加载中...
共找到 39,042 条相关资讯
Operator: Welcome to Strategic Education, Inc.'s first quarter 2026 results conference call. I will now turn the call over to Terese Wilke, Senior Director of Investor Relations for Strategic Education, Inc. Terese Wilke, please go ahead. Terese Wilke: Thank you. Hello, everyone, and welcome to Strategic Education, Inc.'s conference call in which we will discuss first quarter 2026 results. With us today are Karl McDonnell, President and Chief Executive Officer, and Daniel Jackson, Executive Vice President and Chief Financial Officer. Following today's remarks, we will open the call for questions. Please note that this call may include forward-looking statements made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. The statements are based on current expectations and are subject to a number of assumptions, uncertainties, and risks that Strategic Education, Inc. has identified in today's press release that could cause actual results to differ materially. Further information about these and other relevant uncertainties may be found in Strategic Education, Inc.'s most recent annual report on Form 10-Ks, the 10-Q to be filed, and other filings with the Securities and Exchange Commission, as well as Strategic Education, Inc.'s future 8-Ks, 10-Qs, and 10-Ks. Copies of these filings and the full press release are available for viewing on our website at strategiceducation.com. And now I would like to turn the call over to Karl. Karl, please go ahead. Karl McDonnell: Thank you, Terese, and good morning, everyone. Our first quarter results reflect meaningful progress across three of our primary strategic objectives: the continued investment and growth of our Education Technology Services division, growing our employer-focused strategy, and further implementing our AI and other productivity-enabling systems. For the first quarter, Strategic Education, Inc. revenue declined 1% year-over-year driven by a slight decrease in consolidated enrollment. Based on our current enrollment trends, we expect that the first quarter will be the low point of the year in both absolute revenue and revenue growth. Our productivity initiatives drove a 2% reduction in adjusted operating expenses, resulting in 3% operating income growth and slight margin expansion to 14.3%. Adjusted earnings per share came in at $1.41. Turning now to our segments. Education Technology Services grew revenue 21% to $42 million driven by Sophia Learning subscriptions, higher employer-affiliated enrollment, and new Workforce Edge partnerships. Even with a 7% increase in expenses as we continue to invest in the ETS business, ETS operating income grew 42% to $20 million and a 47% margin. ETS now represents 46% of consolidated operating income. Within ETS, Sophia Learning grew average total subscribers by 40% and revenue by 32% with strong growth in both consumer and employer-affiliated subscribers. Workforce Edge ended the quarter with 82 corporate agreements covering 4 million employees, and enrollments from Workforce Edge into either Strayer or Capella grew 70% reaching nearly 4 thousand students. As you know, expanding this network of corporate partners continues to be among our most important strategic focus areas. Moving to U.S. Higher Education, employer-affiliated enrollment grew 10% and reached a new all-time high of 34.5% of total U.S. Higher Education enrollment, an increase of more than 300 basis points from the prior year. Healthcare, which is a key component of our employer strategy, also grew 10%, and healthcare enrollment now represents more than half of all U.S. Higher Education enrollment. U.S. Higher Education revenue declined 4% in the quarter, reflecting a slight decline in unaffiliated enrollment along with somewhat higher discounts and scholarships, which together lowered revenue per student. Our productivity initiatives continue to enable effective cost control with operating expenses down 2%. The segment delivered $26 million of operating income and a 12% margin. U.S. Higher Education also set a new record for average student retention at 89%. Turning now to Australia and New Zealand. Total enrollment declined 3% in the quarter. Regulatory constraints on international enrollment continue to be a headwind and are only partially offset by continued domestic new student growth. We remain focused on maximizing international enrollment within the current caps and on our continued investment in the domestic market. On a constant currency basis, ANZ revenue was down 4% reflecting the enrollment decline and a slight decrease in revenue per student. Here too, our productivity initiatives drove a 3% reduction in operating expenses. We reported an operating loss of $2.4 million for the quarter, which, as we have noted before, reflects the normal seasonality of that business. On capital allocation, in addition to our regular quarterly dividend, we repurchased approximately 493 thousand shares during the quarter for a total of $40 million. As of the end of the first quarter, we have approximately $200 million remaining on our share repurchase authorization through the end of the year. And finally, as always, I would like to thank all of my colleagues here at Strategic Education, Inc. for their ongoing commitment to our students and our employer partners. We will now open the call for questions. Operator: If you have a question or a comment at this time, please press 11 on your telephone. If your question has been answered or you would like to remove yourself from the queue, please press 11 again. Our first question comes from Jeffrey Silber with BMO Capital Markets. Your line is open. Jeffrey Silber: Thanks so much. Karl, I appreciate the comments about saying that the first quarter is hopefully the low point from a revenue and a growth perspective. I know you have always talked about getting back to your notional plan. Any idea in terms of the timing of that, when we might see that? Karl McDonnell: We have partial visibility into the next quarter, obviously, and I would say that enrollment trends in U.S. Higher Education have been improving. We expect that they will continue to improve, which is why we had the comment on Q1 being the low point on revenue growth for the year. As for the notional plan or model, I should clarify, Jeff, that when I am talking about our performance against the notional plan, I am predominantly referring to EBIT and EPS. And from that lens, I have very high confidence that we are going to be on our notional plan this year. Could we get there with better expense management and maybe a little less revenue just given how the first quarter played out? I think that is possible. But as I say, I am very confident that we are going to be there from an EBIT and EPS standpoint. Jeffrey Silber: Okay, that is great to hear. If I could just move on to a regulatory issue. Effective July 1, we have some new rules coming from the One Big Beautiful Bill Act, specifically the caps on graduate and professional loans. I know you do not have as much exposure there, especially on the professional side, but I am just curious if you have seen any impact. Are students maybe a little bit reluctant because they are unsure about the funding environment? Any color you can provide would be great. Karl McDonnell: I have not heard of any demand-related issues or pressures as a result of grad loan limits changing. We are still waiting on final language to see exactly how that is going to be shaped, but I do not expect that we are going to have a major impact from changes to the grad loan limits. Jeffrey Silber: Alright, great to hear. I will get back in the queue. Thanks. Karl McDonnell: Thanks, Jeff. Operator: Again, ladies and gentlemen, if you have a question or a comment at this time, please press 11 on your telephone. One moment for our next question. Our next question comes from Alexander Paris with Barrington Research. Your line is open. Alexander Paris: Hi, guys. Thanks for taking my question. I just had a follow-up on that last one. The notional plan, Karl, you said you had high confidence in EBIT and EPS. From the notional plan, can you just refresh my memory? It calls for 46% revenue growth and 200 basis points of adjusted operating margin improvement. You said it could be a little less revenue, a little bit more cost reduction. But what are you referring to? You are referring to the 200 basis points of adjusted operating income improvement? Karl McDonnell: Yes, specifically. And the reason I say that is, obviously, we control our expense. I would say that the AI and other technological enablement to productivity are being implemented a little faster than even I expected, so I think it is going to have a slightly bigger impact this year than I otherwise would have expected. And I do not know where revenue is going to be ultimately, but if you just assume that our current enrollment trends are going to continue through the balance of the year and you layer on accelerated productivity, that gives me high confidence that we are going to get to the 200 basis points of margin expansion, and that will translate into whatever growth rate it is on EPS. Alexander Paris: Gotcha. And then, regarding enrollment in U.S. Higher Education, obviously, big growth continues in employer-affiliated enrollment that accelerated sequentially from the fourth quarter. Unaffiliated was down 5.5% by my calculation. That too represents a sequential improvement when it was down 8.5% in the fourth quarter. So what explains the sequential improvement? Are new students up in that channel? Karl McDonnell: Specifically, we have had, I would say, a little better than what we expected in new student growth at Capella. In fact, I would describe Capella's new student enrollment as quite strong. We have seen ongoing weakness in predominantly Strayer's undergraduate unaffiliated enrollment, which frankly is not part of our strategy. We are not trying to grow unaffiliated enrollment, but it has been improving. So I would say, Alex, it is a mix of Capella doing better than what we expected and Strayer beginning to improve from lower levels that we had last year. Alexander Paris: Gotcha. And then is there anything different you are doing in terms of marketing to the unaffiliated? Obviously, your focus is on employer-affiliated, but, you know, social media marketing, things like that, trying