as the year advances, Europe generates more -- generally more EBITDA. In particular in the fourth quarter, it's a very strong quarter for Europe. So yes, there is a seasonal effect on EBITDA. As we have mentioned, the $260 million that we delivered during first Q is in line with what we expected for the first Q and what we are seeing, as Rodrigo mentioned, will be to very align or aligned with our guidance. In terms of -- you also mentioned cash generation, there's usually more investment in net working capital during the first quarter that has to do with either CapEx payments of projects that were approved in the fourth quarter of last year and seasonal investment in inventories that we do expect that investment in net working capital to normalize a little bit through the year. Fernando Froylan Mendez Solther: And regarding Hispanic... Rodrigo Martinez: I would say that the margins are -- I don't think that you will see a change in the mix by Hispanic [ press ] or Hispanic cheese compared to packaged meats. At the same time, I would say that as of today, we have a very good position on the unitary margin on packaged meats in the U.S. in anticipation of the seasonal demand, including the bulk of this year. So we feel very comfortable with the margins going forward. Operator: Our next question comes from Ulin Sarawate from Santander. Ulin Sarawate: I think it's -- you partially mentioned this in the previous question, but I wanted to get maybe some more thoughts there on the working capital dynamics, maybe understand a bit more where these investments and where this pressure that we saw in the quarter was coming from. And just to understand also going forward, Roberto, you alluded obviously to some seasonal effects there as well, the first quarter being a bit more heavy or loaded there on the investments on working capital. So just to understand if this is something specific to this year and how you're thinking about it? Or is this kind of the run rate that we should think about for the following years kind of model-wise? Rodrigo Martinez: I'll let Roberto talk about seasonality, but let me start just commenting on the part of inventory within working capital. We found a couple of good opportunities to secure some Turkey and some beef for both the retail on the side of Turkey and for be for the food service during last year. So we have more inventories at the beginning of the year. That will translate -- definitely, we're in a better position, but that would translate that during the year, we might be buying a little less on that, especially more on the Turkey's more breast more than the Turkey type. So again, that will allow -- that leaves us today with a little more inventory, but with good prices. And during the year, we should buy a little less of that. And by the middle of the year, end of the year, we should be lining [ gap ] Roberto Olivares: And just to complement, Rodrigo, Luis, in general, the working capital has a seasonality effect. Usually, it is similar to what Rodrigo mentioned during the first quarter, we built up some inventory because usually prices of raw materials are higher in summer because of supply. I'm talking specifically about, for example, pork, pork during summer usually is higher because of the weather and that makes the pigs to gain less weight and that implies less kilos of supply, et cetera. So you should see this dynamic usually through the year, and we will delever net working capital by the end of the year. In terms of this particular investment for the first quarter, as Rodrigo mentioned, there's this investment in inventory as well as payments that we did regarding CapEx of projects that we approved at the end of last quarter. And you will see that number to normalize through the year. Hernan Lozano: Thank you very much for your question. And I think we can move on to a question that we got from our chat from the webcast. And this is from Vanessa Quiroga asking about any changes in consumer behavior we have identified in the U.S. or Europe resulting from rising inflation recently. Roberto Olivares: Thank you, Vanessa. So in general, if you see -- I mean, I will talk about 2 different markets, the U.S. and Europe. Let me first approach the U.S. If you see the consumer sentiment in the U.S. is the softest that we've seen relative to other regions. And also within the U.S., I think it's record low in many, many years. That has exacerbated with the gasoline prices recently increasing in the U.S. and all that dynamics. In terms of what we are seeing with our consumer stories, the U.S. consumer is taking more -- much more affordability approach to grocery shopping and that is -- I mean, moving the dynamics of the market, we have been following those dynamics and trying to change our strategy as the consumer changes. I think we're well positioned with our brand portfolio to take over a lot of the consumption of our categories. if the consumer or as the consumer trade down within our categories. Our biggest brand in the U.S., Bar-S is positioned as a smart choice more on the mainstream to value segment of the consumers. In regards of the U.S., I would say -- in regards of Europe, I'm sorry, I will say a little bit different particularly last year and through the beginning of this year, we have not seen as much inflation yet. I mean, obviously, this conflict with Iran will and depending on the duration will potentially change that. But actually, branded volume growth has consistently grown in Europe, and that is a signal for us that consumers in Europe are not necessarily that focused on affordability and more focus on the value that they receive from the products. So we see different dynamics in both regions. Rodrigo Martinez: And just important to complement, if you see the categories where we participate, it's a great [indiscernible] quality at a very good price. So we should be in a good position within the categories where we participate in those geographies. Operator: [Operator Instructions] We got a follow-up question of Fernando Olvera of Bank of America. Fernando Olvera Espinosa de los Monteros: Sorry, I was muted. Can you hear me now? Yes, right? Rodrigo Martinez: Yes. Perfect Fernando. Fernando Olvera Espinosa de los Monteros: Now I have just 2 quick ones. The first one is if you can explain the higher tax rate that we are seeing in this quarter? And what should we expect in the quarters ahead? And the other one is if you have any update regarding the Grupo GAL transaction in Europe. Roberto Olivares: Fernando. This is Roberto. Yes, regarding the tax rate, first, let me say that first Q tax rate is not representative of the annual tax rate as there is some volatility from quarter-to-quarter. Factors behind this volatility may include the FX and some other adjustments, particularly labor liabilities and others. The income taxes are comprised of incurred taxes and deferred taxes. Let me first start with the incurred tax and the incurred tax of the operation reflects a lower rate, which is very aligned with the statutory rates. This quarter, we have a deferred tax effect that we recognize, and that is the one that is raising the implied rate to the figure. And that deferred tax is related to a labor liability change that was the effect of the end of ALFA's transformation process. And regarding the update on the fresh meat transaction with Grupo GAL, we are advancing. We actually are moving forward in the process of -- with the competition authorities. We were seeing the transaction to closes to soon. It has taken a little bit more time, not because there has been anything related to the process, but just because of the time the transaction was reviewed by the competition authorities. We do expect to close hopefully during the second quarter of this year. Fernando Olvera Espinosa de los Monteros: Okay. Great. Roberto, regarding what you mentioned about labor liability, I mean, is it something that we can see in coming quarters or it was just this quarter? Roberto Olivares: No, no. Thank you, Yes, it was a nonrecurring effect. So we do not expect that to see in the coming quarters. We do expect the tax rate to lower in the coming quarters -- the implied tax rate to lower in the coming quarters. Operator: Our next question is a follow-up from Froylan Mendez Solther of JPMorgan. Fernando Froylan Mendez Solther: Could you help us just frame how has the reaction of the consumer been so far in Mexico? I remember you saying that part of the benefits from raw materials would be translated into the consumer, probably being a little bit more promotional, more strategic given the health of the consumer. But how would you frame the consumption environment and the reaction of the consumer in Mexico versus your original expectations? Roberto Olivares: First, let me say that -- I mean, if you see volume in Mexico is increasing around 2%, and that has more to do with the retail channels than the foodservice channel. And within retail, particularly dairy is increasing mid- to high single digits versus packaged goods. In general, we're seeing good dynamics in most of our categories where continue improving the position of our brands with consumers. As Rodrigo mentioned in his initial remarks, for example, in the case of yogurt, we are now the #1 player in the yogurt category, and that has to do a lot with our portfolio and that consumers are preferring our brand and our products. In regards to other dairy categories, cheese, particularly coming from value-added cheeses, slice and shredded cheese, and that has also helped us capture more clients. And in the case of packaged meats, particularly those segments that are more value segments and those regarding to specific needs. For example, everything that is regarding grilling has increased a lot in Mexico recently. So we have take this careful approach of incentivizing volume, but also protecting margins as particularly as this very recent improvement in the tight market evolves, we do expect to continue looking into other ways to incentivize volume and also maintain margins. Rodrigo Martinez: And Froylan, I will just complement if you see the unitary EBITDA in Mexico, we have been able to maintain or even grow a little compared to last year. And we have done that with a lot of cost increments of raw materials. So what we're thinking going forward is that balance between maintaining our unitary margins that are very important to make sure that the short-term results are there. But at the same time, the volume that will allow us to keep growing within the geographies. And we do plan to maintain that balance between those 2. And hopefully, with that, we'll be able to keep giving good results in Mexico in the short, medium and long term. Operator: Our next question comes from Felipe Ucros of Scotiabank. Felipe Ucros Nunez: Just a quick one on SG&A. Just wondering if there was any unusual seasonality for the quarter? Or do you expect any unusual seasonality throughout the year with your expenditure and marketing? And just wondering more or less what level of SG&A as a percentage of sales you guys are thinking about for the rest of the year? Roberto Olivares: Thank you, Felipe. This is Roberto. Yes, regarding SG&A, we don't necessarily see a lot of seasonality other than usually, S&A changes a little bit with sales mix. So whenever -- let me give you an example of Mexico. So whenever there's changes even in the categories or the channel mix or even the region where in Mexico, there are some changes in SG&A as we're now selling a little bit more yogurt than relative to the other categories, particularly sales expenses are a little bit higher. Even with that, yogurt margin has increased significantly in the last years due to a better mix coming from value-added products. But yes, there's some changes in SG&A regarding mix. But seasonal effects not necessarily. So yes, Rodrigo. Rodrigo Martinez: And within marketing, Felipe, I would say that we have been -- we have a very strong position in all the markets we participate, but we still see that there might be opportunity to do things even better. We have been putting a lot of effort on the marketing side of the company. We have a couple of good campaigns on the pipeline that should be coming out. In the long term, we definitely will be investing more money in marketing, but this is not something that is going to be radical. What we're seeing is pushing some new products that will be coming out of the market and gradually be spending more time on that, more money on that. So with that, the idea is to put some effort on campaigns that will also bring more volume and more margin and at the net of that should be positive. But again, I don't think that it's going to be anything that will be outside of the [ gradually ] way of saying it. And with that, I don't think that you should see any spike or any change within market, even though as time goes by, we should be spending more on that side. Felipe Ucros Nunez: Okay. Great. So we should expect SG&A levels to be similar to the last 2, 3 quarters for the short term for the next couple of quarters? Rodrigo Martinez: Yes, correct. Operator: There being no further questions, I would like to return the call to management. Hernan Lozano: Let me turn the call back to Rodrigo for a closing comment. Rodrigo Martinez: Thank you, Hernan. We're encouraged by the strong start of the year. These results underscore the resilience of our business model and a high-performing team. We remain focused on operational excellence to stay ahead of consumer needs and preferences in a dynamic environment. We greatly appreciate the continued support of our investors and business partners. We look forward to updating you next quarter. Operator: Thank you all for your interest in Sigma Foods. This concludes today's conference call. You may disconnect.
Operator: Greetings, and welcome to the Bolsa Mexicana de Valores, S.A.B. de C.V. First Quarter 2026 Earnings Call. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Mr. Ramon Guemez, Chief Financial Officer. Thank you, sir. You may begin. Ramón Sarre: Thank you. Good morning, and welcome to Bolsa Mexicana de Valores First Quarter 2026 Earnings Conference Call. Before proceeding, I'd like to provide a brief safe harbor statement. This presentation contains forward-looking statements and information related to Bolsa that are based on the analysis and expectations of its management as well as assumptions made and information currently available at Bolsa. Such statements reflect the current views of Bolsa related to future events and are subject to risks and uncertainties. Many factors could cause the current results, performance or achievements to be somewhat different from any future results or performance that may be expressed or implied by such forward-looking statements, including, among others, changes in general economic, political, governmental and business conditions, both in a global scale and in the individual countries in which Bolsa does business, such as changes in monetary policies, inflation rates, prices, business strategy and various other factors. Should one or more of these risks or uncertainties materialize or should underlying assumptions prove incorrect, actual results may vary considerably from those described herein as anticipated, estimated, expected or targeted. Bolsa does not intend and does not assume any obligation to update these forward-looking statements. I'd like to remind participants that today's call is being recorded with a replay available online on April 23 at Bolsa's corporate website, www.bmv.com.mx. The press release and slide deck can also be accessed in the Investor Relations section in the same site. This call is intended for the financial community only, and the floor will be open at the end to address any questions you may have. Joining us for today's call are Jorge Alegria, our CEO; Claudio Vivian, Chief Information Officer; Roberto Gonzalez, Chief Post Trade Officer; Gabriel Rodriguez, ICAP CEO; Alfredo Guillen, Managing Director of Equity Markets; Jose Miguel De Dios, Managing Director, Derivatives Markets; Luis Rene Ramon, Managing Director of Sales and Marketing; Hanna Rivas, FP&A and IR Director; and myself, Ramon Guemez. With that, I'd like to turn the call over to Jorge Alegria. Jorge Formoso: Thank you. Thank you, Ramon. Good morning, everyone. As you are likely aware yesterday, besides the financial results, we also announced that after 18 years in the exchange and 13 years as a CFO, Ramon has decided to seek early retirement from BMV and focus on new personal and professional endeavors. I want to thank him for his many contributions during his tenure as both as IRO and CFO. On a personal note, I started collaborating with Ramon during the IPO roadshow back in 2008. So I wish him well, and I am very proud and happy to see him leave as a good friend of the Mexican Stock Exchange. Also yesterday, as mentioned, we released our earnings results, including a detailed review of our performance in these first 3 months of 2026. To begin with, I would like to highlight strong operating results achieved this quarter. These were driven by market volatility also from international geopolitical events as well as a market that continues to show increased dynamism generating favorable effects across the entire value chain from financing to settlement and custody. Financing activity rose by 84% in the first quarter of 2026 when compared to the same period of 2025, representing an additional MXN 105 billion of financing and reaching a total of MXN 230 billion. This is led by a 270% increase in long-term debt financing, which reached MXN 146 billion, while the number of new listings increased 200% from 11 to 33. Additionally, we had 2 FIBRAS or REIT deals for MXN 9 billion, the new Fibra Park Life and a follow-on on Fibra Monterrey. Short-term debt listing remained constant even though the amount financed was lower than last year. The financial impact of these operations and this activity is partly reflected in a 53% or MXN 8 million growth in our listing revenues. However, we will see the largest impact next year reflected in maintenance revenues for 2027 onwards. We now have 580 long-term programs totaling MXN 1.8 trillion, both are record numbers. And as you know, I mentioned, the revenue impact for this year is limited due to the cap we have on listing fees. This strong performance reflects issuers growing trust and highlights the role of the Mexican Stock Exchange in efficiently channeling capital towards productive investments. In the equity market, we saw both local and global momentum with average daily trading volume and value approaching MXN 21 billion. This is over 20% when compared to 2025 and one of the highest levels in recent years. Along these same lines, activity in our CCP, CCV for equities, also grew by over 20%, both in amounts and operations cleared. Growth was also evident in futures trading, particularly in the dollar peso contract, where the activity doubled when compared to Q1 2025. This is supported by peso appreciation and other market and volatility factors already explained. We have continued with our efforts to list new equity contracts, joining the ranks of previously listed names such as Apple, Meta, Netflix, NVIDIA and Tesla from our SIC, cash equity trading division. But in derivatives clearing growth, this was impacted by our reduced margin deposits. So in spite of the increased trading volumes, we had a small net negative impact in Asigna because of the reduction of the margins managed. Indeval reaffirmed its strength during the quarter, excelling in 3 key areas: assets under custody, settlements and cross-border transactions through the SIC. Assets under custody rose 14%, driven mainly by funds, pension managers and equities, reaching MXN 47 trillion. Settlement averaged MXN 11 trillion per day, and this is a 25% increase in market instruments -- in equity market instruments, reflecting the segment's dynamism. Volatility during the period provided additional momentum to cross-border transactions of UCITS and ETF via the SIC, which grew 29% in traded value and 47% in the number of operations, consolidating Indeval's role as a key player in international market integration. Overall, Q1 2026 was particularly solid for Grupo BMV with outstanding operating performance across multiple business lines. This confirms the resilience of our business model, which remains robust and consistent across diverse scenarios. And this performance is reflected also in our financial results as follows: Our revenues grew 7% or MXN 83 million, driven mostly by the volatility mentioned before. Growth was concentrated in Indeval, which saw a strong growth in assets under custody as explained, settlement activity and cross-border transactions. Cash equity trading and clearing, which combined grew 19%, as explained. This is due to the daily average trading volume increased. And we are maintaining our market share of around 80% in equity trading. Listing revenues are 53% above Q1 '25 due to the strong listing activity I mentioned. And as I said, the most important impact for this will be next year reflected as maintenance revenues. In derivatives, we saw strong performance in MexDer with the peso-dollar contract driving revenue growth of 24%. However, reduced margin deposits are affecting a little bit revenues in Asigna. SIF ICAP's good results are worth mentioning. In Mexico, revenues grew 12%, and we had very good results in our bond and on our D2C desks. While in Chile, even though the revenues are down, we had a very, very strong activity in March. Expenses are growing by 10%, led by personnel and technology costs, both of which reflect investments in our strategic projects made last year. This expense level is in line with our plans for this quarter, and the growth rate is also in line with our expectations, which we have shared with you in the past, along with the investments in our strategic projects where we continue and will continue with our cost control efforts across the company. CapEx for this quarter was MXN 41 million and not because we are slowing down in any way, but because of the timing of the payments to be made in our CapEx plans for this year. With this, we have an EBITDA of MXN 685 million, 6% above last year, while the margin is 56.5%, 1 percentage point below. To properly analyze this number, we have to take into account the appreciation of the currency, almost MXN 3 versus Q1 of 2025. This is an impact of around MXN 40 million in our EBITDA. Our net income was MXN 437 million, same as last year. And the difference between the EBITDA growth and the flat net income is explained by the lower interest rate income. Interest rates, as you may recall, for the quarter fell from 10% last year to 7% this year. Looking ahead, our priority for 2026 is the execution of our strategic projects that will strengthen our infrastructure, broaden our product portfolio and deepen our integration into global markets. Building on this priority, I would like to share progress on the 2 main initiatives scheduled to release -- to be released by year-end, the new derivatives market platform and the new repo clearing segment. The derivatives platform is a transformative project for our group. It integrates MexDer operations, Asigna clearing, market surveillance and a new data offering, all supported in the cloud. Execution follows a defined plan. Technical testings begin in June and will be followed by functional testing with market participants in September. This will progress from isolated trials to comprehensive system-wide validations. The project is set to conclude on Q4 2026 and go live on Q1 2027. Currently, we have working groups with trading firms and clearing members, which are addressing anticipated changes, the challenges, the implications and market alignment. The repo clearing segment will be incorporated into our CCV service portfolio. End-to-end industry testing is scheduled for Q3 2026 as well with design completion targeted for December this year. This initiative, the repo clearing follows the same agile methodology applied to other projects. So we expect to have a much faster adoption in this segment because of the reduced capital requirements and benefits it will bring to market participants. Both of these projects are supported by a dedicated project management office and multidisciplinary teams, including experts in operations, products, technology and data, alongside representatives from compliance, internal audit, finance and legal. So this structure ensures orderly execution, comprehensive risk and opportunity assessment and a strict adherence to corporate governance standards. So beyond these initiatives, we are also advancing on our broader portfolio of projects within the digital evolution program. Altogether, they represent a comprehensive transformation for BMV Group, modernizing our infrastructure, expanding our reach and reinforcing our role as the backbone for Mexico's financial system. With discipline, innovation and a clear vision, we are shaping the future of market infrastructure and creating lasting value for all participants. With that, I'll conclude our remarks for the quarter. We remain focused on executing our priorities with discipline, advancing our key initiatives and adapting to evolving market conditions. Thank you again to all of you for joining. And together with my colleagues, we are more than glad to address any questions you may have. Thank you very much again. Operator: [Operator Instructions] Our first question comes from the line of Ernesto Gabilondo with Bank of America. Ernesto María Gabilondo Márquez: Ramon, we will miss you and good luck in your next chapter. So I have 3 questions from my side. I will do the first one, and then I can elaborate the other 2. My first question will be on your revenues. You mentioned in the press release that revenues benefited because of the volatility experienced during the quarter. And you do not discard this to moderate in the next quarters. So having said that, how do you see revenues evolving this year? Should we expect around mid-single-digit growth? And what will be the drivers behind your revenues? Jorge Formoso: This is Jorge Alegria. Yes, you're right. I mean I think it's fair to say that this quarter, we have seen quite a lot of volatility and changes, I mean, globally and locally as well, interest rate movements, FX. So that has impacted positively our volumes. Also, we saw very strong issuance activity due to interest rate movements as well as FX helping domestic participants to be more active in the peso market than in the U.S. market. So this is something is good for us. We cannot assume that will continue. We never know. So I guess here is Ramon, but I think, yes, you're right in mid-single digits is a fair assumption. Ramón Sarre: Yes, that's correct, Ernesto. We had a very good month of March. Last year, revenues were relatively stable, around the MXN 1.1 billion. So around mid-single, I think, is good. It also depends on the volatility we get. If we get more help from volatility, you could see that increase to high single. Ernesto María Gabilondo Márquez: Perfect. Perfect. And then my other 2 questions. The second one is also related. So how should we expect the evolution of revenue growth versus expenses growth given your investment plan, how are you seeing both of them? Should we expect OpEx to be a little bit higher versus revenue growth? Any trend that you can guide us could be very helpful. And then my last question is in terms of regulation. I don't know if there's any update on discussions related to a potential market still related to hedge funds? And also if there is any other type of regulation in the pipeline? Ramón Sarre: Expenses, we are projecting them to grow at high single digits, Ernesto. So depending on how revenues perform this year, as we have said before, we would be expecting a slight decrease in margins, just like we saw this Q1. Jorge Formoso: We are working very close to authorities because mainly -- because of our project, Ernesto, and we have heard again quite often that the authorities, mainly the treasury and the Mexican Securities Commission are moving now faster to the hedge fund regulation. So hopefully, we will see something this same year. As you know, the law is there. The law was approved. So it's the secondary market ruling. We are working together also with the Mexican Brokers Association on this. And yes, we agree this will be great news on the hedge funds to increase the market participants. I'm not aware of any other rules coming on the market from the regulators. Operator: Our next question comes from the line of Daniela Miranda with Santander. Daniela Miranda: Congrats on the results. Just a very quick one from my side. Just wondering if you could help us better understand the sensitivities affecting performance. On one hand, for financial income, how should we think about the impact of further rate cuts and lower cash balances? And how much additional downside could we expect on that line? And on the other hand, FX appreciation had negative impact across your P&L. So how should we think about FX sensitivity going forward? And do you hedge any of these exposures? Ramón Sarre: Thank you, Daniela. Interest income, it's going to be impacted by the reduced interest rates on a year-on-year comparison. So the best way is just straight off the cash balance. It's not all in Mexico, but I think that's the best approximation you can have, just the interest rates to the cash balance. On FX, we have 2 impacts on the -- first of all, on the P&L, we have for each peso, the currency appreciates we get around MXN 50 million or MXN 60 million less in EBITDA. That means our operation is long U.S. dollars. So for us, in the short term, a peso depreciation helps our P&L. Roughly, as I said, MXN 1 is equivalent to MXN 50 million, MXN 60 million on a full year basis. On the balance sheet, we started hedging this quarter. We had a bit of an effect still, but we'll continue with our efforts to reduce the impact on the balance sheet, on the difference between assets and liabilities in the balance sheet. Operator: Our next question comes from the line of Edson Murguia with SummaCap. Edson Murguia: Specifically about the expenses and the investment projects. Just trying to figure out and join the dots about CapEx. Those projects that Alegria mentioned it in the call are the main one or related to this increase in expenses and the CapEx? And my second question is, could you give us more detail about the deferred income? It seems odd to try to understand why this quarter increased MXN 525 million. Ramón Sarre: Edson, yes. Our main projects are the ones Jorge mentioned, this technological evolution, upgrading basically all of our technology in derivatives, trading and clearing, in post-trade, the cash equity CCV, the Indeval, having the new technology for the bond and the repo CCV, new data and moving to the cloud. Those are our main projects. That's where our expense is concentrated on those efforts, and that is the majority of the CapEx. On your second question, I didn't quite get it. Could you repeat it, please? Edson Murguia: Yes. This quarter, there is a MXN 525 million in deferred income in the balance sheet. But historically, the deferred income, it's a low single digit between 8, 11. Ramón Sarre: No, what you have seasonality, Edson. The maintenance fees from issuers is collected in advance. We have seasonality in the cash balance. You usually have an increase in cash balance in Q1 because we collect all these annual fees on a onetime basis in Q1. What you collect, we recognize the income on a linear basis throughout the year. The net of the balance is in deferred income. So if you look at historical, you're going to see this deferred income and it goes down every quarter to get very close to 0 for -- towards Q4. Operator: [Operator Instructions] Our next question comes from the line of Carlos Gomez-Lopez with HSBC. Carlos Gomez-Lopez: First of all, thank you for your service of many, many years, Ramon. You have been the face of continuity and good humor from Bolsa. So we will all miss you enormously, and I'm very sad to hear that we will no longer be talking to you. Ramón Sarre: Thank you, Carlos. Carlos Gomez-Lopez: I have -- in the spirit of an analyst, I have 3 questions. The first one is to Jorge, what are you going to do without Ramon because that's a difficult decision to make. On the numbers thing, last year, you had a margin of 56.2%. And I want to understand correctly, you expect that margin to go up or down this year because even with single-digit -- high single-digit revenue growth, I mean, given your expenditure plans, it would seem that the margin should go down rather than up. So we would like to understand that. And finally, we understand that you have started to hedge the foreign position on the balance sheet. We understand that. Does that also impact the income statement and that is why perhaps the impact of the appreciation of the peso has not been as extreme in this quarter? Ramón Sarre: Thank you, Carlos. On a full year basis, EBITDA margin was 57% last year. And as I said, yes, it could go down. We need to have volatility to maintain the margins. If we don't have volatility, margins could be coming down. On the hedging efforts, what we're doing is managing our long position. It means trying to sell the dollars that we have at the end of the month. We're not, as of now, doing any derivatives or any derivative or efforts on that side. It's just trying to net the balance to 0. Carlos Gomez-Lopez: Okay. So that shouldn't have an impact on the P&L? Ramón Sarre: No, it should not. Operator: Our next question comes from the line of Yuri Fernandes with JPMorgan. Yuri Fernandes: Thank you, Ramon, for all the help those years. Good luck. I have a question regarding -- just a follow-up on CapEx. If anything has changed for your previous guidance of MXN 500 million, given this quarter started a little bit soft. I think you are doing less than 10% of the budget for the year. So just checking if -- I know the investments are still there and the modernizations are still there, like the big scheme of things, but if maybe stronger peso, I don't know if maybe the CapEx budget will be less than the MXN 500 million you mentioned in the previous call. And then a second question regarding competition on equities. I think like this was a quarter that -- I know this is volatile, it change all the time, but you gained some market share. So just on competition dynamics and if anything has changed between you and the competitor? Ramón Sarre: Thank you, Yuri. No, CapEx is still expected to be around MXN 500 million. We had a slow start. As Jorge said, it's basically the payment -- the timing of payments. But we're still expecting to finish the year close to MXN 500 million in CapEx. And for competition dynamics, I'll let Alfredo Guillen take that one. Alfredo R. Lara: Yuri, yes, we have been experiencing improvement in market share, explained by some initiatives that were requested to us by our brokerages, mainly 2 initiatives. First, the improvement in block trading dissemination in real time, which is very important for traders to make decisions, and we were lacking detailed information on that. And then we also were requested an improvement in trading reports that are now released by our central counterpart. And this information now includes block trading. So this gives brokers accurate information regarding their place in the equity markets and therefore, driving more trades to the Mexican Stock Exchange. So basically, we experienced better information to the market and better decision-making regarding the depth of the books and trading activity at the Mexican Stock Exchange. Operator: Our next question is a follow-up from the line of Carlos Gomez-Lopez with HSBC. Carlos Gomez-Lopez: Just a follow-up on the dividend. Have you decided what dividend level you will recommend? And what should we expect in terms of buyback for the year? Ramón Sarre: The dividend is what we had said, Carlos, MXN 2.50 per share. That's going to be proposed for the general assembly, which is going to be next Monday. Alfredo R. Lara: Next week. Ramón Sarre: Next week. And for the buybacks, we don't have a fixed amount. As we said, our purpose was to give back 80% of net income. The dividend amounts to 70%. If the buyback does not cover the remaining 10%, we will be proposing an extraordinary dividend for Q3. So more than a specific amount for buybacks, we have a specific amount for overall capital return, which is 80% of net income from last year. Operator: Ladies and gentlemen, that concludes our question-and-answer session. I'll turn the floor back to Mr. Alegria for any final comments. Jorge Formoso: Well, thank you very much to all for joining. We had a pretty interesting quarter. We will continue to strengthen the -- our initiatives on the technology side, keeping a very strong control on costs and expenses. I want to reiterate my appreciation to Ramon Guemez for all those years working with us. In the meantime, while we made a definitive appointment, you all will be dealing with Luis Rene Ramon, that I'm sure pretty much all of you know. He has been working for the company more than 10 years, specifically in the finance area. He was in charge of Investor Relations for many years, and he led our marketing and sales and commercial efforts for almost 2 years now for the exchange with extraordinary positive results. So he will be, in the meantime, taking over the CFO role. So I'm sure that he will have plenty of things to deal with and happy to answer your questions moving forward. So thank you, Ramon, again. We certainly are going to miss you on a lot of things, not on your humor, definitely, but we wish you well. And above all, thank you all for your time and listening to our remarks and see you and talk to you soon, if not in the next quarter. Operator: Thank you. This concludes today's conference call. You may disconnect your lines at this time. Thank you for your participation.
