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Operator: Greetings, ladies and gentlemen, and welcome to the Vesta First Quarter 2026 Earnings Conference Call. [Operator Instructions] And as a reminder, this call is being recorded. It is now my pleasure to introduce your host, Fernanda Bettinger, Vesta's Investor Relations Officer. Please go ahead. Fernanda Bettinger: Good morning, everyone, and welcome to our review of the first quarter 2026 earnings results. Presenting today with me is Lorenzo Dominique Berho, Chief Executive Officer; and Juan Sottil, our Chief Financial Officer. The earnings release detailing our first quarter 2026 results was released yesterday after market close and is available on the IR website, along with our supplemental package. It's important to note that on today's call, management remarks and answers to your questions may contain forward-looking statements. Forward-looking statements address matters that are subject to risks and uncertainties that may cause actual results to differ. For more information on these risk factors, please review our public filings. Vesta assumes no obligation to update any forward-looking statements in the future. Additionally, note that all figures were prepared in accordance with IFRS, which differ in certain significant respect from U.S. GAAP. All information should be read in conjunction with and its qualifying in its entirety by reference to our financial statements, including the notes thereto and are stated in U.S. dollars unless otherwise noted. I'll now turn the call over to Lorenzo Berho. Lorenzo Dominique Berho Carranza: Thank you for joining us today. and for your continued interest in Vesta. The first quarter marked a strong start to the year with solid leasing momentum and stable portfolio performance despite ongoing global tensions. Importantly, as our results demonstrate, we're seeing not only continued activity, but growing conviction from our tenants. This was reflected in new leasing and expansions with existing clients as well as with exciting new clients during the quarter. Our performance reinforces the strength of Vesta's platform and reaffirms our approach for 2026. And of our Route 2030 strategy, which is centered on expanding a well-curated high-quality portfolio for disciplined development, leveraging our privileged land bank to capture demand. We believe value creation in our space is driven more by quality than size. While we are seeing increased competition for stabilized assets, Vesta differentiation lies in our ability to develop and operate a selective portfolio aligned with global best practices and the evolving needs of our clients. Let me briefly highlight the key drivers of Vesta's results. As I noted, leasing activity remains strong with total first quarter leasing reaching approximately 1.6 million square feet, including 1 million square feet in new leases with best-in-class companies. Total portfolio occupancy reached 89.7% by $0.05, while stabilized and same-store occupancy reached 93.4% and 95%, respectively. Reflecting the strength and stability of our tenant relationships. During the quarter, we saw strength in the electronics and aerospace sectors and also in AI-related data center infrastructure which is becoming an increasingly relevant demand driver that will benefit from long-term structural tailwinds. On the development side, our pipeline continues to convert into active construction with Vesta projects breaking ground across key markets. This is further evidence of both improving demand visibility and the strength of our land bank which is expected to support the stabilization and gradual recovery of occupancy. Along these lines, as leasing activity continues to gain momentum, we have selectively resumed development. We launched 2 new projects in Mexico City and 1 in Tijuana during the first quarter, which brings our total development pipeline to approximately 1.6 million square feet. Importantly, our approach remains disciplined and demand-driven, prioritizing tenant back projects in high conviction markets. From a financial perspective, results remain solid. Total rental income increased to $76.7 million, while rental revenues reached $74 million, a 14.1% sequential increase. Also with sustained strength across our key profitability metrics, including NOI and EBITDA. Let me now turn to the broader market environment and how we are seeing it reflected across our portfolio. Recent data has focused on rising vacancy in certain regions, particularly in the North. However, what we are seeing is better characterized as a correction, not a structural slowdown or a decline in underlying demand. Markets such as Tijuana, reflect more uneven dynamics but it's important to note that this is largely due to supply from less experienced developers. Vesta's high-quality infrastructure-ready buildings continue to outperform, reinforcing our focus on portfolio quality. We're leveraging our strength in this market and launched a new project in Tijuana during the first quarter. New construction starts in key markets such as Monterrey have declined significantly year-over-year, reflecting a market that is adjusting quickly. In Mexico City, fundamentals remain strong. According to CBRE, Mexico City gross absorption reached approximately 6.7 million square feet during the quarter with pre-leasing accounting for most of the activity and more than half of new supply delivered already preleased. This dynamic reinforces both demand debt and forward visibility across this market. It has also led us to launch the 2 new projects in Mexico City, which I have described. In Guadalajara, we are seeing healthy demand, particularly from electronics and technology-related tenants, a key driver of activity in the market. During the quarter, we successfully pre-leased the 2 Vesta buildings under construction, underscoring the strength of underlying fundamentals and the sustained momentum we are seeing in the region. Let me now turn to how we are executing against this environment. Our strategy remains consistent. Vesta will grow through a high-quality well-graded portfolio developed with discipline and aligned with the long-term demand. As I have commented, our focus is on portfolio quality, not scale, ensuring that each asset meets the highest standards of infrastructure, energy and operational performance. This is particularly relevant in the current environment. Despite the competition for stabilized assets we are seeing, we believe there is greater opportunity in selective development where we can create value and differentiate through product quality and tenant alignment. Before I conclude, let me briefly touch on our capital position and outlook. As Juan will discuss, we continue to operate with a strong and flexible balance sheet, maintaining a disciplined approach to leverage and liquidity, which enables us to execute our strategy while navigating uncertainty. Capital allocation remains selective with a focus on high-quality projects supporting efficient growth. In closing, we are highly confident in our outlook. While near-term uncertainty persists, the underlying structural drivers underpinning our business are stronger than ever. Tenant activity continues to be robust. Foreign direct investment is maintaining strong momentum and manufacturing experts at record levels. At the same time, higher-value industries such as electronics, aerospace, semiconductors and data infrastructure are accelerating demand for Vesta's premium properties. We also expect a more favorable interest rate environment together with greater clarity around USMCA to support activity in the quarters ahead. Let me now turn the call over to Juan to review our financial results in more detail. Juan Felipe Sottil Achuttegui: Thank you, Lorenzo. Good day, everyone. Let me start with a brief overview of our first quarter results. On the top line, we delivered a solid start of the year, with total revenues increasing 14.4% to $76.7 million, primarily driven by rental income from new leases and inflationary adjustments across our portfolios. In terms of currency mix, 88.9% of first quarter 2026 rental revenues were U.S. dollar denominated compared to 89.7% in the same period last year. Turning to profitability. Adjusted net operating income increased 13.4% to $70.47 million. Our adjusted NOI margin decreased 62 basis points year-on-year to 95.1%, reflecting higher operating property costs relative to rental revenues in the quarter. Adjusted EBITDA totaled $62.1 million, up 12.4% year-over-year, while margin contracted by 130 basis points to 83.9% primarily driven by higher operating and administrative expenses during the quarter. Vesta FFO, excluding current tax, was $43.1 million compared to $45.1 million in the first quarter 2025. The decrease was primarily due to higher interest expense in the first quarter of 2026 compared to the same period in 2025. We closed the quarter with pretax income of $97.9 million compared to $28.6 million in 2025. This increase was primarily due to higher gains in the revaluation of investment properties, higher interest income and higher other income. This was partially offset by higher interest expense, reflecting an increase in the debt balance during the period, along with the increased foreign exchange losses and other expenses. Turning to our balance sheet. We ended the quarter with $206 million in cash and cash equivalents and total debt of $1.2 billion. Net-debt to EBITDA stood at 4.1x, and our loan-to-value ratio was 26%, down from the 28.1% at the year's end, reflecting the prepayment of the remaining $118 million MetLife III facilities. As of the end of the first quarter, we have no secured debt with 100% of our debt denominated in U.S. dollars and 87.2% of our interest rate exposure on a fixed rate basis. Finally, consistent with our balanced capital allocation strategy, on April 22, 2026, Vesta's shareholders approved a $74.8 million dividend for 2026 representing a 7.5% increase year-over-year. On May 6, we will pay a first quarter cash dividend. This concludes our first quarter 2026 review. Operator, could you please open the floor for questions. Operator: [Operator Instructions] Our first question will come from the line of Piero Trotta with Citibank. Piero Trotta: I have 2 questions. The first one is spec development in Tijuana. So given that the start, could you elaborate to us on the key conditions that supported the decision to move forward with this project in a market where vacancies remain high. More specifically, what metrics or market signals are you monitoring most closely when allocating capital in Tijuana? Just to understand as we see like in the market of Tijuana around 16% vacancy and even in your Vesta's portfolio is around 13%. What are you looking at when you're starting a new project in the region? And the second one is about leasing spreads that remained positive at around 9%. And I would like to understand how should we think about the sustainability of spreads from here as supply-demand dynamics continue to evolve across our markets, just to understand on this one. Lorenzo Dominique Berho Carranza: [Foreign Language] Thank you very much for your question and for being on the call. Well, definitely, this is a good quarter to start the year. And I would like to highlight that, as mentioned before, Vesta will -- with very -- little by little start development in certain markets, certain projects, we did good land acquisitions last year. And that's why we start again with projects in Mexico City as well as Tijuana with the ones that we started before in Guadalajara and Queretaro. So the Tijuana project, it's actually -- it's a continuation of our existing project mega region. We -- as you remember, we did a land acquisition on adjacent land to develop the second phase. We did the land improvements last year and today, we're happy to be able to now start the first building of the second phase. It will take us pretty much the rest of the year to conclude the building to be developed. And the reason of developing it is because we believe we have a good pipeline from either existing clients or potential clients that want to be established in a state-of-the-art industrial park in a good location where you can have good access to labor, good access logistically and very importantly, good access to energy. And that's what we already have in our park in Tijuana. And I understand that there's other vacant spaces in the Tijuana market. However, we know that none of them are so well located as this one and that's a key advantage. There has been some new vacant buildings in other submarkets of Tijuana. In many places, actually that lack energy, they lack logistic accessibility and they also lack labor. That's why they will probably remain for a longer period of time available until they find the right client. There's many, I would say, unexperienced industrial real estate developers. So that's why we feel comfortable with the type of buildings that we develop. And we think that eventually, this will turn into a successful project in a market that we know quite well. Secondly, on your question on spreads. Well, I think that the spreads will continue to be in a 10% to 13% range somehow. This one was -- this quarter was slightly lower just because of the -- maybe the combination of computation of previous quarters. But in the end, I think going forward, and we have stated this before, we think that over time, we will continue to see double-digit growth in terms of spreads. We have had some interesting re-leasing spreads throughout the quarter of projects in the 20% to 50% range, which is quite attractive. And I think that together with some of the new leases that have been signed also in some cases with rent, 30%, 40%, 50%, depending on the market. So this trend will continue. We see very strong rent levels in most of the markets. And in some markets, very strong rent growth still. So we are confident that, that will continue to be the same situation going forward. And we -- that's -- that continues to be a main driver of value for our existing portfolio with our existing clients and tenants. And we think that going forward, we will continue to see this positive trend. Operator: Our next question will come from the line of Gordon Lee with BTG Pactual. Gordon Lee: Just a quick question, it's sort of more a general sector question. But as you mentioned, there is a potential for a pretty significant consolidation in the sector, which obviously that's not something that you look at, your business plan is different. But I was wondering, generally, Lorenzo, how you feel about consolidation in the sector, particularly this type of consolidation, would you generally say that's good for better sort of competitive dynamics for a bit more disciplined on the ground? And specifically, do you think that might have also a positive effect in terms of discipline around development? Lorenzo Dominique Berho Carranza: Thank you, Gordon, for your question. It's quite interesting the market dynamics and what we have been seeing from a capital market perspective. I believe that this is a -- in some ways, this is a broader strategy from some global players that are active in Mexico that actually maybe their strength is on capital markets more than being on the local ground and having access to tenants as well as access to development and higher returns. And that's why I think that's a particular strategy for some of them. I think this is an industry that has -- that is very intense in capital. And I think that looking -- seeing that there's a lot of capital chasing for transaction, chasing portfolios even sometimes regardless of the type of assets they hold because sometimes they don't even match the original consolidator assets. But in the end, I think it's more the appetite of having industrial assets and being larger consolidators. I think that we will continue to see that going forward as long as there's strong capital chasing for attractive assets. I think that will continue to be the case. Also, I think it's relevant to consider that it sets a price -- sets pricing to transactions. So even for some assets that I believe are maybe below the quality of the Vesta standards having those prices, I think it's -- it sends a good signal on the opportunity that we see in our own assets that remember that Vesta, we selectively define which markets we invest on. We're very mindful of the quality of assets we develop. We also strategically define the type of tenants. So over the long term, we think that, that makes our assets be way more valuable and I think that, for that reason, these consolidations create an attractive baseline of reference so that we can have some sort of comparables to our own valuations. Gordon Lee: And do you think -- if I could just have a quick follow-up, do you think it has any implications, positive or negative on competitive dynamics or development discipline for the sector as a whole? Or no, I mean, do you think your day-to-day would be unchanged regardless of what happens? Lorenzo Dominique Berho Carranza: I mean frankly, most of these consolidators do not have development capabilities. So I think it doesn't -- I think it's only worth for certain merchant developers. But in the end, I think that we will continue to have our own discipline in terms of development. I think that maybe -- I think this will keep some of the acquirers more distracted in their own acquisition strategy, and I don't see them very active on the development. Operator: Our next question will come from the line of David Soto with Scotiabank. David Soto Soto: Just a quick one and It is related to the micro grid. It would be great if you could tell us in which regions are you currently developing this kind of facility? And what are the challenges that you are facing to develop this kind of facilities within the -- your industrial part? Lorenzo Dominique Berho Carranza: Do you mind repeating the question, David? Thank you. David Soto Soto: Yes, of course. It's related to your micro grid. It would be great if you could tell us in which regions are you currently developing these kind of facilities and which are the main challenges that you are facing? Lorenzo Dominique Berho Carranza: Thank you for which type of assets you mentioned? David Soto Soto: For the [indiscernible] that you are currently developing. If you are having these kind of development or micro grids development? Lorenzo Dominique Berho Carranza: Okay. So maybe if I understand correctly, the question is on which markets we might be developing well. Currently, we started a few projects in Mexico City, the land acquisition that we did last year. This is in the [ quality plan ] corridor, a very attractive market that has shown growth particularly coming from logistics as well as e-commerce and rental, and we continue to see rental growth. That's why returns are quite attractive. And for that reason, we believe that developing spec in the area is very, very appealing. We started a building in Tijuana. And very soon, we will start also development in Guadalajara, as you could see in our report, we were able to lease the 2 projects that we have under construction and we're happy to continue to see growth and demand coming in the electronics sector, particularly, but also this market has shown also strong dynamics in the logistics and e-commerce sector. So hopefully, soon, we're going to start some spec buildings similar to what we have done in the past in the rest of Park Guadalajara. So we're confident that with the land acquisitions we did last year, we're going to have a -- we're going to repeat the success that we have previously in the rest of Park Guadalajara I. Also, we acquired land recently in Monterrey, in La Palma, in Juarez. And these 2 markets are the ones that eventually, we will also start developing spec buildings or build-to-suit projects. We have started with a -- we have had good progress in the permitting licensing and little by little as long as we start seeing a strong momentum on the leasing, we will start buildings and will be a strong signal that the markets are permitting again to have some projects. And this is mainly driven by the pipeline that we have been generating. We have definitely seen stronger demand from different sectors particularly the ones related to electronics, the ones related to AI, to data center infrastructure as well as e-commerce, logistics and medical devices to name a few. So that's pretty much in most of the markets. We see that clients as well as potential new clients are -- have regained confidence in their expansions. Many of these clients have had record high numbers in terms of production and uncertainty is coming back again for them to continue expanding and continue opening up new operations in Mexico. Operator: Our next question will come from the line of Anton Mortenkotter with GBM. Ernst Mortenkotter: Congrats on the results. I have 2 quick questions. One is, I mean, you already mentioned a little bit of the dynamic that you saw that made you start the development. But I was wondering if there is any like specific sign that the market gave you in order for you to decide to move now and reactivate sort of strong Vesta development. That is one. And the other one is with all of these new newly announced developments, it's getting close to the cash balance that you already have. So how are you thinking about funding capacity from here? I mean, specifically, do you see any need or opportunity in the new term to tap either the debt or equity markets? Lorenzo Dominique Berho Carranza: Thank you, Anton, for your question. I think we -- definitely, we have internal metrics that we monitor in order to identify where we should be starting a project. And maybe just to use a positive example is the projects in Guadalajara that we started construction end of last year, we started without having a lease signed, but we identified that there was demand coming from certain sectors and that's why our decision was to anticipate to those clients by starting construction soon. So that in the meantime, while we are under development, we could be able to close with the potential demand that we saw. And this quarter, that's exactly what happened. We closed again, we pre-leased with 2 current existing clients of Vesta that continue to grow and require flexible space, the standards that we have developed in the past. Those particular metrics are the ones that we follow every time we start a building. Again, Mexico City, good dynamics. We have had some good success with the e-commerce clients. We will -- we think that there will continue to be demand for that. So we feel comfortable with that start for a project that will be eventually developed at some point end of the year. And again, Tijuana is a similar situation. Even that we have a few buildings available right now, which we are in a marketing stage, they're both in different regions, different submarkets in Tijuana, different dynamics, and that's why starting a new building in this region makes sense because of some potential demand that we are already identifying. So I think that this strategy has paid out well in other markets. We continue to see -- to have a few buildings that we are in the marketing stage. But we are confident that this will continue to be a good year and good absorption. And we think that we will continue to see good absorption. So this is actually the third quarter in a row that we see strong demand and good absorption. So I think that compared to, let's say, the start of last year, which was -- the uncertainty was incredibly high and projects were pretty much on all of them on hold. I think that dynamism has changed effectively end of last year and with a strong start of the year of clients looking for high-quality buildings with a great -- good reputation landlords where they can establish their new long-term operations and make their own investments in different sectors. Juan Felipe Sottil Achuttegui: As for the balance sheet, well, look, we have a very strong balance sheet. And we will always be flexible and keep our options open. We have $200 million in cash. We have a low leverage. So we will tap the market whenever possible, and we can sell properties, we can do equity. We will always be flexible and we'll see as we continue to grow, what is the best market to tap. And remember, all of this was mentioned on the 2030 plan and we have a long-term vision, and we will always take decisions that balance out the alternatives and balance out the capital requirements of the company. We're very flexible. Operator: Our next question comes from the line of Adrian Huerta with JPMorgan. Adrian Huerta: I have 2 questions. One is if there is any opportunities for asset recycling? Are you looking for potential asset sales? And the second one is how the yield on cost is today given movements on construction and land cost relative to what you can charge on rents? Lorenzo Dominique Berho Carranza: Thank you for your question. On the second question, I think that yield on cost continue to be very attractive in the 10% range, even in some cases, even higher than that. I think that one of the largest benefits to that has been our ability to acquire land at a lower cost basis, I think that we were very opportunistic last year and strategic so that we were able to acquire land at $0.70 to $1, and that's how, together with our ability to get competitive construction costs, that's -- and with a still attractive market rents. That's how we can be able to close a double-digit yield on costs in the -- we're doing deals in Mexico City at 9.8% yield on cost, close to 10%. And in markets -- in other markets, even at 10.5%, 11%, such as Queretaro, Tijuana, for example. So I think that our experience as a developer and managing well the construction process and construction competitive process. I think that that's giving us an edge so that we can make high returns. And more importantly, Adrian, it's not the ability to make 10% return on costs, but it's the spread on the investment that we can make since we believe that if properties in the larger portfolio environment we're seeing that are transacting at 7.5% to 7% to 8% range. We think that assets similar class to Vesta could be trading closer to a 6%. So developing at a 10% and stabilizing at around 6%. That's a lot of spread and this is exactly the value proposition that we have for our shareholders. Juan Felipe Sottil Achuttegui: Look as far as capital recycling -- building recycling, we will always be open to do that. I think that we have been successful in selling parts of our portfolio at a higher than net -- asset valuation value, and we will continue to look at those opportunities. And we do selectively -- we -- it's different to some of the FIBRA that they need to dump a lot of the assets they have recently acquired because they don't match their strategy. We don't need to do that. We sell selectively every now and then we want to only make a scope to our portfolio. But frankly, we invest -- develop to hold and we invest long term and every now and then opportunistically we sell. Operator: Our next question will come from the line... Lorenzo Dominique Berho Carranza: Just to add on that. I think our discipline is a good example. We like to sell above net asset value. Above valuations where we believe we can actually make -- create a premium and make a good profit. And I think a good example has been in the past where we have sold 10%, 20% above abrupt -- appraised value in the private markets. And then we have been able to develop again at 10%. I think that's the approach. In terms of capital allocation, I think that's a discipline that we will continue to see going forward. And I think that's a main differentiator on Vesta. Sorry for the interruption. Operator: Our next question will come from the line of Rodolfo Ramos with Bradesco BBI. Rodolfo Ramos: I only have 1 left, and it's a follow-up on Gordon's on the consolidation angle here. Just to get a sense of the impact that you could see, if any, particularly in the northern markets, let's say, Tijuana, Juarez, if this further consolidation takes place, whether you think that this has any impact on the -- your commercial efforts or on the lease spreads that you're able to get through, I mean -- and maybe perhaps on the positive side, whether a more consolidated market might just lead to better discipline on that front. Lorenzo Dominique Berho Carranza: Thank you. Well, I think that industrial real estate is -- in Mexico, it's a very fragmented sector. There's really no dominance from any player in any of the markets. I think that -- actually many of these consolidations, if you look carefully, most of the acquisitions are done in secondary and tertiary markets. Markets where actually we do not operate and are quite small. I mean, in the end, I mean, some of them there's an overlap, but the majority is in secondary and tertiary markets. So I don't think this could have a major impact when it comes to marketing certain regions as the ones that you mentioned. I don't know exactly what might happen with the -- those secondary and tertiary markets because in many of them, we're not that active. Operator: Our next question will come from the line of Carlos Peyrelongue with Bank of America. Carlos Peyrelongue: Total occupancy remained stable at 90% in the quarter. Your expectation for this year is for this level to be maintained or do you expect some increase. And in that case, which markets do you think would drive that potential increase in occupancy? Juan Felipe Sottil Achuttegui: Look, well, we generally don't project occupancy forward-looking. It's not a guidance item. However, we're very optimistic of the market dynamics, as Lorenzo mentioned, I think that we will have good absorption in the quarters to come. Carlos Peyrelongue: And in terms of market... Lorenzo Dominique Berho Carranza: And the market -- the market, mostly to be specific, we currently -- we have -- we're in a marketing stage in Monterrey in our Apodaca project, and that's gaining strong momentum. So we feel confident that we're going to see some good absorption in the next months -- in the next quarters, and that will have a very positive impact in occupancy. As you mentioned, it has stabilized, and I think there's an opportunity to see an upward trend. We will continue to see demand. So that Monterrey will recover soon also in some markets in the Bajio, which have shown resilience particularly in Queretaro. And actually, in some of the cases, we have good quality buildings where sometimes we rather wait until we have a good tenant. We think that our projects as well as our parks are in good locations with good energy infrastructure, with good quality buildings, again, good access to labor. So we think that eventually that will impact positive absorption and with that have a positive impact on occupancy. Operator: [Operator Instructions] Our next question comes from the line of Igor Machado with Goldman Sachs. Igor Machado: First one, a follow-up on construction costs. So could you please comment if given the ongoing conflict in the Middle East, are there any -- are you seeing imports are already increasing in price? And do you have any [indiscernible] to understand how could this impact your cost? And the second question is on the material equity in San Luis Potosi. So could you comment on what drove this and is this enough? And if you could please comment on how are you seeing the demand on the value region [indiscernible]. Lorenzo Dominique Berho Carranza: Excellent. Thank you for your question. Regarding marketing of San Luis Potosi. San Luis Potosi a smaller market for Vesta. However, we have a project which is next to the BMW plant of San Luis Potosi, this market has a strong dependence on the auto industry. And I think that last year was quite slow. But we start to see us -- as we start seeing a little bit of some adjustments in the production lines of them as well as other auto manufacturers. We think that there will be better demand throughout this year and with that, create a bit more absorption. We have a good quality project, again, right next to BMW. We already have good tenants, but definitely, it's a slower market. Should not have a major impact in the overall strategy for Vesta. And on your construction cost, well, definitely, that's something that we are monitoring carefully, how the -- what are the implications on the conflict of the Middle East on the construction cost. However, we have not seen any material adjustments -- I'm sorry, not materially -- larger adjustments so that could have a negative impact on construction. I think that what is -- nevertheless, I think that what is important to monitor is not only construction costs, but also FX because we calculate everything on a dollar per square foot basis. But even with that, I think that Vesta has been able to absorb well some fluctuations. And I think our -- and we will continue -- and also some of the projects that we have already started construction that we do on guaranteed maximum price. So even if there's fluctuations in the pricing throughout the construction process, that is not impacted to our final cost because we have already guaranteed the price. That's kind of the natural process to it. Operator: And there are no further questions. I'd now like to turn the call back over to Mr. Berho for his concluding remarks. Please go ahead, sir. Lorenzo Dominique Berho Carranza: [Foreign Language]. In closing, we continue to deliver on the important milestones of our Vesta 2030 strategy anchored in portfolio quality, disciplined execution and long-term value creation. Market dynamics are strong, particularly for high-quality infrastructure ready buildings, where demand continues to show resilience. This reinforces our confidence in the near-term outlook and our ability to capture incremental opportunities as activity continues to build. Against this backdrop, we remain committed to executing with discipline and expanding a well-curated platform to capture long-term demand. Along these lines, we look forward sharing important updates. Also on progress related to our Route 2030 strategy at our 2026 Vesta Day to be held in New York on November 11. As always, thank you for your continued support. Goodbye. Operator: This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.
Bertina Engelbrecht: Good afternoon. Thank you for joining the webcast of our Interim Results for the 6 months ended 28th February 2026. I'm Bertina Engelbrecht, Chief Executive Officer of the Clicks Group. I am joined by Gordon Traill, our Chief Financial Officer, who is in a completely different time zone. Gordon and I will take you through the presentation of our interim results, and we'll respond to any questions you may have after the conclusion of our presentation. This slide sets out the outline of our presentation. I will, as usual, kick off with a review of our performance of the past 6 months. Gordon will then present an overview of the financial results. I will walk you through the trading performances of our operating business units, starting with Clicks, followed by UPD. And I will then close with the outlook for the group. Please feel free to submit any questions you may have via the webcast platform during or after the conclusion of our presentation. Sue Hemp will read out your questions to which Gordon and I will respond. I will now take you through the review of the period. It has been a tough 6 months. Despite some interest rate relief and signs of a slow recovery in the economic environment, trading conditions remain constrained, especially for middle-income households. Competition intensified as new players entered the market. Traditional players extended into health and beauty categories, giving rise to heightened levels of promotions aimed at capturing a greater share of the consumer's wallet. Over the period, we experienced lost sales exacerbated by low availability due to the rollout of our warehouse management system in the Western Cape DC over the peak trading period. We invested in the expansion of our store and pharmacy network, technology enablement and progress both our people and sustainability agenda. The number of pharmacy drop-ins were, however, lower than planned. In the period under review, we opened our 1,005th store and our 797th pharmacy at Kidd's Beach in the Eastern Cape. We also increased our primary care clinics to 226 as we deepen partnerships with medical funders. Our ClubCard customer membership increased by 800,000 new members over the period to 12.9 million active members and contributed 83.7% of retail turnover. We continue to be recognized as one of the strongest brands in South Africa. UPD delivered strong growth in its wholesale channel and exceptional growth in preferred bulk contracts. And whilst UPD managed every element of its income statement well, it really managed expenses in a disciplined manner. UPD extended its wholesale fleet of pharma-compliant electric vehicles, most of which have been assigned to our owner drivers. This initiative not only supports our cost savings initiative, but also our sustainability agenda. We remain strongly cash generative and in accordance with our capital allocation strategy, bought back ZAR 752 million worth of shares to the benefit of long-term investors. In the period, diluted headline earnings per share increased by 8.1%, and we increased the interim dividend by 8.4%. I now hand over to Gordon, who will take you through our financial results. Gordon Traill: Thank you, Bertina. If we consider the group's financial highlights, group turnover increased by 7.4% from the period. Retail turnover grew by 5.4% and UPD's reported turnover increased by 13% with a strong performance from wholesale and our preferred bulk contracts. The group trading margin at 9.1% was maintained despite increased promotional activity and faster growth of GLP-1s. The diluted headline earnings per share for the group increased to ZAR 6.53 per share, up 8.1% on the prior period. In the 6 months, ZAR 1.9 billion was generated in cash from operations after working capital. The group's return on equity at 45.7% has remained strong. To note that during the period, we carried out buybacks of ZAR 752 million, which will benefit return on equity and headline earnings per share for the full year. And the dividend declared for the period has been increased by 8.4% to ZAR 2.58 per share, slightly ahead of headline earnings. Retail sales increased 5.4% with same stores growing 3.1%. The warehouse management system implementation at our Western Cape distribution center had a short-term impact of ZAR 175 million on sales. This reduced sales growth by 0.9% in retail. The distribution center is now working optimally and is capable of picking as much as our Centurion distribution center, which is 1.5x its size. The distribution business continued to experience low selling price inflation of 1.5%. Nevertheless, wholesale was up 7% and our preferred bulk distribution business up 31.1% performed strongly. Sales to Clicks were up 11.1%, while hospitals were up 2% for the period. Bertina will elaborate on the detail of each business' performance later in the presentation. This slide reflects the group's total income, which has increased by 6.5% for the period. You can see the total income margin in retail was 70 basis points higher due to the growth in private label volumes. UPD's total income margin was down 50 basis points to 8.9%, which was due to the lower SEP increase. Good performance in preferred bulk distribution contracts at a lower margin, partially offset by 2 distribution contracts that were not renewed in the prior year. Overall, the high growth in the distribution business at a lower margin has resulted in the group total income margin being slightly lower by 30 basis points. The cost base in retail increased in the period, partially due to the wage increase of 7%, higher costs from the WMS implementation to ensure service levels in store were maintained and pharmacy openings. Retail costs grew overall by 6.1% with new stores contributing 2% to the cost increase with the lower rollout of stores in the first half. Over the last 6 months, we have added 14 Clicks on Unicorn stores and 17 pharmacies to the group. The IFRS 16 interest charge increased as a result of the number of renewals in the period. Comparable retail cost growth overall was well controlled, up 5.4%. In our distribution business, depreciation increased as a result of investments in the warehouse systems. Employment costs were well controlled and the increase reflects IT contractors being taken on and moving from other costs. Taking other costs and employment costs together, costs increased by 6.8%. Further investments in electric vehicles have been made, and these will be fully rolled out in the second half. Operating costs overall were well controlled. Retail grew trading profit by 11%, with the margin slightly up from last year as the Intragroup turnover elimination, as a result of the unwinding of the Unicorn unrecognized income is taken into account in the prior year. UPD's trading profit increased by 7%, with the trading margin decreasing 10 basis points due to reasons outlined earlier. Overall, the group's trading profit increased by 7.4% to ZAR 2.3 billion for the period, driven by a good performance in both businesses. Inventory levels for the group were higher by 4 days at 89 days. Retail stock days were 8 days higher than last period and increased ahead of underlying sales. Inventory was driven by higher purchases after recovery from the warehouse management systems implementation and investment in new stores and pharmacies. Retail net working capital days increased by 2 days. UPD inventory days at 49 days were 3 days lower than last year and well controlled. Net group working capital decreased by 2 days. This slide shows the movement of cash during the period. As you can see, we started the period with cash of ZAR 3.3 billion reflected in dark blue on the left-hand side and ended the period with ZAR 1.2 billion on the right-hand side of the slide. The group generated cash of ZAR 3.2 billion highlighted in green before the repayment of lease liabilities amounting to ZAR 456 million, working capital outflows of ZAR 1.4 billion and tax payments of ZAR 651 million. ZAR 311 million was reinvested in capital expenditure across the group. Of this amount, ZAR 186 million was invested in new stores as well as 34 revamps and 15 pharmacy drop-ins and ZAR 125 million was spent on IT and other infrastructure. We returned ZAR 1.5 billion to shareholders during the period through dividends and carried out ZAR 752 million of share buybacks. CapEx of ZAR 1.3 billion is planned for the full year. ZAR 662 million will be invested in our stores and pharmacies. This will include 40 to 50 new Clicks stores and pharmacies and 80 to 90 retail store refurbishments. ZAR 594 million will be spent on IT systems and infrastructure. ZAR 88 million of this amount will be invested on UPD IT and warehouse equipment, and we will invest the balance of ZAR 506 million in retail IT systems, including the further rollout of the warehouse management system and online systems. We will continue to grow our retail footprint, grow the number of pharmacies and continue investment in our IT systems. I will now hand over to Bertina. Bertina Engelbrecht: Thank you, Gordon. I will now take you through our trading performances in greater detail, starting with Clicks and UPD. Turning firstly to the retail performance. This slide reflects the retail sales growth and category contributions. Clicks delivered a muted performance with turnover up 5.4% for the period. This was due to intensified competition, a slower rollout of new pharmacies and the short-term impact of the WMS rollout. Sales turnover in comparable stores was up 3.1%, inflation slowed to 2.3% and volume was up just under 1%. Our 60 stores located in neighboring countries showed pleasing growth of 8.8%. I will now briefly turn to each of the categories on this slide. Our positioning as a trusted healthcare provider anchors on customer value proposition. Pharmacy remains a key driver of footfall traffic, repeat visits and market share gains. Pharmacy performance has been driven by the growth in chronic scripts and select therapies such as diabetes, which also influenced the margin mix. Improved availability supported the positive performance in Schedules 1 and 2 with skin health up 9%, preventive health up 13.8% and lifestyle supplements up 18.4%. The strong growth of GLP-1s is continuing with our extensive pharmacy network providing a clear competitive advantage. Front shop health performance was muted but improved margin. Branded supplements grew by 18% and health foods by 20.1%. Private label ranges such as Smartbite Food and OptiHealth, which is our premium supplements range continue to outperform. We launched 70 new OptiHealth stock keeping units and are launching further range extensions this month. A sales decline of 1% in baby reflects the impact of low availability and high deflation in diapers and accessories. We actively defended our market share and improved gross margin due to a higher private label contribution of 29% to baby sales and 56% to the category margin. Although the beauty category remains heavily competed, the biggest adverse impact was due to the WMS implementation in the Western Cape, which is our strongest beauty node. We continue collaborating with suppliers to elevate service levels in our beauty malls and fragrance counters, resulting in those stores delivering results in line with plan. Personal care delivered a strong performance, up 7.9% despite the substantial impact of lost sales. Our partnerships with key suppliers delivered exceptional outcomes. In the hand and body category, sales grew 12.3%, driven by Vaseline, Nivea, Dove, Cetaphil and Sanex. In the body freshness category, our exclusive brands grew 26% as we sold 20 million roll-ons, resulting in over 40 million very fresh armpits. Promotional sales up 12.8% was instrumental in the performance of the personal care category. Although performance in general merchandise was up just 2.9%, we achieved category share gains across cotton and small household appliances. This supports differentiation and improves the margin mix. Interestingly, over the 1-week Black Friday promotional period, we sold the equivalent of 6 months' worth of Toni&Guy hair straighteners. Turning to market shares. Despite the muted sales performance due to intensified competition, low availability and some supply out of stocks, I am proud that we gained market shares in retail pharmacy, personal care and small household electrical appliances, whilst actively defending our market shares in baby and haircare. The retail pharmacy market share gained share to 24.9% despite the delay in the issue of new pharmacy licenses. We nevertheless opened 17 new pharmacies in H1 and have a steady pipeline of licenses. This will enable us to deliver on our targeted number of pharmacies for this year. Front shop health declined by 80 basis points due to supply constraints in core lines, some manufactured product recalls and increased competitive pressure. Despite competition, we actively defended our baby market share with standard gains in baby ready-to-drink up 460 basis points and baby wet food up 140 basis points. We maintained our market share in infant milk but declined in baby diapers, which was down 30 basis points. Our market share loss of 100 basis points in skincare is due to the double-digit decline in a major brand in which we have a substantial share that experienced poor availability and lack of innovation. In response, we have embarked on range and space optimization initiatives and are also reinforcing service levels in our beauty malls and fragrance counters in collaboration with suppliers. We recognize the role that is growing of digital beauty sales and are investing in our e-commerce platform and mobile app to drive personalized customer engagement. We defended our haircare market share, gaining 10 basis points with strong gains in shampoo, hair colorants and hairspray. Personal care gained 60 basis points with strong gains in hand and body, up 80 basis points; oral health, up 60 basis points; and body fresheners up 70 basis points. The gain in market share of 150 basis points in our legacy category of small household electrical appliances is accelerating across every subcategory and every measurement period. Standout gains were recorded in beverage makers, up 300 basis points; food makers up 430 basis points and indoor cooking up 140 basis points. Great Value as a key brand pillar has sustained the group during tough economic conditions such as we are currently facing. Our strapline, "feel good, pay less" and our promotional campaigns resonate and drive shoppers to our stores and our online platform. Promotional sales were up 8.1% and contributed 47.8% of turnover, confirmation of the consumer response to value. In pharmacy, we deliver value with lower-cost generic medicines up 6%, accounting for 58% of sales by value and 72.1% by volume. The weaker value growth of generics is due to the surge in demand for GLP-1 products. In the past 6 months, we returned ZAR 527 million in cashback to ClubCard members to reward them for their loyalty and to ease financial stress. The competitive landscape is evolving due to new entrants and traditional retailers extending into product categories to capture a greater share of the customers' wallet. Competitors are forming novel strategic partnerships to enhance the customer experience. They are also investing in data capabilities to support personalization aimed at shifting customer behavior and to develop targeted loyalty mechanics that enable more precise price investment. We have an African proverb that states, "if the drum beat changes, the dance must change." We have recognized the need to adapt to the new competitive reality whilst remaining firmly anchored in affordable, accessible health care, supported by a [ fit-for-all-types ] customer loyalty program and a focused private label and exclusives portfolio. In fact, our private label and exclusives portfolio is a key strategic pillar. It mitigates against the margin impact of increasing our share of pharmacy, creates a clear point of differentiation based on consumer trust in the quality of our brands and enables us to maintain our total income margin despite competitive pricing pressures. Over the period, we sold 110 million units of private label and exclusive brands. A fun fact is that we sold enough toilet paper rolls to circumnavigate the earth 100 times. The muted performance of private label and exclusives up 4.6% is because 60% of our bath and body sales are accounted for during the peak trading period when we were most impacted by the WMS implementation. We are though reaping the benefits of working with local suppliers to develop ranges in South Africa. This supports the national agenda to drive localization and employment. Our locally produced ranges are continuing to perform exceptionally well with Expert ranges up 35%, Clicks Skincare Collection up 11% and Smartbite food ranges up 40%. Our Made 4 Tots ranges grew 75% due to range expansion and improved formulations. We also pursue differentiation through our service offering and in-store elevations. A big focus in this year will be on elevating our mens' grooming, informed by the overwhelming positive sales impact of our [ Grow Nation ] campaign and strong growth of our Sorbet Man range, up 29% I am excited at the prospect of what our in-store electronic elevation, which is strongly supported by suppliers, will achieve in elevating the customer experience whilst also growing both sales and income. Despite its challenges, The Body Shop remains our fourth most profitable exclusive brands. The improved performance of the newly introduced ranges and improved availability is therefore encouraging. The investment in the premium ARC beauty retail brand continues to add value with the ARC customer spend totaling ZAR 331 million, up 21% over the past 12 months. This is because for every ZAR 1 in cashback that the ARC customer earns at ARC, they spend ZAR 5.72 at a Clicks store. Our loyalty program is a primary demand driver. It underpins customer affiliation, enabling us to defend and grow market shares. The Clicks ClubCard loyalty program, with its strong affinity partners is our most valuable asset, with 12.9 million active members who contributed 83.7% of sales. Over the period, we added a whopping 800,000 new active ClubCard members. Encouragingly, it is the most used loyalty program in the mass market and among the youth. The ClubCard program played a significant role in easing financial strain on consumers during tough times, which is the reason we moved to monthly cashback payments. In the period, our cashback rewards of over ZAR 0.5 billion certainly brought welcome relief to ClubCard customers as the benefits of our affinity partnership with Engen and FNB's eBucks program to single out two. E-commerce, up 17.9% for the period, accelerated strongly in quarter 2, driven by increasing mobile app adoption, personalization enabled by loyalty data and improvements in our fulfillment execution. Our app shoppers contributed 46.5% of online sales with a Click and Collect option contributing 31% of online sales. We fully implemented LEAP, the only modern pharmacy management system in South Africa across all of Clicks. In response to market demand, we are now marketing the LEAP pharmacy software system to third parties. Over the past 66 months, we have, on average, increased our store count by just over 3 stores per month in pursuit of our medium-term expansion target of 1,200 stores. At the half year, we closed on 1,003 Clicks stores, 795 Clicks pharmacies, 2 UniCare specialized pharmacies and 226 primary care clinics. A week ago, we opened up our 800th pharmacy in Oudtshoorn, a rural town which is roughly 5 hours drive outside of Cape Town. Our store location strategy, which remains premised on convenience and proximity to customers is key to our consistently broad appeal. Over 53% of households reside within 5 kilometers of a Clicks pharmacy. We increased the number of primary care clinics to 226 and are also extending our virtual doctor network. In UniCare, we are extending space to doctors and partnering with medical funders to provide first-level triage after hours. We are opening another UniCare greenfield site at the end of this month and completing another UniCare acquisition in May. We remain strongly aligned to the national health care agenda and committed to providing affordable, accessible health care to all. 252 of our convenience format stores are located in lower LSM areas accounted and accounting for 23.4% of turnover. That completes the review of the retail business. I will now provide an overview of our distribution trading performance. Wholesale turnover was up 7%, boosted by the improved purchasing compliance from its core wholesale customers. Clicks accounted for 60.5% of UPD's fine wholesale turnover, up 11.1%. Clicks has improved purchasing compliance of 98% is in line with our internal targets. This is positive for UPD, but less so for competitors who benefited from Clicks byways in prior periods. UPD will continue to benefit from the growth in Clicks as it increases its pharmacy count in H2. The hospital channel remains constrained by controlled supply rather than demand as they manage their ethical generic mix and inventory levels. Purchasing compliance though has stabilized due to improved service levels. Over the period, UPD's market share of the independent acute private hospital channel improved from 30% to 33%. The dedicated hospital key account management structure, which we introduced over a year ago is yielding positive results. The stabilization of Link pharmacies is due to a relaunched Link offer and dedicated resourcing. The revised structure offer to independent pharmacies is beginning to stimulate sales in that channel. Whilst we are pleased with the improved trading performance, expense management, efficiency extraction and other income gains, there remains room for improvement. The delivery of the strategic initiatives outlined next, together with superior service to all of UPD's customers, will deliver the recovery of UPD's wholesale market share. Quality, regulatory compliance and service excellence underpins UPD's performance. Operational stability with the on-time and in-full metric at 96.4% and customer in-full rate at 99.3% resulted in improved purchasing compliance for fine wholesale customers, whilst preferred bulk contracts delivered a truly stellar performance. However, the loss of the 2 bulk contracts adversely impacted total managed turnover. Value growth continues to be impacted by the higher volume growth of generics, which contributed 76.9% to UPD's fine wholesale sales. Our strategic initiatives are progressing broadly in line with plan. I will highlight a few of these. Medical consumables remains a strategic growth opportunity. The acquisition of the medical consumables business to fuel this opportunity has been finalized. We have completed the integration process. The sales targets are being pursued in a disciplined manner, and we have extended our inventory pipeline to ensure that we have the requisite stock mix for scaling this in our core hospital channel as well as the private sector in Southern Africa. In December, a cross-dock facility located at the retail DC became fully operational with the early benefits already evident. This cross-dock facility enables us to service our core wholesale customers in the Pretoria-Noord much more effectively, which will also reduce byways to competitors. In a low-margin business such as UPD, a relentless focus on efficiencies and expense management is critical. Over the past few years, we have worked on route optimization and on reducing our fuel costs through our electric vehicle conversion program. By the end of this month, 86% of our wholesale fleet will comprise of EVs covering 74% of total kilometers covered. Over the past 12 months, fuel as a percentage of transport costs has already reduced from 40% to 35%. UPD's strong top line momentum accelerated in quarter 2, driven primarily by preferred bulk sales. The business will benefit from a stronger Clicks pharmacy opening program in half 2, improving Link purchasing appliance and the ramp-up of medical consumables. Profitability will remain under pressure. Hence, the UPD team are focusing on maintaining service excellence, working capital improvement and disciplined cost management. This completes the review of our trading performance for the period. As always, I am inspired by the proud brand ambassadors in our company. The WMS impact tested our resilience, but our people in our stores, DCs, IT, regional offices and HQ were unwavering in their commitment to getting us through that period. On behalf of our Board and the executive teams, I would like to thank each employee, team and their families for their individual and collective contribution to our results. I will now conclude the presentation with the outlook. It would appear that the only constant is change. In early January, most economists were cautiously optimistic about the economic outlook for South Africa. Because South Africa imports most of its crude and refined oil products, any increases in fuel prices will have a knock-on effect on the cost of transport and food. In turn, this will adversely impact inflation and interest rates, leading to depressed consumer spending. We too will be affected by fuel price increases. The investment to convert more than 80% of the UPD wholesale fleet to EV is already delivering fuel cost savings. This will enable us to mitigate against a fuel surcharge for our customers whilst also supporting our sustainability agenda. In half 2, we will also be absorbing the impact of the very low SEP increase, primarily in UPD but also in Clicks. We, though, have a proven capability to trade positively through constrained trading conditions. This is because of our fiercely loyal ClubCard customers, extensive private label and exclusive portfolio and our strong market shares in defensive retail categories. The investments made in ARC and Sorbet are attracting new customers to Clicks. UniCare is extending its service offering by creating space in its stores for doctors. The colds and flu season lies ahead. In May, we will trial our on-demand, over-the-counter medicine delivery service, which will be fully pharma-compliant. We will achieve our target of opening 40 to 50 new stores and 40 to 50 pharmacies this year based on data-driven insights. Despite some delays, we will open 2 additional UniCare format pharmacies by the end of May and one more by the end of this year, taking our total UniCare count to 5 by the end of this financial year. We are on track to pilot 10 clearly differentiated concept stores in this year. UPD has a clear, targeted plan to grow sales of its higher-margin medical consumables business in its core hospital channel and in the Southern African private sector. Scale is important because it provides the opportunity to pursue efficiency gains. Earlier, I shared some of UPD's strategic initiatives. All our retail businesses and shared services teams are executing plans aimed at stimulating sales and margin improvements as well as sustainable cost management initiatives to create the necessary leverage to enhance profits. We wrestled with the earnings guidance because of the high levels of uncertainty and volatility as a result of geopolitical events, which will impact on inflation, interest rates, consumer spend, supply chains, product margins and costs in the months ahead. These are the factors that weigh on us in setting on guiding for an increase in diluted headline earnings per share for this financial year of between 4% and 9%. That concludes the presentation. Thank you so much for taking the time to listen to us. We are available to take your questions or your comments. So I'm now handing over to Sue Hemp, who will facilitate the Q&A. Sue Hemp: Thank you, Bertina and Gordon. We have a number of questions here from Michael de Nobrega at Avior Capital Markets. Firstly, competition in the drug retail space appears to be intensifying, particularly around loyalty programs. How is the group thinking about maintaining its competitive position? And could this lead to any evolution of the Clicks ClubCard offering over time? Bertina Engelbrecht: I'll take that question. Michael, thank you very much. That's an excellent question. First, I guess I'm buoyed by the increase in our pharmacy market share. That's probably the clearest indication of whether or not we are winning against the heightened competition. But what will be in addition to that? The first is we are excited at the prospect of trialing our over-the-counter on-demand medicine delivery service as we've said in May month. Secondly, we are going to be hitting our target of up to 60 pharmacies in this financial year. Very well on track of this with this, and we already have a fair number of those licenses already in hand. Thirdly, we continue to see the exceptional loyalty of ClubCard within pharmacy. When we talk about ClubCard, 83.7% of total sales. In pharmacy, they're [indiscernible] over 87%. And then fourthly, we are extending UniCare, which is really a specialized pharmacy format, and we are hopeful that by the end of this year, we will get to 5. Definitely, we know that by maybe will get to 4. Sue Hemp: Second question. As the WMS will be rolled out to the Durban DC, what key lessons have you taken from the Cape Town implementation? Should we expect any further disruption during the rollout? Gordon Traill: I can take Durban. In terms of the rollout to the Cape Town, it's not a start-up from 0 again. So any bugs are operational issues but are being earned out. I think the second thing to bear in mind is that Cape Town is, in terms of complexity, our most complex distribution center, and we've tested every aspect of the warehouse management system over the last few months. And we've put in -- moved people from Cape Town to take the Durban staff through how to work with that with the new system. So there's very good change management. So in short, we are not expecting to experience the same level of issues that we had with Cape Town, and it's at a quieter part of the year. I think the last aspect to just bear in mind is the relative size of the DC. So Durban is about 1/3 of the size in terms of Cape Town in volume. So there's a very good plan to mitigate or alleviate some pressure when we go live on the stores that Durban serves. So we expect that Durban the next DC will be successful. Bertina Engelbrecht: So if I may, maybe just add to some of that because I think, Michael, what you're asking is what have we learned? The first, I think that we have learned is take a bit more time to really consider if you've had a delay, where do you go? So complexity of the distribution center, I think, will be one of the key factors that we take into account. And as Gordon said, Durban is the least complex of all of the retail DCs. The second one is have a plan B but also a plan C. The third one, I think, is that we've already put in place work towards our micro-fulfillment centers, which will alleviate the pressure on the Durban DC when we go live. And then fourthly, part of our plan is that if anything were to go wrong, which we do not anticipate at all because we've been stable now for 2 months flat is that we are able to serve our Durban customers -- stores sorry, from both Lea Glen and then also via Cape Town, the Eastern Cape part, which is really serviced out of the Durban DC at the moment. Sue Hemp: His third question. Could you maybe give us a bit of color on the key assumptions, particularly around diesel prices and inflation? Gordon Traill: Well, we did outline the impact of what the diesel price increase is going to be on our bottom line. But I don't think that is the -- that is an impact, but it's not the major impact. It's also what price increases that suppliers are going to be looking to pass through to ourselves and the impact on the wider economy because it's the consumer has less money in the pocket. It's how much are they going to pull back on spend. So just now inflation remains fairly muted. We expect it to go up in terms of the cost price inflations that were passed through or that suppliers want to pass through, we'll always negotiate for a period of time, but it is going to have some -- I think the more worrying impact is the general impact on the consumer going forward. Sue Hemp: His fourth question, the update mentioned rollout of on-demand OTC medicine delivery from May. Could you provide more detail on the scope initial regions? And how do you see this scaling over time? Bertina Engelbrecht: So I mean we're going to do the rollout trial from May, well on track on that. Much of the work, Michael, has been around really understanding the -- how we ensure that we are compliant from the very beginning. We will be first to market with this. And so I think it's important that we do that. In terms of the mechanics of all of that, I mean that's what the team are currently firming up on. When we've got a bit more detail on that, we will let you guys all know about that via Zoom. Sue Hemp: Then his fifth question and the last question of this session, could you elaborate on the delays in obtaining pharmacy licenses and how you expect approval time lines to evolve going forward? Bertina Engelbrecht: How long is a piece of string? There were two things really. I mean there are resource constraints within both the SAPC and the Department of Health. Just in terms of the inspectors, you need a physical inspection of the site. The second one really is that there was a bit of an irregular meeting schedule for some reasons that were completely understandable, such as, for example, tragedies in some of the family members that sit on that licensing committee. But we are really hoping that the meeting schedule will be more regular going forward. The important thing, I think, at this stage is to note that we have a fair number of the licenses to support our rollout program of pharmacies for the remainder of this year. Sue Hemp: And we have two questions on the same topic from Anda Tyali from NVest Securities and Ya'eesh Patel from SBG, both asking for some insight on the retail post-period trading. Has it improved from a circa 3% print from the last 6 weeks of the first half? Gordon Traill: Bottom line is, yes, it has improved from the 3% print. It's still not where we would -- we always want it higher. But it's still fairly early since we've introduced the additional ClubCard rewards at the end of February. So on the deep cut deals, which has been performing particularly well for the products that we put on promotion there, and we're seeing that our suppliers are quite excited about that and wanting to speak to us more about support around those sorts of deals. That's definitely ahead of the 3% that we saw in the last 6 weeks. Bertina Engelbrecht: And maybe then just to add to that. I mean we haven't really had a high level of new store openings since the half. But today, for example, we're going -- we're opening our doors today. I think between -- I think 5 of them today. UniCare actually goes next week on the 28th, our second -- our third UniCare store opens next week on the 28th. Sue Hemp: So you partially answered the first part of Michael Jackson Bank of America's question, which is how is your rewards program performing since implementing changes in Q1 and should we expect an increase in promotional cadence for H2. But he also asked, will this impact gross margin negatively in H2? Or can you offset this by growing private label further? Bertina Engelbrecht: Partially, the offset will always be an ongoing private label further, but it's also going to be about how you use the revised ClubCard offer in a much more selective way, as opposed to broadly. So that's some of the work that the team is looking at the moment. Sue Hemp: Ya'eesh Patel from SBG asks another question. Retail wage increases seem quite high in the context from moderate CPI for now. What led to such a high negotiated increase? Bertina Engelbrecht: It's something that happened more than 2 years ago. So it was a multiyear deal. And most certainly, what we have done is that we have had discussions with the negotiation team. They commence the negotiation with the new deal, which will be implemented in July month. So the process has kicked off. Sue Hemp: Bruce Williamson from Integral Asset Management says, congrats on continued store growth and good results and a very difficult trading environment. In deciding on the split between dividends and a share buyback, what value did you put on the Clicks share? Gordon Traill: We never disclosed what that value is. We do have a model, and we base it on -- we are expected -- our forecast results. And that's put to the Board by management and approved by the Board, but there's never a number that we disclosed. Sue Hemp: Keenon Choonoo from Investec. We've answered a couple of his questions, but he says thanks for the opportunity to ask them. Front shop health growth has lagged pharmacy. Could you provide some color on the competitive pressures faced currently? Which categories and entities do these pressures stem from? Does this mean sustained promotional activity going forward? Bertina Engelbrecht: I don't think sustained promotional activity is required. It essentially has been in the more premium vitamin and supplements range, and that's the reason we're accelerating our range extensions with the within OptiHealth, which is really performing exceptionally well. I may also say, I mean, we've seen a fantastic performance out of GNC over the last couple of months. I spoke to our Head of Healthcare last night, and he had just come back from leave and he came to tap me in the shoulder and said, "Bertina, the team are working really, really very hard on this." So vitamins and supplements, I think we're quite clear in terms of what the area is, but there were -- we had some core lines that were out of stock. And those are some of the areas that we are attending to at the moment. Sue Hemp: Sorry, we're getting multiple questions on the same things. I hope we've answered people's questions. Sa'ad Chothia from Citi has asked if we can give an inflation outlook for half 2 and for FY 2027? Bertina Engelbrecht: The mirror that I'm looking at is super opaque on that one. I mean, kind of just say, I mean the reserve bank kind of signaled that you may be looking at inflation getting closer to 4% to 4.5% by -- probably by around about the end of May. It's unclear to us at this stage as to what that would mean. I mean, clearly, I think suppliers are already knocking on the doors, talking about price increases. All of us in our personal capacities, we have already had some of our domestic service providers talk to us about fuel surcharges. So I think inflation is ticking up, but it really is all going to depend on what happens to not necessarily in this country but what happens in the Middle East. Sue Hemp: Sa'ad Chothia from Citi asks if we're able to share sales and profit of the medical consumables business. Bertina Engelbrecht: There is a plan. The reason we are not talking about any shift in the guidance as far as UPD is concerned is because those plans must now be realized. And so I think it's early days. The team, I must say, have put together a really impressive plan. They've already started engagements with hospitals, both in the acute as well as within the listed hospital space. Let's just say the margin is significantly and substantially higher than what the margin would be within UPD's final wholesale business. Sue Hemp: Kgomotso Mokabane from Sanlam Private Wealth asks, private label growth was only 4.6% despite its margin benefit. What held back the growth in pharmacy private label is still relatively low versus generic volume? What are the main barriers to scaling private label opportunity there? Bertina Engelbrecht: The biggest impact on private label growth over the period was because 60% of our bath and body, which is a massive category for us. Those sales really happen within over the peak trading period. And so that was a major impact. What would we be doing? I mean the constraint in pharmacy would be there's a regulatory process that you have to go through. You will know that we disinvested of Unicorn and we're no longer applicant on any of those products. And so it's the work really that we do with the Unipharma team. in terms of making a broader range available. And there are specific categories such as mental health, which are much more challenging to shift the patient that is on an originator product. Those probably some of the feedback that I give on that. Sorry, the final thing that I was just going to say is, of course, as well, it's the surging growth of the GLP-1s which are all of originated, at this stage. Sue Hemp: Neo Ramodike from Mazi Asset Management says, should the shift to EVs at UPD be interpreted as a move to integrate electric trucks into their logistics fleet? Maybe meaning the retail business as well? Bertina Engelbrecht: Into the retail business as well. I think, Gordon, you must help me on [indiscernible]? Gordon Traill: Yes. Sorry. The trucks that used in UPD are much smaller. We are trialing EVs in the retail fleet, but just now the economics of the larger trucks versus the traditional ICE vehicles aren't quite there just yet. But it is something that we are looking at very closely because the economics in the larger trucks are changing very, very quickly. So a few years ago, the small electric vehicles probably wouldn't have been feasible for UPD, and that's just changed in the last couple of years. That makes it very attractive. And fortuitous, just now given the recent events, but it is something that we are looking at, but we're not quite there yet. Sue Hemp: [ Pieter Drost ] from [indiscernible] Fund Management says the 1,200 stores, medium-term target. How should we think about a longer-term target or runway? Bertina Engelbrecht: Look, I mean, we're going to get to around about at least 1,040 Clicks stores probably by the end of this financial year. So the target achieving the 1,002 target is in sight. And we've said once there's close proximity to that target, we will be providing an updated target. So definitely, there's a clear understanding in our business that, that is not the final target. We will be providing that target upwards closer to reaching the target itself. Sue Hemp: I have a few -- more questions Kgomotso Mokabane at Sanlam. Has the move to a monthly ClubCard cashback changed how you think about promotions and margin management? Also from a customer perspective, what has been the impact on customer frequency and basket size? Bertina Engelbrecht: The cashback monthly payment cycle was really -- we did a lot of research and benchmarked ourselves. And it became clear especially in a constrained economic environment. Customers didn't have enough time to wait for 2 months before they could redeem. And so that's important, I think, to assist the customer. Actually, when we look at it, ClubCard customer contribution to sales is up. In fact, even as I speak, I was just looking at last year's, it's beyond the contribution that I outlined as of the half year period. So definitely, that change in shift in the ClubCard program does seem to be bearing fruits. Sue Hemp: The WMS impacted the DC MPS to have increased their inventory levels with double digits ahead of top line. Can you give some color on clearing inventory out and any potential impact on margins? Gordon Traill: So the inventory that was brought in was really as a result of not being able to get the stock in during the implementation. So we made a decision to push stock into the DC once things have settled down into January. So it's not a impact that we -- the inventory levels that we have shouldn't give rights to a significant need for any sort of markdown or clearance, et cetera. So it's not something that we're particularly worried about at this point. Bertina Engelbrecht: Actually, Gordon, I might make the point to say that given the price increases that we've been looking at, it would be fortuitous that we have the stock. Gordon Traill: Yes. But I think -- we didn't plan on that but it is fortuitous. Bertina Engelbrecht: We didn't plan on that but it is fortuitous. Sue Hemp: Can you give a bit more detail on the 10 differentiated concept stores you plan to pilot? Bertina Engelbrecht: Well, I mean, first of all, why would we even look at this as opposed to saying, you just change a Clicks and make it smaller. It's because we really want to be true to what the Clicks brand is all about integrated front shop and health care offering. The second bit is that Clicks really needs -- I mean, I don't think we've got some smaller stores, but I mean in an ideal world, Clicks really has a store size, probably a minimum of 500 square meters. We can live smaller, but I think it's in very specific lifestyle estates. That immediately constrains where you will be able to put this up. So we believe if we look at some of the most highly -- most densely populated areas in South Africa, where you've got massive transport hubs that those are the areas that we're looking at. And then, of course, we saw in some of the rural areas where the competitors are not. Sue Hemp: And a final question from Kgomotso or there might be some more still coming. But can you give some color on CEO succession planning, particularly in the context of the group's executive retirement policy of age 63? Bertina Engelbrecht: I think I can say I was actually checking the IR, and you didn't mention it, but the Board has asked and I have agreed that I would stay on as CEO until the end of August 2028. And we have started the process of both identifying and preparing succession candidates within the group, which obviously is [ the remit ] of the Board. Importantly, I think to say is that we've reinstated the Nomination Committee. We had the first Nominations Committee here about a week ago, and that is a primary focus of the Chairman and of the Nominations Committee. Sue Hemp: Now Neo Ramodike from Mazi Asset Management has another question. In 2023, you acquired a software company called 180 Degrees. Does this company have anything to do with the WMS? Bertina Engelbrecht: No, we did not, but it had a lot to do with a very successful project called LEAP, which is the only modern pharmacy management system in South Africa. It's really the implementation went extremely smoothly. And of course, now we've got overwhelming demand from the private sector, and we are starting to process to markets and roll that out within the private sector. Sue Hemp: Rendani Magalela from Absa CIB. With regards to UPD, you mentioned subdued performance in the hospital and independent segments. Could you please touch on the strategy to raise the subdued performance? Bertina Engelbrecht: Both in the hospitals really, it's about the difference between value and volume because hospitals are definitely managing their ethical generics mix as well as the inventory levels across their network. So that's the one part. What are we doing to try and increase our size of basket within hospitals? That's really all about the medical consumables. So the engagements have begun in terms of extending that into the hospitals. And we'll -- we are hopeful that we are making and we'll be able to make inroads. In the independent space, the team have just started about 4 weeks ago with the revised franchise offer and the way which has been communicated, and I must say the early uptake is really, really encouraging. So that's good to see that we are able to now look at arresting, not only arresting, but I think improving the performance in the independent pharmacy space. Sue Hemp: A technical question for Gordon from Ya'eesh Patel at SBG. How should we think about the growth in the finance cost line post double-digit growth over in the first half? Gordon Traill: That's really all about the early share buybacks that we did this year compared to the prior year. So the IFRS 16 cost has been coming down. So it was offset by the early buybacks we did in the first quarter. Sue Hemp: We're. We're running out of time, so I'm going to just ask one final question from Jandre Pieterse at Umthombo Wealth. What do you think would need to go right for Clicks HEPS to again grow around 13% to 14% going forward in the medium term? And what is your medium-term target for HEPS growth? Bertina Engelbrecht: Well, I think what needs to go right probably is that we get the pharmacies as expected. That's critically important because it's the anchor and the [ footfall traffic ] driver. Secondly, I would probably say it would be difficult to think that something that operationally we need to do differently, to be honest with you, because I look, for example, just a shrink, it's half of what it was a year ago. I mean, a year ago, we were already best-in-class globally. So I would have said the biggest for me would be to actually get the pharmacy licenses. The final one would be, I think, we're going to have to be pretty tough with suppliers. We've chosen where they invest disproportionately. And I don't think it's only our company. I think it's all of the other retailers that are knocking on those doors and saying, that was most unfortunate, but you long to have to give us the same. Let's see what they do. Now it would seem to me that we could go on for 2 more days with you guys. Thank you so much for the quality of your questions. We have responded to those that we have. Sue will get back to you if we haven't responded. So can I just say thank you once again for your time and all of the best.