to drive enrollment in undergraduate unaffiliated at Strayer. Karl McDonnell: Yes. Well, it is a combination of a couple of things that have been really playing out over the last couple of years. The first is we have told our U.S. Higher Education management team that we want them to solve for the overall highest growth we can get across U.S. Higher Education and to not necessarily solve for any particular growth at either Strayer or Capella, but to try to maximize the sum of both of those. And what has happened as a result of that is Capella has just been a much stronger grower. And as such, we have been supporting Capella's growth with increased investments in marketing. And because we have not necessarily increased the aggregate amount in U.S. Higher Education, that means that we have been marketing a lot less at Strayer, which is predominantly the channel for unaffiliated enrollment. And in fact, Daniel could give you maybe a more precise number, but if you go back two years ago and compare it to where we are today from a marketing investment standpoint, Strayer is probably down by 50% or more, and Capella is up by 50% or more. And that is feeding the strategy that we are trying to execute, which is employer-focused, healthcare-focused. In some quarters, Capella's mix of employer-affiliated enrollments is over 50%. So it is a direct enablement of our strategy. We are happy to have unaffiliated enrollments. We are not trying to exclude them. It is just not where we are investing our growth capital. We are investing our growth capital in the employer channel, healthcare, and ETS in the States. And that is how it is playing out, and that is how we plan for it to be executed for the rest of this year and moving forward in 2027. Alexander Paris: Gotcha. And given the improving trends in U.S. Higher Education enrollment, you know, the sequential improvement, the slowing rate or the declining rate of decline, do you think we will get to growth by the end of the year in U.S. Higher Education enrollment? Karl McDonnell: I think it will be very close. I think we have a good chance to do that. I cannot predict, obviously, but I think that is entirely possible. Alexander Paris: Great. And then the last question, and kind of similarly, ANZ segment. Given the 3% increase in the international cap expected in 2026 and the strength that you are seeing on the domestic side of new student enrollment, do you still expect that segment to get to overall enrollment growth by the end of the year? Karl McDonnell: It is going to be close. I am hopeful, I should say, that we are going to have full-year new student growth, which will be the first in the post-cap era. Whether or not we get to total enrollment growth, it will depend. I have to say that one of the things that we saw in the first quarter that we did not foresee is that the Australian government has begun to slow down visa approvals even when you are below your cap. That is not something we saw last year. The Australian government was very good about approving visas as long as you were under your international cap. This year, there has been more friction, and we suspect it may have something to do with just greater immigration scrutiny following the Bondi Beach incident that happened in Sydney last year. But that was something that did not happen last year. It happened in the first quarter. I do not know if it is going to happen in the second quarter moving on, but that was more friction than what we were expecting, and that may impact our ability to generate total enrollment growth this year. Alexander Paris: But you feel good about new student enrollment growth this year in ANZ? Karl McDonnell: Yes. And we continue to have pretty strong domestic enrollment growth, and I have to go back and look, but I think three out of the four quarters last year, we had it, the last three. And we also saw that in the first quarter. Alexander Paris: Great. That is helpful. I appreciate the additional color. I will get back in the queue. Karl McDonnell: Okay. Thanks, Alex. Operator: One moment for our next question. Our next question comes from Jasper Bibb with Truist. Your line is open. Jasper Bibb: Hey, good morning, everyone. Underneath the U.S. Higher Education margin performance this quarter, can you compare where the operating margins for Capella and Strayer stood at this point? Is there a big difference there? And with the shifting growth investments from Strayer to Capella that you talked about, do you think you have kind of fully right-sized your fixed costs for what has become a smaller business on the Strayer side versus where you were pre-COVID, or is there more to do there potentially? Daniel Jackson: Hey, Jasper. It is Dan. The Capella margin, probably not surprisingly, is much higher than Strayer and is driving most of the operating income for U.S. Higher Education. Strayer has a positive margin. It is just a fraction right now of Capella. And for expenses at Strayer, though we are pretty close to right-sizing them, there are still opportunities when it comes to some of the productivity work that Karl referenced and continued real estate rationalization. So I think the Strayer margin will improve, but it is unlikely to get to where Capella is. Jasper Bibb: Got it. And then, there was a slight decline in revenue per student in the U.S. in the first quarter. In the context of revenue bottoming in the first quarter, or the expectation there, how are you thinking about revenue per student in the U.S. over the balance of the year? Daniel Jackson: Yes. So first off, we are expecting relatively stable revenue per student for the full year. The first quarter was lower due to higher scholarships and discounts and lower classes per student, both year-over-year and sequentially from the fourth quarter. And that variability is driven by program and degree mix, the mix of corporate students, and the mix of some of our unaffiliated student groups that are eligible for scholarships. Again, it is hard to predict those, but with pricing that takes effect starting in the second quarter, we think the full-year revenue per student is still likely to be flat, so it will offset some of these other trends. And one other note on that because the sequential issue was also exacerbated by our fourth quarter 2025 revenue per student being significantly higher due to a significant decline in scholarships and discounts that quarter compared to the fourth quarter 2024. So that was a little bit of an anomaly. Jasper Bibb: Makes sense. Thank you. And then for Education Technology, it seems like your growth rate for Sophia stayed pretty high, but the Workforce Edge growth rate has slowed a bit. I know you are starting to lap your large retail partner that you were ramping last year. Anything else we should consider for how each of those two businesses are going to perform in 2026 and the relative growth rates there? Karl McDonnell: Well, you have to remember, Sophia is pretty big now, so it would not surprise me if the growth rate moderates some, although our expectation is that we should be able to continue to support 20% plus growth at Sophia. You are right, we are anniversarying a big retail client in Workforce Edge, so there could be slightly less growth there, but remember, one of the big benefits of Workforce Edge is enrollments into Strayer and Capella. And as I said in my prepared remarks, we had over 4 thousand of those students in the first quarter. We expect that number will continue to grow. We have a very robust pipeline of new clients coming into Workforce Edge. We continue to get unsolicited inbound RFPs every quarter. So the way that we think about ETS is that we basically have two market-leading businesses there. Sophia is the market leader on alternative credit pathways. Workforce Edge is knocking on the door—Sophia the market leader on education benefit management. They are both great businesses. We continue to invest heavily in them, and we expect that they will continue to grow significantly both in the near term and the long term. Jasper Bibb: Got it. Thank you for taking the questions. Karl McDonnell: Sure. Thank you. Operator: I am not showing any further questions at this time. I will now turn the call back to Karl for any further remarks. Karl McDonnell: Thank you, ladies and gentlemen, and we look forward to discussing our second quarter results next quarter. Operator: Thank you, ladies and gentlemen. This does conclude today's presentation. You may now disconnect, and have a wonderful day.
Operator: Ladies and gentlemen, thank you for standing by. My name is Abby, and I will be your conference operator today. At this time, I would like to welcome everyone to the Patterson-UTI Energy, Inc. First Quarter 2026 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session. If you would like to withdraw your question, press 1 again. I would now like to turn the conference over to Michael Sabella, Vice President of Investor Relations. You may begin. Michael Sabella: Thank you, operator. Good morning, and welcome to Patterson-UTI Energy, Inc.'s earnings conference call to discuss our first quarter 2026 results. With me today are William Andrew Hendricks, President and Chief Executive Officer, and C. Andrew Smith, Chief Financial Officer. As a reminder, statements that are made in this conference call that refer to the company's or management's plans, intentions, targets, beliefs, expectations, or predictions for the future are forward-looking statements. These forward-looking statements are subject to risks and uncertainties as disclosed in the company's SEC filings, which could cause the company's actual results to differ materially. The company takes no obligation to publicly update or revise any forward-looking statements. Statements made in this conference call include non-GAAP financial measures. The required reconciliations to GAAP financial measures are included on our website, patenergy.com, and in the company's press release issued prior to this conference call. I will now turn the call over to William Andrew Hendricks, Patterson-UTI Energy, Inc.'s Chief Executive Officer. William Andrew Hendricks: Thank you, Mike. Welcome to our first quarter earnings conference call. I am going to begin by saying we are hiring. Now let us get started. The 2026 built on our momentum from 2025 with strong field execution