Kati Kaksone: Good morning, everybody, and welcome to Terveystalo's First Quarter 2026 Results Call and Webcast. My name is Kati Kaksonen. I'm responsible for Investor Relations and Sustainability here at Terveystalo. As usual, I will go through the results with our CEO, Ville Iho; and our CFO, Juuso Pajunen. And after the presentation, you will have time for your questions. Without further ado, over to you, Ville. Ville Iho: Thank you, Kati, and good morning. Let's dive into it. So Terveystalo first quarter, during the first quarter, the market was even more negative than we expected going into the year. That was then clearly reflected into our revenue line, which came clearly down. And despite the adjustment measures that we did, especially in our operations, to adjust the ops to lower demand, there was a drop through to our adjusted EBIT, which was at EUR 34 million. Quality across the operations and services [ highest ] standard even improving, which is, of course, a positive sign of very professional and robust organization, delivering in any circumstances. If one then dives a little bit deeper in what's happening in Healthcare Services market, it is the market that is exceptionally negative this time around. We have not seen this type of a dip since the start of COVID. And basically, all of the segments, regardless of what data you look, all of the segments and services are roughly minus 5% to minus 10% down. The positive thing and silver lining with this one is that we are seeing a market bottoming out. So according to our judgment, and that's reflected also in our plans and actions, the bottom has been passed. And now the market shall start gradually slowly, but steadily grow from a low level. In our own operations, we have been, as we have reported earlier, we have been suffering from lower connected employees number. And that one as well, we see bottoming out. So going forward, now the number has been stable throughout the quarter and now looking at the sales funnel activities, looking at the renewals, looking at new opportunities, looking at win rates, we can with confidence say that we start turning this one into positive going into H2. Of course, the progress will not be rapid because this is B2B business and turning agreements around will take a while. But anyways, market and our own portfolio has bottomed out and now we can start developing on from this new base. The negative market environment was present in all of our 3 P&Ls, Healthcare Services, Portfolio Business and Sweden, a little bit different reasons and different levers into that one. But bottom line was that the market conditions were very, very tough during quarter 1 '26. Despite that one, of course, the absolute result level and profitability we achieved was high, and we can be pleased with our own ops. But now the eyes need to be fixed on growth going forward. Market will not give -- even though it starts gradually improving, it will not give anything for free. We still focus and concentrate on our own agenda. It is very much geared to boost growth in all of our segments. In Healthcare Services, we'll concentrate in occupational health care, a turnaround program and transforming that one to higher value for our customers and growth. We are renewing our offering for insurance customers and companies and intensifying cooperation with the insurance companies. We are focusing in segments that are growing in our traditional integrated care. One prime example is seniors where we have captured big markets in Kela 65 and Kela 65 continues developing positively for us. And of course, on top of this one, we are seeking drastic improvements in efficiency with our digital agenda in traditional operations in a digital 10X and also in prevention. In Portfolio Business, of course, a positive move from our side. This is dental growth. Actually, Dental has been a sort of a light or positive glimpse during quarter 1. It has -- the market conditions have been fairly good, and the team has done very good work in improving the business. And with the Hohde deal, the platform will be ever stronger and an integration of that platform, Juuso will comment on the phasing and timing of that one later in the presentation. We are actively engaging with healthcare counties. It is evident that they are very low with their purchases still. But at one point, that market will activate and we want to capture our fair share and even more from that one. In Sweden, market conditions have been tough. Now the efficiency is there, and we are operationally improving. Now the focus is in commercial actions and getting the revenue line in with the higher operating leverage and improving through that one, profitability. A cycle is a cycle, and it's clearly very, very negative at the present, but we need to look beyond this cycle. As I said, market will start gradually improving. But every time a strong cycle goes through an industry, some things change permanently. And that one, coupled with accelerating speed of technology development will mean that we need to be even speedier than the transformation of this industry, and we need to invest in all of the 3 modalities in Healthcare Services delivery. In integrated care, we are investing in Ella. We are making the life of our professionals easier, smoother, more efficient, and we are giving more time for professionals with the patients. In digital health care retail, we are improving the customer engagement call centers. We are investing in digital 10X and AI-assisted appointments and efficiency potential in this modality is huge. We are also starting to invest in prevention at scale, so digital engagement through digital and based on data proactive, active engagement with our customers being relevant when they need actively guiding them through their lifelong health journey and are looking for new growth in this emerging new market. We have the dry powder, we have the agenda, and we have the speed in executing in all of these 3 buckets. Two landmark milestones in this development during Q1. Terveystalo launched its new novel occupational health care digital platform for its first clients. This one is next level compared to current platforms in the marketplace. It's developed jointly with our joint venture, MedHelp, and it's now live, and it's used by the first paying customers. Early feedback from the market is very positive. We continue scaling this one rapidly throughout the year. And as I said, this is next level, this is future, and this will give way more value for our customers and better insights in their own personnel than before. This is a big step in our main business. In digital 10X, we have introduced AI-assisted appointments, and we are scaling that one. Also during the year, the efficiency potential in this modality is huge. We are also scaling volumes so that we can -- with our intelligent steering engines can steer more volumes in the digital modalities. At the same time, we are improving traditional physician-led integrated care. And there, the prime tool is Ella, which we have launched. It's the user interface for our physicians. And already now, we have gained some 30% efficiency improvement with the new platform. And at the same time, we have been able to give more time to physicians and patients. As said, we continue to scale this one up during the year. Within next 12 months, this is going to bypass any present platforms in the marketplace and will be a clear and powerful asset for Terveystalo. So market has been negative. It has bottomed out. We have agenda for growth. We continue investing. We continue accelerating our technology journey. And with that one, over to Juuso. Juuso Pajunen: Thank you, Ville. So good morning all. I'm Juuso Pajunen, CFO of Terveystalo. Let's go to the topic numbers. So first of all, if we look at the key numbers from first quarter, it is clear to say that the relative numbers are big. We see negative on everything else, excluding the NPS of appointments, which is improving and is a stellar 88. But outside of that one, each and every number is negative, and the market has been weaker than anticipated. But let's go through then a number by number, what we are talking about. But before we go to that one, it is good to note that if we look at absolute numbers, these are still quite robust figures. Our Q1 is materially above our average Q1 if we come to relative profitability. If we look in absolute EBITDA terms, this is the third best quarter ever in absolute EBITDA or EBIT, either way you want to look at. So in absolute terms, we are fairly strong. But in relative terms, we are absolutely disappointed and obviously, we'll work on to get forward. If we then look the group, we know that our big ticket component is the headwinds in the revenue. We also know that the mega trends are there. And in mid- to long-term, they will support, support the growth. But as stated, the market sentiment at the moment is exceptionally weak. If we then look on different segments, we will go a bit further into details. But in the Healthcare Services, the big thing is occupational health in the portfolios, it is the public sector. Sweden, we are now evening out. Then if we look on the group level and think about positives in here, our efficiency is strong. No matter how you view it in an exceptionally big market, we have been able to adjust our operations towards the lower demand, and we will continue to do that one. So all in all, with the efficiency, we will get forward. If we then look on the EPS impacting adjustment items, we have EUR 7 million of these ones. It is slightly more than I would like to see in there. But if we double-click those ones, we have a EUR 1 million related to divestment of child welfare, which was a strategic move, and we have now closed that deal at the end of January. We have EUR 1 million related to reevaluation of the values in the real estate assets. We are doing investments in those ones, and this is something that, when you reevaluate, this will take place. And then finally, EUR 1 million related to restructuring. It's good to note that structural restructurings, items that impact us in the future, not the demand-facing restructurings. And then finally, we have EUR 4 million in the strategic projects, which we have been communicating earlier that we have and we have guided how much annually is coming. This is slightly front heavy now facing a bit more in Q1 than I was anticipating. So all in all, then we end up in the reported EBIT of EUR 26.6 million. If we then go deeper into the Healthcare Services, margins are on a historically good level. So if we take any period of time and if we look at the Q1s of the history, the actual EBITDA and EBIT margins are solid. But obviously, they are coming materially down. So we come into the discussion of relative weakness and absolute weakness. And then if we look further where this is coming, this is coming from demand. The visit growth is minus 9.6%, and then everything else is basically flat. The visit growth, we will double click that one on the next slide. But basically, low morbidity impacts us through 2 different parts. We have the less appointments and weaker mix as the diagnostics are lesser than in a higher upper respiratory disease situation. And then obviously, the occupational health care has been contributing to that one. At the same time, as said, we are continuously adjusting for the lower demand, and we have also, during April, announced statutory negotiations towards the demand situation. And however, of these ones, once again, in absolute terms, we are in a good place, and we will continue to invest, for example, digital transformation like Ville explained. Then looking on the patient visits. We have -- the same factors we have been now going through in a couple of different quarters. We have the seasonality. We do know that we have some 43,000 fewer upper respiratory diseases than previous year. This is part of normal variation and changes annually. This is the lowest prevalence since the COVID pandemic if we take on the curves. Then if we look on the occupational health, it is very good to note, like Ville said, that we are now minus 5% in the connected employees, but it is now bottoming out or has bottomed out. Then the underlying impacts in there are still the same. We have the macro and macro component where there is less employees. And then in the dire times, employers are spending less into employee well-being. And then we have the actional part where we have the ongoing strong program to address this one. But at the same time, the connected employees and the large account sales cycles are longer. So we are getting back on growth in the second half of this year. Public sector has been now bottoming out like we see that this is not -- it's a minuscule bar in the chart. And consumer is having positive momentum in the total supported by the Kela 65 and general tendencies are there. If we then take a segue with that one to the portfolios, we already now see that in the consumer part, the dental business has been actually the best performing in relative terms of our businesses. They are basically flat while other modalities have been clearly down. This is a positive and then hopefully reflecting the future demand environment also. We have then good to note that in the portfolio numbers, we have the divestment of child welfare. It's visible in the bar order in here. Outsourcing is down 50%. This one, we have known. The contracts are expiring and ending. Staffing is still having negative momentum in the welfare -- wellbeing county market, but also that one is now little by little stabilizing out. Dental, as said, positive in relative terms in the performance. And we have announced the Hohde acquisition. That one is progressing well in a very good and positive dialogue with the authorities. And we are expecting the closing in the second half. And now based on the current visibility, it looks like it will be rather third quarter than fourth quarter. But obviously, in these processes, there are variables that are beyond our control. But as said, solid positive dialogue with the authorities. And if I would need to guess, it would be rather in Q3 closing than in Q4 closing. Moving to Sweden. We are having a weak market. It is a continued weak market and Sweden as an export-oriented nation is also having their share of the market environment. At the same time, it's good to note that our efficiency is in place. We have the EBITA margin is now improving, absolute numbers, 50% up, give or take, almost 60%. Obviously, within our scale, that is peanuts in the total absolute numbers. But it's signaling that we are going to the right direction. If we then look beyond the efficiency, our next battle in here is the growth. And we already now see that our connected employees are increasing. But at the same time, the behavior is similar by the employers as in Finland. So their behavior is dampened by the weak macro. But we have the means and the tools for growth in here. And we are confident that this will improve as we have iterated many times earlier. When talking about investments, we continue our investment cycle. We are now at EUR 56 million on the LTM. I think that it's good to highlight from here that what we are doing is facing the real world. It is in production, it is in use. Our brightest investments, Ella, it's the user interface for professionals. It's already live. We have been rolling it out to wider user groups with improved functionalities, and we are seeing continuous growth on the usage rate. So this is live. This is not something that happens at the back office and then one day comes somewhere. We are doing this one. The same applies to our joint venture, MedHelp. We have in March rolled out this to customers. We have paying customers on this one, and we are continuing this one. So what we are doing is already now impacting us positively. If we then look on the balance sheet, we continue to have a positive balance sheet position. Our net debt to EBITDA is at 2.4. It has been increasing due to weak cash flow in Q1 and reduced profitability in Q1. But if we double-click that one, we are in a good component. And on the cash flow perspective, it is good to note that in our cash -- how our cash operates. First of all, we are a negative net working capital company, which is obviously positive from a balance sheet perspective. But when the revenues decline, our cash flow also weakens because we don't actually release net working capital, we increase it. So that one is impacting us negatively. Then the second component on the cash flow is that if we -- if you look on the taxes paid now in Q1, we paid taxes from the record profits of '25, and that is having a negative impact on the cash flow. So all in all, our balance sheet is strong. We can continue to invest. We are not limited by the balance sheet. But at the same time, we are working on the cash flow and the key component in there is going back on growth. Then before going to guidance, let's take a quick view on the market environment. First of all, if we look at the red arrows, they are all pointing down. This is weaker than we originally expected in February. We have had negative momentum through all payer groups. And then we have had incidents in the world that are also impacting, for example, the consumer confidence that Ville was showing, now referring especially to the Iranian war. So the market environment in Q1 has been exceptionally weak. However, then if we look on the next 12 months and we look further the outlook, actually, the arrows are the same we had in February. And based on the data we have, we believe that the bottom has been seen. We do know that public sector both in Portfolio Businesses and Healthcare Services is on a lower level. They are still having stickiness in the system, but little by little, it will improve over time. If we then look at the consumer market, we have the dental, is already performing well. As stated in relative terms, it was the best performing payer group and discipline. And then looking forward, we have the Kela 65. We have recently heard the news on the widening of the scope of Kela 65 and widening the scope of the services within Kela 65, which are positive. Insurance market continues to be in a positive momentum. And then we have Sweden, which still is having positive macro forecast slightly coming down compared to their February post Iranian war, but they are still positive. So if we look at the market momentum, we believe that the market will improve. Then at the same time, we do know that this is tilting towards second half and the latter part of that one. So if we think about the developments, Q2 will definitely be difficult, Q3 is always seasonally low, and then Q4 is the place where we would see the impact. And with these ones, we reiterate our guidance. We expect full year '26 adjusted EBIT to be EUR 135 million to EUR 165 million. The estimates are based on the gradually improving demand environment as explained earlier and normalization of the upper respiratory infections in the second half. And as stated profitability in the first half is expected to be below the first half of '25. Then further to that one, it is good to note that our scenarios at the moment are pointing rather below midpoint than above midpoint of our guidance. So all in all, we have a difficult first half, but we have a strong, robust and efficient motor, and we are investing in the future. So we are confident that we are also delivering with those investments. With these words, thank you, and let's go to Q&A. Kati Kaksone: Thanks, Juuso. We are ready now for your questions. Do we have any questions from the phone lines? Operator: [Operator Instructions] The next question comes from Iiris Theman from DNB Carnegie. Iiris Theman: I have a couple of questions. So if I -- I'll ask them one by one. So firstly, what data indicates that the market has bottomed out? Can you explain that? Ville Iho: Over to you, Juuso. Juuso Pajunen: Yes. So basically, it depends how you look at on the market perspective. We obviously continuously follow up our different type of data points, consumer behavior, visits on different intervals, on days, on weeks and those ones. And at least our internal data is indicating that we have now bottomed out. Then you saw from Ville basically the connected employees perspective. Ville mentioned already in the call that it has been now stabilizing and gradually with the pipeline looking that we can capture going forward. But on the external markets, we are especially referring to our own internal data. Ville Iho: Yes. And I think it's important to note that now we are talking about sequential improvement. So market has -- if one a little bit cuts the corners, market has reset to post-inflation new normal. And now from that base, it starts slowly but steadily grow. Iiris Theman: Okay. And why did you keep your full year guidance even if your scenarios are pointing below the midpoint? Juuso Pajunen: Well, we have actually discussed this topic also earlier that when we are within the range and we see that both ends of the range are something within plausible scenarios, then we don't change it. So that is how we have behaved earlier, and that is how we continue to behave earlier. Iiris Theman: Okay. And can you still go through the drivers that will contribute to reaching the midpoint of the full year guidance, which implies basically only a 4% EBIT decline? Juuso Pajunen: Yes. So first of all, I iterated that we are likely to be rather below midpoint than above midpoint. So then it is up to you to decide on that one. But basically, the drivers that are pushing or that are impacting our guidance. And obviously, you need to put your own finger in the air, how you take them within your estimates. But we have the upper respiratory diseases, we have the consumer confidence and a general corporate behavior that we are expecting to improve from the current rock bottom. And then we are also confident that we have bottomed out in the connected employees and that we are getting forward with those ones in the second half. So these are the key drivers if we look our market. And then, of course, the public sector behavior is expected to have bottomed out at the moment. Iiris Theman: And then a question regarding portfolio businesses. The margin decreased significantly from Q4 and Q1 last year. So is this a one-off or a level that we should expect for the coming quarters? Juuso Pajunen: Well, all in all, portfolios is also facing a negative demand environment, especially from the public sector. And then it is good to note that now the outsourcing contracts have been also value contributing and decline in those ones will not anymore deliver margin expansion, but declining revenues is negative for us in the total perspective. So we are expecting improved performance in portfolios and also now sequential improvement, as Ville explained, for the full year. Ville Iho: Yes. So question, obviously, is warranted -- but if one looks at our plan and also our internal forecast, so we are not expecting as a drastic drop for upcoming quarters as you see during quarter 1, as you said. So we are looking for -- realistically looking for a gradual improvement from a lower base. Iiris Theman: Okay. But basically, the margin decrease is that related to -- mainly to outsourcing business? Juuso Pajunen: There are impacts. It is mainly related to the public sector. But basically, the overall market environment has been weak. So that has been contributing throughout. Iiris Theman: Okay. And my final question is related to the Finnish government's budget proposal that was just released. So is there anything negative or positive that you would like to highlight regarding private health care service providers? Ville Iho: Well, if anything clearly positive, expansion of Kela 65, obviously, is a highly welcomed initiative from our point of view. We have been investing in this segment. So user segment seniors. We have been investing in Kela 65 and now expanding the scope of the service to do more diagnostics and also allowing higher frequency of use will most probably increase the number of users and also frequency of use. So that's welcome news. Operator: [Operator Instructions] Sami Sarkamies: Can you hear me? Kati Kaksone: We hear you fine. Can you hear us? Sami Sarkamies: Okay. Four questions. I'll take this one by one. You're calling first half to be down from last year, but how should we think about the second quarter relative to last year, given your comments regarding the market having bottomed out during the latter part of Q1. Operator: The next question comes from Sami Sarkamies. Juuso Pajunen: Thank you, Sami. We identified you... Ville Iho: There's some stickiness online. Juuso Pajunen: But basically, we don't guide per quarter, but it is clear that quarter 2 will be also weak, but what we think about is sequential improvement in total. So at the moment, it is not against comparables as weak as quarter 1 was. Sami Sarkamies: Okay. And then on connected employees, we're expecting this to start growing sequentially in the second half of the year. Have you already won these deals? And how are front book prices looking relative to your current backlog prices? Ville Iho: Very good question. So deals are won and equally lost all the time. So then the real question forecasting forward is the funnel, how much renewals you have and how much new opportunities you have. And then against that one win rates. And then, of course, you have the packages and scopes and price levels. So what we are seeing now is a clear improvement in the new opportunities funnel. So new opportunities bucket increasing all the time and applying sort of average win rate to that one, we see a clear increase from that source. On the other hand, renewals from our existing customer base, that bucket is shrinking and renewal win rates are improving and really, really high. So just mathematically, looking forward, we can sort of, with confidence, expect growth. It's not going to be sort of early on rapid and skyrocketing, but it starts to grow. And of course, we want to accelerate it over time. Then looking at the scopes when these bids enter this tender space and comparing those ones with our current portfolio, the price levels are higher than existing ones. But then you need to, of course, do the full cycle of negotiations and go over the finish line. And only then you see what is the final package and what is the final price level on those agreements. But all in all, this is forward-looking picture, is positive, finally bottomed out and now looking forward and progressing to more positive. Sami Sarkamies: Okay. Then I may have missed, but did you give any commentary regarding cash flow in Q1? It was quite a bit below last year level. So what are you expecting for the full year? Juuso Pajunen: Yes. So basically, what I iterated on the balance sheet slide was that, first of all, cash flow was negatively impacted by the profitability. Then the second component is that we paid taxes from the record year previous year. So all-time high profits lead to all-time high taxes, obviously. And then the third component is that our net working capital is structurally negative, which means that decline in revenue impacts negatively our cash flow. And these are the 3 components. And obviously, taxes, we don't pay twice, but the growth component is very important for us for the cash recovery when we are going forward. Sami Sarkamies: Okay. And then my final question is on Hohde acquisition. Are you expecting to see any remedies from competition authorities? And what is your thinking on timing for closing when you sort of announced the deal at the year-end? Juuso Pajunen: Yes. So I also iterated that one on the portfolio slide. But basically, first of all, we don't comment the ongoing process from the content perspective. So that one we don't state at here. But on the closing, we have stated that the closing is expected to happen on the second half based on the dialogue so far that we have had with the authorities, we believe that it's rather in Q3 than in Q4. So we have a positive constructive dialogue continuously ongoing. Ville Iho: Yes. And maybe still, even though you said we don't comment the content, I can say that against the assumptions going in with what the process indicates and what is our current view on the sort of deal perimeter and the final package, I would say it's rational. It's rather on slightly more positive than we thought going in. Operator: There are no more questions at this time. So I hand the conference back to the speakers. Kati Kaksone: Thank you. We covered some of the questions from the webcast audience already earlier, but there are a few left. So maybe starting from the cost structure and the adjustment made. What specific actions did we take? And what actions are we still implementing going forward? Ville Iho: So we are -- of course, we are adjusting as agile company should -- for the lower demand and lower volumes, especially in our sort of customer-facing activities in our operations. We have scaled down almost according to the lower volume in our ops in Healthcare Services, where the volumes were down by 11%, we were able to adjust FTEs by 10%. So that's a very, very good and sort of robust achievement by ops team. Then we are -- one needs to note and remember that at the same time, we are also investing. So we are increasing resources in product, customer service, sales, account management-related activities, especially in occupational health care, but also in consumer and insurance-related activities. But all in all, we have been able to adjust nicely. Looking forward, of course, we are -- given the negative cycle, we are using this window as an opportunity also to look at the overhead and look at some structures. We have a separate program related to applying AI in the back-office functions, and that has started. But that's not really now in the scope when we are adjusting for the lower volume. But during next 12 months, you will hear more about this project Nova also. Kati Kaksone: Thanks, Ville. Then let's talk about the outsourcing in the Portfolio Businesses where we have seen the revenue decrease for quite some time. What does the remaining outsourcing portfolio look like? And do we expect further planned reductions beyond '26? Juuso Pajunen: Yes. So basically, if we look at the numbers in '25, the outsourcing delivering revenue of EUR 55 million, give or take. And we have already in our guidance stated that we are expecting roughly EUR 20 million -- we are expecting EUR 20 million reduction in the outsourcing portfolio revenues in '26. And currently, we are very clearly going towards that one. Kati Kaksone: And then beyond '26 is a... Juuso Pajunen: Beyond '26, that remaining -- roughly EUR 30 million portfolio will continue shrinking year-on-year. Kati Kaksone: Yes. Exactly... Ville Iho: And then we are, of course, talking about legacy outsourcing deals, and that's the focus for that sort of sliding curve. We are, of course, interested in partnerships with the health care counties and we are engaging actively. Right now, sort of the sales funnel for larger outsourcing type of -- new type of deals is fairly thin, but sort of engagement is active. And I would say, also according to our sort of data and interviews, some 50% of the counties are interested in increasing their purchases from private sector. But as we have seen, it's very difficult to put a date on when that starts to grow. Kati Kaksone: Yes. And it should be noted that the remaining legacy contracts are on a higher end in the margin as well. So getting healthier from that perspective as well. Then a question on the connected employees in the occupational health. We have seen a decrease for a few quarters for now. Can we just reiterate the reasons behind the decreases? And what are the sort of consequences from? For example, last year, we had some negative media coverage and had that impact... Ville Iho: Yes, it's a very, very good question. It's a combination of a couple of things. When we went into our profitability improvement program in late '23, one of the activities that we were adjusting back then was our very low price level in our main business, occupational health care. So the market was sort of had bypassed us in pricing for quite some time. And hence, the gap was way too large to operate with adequate profitability in this business. We did the increases in 2 steps. And in hindsight, I guess we could have done it a little bit more smoother so that maybe 3 steps would have been the better option. That sort of latter price increase, coupled with the negative media coverage related to billing was a negative trigger point for sort of many companies and additional tendering. Since then, of course, it has been rectified and trust is back. But we saw the damage last year. But as said, the important thing is that after negative development and cycle, now it's bottomed out and forward-looking funnel looks positive. Kati Kaksone: Exactly. Then the last question is related to the cooperation with the insurance companies. We have talked about intensifying our cooperation and sort of next generation of insurance partnerships. And what's the plan there? Ville Iho: First of all, we are doing fine with insurance companies. So actually, looking at the market view, even though the absolute volume in use of insurance coverage for health care spend, all in all, for all of the operators, is negative at the moment. Our market share has been improving. So we are gaining in that market, even though -- even that one is in negative cycle currently. So what we are doing there, of course, we are, in a way, putting ourselves in insurance company shoes and looking at what they are facing, what type of problems they are seeing, how they want our operations to serve the end customer, but also then what type of transparency we want and need to give them related to effectiveness of our care chain and fluency of our care chains and cost level. And we are building that sort of more active engagement all the time and getting positive feedback from that front. So we -- with our capabilities, excellent capabilities, we can be a better partner for insurance companies, guiding and steering the customers and patients to right modality of service, right care chain, measuring the care chain effectiveness, being very precise in billing and also give transparency on that one and also provide more transparency on sort of a full scope of the population on those contracts. So there are many things that we are doing and continue to do to further improve our relationship. Kati Kaksone: Thanks. With that, we don't have any questions left. So any closing words first from you, Juuso and Ville. Juuso Pajunen: No, thank you. We will continue pushing for '26. Ville Iho: Absolutely. It's a tough environment, but of course, we are tougher and now see forward building on a lower base, but with a very, very positive view. Kati Kaksone: Thank you. And on a personal note, this is my last quarter with Terveystalo. It's been a pleasure working with you guys for the last almost 9 years. I have full faith in this company and the team, and I believe that Terveystalo will come through as a winner from this cycle and from this industry transformation. Thanks. Have a great rest of the day and weekend.