Operator: Good day, everyone, and welcome to the Fibra Danhos First Quarter 2026 Conference Call. [Operator Instructions] Please note, this call is being recorded, and I'll be standing by for assistance. Now I'll turn the call over to your host, Rodrigo Martinez. Please go ahead, Rodrigo. Rodrigo Chavez: Thank you, Elise. Hello, everyone. I am Rodrigo Martinez, and I run Investor Relations for the company. At this time, I'd like to welcome everyone to Fibra Danhos 2026 First Quarter Conference Call. We issued our quarterly report yesterday. If you did not receive a copy, please do not hesitate in contact us. Please be aware that they are also available on our website and in Mexico Stock Exchange website. Before we begin our call today, I would like to remind you all that forward-looking statements made during today's call do not account for future economic circumstances, industry conditions and company performance or financial results. These statements are subject to a number of risks and uncertainties. All figures included herein were prepared in accordance to IFRS standards and are stated in nominal Mexican pesos unless otherwise noted. Joining today from Fibra Danhos in Mexico City is Mr. Salvador Daniel, CEO of Fibra Danhos; Mr. Jorge Serrano, CFO of Fibra Danhos; and Mr. Elias Mizrahi. Now I will turn the call to Jorge Serrano for opening remarks and financial and operating indicators. Jorge, please go ahead. Jorge Esponda: Good morning. Thanks for joining us today. Fibra Danhos posted sound financial and operating results for the first quarter 2026. Fixed rent, an 8% growth explained by the full contribution of Cuautitlan and Palomas industrial projects, indexation of lease agreements and improved occupancy levels in our office portfolio. Overage and parking revenues increased almost 13% and 18%, respectively, based on strong sales from our tenants and tariff adjustments in our properties. Consequently, total revenue during the quarter increased 9.4% year-over-year, while operating expenses did so by 7%, resulting in a 10% increase in net operating income and 11% on EBITDA with margin improvements. AFFO per CBFI accounted for MXN 0.76, equivalent to MXN 1.2 billion and almost 16% high year-on-year. Distribution was determined at MXN 0.45 per CBFI, that represents a payout ratio of 59%. GLA on our operating portfolio increased by 15% year-over-year. And overall occupancy level grew 220 basis points, reaching almost 92%. Lease spread on 20,000 square meter renewal agreements on our operating portfolio was 4.3%. Our CapEx pipeline continues to gain momentum, particularly in Palomas and EdoMex III industrial projects that are due to deliver by year-end. While Parque Oaxaca and Nizuc are making progress and running on schedule as well. Balance sheet remains with only 13.6% leverage. During the quarter, Fitch ratified a AAA rating for Fibra Danhos CBFIs and our debt bond issuances. Fibra Danhos shareholders' meeting took place on March 27, with a general quorum of assistance of more than 80% and resulting on the approval of all the agenda items with a favorable vote of more than 95% on each of them. Thanks, and we may now turn to the Q&A session. Operator: [Operator Instructions] Our first question today comes from Igor Machado of Goldman Sachs. Igor Machado: So the first one is on lease maturities. You have a significant amount of lease maturities coming due for retail portfolio, so 28% of total. And your leasing spread is around 7% this quarter. So just want to better understand what could we expect the lease spreads going forward with the lease-up. And also given the significance of the maturities... Jorge Esponda: Something happens with -- we cannot understand well. Can you repeat the question? Igor Machado: Yes, sure. Can you hear me well? Jorge Esponda: We can hear you, it's distortion. I mean we did not hear you clearly. Igor Machado: Can you hear me? Jorge Esponda: Yes, that's better. I think you're closer now to the microphone. Igor Machado: Yes. So the first question is on [ lease maturities ]. So you have a significant amount of maturities due this year for the retail portfolio. So I just want to understand why could we expect the lease spreads going forward with the lease-up? And also given the significance of the maturities, if you see this is an opportunity to do a material change in your tenant book for the retail portfolio? Elias Mizrahi: Igor, this is Elias Mizrahi. So the maturities for our retail portfolio, historically, we have a weighted average term of approximately 4 years. So around 25% of our contracts expire every year, and we actually do renovations on a 3- to 5-year renewals at the most precisely to have these renovation windows, and that's where we can push rents up and have leasing spreads. So on retail, we continue to see lease spreads above inflation in general. And I think that's the question, right? Igor Machado: Yes. Operator: Was there anything further, Igor? Igor Machado: Sorry, if it's possible, I have another question here. Could you comment on why are you seeing the potential increase in construction costs given the conflict in the Middle East? Elias Mizrahi: We haven't seen an impact in costs because of the war in the Middle East. Let me pass this to [indiscernible] to give you some further remarks. Salvador Daniel Kabbaz Zaga: I mean we haven't still seen a significant change in prices. None of our contractors have let us know that we have to be prepared for it. So we're not expecting a big change on the increases in cost of construction, at least for the moment. Operator: Our next question today comes from Gordon Lee of BTG Pactual. Gordon Lee: Two questions. I was wondering on the industrial side. Now that, that segment is becoming more relevant for you, will you be looking at any sort of potential M&A opportunities? And I'm not thinking of Macquarie, but I'm thinking more of -- this is the expectation that there will be a pipeline through the maturation of [indiscernible] properties hitting the market. Would you look to acquire properties? Or do you prefer to focus 100% on developing them? And then the second question is just on Torre Virreyes, that's one of your sort of flagship office properties where we really haven't seen sort of improvements in occupancy in the last 2 or 3 quarters. So I was wondering whether you think that's still something that's just cyclical? Or do you think there's something about the property that may require more work, repositioning, something of that nature? Salvador Daniel Kabbaz Zaga: This is Salvador. I mean, talking about Torre Virreyes, it's 100% leased. Gordon Lee: Sorry, I meant Toreo. I said Torre Virreyes, but I meant Toreo. Sorry about that. Salvador Daniel Kabbaz Zaga: Okay. I mean, Toreo, we've been working very hard. It was hit by the pandemic and we lost some tenants. But we're seeing a gradually increase in occupancy, and we expect it to be even better in the next trimester. So we feel comfortable with it. And we're going to see -- we believe we're going to see good numbers in the next years to come. So as you know, the office segment is still just recuperating after the pandemic. But we've seen a lot more movement in clients and interest in spaces, especially in the last trimester. I mean, I hope this -- we can -- we were able to fulfill into contract [ with ] expectation. But we're -- I mean, happy with it. And in terms of industrial, of course, we are always open to new opportunities. As you know, we prefer to develop because in that way, we can actually get much higher yields with it. But -- but if we find a good opportunity in the market, we'll take advantage of it. Operator: And from JPMorgan, we have Felipe Barragan. Felipe Barragan Sanchez: So we've seen a good uptick on the office occupancy, now coming close to 80%. I just want to get an update from what you guys commented last quarter. If we could see perhaps you guys breaking above the 80% threshold that you guys have been struggling to recover. Salvador Daniel Kabbaz Zaga: Yes. We are expecting this to grow. I mean it's not an easy task. Office, it's much better, but it's not still, I mean, driving. So we expect it to be a better number each trimester and to actually fill up our buildings in the next year, something like that. Felipe Barragan Sanchez: Okay. And I have a second question real quick. So last quarter, you said there was a softer consumer demand that wasn't extremely prominent. Could you guys give us an update on what you guys are seeing on the consumer environment for this quarter? Salvador Daniel Kabbaz Zaga: I mean, we're seeing it to be basically just based on the line, not increasing, not decreasing. It's not a high consumer option, but we believe that things are getting much better, especially with the World Cup coming into Mexico. We expect that -- as you know, our shopping malls are in Mexico City, so we expect this to contribute in a positive way to the portfolio. But the truth is that we're basically just flat online. Operator: Next, we have Alan Macias of Bank of America. Alan Macias: Just a question on land bank. If you can remind us your strategy of acquiring land in Mexico City for the industrial sector? And what are you seeing there in terms of land prices? And perhaps has anything changed in terms of licensing and permits? Salvador Daniel Kabbaz Zaga: I think we're on a good place on acquiring some land with licensing and permitting. We're working very hard on it. We've been doing it in the past couple of years, and they're getting just mature to be almost ready to be developed. So we expect to give good notice in the next probably 6 months about it. But we're going to continue into the industrial development. We feel comfortable with it. I think we're doing a good job with it. And we are working very hard to basically just be able to -- in the next few months or 4 months or 2 trimesters able to give a good notice to the market on it. Operator: [Operator Instructions] And we have no further questions at this time. Rodrigo, back over to you for any additional or closing comments. Rodrigo Chavez: Thank you very much, Elise, and thank you, everyone, for joining us today. Please do not hesitate to contact us, Salvador, Elias, Jorge and myself for any further questions. We are always available, and we'll see you on the next conference call. Thank you very much. Operator: That concludes our meeting today. Thank you for joining. You may now disconnect.
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.
Operator: Ladies and gentlemen, welcome to the Kuehne + Nagel Management AG Q1 2026 Results Conference Call and Live Webcast. I am Sandra, the Chorus Call operator. [Operator Instructions] The conference is being recorded. [Operator Instructions] The conference must not be recorded for publication or broadcast. At this time, it is my pleasure to hand over to Stefan Paul, CEO of Kuehne + Nagel. Please go ahead, sir. Stefan Paul: Thank you very much, Sandra. Good afternoon, and welcome to the presentation of Kuehne + Nagel's First Quarter 2026 Financial Results. I'm CEO, Stefan Paul, and I'm joined today, as always, by our CFO, Markus Blanka-Graff. Page #2, first quarter 2026 results. Recurring EBIT exceeded our guidance. The recurring EBIT of CHF 308 million in Q1 exceeded the guidance we communicated with Q4 results. That is a result that would broadly match the CHF 285 million we achieved in Q3. We attribute most of the upside to first signs of visible cost reduction with phasing running ahead of plan. We had announced this cost reduction program in Q3 and booked provisions, as you all know, for it in Q4. We still expect to achieve at least CHF 200 million of annualized gross savings by year-end 2026. At the close of the first quarter, we are running ahead of plan and confident in our ability to reach our target. Our successful cost management in Q1 mitigated some of the effects of volume impacts from the conflict in the Middle East. Also, the year-over-year comparison was high, especially in Sea Logistics, where underlying volume growth last year was 6% in the first quarter. That was due in part to front-loading before Liberation Day. The net effect in Q1 was a year-over-year decline of 17% in group EBIT. Recurring group EPS declined by 18% year-over-year on the same basis, excluding consideration of negative currency effects and a one-time CHF 35 million gain on a real estate sale and leaseback transaction. The combined Sea & Air conversion rate was 26%. Free cash flow generation in Q1 exceeded that of last year, supported by disposal proceeds linked to the real estate sale. Excluding these, underlying free cash flow conversion of 40% in Q1 reflects typical seasonality as the first quarter is normally the weakest of the year. Before moving on, I would like to address the current market situation. With respect to market share, it is currently more difficult to assess our progress versus peers in Q1, given the spike in volatility set off by conflicts in the Middle East. Pending further clarity, we are assuming that recent trends continued and that our market share was stable or slightly greater in the period. In terms of expectations for near term, we expect a Q2 EBIT result greater than that of Q1 on the back of higher and sustained service intensity during a period of supply chain disruption. As such, we are modestly raising the lower end of our full year financial guidance, a topic which Markus will cover in more detail shortly. Now let's turn to our performance by business unit. Page #3, Sea Logistics. Cost control drives recovery of unit profitability. As always, volume on the left-hand side, GP per container unit in the middle and EBIT per TEU on the right-hand side. In Sea Logistics, unit profitability recovered significantly versus the last couple of quarters, thanks to our cost reduction efforts. You can see this underlying improvement in the last 2 quarters in the middle and in the right-hand chart on the slide. Sequentially, the Q1 volume performance was better than the average change over the last 5 years. Volumes in Q1 declined by 2% year-over-year, mainly due to the events in the Middle East. This pace matched that of Q4, but with a tougher comp. Underlying volume growth last year in Q1 was plus 6% versus plus 4% in Q4 2024, Enhanced by front-loading effects ahead of Liberation Day, European imports volumes from the Far East were once again robust, extending the strong trend we saw in Q4. Transpac volumes remained under pressure on a year-over-year basis. Average yields were stable sequentially for the second consecutive quarter, in line with the expectations we shared during our last earnings calls. This stability has continued thus far into the second quarter. As we mentioned at the time of Q4 results, we do not foresee a repeat of the yield pressure we saw in Q2 and Q3 2025. The Q1 EBIT improved sequentially by 7% to CHF 113 million as cost management efforts more than offset the volume decline. This resulted in a plus 13% increase of EBIT per TEU quarter-on-quarter basis. The Sea Logistics conversion rate was at 25% in Q1. This compares to 23% in Q4 and a 35% conversion rate in Q1 last year. Let me turn now to Page 4, Air Logistics. Stable unit profitability is supported by cost control and mix. In Air Logistics, strong cost control was the most prominent factor supporting stable unit EBIT during the seasonally weak first quarter. You can see this development in the third figure on the slide. Favorable mix shifts also contributed to the stability. Volumes in Q1 were flat year-over-year. This marked a declaration from plus 7% growth in Q4, chiefly due to reduced perishables and Apex e-commerce volumes. Excluding these lower-yielding segments, we achieved upper single-digit volume growth. On a quarter-over-quarter basis, the volume decline exceeded the 10% seasonal decline we have averaged since Apex was acquired in 2021. Volume growth was most robust in Asia-Europe trade lanes, followed by North American exports. North American imports were relatively weak, especially from Europe. Average yields increased by 2% quarter-on-quarter, a notable improvement on the result we usually expect coming out of Q4. From Q4 to Q1, demand for higher-yielding cargo usually softens while lower-yielding perishable volumes tend to remain stable. As I just explained, this was not the case in the most recent quarter as the mix shift resulted in positive yield effects. EBIT rose by 7% to CHF 111 million year-over-year in Q1, excluding FX headwinds. The Air Logistics conversion rate was at 27% in Q1 versus 26% in Q1 last year. That was Air Logistics. Now Page #5, our business unit, Road Logistics. EBIT growth supported by ongoing volume recovery. In Road Logistics, the signs of demand recovery we highlighted in Q4 extended into the first quarter and supported our EBIT growth. Net turnover grew by 9% year-over-year in Q1 or 5% organically, both excluding currency headwinds. This affirms our view that Q4 marked a positive inflection point for shipment demand after a sustained weaker period in the European market. Demand for custom solutions also remained robust, a consistent trend since Liberation Day in April last year. Additionally, we reinforced our services to the UAE in response to supply chain disruption from the conflict in the Middle East. EBIT rose sharply to CHF 25 million in Q1, a 42% improvement on last year or 35% on an organic basis. Please follow me to Page #6, our Contract Logistics business unit. Strong underlying profitability impacted by FX headwinds. In Contract Logistics, recurring EBIT increased modestly year-over-year, offsetting material currency headwinds. The net turnover grew by 5% year-over-year in Q1, excluding these currency effects, in line with the underlying rate of growth over the previous 4 quarters. We saw continued market share gains across geographies with a particularly strong contribution from our North American business. Recurring EBIT totaled at CHF 59 million in Q1, which is 4% higher year-over-year or 11% higher, excluding the currency effects. This figure excludes the CHF 35 million gain from a real estate sale and leaseback transaction. The recurring conversion rate of 6% is in line with the prior year result. With the Q1 results, the trailing 12 months ROCE for Contract Logistics alone is stable at a level of 25%, excluding the effects of exceptional items. And lastly, we are confident in the growth trajectory with more than 30 new contracts currently in the implementation phase. This overall concludes my comments on the performance of the business units, and I will now hand over, as always, to Markus. Markus Blanka-Graff: Thank you, Stefan, and good afternoon all. Thank you once again for your interest in Kuehne + Nagel and taking the time today to review our financial results for the first quarter 2026. First, we see on our profit and loss statement a pronounced 7% foreign exchange headwind at both EBIT and net earnings level. That is because the prior year benefited from a stronger U.S. dollar ahead of Liberation Day. Second, the material cost reductions in the first quarter, which are part of our restructuring program, helped mitigate this impact of the headwinds. Third, while Sea Logistics yield stabilized over the last 2 quarters, the first quarter year-over-year comparison for gross profit reveals some pressures. And lastly, Stefan already mentioned a nonrecurring CHF 35 million EBIT gain related to the real estate sale and leaseback transaction in Germany, a factor to consider when evaluating recurring profitability. Turning to working capital. We saw the base increase to more than CHF 1.5 billion over the past quarter or an increase of 9%. With this, net working capital intensity sits at 6% or above our guidance corridor of 4.5% to 5.5%. This compares to 5.2% at the close of the fourth quarter or 5.1% at the end of the third quarter last year. You can see the spread between DSO and DPO narrowed as DSO deterioration outpaced the DPO improvement due to a temporary shift of business mix. Additionally, the share of multinational customers with extended payment terms in contract logistics is growing. The net CHF 129 million increase of core working capital in the first quarter 2026 was comparable to a CHF 132 million increase over the same period last year. All business units contributed to this expansion, except for Air Logistics. So let's now have a look at how this fits into overall free cash flow generation in the first quarter 2026. We produced CHF 194 million of free cash flow, bolstered by CHF 105 million of cash proceeds from the real estate sale and leaseback transaction just mentioned earlier. Excluding the proceeds, free cash flow sits at CHF 89 million, and that compares to CHF 167 million from last year in Q1, also excluding modest disposal proceeds. For a closer look at cash conversion, let me move on to the next slide. Here, we see the usual comparison of free cash flow conversion in the most recent quarters versus the historical average. The first quarter is typically the weakest cash conversion quarter of the year with an average 48% conversion. In the first quarter 2026, conversion was 40%, including some material cash flows linked to our cost reduction program. Accounting for these, we view the first quarter cash conversion as very much in line with the historic average. We expect a continuation of normal underlying free cash flow conversion trends over the coming quarters. Turning to our financial guidance for 2026, and Stefan mentioned that we have raised the lower end of our 2026 recurring EBIT guidance to reflect both our current expectations and the better-than-expected Q1 results. As such, our guidance range is now CHF 1.25 billion to CHF 1.4 billion, up from the previously communicated CHF 1.2 billion to CHF 1.4 billion. For the second quarter, we expect the recurring EBIT results to exceed that of the first. This is also consistent with the historical long-term average seasonal development from Q1 to Q2. And we consider the seasonal impact of any wage increases, the bulk of which take effect in April. As a reminder, our underlying core guidance assumptions include the global GDP will grow, but with persistent uncertainty across geopolitics, macroeconomic policy and trade. As a base case, global sea and air freight volume demand will grow no faster than GDP. And as we have already highlighted, our cost reduction program remains and is on track, and we still expect more than CHF 200 million of gross savings on an annual basis. These savings will ramp up over the course of 2026 with an estimated impact of at least CHF 100 million in the current year. There is no change to the assumed 5% currency translation headwind reflected in our EBIT guidance nor is there any change on our expectation for a 25% effective tax rate. With this, I would now like to close our presentation with a summary of our key takeaways. Our focus remains on market-beating growth in targeted attractive sectors. At the same time, we are striving to meet the heightened market demands and complexity borne out of the conflict in the Middle East. Yields in both sea and air logistics remain stable and slightly improved. Our cost reduction program is on track with continued confidence in targeted savings, whereby the progress in the first quarter was ahead of plan. We have a strong foundation to achieve AI productivity gains and foresee material traction from 2027 onwards, a view that we shared on our last call. We have seen continued progress over the past few months with AI adoption expanding across our operations, empowering our workforce in their daily work. We will share a more comprehensive update, including further details on operational integration and next steps alongside our second quarter results. Lastly, we are raising the lower end of our full year earnings guidance range to reflect the better-than-expected first quarter results and current expectations for the rest of the year. With this, I want to thank you for your attention and hand back to the operator to open the Q&A session. Operator: [Operator Instructions] Our first question comes from Alex Irving from Bernstein. Alexander Irving: Two for me, please. First one, what impact on earnings do you expect from the recent events in the Middle East? Given the small narrowing of the guidance range, the answer looks like none or at least net none to get your perspective on that. Second, regarding the cost cuts, how far into those and especially how far into the expected headcount reductions are you now? How much is still to be done? And how significant do you take the execution risk to be? Stefan Paul: Alex, Stefan speaking. I take the 2 questions. First of all, in the first quarter, just to reiterate, there was no no impact to be seen on GP or EBIT level from the Middle East crisis. Moving forward into the second and third quarter, mainly into the second quarter, we do not believe there is a significant impact to be expected other than the volume trajectory in sea freight. We see bookings currently are down by 70%, 80% in and out for the GCC. We have mentioned in the numbers that, that had an impact of 1.5% approximately, particularly in March on the volumes. The yield will be stable, as Markus mentioned as well. Yield will be stable in sea freight moving into the second quarter. What you will see more and more coming into the second quarter and the result to be expected is the fuel adders, which we transparently pass forward to our customers. And I want to reiterate very transparency, very transparent. So we definitely will share that on a regular basis with our customer base in order to ensure that everybody understands what is happening. So overall, from a volume perspective, we expect air freight slightly picking up. Volumes overall in sea freight, most probably flattish. We are confident that we can move forward with certain other trade lanes and piggyback on certain other trade lanes and growth, particularly coming in from Asia to Europe and to a certain degree as well to the U.S. to offset the decline in the Middle East. So overall, not a huge impact to be expected from the Middle East crisis, rather not negative, not neither positive. And the main focus in terms of the EBIT improvement will come from the cost efficiency and cost-cutting program. That now focuses on the -- or let me focus on the second question, how many FTEs, what has been executed already by end of March this year, end of March 2026, we have executed in full, and there will be no further reduction from that particular program to be expected in terms of additional FTEs in the second or third quarter. Operator: Next question comes from Muneeba Kayani from Bank of America. Muneeba Kayani: I just wanted to follow up a bit more on the air market, which is clearly tightened because of the Middle East disruption, a bit surprised to hear you say that, that hasn't had an impact and you don't expect it to have an impact. So I just want to understand how you're seeing that. And I wanted to clarify on air yield expectations for 2Q. Do you think there could be a further pickup from the strong performance we've seen in the first quarter on air yields? And then secondly, just on the guidance. So I appreciate you've raised the lower end. But based on what you've said on kind of 2Q expectations, that would imply a second half EBIT lower than the first half, which is seasonally not what happened. So really kind of what needs to happen to reach the second -- the lower end of your guide? And why did you raise the upper end of your guide by a similar CHF 50 million? Markus Blanka-Graff: Muneeba, let me just take the second question first on the guidance. I think I even mentioned it, I think, in my presentation, we expect the second quarter to be seasonally as well stronger than the first quarter. So there is no concern that the second is going to be lower than the first. Why we increased and raised the lower end of the -- the lower end of the guidance is basically because we exceeded on the first quarter and we adjusted the lower end to that effect with a little bit of an add-on on top of it. But it actually means we are consistent and remain with our assumptions and conclusions for the guidance for the rest of the year. Stefan Paul: Yes, Stefan speaking. Muneeba, so clarification or more clarity on the air yield. So what we expect is a slightly higher yield into the second quarter versus the first one on Air Logistics. I mentioned Sea Logistics most probably rather flat in terms of volume and yield. Air will be slightly up. Same is expected for volume. Remember what I said during the call 6 weeks ago in the first quarter in March, when the crisis started, when the war started in the Middle East, we missed roughly 16% to 18% of the total volume, the capacity, which was grounded from the Middle East carriers, that is now back. Single digit still is missing, but this is back. And why do I state that we believe there is a little bit higher EBIT to be expected or yield per 100 kilo expected is based on the product mix, based on the better mix, which we have seen in the last couple of weeks, less perishable, significantly less e-commerce and a better basically gain ratio in the hard cargo segment where we traditionally see a higher yielding paired with the surcharge adders, which will increase the rate level as well to a certain degree. Muneeba Kayani: That's clear. Markus, actually, my question on guide at the lower end was on the second half, not the 2Q, which 2Q is very clear, but how you thought about the second half of the year in that guide? Markus Blanka-Graff: As I said, we are not changing our assumptions for the rest of the year. Operator: The next question comes from Parash Jain from HSBC. Parash Jain: My question is more into -- in your discussion with your customers, both on air and sea, what kind of commentary are they sharing with you given we have seen U.S. retail sales to inventory has come down. But at the same time, do you think that higher inflation will dent the business sentiment or consumer sentiment as it is shown in the U.S. Michigan index. So going into the second half, do you have certain assumptions by when this crisis will be over or where the oil price will be to get to the numbers, the range that you are offering? Stefan Paul: Yes, Stefan speaking, Parash, thank you for the question. So as mentioned, so the Transpac, so the volume, the consumer volume and the sentiment mainly from Asia into the U.S. is rather soft. And I think depending on where you are in the U.S., $1 -- up to $1.50 more per gallon basically and the inflation overall is impacting the consumer sentiment, and you mentioned that quite rightly so. This is definitely ongoing. We do not see any signals that the Transpac market, the U.S. market is recovering soon as long as we have that situation. But that was baked into the updated outlook and forecast that will be offset to a certain degree by other trade lanes and in particular, by our cost measures. But your main question was about the consumer sentiment, and we see that is still rather soft. Parash Jain: And then just in terms of -- has the duration of the war or oil prices has gone into your assumption? Or you think that oil price irrespective will be passed through almost on a real time? Stefan Paul: It will pass through, yes. As I mentioned before, I think that was the question. It will be passed through. And at the beginning of your question, you mentioned how our customers are reacting, right? I think we have very open, transparent discussions and 99% of the customers fully accept and expect it, right, and accept the discussion, and we do not see a significant topic in regards to the fuel price and the adders. But as I said again, and I'm repeating myself, we are extremely transparent. Operator: The next question comes from Marco Limite from Barclays. Marco Limite: I have one follow-up question on your Q2 outlook. So you have talked about sea yields stable quarter-over-quarter. And then you have talked about volumes also stable. Now the question is, is that year-over-year stable or stable quarter-over-quarter? Because generally, Q2 has got better seasonality versus Q1. So yes, wondering if that's year-over-year or quarter-over-quarter. And actually, same question for air freight volumes, where you -- when you said slightly up for volumes, were you referring to year-over-year or quarter-over-quarter? And then my second question, again, another follow-up question is on your cost savings. Clearly, the peak in Q1 was all driven by -- or mostly driven by cost savings. Now are you able to quantify where are you in terms of run rate compared to the CHF 50 million run rate by year-end? Because I mean, if the beat versus the CHF 285 million guidance is all coming from cost savings means that, yes, you achieved CHF 30 million basically more of cost savings than what you expected. So that's a run rate of -- yes, rate compared to the CHF 50 million by Q4. So yes, that would be helpful. Markus Blanka-Graff: Marco, it's Markus. And I'll start with the cost saving part. I appreciate your reverse engineering calculation and you are relatively close to reality. So we had a head start, I would call it, into the first quarter with the cost savings. So it's not a linear development as we anticipated still at year-end. I would say that from our ambition of a CHF 50 million per quarter cost reduction, so CHF 200 million annualized, we are probably just past the 50% on a quarterly basis cost reduction. So you talked about CHF 30 million. We're probably somewhere in that ballpark. That also means we might not see the same linear development going into the CHF 200 million run rate. We might see the second quarter being a bit flatter. We have already talked about inflationary impact on April through the manpower cost. So we might see a bit of a slower progression. But then from then on, we will continue into the third and the fourth quarter. As I said, I think our CHF 100 million ambition for this year, we should be able to exceed that. On your first question, the comparatives had all been on a year-on-year basis. So every comparison on volume and yield had been on a year-on-year basis. Marco Limite: Sorry, just to -- I think it's quite an important point. So also your comment on air yields of small up is on a year-over-year basis, okay, which was CHF 770 million, right? Does not make -- if I can, does not make sense, does not make the outlook for Q2 quite positive, especially in air if you have quarter-over-quarter, let's say, based on normal society, 10% more volumes on higher yields means that Air EBIT will be significantly up quarter-on-quarter versus Q1 in your view? Stefan Paul: I would say the likelihood is there, yes. Short and crisp. Operator: The next question comes from Cedar Ekblom from Morgan Stanley. Cedar Ekblom: I just wanted to ask a little bit more on your air business. Can you talk about your approach to buying capacity? Obviously, there's a huge amount of volatility in the market. And so I just want to get a better understanding for how you're risk managing some of the potential impacts around spot rates for your business. So how are you positioned, net long, net short? Maybe a little bit of color by region would be helpful. Stefan Paul: Yes. What we do is, as you know, we have a combination of block space agreements long and short with the commercial carriers. And we have since years now, a charter operation together with our subsidiary, Apex, where they operate on our behalf as well. So what we do is we have secured in addition the last couple of weeks, we have secured additional charter operation, especially when you look into the Southeast Asian markets where the technology comes from large demand from the hyperscaler, semicon industry and the other tech companies, mainly from Thailand, from Vietnam, to give you 2 main examples, Taiwan, Taipei is as well, very hot in terms of the volume demand is concerned. And we don't only piggyback on the normal commercial flights, the uplifts directly airport to airport from these destinations into the -- or from that locations into the receiving countries. We will operate or we already operate with charter capacity point to point. But additionally, with capacity, which we utilize from Southeast Asia to China, and then we take from China, from Western -- from an airport in the West China region, we take uplift, significant additional uplifts from China in order to ensure that we always promise or keep the promise towards our customers to have enough capacity and to guarantee a certain transit time even if there is a problem on the commercial flights, we add and balance this with additional charter capacity for the customers. Operator: The next question comes from Kulwinder Rajpal from Baader Europe. Kulwinder Rajpal: So 2 questions on my side. First on Road Logistics. So I wanted to better understand how much of the EBIT growth actually came from going to road from sea in the Middle East and how much actually came from the demand recovery in Europe? Just a qualitative flavor there would help. And secondly, I'm not sure if I missed it, but when we look at the decline in air volumes in Q1 on the lower-yielding side, was there some selectivity at play here? Or if there are some other factors behind the scenes. So could you please elaborate on that? Stefan Paul: I'll take the road question first. So it was mainly 90%, 95% coming from additional volumes in the European marketplace plus the U.S. and only to a smaller degree based on our size of business, book of business from the Middle East crisis. Markus Blanka-Graff: Raj, on the second question on the decline in air volumes in Q1 compared to last year, major contribution is coming from a reduction on e-com business, e-commerce business that in the first quarter 2025 was still let's say, there in a simple world. And right now, it has declined by over 50% in volumes. So that's really the volume impact and also the mix impact. Kulwinder Rajpal: Right. So just to clarify, I mean, would we expect some sort of a catch-up? Or would it be determined by customer behavior in the future as to how these volumes trend? Markus Blanka-Graff: But it's not only customer behavior, I think it's also how attractive that volume is for our profitability and how it matches with capacity, right? Operator: The next question comes from Hugo Watkins from BNP Paribas. Hugo Watkins: Just to go back to airfreight. Can you give any insight on potential jet fuel shortages, whether that's from yourself or what you're hearing from carriers and just what that might mean for airfreight capacity more structurally for the remainder of the year? Stefan Paul: Yes. We all know, and this is not a secret that especially in Southeast Asia, I think lowest capacity is in Indonesia, followed by Vietnam, Thailand to a certain degree. I think China has significantly more reserves. I would not worry about China currently. And as I said before, with our strategy to balance charter block-based agreements and own capacity operated by FX, I think we are well positioned to manage that crisis if it would even come. But repeating myself, the highest risk in terms of mitigating lies in Southeast Asia, where some of the countries do not have buffer beyond end of May or so. Operator: The next question comes from Alexia Dogani from JPMorgan. Alexia Dogani: Just firstly, you mentioned you are targeting growth in other trade lanes to offset the Middle East pressure. Can you tell us which trade lanes you're working on? And what gives you confidence that there is kind of growth to be captured there? And then secondly, I'm aware that usually wage deals reprice every April. What is your target or I guess, your assumption for wage inflation this year, considering the CHF 100 million or over CHF 100 million is a gross cost saving target? Stefan Paul: Yes, I tackle the growth question, trade lanes, we have started, and I think I mentioned it now 2 times, we have started heavily to look from a sea freight perspective into the prepaid China market. You have a lot of new Chinese giants who are asking for support and they always call it help me to become global. So we have reiterated and dedicated additional sales force in the Shenzhen area, for instance, where a lot of these customers are located. And we are confident from what we have seen already in the last couple of weeks in terms of business gains are concerned that we can offset with China prepaid additional volume coming in from new customers and existing customers, the mid prices from a pure volume perspective. Markus Blanka-Graff: Alexia, it's Markus. On the inflation base, so as you can imagine, we try obviously to address inflation topics and compensation on the larger workforce on the ground. And I think overall, we usually have a compensation for inflation also for Contract Logistics business. That is usually a pass-through. So where we really have cost impact that is also impacting the bottom line is on the sea and air freight basis. And here, I can safely say we remained below the global inflation values, but I don't want to disclose precise numbers. Alexia Dogani: And can I just ask a follow-up on this prepaid China market? Is that intra-Asia or kind of ex China to the world? Stefan Paul: No, it's ex China to the world. As I said a couple of times, we are not focusing so much on intra-Asia. The volume is huge, but the profitability is rather low on the low-end side, $50, $60 per container unit. So it's always focusing on China long haul to the world. Operator: The next question comes from Gian-Marco Werro from ZKB. Gian Werro: I have 2 questions. The first one is a follow-up really on what you discussed already on this kerosene potential shortage in the belly capacity. So can you tell us, are your clients already planning alternatives to Air Solutions with you, which might be beneficial to you, I think? And then also the charter situation, how does that work with the kerosene availability? Does some of the charters already have their own stock fuels? And then the second question is just on your AI potential that you mentioned already 6 weeks ago. Can you so far already give us a bit more details here about the potential cost cutting that you see there? Stefan Paul: So on the jet fuel, I would say, yes, of course, we have with certain customers different models. And what we do is -- and don't get me wrong, we are -- we cannot do something which is not possible at all, but we can do proper planning. And then with our charter capacity, as I mentioned before a couple of minutes ago, Gian-Marco, so we refill certain charter flights in China. We have access to certain capacity in China. So we bring cargo from Southeast Asia into China and then we refill our aircraft on the way back to Vietnam, for instance, in China. And on the long-haul flights, we refill as well in China. And remember what I said, China capacity will last significantly longer than in Southeast Asia, just in case something is happening. And I'm not saying that we will see a significant shortage. It remains particular on how fast the straight of homes will be reopened and we come back to a normal situation. But just in case this is going to happen, then we are already in close contact with some of our very large customers to do certain planning and scenario planning in order to help them to maintain a certain supply chain accuracy. Markus Blanka-Graff: And Gian-Marco, on AI, so clearly, that's an ongoing development, and we see continued progress over our last couple of weeks. But between our last announcement and today, it's really just a couple of weeks. And I would ask you to wait until we get into the half year results in July. And I think we should be -- you can expect from more tangible report and numbers, I think, at that point in time. But between the last 6 weeks and now, really not much has changed. We have expanded our use cases, and we are more and more seeing the benefits in empowering the workforce and making really their work more or supporting their work in a much better way. Operator: The next question comes from Lars Heindorff from Nordea. Lars Heindorff: The first one is on the road business. It sounds like you actually see maybe a little bit of sign of improvement in the European market. Maybe just if you can sort of elaborate a bit on that. We've seen Maut statistics in Germany still being down. So this increase in the organic revenue growth, is that caused by price increases? Is it volumes? Or where do you see any pockets because I mean, feedback on Germany is still pretty big in my view. And then the second part, which is what most of the other questions have been around, which is still regarding the yield development, the bunker surcharge, particularly in sea freight. To what extent is that affecting the yields positively or negatively? In sea freight, I'm hearing that the carriers are, to some extent, struggling a bit passing through the emergency bunker surcharges and maybe that many customers are waiting for the regular BAF to kick in sometime in the third quarter? And how will that affect your yield development if we look a little bit further beyond just what goes on right now? Stefan Paul: Yes, Lars, it's Stefan. I'll tackle the first one. It is mainly market share gains, right, in the U.S., in particular as well in Europe. We have seen a pretty good development in the last 6 weeks. We have gained additional volumes in Germany and France in the large domestic markets, but as well international. I think it has to do with what we have started last year on the back end of the softening when we saw that the market has really started to soften quite a bit. And then we increased our sales efforts. This is paying off now. And then with you, overall, the German economy is still pretty challenging, but even so we see good development from customers and new customers and the volume is coming in much better than expected. Markus Blanka-Graff: And Lars, I'll take the question on -- I think your general question is any fuel bunker or any surcharges beneficial to the yield. And I can answer, I think, for all 3 business units, if it's road, sea or air, that is neutral to the yield. I think what is important is what Stefan also mentioned a couple of times, there is transparency from that impact towards the customers. And I think that is the most important thing we can do being transparent and straightforward. It's not a yield topic. It's a cost pass-through. Operator: The last question comes from Marc Zeck from Kepler Cheuvreux. Marc Zeck: Last question then would be actually on the macro situation in Europe. We talked about the U.S., I guess. But let's say, volumes into the U.S. were kind of sluggish for the last 2 years and most of the volume growth, at least for the entire market was driven by volumes into Europe. And now the energy crisis is probably more of an issue for Europe as we are not really self-sufficient on energy over here. So what is the latest really that you see for April or that you see forward bookings for May? How is the energy crisis affecting Europe? And why would you be kind of positive that -- yes, that you will get over this rather without a major slowdown in European activity towards peak season in ocean freight in August and September? That's my question. Markus Blanka-Graff: Mark, this is an interesting question because it's, I think, nearly impossible to answer correctly. So I take the risk of being wrong, right? So I think on energy crisis and what is the impact on the macroeconomics, the first question for us is, and I have -- we have talked about a little bit what is the expectation of how long energy prices are going to stay at such a super elevated level, much connected to how long the crisis in the Middle East is going to continue. What -- what we can see is that at the current stage, the trade lanes, Asia to Europe are basically holding up strong. How much the inflationary impact is going to put on customer confidence in the U.S. remains to be seen. But again, here is a question more like how long is it going to persist. So I think too early to say if there is already an impact into the third quarter peak season expectations. I think we really have to sit here and look at the development for the next couple of weeks before we have any idea what's going on. You know better than certainly us, oil price volatility is a topic on the day. And obviously, for us, as I said in the previous answers, we are passing through this impact towards the customers. Their behavior, I think, cannot and has not reacted on a daily basis. How that's going to be going forward, I think, as I said, we have to wait a bit. Marc Zeck: Understood. If I just have a chance to follow up on that one. If you compare the current situation to how things played out during the Ukraine crisis, let's say, from a current perspective was pretty similar end of February, right? When -- then when did you see from European customers really the action that they put back a bit on the other side? Markus Blanka-Graff: Well, I think my first answer would be the magnitude or the impact on economy, on macroeconomics of the Middle East crisis now is far bigger than what we have seen on the Ukraine war. So the energy prices and the severity, I think we have talked about even the potential of jet fuel shortages. That has never been a situation from the -- coming from the Ukraine war. So I'm not sure if that is comparable. What we can generally say is when there is such severe disruption in supply chains, there is a certain period of a couple of weeks, so maybe 6, 8 weeks where alternatives, we spoke about how alternative supply chains are being designed are being done. And then if that new situation persists, then slowly that becomes that new situation to deal with. But I think we are far away from any of that stage right now. We are still in a stage of disruption. Operator: We have a follow-up question from Marco Limite from Barclays. Marco Limite: So I just want to go back to one of your statements, which is the Middle East had no real impact in Q1 and potentially into Q2. Was that referring to the sea freight business or to all the divisions? Yes, I would say this is the question and then in case I've got a small follow-up. Stefan Paul: So my answer was -- Stefan speaking. My answer was that the impact from an EBIT perspective in Q1 was not to be seen from the Middle East crisis. just piggybacking on what I said before, we will see an impact on the overall freight rates due to the fuel surcharge adders, which we transparently hand forward and put forward to our customers, and I talked about that as well. From a yield and from a volume perspective, you might see and I mentioned it as well that the second quarter in air freight will have a little bit of a better yield. Is that coming from the crisis or from a better mix? I would say it's more coming from a better mix and less from the crisis. But overall, one thing is clear due to the fuel surcharge adders, the freight rates overall are getting higher. Marco Limite: That makes a lot of sense. And when we think about the better mix, is that market-driven? Or is you guys trying to... Stefan Paul: Nothing to do with the market. It's us we decide basically based on verticals and higher profitability, where do we play and where do we want to play. Marco Limite: That makes sense. Is that because in a period where capacity there is shortage of capacity, I guess you prefer to go with better yield volumes. Is that the logic or... Stefan Paul: Some of the logic, yes. some of the logic that and we put much more emphasis on the general cargo on the hard cargo, right? And with our service, with our product offering, with the quality we offer, we have the choice to basically go for the higher-yielding business. Operator: Ladies and gentlemen, there are no further questions. Back over to you for any closing remarks. Stefan Paul: Thank you very much, as always, for your interest, listening for the good questions, and we speak to you then when we communicate the Q2 figures. Stay tuned and healthy. Bye-bye. Operator: Ladies and gentlemen, the conference is now over. Thank you for choosing Chorus Call, and thank you for participating in the conference. You may now disconnect your lines. Goodbye.