supported by our technology and digital offerings across our diversified drilling and completions businesses. Our team stayed focused on the same priorities that drove last year's results—staying close to customers, delivering high-quality services and products that help them operate efficiently, and aligning CapEx and operating costs with the opportunities ahead. We are proud of our performance and believe our position across all our businesses will allow us to continue delivering strong cash returns across a range of market conditions. The commodity outlook has shifted materially since the start of the year due to heightened geopolitical risk and oil supply disruptions in the Middle East, which will likely reshape global oil supply and demand balances for several years. These developments underscore the strategic importance of U.S. oil and natural gas production and reinforce the need for a diversified global energy supply base, with U.S. shale production more critical than ever. Over the past several years, even as expectations for U.S. shale activity have fluctuated, we have remained focused on operational excellence in our core businesses. We have consistently believed that excelling in our core operating businesses is critical to enhancing shareholder value regardless of the macro environment. Today, we are pleased with the efficiency of our operations, and as U.S. shale activity inflects higher, we believe the decisions we have made position us to capture outsized value from a higher U.S. rig count. As a predominantly shale services company, we will always evaluate opportunities to deploy capital and expand our exposure to other geographies and product lines. However, we will remain disciplined and focused on returns for any potential growth investment. Momentum appears to be shifting back toward U.S. land activity over the coming quarters, but our corporate priorities remain unchanged. We will continue investing in technology and equipment that differentiates our services and supports long-term free cash flow per share while maintaining capital discipline, balance sheet strength, and consistent returns of capital to shareholders. We are well positioned to execute on these priorities. From a macro perspective, the outlook is improving, though the pace of recovery remains somewhat difficult to predict. We believe the industry will need to increase drilling and completion activity just to maintain oil production. With oil prices now running significantly above the mid-December levels assumed in many customers' 2026 budgets, we are encouraged by the setup for higher U.S. drilling and completion demand. Some customers have already started to make plans for higher activity levels later this quarter, and we increasingly hear that the strip is likely to incentivize additional incremental oil-directed drilling and completion activity in 2026 at approximately $70 and, if those prices hold, higher activity into 2027 becomes more likely. As is typical, private customers are moving faster than the publics. Natural gas activity also appears likely to improve as newly commissioned LNG facilities drive higher export volumes. While some of the incremental demand may be met by additional pipeline capacity from the Permian Basin later in 2026, we believe additional drilling and completion activity in gas-focused basins will be needed to fully supply that growth. As a result, we believe natural gas-directed drilling and completion activity is likely to increase in 2027. In our Drilling Services segment, we are very pleased with how the first quarter unfolded. Pricing remained steady, reflecting the value customers place on performance and reliability. In addition, the cost control programs we implemented towards the end of last year continued to gain traction and provided meaningful support to results. Because customer programs typically adjust with a lag to changes in commodity prices, activity for some customers in the first half of the year continues to reflect prior budget assumptions. We are seeing conditions improve, and we expect momentum to build through the quarter. We expect our rig count will exit the second quarter above the quarterly average and near the high point so far for the year, around 92 to 95 rigs depending on the timing, positioning us well as we move into the second half. As E&Ps continue to drill deeper zones and extend lateral lengths, the importance of rig capability and contractor performance continues to grow. The number of the most capable rigs—those with the load-bearing capacity and pipe handling systems required for today's deeper and longer, more complex wells—remains limited and driven by investments from the best performing drilling contractors. With our in-house engineering expertise and disciplined approach to upgrades, we believe we are well positioned to gain share in this growing market in a capital-efficient manner. As rigs become larger and more technical, we expect this to strengthen our competitive position and support higher returns over time. Our Completion Services segment delivered solid results for the quarter despite disruption from a January winter storm that effectively paused the completions business for five days. Excluding that impact, our frac operations ran near capacity with our natural gas-powered assets near fully utilized. Demand for completion services is improving, particularly in 2026, and we are in discussions with customers on higher pricing to more appropriately reflect rising demand and the high industry utilization. Available frac capacity across the industry is limited, and the few fleets that could be reactivated are among the industry's oldest and least efficient. At current pricing, reactivation does not seem economical, and pricing would need to rise meaningfully to incentivize incremental supply as demand increases. While our completions business has nearly 250 thousand cold-stacked horsepower that could technically be reactivated, we have been clear that our priority is to invest in newer technologies that will drive long-term returns. Our cold-stacked equipment represents the oldest diesel equipment in our fleet, and reactivating a single fleet would require more than $10 million investment. While the equipment could likely find work in the current market, the long-term return potential remains uncertain, and we are not prioritizing investment in these older assets. Over the past several years, we have high-graded our fleet by investing in newer natural gas-powered technologies that we believe will remain in demand and generate strong returns for years to come. We continue to expect our nameplate horsepower to decline this year as we execute this high-grading strategy. Over the past several years, the frac industry has seen consolidation and bifurcation of equipment quality and efficiency. Lower-tier pricing has constrained cash generation for smaller peers, limiting their access to capital and slowing investment in new technology. This dynamic continues to widen the gap between industry leaders and the broader peer group, supporting a more rational and stable market with structurally higher returns over time. We expect our nameplate horsepower to continue to decline as we direct capital toward expanding our Emerald fleet of 100% natural gas-powered assets. By year-end, we expect more than 15% of our active horsepower to be powered entirely by natural gas, with approximately 90% powered at least partially by natural gas. We believe we have one of the highest quality fleets in the industry, and this transition reflects our ongoing focus on improving operational performance. In our Drilling Products segment, the team delivered solid performance despite several industry headwinds. The conflict in the Middle East has increased risk in one of our key regions, which contributes roughly 10% to 15% of segment revenue, primarily from Saudi Arabia. Land activity in Saudi Arabia largely tracked expectations during the quarter, although activity in certain regions was impacted. On the cost side, we have experienced meaningful inflation in several key inputs, particularly the material tungsten, where prices are significantly higher than a year ago. In addition, our Middle East operations have seen higher logistics and personnel costs due to the ongoing conflict in the region. Even with these challenges, our drilling products business delivered only a modest decline in adjusted gross profit versus the fourth quarter, and we are actively pursuing additional actions to further mitigate these risks. From a competitive standpoint, we are encouraged by our position. We are pleased with the team's performance, and we believe we have grown to record market share in several key markets, including Saudi Arabia. In the U.S., we also believe there is additional upside with several large customers. Overall, our teams executed at a high level in the first quarter, maintaining a disciplined focus on service differentiation, capital allocation, and cost control as we navigated a demand environment shaped by customer budgets built on a crude oil price deck well below the current strip. We believe the indicators increasingly point to a period of higher commodity prices. Based on our customer conversations, we expect this to drive an increase in U.S. shale activity starting later in the second quarter and continuing into the second half of the year. Even if oil prices moderate somewhat from current levels, we would still expect upside versus today's activity. As we approach an inflection in U.S. activity, it is worth briefly reflecting on the strategy we have followed the past few years. While we continue to evaluate opportunities to expand beyond our core markets, our priority will always be return-on-capital driven, and we have yet to find compelling opportunities that have cleared our investment threshold. We remain focused on strengthening our competitive position in our core businesses and improving efficiency, operationally and financially. As we have always said, we believe disciplined capital allocation and continuous improvement in our existing businesses are important ways to enhance shareholder value. With activity now inflecting higher, the decisions we have made the past several years position us to deliver improved performance going forward. We are pleased with where the company stands