Operator: Welcome to XVIVO Q1 Report for 2026. [Operator Instructions] Now I will hand the conference over to CEO, Christoffer Rosenblad; and CFO, Kristoffer Nordstrom. Please go ahead. Christoffer Rosenblad: Thank you so much. Good morning and good afternoon, everyone, and welcome to XVIVO's earnings call for the first quarter of 2026. We can go to Slide #2 and just -- today's presenters are me, Christoffer Rosenblad calling in from the 2026 ISHLT Conference in Toronto, Canada; and Kristoffer Nordstrom, CFO calling in from Philadelphia in the United States. And with that, we can go to Slide #3, financial at the glance. So we see that the first quarter of this year showed a 23% organic top line growth. This is equivalent to an 18% organic top line growth if we adjust for the U.S. CAP trial revenue compared to the same quarter last year. EBITDA was kept at a healthy level, resulting in a positive cash flow for the second consecutive quarter. The CFO, Kristoffer Nordstrom will get more into the details on sales, gross margin and EBITDA later in this presentation. Short on the segments. Both the thoracic and abdominal segment are growing rapidly in both regions, which are North America and Europe. The lung market trend we saw in Q4 last year continues into 2026 with a good lung market with good underlying growth. And we see that a larger sales footprint supporting more customers is paying off. I'm also very pleased with the strong kidney sales in the quarter, partly fueled by the Canadian launch and a growing interest in the United States. We will come back later in this presentation on the progress for the service segment, the actions we have taken and how we will execute to become the preferred partner to all the transplant teams. And with that, we can go over to the highlights of the quarter, and we can actually jump straight to Slide #5, where we see the highlights. Very, very busy quarter. We took many important steps last year and this quarter, and we have passed many important milestones that led to actually another record quarter, which is the first highlight. Secondly, we also had the very important OPO EVLP hub pilot has been very successful and is now up and running. And it partly explains the increased lung sales we see in this quarter. So far, the progress is ahead of our internal plan, and we have identified 4 to 5 more OPOs in the rollout pipeline plan, whereof the second OPO in that plan will be onboarded already now in Q2. In parallel, we are continuously investing in more feet on the ground in the United States to enable a closer customer relations with the growing number of EVLP partners we see. And we also can report that the 60-patient CAP is now fully included during the quarter. We had an extreme high interest from trial centers to use the heart technology. And to satisfy their needs, we have -- to use the XVIVO Heart Assist, we have asked the FDA for an extension of the CAP, so they can use it again, under the ID we have. And if we look at #5, it's a testament to how well the XVIVO Heart Assist performed, and it's best shown with the real-life experience in Australia. So during Q1, the penetration increased to 52% for DBD heart, and we are happy to announce that we did our first DCD heart in Australia now as well. It's a very important milestone and makes us convinced that we should aim for the XVIVO Heart Assist to become the global gold standard for preservation of all hearts. And while we're waiting for the last part of the CE-mark for heart, we should mention that both the machine and disposables are already CE-marked, more and more European agencies are approving the XVIVO Heart Assist for compassionate use. And we actually saw sales in Europe picking up already now in Q1. This is again an indication that the European transplant teams can't wait for the device that optimize heart preservation and enable more hearts to be used for the patients waiting for new hearts. In our service business, we saw good progress in the Flowhawk part of it with high growth and new customers opting to use the communication software. Already now, 6 out of 10 of the largest transplant program in the U.S. opted to use Flowhawk since it simplifies the transplant process and reduces overall cost in the process. The organ recovery business is now ready for growth, and we have a positive outlook for the rest of the year. We offer NRP if needed and we see an increased interest to use the XVIVO organ recovery service. I had many, many good conversations during this ISHLT, for example. And with all those highlights, we can go to the deep dive into the highlights on Slide #6. So as I said earlier, I'm right now in the middle of the ISHLT conference, which is the biggest lung and heart transplant congress in the world. And after spending time here, it is clear that XVIVO is by far the innovation leader in the field of both lung and heart transplantation. For example, the XVIVO Heart Assist was featuring 2 late-breaking news sessions that was very well attended and increased interest from clinics who want to use the heart device. And I kind of go into those. We have some press releases regarding those, but I will go into them later in the next slide. I also want to highlight that very soon after this meeting, we will have our heart symposium, which will be really, really interesting to see. But already this Wednesday, we had the lung symposium, so the XVIVO industry-sponsored lung symposium, which was a great success really, had extremely high attendance, created a lot of interest from future customers to start up EVLP program. And it was also very clear that with new innovative technology on the market, the field of lung transplantation has improved significantly over the last decade. So one example over the last 5 years, the number of DCD lung transplantation has more than tripled. But more so, if we look at the patient outcome, that also improved. And over the last 10 years, the 1-year survival for ECDs, extended criteria and DCD lungs has gone from 85% to above 90% and is now on par with what we call normal lungs. And there, we see that the adoption of EVLP has been key to enable safe use of those extended criteria organs. But let's jump into the 2 highlights in the late-breaking news session from XVIVO. So we go to the next slide, which is #7, and it was the U.S. PRESERVE Trial that was presented. Again, the clinical result from investigational use is positively surprising us on the heart side. The trial was performed at 14 clinics in the U.S., and they enrolled a total of 141 patients. The U.S. study aimed to prove that extended criteria heart as described on the slide here, could safely be transplanted using the XVIVO Heart Assist. I'm happy to announce that the study met its predefined efficacy and safety endpoints. The sub-analysis or the analysis of the secondary endpoint showed also that severe PGD was only 7.9%. Severe PGD is the leading cause for early late mortality in heart transplantation. I will come back later here on the importance of it when we look over the European data. And next step is that we will now finalize the file for submission to the FDA for their review. And then we can turn to Slide #8, which is the other late-breaking news, which was a very well-received presentation from the European DCD direct procurement experience with DCD Heart. So the trial was a single-arm, proof-of-concept trial, a total of 40 adult heart transplants recipient across 4 European transplant centers in Belgium and the Netherlands were enrolled. And the primary endpoint for patient survival at 30 days was 98%, which is very high. And the secondary endpoint of severe PGD was only 5%, again, showing that the right preservation of heart keeps complications after heart transplantation low. I also want to mention looking forward that if the method of direct procurement is widely accepted by the heart transplant community, it would significantly reduce cost in the transplant process and simplify for the transplant teams around the world. And with that, we can go into the EU trial, which is now in a publication during Q1 this year. I again want to mention this is the first randomized controlled trial with superior endpoint that was ever performed in the field of heart transplantation. So no one dared to try this before, but we did. It is also the first clinical trial to establish a link between preservation method, severe PGD reduction and reduced 1-year mortality. And we can see this at the data, if you look at the little box of data that both mortality and severe PGD have a clear link, and I will explain that link. So in the analysis of the trial data, it was noted that the ex vivo group had a reduction of severe PGD by 76%. So 20% in the control group and only 5% in the XVIVO group. It was further noted that the mortality after severe PGD was approximately 40% in both groups, leading to an increased survival of 6% in the ex vivo group versus the control group. We can also note here that the primary endpoint showed statistical significance at day 365, which is good. With the experience we have seen in Australia with more than 50% of all DBD hearts now being preserved on the XVIVO Heart Assist and those 3 trials that I just went through that we have recently presented, the body of evidence in favor of the XVIVO Heart Assist is increasing significantly, which is great news. And with that, I will go over to the regulatory update on Slide 10, and we can actually go straight to the Slide 11, which is the usual overview of our regulatory processes. So the U.S. heart trial was fully included in record time, and we now passed the 12-month patient follow-up and you saw the result of that during the late-breaking news session of ISHLT and the press release we sent. We are now preparing the regulatory file. And when ready, we will submit the file to the FDA for their review. The CE-marking process in Europe is ongoing, and we are awaiting feedback from one competent authority. But again, as stated earlier, the heart box and disposable part of the product are already CE-marked, and we have passed the EMA consultation, and we're now waiting for the last consultation. Again, I also want to note, we are ready to launch when the product is fully approved. So we have a launch plan ready. We have staff recruited and the interest from clinics in Europe is very high. And as I stated earlier, we actually saw some sales already from compassionate use this quarter. But unfortunately, the European heart clinics are suffering badly from the lack of alternatives to the XVIVO Heart Assist. So we are working really hard with our notified body to get the final CE-mark. But we are happy to see and hear all the engagement from our heart transplant clinics in Europe who just want to get it up and running. Also to mention, and we mentioned before that the Australian and possible Canadian approval will follow on the CE-mark. So we will use that as a base. I will come back to the U.S. liver update in the next slide, actually, so we can go straight to that slide. And Slide #12 and the liver regulatory status. So we have previously reported that the Liver Assist has been granted breakthrough device designation by the FDA. We have an approved IDE and the CMS funding approved. We could have started a trial last year, mid last year. We did decide to temporarily post activities for the liver PMA process to investigate the alternative regulatory route. And we are right now in preparation for FDA QSA meeting where the possible regulatory route will be outlined further. And the company, and I will come back and inform all investors of the next step in the U.S. liver regulatory investigation and later, so of course, in the -- when we report the Q2 report in July, we will give an update. And with that, I hand over to our CFO for going into the financial performance of XVIVO. Kristoffer Nordstrom: Thank you, and happy to do so, Christoffer. So the financials for the first quarter. This was a record sales quarter with clear signs of growing momentum, as Christoffer mentioned, especially in our core business and across all main markets. For the first -- for the second quarter in a row, the strong sales momentum translated into a positive net cash flow despite continued investments into our clinical and regulatory processes. So we're very happy about that. Net sales in Q1 were SEK 241 million, and organic growth was 23% and 18% excluding the heart trial revenue from the CAP. Gross margins were 71%, while thoracic margins remained strong, the gross margins in abdominal and services were softer, which will be explained when I go through each business area here in a little while. Our continued focus on cost consciousness continues to translate into healthy EBIT and EBITDA levels. EBIT was 13% and EBITDA 21%. The quarter was impacted by SEK 7 million in heart go-to-market preparations, nonrecurring items, which explains the increase in administration costs. Setting this initiative aside, the underlying EBITDA in Q1 was 24% and was more in line with what we saw in Q4 last year. So moving over to Thoracic. So the thoracic business area accelerated in Q1 and delivered record sales of SEK 160 million. Organic growth was 27% and excluding heart trial revenue, 19%. In regard to lung, the momentum for EVLP continues to evolve positively. EVLP disposables grew 56% in Q1 and the main customer segments, the centralized perfusion hubs and larger key accounts grew double digits. And we're very satisfied with the early phase of the perfusion partnership that we launched in Q4 with PSI as we now have proof of concept from the first OPO EVLP hub. 10 EVLPs have been performed since the introduction of this program with good learnings and great collaboration. We also have a second OPO that was onboarded in early April, and we are hopeful that this partnership will be equally successful, of course. So this is a very exciting initiative that can have a significant impact for lung transplant patients on the waiting list in the U.S. and can have a strong impact on the EVLP adoption over time. In regard to heart, Q1 was a very good quarter. The CAP trial, as Christoffer mentioned, in the U.S. included its last patient. Australia and New Zealand continue with extraordinary market penetration on the compassionate use. And finally, what is very encouraging is that we now have a handful of countries in Europe as well where hospitals have worked hard to get the temporary special permits in place to be able to use the technology. All this in wait for the CE-mark approval, of course. Gross margin, 83%, in line with last year, and this means that we have successfully increased prices to offset impacts from tariffs and also from a weakened U.S. dollar. So overall, thoracic experiencing a good momentum. Moving over to abdominal. Abdominal continues to deliver good quarters. Net sales were SEK 66 million and equaling an organic growth of 24%. Liver sales grew 12% in local currencies to SEK 45 million. Kidney was the shining star of the quarter in abdominal and sales grew 63% in local currencies. We see a growing interest for Kidney Assist Transport in the North America, both in the U.S. and Canada, and Q1 brought new accounts both for clinical and research use. With a few important congresses coming up here in Q2, we are optimistic that the good traction for abdominal will continue as the year progresses. When it comes to gross margin in Q1, the gross margin was 54% versus 63% last year. The decrease was mainly a result of a larger portion of kidney sales versus liver, but also a larger portion this quarter of sales to lower-priced markets such as Asia, South America and Eastern Europe. Once again, a solid quarter for abdominal as we continue to build the market for liver and continue to take market share in kidney. Moving over to services, our last business area. Net sales were SEK 60 million, representing a negative 10% organic growth. The 2 areas, Flowhawk and Organ Recovery Services showed mixed results. Flowhawk showed an impressive growth of 62% as a result from both new customer acquisitions and upgrades and renewals. In Q1, the largest transplant program in the United States decided to implement Flowhawk. That's a true feather in the CAP for the Flowhawk team, which means the software is now embedded into the day-to-day practice at 6 out of the 10 largest transplant programs in the country. And with continued investments into Flowhawk, we believe it truly has the potential to become the future golden standard of transplant workflows and secure communication in the field. Organ recovery showed yet another quarter with a negative growth, minus 10%. And as I stated during the Q4 earnings call, we last year put a surgical organization in place that will enable us to return to growth in 2026 and beyond. Today, we have surgical capacity to significantly increase the case volume. And with ISHLT this month as a starting point, our focus from now on will lie heavily on marketing and sales execution. Gross margin decreased to 18%, and this was purely due to the lower case volumes for organ recovery at the same time as we incurred fixed operational costs, keeping our surgical teams on call 24/7. But with an increase in cases, our gross margins will improve to more sustainable levels. EBITDA. So profitability was strong for the second consecutive quarter, 21% and excluding nonrecurring costs, it was 24%. So rolling 12, we're at 20%, and we are on a positive trajectory on the rolling 12 KPI. In the following quarters, we will continue to manage our operating expenses with discipline and ensure resources are directed toward initiatives with clear commercial returns. Investments will mainly be directed to sales and clinical field force to capture the significant market opportunity that lies ahead of us being an all-organ company. And my final slide for the day here, cash flow, and we're ending with a positive -- some positive news here. So for the second consecutive quarter, we ended up with a total positive cash flow. Operating cash flow was SEK 65 million, mainly driven by good sales momentum, of course. And the cash flow from investments was minus SEK 55 million. But all in all, we ended up for the second quarter in a row with a positive total cash flow. And we have SEK 308 million on hand when we closed the quarter. And with those final remarks, Christoffer, I will give the word over to you again. Good luck with the end of the conference here. Christoffer Rosenblad: Thank you. And with that, we go into the outlook and a little bit into the future of what will happen this year and also what will happen in long term. And we can go to Slide #21, really focusing on this year and activities we have for this year. And again, we are going to continue to build salesforce and build new partnerships, especially in the U.S. to enable the OPOs and clinics to recover more lungs by EVLP adoption through a combination of a service model and staying very, very close to customers. In parallel, we just heard from our CFO that we will increase our service offering and better tailor to customer needs. Now we are offering NRP procurement from an increased footprint of surgical teams that can stay close to customers and recover organs with higher quality. We will continue to work closely with competent authorities in Europe to be able to use the heart box as much as possible already now, and we are aiming to obtaining a CE-mark as soon as possible and waiting for the last part there. Another key milestone now with the data from the U.S. PRESERVE Trial presented at ISHLT, we will now submit the regulatory file to the FDA for their review during the summer. And we also talked about the Liver Assist. We come back with more information on the regulatory route, but we know that it's soon becoming the liver gold standard in Europe, and we save hundreds of lives every quarter using Liver Assist. And now we want to continue to support clinics in Europe and also give the U.S. clinicians the ability to actually use the Liver Assist and have the same success we have seen in Europe. And we go to the next slide, 22 and a little bit longer-term outlook, and I want to state this every call for this is the reason here. We know that a lot of patients with end-stage organ failure are dying every day. Some of them are on the wait list, but the majority never even make their waitlist. So the demand for transplant is according to our analysis, approximately 10x of today's supply. We also see that the sales value of machine perfusion that improves patient outcomes and safely increase the usage of donated organ versus cold storage is also approximately 10x in terms of value. So we see a market opportunity with this almost 100x of what we see today. And we know that the machine perfusion and the service model have a proven track record, and that's really been clear here when we were in ISHLT of increased the number of organs used for transplantation and actually safely increase them with improving survival rate as well. And we also know that we see a growing DCD organ pool. In many countries, it's above 50%. We know here in the U.S., it is now hitting the 50% mark, and we have clear evidence that machine perfusion is -- you need to use them to safely address the DCD organs. And XVIVO, we want to change the paradigm on transplantation by innovation. And we want to be very clear that we believe that innovative products and innovative perfusion and preservation solution is the key for the future. And we do have a unique very innovative and world-leading product in the market or under IDE trials. So we believe in the longer term that we will lead this market due to innovation over time, enable lower cost in the transplant process, and we think that, that will be very important going forward. And with that, we turn to Slide 23 and open up for questions. Operator: [Operator Instructions] The next question comes from Simon Larsson from Danske Bank. Simon Larsson: Yes. Firstly, maybe on the U.S. heart theme, I noted in the press release from Wednesday that you are planning to hand in the file to the FDA later this year. But could you give us any more details on when that might be, would be helpful. Christoffer Rosenblad: Thank you. Good question. We are sitting with the file right now. We don't -- I don't have an exact time line, but it will be somewhere during the summer. So I will come back when I have a better time line, but it's somewhere during the summer. So it's not the end of the year, it's earlier than that. Simon Larsson: Yes. Understood. And maybe it's a bit sort of speculative at this point, but would you expect the FDA to sort of summon an advisory committee ahead of a potential approval? Or yes, what's your thinking around that dynamic? Christoffer Rosenblad: I can't speculate on what the FDA wants. We have to hand in the file and see what the feedback is and follow their process. It will be more or less impossible to speculate on what will happen or not. But I know last time we had an expert panel meeting, we fared very well on the lung side with [ 10-0, 10-0, 10-0 ]. So we know how to do this, and we are confident that we can answer any questions the FDA might pose to us. Simon Larsson: Yes, fair. Fair. And I know you said in the beginning of the presentation, Christoffer, that you aim to make the heart box standard of care for all hearts basically. But if you could help us understand the scope of the hearts that you will address in the U.S. maybe to begin with? Will you be focusing on the sort of marginalized ECD, DCD hearts or older donors? I mean any help slicing the market opportunity and what you will target first would be also interesting to hear. Christoffer Rosenblad: That's a great question. I mean we can only market what we get on the label and the label will be pending the FDA review process. So it's hard to say exactly. But if we look at the PRESERVE Trial and the inclusion/exclusion criteria there, it is exactly those hearts we're talking about. It's DCD heart, extended criteria heart. So that's either due to more than 2-hour preservation and a couple of factors -- a couple of risk factors or more than 4 hours. So we will definitely target those hearts. We will also -- we see an increasing interest here from U.S. clinicians. So we will have a quite broad target when we launch the product to make sure that we can reach all clinics as soon as possible after day 1 of the launch. Simon Larsson: Makes sense. And maybe then the final one from my end. Turning a bit to the lung part of the business. Obviously, the EVLP part is doing very good here. Could you say anything about the pipeline, how it looks for new accounts, both in terms of new centers, also OPOs, of course. And also if you're happy with the revenue generation from the new XPS accounts that you signed last year, and also maybe your visibility for the lungs here in the coming, let's say, couple of quarters as well? Christoffer Rosenblad: What I know here from ISHLT is that there is a growing interest for an EVLP program, and we do see great progress now, both an underlying market growth where we see that more and more data is getting published showing that using EVLP for extended grafts or DCD graft has a really positive impact on the overall survival and that we use more organs. So in general, there is a good underlying trend for the lung market. The other thing which we are working with is to put XPS into more hands, so to say, so we can do it and especially the hub model that 1 OPO with 1 center pumps lungs for a larger area, which we have seen has been very successful for. So we have a positive outlook. But again, looking into the future, it's impossible. But what we can see so far it looks very good. And especially, I'm really encouraged after all the meetings we had here in both the lung symposium and all the customer interactions from here from ISHLT, so we see positive outlook. Operator: The next question comes from Ulrik Trattner from DNB Carnegie. Ulrik Trattner: Thank you very much and a few on my end. And I'll start off with the abdominal gross margins. And Christoffer, you touched upon this. But I also note that the gross margin was kind of equally low in Q4. So is there FX related to this since you moved your manufacturing to Sweden from the Netherlands? Or is it just market product mix that we should expect to revert here in the short term? Christoffer Rosenblad: I can start a little bit high level and then Nordstrom, if you want to pitch in on this one. But if we take high level, it is -- there is today in the at least the abdominal [ fees ], slightly lower gross margins in Europe versus the U.S. So it's partly a regional mix that we hope over time we will grow out of. Also, we are moving production right now and have not reached full scale in production that we want. So it's not, let's say, call it, a quick fix, but we diligently work to improve the gross margin for our abdominal portfolio in the next quarters and years to come. So we see a gradual improvement, is my belief. Kristoffer Nordstrom: I'll just add as well, Christoffer, that we do expect to see the growing gross margins for abdominal. What will impact that is, of course, when we start to see a stronger ramp-up in the United States. It was a good quarter in North America abdominal sales this quarter, but it was partly research sales that over time, of course, will translate into more clinical sales, so to say. But it's still very much of a European business with some regions with lower pricing. Ulrik Trattner: Okay. Great. And on to sort of prospects going ahead and the [ SUB-Q ] meeting that you have scheduled. So what is your ambition going into this? You can obviously go down a few routes here. But are you aiming to use the European data in order to get approval as you did for kidney or 510(k)? What is sort of the most feasible and reasonable pathway forward here? Christoffer Rosenblad: It's a great question. I mean, of course, we're aiming that, but we will have a dialogue with FDA. We had a very positive meeting earlier this year, and we will continue in a more official QSUB meeting with them to get a firm route forward. We, of course, aim to leverage as much of the European data as possible. But we would also be in listening mode and see what the requirements from the FDA is. So there would be good dialogue that we have started that is very good and positive, but we also have to be humble that the FDA is deciding in this case. So we will argue our case and see what comes out of it. Ulrik Trattner: And just correct me if I'm wrong, but wouldn't it be beneficial on your end to actually generate some U.S. data prior to launching it, given sort of the -- I mean, hindsight, what we have seen with the kidney launch that U.S. data is of high importance in order to reach higher volume. Potentially a 510(k) would be the preferred route on your end? Christoffer Rosenblad: Yes. I mean the good news with the 510(k) route is that the, let's say, burden of proof is lessened. It's more towards safety than efficacy, but you're right. In either way, whatever the FDA says we need to do a trial, if it's, let's say, before or after. So we will do a clinical trial in the U.S. to make sure that the American users can replicate the European data that is extremely good for it to be believable. And you're right, with the kid experience, we learned that very fast that launching a product without U.S. data will not make it fly. So we have to do something either way. But we're still aiming to leverage as much as possible of the very positive European data. It is by far the largest body of clinical data we have for short, long term, all sorts of graphs, which are very positive. So that's, of course, our aim. Ulrik Trattner: Great. And a question on the CAP program. As you went from 4 patients in Q3 '22 and now further 6 here in Q1. And I would assume that the interest has not come down post ISHLT. So how quickly can you get a sort of reapproval or expansion of your CAP program in the U.S. Christoffer Rosenblad: We're aiming as soon as possible. So yes, it is under review from the FDA, and they will come back to us soon, according to what they said. So -- but again, it's hard to speculate on the FDA time line and the work burden they have. But what we can say is that, yes, the interest is extremely high from U.S. clinicians before the ISHLT and before those 2 presentations, and it has increased significantly after. So that is very clear. Ulrik Trattner: And can you give some type of indication on just the penetration per the sites who are actually active in the CAP program? Are they using it on all of their parts that are being transplanted? Or is it just a portion of them? Or can you give us any more sort of insight that would be very interesting. Christoffer Rosenblad: Yes. That's a good question. We should remember right now that this is a scarce resource for them. There is a limited number of patients. So they only use it on the worst grafts and the sickest patients where they see no other use right now. So we should remember that. But we can see in some CAP centers that is quite high penetration. And then the testimonial I get when I'm here from the users is that this is so easy to use, it's really plug-and-play, and the hearts are in an excellent condition after being in Xvivo Heart Assist. So it's -- some have quite high penetration, but we should remember that it would be higher if we would have an approval or let's say, it's an unlimited use because now it's capped to number of patients. And I think it's more interesting to look to the Australian situation where there is an uncapped continuous access protocol. So it is similar, but it is uncapped. And there, we see that it's 50% for DBDs and now we're starting with DCD. Ulrik Trattner: Sure. Yes. And just on the data that you have generated here lately and presented. Obviously, a positive outcome in the U.S. and 4 additional patients in Europe on HOPE. Are you adding this to the European regulatory agencies and have this in any way sort of increased your confidence in obtaining approval for the heart box here in 2026. Christoffer Rosenblad: The straight answer is yes. I mean, the feedback we get from those compassionate use is that, yes, we don't see any alternative on the market for any graft, pediatric, adult, DCD or DBD. So it's really encouraging to see medical agencies in Europe, looking into the file, clearly state, there is no alternative. We need compassionate use for this product. And so yes, the straight answer is, yes, we get more confident, the more we talk to medical agencies and the more we talk to clinicians of how important this is. And -- but again, the regulatory process is a regulatory process. And it's hard to speculate. But definitely, we are -- due to this, we are more confident, yes. Ulrik Trattner: Great. And last question on my end. Did you mention that you had found 4 to 5 OPO targets to sort of be integrated into an EVLP program. I just too -- if I heard that clearly. Christoffer Rosenblad: Yes, 4 to 5 are identified in the pipeline right now, to clarify that. So we have done our first installment, very successful ahead of plan. We are doing our second one. I think while we speak or at least very soon after ISHLT. And then there is a rollout plan, which is, to some extent, will be resource limited but we have a clear plan, and we're going to make sure that we are successful in every installation. So we're going to make sure that we are there. And we are also increasing our internal resources to be able to handle an increased growth and increased interest from OPOs, where, in all honesty the XPS and the STEEN Solution was developed in the beginning for this target group of OPOs. So it's great to be back home again, so to say, and see the OPOs using it. Ulrik Trattner: Okay. Great. And essentially, it's an acceleration at sort of a maintained pace even with your sort of limited resources. Christoffer Rosenblad: Yes. So we will try to accelerate as fast as possible, but we will be very conscious that we want to have the right quality of people both from our side, from our partner side and from the OPO side to make sure that each and every OPO program is a successful program where the clinicians really get the audience they so deserve for the patients on the waiting list. So we'll be very cautious on keeping a high quality. Operator: The next question comes from Jakob Lembke from SEB. Jakob Lembke: So my first question is on the strong EVLP sales here in Q1. So I'm wondering if you can sort of elaborate a bit more across the different customer groups, sort of your single one large customer, other U.S. customers as well as ex U.S. during the quarter? Christoffer Rosenblad: Yes, definitely can do that. It is one, an underlying market growth where we see an increased interest to making more lung transplantations. And we see a changing organ pool where more and more organs become extended criteria or DCD. So that's the underlying growth we see fueling the interest. So we see both a, let's call it, an underlying growth from existing customers, and we see that we now add new customers as well, which are slowly becoming more up and running. And we see, of course, the fast uptake in the pilot of the OPO that was -- so those are let's say, the 3 reasons. We also see that we're increasing the sales footprint. In other words, number of feet on the -- close to customers. We can see an increased usage. So it's a direct link there. Jakob Lembke: Okay. And then also, I'm wondering if there was any sort of large orders or timing effects impacting the strong Q1 sales for EVLP? Christoffer Rosenblad: I think it was fairly -- we saw the trend in Q4, and I think that trend continued into Q1. We didn't see any huge, let's call it, seasonal effect or up stocking, destocking during either this quarter this year or Q1 this year or Q1 last year. Jakob Lembke: So I guess my question then is it fair to assume then that this is sort of a new base line for the EVLP consumables? Christoffer Rosenblad: Yes, I think that's a fair assumption. I mean we do see an increasing interest, and we do foresee that we will continue to grow new -- both existing and new EVLP programs, absolutely. Jakob Lembke: Good. Then I also have a question on heart and the compassionate use in Europe. I'm wondering if you can elaborate a bit on sort of how freely the centers can use the product right now? And also if you can share how many centers that are live and if you have any more that you think will go live soon. Christoffer Rosenblad: Yes. I think to start with when we talk about compassionate use, there are, of course, limitations to it. And also, this is being Europe, so it's different country by country. Some are more hopefully soon here is going to be more Australian like and some will be more restricted in terms of when you can use it or not. So it's hard to give one answer to that question because it's many countries, but we do see that more and more countries are opening up for this opportunity, and that is very, very positive. That's the key message. And then we, of course, hope that we don't need this and get the CE Mark very soon, but we see that we can keep the high interest and continue to save patients where there is no alternative to the XVIVO Heart Assist, which is the case right now. Jakob Lembke: Okay. And then I'm also wondering if there's been any new or recent dialogue with the notified body or the competent authority regarding CE Mark? And also, if you expect to get the approval then in the early summer. Christoffer Rosenblad: We are in dialogue with our notified body. To clarify, we are not in direct contact with competent authorities in this case because they have asked for a consultation, and we are in contact with notified body. So the answer is yes, to the notified body. There has been contact. We -- from what we heard from them, yes, we should expect something here in early summer or summer. So that's the latest we heard. So we are crossing our fingers and provide all the information we possibly can to make sure that we can get a good decision. Jakob Lembke: Okay. And then as a final question, sort of a follow-up to the earlier discussion about the potential label of the heart product in the U.S. I'm thinking that the FDA must surely also include or consider the data you have gathered outside of the U.S. sort of the European randomized 2-arm trial and as well as the Australian trial. So I guess it must be a very broad label because you have, I mean, the most broad -- the broadest data of any machine perfusion product out there, right? Christoffer Rosenblad: To start with, we're extremely proud of all the data we have. And every time we do something with XVIVO Heart Assist, the clinical outcome is better than we could expect from it. So we're very proud of it. It's hard to speculate on the FDA and what they will do. We will, of course, submit all data for their review -- I mean, the lowest bar is for safety reasons. And we do -- we will argue that it should be taken into consideration at least for a future label discussion. But it's hard to speculate on the ruling from the FDA, so to say, regarding the label. But if we look at the inclusion/exclusion criteria in the United States PRESERVE Trial, it will cover the majority of donated hearts as it is already today. So that would be -- that in itself will be an extremely good label. Operator: The next question comes from Filip Wiberg from Pareto Securities. Filip Wiberg: First, I think I just would like to follow up on a prior question about the strength in EVLP this quarter. So I suppose like the largest customer explains some part of the strength at least. Given that, I'm just trying to get a better sense of the risk of ending up in a similar situation that we had last year with the destock. And you said that you don't think there are any stocking effects this quarter, but could you please just talk a little bit about that and the visibility for this largest customer? Christoffer Rosenblad: Yes, that's a good question. I mean we have very good visibility and very good dialogue with our largest customers, and we could see that they grow actually as much as other customers during Q1. But like we are, they are also depending on the underlying market growth, so to say, but we have a very good 1 year visibility into what they aim to do. And -- but they are for the same reason, as we are, dependent on the underlying market growth. And we saw that last year. In Q2 last year, it was that we got a dip during 1 quarter. So if the momentum we see now that we believe will continue, we have good visibility. Filip Wiberg: Good. We talked a little bit about the gross margins here, but perhaps one on thorax, which was actually okay this quarter. But I'm just thinking about it going forward now when EVLP is growing, Perfadex becoming a smaller part. So will you be able to defend the gross margin you've had when EVLP continues to grow and takes a bigger share and then also how you believe it's going to be affected when you launch heart in both Europe and in the U.S. Kristoffer Nordstrom: That is our goal to defend the thoracic gross margins. You have a point that I mean this quarter was extraordinary when it comes to EVLP portion out of sales, right? So -- and we have a lower margin on EVLP than on Perfadex. But we also see the growing -- the growth initiatives in the U.S., we have good prices on those and speaking about the hub model for EVLP. And also, we have not yet decided on the heart price in the U.S. as well, which will be a contributor to the gross margins going forward. So we feel for thoracic that we are in a good spot. And we will work to continue to defend also the abdominal margins here in 2026, of course. Christoffer Rosenblad: I don't know, but the bigger picture is also that for our thorax products, so heart and lung, we can have more of a global price list. So we don't see any regional differences if you compare, and we're not yet there for our abdominal products. So that's something we need to work on, of course. But we are more confident. And of course, with the heart, there is always when you start up production, there is always slightly lower, but I am confident that we very soon can get the heart up and running and reach scale in production. Filip Wiberg: All right. Good. Perhaps another one to you Nordstrom about the EBITDA margin, you stated it was 24%, excluding U.S. heart activities. But I think you said as well that there was a nonrecurring cost this quarter. So could you elaborate a little bit about that. Was it only related now to Q1 and nothing going forward? Kristoffer Nordstrom: Thank you. Good question and perhaps deserves some clarification, and this also ties into one of the questions I see here in the chat as well. So no, it's the same thing. So what I referred to as noncurrent was the SEK 7 million that we spent on foundational heart launch preparations consultancy work to prepare for the U.S. heart launch. So for us, that was a foundational activity, a bit of a onetime. I think the other investments we will do going forward, which we have touched upon in early calls as well is really to build out the U.S. organization to prepare for the launch. And I think that will be more of a linear step-wise growth in OpEx in marketing and sales. But overall, on EBITDA, I mean, last time I checked the consensus, I think that's kind of where we are aiming to land for the full year 2026. Filip Wiberg: Okay. Good. So just to be clear, admin costs, do you expect that to come down from Q1 levels, but that increasing the selling expenses going forward? Kristoffer Nordstrom: Correct. Filip Wiberg: Okay. Good. Just last question. I was curious around the next step in direct procurement DCD. So the study Filip Rega presented, like what are going to be the next step in this. I suppose there will be more studies required to get the surgeons confident in using this approach? Or what do you have to say about that? Christoffer Rosenblad: Yes, there will be many steps in this. The first one, we hope that Filip Rega can submit a paper on how to do this. So we get a standardized approach to direct procurement. Then this was, of course, a very important step to make this data public and also to get the interest up for direct procurement. But what we've seen is that the uptake is pretty fast once you got the hang of it, and you've done it. And the interest to avoid all complicated other process you would have to do, such as NRP or very expensive machinery in DCD hearts is avoided. So you reduce cost, you reduce complexity, et cetera. So the interest to go this route was during the late-breaking news was extremely high. And there was, unfortunately, not enough time for questions, but we will revisit that during our heart symposium today. So hopefully, more people can ask questions. And then again, this is a technique that spreads really surgeon to surgeon, so they will talk to each other and train each other and get more and more confident over time. Operator: The next question comes from Ludwig Germunder from Handelsbanken. Ludwig Germunder: I would like to follow up with another question on the EVLP and in line with some questions already asked, but I would like to hear if you could say something about or you see the recovery in terms of how much is recovered now in EVLP. Are we back at previous normal levels? You mentioned this is fair to assume as a new baseline in EVLP consumable sales. But do you see any more recovery to do before you're back at some sort of [ pre ] levels after last year? Christoffer Rosenblad: No, I think we -- not so much recovery. We have to be very aggressive and find new customers and new concepts, which satisfy the needs from American surgeons, such as the OPO model. So we will continue to build on what we have, so to say, on the foundation we have now established during Q4, Q3 -- sorry, Q4 and Q1. I want to mention that last year, there was a tough period for lung transplantation in terms of the number flattening out, and there was a lack of resource in the system. But again, the system reacted quickly. I think we reacted quickly to give them alternatives, alternative resources with partnerships. So I more look at it as a forward-looking exercise. Ludwig Germunder: Okay. I see. And then I have a question. I'm not sure if you mentioned it, I apologize if you did. But on the CAP study for heart you filled the 60 hearts that you were allowed to do. You previously mentioned that you could possibly get another 60 hearts. Can you comment anything on the status around that now? Christoffer Rosenblad: I can't comment further than I already did. We have applied for another 60, and we do hope that FDA come back as soon as possible, but it's -- we have to understand, we are under an IDE and the FDA are deciding what we can do and not do, during an IDE. Unknown Executive: Should we continue? Or would you like to end the call? Christoffer Rosenblad: Continue. If the last few questions, if we can keep them short. I know we're over time and I actually have to leave for another meeting, but I see there are 2 more analysts who have questions. So I do want to give them the opportunity to ask those questions. But I will be very brief. Operator: The next question comes from Oscar Bergman from Redeye. Oscar Bergman: Just wondering, R&D costs of SEK 37 million, if that should be considered sort of a baseline going forward? Or are there any one-offs that make maybe the last couple of quarters a better baseline? Kristoffer Nordstrom: Yes. Good question. Yes. I think it could be used as a baseline for the rest of the quarters here this year, but you will see a significantly lower spend on the other type of CapEx, material assets. We're building out the -- we are very soon done with investments into our -- increasing the product capacity. So I think all in all, you will see lower CapEx in 2026 than you saw in 2025, which means that we are optimistic that we should be able to end the year on a cash positive level here, which would be the first time in Xvivo history. Oscar Bergman: And then when you have the CE Mark in place for the heart product? Will you be able to implement any price changes in Australia and New Zealand -- and if yes, roughly how much? And will it be immediately after the CE Marking? Christoffer Rosenblad: To start with, the CE Marking will be the base for the approval in Australia, but we still need to go through a review process there to start with. Now we have fixed reimbursement. So with increasing body of evidence in terms of health and hospital economics, we will, of course, improve reimbursement levels, and the chance of doing that is a lot higher after an approval, so to say. Now you get what you get, so to say, during an unapproved product. So that's a job that will start. It will not be immediate. So you do have to work with reimbursement in each country. Operator: The next question comes from Ed Hall from Stifel. Edward Hall: Just quickly on lung and how we should think about it for the rest of the year. So I think you've outlined the underlying existing customers, the new customers are growing and obviously, looking at Q2 and Q3 or weaker comps? Or is there anything that you would point out to show, anything that I may be missing outside of the trends that you've already outlined? And that would just be my first question. Christoffer Rosenblad: Thank you, Ed, for that question. I do think that there will, of course, be seasonality like in any business depending. And we're also depending on the number of donors going for EVLP, but we do see -- and I still state that we do see an increased interest for lung transplantation in general and for EVLP, in particular, based on the body of evidence we see now that we -- for example, it was the presentation here during ISHLT, which show that you can better outcome on both DBD and DCD for EVLP, if you standardize your EVLP program and EVLP protocol. So if you have a very clear inclusion criteria, you actually get better results from using EVLP than standard of care. So I think this growing body of evidence speaks for EVLP increasing as an indication of all lungs. Edward Hall: Perfect. No, that makes sense. And then just a final question from my side. Just wanted to get your thoughts on how transplant surgeons are thinking about the trade-off between sort of the increased ECMO use that we saw in the PRESERVE data for some of the DCD implants versus what actually came out with lower severe PGD. From your talks that you've had this week at the Congress, is there any initial thoughts you could comment on there? Christoffer Rosenblad: No, but I think that everyone was surprised that the data was as good as it was because both the donor pool and the patients were very marginal, so to say. So this was better than expected from many of the trial centers. So that was really good news. I think that we saw still a low level of severe PDD was really good. I think that would be the leading indicator for us and that we also could see that we could replicate that in survival data, really strengthen the whole belief for what this product can do once it's on the market. Edward Hall: Perfect. Okay. So that makes sense. So it sounds like actually the lower PGD rate is really the driving force in that trade-off. That's how I should think about it. Christoffer Rosenblad: Thank you very much, everyone. Sorry for going a little bit over time. We will now end the call and move to the last slide where we want thank you so much for today and we meet next time on July 14.