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.
Operator: Good day, everyone, and welcome to the Fibra Danhos First Quarter 2026 Conference Call. [Operator Instructions] Please note, this call is being recorded, and I'll be standing by for assistance. Now I'll turn the call over to your host, Rodrigo Martinez. Please go ahead, Rodrigo. Rodrigo Chavez: Thank you, Elise. Hello, everyone. I am Rodrigo Martinez, and I run Investor Relations for the company. At this time, I'd like to welcome everyone to Fibra Danhos 2026 First Quarter Conference Call. We issued our quarterly report yesterday. If you did not receive a copy, please do not hesitate in contact us. Please be aware that they are also available on our website and in Mexico Stock Exchange website. Before we begin our call today, I would like to remind you all that forward-looking statements made during today's call do not account for future economic circumstances, industry conditions and company performance or financial results. These statements are subject to a number of risks and uncertainties. All figures included herein were prepared in accordance to IFRS standards and are stated in nominal Mexican pesos unless otherwise noted. Joining today from Fibra Danhos in Mexico City is Mr. Salvador Daniel, CEO of Fibra Danhos; Mr. Jorge Serrano, CFO of Fibra Danhos; and Mr. Elias Mizrahi. Now I will turn the call to Jorge Serrano for opening remarks and financial and operating indicators. Jorge, please go ahead. Jorge Esponda: Good morning. Thanks for joining us today. Fibra Danhos posted sound financial and operating results for the first quarter 2026. Fixed rent, an 8% growth explained by the full contribution of Cuautitlan and Palomas industrial projects, indexation of lease agreements and improved occupancy levels in our office portfolio. Overage and parking revenues increased almost 13% and 18%, respectively, based on strong sales from our tenants and tariff adjustments in our properties. Consequently, total revenue during the quarter increased 9.4% year-over-year, while operating expenses did so by 7%, resulting in a 10% increase in net operating income and 11% on EBITDA with margin improvements. AFFO per CBFI accounted for MXN 0.76, equivalent to MXN 1.2 billion and almost 16% high year-on-year. Distribution was determined at MXN 0.45 per CBFI, that represents a payout ratio of 59%. GLA on our operating portfolio increased by 15% year-over-year. And overall occupancy level grew 220 basis points, reaching almost 92%. Lease spread on 20,000 square meter renewal agreements on our operating portfolio was 4.3%. Our CapEx pipeline continues to gain momentum, particularly in Palomas and EdoMex III industrial projects that are due to deliver by year-end. While Parque Oaxaca and Nizuc are making progress and running on schedule as well. Balance sheet remains with only 13.6% leverage. During the quarter, Fitch ratified a AAA rating for Fibra Danhos CBFIs and our debt bond issuances. Fibra Danhos shareholders' meeting took place on March 27, with a general quorum of assistance of more than 80% and resulting on the approval of all the agenda items with a favorable vote of more than 95% on each of them. Thanks, and we may now turn to the Q&A session. Operator: [Operator Instructions] Our first question today comes from Igor Machado of Goldman Sachs. Igor Machado: So the first one is on lease maturities. You have a significant amount of lease maturities coming due for retail portfolio, so 28% of total. And your leasing spread is around 7% this quarter. So just want to better understand what could we expect the lease spreads going forward with the lease-up. And also given the significance of the maturities... Jorge Esponda: Something happens with -- we cannot understand well. Can you repeat the question? Igor Machado: Yes, sure. Can you hear me well? Jorge Esponda: We can hear you, it's distortion. I mean we did not hear you clearly. Igor Machado: Can you hear me? Jorge Esponda: Yes, that's better. I think you're closer now to the microphone. Igor Machado: Yes. So the first question is on [ lease maturities ]. So you have a significant amount of maturities due this year for the retail portfolio. So I just want to understand why could we expect the lease spreads going forward with the lease-up? And also given the significance of the maturities, if you see this is an opportunity to do a material change in your tenant book for the retail portfolio? Elias Mizrahi: Igor, this is Elias Mizrahi. So the maturities for our retail portfolio, historically, we have a weighted average term of approximately 4 years. So around 25% of our contracts expire every year, and we actually do renovations on a 3- to 5-year renewals at the most precisely to have these renovation windows, and that's where we can push rents up and have leasing spreads. So on retail, we continue to see lease spreads above inflation in general. And I think that's the question, right? Igor Machado: Yes. Operator: Was there anything further, Igor? Igor Machado: Sorry, if it's possible, I have another question here. Could you comment on why are you seeing the potential increase in construction costs given the conflict in the Middle East? Elias Mizrahi: We haven't seen an impact in costs because of the war in the Middle East. Let me pass this to [indiscernible] to give you some further remarks. Salvador Daniel Kabbaz Zaga: I mean we haven't still seen a significant change in prices. None of our contractors have let us know that we have to be prepared for it. So we're not expecting a big change on the increases in cost of construction, at least for the moment. Operator: Our next question today comes from Gordon Lee of BTG Pactual. Gordon Lee: Two questions. I was wondering on the industrial side. Now that, that segment is becoming more relevant for you, will you be looking at any sort of potential M&A opportunities? And I'm not thinking of Macquarie, but I'm thinking more of -- this is the expectation that there will be a pipeline through the maturation of [indiscernible] properties hitting the market. Would you look to acquire properties? Or do you prefer to focus 100% on developing them? And then the second question is just on Torre Virreyes, that's one of your sort of flagship office properties where we really haven't seen sort of improvements in occupancy in the last 2 or 3 quarters. So I was wondering whether you think that's still something that's just cyclical? Or do you think there's something about the property that may require more work, repositioning, something of that nature? Salvador Daniel Kabbaz Zaga: This is Salvador. I mean, talking about Torre Virreyes, it's 100% leased. Gordon Lee: Sorry, I meant Toreo. I said Torre Virreyes, but I meant Toreo. Sorry about that. Salvador Daniel Kabbaz Zaga: Okay. I mean, Toreo, we've been working very hard. It was hit by the pandemic and we lost some tenants. But we're seeing a gradually increase in occupancy, and we expect it to be even better in the next trimester. So we feel comfortable with it. And we're going to see -- we believe we're going to see good numbers in the next years to come. So as you know, the office segment is still just recuperating after the pandemic. But we've seen a lot more movement in clients and interest in spaces, especially in the last trimester. I mean, I hope this -- we can -- we were able to fulfill into contract [ with ] expectation. But we're -- I mean, happy with it. And in terms of industrial, of course, we are always open to new opportunities. As you know, we prefer to develop because in that way, we can actually get much higher yields with it. But -- but if we find a good opportunity in the market, we'll take advantage of it. Operator: And from JPMorgan, we have Felipe Barragan. Felipe Barragan Sanchez: So we've seen a good uptick on the office occupancy, now coming close to 80%. I just want to get an update from what you guys commented last quarter. If we could see perhaps you guys breaking above the 80% threshold that you guys have been struggling to recover. Salvador Daniel Kabbaz Zaga: Yes. We are expecting this to grow. I mean it's not an easy task. Office, it's much better, but it's not still, I mean, driving. So we expect it to be a better number each trimester and to actually fill up our buildings in the next year, something like that. Felipe Barragan Sanchez: Okay. And I have a second question real quick. So last quarter, you said there was a softer consumer demand that wasn't extremely prominent. Could you guys give us an update on what you guys are seeing on the consumer environment for this quarter? Salvador Daniel Kabbaz Zaga: I mean, we're seeing it to be basically just based on the line, not increasing, not decreasing. It's not a high consumer option, but we believe that things are getting much better, especially with the World Cup coming into Mexico. We expect that -- as you know, our shopping malls are in Mexico City, so we expect this to contribute in a positive way to the portfolio. But the truth is that we're basically just flat online. Operator: Next, we have Alan Macias of Bank of America. Alan Macias: Just a question on land bank. If you can remind us your strategy of acquiring land in Mexico City for the industrial sector? And what are you seeing there in terms of land prices? And perhaps has anything changed in terms of licensing and permits? Salvador Daniel Kabbaz Zaga: I think we're on a good place on acquiring some land with licensing and permitting. We're working very hard on it. We've been doing it in the past couple of years, and they're getting just mature to be almost ready to be developed. So we expect to give good notice in the next probably 6 months about it. But we're going to continue into the industrial development. We feel comfortable with it. I think we're doing a good job with it. And we are working very hard to basically just be able to -- in the next few months or 4 months or 2 trimesters able to give a good notice to the market on it. Operator: [Operator Instructions] And we have no further questions at this time. Rodrigo, back over to you for any additional or closing comments. Rodrigo Chavez: Thank you very much, Elise, and thank you, everyone, for joining us today. Please do not hesitate to contact us, Salvador, Elias, Jorge and myself for any further questions. We are always available, and we'll see you on the next conference call. Thank you very much. Operator: That concludes our meeting today. Thank you for joining. You may now disconnect.
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 FIBRA Macquarie's First Quarter 2026 Earnings Call and Webcast. My name is Alicia, and I'll be your operator for this call. [Operator Instructions] I would now like to turn the conference over to Nikki Sacks. Please go ahead. Nikki Sacks: Thank you, and hello, everyone. Thank you for joining FIBRA Macquarie's First Quarter 2026 Earnings Conference Call and Webcast. Today's call will be led by Simon Hanna, our Chief Executive Officer; and Andrew McDonald-Hughes, our CFO. Before I turn the call over to Simon, I would like to remind everyone that this presentation is proprietary and all rights are reserved. The presentation has been prepared solely for informational purposes and is not a solicitation or an offer to buy or sell any securities. Forward-looking statements in this presentation are subject to a number of risks and uncertainties. Our actual results, performance, prospects or opportunities could differ materially from those expressed in or implied by the forward-looking statements. These forward-looking statements are made as of the date of this presentation. We undertake no obligation to publicly update or revise any forward-looking statements after the completion of this presentation, whether as a result of new information, future events or otherwise, except as required by law. Additionally, on this conference call, we may refer to certain non-IFRS measures as well as to U.S. dollars, which are U.S. dollar equivalent amounts, unless otherwise specified. As usual, we have prepared supplementary materials that we may reference during the call. If you have not already done so, I would encourage you to visit our website at fibramacquarie.com and download these materials. A link to these materials can be found under the Investors Events and Presentations tab. And with that, it's my pleasure to hand the call over to FIBRA Macquarie's Chief Executive Officer, Simon Hanna. Simon? Simon Hanna: Thank you, Nikki, and good afternoon, everyone. Thank you for joining us for FIBRAMQ's First Quarter 2026 Earnings Call. Before we begin our earnings presentation and open the call to questions, I want to take a moment to address the ongoing offer by FIBRA Prologis to acquire up to 100% of FIBRAMQ's outstanding CBFIs, which commenced on April 7, as well as the potential offers by other third parties that have not yet been formally commenced. As noted in our earnings release, we have published the relevant market notices in connection with the FIBRA Prologis offer and we will continue to do so as required. For clarity and due to legal restrictions, we are unable to comment further or answer any questions on these offers. Overall, we delivered a strong and steady quarter with in-line results from both a financial and operating perspective. Portfolio performance remained resilient, and our operating platform continued to execute effectively against a subdued market backdrop. Our outlook on the Mexican real estate market remains cautiously optimistic. We continue to see some softness driven by an ongoing wait-and-see dynamic ahead of the expected USMCA renewal with market-wide industrial vacancy inching up by approximately 100 basis points during the quarter. At the same time, it is encouraging to see a continued decline in new construction starts, which is helping keeping the overall demand-supply balance in check. Importantly, market rental rates have held up relatively well, particularly in core logistics and border markets. We view the current environment as one defined by timing rather than a deterioration in fundamentals. Turning to our industrial portfolio. During the quarter, we executed new and renewal leases on approximately 1.6 million square feet of GLA, a 12-month high across a broad mix of customers and geographies. Leasing spreads were 13.8%, an overall strong outcome and in line with expectations. This supported an overall rental rate increase of 6.1% year-over-year, while industrial NOI reached $51.2 million, up 4.4% annually, highlighting steady cash flow growth and disciplined cost management. Quarter end industrial occupancy was 94.6%. Underlying customer demand remains stable and leasing activity continues as we look forward to working through a very manageable lease expiration profile of just 7.3% for the remainder of the year. A highlight during the quarter was a new lease in Tijuana, which includes an expansion component for a large first-time Asian entrant into Mexico assembling high-end consumer electronics. The expansion is expected to generate a double-digit cash-on-cash yield. We view this transaction as another encouraging signal on the increasing potential in Northern markets as we move towards gaining greater visibility around the longer-term trade and tariff policy. Our retail portfolio remains stable with sustained new and renewal leasing volume of 22,000 square meters. The modest decline in occupancy during the quarter was attributable to the departure of a single cinema tenant at lease expiry. Excluding this event, occupancy would otherwise have been broadly stable. Retail NOI increased 3.6% sequentially, and we also expect full year retail NOI to steadily increase from 2025 as we work through other low-impact scheduled move-outs during the balance of the year. Turning to growth CapEx. We remain committed to our strategy of allocating capital to our industrial development program, focusing on land acquisition opportunities while taking a disciplined approach on new building starts. During the quarter, we completed our largest land acquisition to date, acquiring a 124-hectare parcel in Tijuana's Boulevard 2000 corridor for $114 million. The site supports the future development of up to 3.4 million square feet of Class A industrial space. Importantly, the park will also include a dedicated 90-megawatt substation currently under construction, providing a significant competitive advantage in a power-constrained market. The transaction was structured with favorable payment terms over 3 years with approximately 35% paid at closing, preserving liquidity while securing a long-term strategic asset. While the land bank will not contribute to NOI in the near term, we believe it will generate some meaningful returns over time and aligns directly with our disciplined development strategy. In summary, while leasing velocity continues to be influenced by broader market uncertainty, our portfolio fundamentals remain solid. Cash returns from the top line through to AFFO are robust, and our asset quality and vertically integrated operating platform continue to differentiate us. Importantly, our long-term investment thesis remains intact. We remain committed to executing our strategy with discipline and delivering value for our certificate holders. With that backdrop, I'll turn it over to Andrew to walk through our financial results and guidance outlook. Andrew McDonald-Hughes: Thank you, Simon, and hello, everyone. From a financial perspective, we delivered quarterly results in line with expectations across our key metrics, including record quarterly EBITDA of $55.1 million, up 6.7% and record quarterly FFO of $38.5 million, up 6.8%. AFFO per certificate was MXN 0.65, up on a sequential and annual basis in underlying U.S. dollar terms, driven by robust same-store consolidated NOI growth of 5%. NAV per certificate increased to MXN 49.7 representing a 1.2% quarter-over-quarter increase. Importantly, our NAV incorporates our high-quality land bank at cost, which comprises 8.4 million square feet of buildable GLA and does not reflect the embedded value creation potential given our expectations to develop at 9% to 11% NOI yield as we construct and stabilize these projects over the coming years. Our balance sheet remains strong. Liquidity is ample, our leverage is comfortable, and we retain substantial flexibility to navigate current market conditions while continuing to invest selectively. This strength allows us to remain patient and focused on opportunities that deliver attractive risk-adjusted returns rather than reacting to short-term market noise. Our balance sheet metrics remain prudent with a real estate net LTV of 33.6% and regulatory debt service coverage of 4.2x. Our debt is 99% fixed rate with a weighted average tenor of 3.5 years. Subsequent to quarter end, we completed the refinancing of a sustainability-linked revolving credit facility, upsizing it to $200 million and extending its maturity through April 2031. Notably, this refinancing was completed with the lowest credit spread achieved to date of 105 basis points. As of today, total available liquidity stands at $835 million. On the ESG front, we published our first-time S1 and S2 reports, representing a meaningful step forward in our disclosures. We also achieved another LEED Platinum certification with a record score of 91 points for an industrial development that had previously stabilized at a strong double-digit yield, reinforcing the alignment between sustainability initiatives and strong financial performance. We are updating full year 2026 AFFO guidance to be between MXN 2.54 and MXN 2.64 per certificate, primarily reflecting the additional funding expense associated with the Tijuana land acquisition announced during the quarter. AFFO guidance assumes the exclusion of transaction expenses related to the potential acquisition of FIBRA Macquarie certificates. These expenses include financial adviser fees of up to $9.25 million contingent upon the completion of the acquisition as well as additional legal, advisory and other transaction-related expenses. Our distribution guidance remains unchanged at MXN 2.45 per certificate, which represents an approximate 11% increase in annual distributions in U.S. dollar terms based on current FX levels, following a similar U.S. dollar increase last year. This ongoing momentum in distribution growth reflects the underlying strength and stability of our cash flows as well as our confidence in underlying AFFO growth drivers. Of note, FIBRA Macquarie also declared a first quarter cash distribution of MXN 0.6125 per certificate, which will be paid on or about June 18. While near-term market conditions remain subdued, our financial position is strong, embedded value across the portfolio remains significant, and we are well positioned to continue executing with discipline. Simon and I would also like to take this opportunity to acknowledge the tremendous contribution of our team across the FIBRA Macquarie platform, and we remain confident in our ability to deliver sustained growth and value for all stakeholders. With that, we're happy to take your questions. Operator: [Operator Instructions] Our first question comes from the line of Rodolfo Ramos with Bradesco BBI. Rodolfo Ramos: Just a couple, if I may. First, I know you there is limited to how much you can discuss here. But just wondering whether your technical committee will be evaluating the most recent Monterrey tender regarding its fairness and what could be the timeline there? And second, it was a slight quarter-on-quarter occupancy decline, but can you comment whether it was something like an industry-specific or client, just to give us a sense of how the broader circumstances are weighing on that decision process for tenants? Simon Hanna: Yes. Thanks, Rodolfo. Rodolfo, great to hear from you. That's right. We saw FIBRA Monterrey come out this morning with their offer. And so from a process management perspective, we'll also be managing that with -- after 10 business day deadline to -- for the technical committee or the independent members of the technical committee to provide that fairness opinion. So that will be the other next step on that -- on that front. Look, with regards to move-outs, yes, we saw some move-outs through the quarter. I'd say, in general, nothing particularly concerning there and also not really much in terms of a read-through in terms of market specific or geographic specific, sort of a mixed bunch in terms of -- in terms of reasons for move-out, but I'd say no trend to call out. Through all that, we picked up some good leasing spreads as well on the renewals. You would have sort of seen a good bounce back to 13.8% and the expiration profile for the remainder of the year at 7%, we feel very comfortable sort of working through that. So those move-outs, as always, backfilling will be the aim of the game. And we have actually had some success even in this environment in doing some backfilling. Actually, one of the new leases that we did in Tijuana this quarter was a move-out from the fourth quarter. And that I think last quarter as well in Guadalajara, we had a couple of hundred thousand square feet move-outs, and we actually backfilled that the same quarter. So I think it goes to show that good quality buildings with the right approach, you can actually backfill in good order and something that we'll be addressing as part of those move-outs. But as I say, nothing fundamentally too concerning. When you take a step back and actually look at the market overall, I'd say softening backdrop, mildly softening backdrop in terms of the market-wide vacancy picking up maybe 100 bps or so. But again, I'd say nothing that we're too concerned about, given it is a wait-and-see dynamic as we all wait to get through to USMCA renewal, which to be fair is looking more like back end of this year, but maybe it's looking into next year. But when we look about that softening backdrop, again, we feel good about it. Just remembering 94%, 95% as an occupancy market -- number for the market overall. That's fundamentally healthy and actually where Mexico industrial has historically been. So that's something we feel good about. We also are seeing a rather steep decline in new construction starts. So again, as I said earlier, that's helping to just moderate the demand-supply dynamic and importantly, asking rates are holding up. So you saw us working through with that 14% leasing spread, and we feel good about where rental rates are even with that softening backdrop. So yes, we feel good about the rest of the year, albeit we did see a little bit of a slip in occupancy this quarter. Operator: Thank you. This concludes the question-and-answer session. I'd like to turn the conference back to management for any closing remarks. Simon Hanna: Okay. That was quick. And look, thank you, Alicia, and thanks, everyone, for participating in today's call. Along with Andrew, I would like to thank all of our stakeholders for ongoing support, and we look forward again to speaking with you over the coming days and weeks as we go through this quarter. So thanks very much, everyone. Operator: The conference has now concluded. Thank you for joining our presentation today. You may now disconnect.
Allison Chen: Okay. Great. So thank you for joining us today. We know it's early start, and we appreciate you for dialing in on time. We have the management team with us here today. We have our CEO, Choon-Siang; Mei Lian, our CFO; Head of Investment, Jacqueline; Head of Portfolio Management, Yi Zhuan; and IR team here with us, we have Nathan, Tami and myself. We have to keep things focused today. So we'll start off with key highlights by Choon-Siang before moving on to the Q&A. With that, I will pass the time over to Choon-Siang. Choon-Siang Tan: Thank you, Allison. Good morning, everybody. Thank you for joining us today. I know it's bright and early, bright and early for me too. It feels like we have just spoken recently, and here we are back again. Okay. Today, we just announced business updates for the first quarter 2026. So the numbers could be a little stale given that we have already spent some time talking about some of the transactions earlier. And also, obviously, we have reported an advanced distribution. So some of you would have if you turn some of your numbers from there as well. But nevertheless, let's go through some of the operating numbers, and then we will take some Q&A. But there are some exciting updates in this business update as well. We will walk through in the subsequent slides. Okay. So first quarter net property income, very healthy, closed the quarter at $314 million, up 8%. But of course, this is -- has a lot of -- we've gone through a lot of changes in our portfolio. So we need to dissect the numbers a little bit. But overall, a very healthy set of financial numbers, as you would have seen from our advanced distribution anyway. Aggregate leverage, 38.5%, down 0.1 percentage points from the end of 2025. Average cost of debt has come down quite significantly from 3.2% as at 31st December 2025 to 31st March 2026. This quarter, in terms of cap market transaction, we issued $300 million fixed rate notes due in 2031, which is a 5-year note at 2.18% on 10th of March 2026. Portfolio occupancy, 95.2%, down 1.7% quarter-on-quarter. I'll spend some time walking you through some of the reasons why the occupancy is down for this particular quarter. I think it's mainly due to actually, I don't think it's a portfolio-wide reflection. It's actually very tenant-specific. The top 3 contributors to the decline in occupancy is actually a tenant in MAC in Frankfurt. We have the largest contribution. In fact, it contributed approximately half of the drop because by NLA, that tenant takes up quite a significant space and that contributed. But the rent on that tenant actually is not very significant. So the contribution was about 0.8% of portfolio occupancy. The rent contribution was actually less than 0.2%. So the impact on the financial is not as significant. Then the second tenant, we have a tenant departure from Funan office, one of the larger tenants that we have there. And also the third tenant contribution is a tenant in Clarke Quay that's on the third floor is an event organizer. Fairly large space, but as you can imagine the flow of Clarke Quay very little rent contribution. So the financial impact is more -- it's not as significant as the drop in occupancy suggests. But I want to highlight that we are very actively marketing the space. So of course, we all know that MAC itself has some challenges in terms of leasing. We actually did improve the occupancy last quarter. But I think when we highlighted last quarter as well, there's always some in and out in terms of the leasing momentum. So we will be working quite hard to try to improve the performance for that particular asset. Clarke Quay, a lot of -- it is work in progress. So the team is curating the tenant mix to try to dovetail with the completion of CanningHill, getting some good traction in the leasing discussion. So there could be some new names that will show up at Clarke Quay over the next few months. And also for Funan, the office tenant probably contributed about slightly over 10% of the Funan office occupancy. So we are also actively marketing that space, which we think is transitional. And the office space is actually quite nice because it's fitted out. So it should take us not too long to lease up that space. Okay. So these are the 3 main -- so it's actually very asset and tenant specific. I think overall, the portfolio is still very healthy as evidenced by the rental reversions, which is still very healthy at 4.4% for the retail portfolio. And for the office portfolio is at 6.1% rental reversion, quite in line with our guidance earlier to be trending around mid-single digits. Tenant sales per square foot, up 2.2% year-on-year, fairly healthy. This includes the March numbers as well even after the start of the Iran war. I think January and February numbers were very healthy, as you can see also from the national retail sales numbers. I think February, they reported 11% increase in year-on-year sales. Of course, there's some Chinese New Year effect. But then even if you combine the January and February sales, I think overall, it was up about close to 4%, if I'm not wrong. So in our malls, we are up about 2.2% per square foot, including March numbers. Okay. Next. Shopper traffic, also very healthy, up 3.2%, so quite in line with the -- I mean, slightly better than the tenant sales. In terms of the updates for first quarter, AEIs that we have previously announced, I think they are all work in progress. Lot One, Raffles City, Tampines Mall, all progressing quite well. Divestment of Bukit Panjang has been completed at the end of February. In terms of utilities costs, I think we have been getting a lot of questions in all of our meetings over the last 1 month. I think happy to reiterate that our utilities costs, energy rates are all locked in across our portfolio. For Singapore portfolio, locked in until end of 2026 at a better rate than what we locked in, in 2025, actually. So this year, we're actually expecting savings from our utilities costs. For our overseas properties, we are locked in as well until 2027, depending on which property and 2028 for some other properties overseas. Next. Okay. So I think we have spent some time over the last few days talking about this transaction already. So I won't spend too much time. We can take some questions as well, but I think a lot of you have already had a session with us on this. But I think the market reaction has been fairly positive. So we are quite happy with that. The placement was well oversubscribed at about -- I think it was about just almost 5x subscribed, just below 5, I think. That allowed us to upsize our placement from $600 million. So that's the key change from the last time we spoke. I think when we spoke, it was based on a $600 million equity offering. Now we have raised $750 million and at a tighter discount than what we originally assumed, which was 2.7%. The price that we did at 2.30% was actually a 2.36% discount to the adjusted VWAP. So all in all, very healthy demand for the offering. As a result of that, there will be some adjustments to the DPU accretion because of the larger equity offering, accretion is at 1.7%. But of course, that also means that it allows us to lower our leverage to 38.7%. I think previously, we reported just slightly over 39%. So that also means that it gives us larger debt headroom for other activities that we wish to pursue at least going forward in the future. Next. Okay. So I think this is the key update for this quarter. We want to also report that we have actually started the process for AEI at Plaza Singapura and The Atrium. I mean we have been looking at this for a while. I think we are now confident to go out and announce this asset enhancement, I think for a few reasons. I think timing-wise, of course, this is not like something that we take it quite lightly, asset enhancement. And this is quite a substantial asset enhancement at $160 million. I think we have always been quite deliberate in terms of the spacing of our asset enhancements, as you guys are familiar by now. We always try to time it with a minimal or execute it in a way that has minimal impact on our cash flows. So that has already contributing -- that has already started contributing to our numbers since February and March. And also that, in fact, give us the uplift in terms of financial performance. That was one of the key contributors to first quarter outperformance also in addition to CapitaSpring and in addition to ION acquisitions. So with Gallileo largely resolved and handed over to the tenant, we think that we are ready to take on another major AEI, which is Plaza Singapura. And most of you are familiar with the asset. It is an asset that has been around for a long time. And I think if you look at the performance of Plaza Singapura on a per square foot basis in terms of rent and sales, I think there is some room that we can value add when you compare it to some of the more neighboring malls in downtown, even within our portfolio. So the idea is to elevate the positioning. There are some infrastructure upgrades that we're doing. There is also a tenant refresh that we are planning. We will also be looking at -- probably looking at some -- transforming some spaces into a more immersive experiential entertainment concepts. This is something that we are exploring at the higher levels so that we are able to draw the crowd to the top floor. I think so that's one of the key feature and objective of this particular AEI. The other thing that we wanted to achieve was also to dovetail with the URA's Master Plan. There is a plan to pedestrianize the Orchard Road stretch in front of the mall. So we want to now plan for the seamless linkage between Plaza Singapura to the Istana Park that is right in front. So we will be doing some upgrades at the front to extend the park experience in so that it creates a more seamless connection between nature and retail. So to minimize the disruption, we do plan to carry out the AEI in phases with the mall remaining open and operational throughout this AEI period. So some of the pictures, I think, in the next page, artist impression. Maybe we go to the next page and show the pictures. So there will be some improvements in terms of the facade, there will be improvements to the drop-off point, creating a better experience. So the inside of the mall, we will definitely be upgrading to make the space a bit more open and also the look and feel and the tenant mix is likely to see significant changes at least for the first and second levels and as well as the top level. Okay. So I think the other thing that is interesting is also we are creating some of these bridges that link across -- I think we -- the idea is also because Plaza Singapura actually is quite a big mall. It's about 700,000 square feet. So the idea is also to create better movement across various parts of the mall. So we have all these link bridges, not only looks good from The Atrium area, but also facilitates the flow, creates a bit more vibrancy to some of the upper floors. So that overall effect on the mall is one of a little bit more exciting and vibrant across every floor and not just focus on the -- I mean today, we know that the basement for Plaza Sing is really doing very well. The ground floor is doing well. What we want to do is also to replicate the experience in the slightly quieter areas of the mall, okay? Okay. So in terms of the financial performance, I will touch on that. Gross revenue, we are up 8%. But of course, this includes the contribution from CapitaSpring, which previously was reported under JV structure. NPI up $314 million. Year-on-year, we are up about 7.9%. So this also excludes 1 month of Bukit Panjang because we have sold it in February. So there's a lot of movements within the numbers. Okay. Next. In terms of capital management, I think we have highlighted a very healthy balance sheet now. We are at 38.5% even with the acquisition and coupled with the equity offering, this is not likely to change significantly. Interest coverage, very healthy 3.8x. I think the key takeaway from this slide is that the average cost of debt has come down to 2.9% from 3.2%. Next, well spread out maturity profile. I think we only have about $450 million of loan left for refinancing for this year. And the rest of the years, I think, fairly healthy. Next year, we have about $1 billion up for refinancing. In terms of occupancy, I think we spent a lot of time at the beginning talking about occupancy. So I won't belabor the point. If you look at our retail, actually, it's generally -- it's come down slightly, but I think the largest contributor to that drop was the Clarke Quay that I mentioned, the Clarke Quay tenant I mentioned, but I think the financial impact is very small. Office, largely because this is a combined look, including Germany and Australia. We can have some detailed breakdown later, largely contributed by Germany. Integrated development, it's down slightly. There are some vacancies in I think this is Funan because it's contributed into the under integrated development. That's the drop that I was mentioning as well in the Funan tenant. Next. Top 10 tenants, no significant changes. I would just add that ECB, which we have put into the footnote will feature as a top 10 tenant going forward, but we're still in the process of handing over the last 2%, 3% of the -- so we haven't included it. Once it's 100% handed over, then we will start including it probably from the next quarter or the following quarter onwards. Next, maturity lease expiry profile, generally still doesn't look too dissimilar from our previous. We have 11% for expiry this year for retail and 5% for office. Out of that, probably 4.3% of the retail and 1.6%, which is about 1/3 each has been kind of resolved in advanced negotiations. Next. Okay. Healthy leasing activity. Despite the decline in occupancy, we still have a very healthy retention rate. For retail, it's at close to 90%, for office, about 70%. And we have had quite a lot of new leases and renewed leases as well, about 339,000 square feet spread across the various trade categories and also for office, about 121,000 square feet. Next. Retail occupancy broken down into suburban, downtown, downtown, as I mentioned, contributed primarily by the drop in Clarke Quay. Next. Our rental reversion of 4.4% for retail broken down into downtown and suburban. Downtown, 3.9%; suburban, 5.1%. Tenant sales, 2.2%, as we mentioned, broken down into suburban growth at 3% and also downtown at 1.7%. Next. Yes. Just some of the highlights on some of the new retail concept that we have, sio pasta, which is a maturing recognized casual pasta concept that just opened in Raffles City, Shiseido at Tampines Mall. I don't know whether you guys have been to Tampines Mall. I think you can see the slowly -- slow upgrade on the ground floor. We have also holded up the Isetan space. I think that's work in progress. So we expect to probably finish that over the next few months. But I think the ground floor area has been done in phases. So you can already see some of the new tenants showing up at the ground floor entrance area. Prada at Raffles City. We also have a new tenant at IMM, BYD, which is on the third floor. So that's quite interesting because it's on the third floor, and we have a massive car park at IMM, so which are able to showcase some of their cars. So fairly interesting concept there. Okay. Maybe we'll just move on. Okay. In terms of the office occupancy, as I mentioned, as you can see here from Germany, the significant drop in office is actually due to Germany from 91% to 83%, but financial impact is, I think, not as significant as what the numbers suggest. Australia, actually, the occupancy has been healthy. As we have mentioned a couple of times, we think that the leasing momentum is still -- is picking up. Occupancy in Australia actually improved from 91.8% to 92.8%. And Singapore, we have touched on, I think, generally quite healthy, slight drop due to the Funan vacancy. The good news is that our average rent continues to inch up from last quarter, 10.95% to 11.00%, 2.2%. Although I'll just caveat that, of course, you guys are aware that we have just announced the sale of Asia Square Tower 2, which is -- has a slightly average -- higher average rent than our overall portfolio. So this number could come down, but that's probably because it's not a like-for-like comparison once we take Asia Square out of the equation. Okay. Next. Focus and outlook. Yes. So I think overall, we are still on a pretty good and healthy space in terms of outlook. I don't think anything significant has changed from our last update. Rental reversions continue to provide the organic growth. CapitaSpring, we are still benefiting from the contribution because it was only accrued -- I mean the additional 55% was only included from 26 August onwards. So this first half of the year, we are likely to see that accretion coming from CapitaSpring. Gallileo, already -- our first quarter numbers have already started recognizing the income. So you can see it in the DPU impact as well. IMM already completed, performing well above our underwriting numbers. So we are very happy with the outcome. If you go to IMM today, you will see that the look and feel of the mall is significantly different from what it was before. So that was an area that we're very happy with. Okay. So I think organic growth and also some of the contribution from the inorganic growth has really done well for us. And going forward, we expect this recent announcement on the divestment of Asia Square and the acquisition of Paragon to continue to build on that momentum with the 1.7% accretion. You can also see that our capital management, Mei Lian's team has done a very good job in terms of our interest rate management. Over the last 1 quarter, we have brought the interest rate down from 3% -- 3.2% to 2.9%. That's actually a very significant tailwind, definitely helped to improve the bottom line performance, and we expect this to continue to contribute because as you can see, last year, we have been reporting even in the second half of last year, we were still at 3.3%, 3.2% average. So this 2.9%, even if it maintains, will be a significant savings compared to last year already. I think energy rates, we've talked about it. Okay. Yes. I think value creation strategy, I think this is the same slide we talked about it earlier at both when we brief on the transaction as well as at the AGM. I won't spend too much time. I think we remain -- the 5 pillars continue to drive our growth, organic asset enhancement, unlocking value through divestments and driving growth. And we have been very consistently unlocking value every year. In fact, we have been doing one divestment almost -- this year, we did 2 divestments. Last year, we did one, the year before we did one, and we have been doing one high-quality and meaningful significant, highly accretive acquisition every year for the last 2 years as well, okay? And capital management, of course, that's an important tailwind. All right. Sustainability, we are on track for most of our indicators. I think we won't spend too much time on that. Next, we just probably -- I think maybe we can start moving to Q&A. Allison Chen: Yes. Okay. I see a few raised hands. Yes. And I'm looking to have somebody other than Mervin. So Mervin, please go ahead. Mervin Song: Congrats on excellent set of results. Just a few questions. I think in prior cost of debt guidance was 3% to 3.1%, delivered 2.9%. Do you have an update for this year? On the Plaza Sing AEI, I'm personally quite excited by it. But at any point in time, what will the impact on occupancy? And is there any extra NLA you think you can activate, especially in front of the property with the new startup park? And in terms of Iran war, have you seen any impact on retail sales given petrol prices high today? Choon-Siang Tan: Okay. I'll take the easy question. I'll let Mei Lian do the first question, and then Yi Zhuan can talk about the Plaza Sing AEI. In terms of retail sales in March, actually, it has not -- we have not seen a significant impact. In fact, I think March sales is up year-on-year. It has decelerated in the sense that the growth rate for January, February is higher than the growth rate for March, but March is still a positive growth rate compared to last year. So it has surprised us as well on the upside. I think a couple of reasons. I think there's also some constraint in terms of flight capacity. So maybe people are not traveling out as much, spending more. And I think in the first few weeks of March, there was not as big of a -- in terms of sentiment, I think maybe there was -- it has not affected sentiment as much, maybe the first 2 weeks and people are expecting the war to end quite soon. So that could also be the reason. But in general, I think if you look at tourist numbers coming into Singapore, that has also improved year-on-year, quite healthy tourism numbers. So that has kind of provided a lift probably for some of the numbers. I think so quite a few confluence of factors that helped to drive the first quarter numbers. But I think to your specific question on whether March numbers, we are down, no, we are still up compared to last year. Mervin Song: About April, yes. Choon-Siang Tan: April, too early to -- I don't think we have the April numbers yet. Okay. Maybe Mei Lian can take the question on interest rate guidance and then Yi Zhuan can take the... Mei Lian Wong: Okay. Earlier on, when we look at the interest rate guidance, we're seeing like around the 3% level. But given the -- what we're seeing in the Sing dollar floating rate movement in the past 2 months, it has generally been trending down. So that kind of allowed us to look at an overall lower cost of debt of below 3%. So guidance for this year, again, based on the current levels will be in the high -- high 2%, high 2%. Yes. So depending on where the rates go, right now, I think, yes, there should be continued looking at a year-on-year savings, yes. Mervin Song: Are you seeing tighter credit spreads or just being maintained? Mei Lian Wong: For some of our loan facilities that are on floating rate, we have actually negotiated for tighter credit spread as well. That is around 10, 20 bps, yes. But mainly the cost savings is really from the floating rate movement. Choon-Siang Tan: Okay. Maybe Yi Zhuan. Lee Yi Zhuan: Yes. Okay. I'll talk about the PS one. So during the course of the whole AEI, the reason why we kind of spread it out a little bit more because the works will be done in phases across the different parts of the property, it will largely remain open. And at any point in time, I think probably it's about 10%, 20% of the spaces that will be affected through the course of it. Nothing more. There will be a very small period, where there's a bit of overlap, but it's probably closer to 30%, but most of the malls will be open actually. The second part will be on the NLA question. Net-net, the NLA will be there about pretty much similar. While we create additional NLA on the ground floor in some of the spaces that we managed to identify, part of the AEI will also include compliance work where we will have and also a bit of upgrading works in terms of amenities, which will take a bit of the NLA away. And second part of it will be that as we know in Plaza Sing, right, the back end of the mall actually is quite deep. Some of the spaces are pretty deep. So rather than taking a big anchor that doesn't generate that much rent, right, we may subdivide some of these to create higher value spaces. Mervin Song: And there's no impact on the therma side of this section, right? Lee Yi Zhuan: At this point, there's no major impact on the therma office side, the tower side. Most of the works in the tower side in Phase 1 is actually more along the ground floor where the entrance arrival is. Mervin Song: Okay. Congrats on the results and recent Paragon acquisition. Allison Chen: Thanks, Mervin. [ Jardin ], you're up. Unknown Analyst: Maybe just back to the portfolio refresh opportunities. Choon-Siang, maybe your thoughts on partaking in further development projects with sponsors. So after Hougang Central, there's still some quota to work with. So will this be something that you are interested in or prefer to phase out a little bit? Choon-Siang Tan: Okay. I don't know whether you're referring to the partial... Unknown Analyst: Very sizable. Choon-Siang Tan: Okay. So I think the way we think about it is, I think, firstly, we must like the location. And I think Hougang was unique in the way because it was underserved and it is in a very dense residential catchment, which we think a retail mall is very likely to succeed. And also the connectivity with the 2 major MRT lines and the connectivity to the interchange certainly helps. And the size precludes other significant competitors from coming in. So [ Bishan ], I think we haven't looked at it in detail, to be honest. But I mean, no harm for us to look at it, but then it will come down to a matter of pricing and whether we think that catchment makes sense for us because we -- the other thing that outcome makes a lot of sense for us because we don't have something in that area. So Bishan, of course, will be quite close to dome Mall. But Bishan is also in a private -- slightly more private residential estate. So the residential catchment is not deep as, say, somewhere like a -- And if I'm not wrong, I think the retail component is so small, it's like 200,000 square feet compared to [indiscernible], which is 300,000. So yes, but long story short, I think we will take a look. Question is whether we will consider -- I think we can consider we have room, but we also have to look at the impact. Obviously, there's no impact on DPU as what we mentioned. There will be an impact on balance sheet. We have already deployed quite a bit of capital to Alqam. We're deploying capital to Paragon and now we are deploying capital to Plaza Sing. So we have our hands full probably for the near term. But let's see the details of the project. Unknown Analyst: Okay. Maybe just one more on the tenant at MAC. Is it tied to the geopolitical tenant -- geopolitical headwinds or the tenant was already thinking of it? And any divestment overseas since you have done quite a number in Singapore already? Choon-Siang Tan: Thanks for raising that question. I was waiting for the opportunity to answer that question. Okay. So the tenant is actually all the airlines, and MAC is next to the airport. So I think, unfortunately, it's not due to any geopolitics. It's not due to any rent reasons or whatever. It's due to the fact that they want to consolidate back at the airport, which is obviously a better location for our airline. So actually -- so that's just unfortunate in terms of the business direction that the tenant took -- so that's where we are. In terms of divestment, yes, definitely, we are looking at divestment. And I think, in fact, we have been talking about this at the last business update and now the Iran war obviously spun us into the works because with interest rate expectations being slightly altered in the European area, it might make divestments slightly more challenging. But nevertheless, I think we are embarking on that process. So we are starting to sound out and getting our feet on the ground to see whether there is an opportunity. So yes, hopefully, we have good news. It's not easy. So I don't want to also raise expectations. Obviously, you guys know in this current environment. In Singapore, it looks like it's a lot easier for capital market transactions, but I think the same cannot be said for the European region. I think the number of capital market transactions that we've been observing in the market is few and far between and not at the kind of sizes that we are looking at. Allison Chen: Rachel? Unknown Analyst: Can you hear me now? Allison Chen: Yes, we can hear you. Unknown Analyst: Maybe just a first question on the reversions. I think it has moderated a little bit by first quarter. So I was just wondering what's your outlook for this year since there was some advanced negotiation on the lease that's expiring this year. Choon-Siang Tan: Okay. Maybe Yi Zhuan... Lee Yi Zhuan: Well, for the reversions, right, generally, I think as I mentioned earlier, for the full year, we are still looking at around mid-singles. Of course, with some of the uncertainties in the wider global uncertainties, right, we probably might be a bit cautious on it, and we will see how this trends. For the retail, actually, largely most of the reversions have been quite strong. I think it was a little bit pulled down by a very specific tenant in a unique location. But by and large, I would say the retail reversions has been okay. Unknown Analyst: Can you give more color on this specific tenant? Lee Yi Zhuan: It's the change of use of a tenant into F&B. And because of the location of the unit, it's actually not where the normal rate is. So that's the reason why for that, in that case, compared to the outgoing use, the reversion is a little bit on the downside on that sense. Unknown Analyst: Okay. Which is it? Choon-Siang Tan: I think you -- so maybe I will also just add, I think while we have guided fairly healthy rental reversions, I think one mall that we moderate because I mean Plaza Sing and TAO, we are likely to go through AEI. So we may have to moderate because when you do an AEI, obviously, it causes -- in the course of discussion and lease renewal with tenants, we also have to be mindful that they will be impacted by the renovation going forward. So we have to be a bit more flexible sometimes when it comes -- obviously, this is obviously only during the transition. So it could impact some of -- specifically for Plaza Sing and TAO, I think. So there could be some moderation in terms of rental reversion, which should not be unexpected. But I think the rest of the portfolio should be business as usual. So there could be some impact because of that. Unknown Analyst: Okay. Just moving to the office reversions. Now that you have sold AST 2, do you expect that the reversions may trend down more? Choon-Siang Tan: No, I don't think so. I mean if you look at -- if we break down our reversions and contributions, I think they are quite evenly contributing. So removing AST 2 should not make a significant impact. Unknown Analyst: Okay. Got it. Then maybe just on the tenant sales side, you mentioned that March was up year-on-year, but is -- do you see any impact on the downtown malls? Are they impacted a little bit more from the war? Choon-Siang Tan: I think it was the reverse, right? I think our downtown did better than suburban, if I'm not wrong. Unknown Analyst: For March this year. Choon-Siang Tan: I think downtown actually did better. If you strip out the numbers for March, I believe downtown we did better than suburban. Unknown Analyst: Okay. Interesting. Okay. Maybe just one last quick one, which is on ECB contribution. How much are they contributing in the first quarter? And how much more should we expect? Choon-Siang Tan: How much are they contributing? Mei Lian, do you have the numbers? I have the numbers, but more on the top line because we have to net off -- just in my mind, we have to net off the funding costs also. Mei Lian Wong: Can we get back to you on this? Yes, because we have to net off funding costs and also provide for tax. Choon-Siang Tan: I think that contribution at the top line is probably about -- I think maybe about -- you want to say about $1.5 million to $2 million a month, if I'm not wrong. I'm trying to digest the DPU side and flow down the bottom line, but we need to do some work around that. And so it's also been about 1.5 to 2 months. So it's not a full contribution. Allison Chen: Can we move on to Upiang, please? Unknown Analyst: Can you hear me? Allison Chen: Yes. Unknown Analyst: Yes. Just on the Plaza Sing AEI, the amount seems quite big. And then how confident are we in securing that 6% to 7% ROI? And also given that, does this also mean that any AEI plans for Paragon will be shelved back because of this? Because when I look at Atrium going down and then Plaza seeing occupancy could also be impacted a little bit in terms of performance. So it does seem like we are in a quite uncertain period and then quite a few major assets could be seeing some -- a little bit of downtime. So that's the first question. And then second is on your retail, suburban seems to be meeting downtown. Do you expect this trend to continue in terms of reversions and also tenant sales? Choon-Siang Tan: I'll take the first question and Yi Zhuan can take the second one. Okay. So in terms of the expected return from Plaza Sing, I think -- I mean, you guys are familiar. We normally don't undertake AEI without a calculation of the financial return. And we have put down here that we are targeting about 6% to 7%. Question is whether we are confident of achieving. I think we have put it on