today and are confident in our ability to continue delivering strong cash returns to shareholders. I will now turn it over to C. Andrew Smith, who will review the financial results for the quarter. C. Andrew Smith: Thanks, Andy. Total reported revenue for the quarter was $1.117 billion. We reported a net loss attributable to common shareholders of $25 million, or $0.06 per share. Adjusted EBITDA for the quarter totaled $205 million, which included $3 million in early contract termination revenue in the Drilling Services segment. Our weighted average share count was 380 million shares during Q1. As expected, seasonal working capital headwinds impacted free cash flow in the first quarter. Given the timing and variability of these items throughout the year, we view full-year free cash flow as the most meaningful measure of performance, with working capital turning into a tailwind in the second half. In our Drilling Services segment, first quarter revenue was $352 million and adjusted gross profit was $134 million. Revenue and adjusted gross profit included the previously mentioned $3 million of early contract termination payments. In U.S. contract drilling, we totaled 8,301 operating days in the quarter, with an average operating rig count of 92 rigs. Excluding early termination revenue, pricing was relatively steady versus the fourth quarter, and we continue to see benefits from the cost reduction actions implemented late last year. For the second quarter in Drilling Services, we expect our rig count to average around 90 rigs, and we expect to exit the quarter above the average as we reactivate rigs in the back half of the quarter. We expect adjusted gross profit in the Drilling Services segment to be approximately $130 million. Our guidance includes $5 million of rig reactivation and mobilization costs and assumes minimal second quarter revenue contribution from those reactivations. In our Completion Services segment, first quarter revenue was $680 million, and adjusted gross profit was $98 million. Results reflected the impact of roughly five days of winter storm disruption in January. Excluding that disruption, our frac calendars were essentially full with limited spare capacity to increase activity and an extremely efficient calendar. For the second quarter, we expect Completion Services adjusted gross profit to be approximately $105 million with near full utilization of our active assets. First quarter Drilling Products revenue was $80 million and adjusted gross profit was $33 million. Results reflected disruption in the Middle East related to the ongoing conflict and some cost inflation. For the second quarter, we expect Drilling Products adjusted gross profit to decline slightly, driven by lower profitability in our international business, particularly in the Middle East, and the normal impact of spring breakup in Canada. Other revenue was $6 million for the quarter, with adjusted gross profit of $3 million. For the second quarter, we expect Other adjusted gross profit to be approximately $5 million. General and administrative expenses in the first quarter were $69 million. For the second quarter, we expect G&A to be approximately $67 million. On a consolidated basis in the first quarter, depreciation, depletion, amortization and impairment expense totaled $218 million. For the second quarter, we expect it to be approximately $220 million. During the first quarter, total CapEx was $117 million, including $54 million in Drilling Services, $45 million in Completion Services, $16 million in Drilling Products, and $1 million in Other and Corporate. We ended the first quarter with $337 million of cash on hand and nothing drawn on our $500 million revolving credit facility. We have no senior note maturities until 2028. Our board has approved a quarterly dividend of $0.10 per share, payable June 15 to shareholders of record as of June 1. I will now turn it back to William Andrew Hendricks for closing remarks. William Andrew Hendricks: Thanks, Andy. I want to close the prepared remarks with some additional comments on our company and the industry. The commodity outlook has shifted meaningfully since the start of the year, with both current and future oil prices now well above the assumptions embedded in our customers' initial 2026 budgets. While many customers remain cautious in the near term, we are seeing a clear change in market tone, including more discussions around rig reactivations, stronger completion demand, and improving pricing across our businesses. Taken together, we have much more clarity on the market direction, and these dynamics point to a more constructive environment for activity and profitability for Patterson-UTI Energy, Inc. Even as we expect industry drilling and completion activity to inflect higher, we will continue to invest in our strategic initiatives to improve returns. In completions, we will continue to favor technology investments over overinvesting in our older cold-stacked equipment, and we will invest at a measured pace into new assets that should generate stronger returns over multiple years. In drilling, we are executing a disciplined cadence of structural upgrades to support deeper wells and longer laterals, consistent with where customer demand is trending. Digital and AI investments remain central to our strategy and are embedded across all of our operations. With the changing market sentiment, we believe that technology upgrades will be well supported through favorable contractual structures to support accretive returns. Finally, while the macro environment has changed, our corporate priorities have not. We remain focused on generating durable returns and sustainable free cash flow through the cycle while returning capital to shareholders. Our balance sheet remains strong, and we expect to deliver another solid year of free cash flow in 2026. As we evaluate opportunities to deploy capital, we will remain disciplined and prioritize investments that offer the highest return potential. With that, I would like to thank the men and women of Patterson-UTI Energy, Inc., who work hard every day to help provide energy to the world. Abby, could you please open the lines for questions? Operator: We will now open the call for questions. If you have dialed in and would like to ask a question, please press star then 1 on your telephone keypad. If you are called upon to ask your question and are listening via speakerphone on your device, please pick up your handset and ensure that your phone is not on mute when asking your question. To be able to take as many questions as possible, we ask that you please limit yourself to one question and one follow-up. Our first question comes from the line of Saurabh Pant with Bank of America. Your line is open. Saurabh Pant: Hi. Good morning, Andy and Andy. Andy, I think your inbox is going to be full of résumés by the end of the day after listening to your opening statement. It sounds like the initial leg of the upside is being driven by the private completion side, which makes sense. Already, we are talking about Patterson-UTI Energy, Inc. saying you are pretty much sold out on the high-end fleet, and several peers have said the same. How are the publics thinking about when and how much they want to add activity, if they want to add activity? At that stage, what would the supply side of the equation look like? How much capacity would we have or not have on the sidelines ready to come back, maybe both on the rig and the frac side? William Andrew Hendricks: Okay. Let me see where I can start. To begin with, we are really excited about the opportunity to put drilling rigs back to work, and like I mentioned earlier, we think we will be somewhere between 92 to 95 rigs as we exit the quarter based on timing. That is going to lead to higher completions demand over time. The interesting challenge that we have in the industry is we are sold out of our top-tier equipment. We are essentially sold out of everything that can burn natural gas, and we certainly will see a demand for more capacity as we move through the year. Before we start adding more capacity, we are going to be very focused on returns, trying to improve pricing where we can. We will continue the discussions that we are already having with a number of our customers on what that pricing should look like given the tightness in the market and given the demand. You will see instances over time of trading of customers within the market. We are going to work on improving pricing and improving returns before we start adding capacity. I think that is critically important, especially given how pricing in completions has been pushed down over the last couple of years. It is important for us and for our shareholders to improve returns where we can before we start bringing more capacity onto the market on the completion side. Saurabh Pant: That makes a ton of sense, Andy. On the way pricing would work—on the rig side, there is a contract book. How would contract duration look? How quickly can we expect higher pricing to show up in your numbers based on your contract book? And on the frac side, how should we think about pricing reopeners—three months, six months—or are there still a sufficient number of annual contracts where pricing would take time to reset? William Andrew Hendricks: I think the best way I can describe the pricing situation on the rig side is that when we did the last quarterly conference call, we said leading edge was in the low $30 thousands per day, down from the mid- to low-$30 thousands. What we are seeing today is pricing that is starting to move up from the low $30 thousands. I am not ready to call mid- to low-$30 thousands, but it is definitely moving up from the low $30 thousands at the leading edge with everything fully loaded on the drilling rig, and we are excited about that. As we get requests for technology upgrades on the drilling rigs—structural or digital—that leads to an investment and is going to require a term contract, and we are hearing favorable commentary from our customers that they are willing to do that as well. That will lock in those returns for the investments that we have to make. On the frac side, we are in discussions with customers today. We have anecdotal evidence where some customers have already given us 10% pricing increases. That is relatively small compared to how completions