Alan Gallegos Lopez: Good morning. Welcome to Megacable's First Quarter 2026 Earnings Conference Call. With us this morning, we have Mr. Enrique Yamuni, CEO; Mr. Raymundo Fernández, Deputy CEO; and Mr. Luis Zetter, CFO. Let me remind you that the information discussed at today's earnings call may include forward-looking statements on the company's future financial performance and prospects, which are subject to risks and uncertainties. Megacable undertakes no obligation to update or revise any forward-looking statements. I will now turn the call over to Mr. Enrique Yamuni. Sir, you may begin. Enrique Robles: Thank you, Esau. Good morning, everyone, and thank you for joining us today. With the solid beginning of the year, we are pleased to announce the results of the first quarter of 2026, which came in line with our expectations once again, evidencing the resilience of our operations and the strength of our market position. These results reflect outstanding performance in an economic environment that presented diverse challenges at the outset of the year, marked by uncertainty around trade policy, among other factors, reaffirming our ability to create value. In this context, we managed to present a period with continued subscriber growth, consolidating our presence in the new territories and maintaining subscriber levels in legacy territories. Outstanding mass market revenue increase, including ARPU expansion accelerated net profit growth and a seasonal CapEx increase supporting a higher cash generation. Operationally, broadband remains the main driver of business growth. Net additions of Internet subscribers remained within the quarterly range that we have been discussing in recent periods, and we expected -- we expect to increase the pace of the -- in the next quarters, as a result of better service and a very competitive commercial offer. At the same time, we continue strengthening our network, we have evolved into a predominantly fiber-based company in the few areas that still rely on legacy infrastructure would continue to migrate over time. These advancements reflect our approach to competition, capitalizing on the quality and capabilities of our network beyond just pricing. We're convinced that our infrastructure will continue to be one of the main sources of differentiation and sustainable value creation for Megacable. In terms of financial results, our consolidated revenues and EBITDA continue to grow at a single high digits, while the quarterly figure for net profit recorded one of its best performances in the last 2 years. Moreover, our balance sheet remains strong with a decreasing leverage ratio that implies that Mega has a privileged position to take on investment opportunities that might arise. Regarding CapEx, it is worth noting that CapEx for the first half of the year is typically lower as a percentage of revenues. This quarter, CapEx as a percentage of revenues reached one of the lowest levels since the launch of our expansion and evolution projects. Despite pressure stemming from geopolitical situations and the related price increase in some inputs, we successfully offset these challenges through greater efficiency in the execution of our investment and a strategy focused on a more selective CapEx deployment in the expansion territories. As a result of the above, we can expect 2026 full year CapEx to be around 24% to 27% of revenues for 2026. We have demonstrated that our growth trajectory is advancing according to the 5-year plan that we set and that we have successfully transitioned from a phase of intensive investment and growth to a phase of returns. Our efforts continue unchanged. It is clear that the next phase will be marked by pursuing operational efficiency, consolidation and digitalization. Also, advances in artificial intelligence and digitalization are a core pillar of Megacable's innovation. Under our Mega concept, we are achieving efficiencies that we'll, with no doubt, yield significant results in the coming quarters. These processes will make us more competitive in the market and open up new areas of opportunity. Before concluding, following the resolution approval -- approved yesterday at the shareholders' meeting, the company will distribute a dividend of MXN 3.2 billion. This reflects our confidence in Megacable's cash generation capacity and our commitment to delivering value to our shareholders. We expect this distribution to represent one of the highest dividend yields in the market, in line with previous periods. In summary, the first quarter will consistent -- was consistent with the seasonal trends we usually see at the beginning of the year, although we faced some challenges, none have altered our confidence in the business outlook. We remain focused on execution, capital discipline and strengthening Megacable's competitive positions in the Mexican telecom market, reinforcing our role as a key industry player with an evolving infrastructure that supports a more connected, sustainable and innovative future that with that, let me turn the call over to Raymundo for the operational review. Raymundo, please go ahead. Raymundo Pendones: Thanks, Enrique, and good morning, everyone. As Enrique mentioned, the first quarter developed broadly in line with the seasonal trends we usually see at the beginning of the year. In that context, operating trends remain sound and commercial execution continued to support growth across the business. Starting with network development, our footprint reached 19.5 million home passed at the end of the quarter, up 11% year-over-year, while our network expanded to approximately 110,000 kilometers, an increase of 7%. These figures reflect the scale we have built and more importantly, the platform we now have to continue monetizing recent investments. Fiber migration also continued to advance with approximately 86% of our subscriber base served through fiber technology at quarter end, compared to 77% in the same period last year. We have already reached a level of operational and commercial maturity comparable to that pure-play fiber operator. Turning to subscriber trends, Internet subscriber reached 5.9 million at quarter end, up 9% year-over-year, equivalent to 495,000 net additions over the last 12 months. Sequentially, we added 101,000 subscribers consistent with the range we have communicated in previous quarters. Telephony subscriber reached 5.2 million, increasing 7% year-over-year or 353,000 net additions over the last 12 months. During the quarter, net additions totaled almost 65,000. Telephony continues to play an important role within our bundle offering by reinforcing the value proposition of the mass market. In mobile, our MVNO operation continued to gain traction. We closed the quarter with 740,000 lines, representing a 29% year-over-year increase equivalent to 164,000 net additions over the last 12 months. Sequentially, net additions totaled 61,000 lines, making the best performance since early 2022, result of a commercial strategy with lower ARPU, but higher growth rate. We continue to see mobile as a relevant complement to our fixed services and as an additional tool to strengthen customer loyalty, which now also contributes with a reasonable revenue stream. In content, subscribers stood at 4 million as we continue adapting the product mix toward a broader digital proposition that is more aligned with how customers increasingly consume video. During the quarter, 3.8 million subscribers correspond to traditional video, while the remainder was contributed by the more than 2.2 million streaming app users recorded at quarter end. Our focus is on building a broader content proposition that combines linear video, apps and other nontraditional consumption models. We believe that remains an important differentiator in how we position the service and maintain value perception at the household level. Overall, RGUs reached 15.2 million an increase of 8% versus the same period last year, supported by the continued expansion of the subscriber base and the relevance of bundled services within the mass segment. Regarding churn, trends remain under control. During the quarter, churn stood at 2.0% in Internet, 2.4% in Video and 2.1% in Telephony. These levels remain manageable and do not indicate any deterioration in the underlying business. In fact, Internet, Video, Telephony improved versus first quarter '25, despite the price adjustments implemented during this quarter. On the revenue side, ARPU continued to trend positively supported by the aforementioned price adjustment. Under the new disclosure methodology adopted last quarter, ARPU calculated over Internet subscriber stood at MXN 440.9, up 2% year-over-year. We believe this methodology provides a clearer benchmark for investors and improves comparability with peers. Finally, in the Corporate segment, revenue remained softer on a year-over-year basis. The above was mainly due to the current market conditions, leading to lower average revenue along with a more competitive environment in expansion areas, which requires us to be more creative and efficient going forward. The underlying operation continue to execute, and we remain focused on service quality and commercial discipline that will allow us to go back to revenues levels before 2025. Overall, the first quarter was consistent with the operating trend we have seen in recent periods. Our platform remains strong. Our network continues to differentiate the company, and our priorities remain centered on improving penetration monetizing the scale we have built, and adapting our commercial and content offering to what customers value most. Thank you for your attention. I will now turn the call over to Luis for the financial review. Luis Zetter Zermeno: Thank you, Raymundo, and good morning, everyone. Megacable delivered another quarter of solid top line performance. Total revenues reached MXN 9.4 billion during the quarter, an increase of 9% versus the same period last year. This result was mainly supported by the continued strength of the mass market segment, where revenue rose 11% year-over-year to more than MXN 8 billion, reflecting continued subscriber growth and a positive ARPU trend. As in prior quarters, mass market remain the main driver of the business and more than offset the softer performance in corporate. Below the revenue line, cost of services reached nearly MXN 2.5 billion, an increase of 9% compared with the first quarter of 2025, while SG&A also increased 9% year-over-year to a little over MXN 2.5 billion. These movements were mainly attributed to a larger operation, including higher labor costs driven by annual minimum wage adjustments and the expansion of our workforce, particularly in newer territories. From a profitability standpoint, EBITDA reached more than MXN 4.3 billion, up 9% year-over-year with an EBITDA margin of 46.2% in line with the same period of last year. We expect margin to strengthen on a comparable basis as the year progresses. In this context, net income totaled MXN 841 million, increasing approximately 16% versus the same quarter of last year. This was one of the strongest quarterly results since the second quarter of 2023, as interest rates reduced, and despite the continued impact of depreciation associated with recent infrastructure investments. Turning to the balance sheet. Cash and investments closed the quarter at MXN 5.6 billion, while net debt stood at MXN 20.4 billion, down 3% year-over-year. The debt-to-EBITDA ratio decreased from 1.41x in the first quarter of 2025 to 1.25x this quarter, while our interest coverage ratio closed at 6.38x. This performance confirms that Megacable continues to operate with a strong liquidity position and a conservative balance sheet. Our leverage profile remains one of the strongest in the sector and continues to provide high flexibility for both operations and capital allocation decisions. Quarterly CapEx totaled MXN 2 billion, a decrease of 14% compared with the same period of 2025, as we continue moving past the peak of our expansion and network evolution cycle. In this respect, CapEx represented 21.3% of total revenues compared with the 26.8% in the prior year. It's important to note that this figure is in line with annual seasonality with a softer first half of the year, followed by an increase in the last 6 months. At this point, although we are maintaining our full year CapEx guidance of 24% to 27% of revenues, we are monitoring the potential effect of the geopolitical and trade-related developments on equipment and deployment costs. If those conditions persist for several months, we could see an increase versus the original CapEx plan. Even in that scenario, we retain enough flexibility to rephase part of the program if needed without compromising our broader strategic objectives for 2026. Finally, regarding the dividend payment approved by the shareholders' meeting, even after the distribution, we expect leverage to remain at healthy levels with the usual temporary increase in the second quarter and sequent normalization thereafter. In summary, the first quarter showed resilient revenue growth, healthy profitability, strong net income generation and continued balance sheet strength, the business remains well positioned, focusing on improving profitability and cash flow generation. Thank you for your trust. I will now open the floor for questions. Alan Gallegos Lopez: [Operator Instructions] The first question comes from the line of Marcelo Santos from JPMorgan. Marcelo Santos: The first question is regarding the CapEx. So how do you see that progressing? If you could provide us an update for the next couple of years? How do you see that going down? And the second question would be regarding, you made a comment on pursuit of consolidation. How are you seeing this? What are the opportunities you see? What kind of consolidation would you be seeking out? Raymundo Pendones: Luis, do you want to go ahead with the CapEx? Luis Zetter Zermeno: Yes. Thank you, Marcelo, for your question. On the CapEx, as we have stated, we are leading the investment cycle of the expansion and the GPON evolution project. So we are in a reduction, and also with the revenues increasing, we, for sure, continue to state that CapEx will go down as a percentage of revenues. This year, we still foresee 24% to 26% or 27%, depending on inflation created by geopolitical effects. And next year, we are seeing a reduction of 22% to 24%, and thereafter also going down in 2027, 2028. Raymundo Pendones: The second question was regarding consolidation. I believe that, that was mentioned by Enrique in his speech. It is what we meant, Marcelo, is that we have a strong period of expansion investment and an investment for the GPON evolution. Both projects has been critical, and we believe we did it in the right time. We have been able to grow in the organic markets with the GPON evolution we did, and we have expanded our footprint in the expansion territories. What we're saying about consolidation is that the period of intensive CapEx has passed by, and now is the period of consolidate our operation into continued growth and better efficiency operation in the markets where we grow. That's what we try to send the message is consolidate our operation with a much more efficient way after all this period of huge investment CapEx provided. That's what we meant. Operator: And the next question comes from the line of Phani Kanumuri from HSBC. Phani Kumar Kanumuri: The first one is regarding the AI impact on efficiency. What are the areas that you are expecting to see the impact from AI on the cost? Or do you see even the impact from revenues because of AI? The second one is regarding your Corporate segment. You mentioned that you need to be more creative in your offerings to go back to the revenue levels before. So if you could expand on that comment, it would be great. Raymundo Pendones: Thank you, Phani. Very interesting question both, as all the questions we received, but the impact of AI is going to be strong on this, but in every industry, but it's going to be strong in our industry, too. We're very happy to the process that we have, the period that we have implementing AI within Megacable. That's part of the consolidation I was talking before, because we're implementing AI in the majority of the functional and operational areas of the company. We already have virtual agents working in our contact center. We already have all the knowledge of the Megacable to be trained and to be interactive with our employees, and we already have that to have all the analysis and analytics on the NOC and the core. More than that, we've been having a third party looking at our rate of maturity of AI during -- within Megacable. And I'm really, really proud to say that we are one of the highest in terms of implementing AI within Megacable. And that what we see in the future is nothing, but continues to improve our margins and EBITDA and be a much more efficient company. On the other side, the AI market will continue to increase data center and continue to increase consumption on the cloud, and we do expect to adapt ourselves to that and bring that offer within the corporate segment that we have. Second question regarding the Corporate segment. Still, we are above the MXN 5 billion mark per year that we have -- that we passed in 2024. We haven't decreased that in that part, even though the results are not what we wanted are soft. We expect that to change because we are doing some adjustments in terms of the market that we are approaching with a new product offer that we're sending to the enterprise and the corporate segments. We've been soft in government sector that's been hurting us. We have not been able to increase the revenues coming from that segment. And overall, that's why we keep the MXN 5 billion level that we have. We expect to go this year above what we had in 2025, and trying to go back to the trends that we have before. That's the explanation of the corporate and how we see the AI. Phani Kumar Kanumuri: Excellent. Maybe can I just follow up on the -- on your comment on cloud and data centers. Are you trying to be a reseller of the cloud? Or are you trying -- would you also be going into building the data centers in Mexico? Raymundo Pendones: Good to be clear on that. No, we are not investing into cloud, as I said, the period of strong investment for Megacable has passed by. We will continue to meet what Luis was saying, a lower trend of CapEx of revenue to the future. We already have data center in the western part of Mexico, and we have a big amount -- a huge amount of data center edge for the purpose of getting into the mid- to large cities that has already been invested and ready for the future. In the years to come, data center will -- data consumption will be decentralized and will come from the central part of Mexico and the U.S., more and more into the edge, first into the north part of Mexico, and then into the western part. That one is going to give us a big value for our data center. And in the next years, that one will continue to be decentralized into the regions. Those investments has already been made, and we will be part of that data center growth, not as a significant part of Megacable, I want to say. When I meant cloud and collaboration, those are the services that we sell in MCM business Tech-Co. MCM business Tech-Co not only sales connectivity or infrastructure, but also sells cloud and collaboration under a brand name of Megacable called Symphony, that's our product, where we have the best of different suppliers to provide collaboration. And that's what I meant that we will continue to implement AI to our customers over that cloud and collaboration segment that we have. Alan Gallegos Lopez: The next questions come from Isaac Gonzalez from [indiscernible]. Unknown Analyst: I have one question only. How much traction have you seen in your price increase? And one of your main competitors recently increased speeds without raising prices. So could we interpret that margin expansion is being constrained by these competitive dynamics? Raymundo Pendones: Thank you, Isaac. Yes, we know we are aware of competition. We keep track of them like they do of us, but let me tell you that the speed, the rate -- speed that they increase, the speed they increase, we already did that and way above what they did. Our minimum amount that we are commercializing right now is 200 megabits, and we are the highest speed in the market for the low entry package of any of the companies that are in the fixed segment. So speed is something that normally we're the leaders on that part, and we continue to have that for the price that we're receiving. On the other hand, we have a price increase over this period because we have different segments of subscribers with different packages and rates. And normally, we have some space to increase rates to some of those subscribers while keeping the lowest ARPU in the market. When we see our competitors getting into a new broadband service with an aggressive price, we already have that price, and we're commercializing on that one. So I believe we are the strongest and well-positioned company of the market right now because we have a high speed, a good network and the best price, and also, I'd like to say the best service. All our indicators continue to provide that Megacable, Mega on the Máximo side continued to improve the Net Promoter Score and the customer satisfaction. So it's a killer combination when you have a good price, a good product, good service, the -- everything all around. And that's the secret of our success so far. We continue to provide good results in revenue and subscribers, and that's what we look into the future recycling. Thank you for the question. Alan Gallegos Lopez: The next questions come from Miriam Soto from Scotiabank. Miriam Soto: My question is regarding about the -- if the company could consider entering the wireless business directly by acquiring AT&T? And what is your opinion on the asset valuation? Raymundo Pendones: Well, what we're aware, it's public that it might be an intention of one of our competitors to enter and get into the AT&T. We are not moving from what we know how to do the best. We believe that we have the right size and the right technology to be a good player on this one. And as I said before, we are going to capitalize that into the future. On the other hand, we are on the wireless market. We have Mega Mobile as a service, only aimed to postpaid. We have a terrific quarter, increasing our subscriber base, better is a historical growth on that part. We almost reached the three-quarters of a million subscribers. We expect to get close to 1 million by the end of the year, slightly below that part. With no CapEx for the company, getting the best of the service, the coverage coming from two companies. One is exactly AT&T. The other one is [indiscernible]. And we are looking into how to integrate more players like to sell into the future. So our customers will have the best of the 3 companies on that part and make it competitive. So without having to invest into the frequency, we already have a good MVNO in our part. So we are happy with that, and we are providing our subscribers with the quadruple play already. Alan Gallegos Lopez: The next question comes from Emilio Fuentes from GBM. Emilio Fuentes: My question is regarding your CapEx to sales guidance for the year around 24% to 27%. I was wondering if a higher range of -- if the higher range already incorporates potential supply chain disruptions, or could we expect a worst-case scenario where it could go above this 27%? Luis Zetter Zermeno: Well, as you have seen, normally, the first half of the year, we have lower CapEx and intensifies in the second half. That's why we have to be cautious on the 21.3% that appears in this first quarter. So that is very well aligned with the results of the year that we expect around 24% to 26% or 27%, 26%, but we are just being conservative in case of additional inflation comes, if the global situation does not improve in the short term. We want to be sure that we have the right spot for our CapEx. And also, we have some buffer in the investment phase. We don't need to spend CapEx at the same speed that we're doing in the past. So we have flexibility on leverage or ways to leverage that number and be sure that we don't let that out. Raymundo Pendones: And let me complement Luis, on that part. Yes, the 24% to 26% already integrates the increase that we might receive or might have prices on the worldwide cost of products that we have. It does include exchange rate, what we know so far, it does include the increase that we might have, and it does increase the reduction of CapEx per kilometers and production that we have in the past. So you can have that 24% and 26% with a clear idea that includes everything within the reasonable amount of knowledge that we might have as of April of this year. Emilio Fuentes: Really clear. And if I may, I answer -- ask a second question on the AI, you mentioned the benefits. Do you have any rough estimate of the potential size and timing of those benefits or maybe on basis points from the margin, like what can we expect from these programs you're implementing? Enrique Robles: Yes. What you can expect, I mean, on and it's good. I don't believe that everybody knows and can check the amount of what is going to happen with AI in the next 5 years or 10 years from that, but talking about the present, what we're implementing is operational efficiency, and that aim to bring the margin of Megacable to better levels to what we have right now, even though we have the highest margin in the industry. Remember that, in the last quarters that passed by, we've been having a lot of pressure into labor as all the industry on that part plus all the maintenance and support that we need from all the CapEx that we wrote in the past. And even though that we've been managed to keep our margin and increasing margin as penetration of expansion will come into the future, and AI and efficiency will come on the organic markets, our operating margin will continue to increase in the years to come. Okay? Luis, do you want to complement? Luis Zetter Zermeno: No, that's okay. Alan Gallegos Lopez: The next question comes from Ernesto Gonzalez from Morgan Stanley. Ernesto Gonzalez: It's two. The first one is -- in the past, you had mentioned that if some of your competitors don't raise prices, you could face a more challenging outlook or ability to increase prices going forward. So I wanted to get your thoughts on this. And the second question is on with all the rumors of M&A in Mexico, potentially a competitor of yours acquiring AT&T operations. Does that change your outlook for fixed consolidation in Mexico? Raymundo Pendones: As I said before, we have the lowest ARPU in the industry. So we still have some room to increase prices according to markets, according to packages that our subscriber has into that part and not raising the prices might not good to say, but it hurts the competition more than us. There is one competitor that doesn't increase prices, which is Telmex, that's the one that's been having that, even though it has higher, higher packages. The one that they commercialize stay at the same price with lower speeds. What we've been doing is increasing our speed to those subscribers significantly, we have 200 megabits on the single package, which is broadband and Telephony. And that one will allow us to have a better price in that part than what we have with the competition. So we will continue to increase prices at the rate that we have in the past, bad to say, but it's not around the 5% per year. Normally, we increased 2% to 2.5% prices. We are more aiming to growing the EBITDA and the revenue year-over-year than just to increase prices. But I believe on a defensive move, we are the best to continue to grow because of our market price and structure that we have. The other one was the question regarding the outlook of consolidation. Enrique, I don't know if you want to say something, it is related to the AT&T on the wireless on that part. And if that is going to affect how we see everything in our position. Enrique Robles: Really, I don't really want to make any -- a lot of comments about that. Obviously, the only consolidation that is in the horizon is the AT&T decision to leave the country. They will leave the country. We don't know who is going to, at the end, keep that operation. As we saw in the past also that Telefonica finally sold its operation to a newcomer, a new player in the country. And well, we don't see a lot of consolidation in the horizon, not at this moment, other than the AT&T and what happened about a month ago with Telefonica. Raymundo Pendones: I'd like to add also regarding the market. Market has been increasing the penetration of broadband on that part. We still believe there is room to growth in Mexico. Every time that passes by, it's dry, we all know about that, because of the levels of penetration. But it's good to say for everybody that out of the penetration of the homes when you see at our industry and you look at 4 players because I don't believe we're 5, we're 4. Satellite is not part of our market. It doesn't compete significantly in our market. It does sell or 4G or 5G more than satellite, even though we respect that. We have 4 companies, but we don't have the same footprints. There is one that has the largest footprint. So there is a big percentage of comps in Mexico that only has one player, some percentage that has two, some three and very few that has four. So in those markets where there is only one, we have room to grow some markets where it's two with a lower and legacy technology compared to what we have. We have the ability to grow. So for Megacable, still, we have room into the market to grow too. Regardless whether consolidation of not, we are very focused into growing what we know how to do best. I wanted to complement that, Ernesto. Alan Gallegos Lopez: And we have a follow-up from Marcelo Santos from JPMorgan. Marcelo Santos: My question would be regarding the mobile operation that you have. Do you perceive important improvements in churn when you sell that mobile bundle together with your fixed line operation? Just wanted to get a feeling of how helpful that is to your overall operation. Raymundo Pendones: Well, remember that we have 740,000 shops out of the 5.9 million so far. What we know is that churn on the mobile comes from the promotions that we might be aggressive more than the people leaving. And yes, we have seen that those subscribers has slightly better churn than the ones that don't have the quadruple play. Marcelo Santos: Okay. So it's a slight improvement that you put in so far on this bundled plan. Raymundo Pendones: At the end, Marcelo, economics get a lot into the markets where we grow in that part. And even so when they don't have money for the fixed, they don't have money for the mobile on that part, and they go to a prepaid. Remember that we sell postpaid. But the packages that we have cover the majority of the market. And that's how we've been so successful in the last quarter. I believe it's going to increase. Mobile is going to be a terrific year for us. And those subscribers will help us to keep or reduce the churn that we have right. Remember that we also have into the churn, the content division that we have, the video content, but is not only focused our aim to the traditional video live channels and offline channels, but also to the apps, and we have a really, really good offer to the apps. And that one, we expect also to help us to keep and reduce the churn of the subscribers that has the triple play with us, not only the quadruple play. Marcelo Santos: Okay. Okay. So same idea bundling in. People have more difficulties to leave. Raymundo Pendones: Yes. That one is tough because we are not successful in keeping live traditional TV as well as the whole industry, but we've been very successful in providing apps to our subscribers. So content at the end will help us if we are continuing to be smart in how to market those apps and stream it to our subscribers. Alan Gallegos Lopez: The next question comes from Alejandro Azar from GBM. Alejandro Azar Wabi: A lot of questions on consolidation, and this is the last one, probably. In the case that consolidations were to happen in the fixed market, how do you think about the competitive position of the third smaller player that is left out? Enrique Robles: You mean what happened if one of our competitors acquirers AT&T or? Raymundo Pendones: No, no. Alejandro Azar Wabi: No. I mean. Raymundo Pendones: Third is smaller. Alejandro Azar Wabi: I mean in the case that either total play with us or with Televisa, what do you think happens with the other player? Raymundo Pendones: Okay. When you say -- yes, yes, I kept thinking about the third smaller player. There are different measures. Enrique Robles: The way I see it is that any consolidation will benefit the whole market, everyone. Raymundo Pendones: Everyone is going to be benefited from that. Enrique Robles: Not only the two that consolidate, but everyone. Alan Gallegos Lopez: Now we're going to pass some questions from the platform. We have the first one from [indiscernible]. Please could you share the average penetration rate for the expansion regions older than 12 months? Raymundo Pendones: Thank you. Yes, the penetration that we have on the expansion of territories is around 14% to 15%, 16%. We expect to reach above the 20%. Enrique Robles: It is very variable because it depends on the seniority of the areas. I mean the areas that we activated or we started to commercialize the service 3 years ago, the penetration there is above 20%, 25%, yes. That's why -- but on the average, since we've been adding new areas, the average is around 14%. Raymundo Pendones: That's why we aim to have above 20% penetration as long as those neighborhoods and areas continue to mature. Alan Gallegos Lopez: The next question comes from -- also from [indiscernible]. You mentioned that your strong balance sheet offers you flexibility to pursue investment opportunities. Are you targeting any specific opportunities at the moment? Raymundo Pendones: No. We're targeting to improve still sequentially our revenues, EBITDA and CapEx of revenue and free cash flow that looks really, really good for 2026 and 2020 and above. Enrique Robles: But that doesn't mean if the opportunities, any opportunities arise, we will look at them. That's what we mean is that any arises, we're up. Alan Gallegos Lopez: And now we have a question from Marco Battaglia from Temujin Fund Management. Can you quantify how much margin improvement you expect this year? Luis Zetter Zermeno: Yes. We have been mentioning that as the expansion territories improve on the margin, it will impact the overall margin for the company. And the organic territories stay with the same margin as they were before. So we basically are expecting 0.5 point improvement on the margins for 2026, and also for maybe a little bit higher for next year. Alan Gallegos Lopez: Okay? And we have a final question. What adaptations have you made to your expansion strategy as you have progressed in terms of regions, target customers and pricing? Raymundo Pendones: Well, the adaptations that we have is we have special offers over in the expansion of territories. We have a special motivation to the sales force and different channels that we have right now. We're adapting that the segment that we're adapting more is corporate because corporate has a stronger, stronger competition in the expansion territory, and that's why we have a growth at the same speed that we have in the massive market. That's where we create new products, low-end products for the enterprise SMBs that includes cloud and collaboration. But in the massive market, our strategy continues to be the same. The best speed 200 megabits, better than the competition, with aggressive price entry that increases into the futures and symmetry into the broadband that we have there. That's our strategy. Alan Gallegos Lopez: Okay. We have no more questions in the queue. So I pass the line to Mr. Enrique Yamuni for final remarks. Enrique Robles: Thank you, Esau. As always, it is a pleasure to discuss our results with you. Please contact our Investor Relations department if you have any more questions or concerns regarding the company. And please have a wonderful day and weekend, very, very nice weekend. Thank you. Luis Zetter Zermeno: Thank you all. Bye.