to the slide. We wouldn't have put it there if we are not confident of achieving. That's one. Secondly, of course, but nobody knows this AEI will take -- years. It's also based on a certain assumption. I think -- but based on our track record, if you look at some of the past AEIs in Singapore, like Raffles City, we have done, IMM, we have done, I think we -- safe to say we have firstly, met our underwriting. And secondly, not just meet our underwriting, I think the part of the AEI, the objective is also to transform the mall to make it relevant and to make it able for the current taste and environment and shopping behavior and the new consumer. So all of that is also taken into consideration when we plan an AEI. And I think if you go into -- I think there's no argument that Plaza Singapura has been without AEI for a while, and I think it will definitely be helpful to rejuvenate the space. And also like what we mentioned is also really to dovetail with -- I mean, we have been very deliberate about this. It's not just about, okay, improving the tenant mix and then make it better. It's also -- we want to also think a few years ahead, what will happen to this mall when the pedestrianization of the mall, the road in front comes up. So we want to be positioned when that happens. We will transform the area, and we want to be there and ready when it happens. And I think our portfolio is large. I think we can definitely cushion if there is a bit of downtime. But of course, when we try to do any AEI, we will try to minimize the impact to our cash flow, which is why it will be done in phases so that the downtime doesn't stretch beyond 10% to 20% of the tenants or malls. So question -- so hopefully, that answers your question in terms of whether we are confident. Unknown Analyst: Yes. Can I also check if the construction costs have been locked in? Choon-Siang Tan: Yes. Unknown Analyst: So even if construction cost escalates from now on, your target ROI 6% to 7% is still comfortable? Choon-Siang Tan: Yes. So I think we have also been deliberately trying to upgrade slowly the various assets. I think you have seen that Raffles City was upgraded. Now we are moving on to Plaza Singapura. Then the question in people's mind is, okay, is Paragon next and whether this -- some people may think, okay, we like what you mentioned, if we are doing Plaza Sing, does that mean we have no capacity to do Paragon. I don't think that's the case. And I don't want to jump -- I don't want to prejump the conclusion that we are not doing anything. I think like what we mentioned, it's only been about 4 days since we announced. We want to go in, take a thorough look at what they have done. And there is already an AEI in plan in place, no harm and no skin off our nose to take a look at what they have planned, and we will see whether the plan involves any and how -- you do in phases, whatever they have planned or whatever we want to look at with fresh eyes, we also have to -- obviously, for us, we have to look at it from a portfolio-wide perspective and whether it makes sense for us, both on the asset level as well as the portfolio level in terms of cash flows. So that -- all of that will all have to be taken into consideration. But in any case, so I think Plaza Sing starts third quarter of this year. Paragon completion will only be third quarter of this year probably. So by the time we take over, it's not like we're going to do on day 1. We will definitely have to review the performance, the asset mix. I mean, the tenant mix. And then by the time -- if and when we do take a decision to do anything, it will probably be like possibly 1 year down the road, we're not sure. But I think that's not pre-conclude that it will or will not happen. I don't think I answered that question right now. Unknown Analyst: Okay. Second question is on the retail, the performance within suburban and downtown. Lee Yi Zhuan: So for tenant sales, right, I would say that actually between downtown and suburban, if I just look back at the past few quarters, right, sometimes it will be downtown and suburban. So actually, the 2 of them are really quite closely matched. And I would expect that to kind of go forward in this year also. Of course, naturally, given some of these uncertainties in this few months, right, probably the suburban side, we will probably see a bit more resilience as because with some of these higher cost operating costs and worries over inflation and stuff like that, discretionary spending on large items will probably be a little bit held back for a while, while the day-to-day people still have to spend. So I would say that's the kind of trend that we foresee for the going forward. And I think the related question to this was actually on the reversion side of things. By and large, I would say both retail and downtown -- sorry, for both downtown and suburban, generally, we look at sustainable kind of reversion levels that we go to our tenants. But of course, with downtown, as I think Choon-Siang mentioned earlier, when we do some of these AEI works, right, some of these impact short-term extensions and stuff that we may do to retain a tenant in the near term to kind of time our AEIs a bit better may distort some of these reversion numbers that we may see. Unknown Analyst: Okay. It's just that I noticed your tenant sales have been quite soft in the past few quarters and then reversions have been going up. So just wondering, just a little bit concern on occupancy costs. Yes. Lee Yi Zhuan: I think on occupancy cost year-on-year, we are quite stable actually. This time around, we are around 17.4%, which I believe is 0.1% lower than the previous year. So downtown cost is higher than the suburbans. Suburban, we are looking at high 16s, which is quite actually in line with the market and it's actually quite sustainable. Choon-Siang Tan: And I think the other thing I just want to add that actually 2.2% sales compared to rental reversion of 6%, actually not that out of line because actually 6% rental reversion because it's average over 3 years, actually, it's quite in line with a 2% sales growth. So I wouldn't actually say that it's not in line. Unknown Analyst: Okay. Okay. Last one is, is there any -- do you disclose on ION tenant sales? I think in the past quarters, there was like one small footnote. Maybe I missed that. Choon-Siang Tan: No, it's included. Last time we used to show a footnote as in we strip out the ION because it was not like-for-like. But now ION, we have owned it for a full year already. So there's no need to strip out the effects of ION anymore. So ION has contributed -- ION is in 2025 and 2026 numbers now. So this 2% includes the total sales from ION as well. Allison Chen: Can we go on to Brandon, please? Brandon Lee: Just touching on a bit on occupancy, right? Could you sort of guide us a bit on the forward occupancy for the different like retail office, right? Because when I look at this quarter's numbers, it's kind of quite low. In fact, it's like a 4-year low, right, whether you look at retail office or portfolio. So is that something that you can sort of guide us? Or is this something that we should be concerned about? Choon-Siang Tan: No. So I think quite -- I think I spent some time trying to address this point because I expect this to be an issue and to be raised, which is why I think I have addressed it right from the get-go. So it's actually unique to 3 specific assets that we have and very unique to 3 specific tenants. And the financial impact is quite small because these are all low rent spaces and not one of -- actually half of it -- more than half of it is due to Germany, which doesn't affect our Singapore performance. So I don't -- I won't take this as a read-through on the portfolio to answer your question directly. So no, because at the end of the day, if you look at rental reversion, it's still healthy, which means that we still have the negotiating because we still have the negotiating leverage to negotiate for higher rents. So it's unique to MAC, Germany and unique to Clarke Quay. Clarke Quay, of course, is work in progress until CanningHill gets completed end of this year. Brandon Lee: So if you look at it on a portfolio standpoint, right, should we sort of expect that 95.2% to sort of get back to your usual like 96% to 98% kind of range? Choon-Siang Tan: No, I think we can expect to improve. If you're asking whether this is the new steady state, no, the answer is no. I think we can expect this number to improve. For the simple reason, let's say, for example, today, we were to sell MAC immediately improves and normalizes to that higher level if -- but I would say that as a noncore asset, so we shouldn't even use that as a contributor to look at normalized occupancy. So I do -- but even if we were to include it, we do expect some of these vacancies are very transitory frictional. We do think that the 95.2% is not a reflection of what we are able to achieve with the current portfolio. Brandon Lee: Are you comfortable to share the occupancy of those 3 unique assets? Choon-Siang Tan: Yes, we can. So of the -- I think MAC now we are just trending somewhere above 70%. Clarke Quay, 84%. Funan office was 100%. I think one of the Towers now had vacancy. What is Funan? 87%. But we are quite confident of leasing out that space. So that's a very transitional vacancy. MAC could be a bit more -- take us a bit longer, but I think we will work hard to try to replace or look at divesting at some point. But yes. So those are the 3 assets that probably contributed to this quarter's movement, one of which we are quite confident of re-leasing quite soon, hopefully. But the other 2, I don't think will actually affect the financial because those are very low rent spaces anyway, although they are quite large, and hence, it contributes to the drop. Our financial performance has not been impacted. That's the bottom line. Brandon Lee: Okay. Great. And just going to -- can you talk a bit on Bugis Plaza? I mean, historically, if you look at like CICT, right, when you guys sort of amalgamate your assets and other assets, right, these assets usually get divested, right? So could we sort of expect the same for Bugis Plaza or there should be a wider plan for it given that you really own Bugis Junction? Choon-Siang Tan: Sorry, I don't get your -- you're saying that -- what are you saying about Bugis Plaza? I didn't quite catch your drift. Brandon Lee: Yes. So historically, if you look at CMT, CICT, right, you guys tend to amalgamate the performance of certain assets under other assets, right? And then after that, subsequently, we see you selling those assets, right? Should we expect the same for Bugis Plaza? Is it a noncore asset in your view? Choon-Siang Tan: I think the short answer is no. Lee Yi Zhuan: I think we have also shown that we can sell assets that are not in the others category. So it's not -- it doesn't indicate anything. There was a period of time when there's only so much space and there's only so many buildings you can squeeze into it. So some of the smaller assets tend to be parked under others. Brandon Lee: Yes, yes. Okay. I mean, it's good to know that it's core, okay? So we shouldn't be. Choon-Siang Tan: It's actually a very vibrant area and coming out very nicely. In fact, I see it as a high growth area going forward. Brandon Lee: I'll just end with one last question, right? So if there are opportunities, right, to acquire something that's pretty decent, is CICT sort of open to raising equity more than once a year? Choon-Siang Tan: We try not to. I have been reminded by investors to try not to do that. So we will try not to do that. Allison Chen: Move on to Vijay, please. Vijay Natarajan: Three questions from me, maybe I'll take one by one. Firstly, in terms of the Funan, can you give some bit more color in terms of the tenant who exited. What was the reasons? And how much downtime do you expect for this property? Choon-Siang Tan: Tough question, I leave it to Yi Zhuan. Lee Yi Zhuan: You mean the tenant. Choon-Siang Tan: Funan. Lee Yi Zhuan: So for Funan, the tenant Adidas moving. Actually, it's more of an issue of them trying to consolidate some of the space in terms of the efficiency and their corporate planning. So that was the reason for the move. Vijay Natarajan: And how long do we expect... Lee Yi Zhuan: How long do we expect to backfill it? Well, okay, typically, I would say that if we start from scratch for a tenant of -- because okay, for adidas, right, it's about 28,000 square feet of space. If there's a few ways we can do it. I mean, we subdivide then naturally downtime is a bit shorter, at least for part of the space. But for tenants usually of this kind of size, if they start to look for space, typically, they'll be looking at it around 6 to 9 months ahead of time because they have to plan to move from the previous space. So some of the -- we are already starting talking some interest along the way, and it's really down to how it converts as well as how the negotiations with the other options that they have, right? So it's hard to say for sure, but I would say probably half year. Vijay Natarajan: Got it. My second question is just sharing my observation. I think for a Clarke Quay perspective, it does look like the impact seems to be structural for some time. I mean the asset went a major upgrade after COVID, but still seems to be having a lot more of tenant churn over the last 1, 2 years. Maybe what's your thought on this asset? And would you be willing to divest it? And are you seeing tenant sales improve since last year? Choon-Siang Tan: Okay. So I think Clarke Quay, I won't say it's structural because we have not seen it in its stabilized state. There is definitely a structural difference between the construct of Clarke Quay and some of the other malls for sure. Definitely a slightly different positioning. And of course, it's not a natural mall per se. And of course, now currently it is impacted by CanningHill. I know we have been saying that for the last few quarters, but that is the reality, major construction. We do expect the vibrancy of the whole area would change once you have this few hundred residential units being filled up; and two, hotel blocks being completed. So I mean, hotels generally creates a round-the-clock footfall. So we do expect -- and this is right across the road from them. So definitely there will be some improvements. Whether the improvements will be enough will be one of your questions as well once it becomes stabilized. But we are confident that there will definitely be improvements once that happens. And the challenge with the leasing discussion now is also nobody will commit until they have seen the hotel being completed. That's the reality. I mean, if I were a tenant, I mean, no point for me to take the risk today, I might wait until 6 months later when the hotel is completed. So a lot of the tenant churn is also because a lot of our tenants within Clarke Quay, some of them can be -- some of the movements and the margins is also due to us bringing in shorter leases coming in to fill up the space, create the footfall and vibrancy to that area. But we are doing a lot of things to -- I mean, we have a team that is very focused on marketing the asset. If you go to Clarke Quay, there are a lot of marketing activities going on every weekend. We have now clusters coming in on every Wednesday. We have just done a cycling circuit competition, making use of Clarke Quay natural outdoor roads to create kind of a cycling circuit. We are also -- every time there's a major sporting events, we have organized live shows and all that. So we are making a conscious effort. It's not a natural place where there's natural footfall. So we need to create a more destinational effect to bring in the crowd while CanningHill is being completed. When after completion of CanningHill, we do expect it to have more natural footfall. Yes. So we are making very good efforts. And to your second question on whether we will be open to divesting, I think we have demonstrated our willingness to divest anything, I think, if necessary. I will say that -- I mean, we just divested 2 assets and one of which is fairly large and performing well as well. So I think the question to that is anything is possible, including Clarke Quay as we are divesting Clarke Quay. Vijay Natarajan: If 10% premium, I think, yes, that's what you are alluding to. Choon-Siang Tan: Yes. You hit the nail on the head. I think it's always a matter of pricing, right? But I think the yield is still decent for Clarke Quay based on the current book value. Vijay Natarajan: Okay. My last question, I think in terms of energy rates, you mentioned that this year, you mentioned it is lower than last year. Maybe how low is it for this year compared to last year? And if it normalizes, if you have to go for open market and purchase a contract for next year, should we have to expect a jump in terms of electricity cost and NPA going down. Choon-Siang Tan: No. Thanks for the question. Actually, I also want to take this opportunity to highlight that next year, actually, we do expect utilities cost to come down further. The reason is because although it's not been locked in, we have achieved a better formula. There's -- the formula for utilities cost is always a function of certain input prices. And of course, oil price and gas prices are a key component of it. So even at today's price, if we were to enter into the contract, we are still achieving savings because of the better formula that we have achieved with our supplier. So we do expect savings next year as well compared to this year. Vijay Natarajan: So you're not impacted by external environment or even at this higher price, you can still achieve savings? Lee Yi Zhuan: Yes. Choon-Siang Tan: No, we are impacted because -- but what we are saying is that at the same price -- at the same input price next year, we will achieve savings because of a better formula. But so even though prices have gone up, we will still achieve savings. It takes a very significant increase in the price of oil for us not to achieve savings for next year, and we are not anywhere close to that. Vijay Natarajan: So this is based on the management contract we have signed with calxiaxite? Choon-Siang Tan: No. It's based on our contract with our energy provider, utilities provider. One thing is that we procure energy as a group. So we do have quite a bit of negotiating power. So for example, CICT, Clarke, the whole CLI Group, we are procuring energy as a bulk contract. So as you can imagine, because given our size, we do have some negotiating leverage. So we are able to lock in a better formula for next year. Allison Chen: Can we go to [ Diyash ]. Jian Hua Chang: This is actually Derek from Morgan Stanley. I just assumed another by accident. No, I just want to ask a couple of questions on the cost of debt outlook. I think, Mei Lian, you're alluding to -- it seems like you're alluding to about 10 to 20 basis point savings from the current 2.9%. Does that take into account, I presume, the debt paydown from using proceeds from the raise -- from the equity raise. And when you take on fresh debt for Paragon, is that all taken into account already? Mei Lian Wong: No. We have -- I mean, -- depending on the fixed float assumption for the Paragon debt, we believe that there is some room in terms of floating rate because we continue to see the movement over the past months where floating rate has actually even gone below 1%. So if this kind of continue, there could be even more savings from that anchor. We haven't taken into account the Paragon debt yet, because it will depend on the actual fixing structure. Jian Hua Chang: Is there a rough number that you could -- I mean, could we be looking at 2.5%, 2.6%? I mean I also assume you'll be in lieu of the acquisition coming in, you'll pay down debt first, right, with the equity raise proceeds? Mei Lian Wong: Yes, yes. The assumed debt for interest rate for Paragon debt is about 2.6% to 2.7%, yes. So that could kind of lower the average based on this assumption as well. Jian Hua Chang: And that number actually looks high also compared to what you recently raised at 2.18%, right? So could that number also be a lower number? Mei Lian Wong: We will try to do better. The 2.18% was raised when the fixed benchmark was actually lower than current. So today, if we were to raise the bonds again, it may require slightly higher margin. So it all depends on, first, the timing; second, the tenant that we want to lock in and how much is going to be fixed and float. But generally, we try to keep on an overall basis, at least 70% of our debt portfolio on a fixed basis. Jian Hua Chang: Understood. And if you were to raise fresh debt right now fixed, what will be the number? Mei Lian Wong: Well, probably looking at the secondary trades, close to, say, 2.4%, 2.5%. Jian Hua Chang: 1 Okay. Got it. And just last question, if I may. I think I got some investor queries on the equity raise, why raise at a lower -- at the lower end of the range of the pricing range, given the robust takeup? Choon-Siang Tan: Yes. Okay. I'll take that. Actually, we -- I would say that this is the low end of the range. The low end of range is 2.7%. But you are right, could we have raised it at, say, 2% possibly. But then the quality of the book could be different. So typically, in an equity raise, you guys will be familiar, there will be 3 main types of investors. The first group is what we call the real estate long-only investors. These are the buy and hold investors, right, because they like the assets, they are real estate specialist, they are long only, they buy because they want to achieve the yield that we provide and the growth that we provide going forward. Then there's the hedge funds and then there is a private bank who may or may not buy and hold depending on the valuation, depending on the momentum and depending on the market conditions. So we typically try to allocate a larger part of the book to long-only real estate because these are the investors that will stay with us and grow with us. But of course, these are -- so looking at the book to encourage a larger allocation to debt, that was the reason why we decided to -- but even with the decision, we also are able to bring everybody up from, say, 2.7% discount to 2.36% discount, which was the final price that we did that. And if you look at all of the equity raise done in the last 20 -- I don't know, last 5 years, this is probably the tightest. I don't know whether I can think of a tighter. So I don't think we can say that this is not a tight discount. I think we probably have been spoiling investors a little bit because we went out with a very tight low end in the first place. Most equity offerings will not go out with a 2.7% at the very low end. They typically will go up with 3.5%, 3%, 4%. But we are fairly confident of doing that, and we are able to negotiate because we also want to protect our own downside, and we're able to lock in the underwriting by the banks at 2.7% because our last equity offering was done at 2.7%. And despite that very tight low end, we were able to tighten it further at 2.36%. And I think the other consideration is we also upsize. It's actually very challenging to upsize the equity offering by 25% and still tighten the discount. Usually, you have to choose between the 2, price or quantity. I think that's a very standard trade-off. You want better price, you have to sacrifice on quantity. You want a better quantity, you sacrifice on price, and we are able to achieve both. So it's not -- so I will not actually fully agree with the statement that we are not achieving a tight discount and we didn't -- I think the third thing I will also add is that I think could we have squeezed to say, 2.2%, 2.1%, possibly. But I think we also want to watch the aftermarket performance. We want to make sure that the momentum is maintained to ensure a strong market performance, you also have to allocate and price accordingly. And I think if you look at the post-market performance, I think -- we do think that we did the right thing, and there is definitely some strong market outperformance following the EFR. Unknown Analyst: Just one question on full year DPU growth. Because of the upsized equity issuance in Asia Square 2 that will come in before Paragon acquisitions, are the growth levers that you mentioned sufficient to offset this? Or what are the other mitigating factors on the capital management front such that full year, you're still expecting DPU growth, right? Choon-Siang Tan: Sorry, I didn't get the -- can you summarize the question again? Unknown Analyst: Yes. So equity issuance was upsized. So that will drive dilution. Asia Square 2 loss of income second quarter. This 2 will actually come in before the Paragon acquisition, right? So full year, what are the mitigating factors? And are we still forecasting DPU growth? Choon-Siang Tan: Okay. Okay. Okay. I get what you're saying now. Okay. Firstly, there are 2 potential things. There are quite a few things, right? One is Asia Square divestment is unlikely to close before actually. Asia Square divestment is likely to close after Paragon acquisition because the buyer for Asia Square also needs an EGM and the process takes a bit longer. So we are expecting to close probably at least 1 to 2 months before that, 2 months. So quite counterintuitive, but actually, that is better for accretion. Because before they close, we will have to do a bit of a bridge loan. So if we borrow for 1 to 2 months bridging to bridge the funding gap before we divest Asia Square, that cost of funding is actually lower than the asset yield because we're still earning NPI when -- as long as AST 2 is not being sold, right? So the asset yield at 3% is still better than -- is still higher than the funding cost. And bridging loan we will be borrowing on floating, which, as Mei Lian mentioned, is very -- still today is still very low at about -- the float rise is about 1% today. And spread, you are probably saving a good 1% on the funding cost. So actually, it's more accretive, fairly counterintuitive. But of course, you take a bit of a stretch on the balance sheet for that 1, 2 months, but I think that's okay as long as there's certainty on closing. So that's -- it shouldn't affect -- that part of the equation shouldn't affect accretion, but it can only improve accretion. Second part, I think what you're driving at is also the equity offering being done before the closing of Paragon debt will be dilutive. But of course, we will pay down debt in between. The net effect of both combined together, I think is this dilute -- see, we are buying $3.9 billion. Typically, equity offering makes up a larger proportion of any transaction. But in our case, the equity offering, $750 million is only about, call it, 18 acquisition size. So the dilution impact is actually very small, and it's only for about -- maybe about 2 months. And we are not suffering that entire dilution because we pay down debt. So based on my calculation, plus the accretion that we will get from $2.5 billion, 2 months of bridging loans, actually, the net-net is positive. So we will actually not suffer any dilution. If anything, we will still be fully benefiting from that 1.7% accretion for the year. Allison Chen: We have Mervin, who seems like the last one to go. Mervin Song: Just a question on the retail margins. It fell Q-on-Q and year-on-year. What's causing that given you have some interest cost savings? Choon-Siang Tan: Interest cost savings will not affect retail margin. Mervin Song: Electricity costs, sorry. Choon-Siang Tan: Why the margin go down? Yes, I noticed. Why the margin go down, do you know? Let me think. Was there a change in the portfolio constitution? You sort of BPP, but that's for 1 month. I think the reason is the top line came down slightly on a year-on-year basis because we started AEI. So like, for example, I think Tampines because we did the AEI, I think the margin for Tampines came down because of the top line dropped slightly. So that's one of the key reasons, I think. The other reason, of course, is also Clarke Quay. Clarke Quay, the margins came down because of the significant drop in occupancy compared to last year. So these 2 assets would have contributed to the margin compression. Mervin Song: Any updates on Junction 8 given the change of more commercial? Choon-Siang Tan: You mean like redevelopment plans? Mervin Song: Redevelopment plans or will you take on the office component? Choon-Siang Tan: Well, I think that one is -- that's -- I don't think that will happen anytime soon. If anything, we're in discussion with many, many stakeholders. So we don't have that -- we don't have the clarity now. But Junction 8 is doing very well in the meantime. Yes, sorry, the short answer is no, we don't have anything to provide at this point. No update to provide for Junction 8. Mervin Song: Yes. Just back on the office portfolio, we hosted the IOI properties a couple of days ago, and they said that we could push Asia Square Tower rents towards $13. Is there something you can do on average across your whole portfolio? Choon-Siang Tan: Across our portfolio, that's a tough question because our portfolio obviously has different varying locations and age of building. Obviously, those in -- I think IOI's building obviously is newer than ours. Asia Square, if you compare it to some of our portfolio, is also slightly higher, right? And I mentioned earlier in my presentation that average rent for Asia Square 2 is really higher than our rest of our portfolio. So I think if your question is whether we can do it for the rest of -- I think selectively possible. We are seeing some of the renewals done at those levels for some of our spaces. But I won't say that we can do it for the entire portfolio because there are also big anchor spaces in some of our portfolio. Mervin Song: And in terms of portfolio allocation, like how are you thinking about mix between retail and office, we now have a bit more retail? Choon-Siang Tan: Yes. No, I don't think it was deliberate. It was more -- I think it's a consequence of some of the opportunistic decisions that we made. I don't think if you ask us whether do we design it to be this way? No, we are not deliberately trying to sell office to buy retail. I think we are quite happy with both asset classes. And I think increasingly, the differentiation is not as important. I think what is important for us, even merge both the office and the retail component is what is the most and best construct for our portfolio that will deliver the most stable and highest growth DPU for our unitholders. And I think because we are already so big, so the stability is there. So the question is how to drive the growth. And I think people are more focused on underlying performance -- underlying financial performance than the marginal movement between retail and office. Mervin Song: Okay. Look forward to continued strong results and hopefully high share prices. Allison Chen: Thanks, Mervin. Looks like we have no more questions. So I guess we'll end the session here. Thank you for your time. Have a good Friday and a good weekend. Choon-Siang Tan: Thank you. Mei Lian Wong: Thank you. Lee Yi Zhuan: Thank you.
Operator: Welcome to today's Covenant Logistics Group First Quarter Earnings Release and Investor Conference Call. Our host for today's call is Tripp Grant. I would now like to turn the call over to your host. Mr. Grant, you may begin. James Grant: Good morning, everyone, and welcome to the Covenant Logistics Group First Quarter 2026 Conference Call. As a reminder, this call will contain forward-looking statements under the Private Securities Litigation Reform Act, which are subject to risks and uncertainties that could cause actual results to differ materially. Please review our SEC filings and most recent risk factors. We undertake no obligation to publicly update or revise any forward-looking statements. Our prepared comments and additional financial information are available on our website at www.covenantlogistics.com/investor. Joining me today are CEO, David Parker; President, Paul Bunn; and COO, Dustin Koehl. Our first quarter was unique in that it included 2 of the worst and one of the best months we have experienced in the last 3 years. The trajectory was positive and has continued into April, leaving us with conviction that the change in the market is structural, not seasonal. Our Expedited segment was most negatively impacted by both weather and fuel costs in the quarter, with improved rates and volumes in March and April, which we believe will continue to improve throughout the year, giving us plenty of operational leverage. Our new business pipeline for committed truckload capacity continued to strengthen in the quarter for both our expedited and dedicated fleets. Revenue trends during the first 3 weeks of April remained strong across all of our business units. In our view, we are finally feeling the impact of declining industry-wide driver and truck capacity and improving demand in certain segments and geographies. With that background, I will move on to the quarter's statistical review. Year-over-year highlights for the quarter include consolidated freight revenue increased by 15.9% or approximately $38.7 million to $281.9 million, primarily as a result of the assets acquired in the fourth quarter of 2025 that are now being operated as Star Logistics Solutions. Consolidated adjusted operating income shrank by 11.5% to $9.6 million, primarily as a result of margin compression in our Expedited segment, which was particularly challenged with reduced utility from severe weather and higher net fuel costs. Our net indebtedness as of March 31 decreased by approximately $51 million to $245.3 million compared to December 31, 2025, yielding an adjusted leverage ratio of approximately 1.8x and debt-to-capital ratio of 37.6%. The reduction in net indebtedness was a result of selling a significant amount of used equipment in the quarter and buying very little new equipment. With equipment deliveries concentrated in the last 3 quarters, leverage ratio may increase modestly in the next couple of quarters depending on the timing of deliveries and the prices for used equipment. Ultimately, we expect improved cash flow and disciplined capital allocation to reduce the leverage ratio over time, excluding acquisitions and other strategic options. The average age of our tractors at March 31 increased to 26 months compared to 20 months a year ago, consistent with year-over-year reductions to our high-mileage expedited fleet and growth in our less capital-intensive dedicated fleet. On an adjusted basis, return on average invested capital was 5% for the trailing 4 quarters versus 7.6% for the same period in the prior year. Now providing a little more color on the performance of the individual business segments. The Expedited segment reported an adjusted operating ratio of 99.1% for the quarter, performance that fell well short of our expectations. Severe weather and rising fuel costs adversely impacted this segment more than any other in the quarter due to its linehaul nature, requiring high utilization to cover the fixed cost for the operation. Going forward, we have line of sight to sequential improvement in this segment throughout the year. Over time, our goal was to average a double-digit adjusted operating margin across the freight cycle to generate an accepted return on capital. Dedicated's 95.5% adjusted operating ratio was an improvement compared to the 98.1% achieved in the prior year. Although this segment also encountered cost headwinds in the current period, those headwinds were not as severe as the impact of avian influenza in 2025. Going forward, our goal is to restore adjusted operating margin to double digits, grow the fleet serving high service niches and reduce the fleet that is exposed to more commoditized end markets where returns are inadequate. We were pleased with Managed Freight's performance for the current period, growing both revenue and adjusted operating income compared to the prior year. While the growth in freight revenue outpaced the growth in adjusted operating income, the cost to secure quality brokerage capacity has remained elevated from the fourth quarter of 2025. Due to the asset-light nature of this business, we note that an adjusted operating margin in the mid-single digits generates an acceptable return on capital. The Warehouse segment successfully grew freight revenue 14.6% compared to the prior year as a result of organic growth with a new key customer in the fourth quarter of 2025. Despite the growth in revenue, adjusted operating income declined slightly, primarily due to increased start-up costs and operational inefficiencies associated with a new customer. Looking ahead, we remain committed to driving organic growth within this segment and are focused on enhancing our adjusted operating margin with a target of reaching high single digits. Our minority investment in TEL contributed pretax net income of $3.7 million for the quarter compared to $3.8 million in the prior year period. Regarding our outlook for the future. We believe 2026 will be known as a transition year in the freight market with sequential incremental financial improvement to occur each quarter. During the first quarter, we secured rate and lane improvements with existing customers and developed a mature pipeline of new customers with attractive pricing on a level that has not occurred since 2022. We expect this trend to continue as the year unfolds. The nature of these bids is the new rates and lanes take effect a few weeks after being negotiated. So the first quarter activity will begin to show up in the second quarter and so on. It will take time for our 2026 efforts to be fully reflected in our financial results. This explains why the market impact was more than offset by the softness we experienced in January and February. Nevertheless, for the first time in multiple years, we have line of sight to capturing operational leverage from these environmental tailwinds. Our team is refreshed, energized and ready to execute. Thank you for your time, and we will now open the call for any questions. Operator: [Operator Instructions] Jason Seidl: It's Jason Seidl. I didn't hear the operator introduce me. Sorry about that. James Grant: We didn't either. It's kind of weird. Jason Seidl: Yes. No, I was wondering what kind of happened. Well, listen, a couple of quick questions. You guys are sort of in a unique position in that you have some product lines that are not exactly traditional OTR dry van. I was wondering maybe you could dive into some of the dynamics going on in the poultry market as well. Maybe give us an update on the DoD business. M. Bunn: Yes, Jason, a couple of things. I would say on the dedicated side in general, Tripp talked about it, we're really happy with our pipeline, poultry and non-poultry. And I would say we continue to lean in on that space to specialized equipment, niche. It doesn't mean that, that's all we're doing, but it means that's a heavy percentage of what we're doing. And so just excited for both sides of our dedicated business, poultry and the non-poultry on how the pipeline is building. Dedicated rate increases are going pretty well as well. So excited about that. The DoD business, as you know, rolls up in Expedited, and that business was pretty good in February, better in March and better in April than it was in March. So it's rolling pretty good right now. Jason Seidl: All right. Glad to hear that. One of your competitors out there noted that they're starting to have peak season capacity discussions now and it's sort of unprecedented to happen in early April. Are you guys having the same discussions with customers? And then I have another follow-up. M. Bunn: Yes. I would say we haven't gotten as far as talking about peak now. But I would tell you, some of the capacity constraints in some markets are -- remind you of peak a little bit. It's kind of market dependent, day of week dependent. What I would say, and Dustin just reminded me of this, is that we're seeing more people want to talk about dedicated capacity on the team side than we've seen since '21 or '22. And so there's -- we still got a long way to go on that, but having a lot of discussions with folks around dedicated team capacity as opposed to OTR team capacity. So that could be some of what these folks are feeling is -- but just so you know, we're looking at it more on trying to more of a multiyear, longer-term type deal than just peak season. Jason Seidl: That makes a lot of sense. And finally, before I turn it over to the next person, how should we think about driver pay increases? Because we're hearing about a much -- a tightening market in general by getting some of the questionable capacity off of the road. Once we start seeing a little help in the economy, which it appears that industrial is recovering somewhat, there's obviously going to be increased demand for those remaining drivers. So how should we think about that as we move throughout the year? M. Bunn: Here's what I'd tell you. You're definitely right. Dustin and I were texting last night about driver pay. I was with -- been with 2 of our larger customers, one this week, one last week, and driver pay came up in both of those conversations because for the first time in 40 months, drivers are starting to get tied out there. And so there are definitely targeted driver pay discussions that are going on. As far as how much of it is retention pay versus sign-on bonuses versus rate pay or weekly minimums, that's going to -- I think that's going to bounce around based on the business unit and maybe even down to the account level. But there's no doubt you're talking something in that mid-single digits probably on driver pay, maybe high single digits if this thing gets really hot. Operator: And our next question will come from Jeff Kauffman with Vertical Research Partners. Jeffrey Kauffman: I was wondering what was going on with the question queue there for a minute. Question for David. Everybody is starting to talk about positive things for the first time in about 3 years in terms of fundamentally tightening up, margins getting better, et cetera. And your company is executing, I think, in a lot of areas where others aren't. Managed freight looks good, warehousing looks good, Dedicated looks good. What excites you the most about kind of what's going on in the direction things are heading? And I guess as a second part of that, what do you think can go right better than we're thinking as optimistic as we might be getting? And what do you think might go wrong that we might not be giving enough weight to? David Parker: Jeff, yes, I am more excited right now than I have been in 48 months. Last March is when all this downward spiral started. I mean it's been 4 years since we've been in this trough that the industry has been going through. And so it's been a very difficult time. But I'm here to tell you that it is absolutely turning around. And I remember back in October on the third quarter earnings call, someone asked the question, and we -- A, we didn't know. But B, we just said we believe it's kind of an April event to get through the first quarter and what we were seeing in October, we think that April will really be sensing that. It really started -- excluding the fuel that kicked everybody's bottom in the month of March, it really started turning around nicely in March. And we have seen that continue into April. And you're really starting to get a lot of staff that are backing that up as I think about the last 4 months of PMI and those kind of things that manufacturers really starting to make a nice play because before then, it was all related to capacity, I believe, November, December, January, February, again, excluding weather, but just the feel of the business was, in my mind, capacity related. And now you have got manufacturing that is really starting to kick some bottom. And so that's nothing but a cherry on top of how I'm feeling here about the business environment. And I think that I would say a couple of things, positives, negatives. I was up in Washington 2 days, a couple of days this week and continuing to work. Washington DOT [Shaun], Secretary Duffy [indiscernible] and they are doing unbelievable jobs, and I've told them that, that they are taking the bad drivers, the people that should not be on a truck, they are in the process of taking them off trucks. I believe to the tune right now that somewhere around 2% to 3% of capacity has been eliminated. And keep in mind, 2% to 3% capacity increase or decrease changes the market. You take out 2% or 3% of capacity and we're not raising rates and you take out those 2% to 3% of capacity and the market is tight. And so 2% to 3% is a major number. And I think they're just at the beginning stages of it. So what could the upside be is that. I think drivers are going to continue coming out of the market. Therefore, capacity is going to continue to come out of the market. I personally feel we're just at first base. I think it's going to be an industry-changing environment in the near future. I mean April is better than March, and I expect May is going to be better than April and those kind of things and especially in particular, when we get into third quarter, there's going to be a great opportunity as capacity gets tighter to raise pricing, evident by the fact that we all need it, evident by the fact that we got 20% capacity -- excuse me, 20% inflation in everybody's P&L in the last 4 years, I can look at any one of our customers in the eye and say, let me tell you, we need 10%. We need whatever, whatever double-digit numbers, they need to be there. And I think that the industry that we -- none of us are interested in just buying another white truck or red truck or blue truck. That's not the desire. We've got to replace earnings that we've lost for the last 4 years. And I think everybody is really committed to saying that's the game plan that we're on. And so that's going to be interesting. What could go wrong? I want the war to get over with because capacity is increasing. I mean, manufacturing is increasing even there in the sense of the war, but the longer it lingers and lingers and lingers does it start affecting the economy. That's a concern that I've got. I believe if it gets over in the next whatever, in 1 month, 2 weeks, 4 weeks, 6 weeks sometime, it's going to get better. It's going to take a while for oil to go down, but you let oil get down from $95 a barrel down to $75 a barrel, and it reduces gasoline by $0.50 a gallon. The American people will sense that and feel that, and I think they'll continue to spend. And so I could not be any more excited than I have been in these 4 years. I think that we got our company exactly where we need it in the segments that we're in. And I'm just excited about adding to what already is happening in the industry. Jeffrey Kauffman: That was awesome. One follow-up kind of following a little bit on Jason Seidl's question is how much of the rate increases do you think end up being leaked out because we got to pay more wages to get drivers and taking into account your other cost inflation? Kind of what can you net on these rate increases to help margins get back to where they are? David Parker: Well, I'll let Paul and Dustin answer some of that. But that said, no doubt, I do believe that driver pay is going to go up because we can sense that as we speak, the industry is and that is DOTs taking out drivers, and it has a domino effect. It's not that we hired any of those drivers. We got English-speaking things that go on in our company, we would never hire them. They got to be legal immigrants, et cetera, et cetera. But it has a domino effect on the industry. And so I think that we're just at the beginning stages of feeling that. And I don't know what that means from a standpoint of increases because I think the first thing you're going to do is, hey, you stay with me, I'll pay you this and I'll pay you a bonus to get new drivers in. I don't know that it's going to be -- here's a 5% driver pay increase. I think we'll be around the edges until we know that we know that we know how difficult it will be. So that part, I think, going to say, for the second, third quarter, I think that everybody is just going to be around the fringes, and it will be a number, but it's not going to crazy -- I say crazy, these drivers deserve everything they get. But from a cost standpoint, it's not going to be a crazy number. And I truly believe if capacity continues to tighten, whatever we got to get, we're going to get more than that in increased rates. M. Bunn: I mean, Jeff, historically, driver pay is 30% of maybe total cost, give or take, depending on the exact team or dedicated or regional or whatnot. But if driver pay is in that 30% of your total cost range, I think it probably eats up 30% of your -- 30%, 40% of your wage of what you get from the customer, not immediately, but over the first 6 months or so. But if -- as there's more pressure on driver pay, then you'll go back and get more rate again as a second bite in the apple because, as David said, driver pay is not the only inflation item that we're trying to cover for that where we've had significant inflation over the past few years. And there's some inflation items. I mean the areas around trucks and insurance and some of those that have had a lot of inflation parts the last few years, I don't see that inflation slowing down. And so I think it will be multiple rounds of rate increases. And so you'll probably end up netting 60% to 70% maybe of bottom line without other inflation items. Jeffrey Kauffman: And one last follow-up question. This one is for Tripp. Tripp, the Section 232 tariffs made a little challenging for some of your truck OE partners to be able to quote good prices for vehicles this year. Has that clarified yet? Or is it still a situation where the [indiscernible] that are selling your trucks or manufacturing in Mexico still can't quite get the pricing down? James Grant: No. I would say, Jeff, we do have pricing for next year, and that is a big question for us. So we've got so many like near-term opportunities in terms of how we're thinking about managing our portfolio of business and our assets on the road today. we just unloaded a lot of extra capacity or a lot of extra trucks that weren't being efficiently used, which is one of the reasons why cash flow was so good. But the things we've talked about is the notion of a prebuy in Q4, and I don't think we're leaning towards that because I think our goal is to try to buy capital or buy equipment as smoothly throughout the year as possible with the exception of Q1, it was just a really light buying quarter, which it typically is. And so we are looking at probably a $7,000 to $10,000 probably cost increase, I would say, on the average across all the different types of trucks that we buy for next year. And we'll be factoring that into account as well when we think about rate increases. It's another -- we've seen -- it's just one more thing that Paul and David were talking about in addition to driver pay that has not slowed down, and it's compounded in a loose market where used equipment has never been sold cheaper. And so when you're buying stuff at the highest points and you're selling stuff at the lowest points, it -- it's not the perfect equation for a great profitable quarter. And so we're seeing some strengthening, I would say, or bottoming, I would say, in the used equipment market, and I expect it to strengthen throughout the year as this economy -- or as this freight market turns. So we're optimistic. I mean we'll get some help on the used equipment side, but I think the new stuff is going to continue to go up. And we're going to continue to focus on using our stuff efficiently with the right customers, and it will be what it will be. M. Bunn: Jeff, let me clarify when Tripp talks about the increases next year, those are not tariff-related increases. They're more price [indiscernible] OEMs because of emissions. Operator: [Operator Instructions] We'll move next to Scott Group with Wolfe Research. Scott Group: David, you mentioned -- you just mentioned you were in D.C. I'm hoping maybe you can share a little bit of insight of what you learned. Is there a path forward to Dalilah's Law, Dalilah bill to become a law this year? Anything on Montgomery case and how you think that may or may not impact the industry or anything else that you think is interesting? David Parker: We're going down 2 roads in Washington. On e road is CDLs, immigrants, CDL schools to make sure they -- the bad ones are shut down and the good ones are still producing, insurance requirements. Those are one road that we're going down and the other road we're going down is Tort reform. And I would say on Tort reform, we've gone from a 0% chance to -- my number is 25% chance that, that is going to happen. And the only reason why I say 25% is because President Trump has been affected so much by warfare and law fare or whatever word you want to use there that at least the administration recognizes that. And the administration cannot lead it, but the administration can support it. And so we're working Congress awfully hard to get behind it, and we got some folks that are definitely behind it. And we're just at the infinite stages of dealing with Congress. We did -- we had good meetings this week with judiciary committee. And I think that we're going to be presenting to them in the future. And so that's good. I mean, if you can't get to the judiciary committee, you're never going to get us to the floor. And so we'll see where that goes. But again, to me, we're at 25% that we're able to get to reform, but it was at 0 a year ago. So we'll see. And then the other one, again, is that to me, the DOT is doing exactly what they need to do. So ours is to continue to encourage them and continue to support them and all the things they're doing, again, CDO school, ELD is unbelievable. The amount of cheating that happens in this industry, unbelievable. And -- but they're on top of it. And so to me, the message that DOT is hearing from us is sustainability. We got to continue to sustain this effort that you're going and I'm thinking they've taken out 2% or 3%, I mean, guys, it could be easily another 5% or 6%. I mean it's a big number, whether it's 3% or 4%, 5% or 6%, but whatever it is, it's a big number that is out there. They said my phone just died. Can you all hear me? Scott Group: We got you. David Parker: Okay, good. Tripp texted me there, said my phone died, so good. As long as you all can hear me that's all that matters. So anyway, it could be a large number on capacity coming out. So that's what my efforts in Washington and others is there, but we're definitely getting in front of the right people that can help and they can see us and we'll carry the football. The question is, will we get across the goal line. And I think DOT is a given again, sustainability, Tort reform is 25% chance, and we'll see what happens there, Scott. Scott Group: So is your point there that whether or not maybe Dalilah's law speed things up, but even without that, that the Department of Transportation is going to -- may take a little bit longer, but they're working on all the stuff on their own even without this law. David Parker: I didn't answer your question. I believe Dalilah's law will pass. I do believe that. But I'm going to tell you that they are doing the things in DOT that is really the Dalilah's law without it being rectified in Congress, which would be great because then becomes law versus the next DOT Secretary that doing whatever they want and not paying attention to it. So you wanted to get it codified as a law, but they are doing the Dalilah's law as we speak virtually. Scott Group: Yes. Okay. And then just in terms of your business, right, you've got in the Expedited segment I think still pretty meaningful LTL exposure. Are you seeing the same sorts of improvements on that side of the business? Maybe are you seeing some life in the LTL volume? Just any thoughts on that. David Parker: Yes. I would say in the last couple of months, you started seeing the LTL side coming back. I think it relates to PMI being 4 months above 50, et cetera. I think that they're starting to sense that because we went -- if you remember, Scott, we went, I don't know, last summer, fall, and we started seeing some trends that were not good year-over-year for our LTL freight that we do anyway. And we started seeing that upticking now, and we're starting to sense that the LTL side of the business is starting to get better out there for us, and I think for them probably as an industry. Scott Group: Okay. And then maybe just last thing real quick. Tripp or Paul, whoever, I know you talked about some longer-term margin targets for the different businesses. Any sort of -- I don't know, just near-term thoughts about how to think about margins for the businesses, Q2, Q3? David Parker: Okay. I think we probably found that -- we probably found out Scott. They died and me and you're talking to each other. I would tell you, yes, you're going to continue to see margin improvement. I think that second quarter is going to be -- April is better than March, and March wasn't bad, but we're not going to be -- we're not getting out of rate increases April 15 either. So April, May and June is going to be layered in on whatever we're getting as we speak. And so I think that you'll see second quarter definite improvement over first quarter. And then I think you'll see third quarter improvement over second quarter. Operator: [Operator Instructions]. And it appears that there are no further questions at this time. I'll turn the conference back to our presenters for any additional or closing remarks. James Grant: Yes. Thanks, Jen. And I just want to thank everyone on the call for your interest in Covenant and our Q1 earnings, and we look forward to speaking with you again in Q2. Thanks very much, and have a great week. Operator: And this concludes today's conference. Thank you for attending.