pricing has been pushed down over the last couple of years, but given the tightness in the market—from our side and what we hear from competitors—pricing will move up steadily over the next months through the end of the year. Saurabh Pant: Just to clarify, are the majority of your frac contracts on three- to six-month pricing reopeners? William Andrew Hendricks: It is a mix. We have some spot work in the second quarter. We have some longer-term contracts where pricing only resets every six months for some very large customers. We also have some customers where you revisit it as frequently as every month. So we have a mix. Derek John Podhaizer: Hey, good morning. Maybe a first question on the rig supply. I think on the website you are at 88 rigs today. You are talking about adding up to seven rigs by the end of the quarter. How material are the expenses to get those rigs back to work? And how many more rigs would you have behind that that will require real capital investments and the upgrades you are talking about for deeper wells and longer laterals? I am thinking through putting upward pressure on that low-$30 thousands dayrate toward the mid-$30 thousands or even into the mid- to high-$30 thousands like we saw last cycle. On a rig-by-rig basis, what would the required capital cost be to bring certain rigs back after these seven or ten? William Andrew Hendricks: For the rigs that are going back to work, it has not been too long since they were working, but there are some costs incurred to put them back to work. From an accounting standpoint, we also have to capitalize some of the mobilizations, and we have some rigs that are moving in different parts of the country. That puts us at around $5 million in OpEx to get everything back to work and put a number of rigs out through the end of the second quarter and into the third. We also get revenue back from that—we get paid for mobilizations—but it flows through operating expense, not CapEx. As we move forward through the year for some of the structural upgrades, we think we have a relatively low cost for a number of our customers. It could be in the range of just a few million dollars, and we can see paybacks in a year to a year and a half on some of that, depending on the dayrates, and we will lock that into term contracts. That will start to push dayrates higher. When we get into the large structural upgrades, the CapEx costs are significantly higher. For the Apex XC+ rig we have working in the field today—which went through a large upgrade process—those dayrates are pushing $40 thousand a day, and in the market we are in, we expect to be exceeding $40 thousand a day toward the end of this year and early next year with those types of large structural upgrades. Derek John Podhaizer: Thanks. On the frac side, you are effectively sold out. It is going to take a lot to bring equipment off the fence given it is legacy diesel. Can you talk to the white space in the calendar in Q2? Has that been fully soaked up? How is the second half firming up for your current frac equipment? What needs to happen on the current active fleet as far as white space being soaked up for the remainder of the calendar year before you would consider adding incremental new builds, likely next-gen 100% natural gas type of equipment? William Andrew Hendricks: This has been a very dynamic situation. As of last week, there was some white space in the calendar that a lot of people might not have expected given commodity prices. As of two days ago, we have basically filled the majority of that white space. Hats off to the team in completions for working with customers to fill that up. For completions, the second quarter is really a transitory quarter—not quite the inflection we are seeing in drilling—but that inflection in completions comes right after that. We feel that as of today we are fully loaded in the third quarter. I am really pleased with what the team is doing, how they are working with customers, and how they have loaded up the calendar, especially considering how the overall U.S. rig count had continued to come down earlier in the year. James Rollyson: Good morning. Andy, as you look at this inflection, you have talked about how tight the underlying frac market is. How do you think about getting all your pricing back to where you were two to three years ago? Given what you have been doing on the cost side over the last couple of years, how does that translate into margins relative to, say, the low-20s EBITDA margins in Completion Services right after the Nextier close? Just trying to connect the dots on where margins might trend over the next couple of years. William Andrew Hendricks: What is important for us right now is to constructively work with our customer base to get pricing back in line with where we are in the market. We have been pushed down in completions pricing for the last couple of years, and for shareholders, we need to get returns back to a reasonable level. While we are still generating good cash flow, there is an opportunity to get returns higher, and we want to do that before we start adding capacity. At the same time, throughout this year, we have been adding the new Emerald pumps that are 100% natural gas-burning. We are really excited about the uptake in the market. These pumps are essentially spoken for with various customers even before they show up in our inventory. It has been a measured pace to bring those out, and when we do, it improves our pricing and returns as we introduce those into various fleets. We do not want to add significant capacity to the market until we can structurally move pricing back to where we think it needs to be to get our returns. Positively, a number of our competitors are near sold out too. With consolidation in the completions market over the last five years, it is structurally in a better place. While we are all still competitive, there is a measured level of discipline to improve returns for shareholders before adding capacity. C. Andrew Smith: On CapEx, we set a budget at the beginning of the year implying a down year as we were all expecting. Conditions today look remarkably different than during our budget cycle. We are looking at places where there could be opportunity to lean into what we think is going to be a pretty strong price environment, but we do not have an updated figure to provide today. Scott Andrew Gruber: Good morning. Staying on frac pricing, the fleet is much more stratified today. To set an upside scenario, how much incremental pricing would you need to see on direct drive and e-frac to support new builds that reflect fleet expansion and not just replacement? William Andrew Hendricks: When we look at how we are deploying the new Emerald direct drive—100% natural gas—into our existing fleet, the economics are very good, and the way we are pricing those is very good. The bigger need is to lift the average across the equipment that has been under contract over the last year or so. We need to get our overall average up. It is not really about what we are getting for the new technology; that is working well and generating the returns we want. I am more concerned about lifting overall averages. We are entering a very tight market for completions. We have been sold out of everything that can burn natural gas for a few quarters, and overall the industry is about to enter a very tight market for completions. That bodes well for all of us trying to get returns up to acceptable levels, and then we can look at capacity increases of new technology. C. Andrew Smith: Given where we are in the market and the premium gas-burning equipment gets today, we are seeing pricing improvement across the fleet—more so on the gas-burning equipment. With increasing visibility over the next couple of years, you do not have to see a huge amount of pricing to justify some new builds into this type of market, but you probably still need 5% to 10% additional. Scott Andrew Gruber: On the gap between Emerald kit and dual fuel—there is likely a gap between Emerald and Tier 4 dual, and a gap between Tier 4 and Tier 2 dual. As pricing improves, do those gaps compress or does everything move up while spreads sustain or widen due to diesel displacement economics? William Andrew Hendricks: You are correct—there are various levels of technology and pricing differentials between them. The market we are about to go into over the next six months is a rising tide that lifts all boats. The differentiation and pricing differentials will remain, but overall pricing for all levels of technology should move up. C. Andrew Smith: With the diesel-gas spread, while all pricing will move up, you may see the spread between different levels of equipment widen in terms of cost differentials. Stephen David Gengaro: Thank you, and good morning. On pricing contracts, given your positive commentary, would you expect a strong inflection point in margins in the third quarter for completions, or more of a smoother increase over a couple of quarters? How should we think about when we see it on the income statement? William Andrew Hendricks: I think it will be more of a smoother increase in pricing not just over the next two quarters, but into 2027 as well. This will be based on constructive negotiations with our customers. We are going to have customers who want to increase their capacity, and E&Ps we are not working for today may call, creating opportunities and negotiations across the base. We need to do the right thing for shareholders and improve returns, and it is a steady process over multiple quarters. Stephen David Gengaro: On the drilling side and performance-based packaging of products between completions and drilling, how does that play out in a tighter market? Does it give you more opportunity? William Andrew Hendricks: We have seen challenges since we introduced our P10 Advantage offering as the market was getting softer. Recently, I have been in discussions with some mid-tier operators who may kick off a program and want to discuss what we can do for them. For a mid-tier operator expanding their program, they may not have all the internal resources. If we can help them on efficiencies across drilling and completions, that is positive. A tighter market should be positive for expanding that offering, and we are well positioned to help. Arun Jayaram: Good morning, Andy and team. Your