Maria Gabrielsen: Welcome to Yara's First Quarter Results Presentation. The presentation today will be held by Yara's CEO, Svein Tore Holsether; and Yara's CFO, Magnus Krogh Ankarstrand. I would like to mention that we have a change in how we do our Q&A session today. Once the presentation is done, we will move straight into the Q&A session. [Operator Instructions] But first, let's start the presentation. It is my pleasure to hand over to our CEO, Svein Tore Holsether. Svein-Tore Holsether: Thank you, Maria. Good morning, good afternoon, good evening, depending on where you're dialing in from. And thank you for joining our first quarter presentation. As always, I'm starting with our safety performance. Our license to operate is creating a safe working environment for all our employees and contractors. And we have a lot to be proud of our performance in the first quarter, but safety is not one of them. We continue to see an increase in accidents, and this has also been the case in April, which means that we will likely see further deterioration as we get into the second quarter. And there is only one responsible for it, and that is me. And I take that responsibility very seriously. I'm now in my 30th year in industry. And what I've learned from safety is that you cannot dictate your way to safety and also that campaigns, they only have a short-term impact. It is what we do every day, every week and every year that matters. And we know what to do. We will continue to work according to our Safe by Choice approach that has now been in place for 12 years. This is our joint commitment to safety throughout the whole organization because at the end of the day, 1.2 TRI, that's a ratio. But behind that, there are 59 accidents, 59 colleagues, someone's mother, father, brother, sister, friend that got injured at work during the last 12 months. We can, and we will bring that to 0. But for now, we need to turn the negative trend. On Tuesday next week, we will have our Annual Safety Day, and that is another opportunity for us to spend time together and get this right. That was the low light. Now let's take a look at some of the key highlights for the first quarter. Yara delivered a strong quarter with an EBITDA, excluding special items of $896 million. This is an increase of 40% compared to last year, and that's reflecting higher nitrogen upgrading margins in a tight market in the start of 2026. And in addition, Yara has increased deliveries to customers in the quarter, reflecting a strong commercial execution. And this also enables us to maximize production volumes and consequently also capital efficiency. First quarter results mostly reflect pre-war markets, but the Middle East conflict has disrupted global fertilizer markets since the end of February. The blockage of the Strait of Hormuz disrupts around 1/3 of global traded urea. It also has other key raw materials for fertilizer production such as its gas, its ammonia, its phosphates, and sulfur. And this supply shock has led to significant increase in global fertilizer prices. And that, coupled with weak crop prices and high regulatory burdens, farmer affordability has increasingly come under pressure. And the high prices are increasing volatility and also risk premiums across the fertilizer value chain and eventually into the food markets as well. As we said at our Capital Markets Day in January, Yara is a battle-proven organization due to our global diversification, our energy flexibility in Europe and also our highly competent workforce. And now that is being put to the test again, and we are demonstrating the strength of our business model where our global system enables us to uphold production and to ensure the continuity of supply. And this means that we are uniquely positioned in the current situation with strong commercial and operational execution in a disrupted nitrogen market. And I want to thank all my colleagues in Yara for their strong performance this quarter. Looking then at the EBITDA variance for the quarter. The increase of 40% since last year mainly reflects the increased nitrogen spreads. Nitrogen prices have seen a significant increase since first quarter of 2025. And gas price changes are typically reflected after 2 months in our earnings. So this quarter, EBITDA is largely based on pre-war market dynamics. Volumes are also up, reflecting strong commercial execution in the season to date. And keep in mind here that we also had a strong fourth quarter on volumes. We continue to see a positive impact on EBITDA from our fixed cost reduction program and a further $18 million down from last year. Return on invested capital has doubled from 6% last year to 12.2% on a rolling 12-month basis. And that's above our through-the-cycle target of 10%. Global fertilizer markets are currently heavily affected by the ongoing conflict in the Middle East. Around 1/3 of globally traded urea is exported through the Strait of Hormuz, but also 1/4 of the world's ammonia as well as 50% of sulfur, which is significantly impacting the availability of phosphate fertilizer. And furthermore, 20% of global LNG trade is disrupted, and that's leading to urea production curtailments as well, such as in India. The disruption to urea availability has led to a significant price increase, so far, 47% since February. And urea FOB Egypt is up even more at 77%. TTF gas prices have also increased, however, less so than urea and phosphate prices. Farmers' situation was challenging before the war driven by weak crop prices and cost inflation across many input factors as well as regulatory burdens and global market volatility, which all add to this pressure, and this is concerning. And those that will be hit the hardest are smallholder farmers in the poorest parts of the world because of lower ability to pay. But it's actually a double hit because it's likely also impacting the farmers where the yield curves are the steepest, meaning that marginally lower fertilizer application will have a higher yield impact. Fertilizers are essential for food production and stable access is really critical for farmers to produce the food that the world needs. Yara's role is to remain robust and to ensure the continuity of our production and also the deliveries to the farmers. Building on long-term operational improvements, our production system has seen a steady increase in output. And this is also our core focus in the current situation. And as you see here, deliveries to customers are also up in the same period. Volumes on this slide are not adjusted for turnarounds, but it's reflecting actual production and actual deliveries. And ensuring a high uptime of our assets is really a key objective, and it improves our capital utilization and also our energy efficiency. In addition, our energy flexibility enables us to import ammonia if needed in order to keep finished goods production running. And this has enabled Yara to be a reliable source of fertilizer in this critical period as well, alleviating some of the pressure on markets and serving farmers around the world. Yara's position is unique globally and the flexibility in our system continues to limit cyclical downside as well as maximizing output in the current situation. And with that, I'll now hand over to our CFO, Magnus Krogh Ankarstrand. Magnus Ankarstrand: Thank you, Svein Tore. As mentioned, EBITDA is up more than 40% on a strong first quarter 2025, predominantly driven by increased nitrogen operating margins before the effects of this ongoing conflict in the Middle East. This translated into a 60% increase in earnings per share as depreciation, interest and tax remained stable. Return on invested capital increased to 12.2% on a 12-month rolling basis, reflecting both increased earnings as well as portfolio adjustments. The quarter saw a USD 35 million increase in operating capital, driven by an increased price environment. However, this was more than offset by an increase in cash from operations, resulting in a significant increase in free cash flow of USD 196 million as net investments were flat. This increase in cash returns is attributable both to the improvements undertaken as well as the constructive nitrogen market in the first quarter. Turning to deliveries. We see an increase of 3% in Crop Nutrition deliveries compared to first quarter last year. This was primarily driven by increases in the Americas, but worth noting that stable deliveries in Europe, comes on top of a strong first quarter last year that saw a 15% increase over the year before and a 6% increase in volumes in Q4 2025. That means that season-to-date deliveries in Europe are up 2.5% and are among the highest in the last 5 years. In Africa and Asia, we saw a reduction of commodity volumes, however, an increase in deliveries of our premium products. And deliveries in Industrial Solutions are down 5% for the quarter, following plant closures in Brazil. However, these portfolio changes have a positive impact on our cash flow. Yara has focused through the last months to ensure both production and supply chains flow in the extreme situation to safeguard deliveries to our customers worldwide, and we have not experienced major disruptions to our production or supplies. This then increases our cash earnings further and strengthens our balance sheet, putting Yara in a robust position in the ongoing market volatility. Cash earnings are partly offset by an increase in net operating capital, which despite the seasonal release of inventory is up due to the increased values driven by prices. We are currently experiencing a strong market for all nutrients, especially nitrogen and phosphate. This increase in Yara's nitrogen and phosphate operating margins and increases the bar for our premiums, which we measure above commodity value for the nutrients. That, combined with lower crop prices in general, exercised some pressure on our premiums in certain markets. For the fourth quarter, strong demand and pre-buying in Europe supported European nitrate premiums ahead of the year-end and premiums in the first quarter of 2026 were comparable to the fourth quarter, but lower than first quarter last year given the higher nitrogen prices in general. NPK premiums are somewhat pressured, and primarily driven by Asia, we see a contraction towards more normalized premium levels at a very high commodity price base. Yara has a robust commercial organization and is on a day-to-day assessing the market environment on how to optimize volumes and margins globally. This also underlines flexibility of our business model and the ability to create value both on the upstream margin as well as the premiums, which also limits the commodity downside through the cycle. And building on that, there is no doubt that the current global situation puts significant stress on supply chains, and this is particularly visible in the fertilizer space. Yara's global reach and flexibility is uniquely positioned to navigate this. The current price environment, coupled with weak crop prices, is already leading to a substantial difference in buying appetite in prompt markets versus off-season markets. Despite moving into the end of the season in the Northern Hemisphere, the significant loss of nitrogen and phosphates as described by Svein Tore, means a supply and demand shortage in several Southern Hemisphere market as well in addition to India being a main driver for demand in the period to come. And due to Yara's global reach, we are able to optimize global deliveries and ensure we can keep our production system running at full speed, also by changing from locally produced to imported ammonia, if necessary, due to gas prices in Europe. And this is vital to keep serving a market in severe shortage of nutrients in our core markets such as Latin America. Ensuring our assets are uninterrupted is a core part of our operational excellence. However, we have had an unfortunate outage in Pilbara since mid-March, expecting to come back on stream in May. That is our ammonia plant that was stopped. In addition, we will execute a long-planned major turnaround in Belle Plaine after the season is over in June. And this will lead to a reduction of approximately 150,000 tonnes of urea in Belle Plaine compared to a full year of production and a loss of 140,000 tonnes of ammonia in Pilbara due to the outage. Diving deeper into this market situation, it is clear that the ongoing crisis in the Middle East has an unprecedented impact on global supply, not only urea and phosphate, but also other raw materials essential for fertilizer production such as sulfur are stranded and limiting fertilizer supply globally. And with as much as 1/3 of urea supply impacted and further supply reductions from Russian plants as well as reduced production in India due to LNG shortages, global availability is severely reduced and in an already tight urea market without spare capacity, significant demand reduction is required to balance the lack of supply. And naturally, market prices go up to balance the market and ration demand. This has been exacerbated by the ongoing season in Europe and the U.S., and it's obviously an extraordinary situation given the crisis in the Middle East. Market development going forward will depend a lot on the duration of the blocked Strait of Hormuz, the level of damage to infrastructure and the ramp-up time required to get back on stream. Demand reduction is a balancing factor as is potential exports out of China. In the medium term, as previously illustrated at our Capital Markets Day, there's a limited number of supply additions from ongoing urea projects, and this already seem to increase market tightness versus historic demand growth. And recently and recent announcements suggest that several of these projects are -- that were announced to be commissioned in 2027 will be further delayed, driven by both the Middle East situation and other factors. Capacity and export out of China is likely to remain the balancing factor in the medium term. And for Yara, this medium-term constructive nitrogen outlook is set to drive further value creation. However, our strategic priorities are designed to increase shareholder value irrespective of market developments. As presented at our Capital Markets Day, our strategic priorities rest on 2 pillars: driving performance and competitiveness and growing from our core. The former is the operationalization of our improvement program, focus on asset utilization, logistical optimization, capital reallocation and commercial excellence, all aimed at increasing our EBITDA and cash flow. Our medium-term goal of diversifying our energy position further remains a core part of that agenda. Meanwhile, growing from our core is key to increase value creation, scale and return to our shareholders. This includes healthy organic growth from recent and future production increases, up to 1 million tonnes on premium products as we announced in January. In addition, this includes realization of recent growth projects such as the NPK expansion in Cartagena, our YaraVita plant in the U.K. and the CCS project in Sluiskil, all to be completed this year. In addition, Yara will explore further growth opportunities linked to our core, all within our commitment to strict capital discipline and focus on cash returns. As mentioned on the previous slide, energy diversification is core for Yara and the collaboration with Air Products is a strong strategic fit to deliver this. The combination of Yara's significant ammonia system, including import infrastructure in Europe and Air Products advanced projects in the ammonia space is a strong strategic fit for both parties. For Yara, the drivers are threefold: access to low-cost gas, asset competitiveness and renewal through scale and the ability to harness carbon premiums. Predominantly through CBAM and with our collaboration with Air Products, we get all of these 3. At the same time, Yara is able to place volumes from Air Products more cheaply and efficiently into the core markets without the significant infrastructure investments otherwise needed. Commercial negotiations are proceeding according to plan with a priority on the NEOM project that is due to commission in 2027, and the U.S. project is progressing according to the previously announced time line. Yara is fully underway to materialize the improvement program announced in January. And summarizing the first part, our cost program that we launched almost 2 years ago, we already have a head start on that. Excluding currency changes, our fixed cost level on a 12-month basis is at USD 2.3 billion, down approximately USD 230 million from the second quarter of 2024, and this incorporates the underlying inflation in those 2 years as well. Going forward, we will include this into our improvement program, which expands the value levers into a range of other areas as well, but having achieved a strong cost control environment upfront provides us with a very solid starting point. And the improvement program remains a core focus going forward, aiming at more than USD 200 million EBITDA improvement by the end of 2027 and USD 350 million by the end of 2030. This includes our 10% ROIC target through the cycle, and we are starting to see strong financial metrics through a combination of market developments and improvements. It is, however, important that our aim of improvements irrespective of market developments. Looking at the last 12 months, we see a significantly increased EBITDA of about USD 3 billion, and accumulated cash flow close to USD 1.2 billion and perhaps most importantly, a return on invested capital firmly above 12%. And with that, I will give the word back to Svein Tore. Svein-Tore Holsether: Thank you, Magnus. The current situation is really unprecedented for the global markets, and the fertilizer industry is no exception to that. Together with the Ukraine war, the current conflict in the Middle East adds to the geopolitical volatility. Yara's business model is well adapted to navigate such volatility. And as we said at our Capital Markets Day, we have improved our resilience, building on our experience over recent years. And our competitive edges are really key in achieving this. The bedrock of this is our scale and global optimization, which is even more vital in the current situation. Operational excellence combined with flexible energy sourcing helps us to uphold finished fertilizer production. And our premium and diversified product portfolio provides a strong foundation helping to mitigate earnings volatility when commodity prices fluctuate. Finally, a disciplined and flexible investment approach, clearly anchored in our strategic priorities, will continue to strengthen our long-term competitiveness. Then to conclude our presentation, it is important to highlight that our ambitions and commitments remain firm despite the current market turmoil, further maturing our resilient business model and delivering on the improvement program launched at our Capital Markets Day back in January. They remain core focus areas. And our long-term goals of diversifying our exposure to lower gas costs and enabling low-carbon ammonia opportunities remain key priorities with a strong balance sheet, capital discipline maintained and a clear commitment to our credit rating, Yara is well positioned to deliver sustainable long-term value creation. And with that, I'll hand back to Maria. Maria Gabrielsen: Thank you, Svein Tore. That concludes today's presentation. We will now take a short break to set up and get ready for the Q&A session. [Operator Instructions] With that, we'll see you in a short bit. Thank you. [Break] Maria Gabrielsen: Okay. Welcome back to everyone. We are now ready for the Q&A session. This is Maria speaking. I'm here joined by today's presenters, our CEO, Svein Tore Holsether; and our CFO, Magnus Krogh Ankarstrand, in addition to our Head of Market Intelligence, Dag Tore Mo. [Operator Instructions] Christian Faitz, please unmute yourself and ask your question. Christian Faitz: Two questions, if I may. First of all, can you remind us how you deal with the volatility in gas prices at this point in time? And are you considering hedging at some point? And how are you secured through the rest of the year on the gas side? That's the first question. And then the second question, obviously, yes, thanks for the helpful slides you had in the presentation and in the slide deck. And you did show, obviously, that a large part of the European -- of the Northern Hemisphere is actually covered in terms of fertilizer demand. But if I was a farmer, I would obviously try to optimize costs and maybe also skip one or the other topping during the season. Is that what you see? And could that also be an inventory issue at some point heading into the '27 season? Svein-Tore Holsether: Yes. It's Svein Tore. I can start with the first and then I'll hand over to my colleagues on the second one. When it comes to gas prices, we're not hedging that. And that's been our practice over a very long time period because we see a very strong correlation between global energy prices and nitrogen prices that we have that flexibility to move with the market. And then we've built in additional robustness in our system by also being able to switch between producing ammonia and then I can use Europe as an example, where it's most exposed. So we don't have to produce the ammonia in Europe for about 75% of our finished goods. We can bring ammonia into Europe, and that gives us flexibility to switch if it should not be economical to use gas to produce ammonia in Europe. For the time being, the upgrading margins from gas to ammonia in Europe are also at a level that justifies continued operation, and we're running at full blast. And should that, for some reason, change, well, then we will do like we did back in 2021 and 2022 to bring ammonia in. And that's part of the strength in our business model where we can utilize the global network that we have on ammonia. We're one of, if not the largest ammonia traders in the world, and we have ships that can transport ammonia across the world, and we're utilizing that to maintain finished goods production. And should we have hedged, then we would have lost some of that flexibility. So that's the reason we have that structure in place. And then I'll hand over to Dag Tore or Magnus on the second question. Dag Mo: Yes. When it comes to, let's say, markets like Europe or North America, in some ways, they are kind of well covered when you talk about the import situation and urea in particular, I think I should mention that we are still seeing nitrogen demand. I mean we are delivering both from Belle Plaine and from our production system in Europe now in the second quarter as well. But if you look at -- if you just look at the urea situation, both the U.S. Gulf, which is far away from the application areas in North America at the moment and in Europe, pricing now is such that they do not match, let's say, the India price or the peak pricing elsewhere. So from that perspective, at the current global urea values, there is very low demand, import demand and probably not the need for it either if you look at relative pricing between nitrates and urea, for instance, in Europe. So in that sense, covered on the application, I think that nitrogen application, most areas that are exposed to the global values today will see some demand destruction more or less, you have kind of -- you have China and India covers almost half of global demand for urea, which are not covering -- which are not following the global market and have their own domestic pricing, which is way below. So that leaves kind of half the global market that has to do the demand rationing in a situation where there are significant supply losses. So if we again take Europe as an example, just to give some more details, I think that the industry deliveries in Europe are fairly stable, season over season. And we see that imports according to Eurostat and the numbers from the European Union, so far this season through March, Europe or EU has imported 4.2 million tonnes of urea, which is down from 4.9 million tonnes of urea same period last year, and there's probably been some declines also in other products or there has been some declines in other products, although urea is the dominant one. So I think that just looking at the current supply situation, it's logical to expect, let's say, a short fall of demand or a drop in demand of 5% to 10%, something like that in Europe probably. On your question of inventories, that is something that I kind of concerned us or we have been trying to follow that as well. And what we hear from the field is that from our commercial units is that the farmers are generally using the fertilizer they have bought. So no big carryover risk there into next season, we think, and that distributors and retailers are also back-to-back mostly so that in Europe, and that is normal, there are kind of regularly -- people are quite careful about not having too much inventories. North America, that can be a little bit different because of the longer lead times on the import side that it could end up with a situation where, let's say, imports are a little bit more than what is needed. So I hope that helps. Maria Gabrielsen: The next question is then from Magnus Rasmussen. Magnus Rasmussen: Magnus Rasmussen, SEB. I wanted to touch upon volumes as well. And I wonder if you can give some comments about what you are thinking for Q2. You stated in the presentation that Europe had among the highest season-to-date levels, but also strong volumes in America in Q1. I think Dag Tore touched upon it a bit as well, but some further comments sort of for Yara specifically as well would be helpful. Also a question on price realization in Q2. I mean we see urea prices skyrocketing and nitrate prices not so much and Profercy also reduced their European nitrate prices yesterday. Your sensitivities cover a mix of different products. Is there anything that we should keep in mind and be aware of in terms of price realization into Q2? And also how do you read the low nitrate prices in Europe relative to urea from, call it, demand or market perspective in Europe? Magnus Ankarstrand: Yes. I can maybe start a bit on the volume side. We don't -- as normal, we don't give any future guiding on volumes as such. I think what we can comment, as we also said in our presentation, is that Yara has a global system. And of course, that's also in normal circumstances, obviously, benefit given the difference between season in the Northern Hemisphere and the Southern Hemisphere. And we think that will be even more so the case this year. And of course, beyond that, I mean, our production levels are a question of whether we are -- whether we have sufficient margin to actually produce at different times. And so in a way, looking at market prices and gas prices throughout the quarter, that will kind of explain that situation. But of course, in addition to that, it's important to keep in mind the fact that we also can import ammonia from -- into Europe if gas prices were to go up. But obviously, as everyone can see right now in the current situation, nitrogen prices have increased a lot more than gas prices. So I mean, so that in terms of what we produce and then ultimately sell, that's really what determines that. And of course, where we sell it depends a bit on how markets develop. And I think on maybe the urea nitrate pricing, I can give to you, Dag Tore. Dag Mo: Yes. I think it's, of course, a bit more challenging for you and others to monitor this now that prices are so extremely high because it leads to some more fragmentation and regional differentiation than otherwise. When prices are more normal, then you can use fairly straightforward sensitivities, right, because everything is kind of correlating very strongly. Some of that is now kind of a little bit distorted. Let's say, if you put in spot prices in the Arab Gulf, that is basically the netback from the India tender which they paid kind of $950, say, there are very few regions now in the world that are willing to pay $100 -- $950 for urea, as you can observe, if you observe carefully in the regional prices that the publications quotes, nothing secret about that. You see that U.S. Gulf is discounted. Even Europe is somewhat discounted. Brazil is discounted. So just putting in, let's say, $910, $920 for Arab Gulf, for instance, is giving a little bit exaggerated picture probably. So that is one thing that, of course, we have to be a little bit careful about. When it comes to Europe, of course, I mean, if you were a farmer now that needs urea for March, would you buy it now, question mark. And of course, that is an understandable dynamic. I think that for a while now, maybe the urea import parity is not really the main driver of nitrogen prices in Europe for a period and that we see already as you were hinting at, right? You have 0, say, round numbers, 0 nitrate premiums right now based on the publication references. And it wouldn't be a surprise if you, let's say, with a starting price for next season that you will see a negative nitrate premium versus urea unless urea comes down a bit. So I think that as Svein Tore was saying, I mean, the farmer affordability is so stretched that I think that there will be more regional differentiation based on what farmers need the product right now and what -- and those farmers that can defer the purchasing to closer to their application season. So a bit more challenging, I think, to be very precise on price realization than normal. Maria Gabrielsen: And just to remind everyone as well, the sensitivities are based on high-level easy assumptions, right, 1-month lag and 2 or 3 market prices in volatile markets and with increased regionalization, like you say, it's natural that they will be less precise than in a more stable market environment, yes. Moving to the next question is from John Campbell. John Campbell: It's John from Bank of America. I have 2 quick questions. So maybe if we continue kind of on the NPK and nitrate premium. If I remember properly, I think second quarter '25 had pretty robust reported NPK, I think it was $265 per tonne. I think you've discontinued the practice of actually quoting the specific figure. But presumably, based on what you're kind of saying, gathering the comments you've made on this call, it sounds like that will be down maybe quite steeply into the second quarter. That was my first question. Second question, just very quickly, any comments or assumptions or expectations for resumption of Chinese exports of urea in 2026? I think Bloomberg had a comment saying that it could be something like 3 million tonnes, which should be down year-on-year, but anything you've heard interesting, given, as you say, it's kind of one of the market balancing areas of supply. Dag Mo: Should I take the China question first. Nobody knows, of course. I think there is discussions ongoing in Beijing as we speak. So our understanding, they are debating this right now. The flow started in July last year, so a little bit of time left for that. We also see that there are quite a few market players that have already started to move products to ports. I mean, effectively removing that product from the domestic market already. And that has caused some reactions both from the government and from the nitrogen association. It seems that are a little bit upset about this development ahead of approval. So that there are even some discussions of maybe that -- whether that could lead to some delays in the export approvals. Let's see how that fits. And I also said you referred to those 3 million tonnes. I've also seen those referred. And to me, I haven't seen anything concrete yet nor from our experts in the market. So I tend to believe that must be some kind of speculation. But I also saw 3 million tonnes mentioned. I would think that would be a first tranche then in that case and not necessarily the total volume for the year. But that's what they also did last year, right? They first approved 2 million tonnes and then they added to that quota as they saw that the domestic market did not react to the export volumes. So I don't think you should conclude -- I wouldn't have concluded that those 3 million tonnes, that's it. But be open that this is a really important factor in the market for the rest of the year. Magnus Ankarstrand: And on NPK premiums, and again, of course, we don't give guiding on premiums, exact premium levels as such. But I think it's fair to say that the last couple of years, NPK premiums have been very high and higher than maybe average over a longer time period. But obviously, now with commodity prices increasing as much as they have and nitrogen, as we talked about, but also phosphates with a significant increase in -- due to -- well, same reasons that for nitrogen in the current crisis. It's also natural that, that puts some pressure on the premium that farmers are -- can pay on top of that, of course, also considering the farmer economics. But -- so even though NPK premiums are somewhat down since last quarter and a year ago, it's still holding up quite well, and we'll see how that plays out, which will depend as well on the commodity development in the next quarter. But of course, for Yara, we -- I mean, we, of course, make money both on the premium as well as the operating margin or the commodity margin. And there, of course, on both end, but also particularly phosphate, of course, there's been a significant increase. And I think also worth to mention in our production system, roughly only 1/3 of our NPK production depends on sulfur in the production system. And of course, sulfur is right now being a significant cost driver in phosphate or DAP production and phosphate prices. That's, of course, an advantage that we have on the margin side. Maria Gabrielsen: [Operator Instructions] The next question is from David Symonds. David Symonds: It's David from BNP. I have 3, I think, please. First one, could you talk about your assessment of damage to Middle Eastern nitrogen and LNG facilities so far? How much do you think we've lost longer term? And if the war ends this weekend, let's say, what would be the time lag before we get back to a more normal situation in nitrogen? Second, could you -- this is more just a modeling question. You very generously gave us the 150,000-tonne number for the Belle Plaine turnaround. Is there an estimate of how much you might lose from the India and Australia outages and curtailments that you announced in the second quarter? And then thirdly, what could the policy response to this current crisis be? Is there an increased likelihood of CBAM suspension for fertilizers in the near term? Do you think we might see reopening of plants as we saw Brazil do with Petrobras? Any thoughts on that would be great. Dag Mo: On the Middle East, it's, of course, hard for us to know. We -- what has been announced is that Qatar has had some damage to their natural gas infrastructure that will take quite some years to repair. We don't think that the fertilizer plant is damaged, so that should be able to restart very quickly. There has been some damage in Bahrain and some damage in Saudi Arabia also we hear, a little bit unclear how much and how long it will last. And in Iran, there is quite a lot of damage to the gas infrastructure, and there are only a few of the plants in Iran that has been able to start up. So -- but to your question about how long time this would take to normalize, I think it's hard for us to speculate around that. It certainly takes some time, how much -- yes, it's hard to estimate. Magnus Ankarstrand: I think on your questions on India and Australia, I mean, on the Indian side, the impact to -- I mean, to our results is fairly limited from the current curtailment there. On the Australian part -- sorry, Australian ammonia plant, as I said, we assessed roughly 140,000 tonnes in total. I think we also said in the market that we expect start-up sometime in the first half of May. So then -- I mean, from a -- you can sort of do math on how much that -- because -- I mean, when the plant went down, so how much of that will be in the second quarter versus the first quarter policy? Svein-Tore Holsether: Policies, here. You mentioned CBAM. I think the last thing that Europe should do right now is to create any uncertainty around CBAM because that's in place in order to create a level playing field so that imported volume pays the same emission cost as European players do. And if there's one region that has felt the consequence of dependencies, it's Europe, look at what happened in the energy sector on the energy crisis and what that meant for households and industries that we're still struggling with in Europe right now. So then -- to then weaken such a vital industry as fertilizer and farming would further emphasize the challenges in Europe. So I think what the policymakers should consider here is rather use the CBAM revenue and redirect that towards farmers to not put a burden on the shoulders of the farmers. They don't have the margins to support this, but we need food production in Europe, and we need a healthy fertilizer production system in Europe as well. And if we're -- as a result of this creating an uneven or not a level playing field, that would maybe come at a very short-term relief maybe, but a very high-cost long term because then we would be even more dependent on imports. So it's important to keep the long term in mind here as well. But any uncertainty on CBAM in Europe for the industry right now will have impact on the ability to invest in long-term projects. But of course, as we look globally and with fertilizer being responsible for half of the world's food production, I understand that this is something that is very high on the agenda for politicians all over right now, but it's important that we balance the short-term need with the long-term implications for that interventions could have. But we really do think that CBAM is an important lever and that in combination with ETS, if you are to reach the Paris Agreement to reach the emission targets for Europe, that needs to stay here. And that's also important for the long term of actually growing food because we also have to solve the climate challenge here. And I would say that one of the occupations hardest hit by climate change is actually farming. They work out in nature, and they work, whether it's floods or droughts or record heat or record cold, that's where they have to produce food. So it is in our interest that we deal with the climate challenge as well, but it's not something that we could just put on the shoulders of farmers. Maria Gabrielsen: Let's move to the next question, which is from Tristan Lamotte. Tristan Lamotte: Tristan Lamotte, Deutsche Bank. Two questions, please. The first one is how high is the risk that the CapEx number that you quoted for central blue ammonia projects has to move up given the developments in the world since you first gave those numbers and given that the final agreement is yet to be signed? And the second question is, I'm just wondering if you could talk about any opportunities for permanent market share gains relating to the conflict. Magnus Ankarstrand: Yes. When it comes to the project with Air Products, as we said when we had the announcement, I mean, the time we spend towards midyear to the next phase of that project, including the preparations of the potential FID is sort of around the contracting market and evaluating the technical side the project together with AP. And I think that work is still ongoing, and there's nothing particular that's happened since then that sort of changed anything substantial in that regard. So I mean, it depends on the market, depends on the bids. And so yes, there's nothing new as such there and sort of things are proceeding according to the plan that we had. I think in terms of market share, I would say -- our primary objective also sort of reflected in our improvement program is to increase organically production output for organic growth from our production system, so up to 1 million tonnes of additional premium products through production improvement and debottlenecking. And in addition, we have a few projects coming online now with NPK expansions in Cartagena as well as YaraVita biological plant in the U.K. and so on. So obviously, that will go into increasing our market share as we sell what we produce. But in addition to that, and also as a part of the improvement program, we are looking at optimizing our global system, taking more market share in our most profitable markets. I think -- and as we also communicated there, Europe is one, not the only, but one core market for us, of course. And I think that is also why it is very important for us to keep production running now as we have, take some risk in doing that. But of course, at the current levels so far, we have good production margin on finished products. We also had good operating margin on ammonia. And if gas prices were to go up further, we also have the possibility to import ammonia and keep finished fertilizer production going. So we believe that Yara as such as a quite strong competitive edge also against competition, also in Europe in terms of being a very stable, reliable supplier for the European market and gaining market share. Svein-Tore Holsether: And to add on, you put it very well, Magnus. And as we said at our Capital Markets Day back on January 9th as well, we said that we're a battle-proven organization, and we've been tested again now. And I want to thank all our colleagues for an outstanding performance where finished goods production is at one of the highest levels we've seen. But one thing is to produce, but also to get it out to our customers as well and it's been an outstanding performance on really working hard throughout our whole supply chain in order to get that done. And we've used the robustness and the flexibility that we knew that we had in our business model before the energy crisis and before Russia's war in Ukraine, but the learnings that we had from that, we've also built in even more flexibility in our system, and that's what we're fully utilizing now to maintain production at high levels, but also moving the product. Maria Gabrielsen: [Operator Instructions] With that, we'll move to the next question, which is from Mazahir Mammadli. Mazahir Mammadli: So 2 questions from my side. Sorry, firstly, as we near the planting season in the Southern Hemisphere and if the situation stays the same, how should we think about the market development, whether it's volumes, demand destructions, acreage decisions and also perhaps some relief from amsul substitution in Brazil from Chinese imports? And my second question is, with the free cash flow that you are generating now and perhaps in the next few quarters, what's the plan first, in the scenario where you decide to go ahead with the Air Products project? And second, in the scenario where you decide not to do that, what would be the capital allocation decision there? Dag Mo: On the first, I think it's hard to -- at least for me here in Oslo now - to have a full picture on exactly how the decision-making is going to be on the Southern Hemisphere by the farmers. What we have heard -- it's logical that the topic is on the agenda, right? We hear from Australia, for instance, where -- which has a peak import season for urea now in the second quarter and maybe one of the regions that are hardest hit by the timing of this conflict. There are some talks about reducing wheat acreage, for instance, to go for maybe barley, maybe some canola, find some other crops that are a little bit less nutrient demanding. And I would think that, that would be also a topic in places like Brazil, Argentina. We know South Africa is struggling with high prices and low margins. So exactly -- I think a good -- very good questions, but I think it's hard for us to speculate on exactly how that will play out. But surely, there will be efforts to try to find solutions that would maybe require less nutrients. Magnus Ankarstrand: To the question on cash flow and capital allocation, I mean, for us, it obviously starts with strong capital discipline and as we outlined in January, investing into U.S. projects, as we said, is a core priority for our energy diversification strategy. And then we outlined there as well roughly over the period up to 2030, how much money we sort of -- or much CapEx we plan to spend on that. I think irrespective of sort of FID decision there, I mean, capital discipline will stay strong. Potentially, we would do other projects, pursue other similar type projects for the same objective, but still with the same discipline. And that's really driven by how much we believe that we can take on at one point in time, not only sort of from a balance sheet perspective, but also to make sure we actually deliver a strong return on those projects. And that's kind of the guiding star for that. And of course, if our cash flow was to increase significantly in the period as well, I mean, that doesn't change our plans on the investment side materially necessarily as such. But of course, then we would look at the levers that we have at hand. And of course, as we've said, additional distribution is also something that we would always consider, right, in such a scenario. And I think also on that note, of course, also important to mention that with the current market volatility that we see, we also, of course, need to keep in mind that there could be changes in the market as well. And I think particularly with what we see now, of course, maintaining a very strong balance sheet is extremely important for our flexibility, both to navigate the market, but also to sort of make shareholder-friendly decisions. But sort of regardless, of course, our capital discipline remains even though our cash flow would increase. But that said, we are sticking to our capital allocation policy, our dividend policy, and we will, as a part of that, always consider additional distributions. Maria Gabrielsen: The next question is then from Angelina Glazova. Angelina Glazova: Angelina Glazova from JPMorgan. I just have one question left actually, and that's on the U.S. blue ammonia project. I am wondering how you think about the time line for mid-2026 FID that you provided us with. Do you view it as a hard deadline? Or do you think that this is a goalpost that can be moved potentially? And the reason I'm asking is that we had quite a detailed discussion on policy earlier on the conference call. And it is a possibility that we might not get final certainty on CBAM regulation in Europe by mid-2026. And I'm wondering, in this case, how would you approach the decision? Would you still make the decision in conditions of uncertainty? Or would you rather wait until we get this final certainty on regulation? Magnus Ankarstrand: Yes. Thank you for the question. I think when it comes to certainty around political decisions, whether it's CBAM or tax rates for that matter, you never get that right. They never get 100% certainty. So I think we, as such, are -- always have to make decisions knowing that there is that level of uncertainty. Everything that's politically decided could, of course, be undecided. That being said, I think sort of the tendency that we see on CBAM now as well, also politically and the signals that are public out there is that the appetite for changing it seems to meet with resistance in many places and importantly, among those European parliament as an example. That being said, when we do a project like this, obviously, we don't base that solely on subsidies or sort of political incentives like that, right? As we've said many times before, basically 3 main objectives. It's lower gas prices, it's increased scale and with that comes lower fixed cost and CapEx per tonne. And then it's tapping into carbon -- sort of carbon margin as well. So all 3 are important and play a role in the business case. Obviously, if you take one away, then the business case is less strong. But I mean, still, for us as a big ammonia producer, the 2 first ones are very important. When it comes to the time line, I think that is our plan, and we work by the plan. But I mean, what's important both for us and for Air Products is to make the right decision. So I mean, if there's outstanding technical matters or any other good reason that it makes more sense to wait a little bit, that's, of course, what we do. I mean there's nothing forcing our hand to make a decision on a certain date. I mean we will make the right decision for both companies, and that is one that is value-creating for all our shareholders. Maria Gabrielsen: Thank you. We only have one more question so far. So if anyone else has a burning question, they should raise their hand now. First, Bengt Jonassen, the line is yours. Bengt Jonassen: Bengt Jonassen, ABG. Just one follow-up question on the comment on the Industrial segment. I think you stated in the webcast that there were some curtailments or permanent curtailments of some capacity in the industrials. Could you confirm that? And how much of the capacity was curtailed? Magnus Ankarstrand: So yes, so it's -- on the volume side, we have made -- we announced last year a few closures of segments in Brazil for the industrial side. In addition to that, we had some smaller production issues as well in Cubatao this quarter that also impacted on the volumes. So it was a bit remiss not mentioning that in the presentation as well. Maria Gabrielsen: It's the hibernation of the sulfuric acid plant in Paulinia which we've mentioned last year, if you remember. Smaller plants as such or a smaller volume impact. Okay. There are no further questions, it seems like. So that means that we will end the Q&A session now. Should you have any need for follow-ups, the IR team remains at your disposal. But with that, thank you for joining, and we wish you a pleasant day. Thank you.