Xiuyi Ng: Good morning, everyone. Welcome to CLCT's 1Q 2026 Analyst Briefing. I'm Xiuyi, Investor Relations for CLCT. With me today, we have our CEO, Gerry; CFO, Joanne; CFO Designate, Lintong; and Head of IPM, You Hong. For this meeting, we will start with a brief presentation followed by a Q&A session. [Operator Instructions]. So with that Gerry, please go ahead. Kin Leong Chan: Thanks, Xiuyi. Welcome everyone to CLCT's first Q 2026 business update. Thank you again to making some time this morning to attend this presentation. This is update. So I think it will be relatively short. There'll be more Q&A time later. So CLCT, we are the first and largest China-focused S-REIT. So now, of course, we also have connectivity to the C-REIT market through us jointly listing a C-REIT on the Shanghai Stock Exchange with our sponsor. Our current total asset is SGD 4.5 billion. We have 8 retail malls, 5 business parks, 4 logistics assets. And most of our assets are in Tier 1 and Tier 2 cities. Distribution yield using FY 2025 DPU with the unit price now is roughly about 7.5%, right? That reflects some of the unit price movement from the broad market winners after the start of the Iran war. In terms of our asset allocation, you can see that relatively unchanged. Our retail is still our largest and most resilient asset class, 70% of gross rental income, that's the biggest part. And then the remaining 30% is what we term as more new economy, so business parks 27% and logistics parks smaller at 7%. In terms of the different segments, generally speaking, the retail has been showing relatively more resilient with our AEI effects starting to flow in Q1 of this year. Logistics stabilized, of course, with some rent resets that we have done in 2025. And business parks, we will see that continue to have weak demand. So overall portfolio gross revenue and NPI dropped about 5% and 3%, respectively. And that's mainly due to the divested Yuhuating effect. So encouragingly, on a same-store basis, you will see that our portfolio gross revenue marginally negative at minus 0.4% year-on-year and NPI actually increased 1.3% year-on-year. If we dissect further for retail, again, on the headline revenue, it declined by 7.2%, but again, mainly due to the loss of Yuhuating's revenue, which alone was about RMB 21 million. So without that, if you exclude that on a same-store basis, it narrows to -- the drop narrows to minus 0.5% year-on-year. The other effect is -- for retail is that the completed AEIs started to provide us with new revenue flow. That's about RMB 5 million per quarter, and it was somewhat offset by some of the weakness -- continued weakness we see at Xinnan, Grand Canyon Mall and Aidemengdun. For BP and Logistics, when we combine together the revenue is relatively flat year-on-year. What we have done, of course, we continue to focus on operating efficiency. Our operating costs on a year-on-year basis, we reduced by 3.7% on same-store basis. Next, if you look at some of the retail operational statistics for first Q. Continued growth in traffic and tenant sales. You can see traffic grew by 3.3%. Tenant sales grew by 5.5%. And both of these statistics are generally faster than we have seen in terms of growth than the average of full year 2025 over that full year 2025, which grew about 2-plus percent for the full year 2025. But really, we are continuing the strong momentum that we saw 4Q 2025. Overall, occ cost is healthy, 17%. Again, there's a slight drop in occ cost and that's due to the good healthy sales growth that we have seen. Trade categories that have done well. F&B 4.2%, that's not a surprise, it has been a big category for us. Again, last quarter, I shared the same trends that are driving this F&B segment. We introduced new high-performing trading brands, which are 2 factors for [ shoppers ]. Growth also was broad-based. We have all local favorites, Japanese sushi chains and bakeries all doing well. IT up 8.5%, that's again boosted by consumption voucher as far as we mentioned, we expanded more digital brands during our AEI in Xuefu and Wangjing. Brands like Huawei continue to do very well in our malls. Jewelry & Watches plus 8%, again, driven by the trend to invest in gold. Toys & Hobbies, again, a standout, plus 59.6% this quarter, continued popularity of the collectible toys market. So again, POP MART was 100% up year-on-year. Again, we did very well. [indiscernible] Xuefu going strong. They are up about 58% in terms of sales growth. The other categories that are not in the slide, but I can share a little bit. Last year, we did a lot of supermarket AEIs. So the supermarket upgrading Wangjing share to Xizhimen did well, so those powered our supermarket category. Actually, it's there in the right-hand side. We had strong sales from that RMB 80 million, right? So the growth there is, of course, that double digit since last year's supermarkets, some of them have closed down. And once they were open, this supermarket drove good traffic growth at the 3 malls that we opened. Another category that did well, sporting category, we also opened Decathlon in Rock Square and very good ANTA Guanjun [indiscernible]. So the sporting category this quarter also did very well, plus 46%. One real surprise for me is that the fashion category actually turned positive this quarter, was positive 1.4%, a small positive, and growth was driven by the stronger malls and some of the names that have been going well, most of them, which is basically winter wear, thermal wear. And perhaps it's driven by the winter season. We had a strong overall growth of about 40% sales growth. While no one quarter is in a trend yet, but certainly, this is encouraging because we have had many quarters where we have not seen fashion had a positive sales growth. In terms of occupancy, our malls continue to have high occupancy. So this quarter, we had 97%, with almost all malls are above occupancy of 95% except for Xinnan, which is, of course, we are continuing to reposition. In terms of reversion, similar levels to 2025 at about minus 2% with 2 anchor renewals affecting our reversion number. We are doing some anchor renewals at Nuohemule and Aidemengdun. Business Park occupancy is at 86%, a slight drop from 4Q 2025. Usually, leasing momentum in the first Q is usually slower. But our Business Park assets outperform -- continue to outperform our submarkets despite generally softer environment for business parks. We see improvements in Xinsu and Ascendas Innovation Hub. But they are small -- they are decline in some of the other assets, for example, AIT, Ascendas Innovation Towers' occupancy dropped mainly due to one of the BPO tenants that did not renew upon expiry. We are looking to fill that. Hangzhou Phase 1 and 2 challenging market, which we shared before supply-wise, occupancy drop was from 2 bigger e-commerce tenants that pre-dominated that took up about 4% space of Hangzhou 2. Previously, we also shared that for Hangzhou 2, we had some X master lease service office that -- service office lease that we took back, that's about 55,000 square meters. And then where we subleased now from about 70% last year, we are now up to 74% backfill, right? So we'll continue to backfill that space. Overall Business Park's reversion is at minus 11%. We are, of course, prioritizing occupancy to actively trying to retain our tenants and conversion of the new leasing pipelines. You can see that actually this quarter, we did do quite a lot of leases, almost 60,000 square meters of renewals and new leases in first Q. So we are working hard at it. Logistics Parks, smallest part of our portfolio, 3% of GRI. We can probably say that I think the Logistics portfolio has stabilized. We further improved in Chengdu, driving occupancy of that asset to 96.2%, and also improving the overall logistics portfolio to about 99%. So we feel that rents have almost bottomed up in this Logistics portfolio. We aim to continue to achieve full occupancy at this level. Capital management before I hand it off to Lee to talk about it, I would like to just highlight that in terms of our average cost of debt, this quarter, we have managed to cut it down from 3.3%, where we ended off the year in 2025 to 3.1% by benefiting our efforts from [ RMB ] financing and overall constructive rate environment in both SGD and in RMB. So for this quarter, with the combined efforts, we managed to translate loan interest rate savings of about SGD 2.9 million. So that's about 18% year-on-year drop. So over to you, Lintong. Lintong Yan: Thank you, Gerry. So capital management remain a core strength and priority for CLCT. So our focus is actually very clear. We wanted to maintain a healthy balance sheet and they're actively lowering our cost of borrowing and protect distribution stability across the cycle. So as at March 2026, our CLCT's debt level is slightly higher than 1 quarter ago, following our distribution. That has resulted in aggregate leverage of 41.4%, which still remain comfortably within the regulatory limit. More importantly, like what Gerry has just now highlighted, we actually have achieved year-to-date average cost of debt of 3.1%. This represents 40 basis point reduction year-on-year and 20 basis point reduction versus full year 2025. These are tangible outcomes from active actions taken early in 2025, when we proactively refinanced and shifted funding from higher cost SGD debt into lower cost RMB debt. And also, we have increased our proportion of RMB-denominated debt, which has strengthened our balance sheet against resilience FX -- make it more resilient against the FX movement. So in -- as we deliberately balanced our SGD and RMB debt mix to stay flexible across various macro conditions, I want to highlight that in the small table on the upper right corner, right? That actually shows our distribution sensitivity on SGD and RMB interest rate movement. We now have more floating rate debt in RMB in SGD, right? This actually positions CLCT to benefit from monetary easing in China while being better suited for any potential volatility in SGD interest rate, given the global macro environment. And with lower borrowing costs, that has also strengthened our credit profile. Our interest coverage ratio has improved to 2.9x under stress test scenario, where the 100 basis point increase in average cost of borrowing or 10% decrease in our EBITDA, our ICR, interest coverage ratio, is remaining -- is able to remain comfortably above 2.3x, well above various regulatory threshold. CLCT's debt maturity profile also is very well staggered with annual refinancing kept at around 25% of our total debt, that is to manage our refinancing risk. The only offshore bond that is maturing in 2026 is RMB 600 million, 3.8% FTZ bond, which is due for refinancing in Q4 2026. While CLCT has sufficient committed bank facility to refinance this bond, but we see this as a good opportunity for us to further diversify our cost of funding as well as to refinance our debt and meaningfully lower costs. So we will actually keep unitholders informed about our refinancing efforts in the following quarters. So finally, we have strengthened our natural hedge. Our RMB-denominated debt now represents about 60% of our total borrowing, including other hedging instruments, we have around 78% of our total debt in RMB-denominated form. So in summary, our capital management strategy is to deliver a very clear and measurable outcome for our unitholders, lower cost of debt and stronger resilience to interest rate and FX movement, right? So these efforts underpin our distribution stability and provides CLCT with long-term growth capacity. Over to Gerry. Kin Leong Chan: Okay. Thanks, Lintong. I will just end off with maybe just a summary of our strategy in 2026, which is really a continuation of what we have done in 2025. We're trying to build a portfolio in the long term that aligns with China's focus on domestic consumption and innovation-driven economy. How we are doing it? We create value. We have, in 2025, established a long-term capital recycling vehicle via C-REIT platform. This will continue to support our ongoing portfolio reconstitution. 2026, our immediate target is to expand in -- some expansion in our new assets, especially retail, while continuing to make sure our properties have a stable occupancy. Unlock value, what we have done, of course, is last year, we have recycled CapitaMall Yuhuating. In 2026, our first priority is still to buy an asset to replace, replenish and reconstitute what we have sold in Yuhuating. But we will continue to work on and see whether there are suitable opportunities to recycle some of the noncore or mature assets where we feel that value has kicked. Extract value. Our AEIs, I think it's clear for everyone to see have been successfully completed and helping us in terms of organic income in 2026, right? So that will be -- continue to be a key part for us. We are trying to identify whether we can attract more value from existing assets. And as we look for new acquisition, we also want to see whether the new acquisitions that we are evaluating have potential and room for us to continue to apply our AEI expertise on them. Proactive capital management, I think Lintong has already touched on it. We will continue to drive down our average cost of debt while reducing our FX risk where appropriate. So that's the end of my presentation. I'll hand it back to Xiuyi for the Q&A session. Xiuyi Ng: Thank you, Gerry for the presentation. Now let's proceed to the Q&A segment. We have our first question from Terence. Please go ahead. Terence Lee: Congrats on actually the strong numbers. Actually, I really wanted to ask on Q-on-Q. I noticed that in fourth quarter last year, actually both revenue and NPI did drop in sort of like the mid- to high single-digit number on a Q-on-Q basis in fourth quarter. And then this first quarter, it did improve quite substantially on the Q-o-Q from fourth quarter. So maybe can you share on the Q-on-Q movements in the numbers? That's my first question. Yes. Maybe you can answer this first. Kin Leong Chan: I will answer that, and if there's some additional info that the CFO want to provide, he can do so. For the first Q numbers, I think if you look at this slide, we sort of have already laid that out. Of course, the big effect is Yuhuating, right, in terms of the revenue. And that's -- I think, I mentioned that actually quite for a big number, that's about RMB 21 million that we lost for revenue just because we lost -- we divested Yuhuating. But if you exclude that, you look at the other components, right? We have the AEI effects flowing through. So last year, most of our AEIs are completed, some at the late part of 3Q, some at the late end of 4Q. So most of the income really haven't come in. But this year, we have full contributions from all our AEIs. Just now I mentioned that the swing there is about RMB 5 million per quarter. So that's a key part of why I suppose you saw that retail revenue has on a same-store basis has been quite stable, right? Of course, as I mentioned, it's slightly offset by some of the poorer assets. I'm talking about Xinnan, Grand Canyon Mall and Aidemengdun. So that's basically how we come to about flat, excluding Yuhuating for the retail revenue. Business Parks. Business Parks NPI-wise, actually, if you look at the segmental breakdown, you would have saw that actually Business Parks also improve. Like part of it was because you recall last year, we had been trying to backfill some of the spaces in Hangzhou Phase 2, I mentioned about the service office master tenant, which we took back the leases from and then started releasing up. Last year, we said that we finally managed to lease it up to 70%, but a lot of it was really committed at the back end, right, of the year? And then, again, the income flows and effects started flowing in 2026, right? So that helped basically together with Logistics Park get us to a position where revenue is flat rather than declining in those sectors. And of course, generally, we're trying to maintain cost control. So I mentioned the cost control, and we have saved about 3.7% on a same-store basis. So that's why on overall basis, you can see the NPI is up 1.3%, excluding Yuhuating's effect. Is that... Terence Lee: Yes, that's very helpful. Maybe if I can ask a separate question. I understand that the C-REIT regime has changed quite dramatically. I mean your sponsor is looking at another separate C-REIT. So I wanted to get your views on how the changes impact the existing C-REIT and whether you may look to divest assets via C-REIT or how are you looking at asset divestments? Kin Leong Chan: So two questions. I think one is about the new C-REIT and the relationship with us and the sponsor. Second one is whether we are looking for more securitization or divestment from our portfolio into the new C-REIT. I think those are the two questions. So the new C-REIT format is something that really picked up in concept only end of last year, and it's something that the CSRC in China, the securities regulator, is driving very hard to get going off the back of quite a successful -- already quite a successful C-REIT market that they have right now. And CapitaLand as a very reputable REIT player globally and also in China, right, has been invited to do that sort of the first pilot batch of this new C-REIT format. The differences -- I can let Lintong explain the 2 differences in the short while. But when this was discussed, right, certainly, CLCT was also in the loop. And we also were consulted to see whether we want to have any assets securitized into this vehicle, right, new vehicle that's coming up, which will probably be second and third Q by the time they listed of this year, right. And we decided that since we have done our first securitization quite recently, right, we wanted to pace up the pace of our securitization or divestment, so that our DPU can have some income stability. As you can see from the results, we -- even though Yuhuating's divestment was not that big, we still lost some income. And we wanted to see whether there are opportunities to basically buy some assets to put -- to basically replenish those income before we go on to the next securitization, right? And if you look at the general market for C-REIT, it's actually very buoyant. So we are in no hurry. The market will be there for quite a while for us to take advantage of when we need that liquidity, right? So it depends on whether we have the capital needs, maybe we find very good assets at very good attractive yields that then we may think of activating another round of securitization. You Hong can explain the diverse between a new and old C-REIT as well as what people are seeing in terms of how they work together. Hong You: Yes. So on the new regime, if I may, we can call it commercial C-REIT, just to terminology it differently from the previous regime called infrastructure C-REIT. They are actually quite similar in terms of leverage, the legal structure and all that. I would just say there are 2 to 3 main differences that drives them. One is the speed at which I think the regulatory wanted to move this faster. So I think they have sort of -- the approval window will be shorter because last time, there's NDRC, CSRC sequentially have to approve it. But now I think it's all in the CSRC's purview, so that's number one. Number two, I think asset class, they've expanded into a more bigger real estate focused commercial asset class, namely including office, hotel. Of course, retail are still in it, and all the other more generic type of income-producing real estate are all admitted to this commercial real estate, which previously it was very limited. Number three, I think they've also relaxed certain reinvestment obligations. So I will not go into too detail. But having -- so basically, I think this is welcomed generally by the market as a whole. And from our point of view, I think we are indifferent as to which vehicle is -- can be our offtake vehicle. I think there were also questions on why there are 2 [indiscernible] C-REITs in the -- under CapitaLand's name, I think the regulators also suggest that there could, in the future, be actions there to take care of that, but that will be a next-stage action, yes. Terence Lee: That's very, very clear. And hopefully, we can see more C-REITs to come. That's all I have. Xiuyi Ng: The next question is from Geraldine. Geraldine Wong: Congrats on the more stable than expected set of results. Maybe just tying back to Terence's question on divestment, you'll probably look to phase out a little bit more to reduce DPU impact. Can we also say the same for the existing recycling to your -- to [ CRCR ] in terms of retail assets? Kin Leong Chan: Yes, I think we view it the same actually because it's kind of, I would say, a slew of tools that we have in our disposal because we are part of the same group, right? So we will -- whether it is to the new C-REIT or the old C-REIT, we will place it according to our own needs. Geraldine Wong: Okay. Okay. You also mentioned about acquisition opportunity that you see in other retail assets. Just wondering, would you want to pace that with a divestment? Or if the opportunity is really very interesting, will you actually consider doing EFR given that gearing now is at 41%... Kin Leong Chan: Well, it depends on how attractive the deal and basically the timing that we have basically to complete the deal. So there are quite a lot of permutations, yes. So it really depends. Geraldine Wong: Okay. Okay. Maybe just squeezing in question on Logistics and Business Park. Logistics reversion was a positive surprise. Is this lease specific or really reflecting a potential bottom -- early bottom for the Logistics asset class within China? Kin Leong Chan: I think it's quite been a trend for about 2 quarters already. You Hong can add a little bit more color, but we have tried to communicate that we feel that rentals have really reset, so that's why if you look at the reversions, it's actually just mildly negative in this quarter. Hong You: The reversion mainly come from, if I recall correctly, Kunshan and Chengdu because these 2 are the ones that have a bit of change in leases. But having said that, I think our observation of the market, I think we have alluded to previously as well that we will hopefully be seeing the rent are stabilizing and following 2 years of quite, I would say, drastic drop. Of course, we can't say for the whole China because I think North part of China, Southern part of China may be in a different -- slightly different timing and cycle of the market. But in the 4 cities that we are in, I think this is generally observed. Geraldine Wong: Okay. China, very big. Maybe just on Logistics, right? If you look at your 4 assets, how many percent of the leases are still on the rent that has yet to be [indiscernible] versus the already mark-to-market rents? Hong You: I will say that our leases are generally in the 2, 3 years kind of lease cycle. And then we have more or less done with the [ marketing ], that's my view. Geraldine Wong: Okay. So it looks like one more year to go then. Hong You: No, I would say that we have more or less [indiscernible] to the market, although some of them are 2, 3 years, but I think we have done the big churn in the last 1 and 2 years. Xiuyi Ng: The next question is from [indiscernible]. Unknown Analyst: [indiscernible] from OCBC here. Just a few questions. I noticed that the retail reversion is still negative despite the trade sales going up. So what's causing the divergence? Is it just a timing issue or like tenants still being squeezed? And related to this question is occupancy cost. What should we think about as a steady state kind of occupancy cost like trended lower to 17%? And is this going to trend further lower? And another question I have is on cost reduction, 3.7%. So it is somewhat substantial. What was actually being done to drive that kind of cost reduction? And should we be expecting further cost reduction? Then my third question will be in terms of the cost of debt. So do you have some guidance on where it will go towards the end of this year? Kin Leong Chan: Thanks for the question, 4 questions. So the first 2, I will touch on a little bit before I let You Hong to take the first 2 in detail and then I'll let Lintong answer second 2 in more detail. So generally speaking, the whole China environment is still in a deflationary or environment, right? So prices are not really moving up, right? And that certainly [ keep true ] when you try to ask tenants to increase rent. But of course, for those categories and those malls that we are really well, we have better ability to ask for higher rents, right? This quarter, I spoke about there was -- for the retail, there were some anchors that we renew that affected our reversions. I recall the number without them is minus 1.6%, minus 2%, but still negative. You're right, still on a negative trend or slight negative. And I shared previously, I think last quarter that what I'm -- we believe that sales trend are leading indicator for reversions, right? Of course, the timing you can debate of how much leading indicator it is, right? We have had a year -- almost a year plus or 2 years actually of sales growth, right, that outstrips -- obviously outstrips rental growth, right? So that to me shows actually our tenants are actually in a healthy position, right? That should continue to underpin the strength of our retail portfolio. In terms of the savings, we do work very hard on them. The details, I will let Lintong talk about it. And in terms of both operating expenses as well as our interest, we are working very hard on it. So the first details maybe on the operating side, occupancy costs, maybe You Hong, you want to add more color on that? Hong You: Yes. Thanks. So I think that's a really good question actually. We are also trying to understand and in my conversation with ground team, we are also trying to see whether there's room for us to drive ramp up. So I think the 70% is actually already below the levels of -- before the levels of the pre-COVID. So then again, I think our -- what we hear is that when we talk to the tenants, they are still relatively cautious on upping the rent, although they are able to still do good business, but I think the resistance is there because for one reason is that the they are also sort of in the deflationary environment, trying to promote and do more promotions, do more sales events. So they also felt that the margin -- their business margin is also not as good as the good old days, right? I think that's number one. And number two, I think in terms of the aggressive expansion tenants, what we are seeing is more in the drinking, in the bakeries, some of them still do. But the large format kind of tenants, F&B, fashions are still sort of lacking or rather the willingness to expand is still not there overall. I would say, so we would want to work with them to see how to drive it up. But I think at the moment, we are still seeing the rent being rather subdued, right? So I think that will probably take a bit of time. But hopefully that with now we see the new data on the DPI and all that. Hopefully, the CPI will also be able to go into the positive territory for a longer time, right? I think then people will start to feel that the inflation cycle will turn. I think that will help us generally. Lintong Yan: So for the interest saving, yes, so for this quarter, we are very encouraged to see our cost of borrowing has actually come down. So, yes. So this is actually years of efforts. Since 2025, we have been actually very much focused on lowering cost of debt and also to use the renminbi borrowing to actually lower our overall cost of borrowing. This actually takes time to filter through because we do have some expensive swaps that actually need time to mature and reset. So I think for now, I guess, this level of cost of borrowing, I think we hope to actually hold it there because we still have some floating rate that are actually subject to macro environment, right? But we do hope that we are able to hold the interest rate here at this level. And then we are also looking for opportunities to further reduce our interest rate, right? Take for some example, our FTZ bond that is actually currently the passing coupon rate is 3.8%, right? So this bond is actually coming due. So I think we are able definitely to refinance this bond at below 3% kind of level, even better than that. So -- but this bond will actually -- any refinancing effect will probably be filled in 2027 and when they -- actually interest savings contribute full year, right? And also, we do observe that occasionally, there are opportunities for us to swap our SGD debt into RMB debt through cross-currency swap because the interest rate environments are actually still quite volatile on the long end, right? So opportunistically, we are able to capture some interest savings when we swap SGD into RMB using cross-currency swap. That is actually we might be able to actually pick up a few interest savings here and there. So generally, if you want to look for some guidance, I guess we will be able to keep at this level, like 3.1% kind of level and hopefully can do better. Also want to highlight that earlier, I mentioned our fixed and floating rate debt, right? The ratio is now 65%. And that actually allowed us to enjoy any interest rate savings if the SGD rate actually continue to stay low and then if there's any chance of RMB further monetary easing coming this year. Unknown Analyst: Source of operating costs? Lintong Yan: Okay. Source of operating costs, right? So the team has actually been very focused on the cost measure, right? So a part of our operating costs actually come from revenue-linked expenses because if you look at our cost structure, we have a lot of expenses, including the property tax as well as some of the management fees are actually linked to our revenue. So this part, the decrease -- a portion of it is actually linked to our revenue decrease because we have actually some -- our Yuhuating has been divested. And on the operating front, we have actually seen significant savings in maintenance costs, right? So these are something that we continue to focus on and to actually save the NPI. Kin Leong Chan: Maybe I'll just add a little bit color on that. So the property cost savings, of course, we work indeed very hard actually with our property managers, who, of course, you know is our sponsor, right? So as Lintong said, if you take out the Yuhuating effect, right, if you look at same-store basis, the minus 3.7%, half of it is the revenue-related cost drivers. Some of the costs basically goes and correlates to the revenue levels. The other half, somewhat like, I would say, somewhat like fixed cost, but we have trimmed that down by quite a bit. And the first Q actually, we have made very, very double-digit sort of cuts to those fixed costs on a year-on-year basis. So on a combined basis, that's why you get this minus 3.7%. Xiuyi Ng: We have the next question from Terence Lee. Terence Lee: Terence Lee from UBS. If we look at Page 7, the 1Q year-on-year sales improvements, is there a way to just maybe talk through what would be like from the bottom of the list, like which sectors are more, I guess, worrisome or not performing that well? Kin Leong Chan: Okay. You're talking about trade categories that we may not have shown here. I would say usually, when this question is asked, last quarter, I would say fashion, but this quarter, fashion sort of surprised us a little bit. So the other category is the beauty category, the cosmetics. Again, I think last quarter, I did say within the beauty category about minus single digit, minus, I would say, maybe mid-single digits. But actually, this quarter also not -- it's negative, but it's not so bad, a little bit. I think you also can talk about EVs a little bit that's a big trend. Hong You: Correct. So I think from what we are seeing, the 3 categories that we see year-on-year drop, which is more on the slightly higher side is ranking them vehicle EV sales. And secondly is -- I think EV sales is also reflected in the nationwide consolidation number that was published a while ago. And I think leisure and entertainment also dropped. I think last year, we had a good movie and all that. This year, I think the movie hasn't been -- we haven't seen any big blockbusters, right? So I think that's that. And thirdly, I think home livings, we also -- but that's a very small trade to begin with. But home livings has also seen a little bit of decline year-on-year. I think these are the 3 main ones that we see drop. The rest is a bit more like a mixed bag. There are malls that do better. Also on fashion, I think Gerry mentioned, overall, we see a slight positive. But between more malls, we see differences, right? So some of the strong must do better. I think our [indiscernible] negative. So I think the rest I wouldn't be able to generalize too much, I think. Kin Leong Chan: I mean, in summary, I think this quarter, particularly the positive has more than the negatives. Terence Lee: Yes. I think it almost sounds like the negatives are not that negative broadly, like the range from slight negative to positive as it gets for Toys & Hobbies. Kin Leong Chan: We hope the trend continues. I don't want to call a trend, but this is 1 quarter, yes. Terence Lee: Okay. And next question, remind us of the RMB hedge policy again? And I guess what would be the effective hedge rate on this first quarter results? Kin Leong Chan: Okay. I'll turn that question to Lintong. So the hedge policy and... Terence Lee: FX hedge policy, sorry. Kin Leong Chan: You're talking about the income, right? Terence Lee: RMB to SGD? Lintong Yan: Okay. So we typically hedge -- we look at our RMB exposure and cash flow, right? We typically are forward looking at our upcoming distribution from China, right? We typically hedge about 75% to 90% and then probably 6 to 12 months ahead. So that actually really depends on the hedging cost because I mean, RMB and SGD depends on the tenure that might have some positive carry, which means the forward premium is in our favor. And sometimes the forward premium is actually quite expensive. So we actually look into these hedging costs to decide how much we hedge and for how long we hedge. But generally, it's about looking forward, right so 6 to 12 months and then hedge about 75% to 90%. So as you can see that actually RMB versus SGD recently has actually stabilized. That actually has helped us in terms of our hedging decision as well. Terence Lee: So just if you can help us make our job easier, what would be the effective rate for first quarter or even first half? Lintong Yan: You mean we hedging. Yes. So we hedged about 80% of our forward rate. So our rate hedge is about 5.4%, around that kind of level. Terence Lee: Okay. That's weaker than spot. Lintong Yan: Yes, because some of these hedges was actually done at the second half of last year and then some are actually done at the beginning of this year. So you can actually see that the spot rate has actually strengthened, especially after the [indiscernible], right? So actually towards the March, right, the RMB has actually reached, I think, [ 5.35 ] kind of level. So some of our hedges was actually done before that. Kin Leong Chan: Usually, 6 to 12 months, can do in 6 to 12 months. Terence Lee: Got it. And maybe just going back to the comment by Gerry about wanting to buy first before doing securitization. Just a question on the rationale, like why isn't this more so done at the CLI level? And I guess a little bit more relatedly, related to capital deployment, is there not more value you see in buying back your stock now? Kin Leong Chan: The first question, you were asking why is it not more with the CLI level? Terence Lee: Meaning to say like why -- I mean, if the plan was to so-called like buy or source for, let's say, malls in the market to buy, improve and sell, like why would this not be done at the CLI level? Like why would -- what is the strategic rationale for doing this at the CRCT level? Kin Leong Chan: Okay. Okay. Same strategy. Why CLI is not doing it and why CRCT is doing it? Is that the question? Terence Lee: Or rather, why would it be done at both levels? Kin Leong Chan: I think, first of all, I would say the objective and strategy for China-focused REIT will be very different from the objective and the strategy of global asset management or fund management platform, which CLI is trying to -- CLI is positioned for basically, right? So from CLI's perspective, I'm sure you have heard Paul and Chee Koon talk about it. It not only have China business, they got business basically across different jurisdictions. The asset allocate their business according to where it may bring them the best growth. So it may or may not be China. And in China, they may have different strategies than us. We are quite straightforward, right, because we are China focused. And China for us is Greater China, China, which means Mainland China, Hong Kong and Macao. These are the 3 places that we can look for assets. And we will portfolio reconstitute within these countries across asset class that we currently play in or we may in future, but not -- perhaps not immediate future to look at other asset class, right? So our acquisition, our divestment, our value add would therefore, be contained within China. So that's quite clear for us. I think the other thing that the relationship between us and the sponsor is that the sponsors have different strategies. But one thing that's certain is that they are supportive of our objective. And you will recall, we still have historical ROFRs with the sponsor, right? So when we are looking for assets that we -- assets to basically inject into the REIT, those assets are, of course, up for consideration together with third-party pipeline that we generate from [indiscernible], right? So that's in terms, I think, of the strategy. Second question is unit buyback, right, unit buyback. I think I addressed this in this manner, right? Of course, stock price, it's sort of volatile, sometimes it's down, sometimes it's up, right? And therefore, the trading yield present itself accordingly. Right now, our trading is about 7%. So in terms of capital allocation, right, for the same dollar, which we are using the same gearing headroom, we got to decide for ourselves whether we can find a deal that is basically accretive against the trading yield, right? And that's our ultimate test, right? We sold an asset only end of last year. You Hong is still working hard. Just now, I talked about the pipelines that we have assessed to see whether indeed we can find something that we can buy and add value. Of course, if you buy back our own stock, it could be immediate. But if you buy something that's an asset that's accretive, that means we are basically buying at a yield higher than our trading yield plus, as I said, we want to have some value add in there plus potential to improve on the assets that we buy in. That could actually prove to be a better proposition for the same unit of [indiscernible]. Xiuyi Ng: The next question is from [indiscernible]. Unknown Analyst: I have two questions from me. First, how do you see rental reversions for the Business Park assets trending for the rest of this year? And how is the leasing sentiment like on the ground? Second question is more on aggregate leverage. Was the increase in the total debt a temporary bump to pay out the FY '25 distributions? And what is the ceiling that you'll be comfortable with if you were to acquire an asset and fund it with debt? Kin Leong Chan: First question, I'll let You Hong take, then I'll comment on the second question. Hong You: Yes. On the reversion side, Business Park, I think we -- between assets, we see that since we are still the stronger one, although it also had slight negative this quarter, but the stress really comes from, I would say, Hangzhou. And the situation on the ground, I think we have shared before for the last couple of years, I think there were quite a bit of supply coming on board, but it has sort of I think the last bit of the supply should be already in, right, in that submarket per se. So I think within the submarket, we look at how the other people are doing. I think generally, we are looking at close to 70% already. We are also at slightly above 70%. So I think the kind of competition that we see probably will last a bit longer, but hopefully not that long. So for this year, I still expect that reversion to be stay within this kind of range level. But hopefully, by the time when all the supply glut have sort of been absorbed by the market, I think then we will see a more healthy situation going forward. Kin Leong Chan: On the leverage, indeed, yes, first Q is affected by the fact that we drew on some loans for distributions. So we do expect, over the next few quarters, some money to come back as we extract dividends from our assets in China. So that's something to look out for. In terms of for acquisition, what's our limit? I think generally speaking, yes, the S-REIT environment, although MAS guideline is 50%, most S-REITs will try to contain themselves within 45%, right? And I think that we are now about 41%. So different REITs have different level of gearings. Also a little bit -- we have to look at it a little bit with regards to the -- maybe the cost of debt as well. I think our ICR is still quite healthy, right, a good buffer above the 1.5x required by MAS. So I think generally speaking, our financial metrics still look quite stable, yes. So that will be how I think about basically the leverage that we can take on. Xiuyi Ng: The next question is from [ Joell ]. Unknown Analyst: I just have two questions. The first is regarding electricity prices. I noted from your AGM Q&A is more impacted by coal prices rather than oil prices. I believe coal prices is probably up about 15% higher year-to-date. So I'm just wondering what is CRCT doing? Any proactive actions to handle the higher electricity costs going forward? Kin Leong Chan: Okay. That's the first question. You Hong can take that. I think main thing is basically electricity trend in China as well as I think maybe you can talk about our ability to cut electricity consumption at the ground. Yes. Hong You: I think for the electricity price so far, based on our survey, it has not been affected by the Middle East situation. In China, generally, I think we have seen news that oil price, the gasoline price has gone up, but not the electricity. So I think the government also have -- would want to keep that stable for obvious reasons. So I think that's number one. I think for the ways to reduce consumption, I think this is -- has been always something that we have discussed and hopefully drive. Along -- over the years, I think we have also tapped on, [ for example ], the automation or data analytics to actually help our technicians to be able to drive the efficiency on the same chiller, same electricity level. Of course, the weather -- sometimes weather conditions fluctuate. So I think that can only help. But from our point of view, I think we do what we can in terms of equipping our technicians with smarter and better tools to analyze and to drive the unit rate down. The other thing I may just want to share a little bit that I think this is still [ probably ] coming. I mean we are trying to source our electricity, a portion of it from green renewable sources. In China, some of the cities, this has become available at a rate that's equivalent, not more expensive than the equivalent nongreen energy. So I would say so far, we have been sort of procuring a portion, I think, around slightly above 10% of our energy from the green sources. So I think this is something that we are also watching and experimenting without increasing our costs. Unknown Analyst: That's quite clear. My next question is regarding new leases versus renewed leases. Noted that roughly it's 40% new lease, 60% renewed lease across all your segments. Is there a preference? And also a follow-up on that, any incentives that you're giving on the ground? Kin Leong Chan: You Hong? Hong You: Sure. For retail, I think we would generally like to see a healthy level of renewals, right? It ranges between -- or rather new brands, I would say, right? New brands inject new vibrancies and interesting ideas to the malls. So I think between 40, 50 of new brands is actually quite common. We have seen before, right? In times that's a bit more challenging, of course, then we tend to renew more. But if we have a choice, we do want to get new brands in. That's retail. But for Business Park and Logistics, I think our preference is more sticky tenants, right? So I think generally, the pie will shrink to more fit, I would say, renew, right? So I think usually, we see that figure between 60 to 70 renewal, another 30 to 40 in the new tenants, I mean. Okay. Of course, we do what we can to drive up occupancy and rent. But I think generally, we are also watchful of not going over the line. So I think generally, our save on core, the rent free or -- basically, we do save on core market type of rent-free on incentives. It's quite typical that we have first 1 to 2 months that's for renovation and it could also be some of the market where it requires, it can be about 1 month of rent free that also happens, right? So I think that's something that we will do. Kin Leong Chan: And apart from incentive, I think what we want to do is to be responsive to the tenant needs, right? So in some situations where they need additional power, they need better transportation. We may upgrade power, we upgrade lease for them if the tenant is serious and a strong tenant, right? So these are the kind of things that we do take into consideration. Xiuyi Ng: We have a final question from Vijay. Vijay Natarajan: I have three quick questions. Maybe I'll take it one by one. Firstly, in terms of this Middle East conflict, have you seen any impacts to your portfolio of tenants? Is there any tenants who are exposed to energy, logistics, shipping, et cetera, in Business Parks, Logistics that you are -- that is facing some pressure. And from my understanding, China has a cash flow issue. Are you seeing in terms of rent collection, has this been improving and your rent collection is much more on time at this point of time compared to 1 year before? Kin Leong Chan: Okay. I think for the Middle East conflict, one thing that has really stand out for me is China seems to be quite well controlled in terms of the effect. Utilities, I think You Hong has covered. But that's really tip of the iceberg in terms of they are owning self-sufficiency. Supply chains are being disrupted. But by and large, what we hear in China is things are still available, right? And then in terms of businesses, direct businesses to our tenants, retail, there's actually no issues because just like in last year, when we talked about tariff war, most of our retailers, many of them are local buyers, local sellers, basically selling to local crowd, buying from local producers, right? And the international brands, they do not typically ship from Middle East. Middle East is not a merchandise producing area, right? So retail is not that big an issue. Business Parks, there are a handful who have businesses or sell particularly to Middle East, but that's not a big portion of their business. Nobody really went out of business because of that in our Business Parks. And in terms of Logistics, again, our logistics portfolio, maybe half of it service domestic distribution, right, half of it export facing that's in Shanghai, right? Again, not much to report in terms of disruption from Middle East because they don't have that much business going with Middle East, right? What we do say is second order impacts you cannot ignore, which is in our outlook slide, because petrochemicals, which come from Middle East are a feedstock to some manufacturing inputs for some of the factories in China, for example, plastics and so on and so forth, right? But as many economies and China watches would also inform even that China have a solution because actually, you can produce the same petrochemical with coal, right? It depends on how much in terms of cost of production, basically. But with the prices that the petrochemicals from oil is -- we are talking about, it's making the coal chemicals quite actually a good alternative. So economy and production base is as diversified as China. Actually, we had just one economist spoke to us yesterday. In fact, you would say that strategically it favors China to withstand the pressures that come from the Iranian war. So that's my take on it. Sorry, the second the arrears. No problem with arrears. Hong You: Yes. We don't see any major change in pattern in terms of arrears. Vijay Natarajan: Okay. My second and third question, okay, earlier, you touched upon acquisitions. Maybe can you touch upon which segments you would be looking at and what kind of yield benchmarks you would be looking at for potential acquisitions ahead? And third question is, is there a trend of retail tenants signing a slightly longer lease because I noticed your WALE going up a bit. I mean are the tenants trying to lock in the rents at these levels in the retail segment, especially? Kin Leong Chan: Your first two questions, I will answer. Maybe You Hong can take the last one. The type of assets we're looking at and then the new levels, okay? So actually, we spoke about it, the type of assets that we are looking at. Today, we have 3 asset classes, retail, business park and logistics. We are more focused on the more defensive part, which is retail, right? 70% of our portfolio is in retail. We look at the trends, retail have been more resilient, particularly our sort of our subset, which I call bread and butter, malls, right, not the luxury malls, but maybe more the middle market ones. We are looking more in terms of that segment. But that doesn't stop us from looking at other asset classes. For example, while business park in general are not doing so well, you would have because of the manufacturing drive in China, right, would have seen factories actually doing quite well. And on and off, there may be industrial properties that are not so much decentralized offices, but more of the R&D, more catering to actual production, right, that may be available for sale. Those if they are at the quality of our Xinsu portfolio, which have been very, very strong, right, certainly is something that we can look at. But as a priority, of course, we are -- I think we want to stick to where we add the most value, which is really retail, right? So that's one thing that I can share. The other thing in terms of yield, I think it's very simple. As a REIT, we want to look for something that is yield-accretive. Today, our trading yield is about 7%. That's one way that you look at it. The last deal that we sold for our retail mall, we sold it at NPI cap of about 6-plus percent. So definitely we want to beat those metrics, right, in order to basically, over time, improve the average yield of our assets. You Hong, you want to touch on the next question. Hong You: Yes. WALE, so I don't think we have -- okay. Indeed, some of the retailers do ask for longer locking for both -- I mean, trying to sort of see that the rent is rather favorable and reasonable and also secondly to have a reasonable period of recovery of their investments, right? But we have been more careful in not lock ourselves in if we deem that the rent is [indiscernible]. So I think that will protect us and give us the chance, of course, to go back in terms of negotiating rent on a higher side when the cycle is due. So I think we don't see a big trend in having to lock in very, very long leases, fair to say that. Kin Leong Chan: The bump you see in the first probably is the 2 anchors that we sort of [ resigned ]. Hong You: Yes. Yes. Correct. Correct. Xiuyi Ng: Thanks, Vijay. And thank you, everyone. Since we have no further questions, this concludes our session for today. Please feel free to reach out to me or my team if you have any questions. Thank you all, and have a good day. Kin Leong Chan: Thank you.
Bertina Engelbrecht: Good afternoon. Thank you for joining the webcast of our Interim Results for the 6 months ended 28th February 2026. I'm Bertina Engelbrecht, Chief Executive Officer of the Clicks Group. I am joined by Gordon Traill, our Chief Financial Officer, who is in a completely different time zone. Gordon and I will take you through the presentation of our interim results, and we'll respond to any questions you may have after the conclusion of our presentation. This slide sets out the outline of our presentation. I will, as usual, kick off with a review of our performance of the past 6 months. Gordon will then present an overview of the financial results. I will walk you through the trading performances of our operating business units, starting with Clicks, followed by UPD. And I will then close with the outlook for the group. Please feel free to submit any questions you may have via the webcast platform during or after the conclusion of our presentation. Sue Hemp will read out your questions to which Gordon and I will respond. I will now take you through the review of the period. It has been a tough 6 months. Despite some interest rate relief and signs of a slow recovery in the economic environment, trading conditions remain constrained, especially for middle-income households. Competition intensified as new players entered the market. Traditional players extended into health and beauty categories, giving rise to heightened levels of promotions aimed at capturing a greater share of the consumer's wallet. Over the period, we experienced lost sales exacerbated by low availability due to the rollout of our warehouse management system in the Western Cape DC over the peak trading period. We invested in the expansion of our store and pharmacy network, technology enablement and progress both our people and sustainability agenda. The number of pharmacy drop-ins were, however, lower than planned. In the period under review, we opened our 1,005th store and our 797th pharmacy at Kidd's Beach in the Eastern Cape. We also increased our primary care clinics to 226 as we deepen partnerships with medical funders. Our ClubCard customer membership increased by 800,000 new members over the period to 12.9 million active members and contributed 83.7% of retail turnover. We continue to be recognized as one of the strongest brands in South Africa. UPD delivered strong growth in its wholesale channel and exceptional growth in preferred bulk contracts. And whilst UPD managed every element of its income statement well, it really managed expenses in a disciplined manner. UPD extended its wholesale fleet of pharma-compliant electric vehicles, most of which have been assigned to our owner drivers. This initiative not only supports our cost savings initiative, but also our sustainability agenda. We remain strongly cash generative and in accordance with our capital allocation strategy, bought back ZAR 752 million worth of shares to the benefit of long-term investors. In the period, diluted headline earnings per share increased by 8.1%, and we increased the interim dividend by 8.4%. I now hand over to Gordon, who will take you through our financial results. Gordon Traill: Thank you, Bertina. If we consider the group's financial highlights, group turnover increased by 7.4% from the period. Retail turnover grew by 5.4% and UPD's reported turnover increased by 13% with a strong performance from wholesale and our preferred bulk contracts. The group trading margin at 9.1% was maintained despite increased promotional activity and faster growth of GLP-1s. The diluted headline earnings per share for the group increased to ZAR 6.53 per share, up 8.1% on the prior period. In the 6 months, ZAR 1.9 billion was generated in cash from operations after working capital. The group's return on equity at 45.7% has remained strong. To note that during the period, we carried out buybacks of ZAR 752 million, which will benefit return on equity and headline earnings per share for the full year. And the dividend declared for the period has been increased by 8.4% to ZAR 2.58 per share, slightly ahead of headline earnings. Retail sales increased 5.4% with same stores growing 3.1%. The warehouse management system implementation at our Western Cape distribution center had a short-term impact of ZAR 175 million on sales. This reduced sales growth by 0.9% in retail. The distribution center is now working optimally and is capable of picking as much as our Centurion distribution center, which is 1.5x its size. The distribution business continued to experience low selling price inflation of 1.5%. Nevertheless, wholesale was up 7% and our preferred bulk distribution business up 31.1% performed strongly. Sales to Clicks were up 11.1%, while hospitals were up 2% for the period. Bertina will elaborate on the detail of each business' performance later in the presentation. This slide reflects the group's total income, which has increased by 6.5% for the period. You can see the total income margin in retail was 70 basis points higher due to the growth in private label volumes. UPD's total income margin was down 50 basis points to 8.9%, which was due to the lower SEP increase. Good performance in preferred bulk distribution contracts at a lower margin, partially offset by 2 distribution contracts that were not renewed in the prior year. Overall, the high growth in the distribution business at a lower margin has resulted in the group total income margin being slightly lower by 30 basis points. The cost base in retail increased in the period, partially due to the wage increase of 7%, higher costs from the WMS implementation to ensure service levels in store were maintained and pharmacy openings. Retail costs grew overall by 6.1% with new stores contributing 2% to the cost increase with the lower rollout of stores in the first half. Over the last 6 months, we have added 14 Clicks on Unicorn stores and 17 pharmacies to the group. The IFRS 16 interest charge increased as a result of the number of renewals in the period. Comparable retail cost growth overall was well controlled, up 5.4%. In our distribution business, depreciation increased as a result of investments in the warehouse systems. Employment costs were well controlled and the increase reflects IT contractors being taken on and moving from other costs. Taking other costs and employment costs together, costs increased by 6.8%. Further investments in electric vehicles have been made, and these will be fully rolled out in the second half. Operating costs overall were well controlled. Retail grew trading profit by 11%, with the margin slightly up from last year as the Intragroup turnover elimination, as a result of the unwinding of the Unicorn unrecognized income is taken into account in the prior year. UPD's trading profit increased by 7%, with the trading margin decreasing 10 basis points due to reasons outlined earlier. Overall, the group's trading profit increased by 7.4% to ZAR 2.3 billion for the period, driven by a good performance in both businesses. Inventory levels for the group were higher by 4 days at 89 days. Retail stock days were 8 days higher than last period and increased ahead of underlying sales. Inventory was driven by higher purchases after recovery from the warehouse management systems implementation and investment in new stores and pharmacies. Retail net working capital days increased by 2 days. UPD inventory days at 49 days were 3 days lower than last year and well controlled. Net group working capital decreased by 2 days. This slide shows the movement of cash during the period. As you can see, we started the period with cash of ZAR 3.3 billion reflected in dark blue on the left-hand side and ended the period with ZAR 1.2 billion on the right-hand side of the slide. The group generated cash of ZAR 3.2 billion highlighted in green before the repayment of lease liabilities amounting to ZAR 456 million, working capital outflows of ZAR 1.4 billion and tax payments of ZAR 651 million. ZAR 311 million was reinvested in capital expenditure across the group. Of this amount, ZAR 186 million was invested in new stores as well as 34 revamps and 15 pharmacy drop-ins and ZAR 125 million was spent on IT and other infrastructure. We returned ZAR 1.5 billion to shareholders during the period through dividends and carried out ZAR 752 million of share buybacks. CapEx of ZAR 1.3 billion is planned for the full year. ZAR 662 million will be invested in our stores and pharmacies. This will include 40 to 50 new Clicks stores and pharmacies and 80 to 90 retail store refurbishments. ZAR 594 million will be spent on IT systems and infrastructure. ZAR 88 million of this amount will be invested on UPD IT and warehouse equipment, and we will invest the balance of ZAR 506 million in retail IT systems, including the further rollout of the warehouse management system and online systems. We will continue to grow our retail footprint, grow the number of pharmacies and continue investment in our IT systems. I will now hand over to Bertina. Bertina Engelbrecht: Thank you, Gordon. I will now take you through our trading performances in greater detail, starting with Clicks and UPD. Turning firstly to the retail performance. This slide reflects the retail sales growth and category contributions. Clicks delivered a muted performance with turnover up 5.4% for the period. This was due to intensified competition, a slower rollout of new pharmacies and the short-term impact of the WMS rollout. Sales turnover in comparable stores was up 3.1%, inflation slowed to 2.3% and volume was up just under 1%. Our 60 stores located in neighboring countries showed pleasing growth of 8.8%. I will now briefly turn to each of the categories on this slide. Our positioning as a trusted healthcare provider anchors on customer value proposition. Pharmacy remains a key driver of footfall traffic, repeat visits and market share gains. Pharmacy performance has been driven by the growth in chronic scripts and select therapies such as diabetes, which also influenced the margin mix. Improved availability supported the positive performance in Schedules 1 and 2 with skin health up 9%, preventive health up 13.8% and lifestyle supplements up 18.4%. The strong growth of GLP-1s is continuing with our extensive pharmacy network providing a clear competitive advantage. Front shop health performance was muted but improved margin. Branded supplements grew by 18% and health foods by 20.1%. Private label ranges such as Smartbite Food and OptiHealth, which is our premium supplements range continue to outperform. We launched 70 new OptiHealth stock keeping units and are launching further range extensions this month. A sales decline of 1% in baby reflects the impact of low availability and high deflation in diapers and accessories. We actively defended our market share and improved gross margin due to a higher private label contribution of 29% to baby sales and 56% to the category margin. Although the beauty category remains heavily competed, the biggest adverse impact was due to the WMS implementation in the Western Cape, which is our strongest beauty node. We continue collaborating with suppliers to elevate service levels in our beauty malls and fragrance counters, resulting in those stores delivering results in line with plan. Personal care delivered a strong performance, up 7.9% despite the substantial impact of lost sales. Our partnerships with key suppliers delivered exceptional outcomes. In the hand and body category, sales grew 12.3%, driven by Vaseline, Nivea, Dove, Cetaphil and Sanex. In the body freshness category, our exclusive brands grew 26% as we sold 20 million roll-ons, resulting in over 40 million very fresh armpits. Promotional sales up 12.8% was instrumental in the performance of the personal care category. Although performance in general merchandise was up just 2.9%, we achieved category share gains across cotton and small household appliances. This supports differentiation and improves the margin mix. Interestingly, over the 1-week Black Friday promotional period, we sold the equivalent of 6 months' worth of Toni&Guy hair straighteners. Turning to market shares. Despite the muted sales performance due to intensified competition, low availability and some supply out of stocks, I am proud that we gained market shares in retail pharmacy, personal care and small household electrical appliances, whilst actively defending our market shares in baby and haircare. The retail pharmacy market share gained share to 24.9% despite the delay in the issue of new pharmacy licenses. We nevertheless opened 17 new pharmacies in H1 and have a steady pipeline of licenses. This will enable us to deliver on our targeted number of pharmacies for this year. Front shop health declined by 80 basis points due to supply constraints in core lines, some manufactured product recalls and increased competitive pressure. Despite competition, we actively defended our baby market share with standard gains in baby ready-to-drink up 460 basis points and baby wet food up 140 basis points. We maintained our market share in infant milk but declined in baby diapers, which was down 30 basis points. Our market share loss of 100 basis points in skincare is due to the double-digit decline in a major brand in which we have a substantial share that experienced poor availability and lack of innovation. In response, we have embarked on range and space optimization initiatives and are also reinforcing service levels in our beauty malls and fragrance counters in collaboration with suppliers. We recognize the role that is growing of digital beauty sales and are investing in our e-commerce platform and mobile app to drive personalized customer engagement. We defended our haircare market share, gaining 10 basis points with strong gains in shampoo, hair colorants and hairspray. Personal care gained 60 basis points with strong gains in hand and body, up 80 basis points; oral health, up 60 basis points; and body fresheners up 70 basis points. The gain in market share of 150 basis points in our legacy category of small household electrical appliances is accelerating across every subcategory and every measurement period. Standout gains were recorded in beverage makers, up 300 basis points; food makers up 430 basis points and indoor cooking up 140 basis points. Great Value as a key brand pillar has sustained the group during tough economic conditions such as we are currently facing. Our strapline, "feel good, pay less" and our promotional campaigns resonate and drive shoppers to our stores and our online platform. Promotional sales were up 8.1% and contributed 47.8% of turnover, confirmation of the consumer response to value. In pharmacy, we deliver value with lower-cost generic medicines up 6%, accounting for 58% of sales by value and 72.1% by volume. The weaker value growth of generics is due to the surge in demand for GLP-1 products. In the past 6 months, we returned ZAR 527 million in cashback to ClubCard members to reward them for their loyalty and to ease financial stress. The competitive landscape is evolving due to new entrants and traditional retailers extending into product categories to capture a greater share of the customers' wallet. Competitors are forming novel strategic partnerships to enhance the customer experience. They are also investing in data capabilities to support personalization aimed at shifting customer behavior and to develop targeted loyalty mechanics that enable more precise price investment. We have an African proverb that states, "if the drum beat changes, the dance must change." We have recognized the need to adapt to the new competitive reality whilst remaining firmly anchored in affordable, accessible health care, supported by a [ fit-for-all-types ] customer loyalty program and a focused private label and exclusives portfolio. In fact, our private label and exclusives portfolio is a key strategic pillar. It mitigates against the margin impact of increasing our share of pharmacy, creates a clear point of differentiation based on consumer trust in the quality of our brands and enables us to maintain our total income margin despite competitive pricing pressures. Over the period, we sold 110 million units of private label and exclusive brands. A fun fact is that we sold enough toilet paper rolls to circumnavigate the earth 100 times. The muted performance of private label and exclusives up 4.6% is because 60% of our bath and body sales are accounted for during the peak trading period when we were most impacted by the WMS implementation. We are though reaping the benefits of working with local suppliers to develop ranges in South Africa. This supports the national agenda to drive localization and employment. Our locally produced ranges are continuing to perform exceptionally well with Expert ranges up 35%, Clicks Skincare Collection up 11% and Smartbite food ranges up 40%. Our Made 4 Tots ranges grew 75% due to range expansion and improved formulations. We also pursue differentiation through our service offering and in-store elevations. A big focus in this year will be on elevating our mens' grooming, informed by the overwhelming positive sales impact of our [ Grow Nation ] campaign and strong growth of our Sorbet Man range, up 29% I am excited at the prospect of what our in-store electronic elevation, which is strongly supported by suppliers, will achieve in elevating the customer experience whilst also growing both sales and income. Despite its challenges, The Body Shop remains our fourth most profitable exclusive brands. The improved performance of the newly introduced ranges and improved availability is therefore encouraging. The investment in the premium ARC beauty retail brand continues to add value with the ARC customer spend totaling ZAR 331 million, up 21% over the past 12 months. This is because for every ZAR 1 in cashback that the ARC customer earns at ARC, they spend ZAR 5.72 at a Clicks store. Our loyalty program is a primary demand driver. It underpins customer affiliation, enabling us to defend and grow market shares. The Clicks ClubCard loyalty program, with its strong affinity partners is our most valuable asset, with 12.9 million active members who contributed 83.7% of sales. Over the period, we added a whopping 800,000 new active ClubCard members. Encouragingly, it is the most used loyalty program in the mass market and among the youth. The ClubCard program played a significant role in easing financial strain on consumers during tough times, which is the reason we moved to monthly cashback payments. In the period, our cashback rewards of over ZAR 0.5 billion certainly brought welcome relief to ClubCard customers as the benefits of our affinity partnership with Engen and FNB's eBucks program to single out two. E-commerce, up 17.9% for the period, accelerated strongly in quarter 2, driven by increasing mobile app adoption, personalization enabled by loyalty data and improvements in our fulfillment execution. Our app shoppers contributed 46.5% of online sales with a Click and Collect option contributing 31% of online sales. We fully implemented LEAP, the only modern pharmacy management system in South Africa across all of Clicks. In response to market demand, we are now marketing the LEAP pharmacy software system to third parties. Over the past 66 months, we have, on average, increased our store count by just over 3 stores per month in pursuit of our medium-term expansion target of 1,200 stores. At the half year, we closed on 1,003 Clicks stores, 795 Clicks pharmacies, 2 UniCare specialized pharmacies and 226 primary care clinics. A week ago, we opened up our 800th pharmacy in Oudtshoorn, a rural town which is roughly 5 hours drive outside of Cape Town. Our store location strategy, which remains premised on convenience and proximity to customers is key to our consistently broad appeal. Over 53% of households reside within 5 kilometers of a Clicks pharmacy. We increased the number of primary care clinics to 226 and are also extending our virtual doctor network. In UniCare, we are extending space to doctors and partnering with medical funders to provide first-level triage after hours. We are opening another UniCare greenfield site at the end of this month and completing another UniCare acquisition in May. We remain strongly aligned to the national health care agenda and committed to providing affordable, accessible health care to all. 252 of our convenience format stores are located in lower LSM areas accounted and accounting for 23.4% of turnover. That completes the review of the retail business. I will now provide an overview of our distribution trading performance. Wholesale turnover was up 7%, boosted by the improved purchasing compliance from its core wholesale customers. Clicks accounted for 60.5% of UPD's fine wholesale turnover, up 11.1%. Clicks has improved purchasing compliance of 98% is in line with our internal targets. This is positive for UPD, but less so for competitors who benefited from Clicks byways in prior periods. UPD will continue to benefit from the growth in Clicks as it increases its pharmacy count in H2. The hospital channel remains constrained by controlled supply rather than demand as they manage their ethical generic mix and inventory levels. Purchasing compliance though has stabilized due to improved service levels. Over the period, UPD's market share of the independent acute private hospital channel improved from 30% to 33%. The dedicated hospital key account management structure, which we introduced over a year ago is yielding positive results. The stabilization of Link pharmacies is due to a relaunched Link offer and dedicated resourcing. The revised structure offer to independent pharmacies is beginning to stimulate sales in that channel. Whilst we are pleased with the improved trading performance, expense management, efficiency extraction and other income gains, there remains room for improvement. The delivery of the strategic initiatives outlined next, together with superior service to all of UPD's customers, will deliver the recovery of UPD's wholesale market share. Quality, regulatory compliance and service excellence underpins UPD's performance. Operational stability with the on-time and in-full metric at 96.4% and customer in-full rate at 99.3% resulted in improved purchasing compliance for fine wholesale customers, whilst preferred bulk contracts delivered a truly stellar performance. However, the loss of the 2 bulk contracts adversely impacted total managed turnover. Value growth continues to be impacted by the higher volume growth of generics, which contributed 76.9% to UPD's fine wholesale sales. Our strategic initiatives are progressing broadly in line with plan. I will highlight a few of these. Medical consumables remains a strategic growth opportunity. The acquisition of the medical consumables business to fuel this opportunity has been finalized. We have completed the integration process. The sales targets are being pursued in a disciplined manner, and we have extended our inventory pipeline to ensure that we have the requisite stock mix for scaling this in our core hospital channel as well as the private sector in Southern Africa. In December, a cross-dock facility located at the retail DC became fully operational with the early benefits already evident. This cross-dock facility enables us to service our core wholesale customers in the Pretoria-Noord much more effectively, which will also reduce byways to competitors. In a low-margin business such as UPD, a relentless focus on efficiencies and expense management is critical. Over the past few years, we have worked on route optimization and on reducing our fuel costs through our electric vehicle conversion program. By the end of this month, 86% of our wholesale fleet will comprise of EVs covering 74% of total kilometers covered. Over the past 12 months, fuel as a percentage of transport costs has already reduced from 40% to 35%. UPD's strong top line momentum accelerated in quarter 2, driven primarily by preferred bulk sales. The business will benefit from a stronger Clicks pharmacy opening program in half 2, improving Link purchasing appliance and the ramp-up of medical consumables. Profitability will remain under pressure. Hence, the UPD team are focusing on maintaining service excellence, working capital improvement and disciplined cost management. This completes the review of our trading performance for the period. As always, I am inspired by the proud brand ambassadors in our company. The WMS impact tested our resilience, but our people in our stores, DCs, IT, regional offices and HQ were unwavering in their commitment to getting us through that period. On behalf of our Board and the executive teams, I would like to thank each employee, team and their families for their individual and collective contribution to our results. I will now conclude the presentation with the outlook. It would appear that the only constant is change. In early January, most economists were cautiously optimistic about the economic outlook for South Africa. Because South Africa imports most of its crude and refined oil products, any increases in fuel prices will have a knock-on effect on the cost of transport and food. In turn, this will adversely impact inflation and interest rates, leading to depressed consumer spending. We too will be affected by fuel price increases. The investment to convert more than 80% of the UPD wholesale fleet to EV is already delivering fuel cost savings. This will enable us to mitigate against a fuel surcharge for our customers whilst also supporting our sustainability agenda. In half 2, we will also be absorbing the impact of the very low SEP increase, primarily in UPD but also in Clicks. We, though, have a proven capability to trade positively through constrained trading conditions. This is because of our fiercely loyal ClubCard customers, extensive private label and exclusive portfolio and our strong market shares in defensive retail categories. The investments made in ARC and Sorbet are attracting new customers to Clicks. UniCare is extending its service offering by creating space in its stores for doctors. The colds and flu season lies ahead. In May, we will trial our on-demand, over-the-counter medicine delivery service, which will be fully pharma-compliant. We will achieve our target of opening 40 to 50 new stores and 40 to 50 pharmacies this year based on data-driven insights. Despite some delays, we will open 2 additional UniCare format pharmacies by the end of May and one more by the end of this year, taking our total UniCare count to 5 by the end of this financial year. We are on track to pilot 10 clearly differentiated concept stores in this year. UPD has a clear, targeted plan to grow sales of its higher-margin medical consumables business in its core hospital channel and in the Southern African private sector. Scale is important because it provides the opportunity to pursue efficiency gains. Earlier, I shared some of UPD's strategic initiatives. All our retail businesses and shared services teams are executing plans aimed at stimulating sales and margin improvements as well as sustainable cost management initiatives to create the necessary leverage to enhance profits. We wrestled with the earnings guidance because of the high levels of uncertainty and volatility as a result of geopolitical events, which will impact on inflation, interest rates, consumer spend, supply chains, product margins and costs in the months ahead. These are the factors that weigh on us in setting on guiding for an increase in diluted headline earnings per share for this financial year of between 4% and 9%. That concludes the presentation. Thank you so much for taking the time to listen to us. We are available to take your questions or your comments. So I'm now handing over to Sue Hemp, who will facilitate the Q&A. Sue Hemp: Thank you, Bertina and Gordon. We have a number of questions here from Michael de Nobrega at Avior Capital Markets. Firstly, competition in the drug retail space appears to be intensifying, particularly around loyalty programs. How is the group thinking about maintaining its competitive position? And could this lead to any evolution of the Clicks ClubCard offering over time? Bertina Engelbrecht: I'll take that question. Michael, thank you very much. That's an excellent question. First, I guess I'm buoyed by the increase in our pharmacy market share. That's probably the clearest indication of whether or not we are winning against the heightened competition. But what will be in addition to that? The first is we are excited at the prospect of trialing our over-the-counter on-demand medicine delivery service as we've said in May month. Secondly, we are going to be hitting our target of up to 60 pharmacies in this financial year. Very well on track of this with this, and we already have a fair number of those licenses already in hand. Thirdly, we continue to see the exceptional loyalty of ClubCard within pharmacy. When we talk about ClubCard, 83.7% of total sales. In pharmacy, they're [indiscernible] over 87%. And then fourthly, we are extending UniCare, which is really a specialized pharmacy format, and we are hopeful that by the end of this year, we will get to 5. Definitely, we know that by maybe will get to 4. Sue Hemp: Second question. As the WMS will be rolled out to the Durban DC, what key lessons have you taken from the Cape Town implementation? Should we expect any further disruption during the rollout? Gordon Traill: I can take Durban. In terms of the rollout to the Cape Town, it's not a start-up from 0 again. So any bugs are operational issues but are being earned out. I think the second thing to bear in mind is that Cape Town is, in terms of complexity, our most complex distribution center, and we've tested every aspect of the warehouse management system over the last few months. And we've put in -- moved people from Cape Town to take the Durban staff through how to work with that with the new system. So there's very good change management. So in short, we are not expecting to experience the same level of issues that we had with Cape Town, and it's at a quieter part of the year. I think the last aspect to just bear in mind is the relative size of the DC. So Durban is about 1/3 of the size in terms of Cape Town in volume. So there's a very good plan to mitigate or alleviate some pressure when we go live on the stores that Durban serves. So we expect that Durban the next DC will be successful. Bertina Engelbrecht: So if I may, maybe just add to some of that because I think, Michael, what you're asking is what have we learned? The first, I think that we have learned is take a bit more time to really consider if you've had a delay, where do you go? So complexity of the distribution center, I think, will be one of the key factors that we take into account. And as Gordon said, Durban is the least complex of all of the retail DCs. The second one is have a plan B but also a plan C. The third one, I think, is that we've already put in place work towards our micro-fulfillment centers, which will alleviate the pressure on the Durban DC when we go live. And then fourthly, part of our plan is that if anything were to go wrong, which we do not anticipate at all because we've been stable now for 2 months flat is that we are able to serve our Durban customers -- stores sorry, from both Lea Glen and then also via Cape Town, the Eastern Cape part, which is really serviced out of the Durban DC at the moment. Sue Hemp: His third question. Could you maybe give us a bit of color on the key assumptions, particularly around diesel prices and inflation? Gordon Traill: Well, we did outline the impact of what the diesel price increase is going to be on our bottom line. But I don't think that is the -- that is an impact, but it's not the major impact. It's also what price increases that suppliers are going to be looking to pass through to ourselves and the impact on the wider economy because it's the consumer has less money in the pocket. It's how much are they going to pull back on spend. So just now inflation remains fairly muted. We expect it to go up in terms of the cost price inflations that were passed through or that suppliers want to pass through, we'll always negotiate for a period of time, but it is going to have some -- I think the more worrying impact is the general impact on the consumer going forward. Sue Hemp: His fourth question, the update mentioned rollout of on-demand OTC medicine delivery from May. Could you provide more detail on the scope initial regions? And how do you see this scaling over time? Bertina Engelbrecht: So I mean we're going to do the rollout trial from May, well on track on that. Much of the work, Michael, has been around really understanding the -- how we ensure that we are compliant from the very beginning. We will be first to market with this. And so I think it's important that we do that. In terms of the mechanics of all of that, I mean that's what the team are currently firming up on. When we've got a bit more detail on that, we will let you guys all know about that via Zoom. Sue Hemp: Then his fifth question and the last question of this session, could you elaborate on the delays in obtaining pharmacy licenses and how you expect approval time lines to evolve going forward? Bertina Engelbrecht: How long is a piece of string? There were two things really. I mean there are resource constraints within both the SAPC and the Department of Health. Just in terms of the inspectors, you need a physical inspection of the site. The second one really is that there was a bit of an irregular meeting schedule for some reasons that were completely understandable, such as, for example, tragedies in some of the family members that sit on that licensing committee. But we are really hoping that the meeting schedule will be more regular going forward. The important thing, I think, at this stage is to note that we have a fair number of the licenses to support our rollout program of pharmacies for the remainder of this year. Sue Hemp: And we have two questions on the same topic from Anda Tyali from NVest Securities and Ya'eesh Patel from SBG, both asking for some insight on the retail post-period trading. Has it improved from a circa 3% print from the last 6 weeks of the first half? Gordon Traill: Bottom line is, yes, it has improved from the 3% print. It's still not where we would -- we always want it higher. But it's still fairly early since we've introduced the additional ClubCard rewards at the end of February. So on the deep cut deals, which has been performing particularly well for the products that we put on promotion there, and we're seeing that our suppliers are quite excited about that and wanting to speak to us more about support around those sorts of deals. That's definitely ahead of the 3% that we saw in the last 6 weeks. Bertina Engelbrecht: And maybe then just to add to that. I mean we haven't really had a high level of new store openings since the half. But today, for example, we're going -- we're opening our doors today. I think between -- I think 5 of them today. UniCare actually goes next week on the 28th, our second -- our third UniCare store opens next week on the 28th. Sue Hemp: So you partially answered the first part of Michael Jackson Bank of America's question, which is how is your rewards program performing since implementing changes in Q1 and should we expect an increase in promotional cadence for H2. But he also asked, will this impact gross margin negatively in H2? Or can you offset this by growing private label further? Bertina Engelbrecht: Partially, the offset will always be an ongoing private label further, but it's also going to be about how you use the revised ClubCard offer in a much more selective way, as opposed to broadly. So that's some of the work that the team is looking at the moment. Sue Hemp: Ya'eesh Patel from SBG asks another question. Retail wage increases seem quite high in the context from moderate CPI for now. What led to such a high negotiated increase? Bertina Engelbrecht: It's something that happened more than 2 years ago. So it was a multiyear deal. And most certainly, what we have done is that we have had discussions with the negotiation team. They commence the negotiation with the new deal, which will be implemented in July month. So the process has kicked off. Sue Hemp: Bruce Williamson from Integral Asset Management says, congrats on continued store growth and good results and a very difficult trading environment. In deciding on the split between dividends and a share buyback, what value did you put on the Clicks share? Gordon Traill: We never disclosed what that value is. We do have a model, and we base it on -- we are expected -- our forecast results. And that's put to the Board by management and approved by the Board, but there's never a number that we disclosed. Sue Hemp: Keenon Choonoo from Investec. We've answered a couple of his questions, but he says thanks for the opportunity to ask them. Front shop health growth has lagged pharmacy. Could you provide some color on the competitive pressures faced currently? Which categories and entities do these pressures stem from? Does this mean sustained promotional activity going forward? Bertina Engelbrecht: I don't think sustained promotional activity is required. It essentially has been in the more premium vitamin and supplements range, and that's the reason we're accelerating our range extensions with the within OptiHealth, which is really performing exceptionally well. I may also say, I mean, we've seen a fantastic performance out of GNC over the last couple of months. I spoke to our Head of Healthcare last night, and he had just come back from leave and he came to tap me in the shoulder and said, "Bertina, the team are working really, really very hard on this." So vitamins and supplements, I think we're quite clear in terms of what the area is, but there were -- we had some core lines that were out of stock. And those are some of the areas that we are attending to at the moment. Sue Hemp: Sorry, we're getting multiple questions on the same things. I hope we've answered people's questions. Sa'ad Chothia from Citi has asked if we can give an inflation outlook for half 2 and for FY 2027? Bertina Engelbrecht: The mirror that I'm looking at is super opaque on that one. I mean, kind of just say, I mean the reserve bank kind of signaled that you may be looking at inflation getting closer to 4% to 4.5% by -- probably by around about the end of May. It's unclear to us at this stage as to what that would mean. I mean, clearly, I think suppliers are already knocking on the doors, talking about price increases. All of us in our personal capacities, we have already had some of our domestic service providers talk to us about fuel surcharges. So I think inflation is ticking up, but it really is all going to depend on what happens to not necessarily in this country but what happens in the Middle East. Sue Hemp: Sa'ad Chothia from Citi asks if we're able to share sales and profit of the medical consumables business. Bertina Engelbrecht: There is a plan. The reason we are not talking about any shift in the guidance as far as UPD is concerned is because those plans must now be realized. And so I think it's early days. The team, I must say, have put together a really impressive plan. They've already started engagements with hospitals, both in the acute as well as within the listed hospital space. Let's just say the margin is significantly and substantially higher than what the margin would be within UPD's final wholesale business. Sue Hemp: Kgomotso Mokabane from Sanlam Private Wealth asks, private label growth was only 4.6% despite its margin benefit. What held back the growth in pharmacy private label is still relatively low versus generic volume? What are the main barriers to scaling private label opportunity there? Bertina Engelbrecht: The biggest impact on private label growth over the period was because 60% of our bath and body, which is a massive category for us. Those sales really happen within over the peak trading period. And so that was a major impact. What would we be doing? I mean the constraint in pharmacy would be there's a regulatory process that you have to go through. You will know that we disinvested of Unicorn and we're no longer applicant on any of those products. And so it's the work really that we do with the Unipharma team. in terms of making a broader range available. And there are specific categories such as mental health, which are much more challenging to shift the patient that is on an originator product. Those probably some of the feedback that I give on that. Sorry, the final thing that I was just going to say is, of course, as well, it's the surging growth of the GLP-1s which are all of originated, at this stage. Sue Hemp: Neo Ramodike from Mazi Asset Management says, should the shift to EVs at UPD be interpreted as a move to integrate electric trucks into their logistics fleet? Maybe meaning the retail business as well? Bertina Engelbrecht: Into the retail business as well. I think, Gordon, you must help me on [indiscernible]? Gordon Traill: Yes. Sorry. The trucks that used in UPD are much smaller. We are trialing EVs in the retail fleet, but just now the economics of the larger trucks versus the traditional ICE vehicles aren't quite there just yet. But it is something that we are looking at very closely because the economics in the larger trucks are changing very, very quickly. So a few years ago, the small electric vehicles probably wouldn't have been feasible for UPD, and that's just changed in the last couple of years. That makes it very attractive. And fortuitous, just now given the recent events, but it is something that we are looking at, but we're not quite there yet. Sue Hemp: [ Pieter Drost ] from [indiscernible] Fund Management says the 1,200 stores, medium-term target. How should we think about a longer-term target or runway? Bertina Engelbrecht: Look, I mean, we're going to get to around about at least 1,040 Clicks stores probably by the end of this financial year. So the target achieving the 1,002 target is in sight. And we've said once there's close proximity to that target, we will be providing an updated target. So definitely, there's a clear understanding in our business that, that is not the final target. We will be providing that target upwards closer to reaching the target itself. Sue Hemp: I have a few -- more questions Kgomotso Mokabane at Sanlam. Has the move to a monthly ClubCard cashback changed how you think about promotions and margin management? Also from a customer perspective, what has been the impact on customer frequency and basket size? Bertina Engelbrecht: The cashback monthly payment cycle was really -- we did a lot of research and benchmarked ourselves. And it became clear especially in a constrained economic environment. Customers didn't have enough time to wait for 2 months before they could redeem. And so that's important, I think, to assist the customer. Actually, when we look at it, ClubCard customer contribution to sales is up. In fact, even as I speak, I was just looking at last year's, it's beyond the contribution that I outlined as of the half year period. So definitely, that change in shift in the ClubCard program does seem to be bearing fruits. Sue Hemp: The WMS impacted the DC MPS to have increased their inventory levels with double digits ahead of top line. Can you give some color on clearing inventory out and any potential impact on margins? Gordon Traill: So the inventory that was brought in was really as a result of not being able to get the stock in during the implementation. So we made a decision to push stock into the DC once things have settled down into January. So it's not a impact that we -- the inventory levels that we have shouldn't give rights to a significant need for any sort of markdown or clearance, et cetera. So it's not something that we're particularly worried about at this point. Bertina Engelbrecht: Actually, Gordon, I might make the point to say that given the price increases that we've been looking at, it would be fortuitous that we have the stock. Gordon Traill: Yes. But I think -- we didn't plan on that but it is fortuitous. Bertina Engelbrecht: We didn't plan on that but it is fortuitous. Sue Hemp: Can you give a bit more detail on the 10 differentiated concept stores you plan to pilot? Bertina Engelbrecht: Well, I mean, first of all, why would we even look at this as opposed to saying, you just change a Clicks and make it smaller. It's because we really want to be true to what the Clicks brand is all about integrated front shop and health care offering. The second bit is that Clicks really needs -- I mean, I don't think we've got some smaller stores, but I mean in an ideal world, Clicks really has a store size, probably a minimum of 500 square meters. We can live smaller, but I think it's in very specific lifestyle estates. That immediately constrains where you will be able to put this up. So we believe if we look at some of the most highly -- most densely populated areas in South Africa, where you've got massive transport hubs that those are the areas that we're looking at. And then, of course, we saw in some of the rural areas where the competitors are not. Sue Hemp: And a final question from Kgomotso or there might be some more still coming. But can you give some color on CEO succession planning, particularly in the context of the group's executive retirement policy of age 63? Bertina Engelbrecht: I think I can say I was actually checking the IR, and you didn't mention it, but the Board has asked and I have agreed that I would stay on as CEO until the end of August 2028. And we have started the process of both identifying and preparing succession candidates within the group, which obviously is [ the remit ] of the Board. Importantly, I think to say is that we've reinstated the Nomination Committee. We had the first Nominations Committee here about a week ago, and that is a primary focus of the Chairman and of the Nominations Committee. Sue Hemp: Now Neo Ramodike from Mazi Asset Management has another question. In 2023, you acquired a software company called 180 Degrees. Does this company have anything to do with the WMS? Bertina Engelbrecht: No, we did not, but it had a lot to do with a very successful project called LEAP, which is the only modern pharmacy management system in South Africa. It's really the implementation went extremely smoothly. And of course, now we've got overwhelming demand from the private sector, and we are starting to process to markets and roll that out within the private sector. Sue Hemp: Rendani Magalela from Absa CIB. With regards to UPD, you mentioned subdued performance in the hospital and independent segments. Could you please touch on the strategy to raise the subdued performance? Bertina Engelbrecht: Both in the hospitals really, it's about the difference between value and volume because hospitals are definitely managing their ethical generics mix as well as the inventory levels across their network. So that's the one part. What are we doing to try and increase our size of basket within hospitals? That's really all about the medical consumables. So the engagements have begun in terms of extending that into the hospitals. And we'll -- we are hopeful that we are making and we'll be able to make inroads. In the independent space, the team have just started about 4 weeks ago with the revised franchise offer and the way which has been communicated, and I must say the early uptake is really, really encouraging. So that's good to see that we are able to now look at arresting, not only arresting, but I think improving the performance in the independent pharmacy space. Sue Hemp: A technical question for Gordon from Ya'eesh Patel at SBG. How should we think about the growth in the finance cost line post double-digit growth over in the first half? Gordon Traill: That's really all about the early share buybacks that we did this year compared to the prior year. So the IFRS 16 cost has been coming down. So it was offset by the early buybacks we did in the first quarter. Sue Hemp: We're. We're running out of time, so I'm going to just ask one final question from Jandre Pieterse at Umthombo Wealth. What do you think would need to go right for Clicks HEPS to again grow around 13% to 14% going forward in the medium term? And what is your medium-term target for HEPS growth? Bertina Engelbrecht: Well, I think what needs to go right probably is that we get the pharmacies as expected. That's critically important because it's the anchor and the [ footfall traffic ] driver. Secondly, I would probably say it would be difficult to think that something that operationally we need to do differently, to be honest with you, because I look, for example, just a shrink, it's half of what it was a year ago. I mean, a year ago, we were already best-in-class globally. So I would have said the biggest for me would be to actually get the pharmacy licenses. The final one would be, I think, we're going to have to be pretty tough with suppliers. We've chosen where they invest disproportionately. And I don't think it's only our company. I think it's all of the other retailers that are knocking on those doors and saying, that was most unfortunate, but you long to have to give us the same. Let's see what they do. Now it would seem to me that we could go on for 2 more days with you guys. Thank you so much for the quality of your questions. We have responded to those that we have. Sue will get back to you if we haven't responded. So can I just say thank you once again for your time and all of the best.