prepared comments suggest the rig count is trending up five to seven rigs in Q2. Which U.S. shale basins are you seeing the incremental demand on the rig side? William Andrew Hendricks: We are seeing it across multiple basins, not concentrated in any one. We have customers in multiple basins looking at their economics—both oil and gas—so it is broad. That is encouraging and suggests further opportunities over the next few quarters to expand the rig count. Arun Jayaram: You closed your prepared remarks talking about evaluating opportunities to deploy capital. You talked about Emerald technology—100% natural gas. What are you looking for to add incremental capacity? Your nameplate is going down this year, but what market signals are you looking for to deploy growth capital? William Andrew Hendricks: We have been holding back some cash looking for opportunities to deploy—through increasing the dividend, buying back shares, and looking at M&A. As the market improves, we now have further options because with increasing activity and demand for technology—whether on the completion side with Emerald or on the drilling side with the Apex XC+ rig—we have to evaluate returns and what is the right answer for shareholders as we deploy more capital. Keith MacKey: Good morning. It is rare to be talking about termination revenue and reactivation in the same call. Can you walk us through those factors? Is it a timing issue on the termination? And with the rig reactivations, what type of CapEx or OpEx do these rigs need to come back? Is it a matter of increasing specification requests by operators? William Andrew Hendricks: This quarter has had a lot of moving parts. We have had E&P customers that started the year with budgets based on certain commodity prices and pressure from investors to keep CapEx in line. We did have rigs come down and termination payments, in the same quarter we are now discussing putting rigs back to work. That creates challenges as the rig count comes down and then goes back up, with rigs moving between basins. In terms of costs to put rigs back to work after they have come down, if they have been working in the last year, we are probably in the range of $2 million in CapEx if upgrades are required. There are no upgrades that are less than $1 million for technology—structural or digital—depending on the customer, location, and objectives. That potentially drives more capital spend. As we spend those dollars on upgrades, we certainly want a term contract to cover that. C. Andrew Smith: To clarify, the rigs we are talking about in the second quarter include $5 million of operating expenses to reactivate those rigs. That is OpEx, not CapEx. The CapEx would be on rigs further out that have not worked as recently and may need structural upgrades. Keith MacKey: Understood. On inflation, what are you watching and how much can you mitigate? William Andrew Hendricks: Diesel prices are moving up. On sand, there is plenty in the Permian Basin; we are not seeing challenges there. In smaller basins, things may be starting to tighten, but we expect that to change over time. On the Drilling Products side, tungsten prices are moving up significantly, but we have ways to mitigate that—using more steel body bits versus matrix to reduce tungsten use. If there are costs moving up that we need to pass through, this is the right market to do that, and we will be looking at that as well. Douglas Lee Becker: Thank you. How many rigs will be reactivated with the $5 million in costs? Is there line of sight to term work, or is the spot market picking up enough to deploy that capital? William Andrew Hendricks: I would say right now, nothing at that level yet in terms of new long-term awards, but we are looking ahead to the second half of this year and into early 2027 and having those discussions with customers. The $5 million also includes mobilization costs, not just work on the rigs. The market is moving in the right direction to allow potentially significant technology upgrades and possibly taking share. We are excited about the discussions and the changing conditions. C. Andrew Smith: To clarify, that $5 million ties to the 92 to 95 rig exit rate we were talking about earlier. Douglas Lee Becker: Understood. Housekeeping: you mentioned the winter storm cost about five days on Completion Services. Any EBITDA impact from that? C. Andrew Smith: Yes, it was about $9 million. We had that included in our guidance when we gave it last quarter. We were not as precise then—we said $5 million to $10 million—but it ended up at the high end of that range. Edward Kim: Hi, good morning. I am surprised the overall U.S. land rig count is still roughly flat since the beginning of the Iran conflict about two months ago, even as oil prices have increased substantially. Does that reflect customers being in wait-and-see mode before increasing activity, or is it the lag between making that decision and actually standing up a rig? It does seem based on your outlook that the industry-wide rig count should start picking up within weeks. C. Andrew Smith: Our customers—just like we did—went through a budget cycle, and a lot of this came on right after plans for the year were made. Changing those plans quickly without surety on where it would end up or how long it would last would be difficult. I am not surprised by the pace at which rigs are starting to come back. William Andrew Hendricks: In the public data, some of the biggest E&P operators have not changed their programs—they are sticking to budgets this year. I think that will probably stay that way for many of them. You will see other publics and privates move quicker, and that is what you are seeing in our rig count projections. The large E&Ps will relook at budgets for 2027, which is encouraging for next year. Edward Kim: Based on your commentary, 2026 could almost look like a mirror image of 2025. At the beginning of last year, you were running about 105 active rigs. Is 105 achievable by the fourth quarter of this year, or would that be too much of a stretch? William Andrew Hendricks: It is too early to project exactly what our rig count number will be at the end of this year, but we are encouraged that we will put more rigs out in the second half after the second quarter. We are happy to be working in this type of market versus what we dealt with last year. Daniel Robert Kutz: Hey, thanks. Good morning. On the international businesses—looking past the near-term disruptions related to the conflict—have you had any customer conversations outside the Middle East, or even with customers there, that indicate potential activity upside for Patterson-UTI Energy, Inc.'s services and equipment? Any inbound across global Drilling Products, the LatAm drilling footprint, or the Turnwell JV in the UAE? William Andrew Hendricks: In the Middle East—from Kuwait down to Oman—we have a solid Drilling Products business. Onshore activity was relatively steady, especially in Saudi Arabia and the UAE, but offshore activity shut down midway through the conflict, which had an effect. In Saudi Arabia, our customer was working through inventory in their warehouses, which slowed product sales for everyone. At some point that will end, and product sales should move up. We are seeing higher logistics costs to get products and materials into the Middle East and a slowdown in Kuwait as well. In South America, we shipped two drilling rigs to Argentina. Over the next one to two years, we expect rig count in Argentina to continue moving up; we may get to participate more—too early to call that yet, but we are in a number of conversations. In Venezuela, there are a number of interested parties looking to increase production, especially in the Orinoco Belt with heavy oil. Those discussions will take time and likely go very slow, but interest is there. Daniel Robert Kutz: Back to the U.S., some indicate DUC inventories are materially low, which can influence the relative pace of drilling versus completions. Do you track this, and how might it influence the pace between drilling and completions? William Andrew Hendricks: DUC inventory has come down, directly related to the rig count coming down and the number of wells between drilling and completions. Some smaller customers started the year drilling wells and planned to complete them later; based on current economics, some have called us to frac sooner, and where we could, we accommodated them, which led to better returns on some of that work. It is not widespread yet. Now we are entering a period where the drilling rig count is going to start to move up, and we are going to see DUC inventory start to move up until completion activity moves up. With the tightness in the completion market, there could be a period where DUCs increase more than normal until more completion capacity is available. That should be very positive for completions in the second half of this year. Donald Crist: Good morning, guys. Thanks for fitting me in. A macro question: we are hearing that worldwide supplies are dwindling and there is a significant dichotomy between the physical and financial markets for oil. We are hearing the strip could increase materially, and maybe we do not go back to $65 to $70 oil. What is your macro view on oil over the coming years? William Andrew Hendricks: I am not a commodities trader, but there are interesting things happening. On refined products like jet fuel, kerosene, and distillates, those commodities have been ramping up at a faster rate than crude. Commodity traders on the crude side are watching how products trade to determine what the real cost per barrel should be, given a disconnect between traders’ opinions of where oil should trade versus where you can physically get oil today and where you can move it. We still have a bottleneck of crude in terms of global production that is missing, and that will have to get filled or start moving again, which will take months to work out. Where the strip trades today looking forward seems more like a best guess versus the material price of a barrel of oil. It will be interesting to see how that shakes out over the next year. I am encouraged by how our customer base is reacting and discussing the forward strip, and by the fact that we can tell you today that we are putting drilling rigs out. John Matthew Daniel: Thanks for including me. I completely flubbed