Operator: Good afternoon, ladies and gentlemen, and welcome to Eni's 2026 First Quarter Results Conference Call, hosted by Mr. Francesco Gattei, Chief Transition and Financial Officer. [Operator Instructions] I'm now handing you over to your host to begin today's conference. Thank you. Claudio Descalzi: Good afternoon. Amid the volatility and disruption to the energy system over the past 2 months, at Eni, we continue to focus on the delivery of financial performance and key strategic milestones. As we set out at our capital market update just over a month ago, we are working to deliver reliable, affordable and lower carbon energy for all our customers. Our industrial strategy anchored to technology skills and long-term investment into top tier assets across a diversified portfolio has, if anything, been further validated in the context of the event of this year. Our investment framework underpinned by strong cash flow and a robust balance sheet supports us in delivering sector-leading growth. As a result, we can also reward our investors through a combination of attractive distribution and the continued rise of the capital value of the business, something that has been reflected by the share price improvement. It's also worth keeping in mind that while energy markets have been highly volatile since March, Q1 average, also higher than the planning assumption set out at our capital market update were well within a historical normal range for our volatile industry. Actually, in euro terms, it was a bit softer than last year. 2026 has seen very positive advancement in strategic terms and Q1 supports this progress with strong financials. I will analyze the financial in more detail shortly, but we reported EUR 3.5 billion of pro forma EBIT, cash flow from operation of EUR 2.9 billion and pro forma gearing at 15%, well within our expected 10%, 15% range. Our pro forma gearing, assuming the full effect of Plenitude Deconsolidation is even lower at 12%. Major strategic events of the year-to-date include probably the ever best start to a year for exploration with an exceptional level of new resources discovered in 7 different countries. The FID of Geng North and Gehem in Indonesia, the dual exploration strategy, realization of a stake in our Baleine discovery. Strong production growth helped by start-up of production at NGC in Angola and first LNG export from the second Congo LNG. And in the transition sector, the agreement to reorganize and deconsolidate Plenitude and advancing 2 new biorefineries at Sannazzaro and Priolo. But before we get into the details of the financials, I will spend a bit more time on what was the most remarkable start of the year for exploration. As you know, we have established a track record as the leading exploration company in the sector, discovering an average 900 million barrels per year over the past 10 years. And while our impact activity is somewhat front-loaded in the first 4 months of 2026, we had already added around EUR 1 billion of new resources. Critically, these new resources also all have a credible and visible pathway to development and production, consistent with our focus on efficient time to market where we are also an industry leader. Our production growth to 2030 is visible and sector leading, and we are building material optionality for the 30s. In Angola, our Azule affiliate, as operator, announced the significant oil discovery of Algaita on Block 15/06, preliminary estimates put oil in place at around 500 million barrels and the presence of an FPSO merely 18 kilometers away promises a speedy and efficient development. In Cote d'Ivoire, the Murene South-1 well significantly extended the proven area of Calao gas condensate discovery, confirming a world-class discovery of up to 5 Tcf and 450 million barrels in place. In Libya, in March, we announced a 2 offshore gas discovery estimated to total more than 1 Tcf in place and closed by the existing Bahr Essalam facilities, enabling rapid tieback. In early April, we announced the Denise discovery in the Temsah concession offshore Egypt. Our preliminary estimate for Denise is 2 Tcf of gas and 130 million barrels of condensate in place and situated less than 10 kilometers from existing production infrastructure. Last, but certainly not least, this week, we announced the giant Geliga gas condensate discovery in the Kutei Basin, offshore Indonesia. Our preliminary resource estimate is in place gas of 5 Tcf and 300 million barrels of condensate, effectively a second Geng because Geliga is close to the undeveloped 2 TCF Gula discovery that includes also an additional 70 million barrels of condensate and thus development synergy plus the same infrastructure and time to market advantage of Geng. There is a clear case for a fast track development of a third major production hub and the significant production and value uplift this implies. Q1 results were consistent with the scenario condition we faced and the positive momentum we are generating in growing the company. But not all the upside of the scenario was captured in this quarter as our downstream and biorefineries were under the traditional maintenance that we execute before the start of the driving season. E&P delivered 9% year-on-year production growth and consistent capture of venture prices. Year-over-year, growth contribution from Norway and Congo were especially notable, and the outcome is after disruption to Middle East volumes in March. GGP pro forma EBIT of EUR 0.3 billion is reflecting the more volatile scenario, and it is consistent with our updated guidance of EUR 1.3 billion in pro forma EBIT. In our transition businesses, pro forma EBITDA of EUR 0.52 billion is consistent with our full year guidance of EUR 2.4 billion. Plenitude that will continue to grow both on clients and new capacity will increase its gross EBITDA by 20% to EUR 1.3 billion, while Enilive will continue to see supportive biorefining margin, and will reach an EBITDA of EUR 1.1 billion, 16% over last year. Our refinery utilization was low, reflecting a major turnaround program, which should position us well for the remainder of the year. Meanwhile, our results in Versalis highlight some evident progress in the reported results of curtailing its losses in line with our plan. Contribution from associates reflected the macro scenario condition with reporting a strong production growth. A higher scenario along the year will enhance the results of our satellites and could improve their distribution and our cash flow, too. The tax rate of 42% was in line with our full year guidance. Cash flow from operation generated was in line with our expectation with good contribution from associated dividend and a cash tax rate of around 25%. Working capital had a large negative impact on cash flow, consistent with the sharp rise in prices in March, but it's not out of the ordinary in that context. We do expect to reverse this in the coming quarters. CapEx was EUR 1.9 billion, in line with the full year amount of EUR 7 billion for the year. Net CapEx was broadly equal to gross with limited portfolio activity in this quarter beyond announcing but not completing the sale of a 10% stake in Baleine in Ivory Coast to SOCAR. After the quarter ended, we completed on the previously announced acquisition by Plenitude of Acea Energy for around EUR 500 million. We paid the third quarterly dividend referring to 2025 in March and repurchased EUR 280 million in share. Shares in issues have reduced by 17% since the end of 2021. Pro forma gearing of 15% incorporates M&A transaction announced but not yet concluded and represent a broadly balanced quarter for cash in and cash out. We expect the consolidation of Plenitude to close in the third quarter with a benefit to consolidated net debt over the following quarter as Plenitude funding is restructured. If we incorporate also this effect, our pro forma gearing is actually at 12%. Updating our guidance for 2026, we confirm the outlook for E&P production with a growth rate of 3% or 4%, incorporating our current assumption for the impact of Middle East disruption. We have also updated our market scenario projection for the year in the context of the current situation, raising full year Brent to $83 per barrel from $70, the TTF to EUR 50 per megawatt hour from EUR 36 as we believe that higher price will be necessary for the refilling of empty storage and refining margin in Europe our term to $8 per barrel from $6. From a financial perspective, reflecting the changed scenario underlying outperformance, we now estimate cash flow from operation, pre-working capital of EUR 13.8 billion, up 20% from EUR 11.5 billion set in March. Applying our proposed updated distribution policy, this implies a share buyback raised by around 90% to EUR 2.8 billion. As previously communicated, this is the floor for 2026 that will be maintained even in the case of future scenario deterioration. Actually, taking into account the current market prices are well above that level, we should expect even further increase in our distribution policy in the coming quarters. Our new policy will be put to shareholders for approval at the AGM on 6th of May. And this concludes my remarks. And along with my colleagues from any top management on the call, I am ready to take your questions. Operator: [Operator Instructions] I now leave the floor to Mr. Jon Rigby for the Q&A session. Jonathon Rigby: Thanks, operator. [Operator Instructions] And we're going to start with Biraj at RBC. Biraj Borkhataria: [Technical Difficulty] How should we think about that EUR 55 million this quarter and what we should assume for the full year '26 and into '27? And then second question is just on Indonesia, and congratulations again on the exploration success. Now that we're closer to the deal closing in Q2, are you able to say what the cash adjustment is set to be net to Eni? Jonathon Rigby: Biraj, can you just rego over your first question because we missed the start of it. Biraj Borkhataria: Sorry. It's the transformation costs, the EUR 55 million you've broken out, what should we expect for the full year? Claudio Descalzi: Okay. I'll leave the question about the transformation cost to Adriano Alfani. On Indonesia, we do expect a cash settlement. And also, you know that we work in this kind of model with some distribution that are related to the capability of funding of this entity stand-alone, but we do not disclose this amount that will be in any case irrelevant. Adriano Alfani: Sure. Thanks for the question. I mean on the EUR 55 million, while we started a new project, we continue to drive efficiency on all the sites that are in transformation. So you should read on annualized basis, roughly EUR 50 million of efficiency that we are going to bring. So you should not multiply EUR 55 million or [indiscernible], but you should discount about EUR 50 million at least of efficiency that we are going to bring. But you need to consider that today, the sites are in transformation for the future, adding value through the new project because we are going to start the new activities. So this is something that in the future will generate value. And by the way, it is incorporated in our CFO for guidance. Jonathon Rigby: Thanks, Biraj. We are now going to go -- sorry, one second. We'll now move -- sorry, apologies. We'll now move to Alejandro Vigil at Santander. Alejandro Vigil: The first one is about the situation in the Middle East in your portfolio. How are you managing the situation and potential impact in terms of your supply contracts, your oil and gas production in general, how you are managing this context? And the second one is about Indonesia. I remember that you were talking about the plateau of the new joint venture of about 0.5 million barrels per day. With the new discoveries, this is now a very conservative assumption? Or you reiterate this 0.5 million as a guidance for the production? Claudio Descalzi: I leave to Guido Brusco to answer both questions. Guido Brusco: First, on Middle East, the impact overall is marginal, both on oil production and of course, on free cash flow. We have limited exposure in terms of production, 3% of our total production comes from Middle East. As far as concerned, the products and LNG also is limited, if not 0 impact on LNG, thanks to the flexibility of our portfolio, the diversified geographical footprint, we could basically cope with the missing volumes coming from Qatar essentially. While for the products, we -- on all the commodities, gasoline, diesel and even jet fuel, we are prepared to honor all our commitments with our customers. So -- on Indonesia, yes, indeed, I would say the -- that assumption was reflecting the status of the base of resources at that time. Of course, having discovered Geliga, which is equivalent in terms of volume in place to Geng and having also another stranded asset there, Gula, which is give and take 2 Tcf, so we can basically replicate another hub in the region. So clearly, this will raise the production target in the medium to long term to more than 500, I would say, 700, 750 might be a reasonable figure. Jonathon Rigby: Thank you, Guido. We're going to move to Josh at UBS. Joshua Eliot Stone: Two questions. One, just on the buyback and your decision to list it. Obviously, I understand there's sort of mechanical nature here given the new cash flow guidance, but more a question of the timing of why you felt now was the time to do it so soon after the Capital Markets Day and your confidence there? And then second question, looking at your macro deck, one thing that does stand out is the gas assumption at EUR 50 per megawatt hour, which is above the curve. You're involved in the market, your storage business. Can you explain maybe why prices haven't moved higher so far? What do you think are the main reasons? And why you set your assumption above the forward curve? Claudio Descalzi: Thank you for the question that are partially connected clearly. We decided to move the buyback because we believe actually that is already evident there is a completely different trend even versus the Capital Market Day. The Capital Market Day occurred in the middle of March. The event at the time were just started once we were presenting our first scenario that was based on clearly a crisis, but that could be solved in a shorter time. There were not yet bombing on the facilities that occurred at that specific time and were expanded in the following weeks. And we see there is a continuous or practically 2 months already inside the crisis. This crisis is not just a matter of reaching a sort of cease fire or peace, but it's also to restart a lot of infrastructure and production facilities, processing facilities that were shut down or were impacted by fire and bombing. So it will take longer. So for this reason, we believe that there is a quite unexpected compliance by the market on the duration of this crisis that appears, I would say, much more impactful that the market is probably evaluating. On the gas specifically, we believe that in a EUR 40, EUR 45 megawatt hour environment with extended shortage of gas, particularly from Qatar because even if Qatar will be able to restart or there will be some kind of agreement in the coming weeks, it will take time to restart all these plants of this facility to restart the flow. You have to consider there is also bottlenecks in terms of tankers or ships and clearly LNG carriers. So the overall process of refilling European storage that completed the winter at the minimum, almost at the minimum 25%. Now we are at 30% and to reach at least 80%, 90% before the start of the next winter will require some price signals that should be increased. Price signals not only in the amount of the first front month value, but also on the structure of the curve that is not supportive. So we believe that both on oil and on the gas, our price deck that we have uplifted is still conservative. Jonathon Rigby: We are going to now move to Alessandro Pozzi at Mediobanca. Alessandro Pozzi: The first one is on the number of discoveries that you've made so far this year. I was wondering there is -- in your capital allocation framework, there is a little room for increase in CapEx. And we all appreciate the need to be disciplined when it comes to CapEx budgeting. And I was wondering, to this point, is CapEx more of an input to your modeling assumption? I mean, you want to stick to that level of CapEx despite the current scenario or there is some headroom for maybe accelerating some of these projects, especially the ones in Indonesia? And the second question on GGP. Just wondering whether you can give us more color behind the increase in guidance and whether that is connected to your higher macro assumptions as well. Francesco Gattei: Okay. I will -- just a very short introduction, then I leave to Guido Brusco and Cristian Signoretto for the two questions. Clearly, CapEx, we are strict to a level of CapEx that we want to keep under certain range. You have to consider in exploration that there are exploration that are occurring inside our business combination or affiliates, associates that are reported in equity. So once you see a discovery in Azule or in Indonesia, this will have a different treatment in terms of CapEx. Then I leave to Guido to explain also why CapEx will be relatively softer in this case. Guido Brusco: Yes. I think there are 2 handles here. One is some of the discoveries are discoveries near infrastructure. So our tieback, which are not requiring massive capital intensity. And I mean those are the ones that, on top of what Francesco said, that are in Angola, like Algaita, like the one in Libya or the one in Egypt, basically, those are tie in with, I mean, low cost. The other angle is the others, which we have made in Ivory Coast and in Geliga. The one in Indonesia, it applies again, the concept that Francesco just illustrated. It is in a business combination. But on those, we can also eventually apply our dual exploration model. So the net CapEx would be even accretive from our perspective. Now Cristian... Cristian Signoretto: Well, on guidance of GGP. So I'd say based on the Q1 results, which were fairly strong and the volume increase and the increase of asset-backed trading that we have seen in a more volatile scenario, we updated the guidance, taking that into consideration. And as we said before, also extending this, let's say, situation and scenario broadly along the next month, given the situation that Francesco just explained before to you. Alessandro Pozzi: Is there any new arbitration that we need to be aware of for the rest of the year? Cristian Signoretto: Say it again, sorry? Alessandro Pozzi: Is there any new arbitration that we need to be aware of for the next... Cristian Signoretto: No. Absolutely, not. Jonathon Rigby: Thanks, Alessandro. Next, we're going to move to Al Syme at Citigroup. Alastair Syme: First question just on gearing. Can you just confirm exactly how much net debt sits in Plenitude that obviously gets deconsolidated in third quarter? And then secondly, just a question around the biofuels market. Obviously, we've seen massive price increases through first quarter. You're putting a lot of growth capital in that business. But also this week, we've seen Europe's largest airline announced cuts to routing because of the price of jet fuel. And yet, I look and see sustainable aviation fuel, SAF, is 40% more expensive than jet fuel. So I wonder how you think about the issue of affordability of biofuels in your forecasting and investment [indiscernible]? Claudio Descalzi: Yes, about the Plenitude amount of debt that we are going to deconsolidate is EUR 2.6 billion. That clearly will be reduced once there will be the increase of capital as a consequence inside the new entity. And then I'll leave to Stefano Ballista to answer about the biofuel and SAF. Stefano Ballista: Yes. No, as you said, the scenario significantly improved. And actually, the main reason for the scenario improvement, it's driven by market fundamentals. It's driven by the demand increase that we are seeing due to the regulation and the mandates that are under deployment. And these are rules, mandates, target that has been defined. If we look at the most recent definition of new target, I'm thinking about U.S. with a new renewable volume obligation, we got an increase of about 60% of demand for the next couple of years. So this is the main reason. The geopolitical situation is going to give a little bit of extra headroom, but marginally compared to the fundamentals. This means actually that the perspective on biofuel is and remain definitely strong. When you look at biofuel, you need to look both at renewable diesel on one side and sustainable aviation fuel. The market is coupled. Sustainable aviation fuel is going to be the only answer to decarbonize the aviation transport. There is no other answer at the moment. And even with a small target in terms of blending, now in Europe, we are about 2%, you can create significant demand, but pretty much affecting marginally the overall cost position. So we've got significant space for improvement, not only on renewable diesel as it's happening, but also on sustainable aviation fuel with a marginal impact on a marginal component -- on one side of the component of the aviation business as a whole. So this is the view on the biofuel. And as I said, there is no other answer actually to decarbonize the aviation sector for a long while. Alastair Syme: Stefano, I mean, Europe's largest airline has basically said they can't afford jet fuel at this price. And I accept the mandate is only 2%, but it's meant to go up. So how on earth are they going to be able to afford a high percentage of biofuel of SAF, if it's 40% more expensive than the price of jet fuel, which they can't afford. It seems to be a conundrum. Claudio Descalzi: Okay. I can -- we can comment about what was the statement. But from our point of view, clearly, the biofuel now a solution to have a resource full in a situation of scarcity. The premium eventually could reflect the impact of the scarcity. And you have to consider the supply chain or the chain of production of SAF is relatively young and small. Once you will have a potential larger market, you have also improved synergies. So the cost position is not just a matter of, let's say, industrial process. It's also a matter of having this process aligned in terms of size and materiality with demand potential. We do expect that after this crisis, there will be as a reply, not only on environmental solution, but also apply towards a potential diversification risk to deploy a larger use of this kind of alternative solution for ships, for airplane and for cars. Jonathon Rigby: Thanks, Francesco. Thanks, Al. We're now going to move to Michele Della Vigna at Goldman Sachs. Michele Della Vigna: I wanted to follow up on your exceptional exploration success. And I believe you've also completed the first deepwater well in Libya and I was wondering what were the early results there? And second, I wanted to come back to aviation, but from a different side, I think we keep reading that we may be short of kerosene this summer. How do you see the situation? And how low do you think inventory days can go before flights are actually starting to be grounded? And how much do you think that in your refineries, you can actually tilt towards more jet fuel production? Claudio Descalzi: I leave to Guido to answer both questions. Guido Brusco: So the one in Libya has resulted in a noncommercial discovery. And -- but it was very important either for us to have a better understanding of the basin, which is quite large, huge, diverse in terms of number of prospects. And so you have to think that this is a block where the last well drilled was drilled by us in the early 2000s. So we are talking of a large basin with quite a number of untapped resources. So it's the first well, but we'll have, for sure, more understanding of the basin. As far as concerning the jet fuel, as I said before, we are prepared to satisfy and honor our commitment with our customer. Of course, the situation is very different and diverse if you, I mean, if you look at the different flight operator and supplier. But as far as concerned, Eni, we are prepared to satisfy our customers. Jonathon Rigby: Thanks, Michele. We're going to now move to Paul Redman at BNP. Paul Redman: Yes. First question is just come back to Enilive. Could you give us some insight into kind of what you've seen in terms of margins, February, March and what you're seeing in April for the biofuel business? And if they're a lot stronger, I was surprised the EBITDA guidance didn't get upgraded. Is this because biofuels is positive for the commercial business, maybe having a few more issues. And then secondly, just on working capital, I think you mentioned in your prepared remarks that you expect this to come down. Could you just talk us through how you expect that to play out? Francesco Gattei: I'll let Stefano to answer on Enilive, and then I will reply on the working cap. Stefano Goberti: Yes. First of all, on the scenario. Actually, the scenario on biofuel improved significantly along the first quarter even before the starting of the conflict. This is what's true in Europe. And it's, as I said before, linked to mandates, so to fundamentals. An example, we got recently approved in Holland, the new GHG target is 28% versus a rate of 14%, and we got no more double counting. So, a good news, to be honest, fully expected. Same in U.S., we got a market significantly increasing, again, linked to fundamental. Even in the first quarter, we got an average on the RIN about $1.5 per RIN. It was less than $1 last year. And now we are about $1.8 after the approval of the new target. So the market was already expecting the new mandate. In terms of output, it has been even better. So this got an extra drive in terms of overall margin. So this is in terms of market setting. In terms of results, a comment. In the first quarter, we got as Enlive as a whole, EUR 220 million of EBITDA pro forma adjusted. This means EUR 50 million above the first quarter of last year. And this has been fully driven by biorefinery performance. It actually, on top of driving the upside, as you said, balanced the partial pressure on retail prices that we are experiencing in Europe linked to fossil fuel prices. On top, I want to highlight that actually in the first quarter, we got Venice under maintenance and upgrading maintenance. So it has been shut down for the whole quarter. And that result has been achieved without that kind of production. Venice is going to come in place during the second quarter. And we're going to be at full potential for the second half, so being the condition of capturing results. Last comment, as I said, we were definitely expecting the improvement of the scenario even in the business plan. So this improvement has been for the majority already crafted in our business plan, that one related to fundamentals. The extra upside, assuming the extra upside is going to last for the time being, this is going to get an additional value that we are capturing and we're going to keep capturing. Jonathon Rigby: Thanks, Paul. So watch this space. The next questions come from Lydia Rainforth of Barclays. Lydia Rainforth: Two questions, if I could. I mean just... Francesco Gattei: No, I would like just to answer about the working capital very fast. The working capital will turn back, will improve immediately in the next quarter and clearly along the year, is subject to the evolution of the spike of the price that we -- let's say, we were -- we recognized in the first quarter. Sorry, Lydia, please continue. Lydia Rainforth: No, no, that was important. Just 2 questions. One, I just wanted to touch on Venezuela and what you're seeing there. And then the second one, sorry, this is more of a long-term thing. But are you seeing in terms of the conversations you're having with host nations, with governments, has anything changed yet? Are they suddenly going, actually, we'd like to accelerate plans around exploration. We want more in terms of energy security. We want you involved more. So just if there's anything -- those sort of conversations, or is it just too early for that at this point? Guido Brusco: On Venezuela, just a month ago, we've signed an agreement, which we call Cardón IV Sustainability Agreement, which would allow us to basically produce sustainably the gas and provide energy to the country. And this implies also future -- so this fix for the future essentially and implies also some activity to do some debottlenecking to the plant to increase slightly the amount of volume to the domestic and to have an export outlet for the larger resources, which Perla carries. Basically, Perla is a reservoir of 20 Tcf. So there is quite a significant potential for an export. On the oil side, we have 2 assets there, one in conventional water and one unconventional onshore. Two things happened. First, a new general license was issued by OFAC, which allows the -- I mean, the operator to carry activity in Venezuela. And second, a new hydrocarbon law was enacted at the end of January this year. And this provides a framework, a legal framework, a fiscal framework to develop in a sustainable way our oil assets. And of course, we are engaging the authorities to make this happen. Jonathon Rigby: And Lydia's second question was on host governments and changing. Guido Brusco: In Venezuela. Jonathon Rigby: More broadly, I think, as well. Lydia Rainforth: Accelerate the exploration. Guido Brusco: Yes. No, I mean, broadly, there is, of course, a positive reaction from government. And we are noticing in several geographies that government are more prone to provide the right enabler for the operator to increase exploration, provide fiscal term to produce stranded resources. Of course, there is a price element which plays a significant role, but many governments are trying to introduce enablers to make it possible. The focus is on energy security, of course, most of them are trying to maximize the domestic production on the government side. On the international oil company side, of course, diversification is another pillar of the strategy. It has proven in the last 5 years that 2 major providers of energy, Russia and Middle East for both oil and gas have failed to or has proven that they could fail to deliver and diversification in other geographies like Far East and South America or America in general and Africa is very welcomed now in the strategy. As Eni, we are very well positioned in these 3 geographies. We had very limited exposure to Russia. We have, as I said before, limited exposure to the Middle East. And if you look at the portfolio in the long term, which we presented also at our last CMU, the Americas, Africa and Far East will play a larger role in our portfolio. Jonathon Rigby: Thanks, Guido. We're now going to move to Martijn Rats at Morgan Stanley. Martijn? Martijn Rats: I've got 2. First of all, I just thought I'll ask you a broad question about demand destruction. It clearly is a topic and with a broad range of views of whether there is and how much oil and gas demand might have been destroyed as a result of these high prices. But I was wondering if you could share a perspective. And to be clear, the nature of the question goes just beyond jet fuel, which is sort of separate topic in its own right. But what do you think is the amount of oil demand that has been destroyed as a result of these very high prices? And the second thing I wanted to ask you is about the Argentina LNG FID. I noticed there wasn't a mention any more of it in the 1Q sort of statement, but that should still be on the schedule for later this year. I just wanted to confirm that. Francesco Gattei: About demand destruction, I think that thinking about demand destruction in a matter of 1.5 months, it's too early. So I think that demand is there. Clearly, there is potentially some small reduction that potential buyers that do not afford, but demand destruction is generally happening in a certain time frame. So for the time being, you see that there is no demand destruction. There is supply destruction. There is storage use and there is some kind of switch wherever it is possible to switch, eventually in certain coal gas plants. But I haven't seen a real material destruction in terms of demand from the data that we can collect. About the Argentina LNG, I leave to Guido for completing the question. Guido Brusco: On Argentina LNG, we are still projecting an FID by the year-end. And just to give you more visibility on the activity, the engineering work is almost completed. The main -- all the major EPC tenders are progressing, and we are estimating to complete by Q2, the majority of those and in early Q3, the remaining. And in parallel, a significant progress has been made also in LNG and NGL marketing as well as on project financing. So definitely, we're setting up ourselves and our partner and all the stakeholders in Argentina to -- for an FID by the year-end. Jonathon Rigby: Thanks, Martijn. And to be clear, it's probably more of a function of a long list of projects that we can't fit in every quarter. Martijn Rats: Excellent. Yes. Jonathon Rigby: Yes. Martijn. Moving on, we've got Matt Lofting at JPMorgan. Matt, have you got some questions? Matthew Lofting: Yes. Two, please. First, it struck me looking at the revised cash flow guidance for 2026 that if we annualize Q1, the new full year targets look comfortably above that. I imagine there's probably some price lagging effects in oil and gas that impacted the numbers in Q1, particularly given prices rallied sharply in March. I wondered if you could sort of share the price lagging impact and how that might come through. And then secondly, obviously unusual in many respects to raise distributions and buybacks so much so early in the year. Obviously, it's an unusual macro situation that we're in, in that context as well. But in the past, you've talked about effectively a sort of a hard floor and a sort of a soft ceiling to buyback revisions. Does that still apply for 2026 against the 2.8 baseline? Francesco Gattei: Yes. About the cash flow from operation results and the fact is clearly the -- as a consequence, you know that in the first quarter, as we mentioned, there were -- and downtime, still some maintenance. So we are not able to capture certain results. Also from the point of view of GGP, there were some benefits that we were able to capture partially but just the last month of the quarter. There is a ramp-up of production in E&P to improve the further benefit along the year. And on the other side, you have to consider that there is distribution from associates that follow in certain cases, quarterly, but in other cases, there are half-year or yearly distribution. So there are various elements that will determine a different distribution in the next 3 quarters versus what we had in the first quarter. The other question was. Yes, the unusual distribution is because we had the policy and we apply the policy. I think that I do expect that this distribution will become potentially even more unusual in the coming quarters if the market persists. Jonathon Rigby: Thanks, Matt. We're going to move to Massimo Bonisoli at Equita. Massimo Bonisoli: Two questions. One on the discovery in Indonesia regarding the SEARAH JV with PETRONAS. In light of the significant discovery in Indonesia, can you clarify whether the terms of the agreement already incorporated the option of the additional resource upside you just discovered ahead of the closing? And the second on the sensitivity table, given the recent increase in volatility in physical commodity markets with widening differential across crude qualities and geographies, do you believe the sensitivities you provided on benchmark prices are still fully representative? Or should we expect some divergence between benchmark movements and your realized profitability in the current environment? Francesco Gattei: On the sensitivity, then I will leave to Guido for the question about Indonesia. On the sensitivity, we gave -- you remember that we're, let's say, applied assuming a broader volatility range. So we're different than the usual sensitivity that we fixed on a shorter size fluctuation. Clearly, volatility and -- sorry, sensitivity is just a theoretical number. We do not capture all the arbitrage also because the arbitrage cannot be modeled because we don't know where this potential gap and the effect that on the physical barrel bottleneck that could emerge. So you keep it as a key reference, but it's clear there will be some specific spot situation where the sensitivity is not applied, but the sensitivity is applied also on 1.7 million barrels per day of production. So that effect is already in a certain way, diluting any specific case. I'll leave that to Guido. Guido Brusco: There are adjustments on the free cash flow working capital, but there are also adjustments on the new resources discovered in the interim period and beyond the interim period. So there are a mechanism in the agreement to readjust value accordingly. Jonathon Rigby: Thanks, Massimo. We're going to move to Fergus Neve at Rothschild. Fergus? Fergus Neve: There's been a flurry of exploration success at the start of this year and the 1 billion BOE of resources discovered is very impressive. I just wanted to know whether there was any color you could give on further wells being drilled this year that we might be looking out for and if there are any others you're particularly excited about? And then secondly, it was positive to see the chemicals result improved sequentially this quarter. How should we think about this improvement in terms of the contribution from the Versalis restructuring and then also the scenario in the quarter? And looking forward to 2Q, do we expect the business to be able to capture any improved margins should they materialize? Francesco Gattei: I'll leave then to Aldo Napolitano for the exploration and Adriano Alfani back for Versalis. Aldo Napolitano: Yes. In terms of program -- exploration program for the rest of the year, -- of course, we had a program this year that was really front-loaded. So many of the high-impact wells have been drilled. And so in 4 months, we have -- so we had the sequence of results that you mentioned. However, we still have some interesting wells to drill during the year, again, in Indonesia, so in the Kutei Basin. So we plan to drill another well, another interesting prospect. And we will have a couple of wells in Egypt and a well in Ghana. So this will complete the wells at least with a certain materiality. There's a large part of our exploration portfolio anyway that is interested by drilling for near-field ILX drilling, so contributing to production in very short term. But in those cases with more limited reserves. Adriano Alfani: So on the chemical side, if we look back to the Q1, the transformation has a positive impact of roughly EUR 100 million. Although we are facing a negative scenario because in the first quarter, clearly, there was a sort of a time lag between what Francesco was talking about before, the effect on the demand versus the negative effect of supply because we had higher cost in terms of feedstock, higher cost in terms of utilities. So at the end, the positive impact quarter-on-quarter at pro forma level is a little less than EUR 100 million because for the effect of the negative scenario, roughly EUR 85 million. If we go in the second quarter, we are putting in place a significant action in addition to further reduce costs and to continue the transformation plan, and we expect the second quarter significantly better than the Q1, also catching some shortage that we see on the polymer market despite still the high cost in terms of feedstock and utilities. Jonathon Rigby: Thank you, Adriano. We're going to now move to Mark Wilson at Jefferies. Mark? Mark Wilson: Okay. My first question is, you say how you can honor commitments to customers, gasoline, jet fuel, diesel, et cetera, totally understandable. And just does that flag the idea that margins can be squeezed given feedstock prices? That's the first question. And then the second one, more general, yes, yet more exploration success, deepwater, talking about additional developments as well. You commented previously, Claudio, on the service market and how there could potentially be tightness. We're seeing service providers talk about renewed developments. So how would you see tightness in that contractor market and any particular services you feel may be under pressure given developments that we're looking at? Francesco Gattei: Yes. About the first question on the margin -- potential risk of margin squeeze, this is -- for us, it's a relative risk because substantially, we are -- in our chain of supply, we can able to cover most of the products that we are delivering to our customers. So from our point of view, we are not in a situation where we have to rely too much on the cargo market. There could be some volumes related specifically on jet fuel, but this is a marginal amount. So for this reason, we do take the commitment. That this is a commitment that is clearly related to our integrated value along the chain. About the contractual services in the oil market, I leave it to Guido. Guido Brusco: Sorry, I have to restart again. So I was talking with the microphone off. So there are 2 elements of -- that are driving cost at the moment. One is driving the short-term cost inflation, and this is mainly driven by the conflict in the Middle East and of course, across the whole oil and gas value chain, higher energy prices, logistics, insurance, commodity costs are increasing, and these are bringing almost immediate cost inflation. But for one moment, let's imagine that this cost pressure will be shortly fixed, assuming that this cost pressure on the short term will disappear. There are, of course, longer-term drivers of cost pressure, an increase -- a general increase in the activity in the upstream. And we've noticed that basically, I mean, if you look at the inflation trends from '22 to '23, '23, '24, up to '25, we already had a 15% cost increase in -- I mean, starting from the 2022. And the pre-war 2026 and coming here, we were in the region of the 3% to 4% of cost increase. But if you add up this short term, which I was mentioning before, the range would expand from 4% to 7%. Of course, this is the average. There are costs which are in the long term, more under pressure like the vessel installation for the deepwater activity and others which are less under pressure like the onshore drilling rig, but this is the general overview that we see in the market. And that is backed up also by sources like IHS UCCI Index. Jonathon Rigby: Good stuff. Thanks, Guido. Thanks, Mark. We're going to move now to Chris Kuplent at Bank of America. Chris? Christopher Kuplent: Hope you can hear me okay. Just 2 quick detailed questions to follow up on. I wonder whether you can talk to us about those exploration blocks that have ended up with BP. Was there a consideration whether to do this with Azule? I'm talking about Namibia, sorry. And maybe you can tell us why not with Azule. And second, even smaller detail, I just wonder whether between your CMD and now, you've changed your expectations regarding receiving dividends from ADNOC Refining. Francesco Gattei: I leave the answer to Aldo for the block in Namibia and then on ADNOC, I will reply later. Aldo Napolitano: So if I understood correctly, so you're talking about the blocks that BP has -- the new blocks that BP has taken in Namibia. So these are real exploration blocks in frontier areas. So for the time being, it's an initiative of BP. So we are, of course, talking to each other, but they are not part of the Azule Energy activity. Francesco Gattei: About the ADNOC Refining, you have to consider that, that dividend is based on 2 activities. One is the one of refining the crudes. The other is related to trading. So these 2 activities clearly have different perspectives under the current crisis. We do not have yet changed any assumption. It's not material in the overall amount of dividend that we received in the year. So I will keep the assumption as it is and it's not -- eventually, we do believe there is a relative hedging between these 2 activities. Jonathon Rigby: Thanks, Chris. Christopher Kuplent: Sorry, the first answer was this was too much greenfield. I'm aware that you are not taking part, but I just wondered why not. Francesco Gattei: So as I said, it's an initiative taken by BP, so based on their geological reconstruction. And so I think the question should be made to BP, sorry. Jonathon Rigby: Thanks, Chris. We're going to move now to Sadnan Ali at HSBC. Sadnan Ali: First of all, could you just remind us of the divestment proceeds you're expecting for the rest of the year? And secondly, I was wondering if there's any further updates or developments in your plans to get back into trading. Of course, the volatile price environment that we're seeing now is a perfect opportunity to capture trading profits, which your peers will benefit from. So I was wondering if the current environment has accelerated your plans at all? Francesco Gattei: On M&A, you know that we have completed Baleine in the first quarter. And also on the other side, we have completed in the acquisition side, HNR, Energea, with Plenitude. We do expect to have a further disposal completed in the -- during the year. You have the one that we announced last year. There will be further opportunity that we are valorizing. We do exploration model, some tail assets or areas that we do not consider core. So there is activity ongoing negotiations that are getting closer to completion, and we do expect eventually to disclose later on. So remain, as we said before, quite material this year. On top of that, you should include the deconsolidation of Plenitude as an opportunity. Clearly, Indonesia is another factor that will benefit from the partial disposal of Indonesia, referring to the 10% that will benefit not only of a scenario that is quite supportive, but also of the new discoveries that are emerging and the overall upside potential that is related to that basin. On the trading, I hand back to you. Guido Brusco: Yes. On the trading, we had a journey which started with step 1 was to include the trading into the overall value chain of global natural resources to try to capture all the margin. This was the step #1. Step #2 was to change the model, to do some transformation internally and turn our trading arm from a pure service provider of the different business to a marketplace where we've optimized our activity in the assets driven by the market needs. And then there is this third stage where we wanted to improve our soft skills in trading. We have a large base of assets. We have refineries, we have storage, we have physical oil, we have physical gas. We have a lot in terms of resources and assets, and we wanted to improve our soft skills. So we started this engagement with other trading players to try to combine the best of the 2, the best of an oil company and the best of a trading company. And this is the objective of the third step, which are -- which is definitely forthcoming. And this scenario, of course, will accelerate it. But despite this contingent situation, we would have done in both cases, yes. Jonathon Rigby: We're going to move to the last question, which is from Bertrand Hodee at Kepler. Bertrand Hodee: I have just one left. On Venezuela, you had outstanding receivables of around $2.3 billion, with an estimated realized value of $1 billion. Do you expect to recover more than the $1 billion because of the new Cardón IV Sustainability Agreement? Guido Brusco: Yes. As I said before, we just signed one agreement, the Cardón IV Sustainability Agreement to fix the future. And now with this new engagement and conversation we are having on how to develop the oil assets, we will fix also the past. Bertrand Hodee: And so how should we think about this $2.3 billion of outstanding receivables? Guido Brusco: There will be mechanisms developed to recover these past dues within the framework of the development of the oil field. Is that more clear? Bertrand Hodee: Yes. So it's not going to be within the Cardón IV JV, but within the new oil framework? Guido Brusco: Or a combination. It's very flexible, but it will be essentially more focused or centered around the oil development. Francesco Gattei: New development that will clearly give more flexibility in terms of cargo that could be used or new revenues that could emerge by production -- additional production. Jonathon Rigby: Think of it as an holistic solution to all the challenges that we have. Thank you, Bertrand. Thank you, everybody, for joining the Q&A and your attention on Eni's Q1. We look forward to speaking to you soon. Have a great weekend. Thank you. Operator: Ladies and gentlemen, thank you for joining. The conference is now over. You may disconnect your telephones.