Operator: Good day, everyone, and welcome to today's Nomura Holdings Fourth Quarter and Full Year Operating Results for Fiscal Year Ended March 2026 Conference Call. Please be reminded that today's conference call is being recorded at the request of the hosting company. [Indiscernible] Please note that this telephone conference contains certain forward-looking statements and other projected results, which involve known and unknown risks, delays, uncertainties and other factors not under the company's control, which may cause actual results, performance or achievements of the company to be materially different from the results, performance or other expectations implied by these projections. Such factors include economic and market conditions, political events and investor sentiments, liquidity of secondary markets, level and volatility of interest rates, currency exchange rates, security valuations, competitive conditions and size, number and timing of transactions. With that, we'd like to begin the conference. Mr. Hiroyuki Moriuchi, Chief Financial Officer. Please go ahead. Hiroyuki Moriuchi: This is Moriuchi, CFO. Thank you for joining us. I will now give you an overview of our financial results for the fourth quarter and full year for the fiscal year ended March 2026. Please turn to Page 2. First of all, our full year results. As you can see on the bottom left, group net revenue increased 15% year-on-year to JPY 2,167.7 billion, while income before income taxes grew 14% to JPY 539.8 billion, and net income increased 6% to JPY 362.1 billion, setting a record high for the second consecutive year. We achieved full year ROE of 10.1% on target for the second year in a row since we set our ROE target range of 8% to 10% or more by 2030. Four segment income before income taxes reached an all-time high of JPY 506.9 billion. Wealth Management and Wholesale drove company-wide earnings while both divisions achieving their highest income since their respective establishments. Wealth Management achieved growth of 23% in income before income taxes as the recurring revenue-based business model gained further momentum and major KPIs also saw substantial growth. Investment Management saw its assets under management rise by more than 50% over the year to around JPY 137 trillion, with a substantial increase in the stable business revenue base. Meanwhile, wholesale saw revenue growth across all regions and both Global Markets and Investment Banking achieved record high revenue, resulting in income growth of 21%. As for banking, it has steadily expanded its business base since the division was established and is making solid progress toward implementing deposit sweep. In view of our strong performance for the period ended March 26, we expect to pay an ordinary dividend of JPY 24 per share. This brings the annual dividend to JPY 51 per share for a dividend payout ratio of 41%. Next, let me give you an overview of the fourth quarter results. Please turn to Page 3. All the percentages I mention from here on are quarter-on-quarter comparisons. First of all, group net revenue rose 5% to JPY 577.2 billion. Income before income taxes fell 20% to JPY 107.7 billion, and net income was down 19% at JPY 73.9 billion. Earnings per share came to JPY 24.34 and ROE was 8%. While four segment net revenue rose income fell due to factors, including a decrease in the amount of profit recognized from affiliates in the Other segment as well as an impairment loss at an investee company in Investment Management. Next, please turn to Page 7, and I will present an overview of each business in the fourth quarter. As you can see in the top left, in Wealth Management, net revenue was more or less flat versus the previous quarter at JPY 133.1 billion, while income before income taxes exceeded the strong previous quarter, rising 5% to JPY 61.2 billion. The recurring revenue cost coverage ratio reached 72%, and the division achieved a high level of profitability with the margin on income before income taxes remaining above 40%, which is higher than the industry average. As shown on the bottom left, recurring revenue reached an all-time high of JPY 56.8 billion. Net inflows of recurring revenue assets remained at a high level, exceeding JPY 400 billion once again this quarter. Flow revenue was down slightly, but at JPY 76.4 billion remain high in absolute terms, second only to the level of the previous quarter as we were able to effectively support customers' need amid volatile market conditions. Next, I will give you an update on total sales by product. Please turn to Page 8. Total sales rose 75 quarter-on-quarter to around JPY 11.7 trillion. This was largely due to major tender offers totaling JPY 4 trillion. But even excluding this factor, total sales remained at a high level by product. Excluding the tender offers, sales of Japanese stocks remain high, thanks to a contribution from primary deals. Sales of bonds fell by 5%, while demand for foreign products was solid, sales of Japanese bonds fell slightly in the absence of primary deals. Sales of investment trust and discretionary investments, which constitute recurring revenue assets saw some fluctuations but remained at a high level as a flow from savings to investments continued. In insurance, meanwhile, sales of foreign currency-denominated products declined on weaker yen. Next, we take a look at KPIs on Page 9. Net inflow of recurring revenue assets shown on the top left were JPY 422.8 billion, the 16th straight quarter for inflows to exceed outflows. Recurring revenue assets at the end of March, shown on the top right, were down owing to market factors, but recurring revenue came to JPY 56.8 billion, a record high even when factoring out the receipt of half yearly investment advisory fees. As shown on the bottom left, number of flow business clients rose by around 200,000 from the previous quarter, reaching 1.74 million. Business was -- has been growing against the backdrop of high market volatility, primarily in face-to-face channels. Next is Investment Management. Please turn to Page 10. As seen on the top left, net revenue increased 42% to JPY 86.2 billion, and income before income taxes was more or less flat at JPY 18.1 billion. Business revenue, which is a stable type of revenue, was at an all-time high, owing to growth in existing business and the expansion of international business through acquisitions. At the same time, expenses related to acquired businesses and losses on impairment of our equity stake in an investee company were recognized. As an explanation of the breakdown of net revenues can be found on the bottom right. Solid asset management business in the aircraft leasing business, Nomura Babcock and Brown both contributed to the increase in business revenue, while investment gains related to American Century Investments rose quarter-on-quarter. Moving on to Page 11, we look at our asset management business as a backbone of business revenue. The graph on the upper left shows that assets under management hit an all-time high of JPY 136.9 trillion at the end of March. Shifting our focus on the bottom left, we see there were net outflows of JPY 279 billion. In the domestic investment trust business, which had inflows of JPY 816 billion, funds went mostly into Japanese equity products in the ETF category and into balanced funds, Japan equity active funds and private asset-related products in the investment trust category. In the domestic investment advisory international business, outflows came to about JPY 1 trillion, mainly from business targeted for acquisition. In line with the industry trends in the U.S., we expect funds to continue flowing from active-type mutual funds for now, but we aim to grow assets under management by boosting total sales and bringing net flows close to neutral as soon as possible with enhancements to making capabilities and expansion of active ETF SMA business opportunities. Alternative assets under management on the bottom right grew to a record high JPY 3.6 trillion, an increase of about JPY 300 billion from the end of December, of which fund inflows account for more than half. Next, wholesale. Please refer to Page 12. On the top left, you can see that wholesale net revenue fell 2% to JPY 308.1 billion and income before income taxes declined 31% to JPY 43.2 billion. Looking at the breakdown on the bottom left, Global Markets net revenue split 2% and Investment Banking net revenue fell 3%. Discussion by business line can be found on Page 13. Global Markets net revenue was down 2% at JPY 252.5 billion. Please find the middle section on the right. Fixed income revenue declined 8% to JPY 125.3 billion. In macro products, rates revenue was weak in the Americas with weak volatility rising, but rose in Japan. FX emerging revenue offset some of the weakness in rates revenue as client flows were accurately captured. In spread products, securitized products revenue remained high, mainly in Americas and fell quarter-on-quarter in AEJ. Credit revenue was unchanged despite widening spreads. Equities revenue was up 6% to JPY 127.2 billion. Equity products revenue reached a record high as revenue rose sharply in Japan and AEJ on strong financing and derivatives performance. Execution Services revenue rose in all regions, benefiting from a pickup in client activity. Please go to Page 14 next. As shown on the bottom left, investment banking net revenue came to JPY 55.6 billion, down 3%, but still at a high level. By product in advisory, revenue growth momentum continued based on involvement in many M&A deals, chiefly in Japan. The range of deals was varied and included domestic realignment, privatization and cross-border deals in financing and solutions, et cetera. ECM revenue rose slightly on contributions from large-scale CB and PO deals. Solutions business continued to perform well as it tapped demand for unwinding of cross-shareholdings holdings. Let's continue to banking on Page 15. On the top left, banking net revenue was up 6% at JPY 14.5 billion, and income before income taxes was down 27% at JPY 3.0 billion. Loans outstanding accumulated steadily due to -- during the quarter as recognition of loan products on offer grew. The investment trust balance grew, thanks to both market factors and establishment of new trust. Income fell as expenses rose, including spending on IT and a part of the standardization of business processes and recognition of taxes and public charges. We would like you to view this as an upfront investment aimed for future business expansion. Next, expenses page -- on Page 16. groupwide expenses were JPY 469.5 billion, a quarter-on-quarter increase of about 13% or JPY 53 billion. Extraordinary factors that boosted expenses include impairment losses associated with our equity stake in investee company, compensation and benefits accompanying changes to remuneration regulation and effects from changes to the method of presentation of financial statements. When these factors are excluded, we think it's evident that the cost structure in place is appropriate for the revenue growth. We aim to balance revenue growth and cost controls while making steady investment in growth. Next, Page 17 for financial position. As you can see in the bottom left, the common equity Tier 1 ratio stood at 12.9% at the end of March, down 0.1 points from 13.0% at the end of December. This concludes our overview of our fourth quarter results. In closing, we announced which -- lastly, please allow me to briefly talk about the situation related to private credit. First, our group's exposure is properly diversified and managed, breaking down our exposure in wholesale business, lender financing for private credit funds comes to about $800 million. and direct lending to SMEs comes to about $1.2 billion, while in investment management, investment holdings related to private credit come to about $400 million. Lender financing is backed by a diversified corporate credit portfolio and the credit fund counterparties are, by and large, supported by long-term capital provided by institutional investors and the like. Direct lending is diversified across more than 40 companies and investment management investments are also suitably diversified and have been performing stably. In closing, we announced reaching for sustainable growth, our vision for business in 2030 in May 2024 and set as numerical targets, a consistent attainment of ROE of 8% to 10% or more and income before income taxes of more than JPY 500 billion with the targets attained now in the span of 2 years. Great strides have been made to build the franchise required to realize sustained growth of the Nomura Group. I would like to briefly touch upon the situation as of now in April. In Wealth Management, net revenue is largely at the same level as in the fourth quarter. Uncertainty remains in the market due to geopolitical risk, but the flow of funds into products and services, assuming the long-term diversification of investments remains firm and client sentiment has been recovering. In wholesale, net revenue has been trending much higher than in the fourth quarter with equity markets rebounding sharply from the end of March and rising to new all-time highs. Client activity has picked up and equity products revenue has been strong. The rates has also been steadily monetizing client flows amid moderate market volatility. We aim to monetize business opportunities while keeping mindful of appropriate risk levels and cost controls. Your continued support is appreciated. Operator: [Operator Instructions] The first question is from SMBC Nikko Securities, Muraki-san. Masao Muraki: SMBC Nikko Muraki, I have 2 questions. First, international asset management company control. On Page 10, on the footnote, 4 years ago, investment had been made forest-related asset management investment was done and JPY 12 billion of losses have been booked this time around. Can you explain the backdrop? And on Page 11, Macquarie Asset Management. Regarding the cancellation of the agreement, there is a comment. But against the plan, how is the actual performance? That's my first question. Second question is with regards to capital, Page 17. The short question is, in the next quarter, what would be the CET1 ratio? This is the new fiscal year. So I think this is a quarter where you can quite easily leverage your balance sheet. In equity derivatives, you are taking significant credit risk and private credit, U.S. division portfolio has been increasing in the past few years, which is using your balance sheet. So what's your idea regarding the use of balance sheet? And how will that impact your CET1 ratio? Hiroyuki Moriuchi: Muraki. Then let me take the first question. First, international asset management-related question. You touched upon 2 points. The forestry asset management company, we made an investment 4 years ago. And what about the loss and the history that had led to this loss. Back then, when we made the investment, ESG -- global ESG trend was on the rise globally and in the United States. And we expected that this will become a major trend. And we were also advocating public to private, and we were trying to expand our private asset business. So those have been the objectives based upon which we made a decision to make an investment into this company. On the other hand, after the investment was made, as is well known to all of you, the ESG environment had significantly changed mainly in the United States. So that had triggered some difficulties in fundraising. This company itself, AUM is top 5 in forestry. So the health doesn't change. But in comparison to the plan we had drawn back when we made the investment, the growth has decelerated. So we had to book that based upon accounting standards, and that is why we've decided to book for impairment this time around. Carbon offset requirements from operating companies, there are funds that will be introduced and those initiatives are under study. So we are hoping to further accelerate this business in the coming months and years. So that's the backdrop. Now this company is booking profits at the moment. However, the growth of profit is slower than we had expected. And international Asset Management, your second point, net outflow, I touched upon that in the initial presentation. Against the plan, what is the current situation? That was your question. Net outflow itself. From the acquisition, U.S. traditional asset management company was the industry trend. So that had been factored into the valuation in making investments. And based upon that, what about the performance? In principle, onetime of investment or excluding onetime of costs, the original revenue and expense and EBITDA expected in the CEO Forum in December, we made a presentation at the pure earning power a quarter. So 1 quarter worth has been booked. On the other hand, -- as we mentioned on that occasion, towards integration, onetime of expenses have been booked and amortization of intangibles have also been booked. So more or less -- we are more or less in line with the original expectations. But in the mid- to long run, this net outflow will be minimized, and we have to achieve net inflow. So back when we hosted the CEO forum, active ETF transition, and we will also be making J-curve investments in order to expand the business. On your second question, CET1 ratio for the next quarter. Wholesale equity and SPPC balance sheet, use of the balance sheet. Those were the points that you touched upon. Regarding wholesale, as you know, self-funding -- based upon self-funding within the border of additional capital, balance sheet is used, RWA leverage exposure is used within that framework. So based upon the earning power, they are hoping to grow business in that quarter. But additional capital within self-funding -- additional capital is within self-funding. So CET1 ratio impact through business expansion is not that significant. And then within that, what would be the positioning of equity PC and credit business? In the mid- to long run, we want to have a balanced portfolio, and that policy remains unchanged. Of course, we want to grow equity, but regarding SPPC, we will be looking at certain opportunities, and we will not deviate from that policy and quantitative control will be in place as we try to manage our portfolio. I hope I answered your question. Masao Muraki: Then in Q1, top line performance was good. CET1 ratio will not decline so significantly and ROE will improve. Is that the right interpretation? Hiroyuki Moriuchi: CET1 ratio will not decline due to this factor. We don't think so. As you rightly pointed out, we are also hopeful that this will lead to improved ROE. Operator: Next question comes from BofA Securities, Tsujino-san. Natsumu Tsujino: Regarding personnel expense on a Q-on-Q basis, it's up by more than JPY 6 billion. But in the U.K. regulatory change, there was regulatory change. And from the third quarter, there has been a change made to the deferred compensation. So what's the impact coming from them? That's my question. And also, then in the first quarter, what is going to be the impact coming from them? Could you explain? Another question relates to global markets. In April compared to the fourth quarter, wholesale outperformed compared to the fourth quarter. In other words, I believe that's due to thanks to global markets performance and Japan equity was mentioned, and it may be the case for overseas as well. But could you speak more about geographical split, equity or FIC and something like that? Hiroyuki Moriuchi: Thank you, Tsujino-san, for your questions. Regarding personnel expense, in the fourth quarter, as you pointed out, or in the third quarter, we made the announcement, but deferred compensation change, so that had an impact. And as a result, in the fourth quarter, we booked a relevant impact. Compared to the third quarter, the impact, the amount is smaller. However, it's about the same as in the third quarter. In the third and fourth quarters, deferred compensation related expense is booked. But in the third quarter, I explained it, but there is a timing gap, timing difference in terms of bookings. So for the fourth quarter, in terms of the amount, it's smaller. And this year, the impact is going to get closer to 0. As for the compensation regulation relaxation in the U.K., I am skipping details, but it's one-off in nature. So it's similar to the difference, quite a slight in the booking timing. That's my answer regarding personnel costs. Regarding April, when wholesale performance improved compared to the fourth quarter. The main factors are as follows: In wholesale, mainly rates, equity products drove the outperformance. And in the fourth quarter, rates, especially from the middle of March based upon the turmoil in the Middle East, the risk had to be controlled. So it's not just about the end of year factors, but due to risk control, revenue slowed down. And in April, we saw the significant improvement. Equity product is continuously performing well. As for nations, please give me a moment. As for the geography -- geographical split, all regions compared to the fourth quarter, we see outperformance, but regions other than the U.S. are particularly outperforming. The U.S. is performing well, but compared to other regions, growth rate is relatively lower. I hope I answered your question. Natsumu Tsujino: I have not captured everything, but U.S. was doing well as of the end of fiscal year -- previous fiscal year, if I am not mistaken, the U.S. business was strong. On the other hand, compared to the U.S. in the first quarter, growth is limited. Hiroyuki Moriuchi: Tsujino-san, sorry, I did not explain clearly, but bottom right on Page 12, you can find revenue by geography. In Americas, in the fourth quarter, revenue has come down relatively significantly in Americas compared to other regions. That's partially due to seasonality and also due to the impact from the Middle East. Since the middle of March, we had to control business. So especially macro business in Americas was particularly impacted and the timing didn't work well, especially the last 1 week of the month. And those -- that happened. And then the situation got relaxed. And then there has been a less tension after April, and we saw recovery. Operator: The next question is Daiwa Securities, Watanabe-san. Kazuki Watanabe: Daiwa Securities, Watanabe. I have 2 questions. First, private credit, $2.4 billion you explained. You also said diversification is in place, software by sector, can you give us some more detailed breakdown? And retail, private-related products, what is the redemption call? And what is your policy of sales going forward? And secondly, capital policy. You didn't announce any new buyback program. RSU, JPY 40 billion, it would be JPY 20 billion about buyback, 50% total return -- total payout ratio to shareholders. Is that the right interpretation? Hiroyuki Moriuchi: Watano-san, thank you very much. First of all, private credit sector diversification. So what is the picture? Overall, health care, business service, software and computer service, consumer, engineering and construction, these are the sectors included. Mostly health care and business service occupy quite a large proportion. Software, not necessarily high in terms of percentage. And on top of that, there is regional diversification in place as well. And regarding the second half of your first question, retail customers, private credit, what about the redemption and regarding sales policies, as client sentiments, there is some conservativeness. But at the moment, we are not seeing any calls for cancellation or requests. Originally -- or to begin with, when we sell to retail customers, we tell them that it's based upon the assumption of mid- to long-term investment. And when we obtain their understanding, we sell those products to them for the first time. So I think those communications have been effective so much so that there hasn't been any significant run. And on buyback and total payout ratio, first half, second half put together, full year RSU included 58%. Excluding RSU, it's beyond 50%. So I hope that answers your question. Kazuki Watanabe: Regarding buyback, announcement timing, if there's an announcement in 4Q, that would be fiscal year '25. Hiroyuki Moriuchi: The JPY 60 billion buyback program we announced in Q3, in Q4, we assumed the Q4 profit and we defined the amount based upon our assumption. Operator: The next question comes from JPMorgan Securities, Sato-san. Koki Sato: I am Sato from JPMorgan Securities. I have 2 questions. First question is about wholesale and wealth management expense outlook. In wholesale, performance was strong, and there was an adjustment made to the bonus, I believe. And as you explained, and there were onetime factors. So 83% of our cost-income ratio for the year and next following year onward, if top line is at the same level, then what kind of a level can we expect? And on the other hand, for wealth, in the fourth quarter, the performance was solid. The quarterly expense came down. So in this strong performance, I believe you are doing the payout to employees. And even in light of that, if this is the level you are achieving, then when recurring asset growth are bigger, then can we expect more leverage? So could you explain your outlook for expense for those 2 divisions? Secondly, in the third quarter related to laser digital loss was booked. At that time, risk control and net exposure reduction were explained. But in the fourth quarter period, what was the market situation -- based upon the market situation in the fourth quarter and based upon the result of the third quarter and what is the update on the effects achieved as a result of the countermeasure you have taken? Hiroyuki Moriuchi: Thank you for your question. First, outlook for -- the outlook for expense first, wholesale in the fourth quarter on a Q-on-Q basis, plus JPY 13 billion. Out of this increase, 30% is due to the compensation regulatory change and also end of the year performance-linked bonus adjustment. And then the last part is increase in the professional fee and the payment for services received. So the expense rate increased, but fixed cost was suppressed. So this fiscal year in the sense of the review of expense in the fourth quarter, wholesale, they had a few onetime items and also fees paid or professional fees. For example, SPPC pipeline -- so cost was incurred before the deal as we hired lawyers and the revenue recognition got delayed. So compared to the fourth quarter, we expect the expense level to come down. As for wealth management, we booked high level of margin. And can we expect the same level this year? As for this year, advanced investment in AI, also corporate cost increase due to inflation are expected. But continuously in Japan, for wealth management, we are going to tightly control cost. So even though there are timings when cost increases due to advanced investment, but it depends on revenues, but we expect we will be able to deliver a certain level of margin. And finally, regarding laser, in the third quarter, we troubled you and we got you worried with loss related to laser. But as you said, we have controlled risk volume and we have taken a more conservative stance. And in the fourth quarter, when we look at the market, Bitcoin and crypto market decline was the same level as in the third quarter. In terms of profit and loss, impact on consolidated result was limited. I hope I answered your question. Koki Sato: Regarding the latter part of your answer, the situation in the crypto market and the impact on your profitability. Simply put, you've reduced the exposure. So the benefit you've received is as a result of reduced exposure and hedging or different ways of conducting market making. In other words, what I'm getting at is previously, you said you are not intending to downsize the business. So the exposure level, I think, will increase in the future. Even with that, you have a structure in place to prevent impact on profit? Hiroyuki Moriuchi: Thank you very much. Regarding trading, the market making, the absolute amount of risk has been reduced. And of course, there are venture capital investments and asset management seed capital with our own fund. So for those areas, in nontrading areas, we have long positions. So when we have progress in asset management business, then from seed capital, we will see that transfer to equity capital by investors -- LP investment. Operator: The next question, SBI Securities, Otsuka-san. Wataru Otsuka: Otsuka of SBI Securities. Is my voice coming through? Operator: Yes. Wataru Otsuka: Could I do one question and one answer. The first question is just for confirmation purposes, but wholesale, quarter-on-quarter basis, profits declined. What's the reason? Can you recap that? Revenue, as you had explained, global markets fixed income, Q4 seasonality factor and Iran had been quite significant and expenses, expertise fee and performance -- pay for performance. And so due to the revenue and expenses, 30% decline in profit. That's quite significant, but it wasn't a surprise to you. So that's my first question. Hiroyuki Moriuchi: Thank you very much. And you've made the situation very clear. So if we divide it between revenue and cost, as far as revenue is concerned, seasonality due to the end of the fiscal year, risk position was controlled. And on top of that, due to the Middle East situation, in the mid- to late March period, there was exacerbation quite rapidly. So we had to control defensive position, and that's the big factor for the reduction of revenue. And on the cost side, I slightly touched upon this in my presentation. But due to the review of the compensation regulation and also being the end of the fiscal year, part of it is timing gap, and there has been a onetime of increase. And the remainder is increase of fees payable to experts and for transactions. But regarding this factor, the original understanding regarding SPPC we were to add one product to the lineup. So the initial investment, that was within our control. But professional fees, we paid it earlier than booking the revenue. So this was a relatively high cost increase higher than we had expected. That's my personal view. I hope I answered your first question. Wataru Otsuka: Sorry. One follow-up question. 86% expense ratio is slightly high. So there was the timing gap, but 83% for full year -- is that a normalized basis ratio? Hiroyuki Moriuchi: Q4, 86%. Obviously, it's quite significantly higher. And regarding expense ratio, rather than expense side, the impact from revenue is quite heavy. But at any rate, 86% is slightly higher than normal. Wataru Otsuka: Second question, at the end, you mentioned ROE, 10% full year basis. And 8% to 10% or higher and stably performing such ROE, you've achieved that goal. On the other hand, if we look at banks and other Japanese financial institutions or more so regarding overseas financial institutions, 8% to 10% ROE isn't that high. So plus, don't you have an intention to elevate your goal? Isn't that discussed at the Board of Directors meeting? Can you touch upon such aspects? Thank you very much. Hiroyuki Moriuchi: Otsuka-san. Your point is very true, of course, in comparison to mega banks, Japanese for financial institutions and peers overseas from the perspective of being in the investment business, 8% to 10% plus level is just a midpoint. It's not the ultimate goal. Regarding this matter, in the deliberations for the budget, there is intensive discussion on this matter. So if there are any points that we need to review, in late May, we will have the Investors Day, so we may touch upon that aspect. Thank you. That concludes my response. Wataru Otsuka: So your answer is you're discussing that point heavily, right? Hiroyuki Moriuchi: Yes, exactly. Operator: The next question comes from UBS Securities, Niwa-san. Koichi Niwa: I am Niwa. Can you hear me? Yes. Regarding wholesale cost and private asset initiatives of Nomura, I have a question about them. First, regarding wholesale cost this year and next year, on a run rate basis, what's the percentage? I do understand you have a medium-term goal. But given the environment where there is a strong cost increase pressure, what is your outlook? My second question is more long term than the earnings result. But in Americas, what's the future outlook of private asset market in the U.S.A. And on that basis, what is Nomura's strategy? So if it's in the initial phase, then there will be the room for expansion. And in the call today, listen to the tone of your explanation, it appears you remain positive. But looking at your peers, they are switching gears. So if you could give me some perspective on this, that's appreciated. Hiroyuki Moriuchi: Thank you very much. Regarding your first question on wholesale cost control and cost/income ratio target, what is the rate of progress and what is our outlook for this year? And the cost pressure may be high, as you said. But as you said, the group-wide cost control has an important theme of how to manage inflation. So certain parts of this are unavoidable, but rather than absorbing taking them 100%. The theme is to look at where we can reduce cost in other areas. For example, through location strategy, offshore can be more effectively used. So we are considering approaches, including structural approaches so that we can suppress cost increase to a certain level. And regarding cost/income ratio, we would like to grow revenue at a rate that beats inflation. That's an important factor. And for business, this is more important. So in wholesale, ROI against additional capital needs to be increased to increase ROE. That's our intention. Secondly, regarding our outlook for private credit, we need to separate my answer for midterm and long term. Regarding private credit market itself, our view is positive. In the medium to long term, market has the potential to grow. On the other hand, both the bracket and our peers have pointed out repeatedly that in the short term, credit cycle needs to be monitored closely and the risks must be controlled tightly. We do acknowledge the need to do so. So earlier, I answered to a previously asked question. But in SPPC, we have a rich pipeline with attractive opportunities, but our stance is to take selective approach and medium- to long-term portfolio, in wholesale as a whole, we would like to control so that no single product stands out too much. So that kind of control will be needed, and we have an agreement in our approach with wholesale. That's all. Koichi Niwa: Just one more thing from me. So mainly impact on you in terms of division, the impact is happening mainly in wholesale, not really in investment management, but wholesale is mainly impacted. in terms of product line? Hiroyuki Moriuchi: So as for the existing P&L, especially risk side, wholesale portion is the biggest. So your understanding is fine. But as we think about medium- to long-term growth, asset management is the area. As we have said since 2020, we are closely looking at the market opportunities and not just private credit, but we look to grow private business. And as part of that, hopefully, private credit will grow. And wealth management based upon the principle of suitability, based upon the needs of our clients, we would like to steadily accumulate assets. And going back to the previous point, in the short term, we need to control risk for wholesale, that's as you pointed out. Operator: We'd like to conclude question-and-answer session. If you have some more questions, please ask our Nomura Holdings IR department. In the end, we'd like to make closing address by Nomura Holdings. Once again, thank you for joining us. Hiroyuki Moriuchi: As I have said a few times, for 2 successive years on a full year basis, we've renewed the net profit and ROE. Yes, there were some voices saying that this may not be enough, but we exceeded 10% and we were able to achieve the goal towards the 2030 vision 2 years upfront. Recurring asset increased banking division establishment, Macquarie asset management, acquisition, these investments were done in order to make a robust platform for future growth. That was what we've done in the past 12 months. So I think we will begin to monetize out of those initiatives, and therefore, we call upon you to provide your continued support. That was Moriuchi, CFO. Thank you. Operator: Thank you for taking your time, and that concludes today's conference call. You may now disconnect your lines.
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.