and thought your call started at ten. Apologies. Three questions—first, from a supply chain perspective for drilling capital equipment, where are the longest lead times today, and could that delay rig reactivations over the next several quarters? William Andrew Hendricks: There are some long lead items—some close to a year—for specialty items for very large upgrades. We have already been placing orders for some long lead items to keep things moving within the existing budget. Our capital budget includes technology upgrades, not just maintenance, so we try to stay in front of long lead items. Lead times are what they are, and we keep items on order where it makes sense. There are shorter lead items as well—structural steel, for example—that we can get in a reasonable timeframe. I have not heard anything from the teams that gives me concern about getting the items we need at the pace we think we will need them. John Matthew Daniel: You touched on international—Argentina and Venezuela. How do the rig specs differ between those markets and what you are doing in the U.S.? Any operational color? William Andrew Hendricks: For Argentina (Vaca Muerta), you can take a U.S. rig and move it down there to drill the horizontals—almost identical rig specs. In Venezuela, it depends on the basin. In the Orinoco heavy oil, we were drilling those wells twenty years ago with 1 thousand horsepower rigs. A 1.5 thousand horsepower U.S. rig can work very well there today. There are deeper onshore plays where you would need 2 thousand to 3 thousand horsepower, but I suspect the focus in Venezuela will be on heavy oil, given Gulf Coast refineries, and U.S. rigs can work there. John Matthew Daniel: For your employees in the Middle East, what percent left when the conflict started and what percent have returned? How do you think about sending more people back? William Andrew Hendricks: Hats off to our enterprise response team. They ran a 24-hour operation to check on everyone from Kuwait to Oman, ensure people were okay, and assist moves where needed. A bigger concern was rotators working in the field in the UAE—we moved them over land to Oman and then flew them out once flights were operating. At this point, we have everybody back to where they are, and it is relatively business as usual. We still have concerns, but our people there are comfortable working there. If they are not, we certainly have work for them here—we are hiring. Operator: That concludes our question and answer session. I will now turn the conference back over to William Andrew Hendricks for closing remarks. William Andrew Hendricks: Thanks, Abby. I just want to thank everybody that dialed in today for our conference call. It is an exciting time in the industry where we are seeing this inflection. We are very happy to report a quarter where we are putting drilling rigs back to work and have a good line of sight on completions for the rest of the year to be relatively fully loaded out. Thank you. Operator: Ladies and gentlemen, this concludes today's call, and we thank you for your participation. You may now disconnect.
Chris Doyle: Good morning. I am Chris Doyle, Vice President of Investor Relations and FP&A. Welcome to our earnings call for 2026. Before we begin this morning's call, I would like to remind you that today's presentation contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements are not guarantees of future performance and are subject to various risks, uncertainties, and assumptions that could cause actual results to differ materially from those expressed. Please refer to the page titled Forward-Looking Statements in our earnings material for more detail. Presentation materials for today's call were posted this morning on the Investors section of Visteon Corporation’s website. Joining us today are Sachin S. Lawande, President and Chief Executive Officer, and Jerome J. Rouquet, Senior Vice President and Chief Financial Officer. We have scheduled the call for one hour, and we will open the lines for questions after Sachin’s and Jerome’s prepared remarks. Please limit your participation to one question and one follow-up. Thank you again for joining us. Now I will turn the call over to Sachin. Sachin S. Lawande: Thank you, Chris, and good morning, everyone. Visteon Corporation delivered a solid start to the year with first quarter sales coming ahead of our expectations. Net sales were $954 million, up 2% year over year, despite lower industry and customer vehicle production. New product launches and customer recoveries more than offset the anticipated headwinds from lower BMS volumes and vehicle discontinuations at Ford. Growth over market in the quarter was 3%. Adjusted EBITDA was $104 million, broadly in line with our expectations. During the quarter, we saw elevated semiconductor costs, while the associated recoveries from customers are expected to be weighted more to the later part of the year. Adjusted free cash flow was negative $23 million, primarily driven by normal seasonality and higher inventory levels. We continue to maintain a strong balance sheet with net cash of $385 million, providing ample flexibility to execute our capital allocation strategy. New business wins were just over $1 billion, led by cockpit domain controllers and digital clusters. A key highlight was our high-performance compute win with SAIC in China, a third customer for AI-based smart cockpit systems, reinforcing our first-mover advantage in this emerging technology, similar to our early leadership with SmartCore. Q1 was a busy quarter for operations: 20 launches across 11 automakers, including on several high-profile vehicles, underscoring our continued execution excellence in a dynamic supply chain environment. Finally, we continue to return capital to shareholders. During the quarter, we returned $40 million through share repurchases and dividends. Overall, the quarter reflects a good start to the year with strong execution across all parts of our business and continued progress on our strategic priorities. Sachin S. Lawande: Turning to page three. This page shows our Q1 sales performance by region, representing a solid start to the year with balanced global customer demand. In the Americas, demand for cockpit electronics was strong, driven by ramp-up of recently launched products, including new display programs with Nissan and GM. We also benefited from one-time customer recoveries related to prior EV volume declines. Offsetting these were the anticipated headwinds from vehicle discontinuations at Ford and lower BMS volumes due to changes in EV policies and incentives. In Europe, we benefited from strong ramp-ups on several successful vehicle programs. Key contributors included a curved panoramic display referred to as a digital stage combining a 12-inch digital cluster and a slightly larger central information display on the Audi Q3, digital clusters and displays on the Renault 4 and 5 EVs, and digital clusters on the new Nissan Qashqai and Juke. These programs supported Q1 sales growth despite a weak vehicle production environment. The engineering services acquisition from last year also contributed modestly to our sales in Europe. In Rest of Asia, India was a strong market for Visteon Corporation, with ramp-ups of a new SmartCore system for Mahindra and a digital cluster for TVS, a leading two-wheeler OEM. We also launched new digital cluster programs with Nissan and Mitsubishi for Japan and ASEAN markets, offsetting a Mazda program roll-off. In China, policy reset and demand pull-forward late last year led to lower Q1 vehicle production, particularly in the price-sensitive segments. Our sales were in line with expectations, supported by greater exposure to higher-value segments that are less affected by policy changes. We also benefited from several recently launched programs including a new cockpit domain controller with Zeekr, an upgraded digital cluster on the Toyota Corolla, and a new digital cluster on the Toyota Frontlander. The year-over-year decline in our sales has reduced significantly versus prior quarters and is now tracking more in line with customer production volumes. Looking ahead, we have multiple launches in the second half that are expected to drive modest growth in China this year, followed by a more meaningful step-up in 2027. In summary, we started the year very well with stable global demand for cockpit electronics and new product launches offsetting the expected headwinds, primarily from lower BMS volumes. Sachin S. Lawande: Turning to page four. Q1 was a busy launch quarter with 20 new products launched with 11 carmakers, and on some strategically important vehicles for our customers. This page highlights a few key programs. We marked a significant milestone with our first launch with Toyota’s Lexus brand, with the fully redesigned Lexus ES, a flagship model leading the next-generation electrified lineup for Lexus. Our driver display is standard on all trims globally, reinforcing Visteon Corporation’s role in advancing premium in-cabin experiences with Toyota and contributing to our growth with this customer. We also launched a digital cluster on the first-ever Infiniti QX65, a midsized luxury SUV from Nissan for U.S. and Middle East markets. This new vehicle is a key part of Nissan’s turnaround strategy in the U.S. Our 12-inch digital cluster comes standard in all trim lines of this vehicle. In China, we launched a driver display for the new electric Ford Bronco developed specifically for that market. The automotive market in China is evolving beyond electrification to highly specialized segments with focus on technology and lifestyle applications, and the electric Bronco is significant for Ford in China, designed to compete directly with local EV manufacturers. India is one of the fastest growing auto markets, and in Q1, we launched multiple products including a digital cluster with Hyundai, infotainment with Tata, and the center information display with Renault. Hyundai and Tata are already well positioned in India as number two and number three players, and Renault has recently made India a cornerstone of its strategy. India today represents nearly 10% of our total sales, and these launches position us to grow alongside our customers in what will be a key growth market going forward. In summary, we had a solid start in Q1 with new launches that laid the foundation