Operator: Good morning, and welcome to the Sigma Foods First Quarter 2026 Earnings Conference Call. [Operator Instructions] As a reminder, today's call is being recorded. A replay will be available on Sigma Foods Investor Relations website later today. I will now turn the call over to Hernan Lozano, Sigma Foods IRO. Hernan Lozano: Thank you, operator, and good morning to everyone joining us today. Further details regarding our first quarter results can be found in our press release and earnings presentation that were distributed yesterday. Both documents are available in the Investor Relations section of our website. Before we begin, please note that today's discussion will include forward-looking statements. These statements are based on current expectations and assumptions that are subject to risks and uncertainties. Actual results may differ materially. Sigma Foods undertakes no obligation to update these statements. It is my pleasure to participate in today's call together with Rodrigo Fernandez, Chief Executive Officer; and Roberto Olivares, Chief Financial Officer. Our agenda today is straightforward. Rodrigo will begin with a strategic and operational overview of the quarter. Roberto will then review our financial performance in more detail, and we will conclude with a Q&A session. With that, I'll turn the call over to Rodrigo. Rodrigo Martinez: Thank you, Hernan, and good morning, everyone. 2026 started on a strong note with record first quarter volume and revenues as well as the second highest comparable EBITDA for the period. Results were supported by disciplined execution, early signs of improvement in certain raw materials and stronger currencies benefiting our operations outside the U.S. Sigma operates from a position of financial strength. Our investment-grade balance sheet has no material debt obligations over the next 2 years as we proactively refinance those maturities through a successful issuance of the local notes during the first quarter. From a capital allocation perspective, we recently held our first Annual Ordinary Shareholders Meeting at Sigma Foods, where shareholders approved total cash dividends of $150 million for 2026. This reflects our strong cash generation, which supports our balanced approach to drive growth while returning capital to our stockholders. Disciplined investment in high-return strategic projects is fundamental to continue growing our core. Let me highlight several key developments on this front. In Mexico, we continue expanding yogurt capacity to meet strong demand. Our yogurt team has done an outstanding job recently climbing to the #1 position of this product category nationwide. In the United States, we're advancing the expansion of our cheese operations in California, supporting the continued growth of our Hispanic brands as they gain traction in mainstream channels. In Europe, we're encouraged by the steady improvement in profitability and the progress of our capacity recovery in Spain. The expansion of La Bureba facility is almost complete and our new packaged meats plant in Valencia is on track to start operations in 2027. Both projects are key to restoring lost capacity and further strengthening our competitive position through efficiencies. Turning briefly to the global macro environment. Conditions remain fluid given the broad effects of the ongoing conflict in Iran. The recent spike in oil prices increases uncertainty and pressure for consumers across many markets. We are actively managing to mitigate short-term headwinds related to energy, plastic packaging and transportation, among others. At the same time, we're encouraged by positive external developments around meat, raw material cost and foreign exchange trends. Combined with the diversification and scale of our operations, these factors provide flexibility as well as we navigate the current environment. Overall, the balance of external headwinds and tailwinds remain supportive of our 2026 guidance, which remains unchanged. With that, I will now turn the call over to Roberto for a more detailed review of our first quarter financial results. Roberto Olivares: Thank you, Rodrigo, and good morning, everyone. Our consolidated results reflect solid execution, complemented by a favorable currency translation effect. Total revenues increased 13% year-on-year. Supported by volume growth and higher average prices in Mexico, Europe and Latin America. Similarly, comparable EBITDA increased 18% year-on-year, driven by robust growth in Mexico, Europe and LatAm. Regarding performance by region. Mexico was a standout once again this quarter, delivering record first quarter volume, revenues and EBITDA. Growth was mainly driven by strong results in the dairy category across all channels as well as solid packaged meat performance in proximity retail channels. By brand segment, our value-oriented brands continued to grow at a higher pace than the rest of the portfolio. Europe delivered solid progress with volume increasing 4%, supported by double-digit growth in the fresh meat business, which benefited from temporarily lower live hog prices in Spain. EBITDA was $25 million, marking Sigma Europe's highest first quarter figure since 2021. Regarding the Torrente plant floating insurance, let me remind you that we received 2 types of reimbursements, property damage and business interruption. During first Q '26, we received reimbursements exclusively related to business interruption, which replicate the plant's operation and therefore, are considered part of our operating results. Only property damage reimbursements are considered extraordinary items for purposes of comparable EBITDA. For the avoidance of doubt, we did not receive any property damage reimbursements in first Q '26. On the strategic front, we continue advancing to obtain regulatory approval for the previously announced fresh meat transaction in Spain as soon as possible. In the United States, the consumer environment remains softer relative to other regions. Yet continued progress in Hispanic brands across mainstream channels helped offset lower demand in national brands. Sequential improvements in volume, revenues and EBITDA were in line with expectations as pricing actions continue to better align with cost. We expect this trend to accelerate in the second quarter as seasonal effect kicks in. Latin America continued its positive trend recovery trend, delivering year-over-year growth in volume, revenues and EBITDA, supported by ongoing operational initiatives and improved execution. Turning to the balance sheet. We continued strengthening our debt profile during the first quarter, successfully issuing approximately $580 million in local notes and extending our average tenure to 8 years by refinancing short-term term maturities. These notes received the highest local credit ratings from Fitch and Moody's and attractive demand of roughly 3x the initial target. We benefit from a diversified financial structure that provides flexibility to meet our funding needs across different currencies, maturities and credit instruments. Net debt totaled $2.8 billion at the close of the first quarter, up $127 million year-to-date. The increase was mainly driven by higher net working capital, reflecting supplier payments related to year-end CapEx projects and seasonal inventory investments. Importantly, net working capital investments was 18% lower compared with the first quarter of 2025. Regarding leverage, our net debt-to-EBITDA ratio ended the quarter slightly above our long-term target of 2.5x, reflecting the previously discussed working capital dynamics. This concludes our prepared remarks. I will now turn the call back to Hernan for Q&A. Hernan? Hernan Lozano: Thank you, Roberto. [Operator Instructions] We will now open the line for questions. Operator, please. Operator: [Operator Instructions] Our first question comes from Fernando Olvera of Bank of America. Fernando Olvera Espinosa de los Monteros: Keeping this to one question, I want to ask you, I mean, based on the volatility of whole prices that you highlight in the initial remarks, can you give us some color of the potential impact that this could have on margins and how relevant are from your cost structure, the freight cost? Roberto Olivares: Fernando, this is Roberto. Thank you for your question. Regarding the Iran conflict and the potential and the impact that it has on the market, the potential effect will depend on the conflict duration. Yes, we have some exposure to -- in some categories, particularly in the packaging category. So we have some plastic packaging. We have the freight costs as well as some utilities. In regards to utilities, particularly in Europe, where we are seeing that the markets are -- have more volatility, we're mostly hedged for the year. We have around 80% of the utilities hedged in Europe. And in regards of the other categories, the impact so how that we have seen has been manageable through other efficiencies and initiatives within the company. Let me just put this into relative context. We are seeing as well favorable raw material dynamics, particularly in the Turkey segment as well as fresh field. And also the FX has continued to help during this year. So we do not expect any material impact coming from the conflict. And as we mentioned, we remain confident to reach our guidance for the year. Operator: Our next question comes from Enrique Maguero of Morgan Stanley. Enrique Maguero: My question will be on Mexico EBITDA margins. We were a bit surprised to see a margin decline in Mexico this quarter, given the current Mexican peso level and the raw material benefits you just mentioned as well. So on that matter, if you could just dive a little bit deeper on the drivers behind this margin decline in Mexico. It would be very helpful. So for instance, if you saw any tailwinds from the stronger Mexico peso this quarter, if you should -- maybe if we should see that only later on, any relevant raw material or SG&A components this quarter as well? And still on Mexico margin, if you could comment on how you're seeing the latest developments on raw materials? And how does that affect your initial expectations on Mexico profitability for the year as well would be very helpful. Rodrigo Martinez: Let me start and then Roberto can complement. We see Mexico very strong. And something important to mention is that dairy has been growing at a higher pace and the margins between dairy and packaged meats, both are very positive, but there is a mixed part on that. And if you want to complement, Roberto? Roberto Olivares: Yes, sure. And not only will be a mix in categories, but also in brands, we have been seeing value brands growing a little bit more than premium and mainstream brands. So that will also have an effect on mix. On the part of raw materials, as we have mentioned, we have seen particularly since the start of the year, Turkey bad decreasing sooner than we expected. And positively, we've recently seen Turkey ties start to move. In the last couple of years, the market of Turkey tie has decreased so far MXN 0.02, but it's signaling that we do expect the Turkey market to decrease in the coming months. That will -- particularly Turkey will potentially have a benefit in COGS. We, as always, will take a more balanced approach in terms of margin and volume. We want to incentivize volume. So particularly this year, as we're seeing the consumer a little bit softer than in previous years. So we will take a balanced approach to see how much of that potential improvement in COGS will be go up down to the margin. Enrique Maguero: Let me just give a quick clarification about the tie price increase. This is a very recent development over the last couple of days. Rodrigo Martinez: Correct. Operator: Our next question comes from Froylán Méndez Solther of JPMorgan. Fernando Froylan Mendez Solther: Is there anything that makes the first quarter in terms of margins and cash generation seasonally weaker versus the rest of the year? Because my question comes because if we extrapolate the margin performance seen in the first quarter, it would be hard to think that guidance is achievable. And my second question, if I may, you mentioned improved penetration of Hispanic cheese in the mainstream channels. Should this be margin accretive? Are you able to price Hispanic products in the mainstream channel as, let's say, more premium product that should command a higher margin? Rodrigo Martinez: Let me just very briefly start that we do see a good start of the year. And as Roberto mentioned, we're actively managing to mitigate impacts from the conflict, so that shouldn't be a problem. We do see lower raw materials cost going forward. We do see favorable FX trends within the geographies. We do see by the end of the quarter, positive strength within each one of the geographies. So with that, we feel comfortable with the 2026 guidance. Roberto Olivares: And I will only complement for that there's usually a seasonality effect in terms of EBITDA generation, particularly coming from the U.S. and Europe during the second quarter is a stronger quarter for the U.S. And as the year advances, Europe generates more -- generally more EBITDA. In particular in the fourth quarter, it's a very strong quarter for Europe. So yes, there is a seasonal effect on EBITDA. As we have mentioned, the $260 million that we delivered during first Q is in line with what we expected for the first Q and what we are seeing, as Rodrigo mentioned, will be to very align or aligned with our guidance. In terms of -- you also mentioned cash generation, there's usually more investment in net working capital during the first quarter that has to do with either CapEx payments of projects that were approved in the fourth quarter of last year and seasonal investment in inventories that we do expect that investment in net working capital to normalize a little bit through the year. Fernando Froylan Mendez Solther: And regarding Hispanic... Rodrigo Martinez: I would say that the margins are -- I don't think that you will see a change in the mix by Hispanic [ press ] or Hispanic cheese compared to packaged meats. At the same time, I would say that as of today, we have a very good position on the unitary margin on packaged meats in the U.S. in anticipation of the seasonal demand, including the bulk of this year. So we feel very comfortable with the margins going forward. Operator: Our next question comes from Ulin Sarawate from Santander. Ulin Sarawate: I think it's -- you partially mentioned this in the previous question, but I wanted to get maybe some more thoughts there on the working capital dynamics, maybe understand a bit more where these investments and where this pressure that we saw in the quarter was coming from. And just to understand also going forward, Roberto, you alluded obviously to some seasonal effects there as well, the first quarter being a bit more heavy or loaded there on the investments on working capital. So just to understand if this is something specific to this year and how you're thinking about it? Or is this kind of the run rate that we should think about for the following years kind of model-wise? Rodrigo Martinez: I'll let Roberto talk about seasonality, but let me start just commenting on the part of inventory within working capital. We found a couple of good opportunities to secure some Turkey and some beef for both the retail on the side of Turkey and for be for the food service during last year. So we have more inventories at the beginning of the year. That will translate -- definitely, we're in a better position, but that would translate that during the year, we might be buying a little less on that, especially more on the Turkey's more breast more than the Turkey type. So again, that will allow -- that leaves us today with a little more inventory, but with good prices. And during the year, we should buy a little less of that. And by the middle of the year, end of the year, we should be lining [ gap ] Roberto Olivares: And just to complement, Rodrigo, Luis, in general, the working capital has a seasonality effect. Usually, it is similar to what Rodrigo mentioned during the first quarter, we built up some inventory because usually prices of raw materials are higher in summer because of supply. I'm talking specifically about, for example, pork, pork during summer usually is higher because of the weather and that makes the pigs to gain less weight and that implies less kilos of supply, et cetera. So you should see this dynamic usually through the year, and we will delever net working capital by the end of the year. In terms of this particular investment for the first quarter, as Rodrigo mentioned, there's this investment in inventory as well as payments that we did regarding CapEx of projects that we approved at the end of last quarter. And you will see that number to normalize through the year. Hernan Lozano: Thank you very much for your question. And I think we can move on to a question that we got from our chat from the webcast. And this is from Vanessa Quiroga asking about any changes in consumer behavior we have identified in the U.S. or Europe resulting from rising inflation recently. Roberto Olivares: Thank you, Vanessa. So in general, if you see -- I mean, I will talk about 2 different markets, the U.S. and Europe. Let me first approach the U.S. If you see the consumer sentiment in the U.S. is the softest that we've seen relative to other regions. And also within the U.S., I think it's record low in many, many years. That has exacerbated with the gasoline prices recently increasing in the U.S. and all that dynamics. In terms of what we are seeing with our consumer stories, the U.S. consumer is taking more -- much more affordability approach to grocery shopping and that is -- I mean, moving the dynamics of the market, we have been following those dynamics and trying to change our strategy as the consumer changes. I think we're well positioned with our brand portfolio to take over a lot of the consumption of our categories. if the consumer or as the consumer trade down within our categories. Our biggest brand in the U.S., Bar-S is positioned as a smart choice more on the mainstream to value segment of the consumers. In regards of the U.S., I would say -- in regards of Europe, I'm sorry, I will say a little bit different particularly last year and through the beginning of this year, we have not seen as much inflation yet. I mean, obviously, this conflict with Iran will and depending on the duration will potentially change that. But actually, branded volume growth has consistently grown in Europe, and that is a signal for us that consumers in Europe are not necessarily that focused on affordability and more focus on the value that they receive from the products. So we see different dynamics in both regions. Rodrigo Martinez: And just important to complement, if you see the categories where we participate, it's a great [indiscernible] quality at a very good price. So we should be in a good position within the categories where we participate in those geographies. Operator: [Operator Instructions] We got a follow-up question of Fernando Olvera of Bank of America. Fernando Olvera Espinosa de los Monteros: Sorry, I was muted. Can you hear me now? Yes, right? Rodrigo Martinez: Yes. Perfect Fernando. Fernando Olvera Espinosa de los Monteros: Now I have just 2 quick ones. The first one is if you can explain the higher tax rate that we are seeing in this quarter? And what should we expect in the quarters ahead? And the other one is if you have any update regarding the Grupo GAL transaction in Europe. Roberto Olivares: Fernando. This is Roberto. Yes, regarding the tax rate, first, let me say that first Q tax rate is not representative of the annual tax rate as there is some volatility from quarter-to-quarter. Factors behind this volatility may include the FX and some other adjustments, particularly labor liabilities and others. The income taxes are comprised of incurred taxes and deferred taxes. Let me first start with the incurred tax and the incurred tax of the operation reflects a lower rate, which is very aligned with the statutory rates. This quarter, we have a deferred tax effect that we recognize, and that is the one that is raising the implied rate to the figure. And that deferred tax is related to a labor liability change that was the effect of the end of ALFA's transformation process. And regarding the update on the fresh meat transaction with Grupo GAL, we are advancing. We actually are moving forward in the process of -- with the competition authorities. We were seeing the transaction to closes to soon. It has taken a little bit more time, not because there has been anything related to the process, but just because of the time the transaction was reviewed by the competition authorities. We do expect to close hopefully during the second quarter of this year. Fernando Olvera Espinosa de los Monteros: Okay. Great. Roberto, regarding what you mentioned about labor liability, I mean, is it something that we can see in coming quarters or it was just this quarter? Roberto Olivares: No, no. Thank you, Yes, it was a nonrecurring effect. So we do not expect that to see in the coming quarters. We do expect the tax rate to lower in the coming quarters -- the implied tax rate to lower in the coming quarters. Operator: Our next question is a follow-up from Froylan Mendez Solther of JPMorgan. Fernando Froylan Mendez Solther: Could you help us just frame how has the reaction of the consumer been so far in Mexico? I remember you saying that part of the benefits from raw materials would be translated into the consumer, probably being a little bit more promotional, more strategic given the health of the consumer. But how would you frame the consumption environment and the reaction of the consumer in Mexico versus your original expectations? Roberto Olivares: First, let me say that -- I mean, if you see volume in Mexico is increasing around 2%, and that has more to do with the retail channels than the foodservice channel. And within retail, particularly dairy is increasing mid- to high single digits versus packaged goods. In general, we're seeing good dynamics in most of our categories where continue improving the position of our brands with consumers. As Rodrigo mentioned in his initial remarks, for example, in the case of yogurt, we are now the #1 player in the yogurt category, and that has to do a lot with our portfolio and that consumers are preferring our brand and our products. In regards to other dairy categories, cheese, particularly coming from value-added cheeses, slice and shredded cheese, and that has also helped us capture more clients. And in the case of packaged meats, particularly those segments that are more value segments and those regarding to specific needs. For example, everything that is regarding grilling has increased a lot in Mexico recently. So we have take this careful approach of incentivizing volume, but also protecting margins as particularly as this very recent improvement in the tight market evolves, we do expect to continue looking into other ways to incentivize volume and also maintain margins. Rodrigo Martinez: And Froylan, I will just complement if you see the unitary EBITDA in Mexico, we have been able to maintain or even grow a little compared to last year. And we have done that with a lot of cost increments of raw materials. So what we're thinking going forward is that balance between maintaining our unitary margins that are very important to make sure that the short-term results are there. But at the same time, the volume that will allow us to keep growing within the geographies. And we do plan to maintain that balance between those 2. And hopefully, with that, we'll be able to keep giving good results in Mexico in the short, medium and long term. Operator: Our next question comes from Felipe Ucros of Scotiabank. Felipe Ucros Nunez: Just a quick one on SG&A. Just wondering if there was any unusual seasonality for the quarter? Or do you expect any unusual seasonality throughout the year with your expenditure and marketing? And just wondering more or less what level of SG&A as a percentage of sales you guys are thinking about for the rest of the year? Roberto Olivares: Thank you, Felipe. This is Roberto. Yes, regarding SG&A, we don't necessarily see a lot of seasonality other than usually, S&A changes a little bit with sales mix. So whenever -- let me give you an example of Mexico. So whenever there's changes even in the categories or the channel mix or even the region where in Mexico, there are some changes in SG&A as we're now selling a little bit more yogurt than relative to the other categories, particularly sales expenses are a little bit higher. Even with that, yogurt margin has increased significantly in the last years due to a better mix coming from value-added products. But yes, there's some changes in SG&A regarding mix. But seasonal effects not necessarily. So yes, Rodrigo. Rodrigo Martinez: And within marketing, Felipe, I would say that we have been -- we have a very strong position in all the markets we participate, but we still see that there might be opportunity to do things even better. We have been putting a lot of effort on the marketing side of the company. We have a couple of good campaigns on the pipeline that should be coming out. In the long term, we definitely will be investing more money in marketing, but this is not something that is going to be radical. What we're seeing is pushing some new products that will be coming out of the market and gradually be spending more time on that, more money on that. So with that, the idea is to put some effort on campaigns that will also bring more volume and more margin and at the net of that should be positive. But again, I don't think that it's going to be anything that will be outside of the [ gradually ] way of saying it. And with that, I don't think that you should see any spike or any change within market, even though as time goes by, we should be spending more on that side. Felipe Ucros Nunez: Okay. Great. So we should expect SG&A levels to be similar to the last 2, 3 quarters for the short term for the next couple of quarters? Rodrigo Martinez: Yes, correct. Operator: There being no further questions, I would like to return the call to management. Hernan Lozano: Let me turn the call back to Rodrigo for a closing comment. Rodrigo Martinez: Thank you, Hernan. We're encouraged by the strong start of the year. These results underscore the resilience of our business model and a high-performing team. We remain focused on operational excellence to stay ahead of consumer needs and preferences in a dynamic environment. We greatly appreciate the continued support of our investors and business partners. We look forward to updating you next quarter. Operator: Thank you all for your interest in Sigma Foods. This concludes today's conference call. You may disconnect.