Operator: Hello, everyone. Thank you for joining us, and welcome to the Moog Inc. Second Quarter Fiscal 2026 Earnings Conference Call. [Operator Instructions] I will now hand the conference over to Aaron Astrachan, Director of Investor Relations and Financial Planning and Analysis. Aaron, please go ahead. Aaron Astrachan: Good morning, and thank you for joining Moog's Second Quarter 2026 Earnings Release Conference Call. I'm Aaron Astrachan, Director of Investor Relations. With me today are Pat Roche, our Chief Executive Officer; and Jennifer Walter, our Chief Financial Officer. Earlier this morning, we released our results and our supplemental slides, both of which are available on our website. Our earnings press release, our supplemental slides and remarks made during our call today contain adjusted non-GAAP results. Reconciliations for these adjusted results to GAAP results are contained within the provided materials. Lastly, our comments today may include statements related to expected future results and other forward-looking statements, which are not guarantees. Our actual results may differ materially from those described in our forward-looking statements and are subject to a variety of risks and uncertainties that are described in our earnings press release and in our other SEC filings. Now I'm happy to turn the call over to Pat. Patrick Roche: Good morning, and welcome to our earnings call. We delivered an outstanding second quarter. We achieved double-digit revenue growth relative to prior year, our second highest revenue on record with strength in all segments. We set records for both total and 12-month backlog with 12-month backlog up 33% from the prior year. We also delivered record adjusted earnings per share due to our strong growth and improved adjusted operating margin. Demand is strong. The business is executing well, and we're delivering ahead of our guidance. We are continuing to see the effect of a structural shift in the defense market, and we're well positioned to meet that growth. Our focus on operational simplification ensures that we can deliver on that growth and continue to meet customer commitments. Our results are reflective of continuing success in driving both improved operational and financial performance, and we're confident in our ability to deliver for the rest of the year. Now let's turn attention to end markets and the macro environment, starting with defense. The Middle Eastern war has further increased the need and urgency to boost U.S. defense industrial manufacturing capacity. This has resulted in increased spending requests by the administration and alternative procurement strategies to align resources within the industry. We are actively partnering with the primes and agencies to respond to this urgent and growing need. For example, production rates on key missile defense programs are anticipated to increase by factors ranging from 2 to 4x over the next few years. For our part, we continue to invest in expanding our capacity and are well positioned to respond and deliver increased production output. Moving to commercial aerospace. Customer demand remains strong with clear and consistent signals of increased production rates. We are confident in our customers' growth. Our production plans support those customers' near-term needs and longer-term goals while judiciously managing inventory growth. On the aftermarket side, higher fuel costs may result in a shift to more fuel-efficient aircraft and a reduction in some operating routes. Despite this, we are confident that our platform exposure and strong aftermarket position will support our current plan. Finally, within industrial markets, we see continuing stability with no discernible impact from the Middle Eastern war at this point. Backlog is firm relative to prior quarter. We see further strengthening of data center cooling pump demand. Overall, end market conditions across the board continue to be very favorable for our business. Now turning attention to the 3 leadership priorities that guide our work: Customer focus; people, community and planet; and financial strength. It was inspiring to see the successful launch of Artemis II and the safe return of NASA astronauts after traveling around the moon and back. Moog played a key role across the Artemis II mission with launch platform gantry actuation, thrust vector control on all stages of the SLS rocket and critical light control systems in the Orion spacecraft. We are proud of how our innovation has supported manned space exploration on Mercury, Gemini, Apollo, Space Shuttle and now Artemis missions. Back on earth, we are pleased that 2 important customers have recognized unique contributions we make to their business. We received Embraer's Supplier of the Year Award for 2025, recognizing consistent operational execution and technical collaboration on mechanical systems. We also received General Dynamics Land Systems Supplier of the Year for Technology and Innovation Award for 2025. Our technology leadership to solve our customers' most difficult technical challenges and our focus on operational excellence, always ensuring we meet our commitments has built through long-term partnerships. Our customers' demand is strong and rising. We are proactively investing in capacity and capability to meet the increased demand. This includes robust investment in facilities, manufacturing equipment and automation and supplier resilience. It also includes the onboarding and upskilling of talent to support next-generation production. Across each segment, we are simplifying, optimizing and driving productivity improvements to systematically reduce lead times, increase throughput and ensure readiness for further growth. We will continue to invest in our organic growth and partner with customers in the U.S. and the U.S. government to ensure that we are ready to deliver at higher production rates. Now turning to people, community and planet. We're committed to developing our high-performing and engaged workforce through targeted leadership development, strategic workforce planning and global talent initiatives that accelerate skill building and succession readiness. Our collaborative efforts extend beyond our walls as we've actively strengthened local community engagement by increasing the level of hands-on volunteer efforts globally, supporting education, well-being and social impact. In parallel, our sustainability efforts are advancing with meaningful projects like rainwater harvesting installations. Together, these integrated initiatives reflect Moog's holistic approach to building a sustainable business that cares for its people, enriches its communities and protects the planet. Turning to financial strength. Our 80/20 mindset is key to simplifying the business. It allows us to focus our commitment of people and investments to the most productive and profitable uses. We're achieving operational improvements, and we are redeploying resources to accommodate new demand. Our portfolio reviews stretch from our operating segments through business units to our individual facilities. We continue to prune the portfolio through licensing, asset sales and end-of-life decisions. This quarter, we exited the general aviation avionics market with the licensing of IP and a last-time buy for our customers. As we further develop our 80/20 capabilities, we're evolving our playbook to reflect the nuanced difference of applying 80/20 to our businesses from industrial businesses with thousands of customers and hundreds of products to aerospace businesses with fewer customers and highly integrated platforms. This learning and refinement are part of increasing our maturity. Now let me switch over to the work we are doing to optimize our balance sheet, specifically the structural improvement in our commercial aircraft business. We're simplifying our global manufacturing and supply chain network and reshaping our supplier relationships. We have made excellent progress on the supplier side in this quarter. We're ahead of our plan in moving suppliers to a more agile demand arrangement. And in that process, we've achieved inventory destocking exceeding our plan. We have also selected a fourth-party logistics coordinator who will assume the management of nearly 30% of our suppliers. These are all transactional suppliers. We continue to drive cycle time and work in progress reduction by transitioning to focused factories with fewer non-value-add handoffs between Moog facilities or outside services. We used an 80/20 mindset to prioritize the transition required to achieve this. We also invested in a new Philippine facility at Clark to accommodate inbound transitions and vertical integrations to support our focused factory in Baguio for commercial flight control systems. The cycle time impact on parts transferred is substantial. In this early phase, it gives us the confidence that we can continue to optimize the balance sheet. In addition, these transitions release floor space in our domestic U.S. defense facilities, which is needed to accommodate growth. These examples highlight our continued progress with 80/20, driving productivity and margin enhancement. Our drive to make structural change is also starting to demonstrate operational improvement. Pricing reviews are integral to our business process and continue to happen at all levels in the organization. We are taking actions to mitigate any cost risk arising from the Middle Eastern war. We are also reviewing the evolving tariff landscape, adjusting our mitigation actions as appropriate and pursuing refunds when available. Our pricing activities are ensuring that we are fairly compensated for the value we create for our customers. Now turning to the full year. We've updated our guidance for fiscal '26 to reflect our excellent performance in the first half and a more positive market outlook. We've increased sales and adjusted diluted earnings per share and held adjusted operating margin and free cash flow conversion unchanged. With this updated guidance, FY '26 will be a year of solid double-digit year-over-year sales growth, further expansion in adjusted operating margin, even stronger double-digit growth in adjusted diluted earnings per share and improved free cash flow conversion. This represents substantive achievement against our Investor Day goals, outperforming on sales growth and operating margin, excluding tariffs. And with that, let me hand over to Jennifer for a detailed breakdown on the quarter and our updated fiscal '26 guidance. Jennifer Walter: Thanks, Pat. Before I get into our financial performance, I wanted to describe the refinancing activities we successfully completed this quarter. First, we amended our $1.1 billion revolving credit facility and our $250 million term loan, extending maturities of each out to 5 years. We also issued $500 million of 5.5% senior notes maturing in 8.5 years. We used the proceeds to call our 4.25% notes that were coming due in under 2 years, redeeming them just after quarter end. We're pleased to have extended and staggered our debt maturities and achieved tight pricing on the new notes. We had contemplated refinancing activities in our previous guidance, so there are no material updates to the guidance we're providing today related to these activities. I'll now turn to the financial performance of our business. It was another outstanding quarter. Sales were robust and adjusted operating margin was strong, resulting in adjusted earnings per share well above our guidance. We also generated free cash flow in excess of earnings. We took $3 million of charges in the second quarter that we've adjusted out of the operating profit numbers that we'll describe. These charges were largely associated with simplification activities, in particular, continuing activities related to footprint rationalization. I'll now talk through our second quarter results, excluding these charges. Sales in the second quarter of $1.1 billion were 13% higher than last year's second quarter. Sales increased nicely in each of our segments. The largest increase in segment sales was in Space and Defense. Sales were $314 million, up 16% over the second quarter last year, reflecting broad-based defense demand. Demand was particularly strong for space vehicles and missile controls. Commercial Aircraft sales of $247 million increased 15% over the same quarter a year ago. The increase was driven by higher volume and pricing on some of our major production programs. In Military Aircraft, sales of $235 million were up 10% over the second quarter last year. Activity continued to increase on the MV-75 program, reaching peak levels for the current development phase earlier than we had planned. Industrial sales were $256 million in the quarter, up 9% over the same quarter a year ago. The expanding data center cooling market fueled our sales growth, and we also benefited from foreign currency effects. We'll now shift to operating margins. Adjusted operating margin in the second quarter was 13.4%, up 90 basis points from the second quarter a year ago. We achieved these results despite 100 basis points of pressure from tariffs. Excluding this pressure, all of our segments were up nicely, reflecting operating strength. Space & Defense operating margin was 14.6% in the second quarter, up 200 basis points. The increase was driven by profitable sales growth, offset partially by increased product development, business capture and operational readiness investments. The margin expansion drivers have been consistent over the past several quarters. Military Aircraft operating margin was 13.7% in the second quarter, up 170 basis points from the second quarter last year. We benefited from profitable sales growth. Commercial Aircraft operating margin was 11.9%, just above that of the second quarter last year. Operating margin expanded from pricing benefits and was pressured from tariffs. Industrial operating margin was 13.2%, just below that of the same period [Audio Gap], up 40% compared to last year's second quarter. The increase, which we achieved despite the pressure from tariffs, reflects both higher operating margins and sales. Let's shift over to cash flow. In the second quarter, we generated nearly $100 million of free cash flow, bringing our year-to-date performance into solid positive territory and better than we had projected. Strong earnings contributed to our cash generation. Despite our strong sales growth, we held working capital relatively constantly. Growth in physical inventories associated with sales growth was largely offset by customer advances. Capital expenditures were somewhat below the quarterly average from the past year and are expected to pick up in the rest of the year. We continue to invest in our facilities to support our strong growth opportunities. In particular, we'll invest to support secured growth within Space and Defense and operational initiatives within commercial aircraft. Our leverage ratio was 1.8x as of the end of the second quarter, putting us just below the target end -- target leverage of 2 to 3x. Our capital deployment priorities center around organic growth, and we'll pursue strategic acquisitions to complement our existing portfolio. We strive to have a balanced capital deployment strategy over the long term. We'll now shift over to our updated guidance for the year. We're increasing 2026 guidance for sales and adjusted earnings per share from what we provided a quarter ago, and we're reaffirming our guidance on adjusted operating margin and free cash flow conversion. We're increasing our sales guidance for the year, reflecting the strong second quarter as well as further sales growth later in the year. We're increasing our sales guidance for 3 of our segments and lowering it for one. In Space and Defense, we're increasing our guidance by $35 million to reflect broad-based defense demand. We're increasing guidance for Industrial by $30 million, reflecting a strengthened order book, including for data center cooling pumps. We're also increasing guidance for Military Aircraft with an additional $25 million of growth largely associated with accelerated activity on the MV-75 program. For Commercial Aircraft, we're decreasing our sales guidance by $20 million to reflect our decision to slow the rate of incoming inventory on certain narrow-body platforms. We're pleased to report that we're -- our adjusted operating margin in FY '26 at 13.4% despite growing tariff pressure. We're now expecting 110 basis points of pressure from tariffs in FY '26, up 30 basis points from our previous guidance. Increased activity within our Industrial segment is causing this additional pressure, and we continue to work on our tariff mitigation plan. Our underlying business is performing well such that we were able to compensate for the increasing tariff pressure. At the segment level, we're increasing operating margin in Space and Defense on second quarter strength, partially offset by higher levels of research and development that we'll make in the second half of the year. We're decreasing operating margin in commercial aircraft on mix. We're holding operating margins for Military Aircraft and Industrial. Within Industrial, we're fully offsetting increased tariff pressure with benefits associated with higher sales growth. We're increasing our FY '26 adjusted earnings per share guidance by $0.40 to $10.60, plus or minus $0.20. We're reflecting our second quarter EPS beat, additional operating profit we're now expecting in the back half of the year and lower nonoperating costs, which are partially offset by higher tariff pressure. For the third quarter, we're forecasting earnings per share to be $2.65, plus or minus $0.10. Finally, turning to cash. We're still projecting free cash flow conversion to be about 60% with some changes within our guidance from a quarter ago. We'll use more cash for growth in physical inventories, and this will be offset by an increase in customer advances that we've secured as well as reduced capital expenditures as we align our spend with growth areas and adjust our timing to our needs. With respect to physical inventories, it has taken us longer to [indiscernible] existing operational challenges, and we continue to focus on resolving those. We have made progress, however, on rescheduling material receipts within commercial aircraft, as Pat described earlier. Next quarter, we expect to generate free cash flow conversion at about 100%. We won't consume cash for changes in working capital but we will increase our investments in capital expenditures. Fiscal year 2026 is shaping up to be another great year. We'll achieve a record level of sales, further expand our operating margins and make meaningful progress towards generating strong free cash flow. And now I'll turn it back to Pat. Patrick Roche: Thank you. We delivered outstanding second quarter financial results. We increased our guidance based on the continuing strong performance within robust markets. And with that, let me open it up to the floor for questions. Operator: [Operator Instructions] Your first question comes from the line of Jon Tanwanteng from CJS Securities. Jonathan Tanwanteng: Nice job on the quarter and the outlook. I was wondering -- I was wondering if you could start with the missile business and if there's any update to the 20% growth outlook you've seen there, number one. And number two, can the industry and yourself grow faster than that if asked by the government? And are you being asked to do that? Patrick Roche: Jon, could you repeat which piece of the business you were asking about at the very beginning? Jonathan Tanwanteng: The missile controls business. Patrick Roche: Yes. Okay. Yes, as you can see with what's going on in the world currently, the demand is obviously increasing in the urgency of that demand. I talked about changing procurement strategies from the government, and you saw that reflected in 7-year agreements with the primes on ramping up their capacity by significant amounts. I mean, quadrupling or tripling the rate of production, if you take PAC-3 to go from 650 missiles per year up to the level of 2,000 per year. We've been in discussions with our customers over the last year or more about these increasing demands. It was becoming obvious that the arsenal was depleted and that production rates needed to increase, and we've been preparing ourselves for that, Jon. So at our Salt Lake City facility. That's where we do a lot of these control actuation systems that go on to the missiles. We have freed up floor space within that facility by the transitioning of other products out of that building. We are investing in the facility with some new capabilities to support this growth in the missiles program. And we feel that we have the facility space available and the capabilities to increase our rate at the level that's being asked for. Jonathan Tanwanteng: Okay. Great. And then on the Commercial Aircraft side, how should we think about the impact of the war on your airline customers' demand? Is that fully reflected in your outlook today? And does your wide-body focus provide more relative insulation just due to the airplane economics? Or maybe does the impact on these customers maybe shift that the other direction? Just help us understand how you're thinking about that demand picture going through next year. Patrick Roche: Yes. So we have reflected our current thinking into the guidance. There is some impact on flight patterns. I mean the flights in and out of the Middle East are down, obviously. We have 2 forward stocking locations in the Middle East where we hold product for aircraft on the ground servicing. Obviously, we shut those down as a consequence of what was going on, and we're servicing those from other parts of the world at present. A lot of airlines are suffering from higher aviation fuel, and therefore, they're making decisions on number of flights on routes. That, we believe, also switches their focus over to more fuel-efficient aircraft, and we would regard 787, A350 to be in that class. So you could expect more hours on those types of aircraft. And when we look at it in balance then, we see our business sustaining on the aftermarket side for the rest of the year, roughly the rate -- our rough run rate. And so it's in the guidance. We think it's a fair reflection on where we are today. And then on the OE production side, we're continuing to support the customers' interest in increasing their ramp rate and their longer-term aspirational goals within our own plans. And thank you for taking the second question, Jon, because we're not limiting it to one question. Operator: [Operator Instructions] The next question comes from Kristine Liwag. Unknown Analyst: Pat, Jennifer, Aaron, I just wanted to ask on the defense environment. It seems like we're just in a completely different trajectory versus different cycles. The White House is asking for $1.5 trillion for fiscal year '27. Now whether or not that materializes or not, it seems like the general direction for that fiscal year '27 number is still higher than fiscal year '26, meaningfully so, maybe at least 20%. I was wondering when you look at your outlook for your defense business, like how is Moog positioned to capitalize on this potentially meaningful growth ahead? Because when you look at your core capabilities over the years, you guys have transformed from a component manufacturer to really providing more systems and solutions that are in greater need. So I just want to understand what that looks like and what's kind of embedded in your base case? And if we look out a few years, I mean, how meaningfully higher could revenue be? Patrick Roche: So thank you for the question, Kristine. Good to hear from you. Our business is continuing to expand as a consequence of this. And yes, whether it's a 50% step-up next year or 20%, it's a business that we are well positioned to secure. I think that's from 2 perspectives. It's our operational effectiveness as a business, and it's the technical capabilities we have. Let me explain both of those. So the operational efficiency side, our delivery performance on the missiles has been 100%, 100%. That's 100% on time, 100% quality to our customers. That is winning more business. And so when we announced our orders on PAC-3, that was a partial takeaway from one of our competitors. And so our operational performance wins us additional business, especially in an environment where the primes are struggling to get capacity. So we have an opportunity not just with the uplift on existing programs, but our ability to displace competitors on other programs. And then the technical side gives us an ability to increase our scope of supply. And so we're actively pursuing opportunities where we can add to the solutions that we deliver for the customers. So I would say they're the important factors that feed into a growing strengthening of not just the business, the market itself but our business within that market. Unknown Analyst: Super helpful. And we're also seeing multiyear agreements for the defense primes to increase capacity. When it comes down to where you are in your tier of a supplier, how do you anticipate that capacity spend going to be supported? Do you expect more customer advances to support some of that incremental working capital or CapEx? Or would you have to invest your own money to be able to meet some of those demand signals? How do we think about that balance? Patrick Roche: I think there's a mix in there. We are in the process of discussions with our customers about that ramp that's in front of us. If you reflect on the PAC-3 orders that we got in some of the prior couple of quarters over the last year, that was reflective of current production volumes of 650 units per year. Obviously, there's a significant ramp, and we're in negotiations with each of our customers on how we support that ramp with them over that extended period of time. We are prepared to invest in the business. We think that's the right thing to do. Jennifer has consistently said that we have a balanced capital investment plan and supporting the organic growth in pieces of the business that we excel at, it makes a lot of sense for us. So for instance, on the missile side, I talked about Salt Lake City facility. We're putting in a circuit card assembly line there that specifically supports those missile programs. So we are making internal investments on it. We are looking to our customers and the government to say, well, how can they help us accelerate things if we need to, but that's all ongoing discussion. Unknown Analyst: Great. Switching gears to space. You called out the Artemis II mission. I mean you guys are very -- your presence in legacy space companies are pretty clear with demand space exploration at Mercury, Gemini, Apollo and then previously historically with Space Shuttle, now Artemis. Can you talk about the environment for that? How -- what's your presence in terms of the newer space companies? How do you see the dollars shifting from legacy space versus the new space innovators? And what's your presence between the 2? Patrick Roche: Yes. So thanks for highlighting the rich heritage in space exploration. I mean we've been in that from the beginning, as I stated in the notes, a piece of Moog hardware flies into space every week, which is a remarkable fact. It's not just the legacy programs that we're involved in. I think, Kristine, you know that we are involved in thrust vector actuation on many of the launch vehicles themselves. So as the commercialization and growing defense presence in space drives demand, we get exposure to that on the thrust vector control side of launch vehicles. Our investment in what we call Plant 27 here in East Aurora campus is around avionics and actuation that goes right into those launch vehicles themselves, and we've been ramping our capacity there. Our exposure in space also extends to the space vehicles. And as you know, with space as the new warfighting domain, as it was described last year in Space Symposium, there is a lot of interest on the defense side in our space capabilities, and we see growth in that as well. And Jennifer called it out, I think, as space vehicle strength within the Space and Defense Group in the second quarter. Unknown Analyst: Great. By the way, not having to limit some questions, may be a bad thing but I'll push my luck here with one more. You guys have given a multiyear outlook on margins and where they could be in the trajectory and you've been executing on that. I was thinking about all these opportunities, all your end markets are experiencing significant growth. You have changed your pricing mechanism across the business. I was wondering how conservative is the previous 3-year guidance you've given on margin now with how well you've been able to execute so far? And when you look at the quality of the things that you're providing and the lack of other available options, really, where do you see the maximum limit on margin? And it could be in reference to your 3-year outlook or over time? Just want to understand the earnings power of Moog going forward. Patrick Roche: Well, I'm incredibly proud of the success we've achieved to date, Kristine, in delivering on those long-term goals we set out back in 2023. This comes up to the tail end of that period now, 2026. And as I said, we're delivering substantively on what we committed to in that we are due to give an update on what comes beyond this. And so we're looking forward to having the opportunity to do another Investor Day. It's maybe later in our calendar year. We'll announce a date at some point in the future. And I look forward with a high degree of optimism to our future, Kristine. Do you want to say something, Jennifer? Jennifer Walter: Yes. I would say for our guidance this year, we feel that we've got a balanced approach to our guidance like we did for EPS, we did increased that by $0.40, and we did beat our guidance by about that same $0.40. What we are seeing is, we're reflecting that strong Q2 in our guidance, and we're also projecting some benefit in the second half as well. Operating profit, specifically in Space and Defense is going to continue to contribute. So we have adjusted for that. But we're also now making additional investments in R&D because we've got such great opportunities, as we are just discussing some also lower nonoperating expenses. But we do have tariff pressure that is increasing that is offsetting that as well. So we want to make sure that we're staying balanced and some of the things that we're doing to reflect the strong operational performance of the business. We're also continuing to invest at higher rates, too, to secure and to ensure we're positioned great for new business opportunities. Operator: Your next question comes from the line of Gautam Khanna from TD Securities. Gautam Khanna: I wanted to make sure I understood. On the Commercial Aircraft guidance revision, what's driving that? Because it sounds like demand is pretty strong. Just curious. Jennifer Walter: Yes. So overall, demand is strong for our Commercial business. But when we talk about the guidance, we are making a deliberate decision so that we are not bringing in materials ahead of when we need it, and that does have some downward pressure for us on our guidance. It's not to say that there's any long-term substantial changes in anything that we're doing from an outlook. It's just us managing our inventory to align with the timing of deliveries that we need to do and not building up excess cash for that. So it's really a timing thing that is incorporated into that guide. Gautam Khanna: And just to be clear, is that due to cost-to-cost accounting or meaning what you expect to ship is no different? Jennifer Walter: We're bringing in lower amounts of material and those material otherwise would have been absorbed into the cost-to-cost accounting and been reflected in sales and operating margin. We're simply delaying that somewhat. Gautam Khanna: Got you. And so does that have an equal impact to benefit cash flow by the same amount? Jennifer Walter: It does. So it does benefit our cash flow, and you can see that our cash flow we're kind of holding the same. Some of the things that we're seeing on the cash flow side is from a short-term perspective, we are pushing out material receipts. That has a benefit. That's what we're talking about here. But there's also operational execution things of getting shipments out that we continue to work. It's managing our customer demand and transitions also fall into that as well. Gautam Khanna: Okay. That's very helpful. I was curious if you could give us some flavor for if demand has changed on some of the major Commercial Aircraft production programs like the A350, 787, does that explain some of the... Jennifer Walter: I would say, no, the demand has not changed. Sometimes it's just the timing of when we are doing the work that can impact when we're recognizing the sales But overall, there's strong demand for the -- there's strong demand for the aircraft. We're seeing that on the wide-body platforms that we've got significant content. We're seeing that on the narrow-body platforms as well. So overall, the business is very robust, and these things only reflect some timing. Gautam Khanna: Timing by Moog, not by the OEM customer, it is... Jennifer Walter: By Moog, yes, by Moog. So we're not going to bring in material prior that we can so that we can manage cash flow, manage the business for cash. Gautam Khanna: Okay. That's helpful. And then I was curious also, a quarter ago, there was a more urgent order for V-22 parts. I was curious, are you seeing other pockets of more urgent demand? I know you mentioned missiles but elsewhere in the defense business? Jennifer Walter: Not to that extent. That one was definitely one that stood out. That's why we called it out because it's basically the demand that we had expected for a year that it was all captured in one quarter. So there has not been anything significant that stands out like that. However, the overall growth of the business is significant, and that's why we've beat on our sales, and we are also raising our guidance on the sales as well because there is just that underlying business performance, not necessarily on any one program or acceleration of any one program but just overall strength in our defense businesses. Gautam Khanna: Great. And then I know you did discuss tariffs and the impact. Could you just maybe elaborate on what changed from the first quarter with respect to tariff impacts for the year? Because I remember you were moving product flows and helping the airlines file for duty drawback and the like. Is that still happening? What explains the variance on tariffs relative to what you thought a quarter ago? Patrick Roche: So I would -- Gautam, I would describe it as a pretty fluid situation still. I mean the tariffs were struck down in the quarter. The Section 121 tariffs were imposed then on other countries from outside the U.S. and that has a 90-day validity. And then we're moving over to Section 301 tariffs for the balance of the year, we anticipate as the administration continues to focus on tariffs as a revenue-generating mechanism. And so we assume that we have tariffs on an ongoing basis, and it's in our guidance. I think what has changed for us is the level of business in some of the parts of our organization that are particularly sensitive to the tariffs. So we have greater volume of business going through on the industrial side, that's attracting tariffs. And so the amount of dollars we're spending on tariffs has increased as a consequence of that sort of mix shift, if you like. Gautam Khanna: Okay. And I know I'm asking a lot of questions but I appreciate the invitation to do so. Just curious also, is there any kind of direct Middle East impact that you could foresee in the business? I'm not talking just demand-wise, but supply chain or input costs or any other kind of more diffuse impacts that we can see? Patrick Roche: Yes. Well, maybe a couple of things that come to front of mind. I mentioned earlier that we had 2 forward stocking locations in the Middle East. I mean their activities have wound down completely because of the war that's going on. So we've redirected where that work goes. Obviously, fuel, the cost of fuel has increased, and we see that in some parts of the world already, maybe even an escalated or an elevated level relative to what you see here in the U.S. So in the Philippines, we see fuel costs have increased quite significantly because it's all imported fuel. And so we've reflected those in our thinking as well for the quarter. So that's some of the direct impacts. Indirect changing of flight patterns, changing of aircraft flying and routes. We think we've integrated into our guidance as best we can at this point, and we'll see how that unfolds. It all depends on the duration and depth of the impact that comes from the war, and that is highly dependent on the duration. Gautam Khanna: Got you. But the fuel impacts are already reflected in your guidance. Patrick Roche: Yes. Gautam Khanna: We've already marked-to-market, assuming for the full year, we stay at this level. Patrick Roche: What I'm describing in Philippines are transportation costs and stuff like that. The direct input costs that we have, we've reflected what we expect those to be for the full year. Gautam Khanna: Perfect. And I just wanted to ask, I know it's 3, 4 weeks -- 3.5 weeks into the quarter you have not seen any indications of demand weakness incrementally from what you saw in the March quarter? Patrick Roche: No, nothing. Operator: Your next question comes from Jon Tanwanteng from CJS Securities. Jonathan Tanwanteng: Can you hear me? Patrick Roche: Yes. Jonathan Tanwanteng: Okay. Perfect. I was wondering if you could give us a little bit more color on the FLRAA MV-75 program. How much that is pulled in by? And how that impacts your, I guess, revenue and profitability run rate in the out years, not specifically this year? Patrick Roche: So, in this year, what we were reflecting in the high level of activity in quarter 2 was getting up to the level of activity at an earlier point in the year. We expected to get to that level of activity, which we Jennifer described as peak activity. We expected that to come in the third quarter, I believe, and we got there in the second quarter because of the focus on the program from both our customer and the government. We brought forward some of the work we were doing. So we're at the peak run rate as we see it for the activities themselves. That continues throughout the EMD phase, engineering, manufacturing development phase of the program. There are conversations between our customer, Bell and the government about getting towards flight earlier than was originally planned, so getting into early-stage production more quickly. Those conversations are active, and we are supporting them. Jonathan Tanwanteng: Okay. Great. And then second, how should we think about the potential for Congress to change or flip this fall? And how does that impact your expectation on the defense spending in general? And if that could bleed through to specific programs like munitions or aircraft or in the space arena? Patrick Roche: Yes. I mean, whatever the total level of spending is, it really comes down to your exposure to different programs. And we believe that we are exposed to a set of programs that are in priority areas. The replenishment being one specific example, there's a need there that will have to be satisfied no matter what is agreed as the total budget for the defense forces. And then there are a number of priority programs, and we believe that our exposure is across many of those. And even if one or other goes by the wayside, we think we have a good solid growing business based on what's happening. Operator: Thank you. There are no further questions at this time. We have reached the end of the Q&A. I will now pass the call back over to Pat for closing remarks. Patrick Roche: So that concludes our earnings call. I appreciate you taking the time to listen to our update on the business, and I look forward to providing an update again next quarter. Thank you. Operator: This concludes today's call. Thank you for attending. You may now disconnect.
Allison Chen: Okay. Great. So thank you for joining us today. We know it's early start, and we appreciate you for dialing in on time. We have the management team with us here today. We have our CEO, Choon-Siang; Mei Lian, our CFO; Head of Investment, Jacqueline; Head of Portfolio Management, Yi Zhuan; and IR team here with us, we have Nathan, Tami and myself. We have to keep things focused today. So we'll start off with key highlights by Choon-Siang before moving on to the Q&A. With that, I will pass the time over to Choon-Siang. Choon-Siang Tan: Thank you, Allison. Good morning, everybody. Thank you for joining us today. I know it's bright and early, bright and early for me too. It feels like we have just spoken recently, and here we are back again. Okay. Today, we just announced business updates for the first quarter 2026. So the numbers could be a little stale given that we have already spent some time talking about some of the transactions earlier. And also, obviously, we have reported an advanced distribution. So some of you would have if you turn some of your numbers from there as well. But nevertheless, let's go through some of the operating numbers, and then we will take some Q&A. But there are some exciting updates in this business update as well. We will walk through in the subsequent slides. Okay. So first quarter net property income, very healthy, closed the quarter at $314 million, up 8%. But of course, this is -- has a lot of -- we've gone through a lot of changes in our portfolio. So we need to dissect the numbers a little bit. But overall, a very healthy set of financial numbers, as you would have seen from our advanced distribution anyway. Aggregate leverage, 38.5%, down 0.1 percentage points from the end of 2025. Average cost of debt has come down quite significantly from 3.2% as at 31st December 2025 to 31st March 2026. This quarter, in terms of cap market transaction, we issued $300 million fixed rate notes due in 2031, which is a 5-year note at 2.18% on 10th of March 2026. Portfolio occupancy, 95.2%, down 1.7% quarter-on-quarter. I'll spend some time walking you through some of the reasons why the occupancy is down for this particular quarter. I think it's mainly due to actually, I don't think it's a portfolio-wide reflection. It's actually very tenant-specific. The top 3 contributors to the decline in occupancy is actually a tenant in MAC in Frankfurt. We have the largest contribution. In fact, it contributed approximately half of the drop because by NLA, that tenant takes up quite a significant space and that contributed. But the rent on that tenant actually is not very significant. So the contribution was about 0.8% of portfolio occupancy. The rent contribution was actually less than 0.2%. So the impact on the financial is not as significant. Then the second tenant, we have a tenant departure from Funan office, one of the larger tenants that we have there. And also the third tenant contribution is a tenant in Clarke Quay that's on the third floor is an event organizer. Fairly large space, but as you can imagine the flow of Clarke Quay very little rent contribution. So the financial impact is more -- it's not as significant as the drop in occupancy suggests. But I want to highlight that we are very actively marketing the space. So of course, we all know that MAC itself has some challenges in terms of leasing. We actually did improve the occupancy last quarter. But I think when we highlighted last quarter as well, there's always some in and out in terms of the leasing momentum. So we will be working quite hard to try to improve the performance for that particular asset. Clarke Quay, a lot of -- it is work in progress. So the team is curating the tenant mix to try to dovetail with the completion of CanningHill, getting some good traction in the leasing discussion. So there could be some new names that will show up at Clarke Quay over the next few months. And also for Funan, the office tenant probably contributed about slightly over 10% of the Funan office occupancy. So we are also actively marketing that space, which we think is transitional. And the office space is actually quite nice because it's fitted out. So it should take us not too long to lease up that space. Okay. So these are the 3 main -- so it's actually very asset and tenant specific. I think overall, the portfolio is still very healthy as evidenced by the rental reversions, which is still very healthy at 4.4% for the retail portfolio. And for the office portfolio is at 6.1% rental reversion, quite in line with our guidance earlier to be trending around mid-single digits. Tenant sales per square foot, up 2.2% year-on-year, fairly healthy. This includes the March numbers as well even after the start of the Iran war. I think January and February numbers were very healthy, as you can see also from the national retail sales numbers. I think February, they reported 11% increase in year-on-year sales. Of course, there's some Chinese New Year effect. But then even if you combine the January and February sales, I think overall, it was up about close to 4%, if I'm not wrong. So in our malls, we are up about 2.2% per square foot, including March numbers. Okay. Next. Shopper traffic, also very healthy, up 3.2%, so quite in line with the -- I mean, slightly better than the tenant sales. In terms of the updates for first quarter, AEIs that we have previously announced, I think they are all work in progress. Lot One, Raffles City, Tampines Mall, all progressing quite well. Divestment of Bukit Panjang has been completed at the end of February. In terms of utilities costs, I think we have been getting a lot of questions in all of our meetings over the last 1 month. I think happy to reiterate that our utilities costs, energy rates are all locked in across our portfolio. For Singapore portfolio, locked in until end of 2026 at a better rate than what we locked in, in 2025, actually. So this year, we're actually expecting savings from our utilities costs. For our overseas properties, we are locked in as well until 2027, depending on which property and 2028 for some other properties overseas. Next. Okay. So I think we have spent some time over the last few days talking about this transaction already. So I won't spend too much time. We can take some questions as well, but I think a lot of you have already had a session with us on this. But I think the market reaction has been fairly positive. So we are quite happy with that. The placement was well oversubscribed at about -- I think it was about just almost 5x subscribed, just below 5, I think. That allowed us to upsize our placement from $600 million. So that's the key change from the last time we spoke. I think when we spoke, it was based on a $600 million equity offering. Now we have raised $750 million and at a tighter discount than what we originally assumed, which was 2.7%. The price that we did at 2.30% was actually a 2.36% discount to the adjusted VWAP. So all in all, very healthy demand for the offering. As a result of that, there will be some adjustments to the DPU accretion because of the larger equity offering, accretion is at 1.7%. But of course, that also means that it allows us to lower our leverage to 38.7%. I think previously, we reported just slightly over 39%. So that also means that it gives us larger debt headroom for other activities that we wish to pursue at least going forward in the future. Next. Okay. So I think this is the key update for this quarter. We want to also report that we have actually started the process for AEI at Plaza Singapura and The Atrium. I mean we have been looking at this for a while. I think we are now confident to go out and announce this asset enhancement, I think for a few reasons. I think timing-wise, of course, this is not like something that we take it quite lightly, asset enhancement. And this is quite a substantial asset enhancement at $160 million. I think we have always been quite deliberate in terms of the spacing of our asset enhancements, as you guys are familiar by now. We always try to time it with a minimal or execute it in a way that has minimal impact on our cash flows. So that has already contributing -- that has already started contributing to our numbers since February and March. And also that, in fact, give us the uplift in terms of financial performance. That was one of the key contributors to first quarter outperformance also in addition to CapitaSpring and in addition to ION acquisitions. So with Gallileo largely resolved and handed over to the tenant, we think that we are ready to take on another major AEI, which is Plaza Singapura. And most of you are familiar with the asset. It is an asset that has been around for a long time. And I think if you look at the performance of Plaza Singapura on a per square foot basis in terms of rent and sales, I think there is some room that we can value add when you compare it to some of the more neighboring malls in downtown, even within our portfolio. So the idea is to elevate the positioning. There are some infrastructure upgrades that we're doing. There is also a tenant refresh that we are planning. We will also be looking at -- probably looking at some -- transforming some spaces into a more immersive experiential entertainment concepts. This is something that we are exploring at the higher levels so that we are able to draw the crowd to the top floor. I think so that's one of the key feature and objective of this particular AEI. The other thing that we wanted to achieve was also to dovetail with the URA's Master Plan. There is a plan to pedestrianize the Orchard Road stretch in front of the mall. So we want to now plan for the seamless linkage between Plaza Singapura to the Istana Park that is right in front. So we will be doing some upgrades at the front to extend the park experience in so that it creates a more seamless connection between nature and retail. So to minimize the disruption, we do plan to carry out the AEI in phases with the mall remaining open and operational throughout this AEI period. So some of the pictures, I think, in the next page, artist impression. Maybe we go to the next page and show the pictures. So there will be some improvements in terms of the facade, there will be improvements to the drop-off point, creating a better experience. So the inside of the mall, we will definitely be upgrading to make the space a bit more open and also the look and feel and the tenant mix is likely to see significant changes at least for the first and second levels and as well as the top level. Okay. So I think the other thing that is interesting is also we are creating some of these bridges that link across -- I think we -- the idea is also because Plaza Singapura actually is quite a big mall. It's about 700,000 square feet. So the idea is also to create better movement across various parts of the mall. So we have all these link bridges, not only looks good from The Atrium area, but also facilitates the flow, creates a bit more vibrancy to some of the upper floors. So that overall effect on the mall is one of a little bit more exciting and vibrant across every floor and not just focus on the -- I mean today, we know that the basement for Plaza Sing is really doing very well. The ground floor is doing well. What we want to do is also to replicate the experience in the slightly quieter areas of the mall, okay? Okay. So in terms of the financial performance, I will touch on that. Gross revenue, we are up 8%. But of course, this includes the contribution from CapitaSpring, which previously was reported under JV structure. NPI up $314 million. Year-on-year, we are up about 7.9%. So this also excludes 1 month of Bukit Panjang because we have sold it in February. So there's a lot of movements within the numbers. Okay. Next. In terms of capital management, I think we have highlighted a very healthy balance sheet now. We are at 38.5% even with the acquisition and coupled with the equity offering, this is not likely to change significantly. Interest coverage, very healthy 3.8x. I think the key takeaway from this slide is that the average cost of debt has come down to 2.9% from 3.2%. Next, well spread out maturity profile. I think we only have about $450 million of loan left for refinancing for this year. And the rest of the years, I think, fairly healthy. Next year, we have about $1 billion up for refinancing. In terms of occupancy, I think we spent a lot of time at the beginning talking about occupancy. So I won't belabor the point. If you look at our retail, actually, it's generally -- it's come down slightly, but I think the largest contributor to that drop was the Clarke Quay that I mentioned, the Clarke Quay tenant I mentioned, but I think the financial impact is very small. Office, largely because this is a combined look, including Germany and Australia. We can have some detailed breakdown later, largely contributed by Germany. Integrated development, it's down slightly. There are some vacancies in I think this is Funan because it's contributed into the under integrated development. That's the drop that I was mentioning as well in the Funan tenant. Next. Top 10 tenants, no significant changes. I would just add that ECB, which we have put into the footnote will feature as a top 10 tenant going forward, but we're still in the process of handing over the last 2%, 3% of the -- so we haven't included it. Once it's 100% handed over, then we will start including it probably from the next quarter or the following quarter onwards. Next, maturity lease expiry profile, generally still doesn't look too dissimilar from our previous. We have 11% for expiry this year for retail and 5% for office. Out of that, probably 4.3% of the retail and 1.6%, which is about 1/3 each has been kind of resolved in advanced negotiations. Next. Okay. Healthy leasing activity. Despite the decline in occupancy, we still have a very healthy retention rate. For retail, it's at close to 90%, for office, about 70%. And we have had quite a lot of new leases and renewed leases as well, about 339,000 square feet spread across the various trade categories and also for office, about 121,000 square feet. Next. Retail occupancy broken down into suburban, downtown, downtown, as I mentioned, contributed primarily by the drop in Clarke Quay. Next. Our rental reversion of 4.4% for retail broken down into downtown and suburban. Downtown, 3.9%; suburban, 5.1%. Tenant sales, 2.2%, as we mentioned, broken down into suburban growth at 3% and also downtown at 1.7%. Next. Yes. Just some of the highlights on some of the new retail concept that we have, sio pasta, which is a maturing recognized casual pasta concept that just opened in Raffles City, Shiseido at Tampines Mall. I don't know whether you guys have been to Tampines Mall. I think you can see the slowly -- slow upgrade on the ground floor. We have also holded up the Isetan space. I think that's work in progress. So we expect to probably finish that over the next few months. But I think the ground floor area has been done in phases. So you can already see some of the new tenants showing up at the ground floor entrance area. Prada at Raffles City. We also have a new tenant at IMM, BYD, which is on the third floor. So that's quite interesting because it's on the third floor, and we have a massive car park at IMM, so which are able to showcase some of their cars. So fairly interesting concept there. Okay. Maybe we'll just move on. Okay. In terms of the office occupancy, as I mentioned, as you can see here from Germany, the significant drop in office is actually due to Germany from 91% to 83%, but financial impact is, I think, not as significant as what the numbers suggest. Australia, actually, the occupancy has been healthy. As we have mentioned a couple of times, we think that the leasing momentum is still -- is picking up. Occupancy in Australia actually improved from 91.8% to 92.8%. And Singapore, we have touched on, I think, generally quite healthy, slight drop due to the Funan vacancy. The good news is that our average rent continues to inch up from last quarter, 10.95% to 11.00%, 2.2%. Although I'll just caveat that, of course, you guys are aware that we have just announced the sale of Asia Square Tower 2, which is -- has a slightly average -- higher average rent than our overall portfolio. So this number could come down, but that's probably because it's not a like-for-like comparison once we take Asia Square out of the equation. Okay. Next. Focus and outlook. Yes. So I think overall, we are still on a pretty good and healthy space in terms of outlook. I don't think anything significant has changed from our last update. Rental reversions continue to provide the organic growth. CapitaSpring, we are still benefiting from the contribution because it was only accrued -- I mean the additional 55% was only included from 26 August onwards. So this first half of the year, we are likely to see that accretion coming from CapitaSpring. Gallileo, already -- our first quarter numbers have already started recognizing the income. So you can see it in the DPU impact as well. IMM already completed, performing well above our underwriting numbers. So we are very happy with the outcome. If you go to IMM today, you will see that the look and feel of the mall is significantly different from what it was before. So that was an area that we're very happy with. Okay. So I think organic growth and also some of the contribution from the inorganic growth has really done well for us. And going forward, we expect this recent announcement on the divestment of Asia Square and the acquisition of Paragon to continue to build on that momentum with the 1.7% accretion. You can also see that our capital management, Mei Lian's team has done a very good job in terms of our interest rate management. Over the last 1 quarter, we have brought the interest rate down from 3% -- 3.2% to 2.9%. That's actually a very significant tailwind, definitely helped to improve the bottom line performance, and we expect this to continue to contribute because as you can see, last year, we have been reporting even in the second half of last year, we were still at 3.3%, 3.2% average. So this 2.9%, even if it maintains, will be a significant savings compared to last year already. I think energy rates, we've talked about it. Okay. Yes. I think value creation strategy, I think this is the same slide we talked about it earlier at both when we brief on the transaction as well as at the AGM. I won't spend too much time. I think we remain -- the 5 pillars continue to drive our growth, organic asset enhancement, unlocking value through divestments and driving growth. And we have been very consistently unlocking value every year. In fact, we have been doing one divestment almost -- this year, we did 2 divestments. Last year, we did one, the year before we did one, and we have been doing one high-quality and meaningful significant, highly accretive acquisition every year for the last 2 years as well, okay? And capital management, of course, that's an important tailwind. All right. Sustainability, we are on track for most of our indicators. I think we won't spend too much time on that. Next, we just probably -- I think maybe we can start moving to Q&A. Allison Chen: Yes. Okay. I see a few raised hands. Yes. And I'm looking to have somebody other than Mervin. So Mervin, please go ahead. Mervin Song: Congrats on excellent set of results. Just a few questions. I think in prior cost of debt guidance was 3% to 3.1%, delivered 2.9%. Do you have an update for this year? On the Plaza Sing AEI, I'm personally quite excited by it. But at any point in time, what will the impact on occupancy? And is there any extra NLA you think you can activate, especially in front of the property with the new startup park? And in terms of Iran war, have you seen any impact on retail sales given petrol prices high today? Choon-Siang Tan: Okay. I'll take the easy question. I'll let Mei Lian do the first question, and then Yi Zhuan can talk about the Plaza Sing AEI. In terms of retail sales in March, actually, it has not -- we have not seen a significant impact. In fact, I think March sales is up year-on-year. It has decelerated in the sense that the growth rate for January, February is higher than the growth rate for March, but March is still a positive growth rate compared to last year. So it has surprised us as well on the upside. I think a couple of reasons. I think there's also some constraint in terms of flight capacity. So maybe people are not traveling out as much, spending more. And I think in the first few weeks of March, there was not as big of a -- in terms of sentiment, I think maybe there was -- it has not affected sentiment as much, maybe the first 2 weeks and people are expecting the war to end quite soon. So that could also be the reason. But in general, I think if you look at tourist numbers coming into Singapore, that has also improved year-on-year, quite healthy tourism numbers. So that has kind of provided a lift probably for some of the numbers. I think so quite a few confluence of factors that helped to drive the first quarter numbers. But I think to your specific question on whether March numbers, we are down, no, we are still up compared to last year. Mervin Song: About April, yes. Choon-Siang Tan: April, too early to -- I don't think we have the April numbers yet. Okay. Maybe Mei Lian can take the question on interest rate guidance and then Yi Zhuan can take the... Mei Lian Wong: Okay. Earlier on, when we look at the interest rate guidance, we're seeing like around the 3% level. But given the -- what we're seeing in the Sing dollar floating rate movement in the past 2 months, it has generally been trending down. So that kind of allowed us to look at an overall lower cost of debt of below 3%. So guidance for this year, again, based on the current levels will be in the high -- high 2%, high 2%. Yes. So depending on where the rates go, right now, I think, yes, there should be continued looking at a year-on-year savings, yes. Mervin Song: Are you seeing tighter credit spreads or just being maintained? Mei Lian Wong: For some of our loan facilities that are on floating rate, we have actually negotiated for tighter credit spread as well. That is around 10, 20 bps, yes. But mainly the cost savings is really from the floating rate movement. Choon-Siang Tan: Okay. Maybe Yi Zhuan. Lee Yi Zhuan: Yes. Okay. I'll talk about the PS one. So during the course of the whole AEI, the reason why we kind of spread it out a little bit more because the works will be done in phases across the different parts of the property, it will largely remain open. And at any point in time, I think probably it's about 10%, 20% of the spaces that will be affected through the course of it. Nothing more. There will be a very small period, where there's a bit of overlap, but it's probably closer to 30%, but most of the malls will be open actually. The second part will be on the NLA question. Net-net, the NLA will be there about pretty much similar. While we create additional NLA on the ground floor in some of the spaces that we managed to identify, part of the AEI will also include compliance work where we will have and also a bit of upgrading works in terms of amenities, which will take a bit of the NLA away. And second part of it will be that as we know in Plaza Sing, right, the back end of the mall actually is quite deep. Some of the spaces are pretty deep. So rather than taking a big anchor that doesn't generate that much rent, right, we may subdivide some of these to create higher value spaces. Mervin Song: And there's no impact on the therma side of this section, right? Lee Yi Zhuan: At this point, there's no major impact on the therma office side, the tower side. Most of the works in the tower side in Phase 1 is actually more along the ground floor where the entrance arrival is. Mervin Song: Okay. Congrats on the results and recent Paragon acquisition. Allison Chen: Thanks, Mervin. [ Jardin ], you're up. Unknown Analyst: Maybe just back to the portfolio refresh opportunities. Choon-Siang, maybe your thoughts on partaking in further development projects with sponsors. So after Hougang Central, there's still some quota to work with. So will this be something that you are interested in or prefer to phase out a little bit? Choon-Siang Tan: Okay. I don't know whether you're referring to the partial... Unknown Analyst: Very sizable. Choon-Siang Tan: Okay. So I think the way we think about it is, I think, firstly, we must like the location. And I think Hougang was unique in the way because it was underserved and it is in a very dense residential catchment, which we think a retail mall is very likely to succeed. And also the connectivity with the 2 major MRT lines and the connectivity to the interchange certainly helps. And the size precludes other significant competitors from coming in. So [ Bishan ], I think we haven't looked at it in detail, to be honest. But I mean, no harm for us to look at it, but then it will come down to a matter of pricing and whether we think that catchment makes sense for us because we -- the other thing that outcome makes a lot of sense for us because we don't have something in that area. So Bishan, of course, will be quite close to dome Mall. But Bishan is also in a private -- slightly more private residential estate. So the residential catchment is not deep as, say, somewhere like a -- And if I'm not wrong, I think the retail component is so small, it's like 200,000 square feet compared to [indiscernible], which is 300,000. So yes, but long story short, I think we will take a look. Question is whether we will consider -- I think we can consider we have room, but we also have to look at the impact. Obviously, there's no impact on DPU as what we mentioned. There will be an impact on balance sheet. We have already deployed quite a bit of capital to Alqam. We're deploying capital to Paragon and now we are deploying capital to Plaza Sing. So we have our hands full probably for the near term. But let's see the details of the project. Unknown Analyst: Okay. Maybe just one more on the tenant at MAC. Is it tied to the geopolitical tenant -- geopolitical headwinds or the tenant was already thinking of it? And any divestment overseas since you have done quite a number in Singapore already? Choon-Siang Tan: Thanks for raising that question. I was waiting for the opportunity to answer that question. Okay. So the tenant is actually all the airlines, and MAC is next to the airport. So I think, unfortunately, it's not due to any geopolitics. It's not due to any rent reasons or whatever. It's due to the fact that they want to consolidate back at the airport, which is obviously a better location for our airline. So actually -- so that's just unfortunate in terms of the business direction that the tenant took -- so that's where we are. In terms of divestment, yes, definitely, we are looking at divestment. And I think, in fact, we have been talking about this at the last business update and now the Iran war obviously spun us into the works because with interest rate expectations being slightly altered in the European area, it might make divestments slightly more challenging. But nevertheless, I think we are embarking on that process. So we are starting to sound out and getting our feet on the ground to see whether there is an opportunity. So yes, hopefully, we have good news. It's not easy. So I don't want to also raise expectations. Obviously, you guys know in this current environment. In Singapore, it looks like it's a lot easier for capital market transactions, but I think the same cannot be said for the European region. I think the number of capital market transactions that we've been observing in the market is few and far between and not at the kind of sizes that we are looking at. Allison Chen: Rachel? Unknown Analyst: Can you hear me now? Allison Chen: Yes, we can hear you. Unknown Analyst: Maybe just a first question on the reversions. I think it has moderated a little bit by first quarter. So I was just wondering what's your outlook for this year since there was some advanced negotiation on the lease that's expiring this year. Choon-Siang Tan: Okay. Maybe Yi Zhuan... Lee Yi Zhuan: Well, for the reversions, right, generally, I think as I mentioned earlier, for the full year, we are still looking at around mid-singles. Of course, with some of the uncertainties in the wider global uncertainties, right, we probably might be a bit cautious on it, and we will see how this trends. For the retail, actually, largely most of the reversions have been quite strong. I think it was a little bit pulled down by a very specific tenant in a unique location. But by and large, I would say the retail reversions has been okay. Unknown Analyst: Can you give more color on this specific tenant? Lee Yi Zhuan: It's the change of use of a tenant into F&B. And because of the location of the unit, it's actually not where the normal rate is. So that's the reason why for that, in that case, compared to the outgoing use, the reversion is a little bit on the downside on that sense. Unknown Analyst: Okay. Which is it? Choon-Siang Tan: I think you -- so maybe I will also just add, I think while we have guided fairly healthy rental reversions, I think one mall that we moderate because I mean Plaza Sing and TAO, we are likely to go through AEI. So we may have to moderate because when you do an AEI, obviously, it causes -- in the course of discussion and lease renewal with tenants, we also have to be mindful that they will be impacted by the renovation going forward. So we have to be a bit more flexible sometimes when it comes -- obviously, this is obviously only during the transition. So it could impact some of -- specifically for Plaza Sing and TAO, I think. So there could be some moderation in terms of rental reversion, which should not be unexpected. But I think the rest of the portfolio should be business as usual. So there could be some impact because of that. Unknown Analyst: Okay. Just moving to the office reversions. Now that you have sold AST 2, do you expect that the reversions may trend down more? Choon-Siang Tan: No, I don't think so. I mean if you look at -- if we break down our reversions and contributions, I think they are quite evenly contributing. So removing AST 2 should not make a significant impact. Unknown Analyst: Okay. Got it. Then maybe just on the tenant sales side, you mentioned that March was up year-on-year, but is -- do you see any impact on the downtown malls? Are they impacted a little bit more from the war? Choon-Siang Tan: I think it was the reverse, right? I think our downtown did better than suburban, if I'm not wrong. Unknown Analyst: For March this year. Choon-Siang Tan: I think downtown actually did better. If you strip out the numbers for March, I believe downtown we did better than suburban. Unknown Analyst: Okay. Interesting. Okay. Maybe just one last quick one, which is on ECB contribution. How much are they contributing in the first quarter? And how much more should we expect? Choon-Siang Tan: How much are they contributing? Mei Lian, do you have the numbers? I have the numbers, but more on the top line because we have to net off -- just in my mind, we have to net off the funding costs also. Mei Lian Wong: Can we get back to you on this? Yes, because we have to net off funding costs and also provide for tax. Choon-Siang Tan: I think that contribution at the top line is probably about -- I think maybe about -- you want to say about $1.5 million to $2 million a month, if I'm not wrong. I'm trying to digest the DPU side and flow down the bottom line, but we need to do some work around that. And so it's also been about 1.5 to 2 months. So it's not a full contribution. Allison Chen: Can we move on to Upiang, please? Unknown Analyst: Can you hear me? Allison Chen: Yes. Unknown Analyst: Yes. Just on the Plaza Sing AEI, the amount seems quite big. And then how confident are we in securing that 6% to 7% ROI? And also given that, does this also mean that any AEI plans for Paragon will be shelved back because of this? Because when I look at Atrium going down and then Plaza seeing occupancy could also be impacted a little bit in terms of performance. So it does seem like we are in a quite uncertain period and then quite a few major assets could be seeing some -- a little bit of downtime. So that's the first question. And then second is on your retail, suburban seems to be meeting downtown. Do you expect this trend to continue in terms of reversions and also tenant sales? Choon-Siang Tan: I'll take the first question and Yi Zhuan can take the second one. Okay. So in terms of the expected return from Plaza Sing, I think -- I mean, you guys are familiar. We normally don't undertake AEI without a calculation of the financial return. And we have put down here that we are targeting about 6% to 7%. Question is whether we are confident of achieving. I think we have put it on to the slide. We wouldn't have put it there if we are not confident of achieving. That's one. Secondly, of course, but nobody knows this AEI will take -- years. It's also based on a certain assumption. I think -- but based on our track record, if you look at some of the past AEIs in Singapore, like Raffles City, we have done, IMM, we have done, I think we -- safe to say we have firstly, met our underwriting. And secondly, not just meet our underwriting, I think the part of the AEI, the objective is also to transform the mall to make it relevant and to make it able for the current taste and environment and shopping behavior and the new consumer. So all of that is also taken into consideration when we plan an AEI. And I think if you go into -- I think there's no argument that Plaza Singapura has been without AEI for a while, and I think it will definitely be helpful to rejuvenate the space. And also like what we mentioned is also really to dovetail with -- I mean, we have been very deliberate about this. It's not just about, okay, improving the tenant mix and then make it better. It's also -- we want to also think a few years ahead, what will happen to this mall when the pedestrianization of the mall, the road in front comes up. So we want to be positioned when that happens. We will transform the area, and we want to be there and ready when it happens. And I think our portfolio is large. I think we can definitely cushion if there is a bit of downtime. But of course, when we try to do any AEI, we will try to minimize the impact to our cash flow, which is why it will be done in phases so that the downtime doesn't stretch beyond 10% to 20% of the tenants or malls. So question -- so hopefully, that answers your question in terms of whether we are confident. Unknown Analyst: Yes. Can I also check if the construction costs have been locked in? Choon-Siang Tan: Yes. Unknown Analyst: So even if construction cost escalates from now on, your target ROI 6% to 7% is still comfortable? Choon-Siang Tan: Yes. So I think we have also been deliberately trying to upgrade slowly the various assets. I think you have seen that Raffles City was upgraded. Now we are moving on to Plaza Singapura. Then the question in people's mind is, okay, is Paragon next and whether this -- some people may think, okay, we like what you mentioned, if we are doing Plaza Sing, does that mean we have no capacity to do Paragon. I don't think that's the case. And I don't want to jump -- I don't want to prejump the conclusion that we are not doing anything. I think like what we mentioned, it's only been about 4 days since we announced. We want to go in, take a thorough look at what they have done. And there is already an AEI in plan in place, no harm and no skin off our nose to take a look at what they have planned, and we will see whether the plan involves any and how -- you do in phases, whatever they have planned or whatever we want to look at with fresh eyes, we also have to -- obviously, for us, we have to look at it from a portfolio-wide perspective and whether it makes sense for us, both on the asset level as well as the portfolio level in terms of cash flows. So that -- all of that will all have to be taken into consideration. But in any case, so I think Plaza Sing starts third quarter of this year. Paragon completion will only be third quarter of this year probably. So by the time we take over, it's not like we're going to do on day 1. We will definitely have to review the performance, the asset mix. I mean, the tenant mix. And then by the time -- if and when we do take a decision to do anything, it will probably be like possibly 1 year down the road, we're not sure. But I think that's not pre-conclude that it will or will not happen. I don't think I answered that question right now. Unknown Analyst: Okay. Second question is on the retail, the performance within suburban and downtown. Lee Yi Zhuan: So for tenant sales, right, I would say that actually between downtown and suburban, if I just look back at the past few quarters, right, sometimes it will be downtown and suburban. So actually, the 2 of them are really quite closely matched. And I would expect that to kind of go forward in this year also. Of course, naturally, given some of these uncertainties in this few months, right, probably the suburban side, we will probably see a bit more resilience as because with some of these higher cost operating costs and worries over inflation and stuff like that, discretionary spending on large items will probably be a little bit held back for a while, while the day-to-day people still have to spend. So I would say that's the kind of trend that we foresee for the going forward. And I think the related question to this was actually on the reversion side of things. By and large, I would say both retail and downtown -- sorry, for both downtown and suburban, generally, we look at sustainable kind of reversion levels that we go to our tenants. But of course, with downtown, as I think Choon-Siang mentioned earlier, when we do some of these AEI works, right, some of these impact short-term extensions and stuff that we may do to retain a tenant in the near term to kind of time our AEIs a bit better may distort some of these reversion numbers that we may see. Unknown Analyst: Okay. It's just that I noticed your tenant sales have been quite soft in the past few quarters and then reversions have been going up. So just wondering, just a little bit concern on occupancy costs. Yes. Lee Yi Zhuan: I think on occupancy cost year-on-year, we are quite stable actually. This time around, we are around 17.4%, which I believe is 0.1% lower than the previous year. So downtown cost is higher than the suburbans. Suburban, we are looking at high 16s, which is quite actually in line with the market and it's actually quite sustainable. Choon-Siang Tan: And I think the other thing I just want to add that actually 2.2% sales compared to rental reversion of 6%, actually not that out of line because actually 6% rental reversion because it's average over 3 years, actually, it's quite in line with a 2% sales growth. So I wouldn't actually say that it's not in line. Unknown Analyst: Okay. Okay. Last one is, is there any -- do you disclose on ION tenant sales? I think in the past quarters, there was like one small footnote. Maybe I missed that. Choon-Siang Tan: No, it's included. Last time we used to show a footnote as in we strip out the ION because it was not like-for-like. But now ION, we have owned it for a full year already. So there's no need to strip out the effects of ION anymore. So ION has contributed -- ION is in 2025 and 2026 numbers now. So this 2% includes the total sales from ION as well. Allison Chen: Can we go on to Brandon, please? Brandon Lee: Just touching on a bit on occupancy, right? Could you sort of guide us a bit on the forward occupancy for the different like retail office, right? Because when I look at this quarter's numbers, it's kind of quite low. In fact, it's like a 4-year low, right, whether you look at retail office or portfolio. So is that something that you can sort of guide us? Or is this something that we should be concerned about? Choon-Siang Tan: No. So I think quite -- I think I spent some time trying to address this point because I expect this to be an issue and to be raised, which is why I think I have addressed it right from the get-go. So it's actually unique to 3 specific assets that we have and very unique to 3 specific tenants. And the financial impact is quite small because these are all low rent spaces and not one of -- actually half of it -- more than half of it is due to Germany, which doesn't affect our Singapore performance. So I don't -- I won't take this as a read-through on the portfolio to answer your question directly. So no, because at the end of the day, if you look at rental reversion, it's still healthy, which means that we still have the negotiating because we still have the negotiating leverage to negotiate for higher rents. So it's unique to MAC, Germany and unique to Clarke Quay. Clarke Quay, of course, is work in progress until CanningHill gets completed end of this year. Brandon Lee: So if you look at it on a portfolio standpoint, right, should we sort of expect that 95.2% to sort of get back to your usual like 96% to 98% kind of range? Choon-Siang Tan: No, I think we can expect to improve. If you're asking whether this is the new steady state, no, the answer is no. I think we can expect this number to improve. For the simple reason, let's say, for example, today, we were to sell MAC immediately improves and normalizes to that higher level if -- but I would say that as a noncore asset, so we shouldn't even use that as a contributor to look at normalized occupancy. So I do -- but even if we were to include it, we do expect some of these vacancies are very transitory frictional. We do think that the 95.2% is not a reflection of what we are able to achieve with the current portfolio. Brandon Lee: Are you comfortable to share the occupancy of those 3 unique assets? Choon-Siang Tan: Yes, we can. So of the -- I think MAC now we are just trending somewhere above 70%. Clarke Quay, 84%. Funan office was 100%. I think one of the Towers now had vacancy. What is Funan? 