Ben Jenkins: Good morning, everyone. Thank you for joining us. There's obviously a lot to get through in the announcements today. So alongside the presentation, the Aura-Qoria team is going to be in the ground in Australia next week, meeting with as many of you as possible. In terms of the call today we have Peter, Tim, Ben and Crispin joining from Qoria alongside Brian from Aura. Everyone's going to be available with the line of Q&A at the end of this call. Hari is unfortunately, already in transit to Australia. But we do have some comments from him played shortly. So with that, Peter, I'll pass over to you to make a start. Peter Pawlowitsch: Thanks, Ben. And good morning, and thank you all for joining us. So today, we announced some changes to our merger arrangements with Aura. These changes reflected deliberate set of decisions by our respective boards to ensure that the combined group AXQ is positioned for long-term success in a rapidly evolving global technology landscape. We've announced that Aura secured binding commitments for an increased equity placement of USD 100 million. That's a significant increase from the original USD 75 million. And importantly, it's fully supported by existing Aura shareholders, demonstrating their confidence and strong conviction to the mission. Also it ensures that we have a strong balance sheet for the group on when the merger completes with only a modest dilution. We also announced today a new organizational structure, one designed to get the best out of the capabilities of the group, combining U.S.-based technology and growth leadership with Qoria's global market presence, regulatory expertise and customer footprint. Hari, Sujay and Brian have all agreed to continue in their current roles as CEO, Chairman and CFO, respectively, of Aura. And the group has been secured by the continued service of Tim to drive our ambition to be the global trusted name in online safety and Ben to support Brian as Australia's CFO. The Qoria Board is delighted to announce today's changes and continues to unanimously recommend the transaction. They ensure that Aura enters the ASX as a well-capitalized global platform, has the ability to execute through integration and invest in growth and is unconstrained in this area of significant technological change. We believe this structure, both capital and ownership gives shareholders the best opportunity to participate in the long-term value creation. Regretfully, Hari is currently on a plane coming to Australia to meet with investors. We wish he could have joined us on this call and has recorded a few comments. Tim, can you please roll the play? Timothy Levy: Sure. Hari Ravichandran: Hello, everyone. I'm really disappointed. I cannot be on this call live as I'm on my way to Australia to meet our investors and the Qoria team. I'm extremely excited and looking forward to meeting with the investors and engaging with all of you over the course of next week. What we are building here is something very significant. This is a global platform for digital safety and security at a time when the problem set is accelerating, it's not slowing down. The change announced today will reflect a very thoughtful and conscious decision to prioritize strength. The markets have moved, everyone in global SaaS knows that. We want to position Aura to win with both capital and capability. Sujay and I are excited to get behind the merger and commit a further $25 million to its success on top of our previous investments. The leadership structure here also reflects our commitment with me and Sujay continuing. My role here is to bring the businesses together and ensure that we hit our numbers and to drive global innovation, replatforming and growth. I'm also really looking forward to continuing my work with Tim Levy, who will support me at Aura through a leading Aura Alpha. Aura Alpha is a critical part of our strategy. This is how we will build new growth vectors across partnerships, markets and corporate development. This is not a site initiative. It focuses Tim on his unique vision, his global relationships and his skill set. And this is how we'll ensure that we stay ahead of the market as it evolves. We now have the platform, the leadership and the capital to build a global category leader. Again, I'm very sorry I'm not live on this call. However, I'm sure I'll get some baseline with many of you next week. With that, I'd like to now hand it over to Tim, Brian and Ben to deliver our results. Thank you all. Timothy Levy: Thanks, Hari. Thanks, Peter. That's great. So what I'll do now is I'll do a highlights of the Qoria, Aura and the group, and then I'll hand over to Brian DeCenzo who's going to run through Aura's results, which are fairly impressive. And then we'll cover off our typical Qoria results operational update with Crispin and Ben and then a brief Q&A at the end. So I guess if I was to summarize this slide, which is becoming increasingly complex. The overall thematic here is that the Qoria business, if you look through FX movements for the falling U.S. dollar and the transactional costs that we've been spending is actually performing extremely strongly. In the March quarter, it was probably a surprise to all of us. I think we outperformed analysts' expectations in terms of ARR added and net ARR growth at 49% improvement on what we did in the equivalent period last year, so that was pretty remarkable and not just in K-12. And one real highlight actually, which I do want to call out now is the K12 business in the U.K. that's been battling some headwinds for a while, particularly around funding and the lack of product. Now both of those things seem to be solving themselves. And so we had over a 60% PCP improvement in the performance of the U.K. operation in the March quarter. So it was tremendous. But really the But really the standout clearly continued to be still Qustodio's $2.7 million of ARR, which is more than double what they did in the equivalent period last year. So Victoria and the team are doing an outstanding job there with very modest increases in investments. On a constant currency basis, we ended at -- we would have ended at $169 million of recurring revenue, which would have been beyond everybody's expectations, I feel. But of course, we were buffeted by FX. The FX in our -- when we started the year was $0.64, that is $0.72 now. Now turning to Aura, if I can speak just briefly for Brian. Let me speak with admiration, added $26 million of recurring revenue in the quarter, 40% up versus the prior period with less marketing spend, improved AOV, improved CAC. It's an astonishing result. Just to remind everybody, when we started talking to Aura, I think they had $180 million or thereabout of recurring revenue. This is in October, November last year, ended the year with $216 million and now at $241 million. That's astonishing. And the businesses in combination now have $345 million in ARR. And if you extrapolate the March result, you get to a very big number. And remember, for those people that know Qoria well, the June quarter is our biggest period of growth. Last June, we added $14 million recurring revenue, around $10 million we added in the June quarter. If we replicate that, then a very big number will appear on the right-hand side of the screen in July. So all of those numbers are really, really strong. The unit economics of Aura in particular, I would like you to note because they're the things that give us the confidence as to why this deal is the right thing for our shareholders to do. So that being said, I might hand over to Brian. Brian DeCenzo: Yes. Thanks, Tim. So as Tim alluded to, very pleased to report that the performance that we had indicated through February on the call that we had about a month ago at this point, continued through the end of March. So GAAP revenue or statutory revenue was $59 million for the quarter with ARR ending at $241.5 million. That represents 31% up year-over-year for both metrics. Again, sort of reiterating some of the themes that we talked about at that March session, a lot of this has to do with strong unit economics in our D2C business, not only the CAC that Tim talked about, but really being able to mitigate the burn on account of the sales within our D2C business and then the deliberate upsell motions that we were able to employ to drive incremental AOV. Adjusted EBITDA for the quarter was negative AUD 14.3 million. So that was an improvement of AUD 1.1 million year-over-year. And while that is an improvement over last year, we would note that it does not reflect the full run rate impact of the cost actions that we executed in February, which we discussed on that call about a month ago or any additional planned cost savings, including the performance marketing spend pullback that we've indicated to the market we will do in the back half of the year. So just to summarize, I think these results reflect our ability to achieve the targets that we've set out and very much as we think about the performance in the first quarter and as we roll forward in the year, aligned with the prior communication that on a combined basis, we will be free cash flow positive from the time of closing through the end of 2026. On the next slide, if you turn there -- thank you. So as Tim noted, what we wanted to highlight here was when we first spoke with the market in February around this transaction, we indicated a commitment, again, free cash flow positive on a combined basis from the time of closing through the end of the year. And one of the ways that we would get there was through improved efficiency in our performance marketing spend. And so what we want to highlight here is we were able to both bring CAC down and then on account of the reduction in CAC and that improved AOV that I referred to on the prior page, we were able to see a very dramatic improvement, not only in CAC, but also in the overall burn rate through the first quarter at that $5 million number. If you flip to the next 2 pages, Tim, I also wanted to provide the market just a roll forward of the metrics that we've shared in prior sessions, so people can get a sense of how everything is trending. Obviously, as we talked about, we'll be in front of investors over the coming days and happy to answer any further questions. So with that, I'll turn it back to Tim. Timothy Levy: Thanks, Brian. So yes, I'll quickly skip through the quarter highlights. Obviously, I'm sure there are going to be a lot of questions and thorough side of things is probably less interesting, but I'll go through them. At the end of the year, actually, it should be 31 million children now. So we've added a further 1 million students since we last reported 10 million parents. All of the kind of operational metrics within Qoria are performing really well. Growth within the regions, U.S. is growing north of 26%. We expect to improve that through June. Qustodio is a standout, 30%. I think we're talking at the beginning of the year, 30% growth, and that's comfortably doing that. EMEA is the U.K. and now operation in Spain called Qoria Spain that's starting to target international schools globally and now recently in the Middle East. It's subdued at 6%, but you'll see that really picking up, particularly as we're launching this Qoria Connect product, the unified Qoria K12 platform is literally rolling out now. We've got customers using it now. So this year, I think I've said many times, for Qoria, it's about retention in the U.K. and next year, it's about growth. and we're seeing some really, really positive signs. The team there are doing outstanding work. And as I said, for now about a year, Australia is our best-performing K12 market with the community proposition of selling parental controls through schools in the Australian private school system. It's an outstanding performance. I think their PCP performance was like 80% above what they did in the prior year. That's just extraordinary growth out of this market here. So the contributors to ARR, obviously, Qustodio is a standout there at $2.7 million. Remember, that's net of churn, so that's a fabulous result. There's a modest amount of price optimization in that. They run a number of price optimization trials in January, February. They launched those at the back end of February. They've had to pull them back a bit tweak because it was elevating churn, but you will definitely see a flow through the year, particularly in that key renewal period in back-to-school and Christmas period. So there's something like a 5%, possibly 10% natural growth rate, net dollar retention and price increases coming to that business. So that's really exciting. And then the K12, as I said, a big contribution from new, increasingly strong contribution from existing cross-sells and upsells. I think our target was 33% or 34% contribution of growth through existing customers, and we're easily outperforming that. So Crispin and his team are doing a fantastic job. Obviously, the big story is the big red line on the right-hand side, we are being buffeted by the FX movement of the U.S. dollar. But the underlying business is really strong. And fortunately, for us, from July, we'll be reporting in U.S. dollars. So that will become much less of a problem for us and much less of an issue to explain to analysts. K12, I mean the numbers here speak for themselves. The real highlight for us, given our focus on that back to -- so the June quarter in the U.S. is the pipeline. $40 million of pipeline with a weighted value of $19 million. It is the highest I think we've ever had or equivalent to the highest that we had last year. We're set up really well. And of course, we have a number of [ whales ] that are outside that pipeline that give us a lot of confidence to outperform. So feeling really good about that. I think I touched on all these metrics, everything else is pretty stable. Average sales order, average price per unit, they really -- the June quarter is a really important period for us. So you'll see a turn in that chart down the bottom, average sales price per order, you'll see that click up in the June quarter again, as you saw last year. Qustodio performing on all metrics, profitable business growing really well. As I said, there's been price optimizations. We've given Victoria an extra 30%, 40% in marketing spend, and she's spending it very, very wisely. She's -- as compared to the -- and I'm not being disparaging but the Qustodio business is selling parental controls, they have the benefit of a positive cash burn in marketing. And so we've told Victoria, you can spend up to that burn and no more. So basically manage your cash flow and grow as hard as you can. And she is doing very well. School promotions continuing to grow. The old community stuff that we spoke about is going really well, 540 districts now. So I think we're now about 18% of our districts on that program, which is equivalent to 1.3 million parents. So the parents of 1.3 million students are being promoted Qustodio. That's pretty exciting. We're still getting those schools that launched our program north of 20% taking up the freemium offer and of those 1% taking up the premium offer. We're launching monthly subscriptions to those customers literally this quarter actually. So we're now starting to get into the cadence of promoting and seeing how we can monetize that pretty big audience. So stay tuned. Okay. It's obviously very, very cyclical. I would urge investors to not read too much into our December quarter or March quarter -- sorry, the March quarter or June quarter cash flows because really the key selling period for us, the key is June and the cash comes in, in that December half. 65% of our growth is typically in the June quarter. So I should be on our ARR performance for June. And you can see in this chart that the business is growing every year, and there's a high cyclicality now in our numbers. These charts are hard to interpret given the FX movements and what we've tried to do is show that our net ARR is growing, which is the -- on the bottom chart is the green box, the green shaded area. And the column on the right-hand side is our FX adjusted underlying cost structure. And you can see that there is -- it's moderated now with these -- we announced some changes in the last couple of months. We're pulling some costs out of the business, essentially reducing new hires and replacements to make sure that any operational cost expansion in our business is covered by cost outs or any delays in cash flows are similarly covered by very careful spending. But I'll let Ben talk more about that at the end of this deck. Over to you, Ben. Ben Jenkins: Thanks Tim. I'll just touch on a couple of things here quickly so that we can get into questions sooner rather than later. One of the main things that people will notice is the customer collections, the cash receipts are only slightly up year-on-year. Tim has touched on the seasonality of that. The December quarter is what feeds the March quarter receipts, so December sales and the December quarter is -- the U.S. is about 5% of its business in that quarter. And so it's more about Australia and New Zealand. So it's very hard to shift the March cash flows. But as noted here, the U.K. had a good quarter. That was largely in the month of March. So very little collections, if any, related to that in the March quarter, and that will flow through to a good growth in year-on-year comparisons for cash collections in the June quarter. On to a little bit more of the detail around the costs. Obviously, you can see direct costs in the quarter were up significantly. There's 2 things at play there. December quarter was down. It's just timing of cash flow payments falling into January. So some of that related to December. But also there's an annual billing cycle for some of the Google costs and that occurs at the end of November, invoiced in December, paid in the March quarter. So you'll see the direct costs come back down into line with the June, September quarter from last year. There's nothing structural that's changing that spend to be up on an annualized basis. It's a little bit in line with growth in students, but it's not linear. So we do get economic benefits there as we grow. Marketing costs are obviously up year-on-year, but as we flagged in the December quarter would be down from December, which is one of the biggest spending periods. The June quarter should be a similar number and staff costs well under control, some changes made during the March quarter that we announced as part of the half year results. So we've taken some cost out of the business, a slowdown on recruitment, and we've got that well under control, fixed other down as well and leases down as well. So overall, costs very much under control. And if you project that forward with the growth in ARR that Tim is talking about in the June quarter, you'll be able to see the growth in cash flows and cash generation over that period. So very comfortable with where we're at the moment, got line of sight through to July where the cash starts to flow strongly again and comfortable that the June quarter will significantly outperform the March quarter in terms of free cash flow. That's probably all I'll cover on that and happy to jump into questions there. Unknown Executive: We can. Ben Jenkins: Thanks a lot. We have some restrictions in place given around what we answer given the scheme booklet publication late May, early June. However, that being said, happy for you to ask whatever is top of mind around the update today. And if we're restricted from answering it, we'll just take it on notice and address later on. So with that, I think we'll go to Lindsay for our first question. Lindsay Bettiol: I think like probably today's results, there's kind of 3 parts to it. So maybe like first question just on the stand-alone Qoria business. Your pipeline is $44 million and your weighted pipeline is $19 million, which more or less is the exact same numbers you printed this quarter last year. So like how should we think about the June quarter in terms of -- if I'm just taking the pipeline as a gauge, it doesn't look like you're going to have much improvement year-over-year in the June quarter. Could you just maybe talk to that and explain where I'm not wrong, please? Timothy Levy: Crispin, you want to take that? Crispin Swan: Yes. So it is the biggest pipeline we've had, as you correctly state marginally. Yes. So from the North American market, as we know, it's the biggest selling period, and they are on track to have their largest ever quarter, Lindsay. We've also -- I don't know if you remember, we changed the structure of the team with an individual call Adam leading that team recently. And he's really implemented a lot of additional focus on deal management. So we're seeing extremely strong conversion ratios at this point in time as well. And as an example, we've got 30 deals in the pipeline with over 40,000 students each, which represents 2.5 million students with a [ fee ] of $350,000. So it will be our biggest ever quarter in the U.S. And then if you add the U.K. on top of that, as Tim said, they've had a really strong performance. They've essentially hit their annual budget year-to-date with 1 quarter to go and are projecting a strong Q4 as well and similarly for Australia. So all in all, I'm incredibly confident where we're at and the pipeline is definitely sufficient for us to have -- if you're focusing on the U.S., our biggest ever quarter. Lindsay Bettiol: Okay. So summary is absolute dollars is the same, but they're probably higher quality dollars. Crispin Swan: Yes. Lindsay Bettiol: Very good. Okay. Maybe a question on that. You've given us some updated figures versus, say, the Feb update. I look at the CAC that you've given for the first quarter, it's $169 in the D2C business. It was $173, I think, in the last update you gave, but that was only weeks ago. So just backsolving it implies like the CAC has collapsed in March. So one, like is that math correct? And two, could you just talk to what you're seeing on the CAC front, please, in the D2C business? Brian DeCenzo: Yes, absolutely. So yes, that math is correct. We saw some really favorable CACs towards the last few weeks of March. The prior update that we had given was only through the February month. So we had a full another month of performance, and it was a favorable month from a CAC standpoint. Look, it's a dynamic market. And so you look at what channels you're in, who is bidding on words in certain of those channels at different rates at different points in time. And then ultimately, there's the end market demand that exists at any point in time. And so based on those combination of factors, I think we were able to meet demand at a really attractive rate over the course of the month of March. Lindsay Bettiol: Okay. Brilliant. And I'll sneak in a third question just on the merger update. I think like probably one of the biggest critiques on the proposed merger I got is that it didn't make a lot of sense for what is essentially a U.S. business to run out of Perth. So you've obviously changed that. But my question is like is there not maybe an element of overcorrecting here? I mean Qoria is still going to be 1/3 of the combined business. And it just feels like -- I guess my question is who runs the legacy Qoria business inside the combined entity with both Tim and stepping back a bit. Timothy Levy: I'll take that one. So the structure, not everyone on this call will understand kind of the organizational structure of our businesses. But Crispin, who you see here on the call, who runs K12, he'll be reporting to Hari in the structure. So that's signaling the importance, the critical importance of K12 in this broader strategy. Victoria, who runs our Qustodio business will fall under Tom Clayton, who runs is the COO, current COO of Aura. And so he will essentially be looking after all of the consumer-facing revenue. And then our kind of functional product and engineering kind of security people and finance people will fall under their functional head. So in many ways, it's BAU to Crispin in particular, he's running his team. They're responsible end-to-end for revenue. And he has a product person, Nabil, and he has an engineering person, Rick, that will keep doing the things that he needs done, with their new reporting line. So but below the surface, not much difference. And the message internally is constantly reiterated, we're hitting our numbers, road maps aren't changing, plans aren't changing, hit your numbers, hit your numbers, don't break, [ it is not broken ]. Ben Jenkins: Thanks Lindsay. Owen, over to you. Owen Humphries: A quick question for me. Just we're getting to know the Aura business a bit better. I'm keen to learn more around the seasonality of that business. A critique this morning has been around the Jan and Feb run rate when you gave an update in March, running at around $11 million per month for Aura and then stepped down to, call it, $3 million for the month of March. Just keen to understand a little bit around seasonality of that business. What was March last year? Brian DeCenzo: I don't have those numbers. I don't have the March numbers at my fingertips. Ben Jenkins: Yes. Year-on-year ARR added is 39% up. So it's significantly up. Growth was around about $16 million in the March quarter last year. So it's not all seasonality. It's a really good quarter from the Aura business. Owen Humphries: So I guess the concern in the market has been around run rating a March number -- the March net add number? Brian DeCenzo: Yes. So there's a high degree of recurrence in that number. The -- when you look at the business, we have the big step up in January on the employee benefit side. And in the -- on the consumer side, there does tend to be some seasonality in the business. It actually tends to correlate a little bit more with a couple of things. One is the holiday period when you have people getting new devices and wanting to bring protection on those devices. You tend to see in the U.S. actually in the March and early April tax quarters around tax season with tax day being April 15, so anticipation of people getting their return checks. And then there are certain historical events that have driven excess demand. We've talked about those in prior forums, in particular, data breaches and so what you'll see is you'll see a little bit not necessarily on a new cash basis, but on a P&L overall basis, including renewal, you'll see slight bumps in late April and then a bigger bump in sort of the August, September period every year because of a prior event in 2024, if I'm understanding your question the right way. Crispin Swan: Yes. I think if I can jump in. This chart here, I think, shows you what you need to see, which is the EB business has an annual step change in the first quarter of the year, and that's magical, like it just -- they sell new logos and then they do essentially upselling within existing employers. That's a great business. So that's probably what the question is actually -- answering the question that you received. I think that's the answer to it, which is the March comp there was definitely step changes in that kind of more enterprise motion of the EB channel. And then the light blue is the typical consumer model. There is cyclicality far less than in the Family Safety business. But you also see in that Q1 '25, a jump that I think it was Q1 '25 when there was that big data leak in the U.S. And so there's also a consumer bump in that period as well. But they're the 2 cycles that flow in. Owen Humphries: And I guess a question for you guys then is just to understand the confidence of ARR growth. I understand the Qoria side of the growth in ARR in the second quarter of the calendar year. Maybe, Brian, if you can give us an indication of the expectations of where ARR growth would lie in the second quarter? Brian DeCenzo: Yes. Look, we continue -- so we grew at 31% year-over-year through the first quarter, as we talked about. We wouldn't necessarily view that as being the year-over-year run rate going forward. But we -- I think what we would say is we anticipate it growing sufficient to achieve the objectives that we put out to the market in terms of growing 20% on a combined basis year-over-year. Owen Humphries: So that is rolled over on the same ARR in the second quarter of last year, I'm not sure of the nuances in the D2C business. I'm guessing you'd expect to exceed that in the second quarter this year? Brian DeCenzo: Yes. So there were some issues around, frankly, Google algorithm changes and then also the shift to AI search that occurred in the second quarter of last year that I think we don't expect to see those same types of headwinds this year. Ben Jenkins: Sorry, I just realized you were asking about the March month. But the March quarter last year was $18.5 million. The March month last year was $1 million. So the $3.5 million of written this year is significantly up on last year as well. [indiscernible] over to you. Unknown Analyst: Just a couple of questions from me. Just with the new products flagged with Aura Enterprise, for example, can you just talk through how big the potential is there, sort of when that should be contributing to revenue? And then more broadly, just the road map and the opportunity across the 1.75 million subscribers that you've got and sort of what you think you can do with that over time? Brian DeCenzo: The first question, James, specifically relates to the Aura MSP business, if you will? Unknown Analyst: Yes. Yes, that's right. Brian DeCenzo: Yes. So that business is early days. We just moved the product out of beta. It's a sales channel that we find very compelling from a sales dynamic standpoint because it's a very large sales channel in the MSP network. We've seen estimates 30,000 MSPs plus in the United States alone. And then there's a multiplier effect underneath those 30,000 MSPs where they'll each have a number of small business clients who will each have a number of endpoints for each one of their SMB customers that are addressable. And it tends to be a very levered sales channel because these 30,000 MSPs, many of them don't compete with one another because they don't cover either the same industry or in the same geography. But they do tend to get together at large sort of conference-type events and sort of compare notes. So we find that to be a very interesting and levered sales channel when you can tap something that really appeals to that customer base. Again, early days, the feedback and the early returns have been good. It's growing off a base of 0. So I'd say it would take a period of time before it's going to be a material contributor. I think we'll start to see more momentum in that next year and then really start to see some ramp in sort of '28 and '29. Unknown Analyst: Excellent. And then second part of the question, just in terms of monetizing the existing user base over time with additional functionality and the like, maybe things like pace or locations and these type of things. Brian DeCenzo: Yes. Look, I think I'd say core to the discussion between the 2 of us, say Qoria and Aura is how do we deliver more value to the customer in the first instance based on the things that we each bring to the table today. And so as we go through and think about the back half of the year operating as a combined entity, we're thinking a lot about how to deliver value across the 2 different customer bases, one to the other, how do you take a Qustodio customer as an example, and make them an Aura customer. And then as we go forward, I think we're going to be very deliberate in terms of adding new products and features that they can deliver value to the existing customer base as well as new customers and also be very thoughtful about the way that we merchandise new product features, I'd say, in line with the merchandising that we have demonstrated with our upsell motion over the past couple of 6 months or so as we've talked about with the boost in AOV. I don't know, Tim, would you add anything to that? Timothy Levy: I think you answered it perfectly. Unknown Analyst: No, that's great. That all makes sense. Maybe just a couple more. Just on the rationale for taking the extra cash. I suppose the merged group is slated to be breakeven on completion. So strategically, is there a pathway to accelerating some strategic ambitions or just the thinking on taking that cash given the breakeven? Brian DeCenzo: Yes. So the way I would characterize it is given the dynamic operating environment that I think we all find ourselves in, we feel it's prudent from a balance sheet standpoint to capitalize ourselves in that way. Unknown Analyst: Okay. Great. And then just last one, I think you might have touched on it with Owen's question a little bit. But just with the ARR growth ambition of 20% this year and the performance marketing rolling off, I suppose you're growing at 28% currently, and we're 1/4 of the way through the year. So I suppose how do you get visibility in terms of what the growth does sort of post deal completion with that performance marketing reduction? Brian DeCenzo: Yes. So again, I didn't fully grasp Owen's question while he was asking it. And I think one of the things to highlight that's sort of embedded in the ARR growth year-over-year is the step-up, as I think Tim mentioned, around our employee benefits business that happens really in January and then a little bit of an incremental effect in February. Because of -- there is ballast from that business that continues through the course of the year on a year-over-year basis. So that gives us some visibility into the overall ARR growth. And then the remaining visibility that we have is it's very formulaic the way that we think about modeling out spend versus return in the D2C business and ensuring that we spend in order to be able to hit certain top line performance targets that we have. Unknown Analyst: Great. And maybe just last one, I'm not sure if we touched on it during the presentation, I dropped off. Just in terms of time line and catalysts and I suppose what we can expect to hear out of the company forward over the next 6 months? Brian DeCenzo: Yes. So in the first instance, I think the -- we have the deal process to get through. We've highlighted the time line to get through that process. So you'll be hearing a lot from us, frankly, through a regulatory lens over the course of the next 2 months, scheme booklet, et cetera, which will be published. And so you move forward with that. In terms of other announcements, we will be obviously having the Qoria fourth quarter announcements at some point in July, I would assume. And at that point, I think we'll have more updates, obviously, on the deal process, which should be near hopefully completion as well as incremental actions that we've taken to sort of put the business in the position what we've indicated to the market we will get it in. Ben Jenkins: Wei-Weng, go ahead. Wei-Weng Chen: I guess one of the announcements today was the creation of Aura Alpha, which is, I guess, a strategic sort of corporate dev-type division. Given the near-term sort of post-merger is very much about driving the path to positive free cash flow. Wondering what the near term looks like for that division? Timothy Levy: Yes, that's a good question. Thanks for that. There's seems to be things that we can -- we have to do actually that unlocks. And that when you're busy -- and we've been through this, Crispin and I have been tortured by a unification process that's been running way too long, probably 4 years. You don't get to do them when you're in BAU or the grind of unifying businesses. So what Hari wants me to do is to not get distracted by the day-to-day operations, hitting quarterly numbers, restructuring and so on and focus on those things that unlock value and not on the quarterly results, but unlock value in 2 or 3-year horizons. Some of those, of course, are going to be corporate, but they don't have to be. Some of those will definitely be partnerships. A lot of that is in relation to the work that I've been doing in a sense,, part time in advocacy, government relations, competition law reform, safety law reform, things that are really starting to change. One -- something that came up today is not -- I wouldn't claim in any respect that I or Qoria drove this, but there is this push for digital safety globally, and that's now manifested in California with an obligation for schools to limit screen time. And that's everything we've been talking about for 10 years in our business, and now that's coming to law in California. And who is better placed to organize to respond to that opportunity or that challenge than us with the parental control tools we have with the Octopus acquisition that allows us to measure time, use of on school devices, on school and other apps, like it's such an opportunity, and we're in the right place at the right time. So my job is to look for those opportunities and where I can internally or externally, make sure that we're pursuing them. We're already in discussions and have been prior to this deal, but since the deal was announced, we've opened up some new discussions with some really interesting strategic partnerships. So look, there is -- my problem actually is there's too much opportunity, not too little. As this business comes together and we get the confidence of the capital market, so our cost of capital comes down, then I think there's probably more corporate things that we can do. But for now, look, there's some really interesting stuff that I can do in my day-to-day and partnerships that will add a lot of value, I think, pretty quickly. So look, that's a stay tuned thing, but I'm hoping to very regularly update the market on that progress. Wei-Weng Chen: Yes, cool. And there's been, I guess, a few changes to the structure of the deal announced today. At the time of the announcement, I guess -- would it be correct to say, firstly, that you had no intention for, I guess, your announcement to be in negotiation, but it seems like you've taken on some feedback and kind of obviously restructured things in what I view as kind of a pretty logical manner. But I guess is the work now on, I guess, negotiating the structure in terms of the deal now kind of over and now it's just all about just kind of executing on the deal? Crispin Swan: Do you want to take that? Peter Pawlowitsch: Yes. So it wasn't an intention to have that, but a lot has changed since January, we're finalizing this what's happened with Claude AI, what you can now do from a development point of view and the AI stuff coming through is a dramatic change. And I think what we want to be known as a dynamic organization that adapts to what's happening to the market quickly. So there's a factor of that tied into it. We're not -- right here today, we're not expecting other changes. And we think we've got the structure that can handle that dynamism for the next period of time. So we're confident with that. And now it's just let's get this thing done and execute as quickly as we can. We put our timetable today. Obviously, some of these changes take a few weeks, but we're pushing [indiscernible] to get it done as quickly as we can and hit that strong growth. Wei-Weng Chen: Yes. And then just one more, just, I guess, to follow up on a prior question. The upsized raise, the $25 million, is that additive to your prior net cash guidance of $65 million to $70 million post transaction? Or -- and I guess, if not, does this reflect potentially higher-than-expected deal costs or... Brian DeCenzo: It is additive to the anticipated net cash position. Ben Jenkins: Possibly to be higher, we're still tracking in line with what we're expecting originally. So strong net cash position is the -- I guess, the outcome of the higher placement. Owen has a followup question. Owen Humphries: Yes. Just hitting directly on that, can you guys give an indicative guidance on -- or an update or reiteration around what the cash balance will be post transaction, noting that your guidance is free cash flow positive in the second half or July or close in July to December. So what the cash balance would be and then the undrawn debt facility? Brian DeCenzo: The cash balance at the time of the transaction, like in pro forma for day 1? Owen Humphries: Yes. Brian DeCenzo: Yes. So I would say that is still moving around on the basis of, I'd say, balance sheet management with respect to the various debt facilities that are in place. But we're currently anticipating somewhere in the order of magnitude of net cash of $20 million. Owen Humphries: Which is? Peter Pawlowitsch: At the time of merger, we said [ 0.5 negative ] so plus 25... Ben Jenkins: I've got a written question come through. So on today's announcement, the additional funds from the Aura founders, a figure of $0.40 was mentioned. I'm unclear as to what the jargon means. Will Qoria's shareholders still receive 1 AXQ share for average 17.2 Qoria shares? Unknown Executive: Yes, they will. There's no change to the relative valuation of the merger still a 35-65 split preplacement money. So the 17.2 exchange ratio that was disclosed when we originally announced deal still holds. Ben Jenkins: Awesome. I think that's all the questions I can see in the queue. Lindsay just put hand up actually. Lindsay Bettiol: Yes, I might just ask a third way on the balance sheet piece. So like rather than looking at it from a net debt perspective, just think about like the available liquidity. So you're going to raise $100 million, you have a debt facility of $100 million. Could you just remind us again like what the plans are in terms of existing debt facilities and like how much liquidity you're thinking you're going to have on day 1 post merger completion, please? Brian DeCenzo: Yes. So the anticipation is as quickly as practicable to consolidate all forms of debt that we choose to have outstanding into the new facility with the Banc of California. Again, as you highlighted, that would be a $100 million facility. And so I guess the math on that liquidity-wise would be we'd have, let's call it, $80 million drawn and $20 million of cash, so about $40 million of liquidity. $20 million of net cash. So $100 million of cash total and an additional $20 million of liquidity from the facility. Ben Jenkins: Tim, I'll pass back to you for closing remarks. Timothy Levy: Yes, cool. Thank you. Look, so this might be my last time closing one of these sessions. So first, I'd like to say thanks for everybody for supporting us to where we've got to. I'm very excited about this merger. I guess if I could position the bringing together these businesses and the most recent changes, what we're trying to do here is concentrate on setting up something that is globally significant. And the moves of the last announced today are really about setting this company up for success to tackle that immense opportunity with a heightened focus on the speed of pace of change in valuations, [indiscernible] and so on. So setting the organization up with the right division of labor with the right focus on engineering capability, where our revenue is based in the U.S., but also having an eye to the future with the role of Aura Alpha, setting up the business with the right capital structure, taking advantage of the extraordinary network of connections that the Aura team have, which is something I'm incredibly excited about. And so yes, that's what this whole thing is about is not creating a nice little business that's growing and making a little bit of profits, but to solving a global challenge and doing so in a really big way. And that's really the underlying message. And one final thing I'd add is the Aura leadership team are here with us in Perth. The senior leadership team of Aura are going to be in Sydney talking to investors next week. So please find the time to speak to them and be as excited about what we're creating. I'm sure we will be loving that process. Thanks for your time, everybody. I'll see you all very soon.