87%. But we are quite confident of leasing out that space. So that's a very transitional vacancy. MAC could be a bit more -- take us a bit longer, but I think we will work hard to try to replace or look at divesting at some point. But yes. So those are the 3 assets that probably contributed to this quarter's movement, one of which we are quite confident of re-leasing quite soon, hopefully. But the other 2, I don't think will actually affect the financial because those are very low rent spaces anyway, although they are quite large, and hence, it contributes to the drop. Our financial performance has not been impacted. That's the bottom line. Brandon Lee: Okay. Great. And just going to -- can you talk a bit on Bugis Plaza? I mean, historically, if you look at like CICT, right, when you guys sort of amalgamate your assets and other assets, right, these assets usually get divested, right? So could we sort of expect the same for Bugis Plaza or there should be a wider plan for it given that you really own Bugis Junction? Choon-Siang Tan: Sorry, I don't get your -- you're saying that -- what are you saying about Bugis Plaza? I didn't quite catch your drift. Brandon Lee: Yes. So historically, if you look at CMT, CICT, right, you guys tend to amalgamate the performance of certain assets under other assets, right? And then after that, subsequently, we see you selling those assets, right? Should we expect the same for Bugis Plaza? Is it a noncore asset in your view? Choon-Siang Tan: I think the short answer is no. Lee Yi Zhuan: I think we have also shown that we can sell assets that are not in the others category. So it's not -- it doesn't indicate anything. There was a period of time when there's only so much space and there's only so many buildings you can squeeze into it. So some of the smaller assets tend to be parked under others. Brandon Lee: Yes, yes. Okay. I mean, it's good to know that it's core, okay? So we shouldn't be. Choon-Siang Tan: It's actually a very vibrant area and coming out very nicely. In fact, I see it as a high growth area going forward. Brandon Lee: I'll just end with one last question, right? So if there are opportunities, right, to acquire something that's pretty decent, is CICT sort of open to raising equity more than once a year? Choon-Siang Tan: We try not to. I have been reminded by investors to try not to do that. So we will try not to do that. Allison Chen: Move on to Vijay, please. Vijay Natarajan: Three questions from me, maybe I'll take one by one. Firstly, in terms of the Funan, can you give some bit more color in terms of the tenant who exited. What was the reasons? And how much downtime do you expect for this property? Choon-Siang Tan: Tough question, I leave it to Yi Zhuan. Lee Yi Zhuan: You mean the tenant. Choon-Siang Tan: Funan. Lee Yi Zhuan: So for Funan, the tenant Adidas moving. Actually, it's more of an issue of them trying to consolidate some of the space in terms of the efficiency and their corporate planning. So that was the reason for the move. Vijay Natarajan: And how long do we expect... Lee Yi Zhuan: How long do we expect to backfill it? Well, okay, typically, I would say that if we start from scratch for a tenant of -- because okay, for adidas, right, it's about 28,000 square feet of space. If there's a few ways we can do it. I mean, we subdivide then naturally downtime is a bit shorter, at least for part of the space. But for tenants usually of this kind of size, if they start to look for space, typically, they'll be looking at it around 6 to 9 months ahead of time because they have to plan to move from the previous space. So some of the -- we are already starting talking some interest along the way, and it's really down to how it converts as well as how the negotiations with the other options that they have, right? So it's hard to say for sure, but I would say probably half year. Vijay Natarajan: Got it. My second question is just sharing my observation. I think for a Clarke Quay perspective, it does look like the impact seems to be structural for some time. I mean the asset went a major upgrade after COVID, but still seems to be having a lot more of tenant churn over the last 1, 2 years. Maybe what's your thought on this asset? And would you be willing to divest it? And are you seeing tenant sales improve since last year? Choon-Siang Tan: Okay. So I think Clarke Quay, I won't say it's structural because we have not seen it in its stabilized state. There is definitely a structural difference between the construct of Clarke Quay and some of the other malls for sure. Definitely a slightly different positioning. And of course, it's not a natural mall per se. And of course, now currently it is impacted by CanningHill. I know we have been saying that for the last few quarters, but that is the reality, major construction. We do expect the vibrancy of the whole area would change once you have this few hundred residential units being filled up; and two, hotel blocks being completed. So I mean, hotels generally creates a round-the-clock footfall. So we do expect -- and this is right across the road from them. So definitely there will be some improvements. Whether the improvements will be enough will be one of your questions as well once it becomes stabilized. But we are confident that there will definitely be improvements once that happens. And the challenge with the leasing discussion now is also nobody will commit until they have seen the hotel being completed. That's the reality. I mean, if I were a tenant, I mean, no point for me to take the risk today, I might wait until 6 months later when the hotel is completed. So a lot of the tenant churn is also because a lot of our tenants within Clarke Quay, some of them can be -- some of the movements and the margins is also due to us bringing in shorter leases coming in to fill up the space, create the footfall and vibrancy to that area. But we are doing a lot of things to -- I mean, we have a team that is very focused on marketing the asset. If you go to Clarke Quay, there are a lot of marketing activities going on every weekend. We have now clusters coming in on every Wednesday. We have just done a cycling circuit competition, making use of Clarke Quay natural outdoor roads to create kind of a cycling circuit. We are also -- every time there's a major sporting events, we have organized live shows and all that. So we are making a conscious effort. It's not a natural place where there's natural footfall. So we need to create a more destinational effect to bring in the crowd while CanningHill is being completed. When after completion of CanningHill, we do expect it to have more natural footfall. Yes. So we are making very good efforts. And to your second question on whether we will be open to divesting, I think we have demonstrated our willingness to divest anything, I think, if necessary. I will say that -- I mean, we just divested 2 assets and one of which is fairly large and performing well as well. So I think the question to that is anything is possible, including Clarke Quay as we are divesting Clarke Quay. Vijay Natarajan: If 10% premium, I think, yes, that's what you are alluding to. Choon-Siang Tan: Yes. You hit the nail on the head. I think it's always a matter of pricing, right? But I think the yield is still decent for Clarke Quay based on the current book value. Vijay Natarajan: Okay. My last question, I think in terms of energy rates, you mentioned that this year, you mentioned it is lower than last year. Maybe how low is it for this year compared to last year? And if it normalizes, if you have to go for open market and purchase a contract for next year, should we have to expect a jump in terms of electricity cost and NPA going down. Choon-Siang Tan: No. Thanks for the question. Actually, I also want to take this opportunity to highlight that next year, actually, we do expect utilities cost to come down further. The reason is because although it's not been locked in, we have achieved a better formula. There's -- the formula for utilities cost is always a function of certain input prices. And of course, oil price and gas prices are a key component of it. So even at today's price, if we were to enter into the contract, we are still achieving savings because of the better formula that we have achieved with our supplier. So we do expect savings next year as well compared to this year. Vijay Natarajan: So you're not impacted by external environment or even at this higher price, you can still achieve savings? Lee Yi Zhuan: Yes. Choon-Siang Tan: No, we are impacted because -- but what we are saying is that at the same price -- at the same input price next year, we will achieve savings because of a better formula. But so even though prices have gone up, we will still achieve savings. It takes a very significant increase in the price of oil for us not to achieve savings for next year, and we are not anywhere close to that. Vijay Natarajan: So this is based on the management contract we have signed with calxiaxite? Choon-Siang Tan: No. It's based on our contract with our energy provider, utilities provider. One thing is that we procure energy as a group. So we do have quite a bit of negotiating power. So for example, CICT, Clarke, the whole CLI Group, we are procuring energy as a bulk contract. So as you can imagine, because given our size, we do have some negotiating leverage. So we are able to lock in a better formula for next year. Allison Chen: Can we go to [ Diyash ]. Jian Hua Chang: This is actually Derek from Morgan Stanley. I just assumed another by accident. No, I just want to ask a couple of questions on the cost of debt outlook. I think, Mei Lian, you're alluding to -- it seems like you're alluding to about 10 to 20 basis point savings from the current 2.9%. Does that take into account, I presume, the debt paydown from using proceeds from the raise -- from the equity raise. And when you take on fresh debt for Paragon, is that all taken into account already? Mei Lian Wong: No. We have -- I mean, -- depending on the fixed float assumption for the Paragon debt, we believe that there is some room in terms of floating rate because we continue to see the movement over the past months where floating rate has actually even gone below 1%. So if this kind of continue, there could be even more savings from that anchor. We haven't taken into account the Paragon debt yet, because it will depend on the actual fixing structure. Jian Hua Chang: Is there a rough number that you could -- I mean, could we be looking at 2.5%, 2.6%? I mean I also assume you'll be in lieu of the acquisition coming in, you'll pay down debt first, right, with the equity raise proceeds? Mei Lian Wong: Yes, yes. The assumed debt for interest rate for Paragon debt is about 2.6% to 2.7%, yes. So that could kind of lower the average based on this assumption as well. Jian Hua Chang: And that number actually looks high also compared to what you recently raised at 2.18%, right? So could that number also be a lower number? Mei Lian Wong: We will try to do better. The 2.18% was raised when the fixed benchmark was actually lower than current. So today, if we were to raise the bonds again, it may require slightly higher margin. So it all depends on, first, the timing; second, the tenant that we want to lock in and how much is going to be fixed and float. But generally, we try to keep on an overall basis, at least 70% of our debt portfolio on a fixed basis. Jian Hua Chang: Understood. And if you were to raise fresh debt right now fixed, what will be the number? Mei Lian Wong: Well, probably looking at the secondary trades, close to, say, 2.4%, 2.5%. Jian Hua Chang: 1 Okay. Got it. And just last question, if I may. I think I got some investor queries on the equity raise, why raise at a lower -- at the lower end of the range of the pricing range, given the robust takeup? Choon-Siang Tan: Yes. Okay. I'll take that. Actually, we -- I would say that this is the low end of the range. The low end of range is 2.7%. But you are right, could we have raised it at, say, 2% possibly. But then the quality of the book could be different. So typically, in an equity raise, you guys will be familiar, there will be 3 main types of investors. The first group is what we call the real estate long-only investors. These are the buy and hold investors, right, because they like the assets, they are real estate specialist, they are long only, they buy because they want to achieve the yield that we provide and the growth that we provide going forward. Then there's the hedge funds and then there is a private bank who may or may not buy and hold depending on the valuation, depending on the momentum and depending on the market conditions. So we typically try to allocate a larger part of the book to long-only real estate because these are the investors that will stay with us and grow with us. But of course, these are -- so looking at the book to encourage a larger allocation to debt, that was the reason why we decided to -- but even with the decision, we also are able to bring everybody up from, say, 2.7% discount to 2.36% discount, which was the final price that we did that. And if you look at all of the equity raise done in the last 20 -- I don't know, last 5 years, this is probably the tightest. I don't know whether I can think of a tighter. So I don't think we can say that this is not a tight discount. I think we probably have been spoiling investors a little bit because we went out with a very tight low end in the first place. Most equity offerings will not go out with a 2.7% at the very low end. They typically will go up with 3.5%, 3%, 4%. But we are fairly confident of doing that, and we are able to negotiate because we also want to protect our own downside, and we're able to lock in the underwriting by the banks at 2.7% because our last equity offering was done at 2.7%. And despite that very tight low end, we were able to tighten it further at 2.36%. And I think the other consideration is we also upsize. It's actually very challenging to upsize the equity offering by 25% and still tighten the discount. Usually, you have to choose between the 2, price or quantity. I think that's a very standard trade-off. You want better price, you have to sacrifice on quantity. You want a better quantity, you sacrifice on price, and we are able to achieve both. So it's not -- so I will not actually fully agree with the statement that we are not achieving a tight discount and we didn't -- I think the third thing I will also add is that I think could we have squeezed to say, 2.2%, 2.1%, possibly. But I think we also want to watch the aftermarket performance. We want to make sure that the momentum is maintained to ensure a strong market performance, you also have to allocate and price accordingly. And I think if you look at the post-market performance, I think -- we do think that we did the right thing, and there is definitely some strong market outperformance following the EFR. Unknown Analyst: Just one question on full year DPU growth. Because of the upsized equity issuance in Asia Square 2 that will come in before Paragon acquisitions, are the growth levers that you mentioned sufficient to offset this? Or what are the other mitigating factors on the capital management front such that full year, you're still expecting DPU growth, right? Choon-Siang Tan: Sorry, I didn't get the -- can you summarize the question again? Unknown Analyst: Yes. So equity issuance was upsized. So that will drive dilution. Asia Square 2 loss of income second quarter. This 2 will actually come in before the Paragon acquisition, right? So full year, what are the mitigating factors? And are we still forecasting DPU growth? Choon-Siang Tan: Okay. Okay. Okay. I get what you're saying now. Okay. Firstly, there are 2 potential things. There are quite a few things, right? One is Asia Square divestment is unlikely to close before actually. Asia Square divestment is likely to close after Paragon acquisition because the buyer for Asia Square also needs an EGM and the process takes a bit longer. So we are expecting to close probably at least 1 to 2 months before that, 2 months. So quite counterintuitive, but actually, that is better for accretion. Because before they close, we will have to do a bit of a bridge loan. So if we borrow for 1 to 2 months bridging to bridge the funding gap before we divest Asia Square, that cost of funding is actually lower than the asset yield because we're still earning NPI when -- as long as AST 2 is not being sold, right? So the asset yield at 3% is still better than -- is still higher than the funding cost. And bridging loan we will be borrowing on floating, which, as Mei Lian mentioned, is very -- still today is still very low at about -- the float rise is about 1% today. And spread, you are probably saving a good 1% on the funding cost. So actually, it's more accretive, fairly counterintuitive. But of course, you take a bit of a stretch on the balance sheet for that 1, 2 months, but I think that's okay as long as there's certainty on closing. So that's -- it shouldn't affect -- that part of the equation shouldn't affect accretion, but it can only improve accretion. Second part, I think what you're driving at is also the equity offering being done before the closing of Paragon debt will be dilutive. But of course, we will pay down debt in between. The net effect of both combined together, I think is this dilute -- see, we are buying $3.9 billion. Typically, equity offering makes up a larger proportion of any transaction. But in our case, the equity offering, $750 million is only about, call it, 18 acquisition size. So the dilution impact is actually very small, and it's only for about -- maybe about 2 months. And we are not suffering that entire dilution because we pay down debt. So based on my calculation, plus the accretion that we will get from $2.5 billion, 2 months of bridging loans, actually, the net-net is positive. So we will actually not suffer any dilution. If anything, we will still be fully benefiting from that 1.7% accretion for the year. Allison Chen: We have Mervin, who seems like the last one to go. Mervin Song: Just a question on the retail margins. It fell Q-on-Q and year-on-year. What's causing that given you have some interest cost savings? Choon-Siang Tan: Interest cost savings will not affect retail margin. Mervin Song: Electricity costs, sorry. Choon-Siang Tan: Why the margin go down? Yes, I noticed. Why the margin go down, do you know? Let me think. Was there a change in the portfolio constitution? You sort of BPP, but that's for 1 month. I think the reason is the top line came down slightly on a year-on-year basis because we started AEI. So like, for example, I think Tampines because we did the AEI, I think the margin for Tampines came down because of the top line dropped slightly. So that's one of the key reasons, I think. The other reason, of course, is also Clarke Quay. Clarke Quay, the margins came down because of the significant drop in occupancy compared to last year. So these 2 assets would have contributed to the margin compression. Mervin Song: Any updates on Junction 8 given the change of more commercial? Choon-Siang Tan: You mean like redevelopment plans? Mervin Song: Redevelopment plans or will you take on the office component? Choon-Siang Tan: Well, I think that one is -- that's -- I don't think that will happen anytime soon. If anything, we're in discussion with many, many stakeholders. So we don't have that -- we don't have the clarity now. But Junction 8 is doing very well in the meantime. Yes, sorry, the short answer is no, we don't have anything to provide at this point. No update to provide for Junction 8. Mervin Song: Yes. Just back on the office portfolio, we hosted the IOI properties a couple of days ago, and they said that we could push Asia Square Tower rents towards $13. Is there something you can do on average across your whole portfolio? Choon-Siang Tan: Across our portfolio, that's a tough question because our portfolio obviously has different varying locations and age of building. Obviously, those in -- I think IOI's building obviously is newer than ours. Asia Square, if you compare it to some of our portfolio, is also slightly higher, right? And I mentioned earlier in my presentation that average rent for Asia Square 2 is really higher than our rest of our portfolio. So I think if your question is whether we can do it for the rest of -- I think selectively possible. We are seeing some of the renewals done at those levels for some of our spaces. But I won't say that we can do it for the entire portfolio because there are also big anchor spaces in some of our portfolio. Mervin Song: And in terms of portfolio allocation, like how are you thinking about mix between retail and office, we now have a bit more retail? Choon-Siang Tan: Yes. No, I don't think it was deliberate. It was more -- I think it's a consequence of some of the opportunistic decisions that we made. I don't think if you ask us whether do we design it to be this way? No, we are not deliberately trying to sell office to buy retail. I think we are quite happy with both asset classes. And I think increasingly, the differentiation is not as important. I think what is important for us, even merge both the office and the retail component is what is the most and best construct for our portfolio that will deliver the most stable and highest growth DPU for our unitholders. And I think because we are already so big, so the stability is there. So the question is how to drive the growth. And I think people are more focused on underlying performance -- underlying financial performance than the marginal movement between retail and office. Mervin Song: Okay. Look forward to continued strong results and hopefully high share prices. Allison Chen: Thanks, Mervin. Looks like we have no more questions. So I guess we'll end the session here. Thank you for your time. Have a good Friday and a good weekend. Choon-Siang Tan: Thank you. Mei Lian Wong: Thank you. Lee Yi Zhuan: Thank you.
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.
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.
Anders Edholm: Good morning, and welcome to this presentation of SCA's 2026 First Quarter Report. With me here today, I have President and CEO, Ulf Larsson; and CFO, Andreas Ewertz, to go through the results and take your questions. Over to you, Ulf. Ulf Larsson: Thank you for that, Anders. And also from my side, a very good morning. So despite the increasing costs and the continued challenging market for forest industrial products, we delivered SEK 1.1 billion on EBITDA level and by -- that's an EBITDA margin of 23% for the first quarter. Segment Renewable Energy had a record high result during the first quarter, and that was driven by electricity prices, strong deliveries and also a very good market for liquid biofuels. Our new wind farm located in Jamtland started operations during the quarter and contributed to a high profitability within the segment. And our high degree of self-sufficiency in strategic areas continue to be an important factor to mitigate higher costs, partly offsetting higher wood raw material and energy costs. Turning over to some financial KPIs for the first quarter. As already said, our EBITDA reached SEK 1.1 billion, and that corresponds to a 23% EBITDA margin. Our industrial return on capital employed came out on 2% accounted for the last 12 months, and the leverage was 2, while our net debt to equity reached 11.9%. And I will now make some comments for each segment, starting with Forest. Stable harvesting levels from our own forest have contributed to balanced supply of wood raw materials to our industries during the period. We have seen a long-term trend of increasing sawlog prices, and they continued up also in the first quarter. However, availability of sawlogs has increased towards the end of the quarter due to the big storm, and that will also gradually reduce prices coming quarters. Regarding pulpwood prices, they have been rather flat for a couple of quarters, and now they have started to come down. When we compare the first quarter '26 with the first quarter '25, sales were up 2%, while EBITDA was up 1%, mainly due to higher prices for wood raw materials. Over to solid wood products. And -- in general, we still have a slow underlying market for solid wood products. We continue to note signs of improvement in the repair and remodeling segment, and we also see a decreased production in Scandinavia and Germany, generating a better supply and demand balance, especially for spruce. Stock levels remain on the high side among producers for pine, but are on normal levels for spruce and stock levels at customers continue to be on the low side. Delivery volumes were lower in Q1 '26 in comparison with the first quarter of '25, but first quarter '25 was an exceptionally strong quarter. SCA stock level of sawn goods is currently on a very balanced level. The price for solid wood products increased by a bit less than 4% in the first quarter of '26 in comparison with the fourth quarter of '25. And this development is in line with what I said when we presented the report for the fourth quarter last year. Sales were 13% lower in comparison with the same quarter last year. EBITDA margin decreased from 16% to 4% due to higher raw material costs, lower deliveries and a negative currency effect. Today's stock level of solid wood products in Sweden and Finland is described at the top left on this slide and is shown in relation to the average for the last 5 years. As mentioned earlier, we note that the inventory level is on the high side, especially for pine, while the SCA inventory level is balanced. As can be seen in the diagram to the bottom left, the Swedish and Finnish sawmill production has been lower than average in the beginning of '26. And in the diagram to the top right, we can note that the export price index decreased in the first quarter. SCA's prices, however, increased due to a better mix. Going into the next quarter, I estimate that prices in the market will increase. On the other hand, increasing freight costs will have a negative effect, resulting in a slight net price increase for SCA. Looking forward, we will probably see a stable development going into autumn with an okay balance between supply and demand. Over to pulp. When comparing the first quarter '26 with Q1 '25, sales were down 16%, mainly due to lower prices and negative currency effects. EBITDA was down 88%, which was also driven by lower prices and negative currency effects. During the third and fourth quarters of '25, demand for NBSK pulp was rather weak and prices were stable at low levels. Net prices on NBSK then decreased further in the first quarter of '26, very much due to the higher rebates in Europe and U.S. At the same time, gross prices increased in Europe and U.S. despite weak demand. In China, demand for NBSK pulp was on a normal level during the first quarter, but prices remained low. The conflict in Middle East is adding complexity in the pulp market, and it also increases the cost pressure. Looking at CTMP, demand was very low in January and February, and prices were at the bottom. However, during March, we saw an improvement in demand and prices started to increase. Inventories of NBSK were on a high level during the first quarter. Hardwood inventories on the contrary were below average level. Finally, CTMP inventories have been on a rather normal level. Moving over to containerboard. Sales were up 4% in Q1 in comparison with the same period last year, driven by higher delivery volumes, somewhat mitigated by lower prices and the negative currency effect. EBITDA was down by 56%, driven by lower prices, negative currency effect and higher energy costs. We have noted a rather soft box demand during the start of the first quarter, but it has since then developed in a cautious positive direction. The retail business remains a positive driver, and we have also seen the manufacturing industry recovering in the beginning of the year. European demand of containerboard has been moving sideways during the first quarter, in line with the box demand. There is no new containerboard capacity expected to start up in the first half of '26, although we can expect a ramp-up effect of new capacity started in '25 with the vast majority coming in testliner. Kraftliner inventories remain above historical average in Q1, as you can see in the graph. During the first quarter, the availability of OCC has been in balance with supply and demand, which in its turn has led to stable prices in the first quarter. Prices for brown kraftliner in Central Europe has during the first quarter decreased with EUR 25 per tonne and for white kraftliner with EUR 20 per tonne. Anyway, we now feel a more solid underlying demand in combination with strong cost pressure. And due to that, we have implemented a price increase of EUR 60 per tonne for brown kraftliner and EUR 40 per tonne for white kraftliner from the 1st of April. Finally, I will say some words about renewable energy. And in the segment, we have had a stronger quarter compared to the same period last year and maybe the strongest quarter ever. And that is, of course, mainly due to higher production and stronger margins in our -- with St1 jointly owned biorefinery in Gothenburg. In addition, we have also had a positive impact from our new wind farm in the county of Jamtland. Electricity prices were high during the quarter, which had a positive impact in our wind business. Our new wind farm, Fasikan, was taken over in time and on budget and has been ramping up production during the quarter. SCA's land lease business is stable at 10.6 terawatt hours according to plan. And this is, as said before, equal to 20% of installed capacity of wind power in Sweden. The market and price for solid biofuels were strong due to cold weather during the first quarter. Anyway, the positive effect was mainly offset by higher costs for raw materials compared to same quarter last year. For liquid biofuels, we have seen continuous high margins compared to previous quarters. The main reasons are the implementation of RED III across European countries as well as strengthened EU control mechanism regarding imported products and feedstocks. In March, we also see additional price increases due to the situation in the Middle East. We expect market volatility in renewable fuels to remain high as Europe ramps up the blending mandates, both in HVO and SAF. And with that, Andreas, I hand over to you. Andreas Ewertz: Thank you Ulf, and good morning, everybody. I'll start off with the income statement for the first quarter. Net sales decreased 8% to SEK 4.7 billion, driven by lower prices and negative currency effects. EBITDA decreased 33% to SEK 1.1 billion, driven by lower prices, negative currency effects and higher cost for wood raw material. EBIT decreased to SEK 543 million and financial items totaled minus SEK 86 million with an effective tax rate of below 20%, bringing net profit to SEK 380 million or SEK 0.54 per share. On the next slide, we have the financial development by segment. Starting with the Forest segment to the left. Net sales were in line with the previous quarter at SEK 2.5 billion. Higher prices for sawlogs were offset by lower delivery volumes to SCA's Industries. EBITDA decreased slightly to SEK 884 million due to seasonally lower harvest from SCA's own forest compared to the previous quarter, which was offset by higher prices for sawlogs. In Wood, prices were slightly higher compared to the previous quarter. Net sales decreased to SEK 1.3 billion due to lower delivery volumes. EBITDA decreased to SEK 49 million, corresponding to a margin of 4%. High costs for wood raw materials and lower delivery volumes were partly offset by higher prices. In Pulp, net sales decreased to SEK 1.6 billion compared to the previous quarter, while EBITDA increased to SEK 40 million, corresponding to a margin of 3%. Lower costs for planned maintenance stops were offset by negative currency effects and lower prices. In the quarter, we took market-related downtime in our CTMP mill due to high electricity prices. In Containerboard, net sales were in line with the previous quarter at SEK 1.7 billion. EBITDA decreased to SEK 104 million, corresponding to a margin of 6%. Lower prices, negative currency effects and higher energy costs were partly offset by lower costs for raw materials and higher delivery volumes. Renewable Energy, we had a record quarter. EBITDA increased to SEK 206 million, corresponding to a margin of 31%. The increase was driven by high electricity prices, the new Fasikan wind mill and higher results in liquid biofuels. On the next slide, we have the sales bridge between Q1 last year and Q1 this year. Prices decreased 4% with lower prices in pulp and containerboard, partly offset by somewhat higher prices in wood. Volumes were flat with higher volumes in containerboard, but lower in wood. And lastly, currency had a negative impact of 4%, bringing net sales to SEK 4.7 billion. Moving on to EBITDA bridge and starting to the left. Price/mix had a negative impact of SEK 255 million. Higher costs from mainly wood raw materials had a negative impact of SEK 111 million. We had a positive impact from energy of SEK 34 million and a negative impact from currency of SEK 203 million. In total, EBITDA decreased to SEK 1.1 billion, corresponding to a margin of 23%. Looking at the cash flow. We had an operating cash flow of SEK 569 million in the quarter. And as you know, other operating cash flow relates mostly to working capital currency hedges and should, therefore, be seen together with changes in working capital. Looking at the balance sheet. The value of the forest assets totaled SEK 104 billion. Working capital decreased to SEK 5 billion. Capital employed totaled SEK 112 billion. Net debt stood at SEK 12 billion and equity totaled SEK 100 billion, corresponding to a net debt to equity of 12%. And we are now almost finalized our large ongoing investment projects. Thank you. With that, I'll hand back to you Ulf. Ulf Larsson: Thank you, Andreas. And just to summarize, I mean, we have had a challenging first quarter. I think we have controlled what we can control in a good way. We see a positive effect from the ramp-up of our big strategic investments, and we are looking forward to the time when we can move over those extra volumes to our main market in Europe and the margin that can create. We have also started up our new wind farm outside Bracke in Jamtland and the project was done on time and in budget. So by that, I think we open up for questions. Operator: [Operator Instructions] We will now take our first question from oannis Masvoulas of Morgan Stanley. Ioannis Masvoulas: Three questions from my side. I'll take them one at a time, if that's okay. First, on containerboard. So you're starting from a fairly depressed EBITDA margin level in Q1. And going into the second quarter, you should be benefiting from lower fiber costs as well as lower power costs. How about other input costs around logistics, chemicals, et cetera? Just trying to understand the overall development into the second quarter on the cost side. And then related to that, is it fair to expect another increase in kraftliner prices in May to help restore margins? I'll stop here for the first one. Ulf Larsson: I'll start with the market and then Andreas will give you the cost perspective. And I guess, I mean, as you realize, we did increase the price for kraftliner from 1st of -- first, we reduced the price by EUR 25 per tonne for brown kraftliner in the first quarter and EUR 20 for white top. And then from 1st of April, we have announced that we will also come through with price increases of EUR 60 per tonne for brown and EUR 40 per tonne for white from 1st of April. And that will stepwise be implemented in the price for the first quarter. I guess we see no price movement in May. We haven't heard anything more from testliners producers. And I think it's fair to say that they have to start and then I believe that kraftliner can come after. So nothing is planned for May. But if we will remain on this level when it comes to gas prices, I guess, we'll see some attempts in -- yes, later in Q2 or in the beginning of Q3. So that's my view. Then Andreas, about the cost situation. Andreas Ewertz: Yes. On the cost side, if we start with pulpwood, the pulpwood will continue to go down slightly in Q2, but very slightly. As we talked about earlier, we have this 6 months lag effect. So the pulp wood prices will go down mainly in the second half of the year. OCC prices are fairly stable. If we look at electricity prices, they're very high in January, February. So depending on how the electricity prices develop, but most likely, it will be lower compared to Q1. And then in terms of transportation costs depending on the oil price development, but the oil price will, of course, affect transportation. So that's the big moving parts. Ioannis Masvoulas: Okay. Then the second question, can you comment about current pulpwood prices? I know you mentioned a slight benefit in the industrial units in Q2, but just trying to understand where are we now on pulpwood prices versus the peak of 2025? Andreas Ewertz: Yes. So pulpwood prices, they went down slightly in Q4, slightly in Q1, but we are talking about maybe 1% to 2% down. It would continue to go down 1%, 2% in Q2. And then you get a larger effect in Q3 and in Q4 because of this lag effect. Ioannis Masvoulas: Okay. And just the last one for me. You talked about the CTMP market where demand remains low, same with prices. Could you give us an update on operating rates in Q1 here and your expectation for Q2? And how are you feeling about this business given the depressed market backdrop? Are you willing to run the asset? I know it's a low-cost mill, but just trying to understand how you're looking at optimizing the business here. Ulf Larsson: Well, in the first quarter, I would say that we have maybe run the CTMP mill at 50% or something like that, I mean, due to high electricity prices and also the margin cost for pulpwood. So that's the case for first quarter. And I mean, CTMP has been a very bad business in the first part of this year. Now we see that the CTMP market is picking up. And I guess one part of it is that short fiber pulp is picking up step by step and maybe we see some kind of substitution. I also feel that we have a better consumption by board customers, not the least. And so I mean, just now, we are running more or less full for the moment being. Of course, we keep an eye on the electricity price. And if it's too high, then we have to close down, but we are rather positive for the CTMP business in the second quarter. Operator: And we'll now move on to our next question from Linus Larsson of SEB. Linus Larsson: I'll start with a follow-up on the input cost side. And if you could maybe elaborate a bit on the pulpwood cost declines that you're seeing in your wood consuming operations over the course of the next few quarters. If you could quantify in any way what you're expecting going into the second half of 2026, please? Andreas Ewertz: Yes. So as I said, now we got maybe 1% down on pulpwood cost in Q1 compared to Q4, while the sawlog prices increased with around 7% in Q1 compared to Q4. In the second quarter, we expect both pulpwood and sawlog prices to go down slightly, but we're talking about 1%, 2%, maybe 3% on pulpwood and 1% to 2% on sawlogs. And then we'll see a bigger effect in Q3 and Q4. But it's hard to say exactly now because it's now we're going to -- in second quarter, then we're going to get more of these storm volumes, of course, will help to get the price down. So we'll see, but we expect a bigger decrease in Q3 compared to in Q2. Linus Larsson: Great. And then -- and I hate to ask this, but if you could maybe please help us dissect the other line, which was weaker in the first quarter? And if you could help us understand what the normalized level might be going forward? And the reason I'm asking is that this is actually where more than the entire deviation compared to consensus occurred. So if you could just help us understand that would be super helpful. Andreas Ewertz: Yes. Firstly, we have a seasonal effect, but the biggest thing is, of course, profit in stock. So when we sell something, for example, from the Forest business to the Wood business, then the Forest segment, of course, makes a profit. But until the Wood division sells that final product, you eliminate that profit. And that's why you have this cyclicality between -- dotted line between different quarters. So because of the increased prices of sawlog and a bit lower delivery volumes in our Wood segment, you have a higher other costs, but that's only periodization between different quarters. Linus Larsson: Great. That's really helpful. And like given what you just said, Andreas, any pointers for what to expect in the second quarter? Andreas Ewertz: I think if you look at the full year, of course then these prioritization effects, I mean, they get canceled out. So if you look at the full year, then you get quite a good picture of the yearly other costs. Linus Larsson: Sorry, what do you mean -- if I look at the past couple of years, that... Andreas Ewertz: Yes, yes, exactly. The past year. Operator: And we'll now move on to our next question from Robin Santavirta of DNB Carnegie. Robin Santavirta: Now in terms of Middle East crisis, you mentioned in the report that it increases uncertainty and of course, the oil price is also higher and you call out this as an indirect negative. But you have high energy self-sufficiency. Do you think you have a competitive advantage to Continental European producers, especially in containerboard? Ulf Larsson: Yes. I mean, we are not dependent on Russian oil and gas or oil at all, more or less. I mean that is, of course, a positive thing. And the other thing is that when it comes to distribution, I mean, we used to say that we have 40% -- degree of self-sufficiency due to the fact that we now produce liquid biofuels in Gothenburg and our part, I mean, account for around 40% coverage of the total cost. So that is, of course, very positive. And as you could see also in this quarter, I think we did the strongest quarter ever for renewable energy and a big part of that was, of course, liquid biofuels. Robin Santavirta: Right. And then also related to containerboard from what I hear from not only you, but from other companies in the market, it seems demand has increased quite significantly in March and April, and it's certainly in containerboard grades in Europe and the start of the year was much slower. What explains the pickup in demand? Is this just pre-buying before prices go up? Or are there other dynamics in play? Ulf Larsson: It's hard to say really. I think one thing can be that you have -- I mean, I guess people, they are securing the raw material supply in different areas due to the geopolitical situations. So that might be one thing. But we also feel that -- I mean, the retail sector has been quite good for a while. And now we feel also that the industrial customers, they are coming back. And I mean, not at least today, I mean, we have seen some reports and also yesterday from some companies. And I mean, they also say that the order inflow is quite strong also from the more heavy industry, which has -- that will have a good impact also on our kraftliner business. So yes, the market is definitely strong just now. The balance is -- still we are a little bit on the high side when it comes to the inventory level. And I mean, we all know that we have a lot of testliner capacity out there, curtailed just now, I guess. And on the other side, if we will -- if gas prices will remain on this level, there still -- I guess, many of them, they lose money. So I guess we will see -- it's a mix between supply-demand and cost pressure and so on. But I guess we can -- we might see some further price increases coming into the autumn. Robin Santavirta: I understand. Finally, just on saw timber. I mean, this market, of course, is tricky. But when I look at log prices in Europe and when I speak to companies there, they complain about scarcity, essentially of sawlogs -- prices of -- log prices that are much higher than you have in Northern part of Sweden. Why wouldn't you sort of have better -- I mean, you're in black figures most of the quarters, even in this tough environment. But could it be a setup where you basically do not need the construction market to come back and still get higher prices? Or is there something I'm missing with the mismatch of sawlog prices in Europe versus Northern part of Sweden. Ulf Larsson: I don't know if I fully took your question, but you talked about price deviation from Northern -- Southern part of Sweden... Robin Santavirta: I mean, they are paying 2x more for sawlogs... Ulf Larsson: No, no, they don't. No, no, they don't. And I think that's a misunderstanding. No. I mean you look at public price lists, and that is, of course, not the price in the market. So I guess, when we do some comparisons, I mean, you don't -- it doesn't really differ too much. And also when it comes to log size, I mean, the log is much more narrow in the Northern part in comparison with the Southern part and so on. So I don't think that delta is -- yes, we are favored. Robin Santavirta: So the price is roughly the same. Ulf Larsson: Maybe not the same, but it's not -- as you say, I mean, it's not the double price. So I mean, I think it's -- and then, of course, now with -- now you have the storm effect, and we haven't seen really the result out of that. You see a big difference between spruce logs and pine. You see also in the end market that now we have a deviation for sawn goods by SEK 300 per cubic meter more or less if you compare spruce and pine to the advantage of spruce, of course. And I guess that's a result of the spruce beetle effect that we had in Central Europe a couple of years ago. So I mean they have a deficit of spruce logs. So it's a more complex market than that. And you cannot really look at official price list. That's my clear message. You have to -- because what we buy in the market is something completely different in many cases, where you have to add premiums and things like that. Operator: And we'll now take our next question from Johannes Grunselius from SB1 Markets. Johannes Grunselius: It's Johannes here. I have two questions. I would like to zoom in on your energy business and the containerboard business. So on energy, you said it already, Ulf, but you had a nice tailwind from higher biofuels. So I was wondering if you could provide some color on what that means. I think your earnings delta were like SEK 60 million Q1 versus Q4. How much did biofuels supported that earnings growth? Ulf Larsson: I can first start with the production. I mean, we are also in the ramp-up phase with biorefinery in Gothenburg, and that is the first thing. We have had record production in that unit, and we are far above design capacity. So that is a very positive thing, of course. And then in addition to that, of course, we have had a very good price development. And then Andreas, you can. Andreas Ewertz: Yes. So if you look in Q4 compared to Q1, the solid biomass pellets and unrefined fuels basically had the same profitability in Q4 as in Q1. So the increase comes from -- roughly half from the wind segment and roughly half from the biofuel business, roughly speaking. Johannes Grunselius: Okay. But what you're saying, it's more of a ramp-up benefits, not sort of pricing benefits. And could you comment on Q2, how we should think about the pricing effect here coming from higher prices? Andreas Ewertz: Both. We got both, higher margin in the biofuel business compared to Q4 as well as good production. And we'll have to see how the market develops. But for energy, I mean, if fuels continue to be high, that, of course, will benefit our fuels business. But then, of course, Q2 is a weaker market for our Solid Biomass segment and Wind compared to Q1. Johannes Grunselius: Got you. And then on containerboard, if you could elaborate a bit on basically operations and also the mix because I assume you're still in sort of a ramp-up phase in Obbola. So do you foresee sort of tangible benefits from more efficient operations in the coming quarters and also benefits from a more commercial mix, if you can elaborate on that one, please? Ulf Larsson: I mean, step by step -- I mean, we produce more in Obbola. And by that, we also will be -- if you count per tonne, I mean, then you will be more also cost efficient. And first, the volume and then we fine-tune the cost level. And this year, as we said before, I mean, we will probably produce around 100,000 tonnes more in '26 in comparison with '25. And step-by-step, we will be more and more cost efficient. So that is one thing. But as you say, I mean, all surplus volumes today, I mean, they are placed in overseas market and the margin is completely different if you have to place those volumes in Asia or U.S. or South America or wherever. So I mean, when the market comes back in Europe, that will, of course, improve the margin quite a lot, I would say. Operator: And we'll now take our next question from Gabriel Simoes of Goldman Sachs. Gabriel Simoes: So I have two. The first one, they're both on the forestry side. But the first one is related to your forestry -- your silviculture cost in the first quarter, which are usually lower. But then I would expect some of that to come back in the second quarter, right? So overall, if you could guide us towards the level of expected profitability on a per cubic meter basis for wood harvested maybe excluding the revaluation, of course, for the remainder of the year and for the second quarter, specifically, that would be very helpful. And then a longer-term or more strategic question here would be basically on the valuation of these forests, right? So the company now trades at a significant discount to the book value of the forest. And I just wanted to pick your brains on whether this is something that bothers you and if there are any measures to try and unlock some of that value of these forests. Andreas Ewertz: Yes, I can start with the seasonality of the forest. I won't go into exact figures, but just to get some flavor. And as you know, we harvest seasonally more from our own forest in Q2 compared to Q1. So that's a net benefit. Then you're absolutely right that in Q2 and Q3, especially, we have our fertilization and silviculture cost because it's then we replant, we do this fertilization. And that's maybe, roughly speaking, what can it be SEK 50 million to SEK 80 million per quarter in Q2 and in Q3. And then, of course, we will see how higher oil prices, of course, will also affect our -- the transportation and harvesting business. So on the plus side, we harvest more from our own forest, will have slightly lower prices, and we will have higher seasonal costs for silviculture and fertilization. Ulf Larsson: And then when it comes to the valuation of the forest and if you plan something to unlock the hidden value of the forest, I mean, we don't. I mean, we have had a couple of big transactions recently. And I mean, they show that the book value is also the market value. And I mean, we trust that. And forest and forest business is a cyclical business. So you have to like that and see opportunities when you have them. And I guess we will -- we are looking forward to what's going to happen now when Stora Enso will split, of course, and that might have an impact on the view of the price of the forest. Otherwise, I mean, we are following continuously the market for -- I mean, the local market for -- when you buy and sell forest estates, and we can just see that we are more or less on the same level as before. So I mean nothing has changed. Operator: And we'll now move on to our next question from Oskar Lindstrom of Danske Bank. Oskar Lindström: Three sets of questions from Danske Bank here. First off, I'm just very curious, are sort of higher oil prices and talk of possible aviation fuel shortages in Europe creating a greater interest from you or from others in your aviation fuel project in -- biorefinery in Ostrand? That's my first question. . Ulf Larsson: Yes. I mean, as you say, just now, it is good profitability in the biorefinery in Gothenburg. And by that, you can say that conditions for the Ostrand project should also be very good. And I guess they are. But that is, of course, a much bigger bet. And as we have also said, this market will be very volatile, and it's also very capital intensive. And I guess if -- before you start a big project like that, you need to have some security when it comes to some kind of offtake agreement or at least the price level for SAF long term. I mean you can talk about resilience and degree of self-sufficiency and things like that, both in the union, but also in Sweden. Will that come? We don't know. And the tricky thing, I guess, with these kind of projects is always the political risk. I mean we are used to take the technical risk, the project risk, and we can handle that. But the challenge is really the political risk. Will something change when we have a new government in place, both in Sweden and in the union and what kind of impact will that have? And that will, of course -- it's more challenging to raise the money needed for such a big projects. Oskar Lindström: But -- follow up on that. I mean, would you be open to doing that as a JV then? Ulf Larsson: Absolutely. I think that's the only solution really. I mean we can provide a fantastic place close nearby Ostrand, lots of synergies. We also have from now the energy supply, which is really important. But maybe the most important thing, I mean, we are maybe the only player in that part of Sweden that can provide with the raw materials, I mean, the feedstocks. I mean, I guess we are a perfect partner in the JV, but this project is, of course, too big for us alone. And -- so we have to talk with some friends if this should come through. Oskar Lindström: Very interesting. My second question is, I mean, continuing on that with the Middle East conflict causing disruptions, as you mentioned. We hear a lot about how this is having an impact on Continental European producers, perhaps especially of containerboard, who are dependent on natural gas and oil for energy. What about sort of -- is it causing other shifts sort of that you're noticing, for example, in Asia or having impacts on logistics, which is causing shifts in the market or in the cost curve that are meaningful for you. Ulf Larsson: Yes, I don't know if we see some structure -- I mean, for everyone, I mean, we see that the freight costs, I mean, they will increase, of course. And in our case, as I said before, I mean, we have maybe a degree of self-sufficiency due to the biorefinery we have in Gothenburg up to 40%, and that is different for different companies. And as you also say, I mean, we are not depending on oil and gas prices as we have a fantastic energy supply situation in not only SCA, but Scandinavian companies. So I mean, that is, of course, in our advantage. But input costs will increase and freight costs, oil, one thing. The other one is, of course, chemicals into the industry. But on the other hand, I mean, that will have, I guess, a bigger impact from plastics and other competing materials. So it's really hard to say how this will turn out. If you will see a big restriction now when it comes to aviation and things like that, that might create the same situation as we had during the pandemic that people they will stay home and build Verandas and do a lot of work in their gardens and the houses and so on that might create some kind of better market for solid wood products. I mean, it's hard to say and it's hard to speculate. We are so focused now on trying to control what we can control. And that is also something that we are very happy in the first quarter. I mean we have had a good production. The cost level is good, very strong energy business. We see a positive effect of those strategic projects that we have launched. And -- but still, we are at the bottom of the business cycle just now, and let's see when it will recover. Oskar Lindström: And my third and final question is more straightforward. In the Renewable Energy division, I mean, you've obviously been able to benefit here in Q1, partly from the ramp-up, of course, which will be hopefully sustainable for the rest of the year, but also from higher prices due to the situation in the Middle East. Are you able to lock in any of the higher prices through hedging or something like that so that we get a little bit of that benefit for the rest of the year as well? Andreas Ewertz: If we start with the wind business, then we don't hedge anything. I mean, that's just our self-sufficiency, so then we're exposed to spot prices. If we look at our solid biofuel business, here I say you have much more long-term stable contracts and they have some spot volumes, but a large share is long-term contracts and they are quite stable prices, while the spot, of course, that moves up and down with the market. And with the biofuel business, there you do some contracts in advance, but not very far. So I would say we are exposed to spot, and that's part of our strategy to be -- have a high self-sufficiency. As I said, on oil, we are around 40% self-sufficient. So there we want to have when the cost goes up or down, our renewable energy income goes up and down as well. So I would say we don't have that long hedge exposure on renewable energy, more spot. Operator: And we'll now take our next question from Andrew Jones of UBS. Andrew Jones: I just got a couple of questions. First of all, on containerboard, you mentioned the first EUR 60 hike through in April, nothing expected in May. The index realized EUR 30. I'm curious what you're seeing from some of your competitors where some of them hiking, but with a bit of a delay, maybe coming through in May? Or like what explains the lower index move? And just to confirm, like are your customers in April already paying that EUR 60? Has that been fully implemented? Ulf Larsson: Good question. And yes, I guess they -- many of them, they have announced price increases from 1st of May. So what you see now in the index is the price hike from SCA. And I mean, as I would say, the major part of our business is also related to the index movements. I mean, we will not get even 50% of this price increase in April, but we will get it in May. So that's the case. Andrew Jones: Yes. Okay. That makes sense. And just on the Wood Products business. I think you guided last quarter to flat price development in the first quarter, and it looks like it went up about 7% on a revenue per tonne basis. So kind of curious what changed versus your initial thought process? And can you give us some guidance on how you see prices developing in the second quarter? Ulf Larsson: Maybe you have a better memory than me. I think I said 4%, and I think we had 4% more or less. But I'm not sure. But anyway, we had a small price increase, but the price development for sawlogs was even higher. So that's also the main reason for the profitability coming down. In the second quarter, I mean, it was a little bit of a disappointment for me. I thought that we should have a higher price increase in the second quarter in comparison to the first quarter. But I guess we will have around 4%, a little bit more for spruce, a little bit less for pine, a little bit more in some markets, a little bit less in other markets. So we try also to work with the mix, of course. And now this quarter, we see that log prices will come down a bit. But on the other hand, I guess that 50% of the price increase will be mitigated by higher freight costs. So it will be a small positive effect from increasing prices and also a positive -- small positive effect from decreasing log prices, I would say, in the second quarter. Andreas Ewertz: And you're right. I mean, as Ulf said, we probably expected prices to be a bit more flat in Q1, but then get a larger effect in Q2. Now we got a bit of that Q2 effect already in Q1. So I think the increase was about the same as we thought, but less -- more in Q1 versus Q4, but less in Q2 versus [indiscernible]. Ulf Larsson: Yes, related to what we said. But my thinking was that we should have a stronger market really in the second quarter. But that has not come through. It is much stronger for spruce than in comparison with pine. So spruce is maybe a little bit better and pine is a little bit less good, I would say. Andrew Jones: Yes. That's clear. And actually, just on the freight question. You have -- I know you have some of your own vessels, I mean, obviously, that probably doesn't protect you from bunker fuel and all that sort of stuff. But I mean, how does -- can you quantify the impact on your freight costs across the various divisions from what you're seeing now and maybe compared to what you think your peers might be paying, but without that self-sufficiency in vessels? Andreas Ewertz: [indiscernible] so figures you can work with, it's that if you took both bunker oil, we took oil for burning and then also diesel for trucks and everything. I think our total exposure is around 130,000 to 140,000 tonnes. And then we get back 50,000 tonnes is from tall oil and that's linked to the fossil price plus a green premium. So there we are self-sufficient at around 40%. And then, of course, [indiscernible] and our pellets business will be also an indirect hedge. But if you remove those, I mean, our total exposure of 130,000 to 140,000 tonnes, minus 50,000, that's around 80,000, 90,000 tonnes of exposure. And of course, this indirect effect from pellets and [indiscernible]. Operator: We'll now take our next question from Cole Hathorn of Jefferies. Cole Hathorn: I'd just like to ask on the pulp markets for softwood pulp in particular. What do you think is ultimately needed to bring down those inventory levels and tighten this market here? Because we've seen some kind of demand shift to the hardwood side. We've still got a lot of inventory levels in China. Softwood futures have come lower. It just seems like quite a disconnected market, softwood versus hardwood. So I'm just wondering what do you think needs to play out over the next few months to help balance the softwood market and ultimately support further pricing? Ulf Larsson: It's a very good question. And I mean we are a little bit surprised ourselves, I must say. I mean, we have heard also talk about interest in implementations in China that swing capacity is now running long fiber and so on. But honestly, I don't know really. But what we have seen is that a positive price development step-by-step for eucalyptus pulp. And just now, I mean, you have a small delta between hardwood and softwood. So I guess that is the first sign that we will see some kind of substitution going forward. But again, when you look at the inventory level, you are still on the high side for softwood and on the low side for hardwood. And also, we have big producers in hardwood, they have announced some curtailments. But on the other hand, we have also heard that some Scandinavian producers, they have also announced curtailments now. But I mean, short term, it's always a question about supply-demand balance. And I guess, the price difference now between short and long fiber, that will help a bit. We see that on CTMP already now, definitely for March, but also, I guess, coming in now in the second quarter, that will help us. I don't feel that we have any structural things that dramatically have changed the situation. I mean, as long as something is a little bit cheaper than something else, I mean, then you try to substitute as much as you can. So I mean, long term, I don't think this is a structural thing. It's more a question about supply-demand. And so let's see, but a little bit annoying, of course. Cole Hathorn: Well, hopefully, we see some capacity closures. But if I look at some of the softwood producers, there's some listed players that have seen their debt trade down. It seems like a lot of the market is really under pressure. If assets do become available, how does SCA think about M&A in that context at the right price? Or are you just comfortable staying with your business in Sweden? Ulf Larsson: Yes. I think our -- I mean, we are an integrated forest company with the industry. And I mean, I have a great respect to move into other geographies if you don't -- can guarantee the raw material supply. So I think the integrated model we have today, I think, has been very profitable over time. And also in relative terms, I mean, we perform well. And as it is just now, we have also done a lot of big strategic investments, and we will be very cautious now. We will focus on, I mean, ramping up what we have started and also to consolidate the balance sheet. And so I mean, for us, no M&As, at least not short term. Operator: And we'll now take our last question from Pallav Mittal of Barclays. Pallav Mittal: So firstly, just following up on oil and appreciate all the self-sufficiency and hedges that you have highlighted. But if I just look at your transportation and distribution, it is almost 25% of your cost base, so say, roughly around SEK 4 billion and diesel is up 30%, 35%. So how do you plan to offset that SEK 1.5 billion cost headwind that you have? And just as a follow-up to this, are you seeing the roadside pulpwood increasing on the back of diesel costs going up? Andreas Ewertz: As I said before, we have around 140,000 tonnes of exposure to bunker oil and diesel and oil in our industries. And roughly that we produce 50% to get back from a tall oil. So there is an exposure of 80,000 to 90,000 tonnes. So of course, I mean, if the prices of diesel or oil goes up, I mean, they will have a 90,000 around roughly exposure, so they can calculate the figure. And then in [indiscernible] that's the pure oil part. And then transportation, I mean, part of our business, I mean, we have our own RORO ships. So there is only the bunker exposure. And of course, [indiscernible], especially to U.S. and there we freight ships. And of course, then it depends on how the market for renting those or freighting those vessels move forward. But to bunker and diesel, our net exposure is around 80,000, 90,000 tonnes. Pallav Mittal: Okay. And then just -- how should we think about your capital allocation now going forward given the pressure on -- I mean, the market and the free cash flow generation? Do you think maintaining dividend is possible in this market environment? Andreas Ewertz: So in terms of CapEx, I would say that we will have around SEK 1.5 billion in current CapEx this year and then around another maybe SEK 400 million, SEK 450 million in strategic CapEx. And then in terms of capital allocation with dividend or with share buybacks or other strategic CapEx, I think that's something for the Board and now we're focusing just on ramping up and getting the cash flow for our investments. Operator: With no further questions on the line, I will now hand it back to the host for closing remarks. Ulf Larsson: And that concludes our presentation of the first quarter report, and we wish -- welcome back in July for our half year report. Thank you very much for joining us today.