for growth in the coming quarters and underscored Visteon Corporation’s role in automakers’ go-to-market strategies worldwide. Sachin S. Lawande: Turning to page five. We secured approximately $1 billion in new business during the quarter. As expected, customer sourcing in Q1 was somewhat lighter following a strong finish to last year, and some display opportunities were shifted into the second quarter. Our product portfolio remains well aligned with key industry trends, and our new business opportunity pipeline is strong for the rest of the year. Based on current visibility, we remain on track to achieve our full-year target of $6 billion. I would like to highlight a few of the key first-quarter wins on this page. In China, we secured our third customer for an AI-capable cockpit system with SAIC Motor for its IM brand. SAIC Motor is one of the largest carmakers in China, and IM is the new brand targeting the premium car segment. Automakers in China are rapidly adopting agentic AI-enhanced in-cabin experiences, driving demand for high-performance cockpit systems capable of running LLMs and video language models, or VLMs, using the latest silicon, such as Qualcomm’s fifth-generation Snapdragon chips. These high-performance systems also enable greater integration, accelerating the shift towards centralized domain architectures. Importantly, Visteon Corporation has established an early-mover advantage with three OEM wins in the space, more than any other tier-one supplier, positioning us very well to take advantage of this emerging trend. Mainstream vehicles will continue to use conventional cockpit domain controllers for affordability reasons, with premium vehicles transitioning to AI-based cockpits. In India, we secured a SmartCore domain controller win with a European OEM for their vehicles for India and other emerging markets, our first SmartCore win with this customer. The system will power three cockpit displays and support advanced infotainment and entertainment features. Similar to recent SmartCore launches in China and India, beyond strong product-market fit of SmartCore, speed was a key competitive differentiator and the main reason for this win, as the start of production of the vehicle is under 12 months. We also expanded our commercial vehicle business by adding a new customer for digital clusters with a U.S. manufacturer of purpose-built vehicles for defense, delivery, and fire and emergency markets. The 12-inch cluster will feature on their next-generation delivery vehicles, with production starting in early 2028, reflecting the growing adoption of digital cockpits in all kinds of commercial vehicles and not just for heavy-duty trucks. In two-wheelers, we expanded our digital cluster program with Honda to additional models representing an incremental $100 million of lifetime sales, further strengthening our engagement with the world’s largest two-wheeler OEM. In summary, our Q1 performance was highlighted by strategic wins in key markets, reinforcing our technology leadership and supporting a strong pipeline that keeps us on track for our $6 billion full-year target. Sachin S. Lawande: Turning to page six. China, the world’s largest auto market, is also the most competitive, with intense pricing pressure in budget and mainstream segments, which Visteon Corporation has strategically avoided to protect profitability. Above mainstream, the market is now evolving beyond electrification into more specialized segments centered on intelligence, luxury, and lifestyle. A key area of growth is the emerging premium tech segment, as traditional OEMs compete with tech-first players such as Tesla, Xiaopeng, and Li Auto with vehicles that combine luxury with advanced technology. OEMs such as Geely, Chery, and SAIC, who are among the largest in China, are defining their premium brands around the convergence of premium design, immersive digital experiences, and, most importantly, artificial intelligence. The cockpit is at the center of differentiation, with agentic AI enabling a new level of in-cabin intelligence. Unlike traditional command-based systems, AI-powered smart cabins can understand user intent, reason through complex tasks, and act proactively on behalf of the user. For example, instead of manually entering a destination, the system can anticipate and suggest it based on context or what it hears from conversation. It can also translate incoming messages in real time, draft responses with minimal input, and answer open-ended questions about surroundings—what the driver may be seeing outside the window, for example—delivering a far more intuitive and personalized cabin experience. This level of intelligence requires a step-change in computing power to run AI workloads far beyond what current cockpit domain controllers can provide. Visteon Corporation was the first tier-one supplier to develop a high-performance version of SmartCore using the newest fifth-generation chip from Qualcomm. We also developed the first cockpit-specific agentic AI software framework, Cognito AI, to enable the development of use cases like I just mentioned. Our early investments in AI helped establish Visteon Corporation as a preferred partner for carmakers in China for their AI-enabled cockpit systems. These next-generation systems carry significantly higher content value, and the business booked with the three OEMs thus far is already over $1 billion in value. We expect more vehicles to be added to the programs after the initial launches, which are happening this year. While China is leading adoption of AI, we see this as a global inflection point. AI will also become a competitive must-have in other parts of the world, accelerated by the international expansion of Chinese OEMs, and drive the next phase of growth for Visteon Corporation. Sachin S. Lawande: Turning to page seven. Before wrapping up, let me briefly discuss our outlook for the remainder of the year. Since issuing our guidance, S&P has lowered its global light vehicle production forecast for our customers by approximately 1.5 percentage points, with most of the impact in the second half of the year, the main reason being the Middle East conflict, and there could be further downside if the hostilities persist for longer than anticipated. Production for our key customers is now expected to decline in the mid-single digits year over year. On the supply side, memory remains constrained. Strong demand from AI and data centers limits availability for automotive. Automotive continues to rely on older memory technologies that suppliers are phasing out in favor of newer nodes, creating a structural supply-demand imbalance and driving pricing pressure and tightness in supply. We expect this environment to persist through 2027 before easing as new capacity starts to come online. In this environment, we are proactively managing supply by working closely with existing suppliers and qualifying additional sources. We were able to secure sufficient supply in Q1 through proactive actions, ensuring no impact on our customers. We expect supply to remain tight throughout the rest of the year, with incremental supply from new sources starting to become more meaningful in the second half of the year. On the positive side, customer demand has remained resilient, with Q1 coming in ahead of expectations and Q2 schedules indicating a continued trend. Importantly, our key launches remain on track. Taking all this into account and based on current data, we are reaffirming our full-year sales guidance despite incremental headwinds in the broader market. We will continue to closely monitor macro and supply conditions and provide updates as the year progresses. Now I will hand it over to Jerome to discuss financials in more detail. Jerome J. Rouquet: Thank you, Sachin, and good morning, everyone. We delivered in Q1 a balanced set of financial results in what continues to be a dynamic operating environment. For the quarter, sales were $954 million, a 2% increase from the prior year. We continue to see strong growth with new product launches and benefit from solid commercial execution, partially offset by lower customer production and expected headwinds, including lower BMS sales with GM and the discontinuation of several car lines at Ford. Growth over market was 3%, in line with our full-year expectations of low single-digit outperformance. Adjusted EBITDA was $104 million, representing a margin of 10.9%. As we indicated on the prior call, we expected Q1 to be the low point for EBITDA, with improvement throughout the year as we make progress on customer recovery agreements and cost initiatives. In the quarter, we were impacted by elevated semiconductor costs and the timing mismatch of customer recoveries. Adjusted free cash flow was negative in the quarter, primarily driven by an increase in working capital, particularly inventory, and a 2025 incentive compensation, which was paid in Q1. We continue to execute on our capital allocation strategy, returning $40 million to shareholders, with $30 million in share repurchases and $10 million in dividends. We ended the quarter with a strong balance sheet and net cash of $385 million, providing flexibility to deploy capital while navigating the current market environment. Jerome J. Rouquet: Turning to page 10. Sales for the quarter were $954 million, an increase of $20 million year over year. Customer production volumes were down 4%, while growth over market was 3% when excluding pricing and currency. Compared to our internal expectations a couple of months ago, we benefited from higher customer volumes, better pricing dynamics, and additional benefits from EV program commercial settlements. As Sachin already provided details on customer volumes in the quarter, let me provide some additional color on pricing and EV commercial settlements and how they impacted both sales and EBITDA. First, pricing was a headwind of $5 million in the quarter, which was lower than what we typically see. As a reminder, pricing in this environment is influenced by several moving pieces. These include annual and discrete price changes with customers, the unwinding or maintaining of surcharges put in place during the prior semiconductor shortage, and, more recently, customer recoveries related to memory cost increases. During the first quarter, we were able to mitigate a portion of the elevated semiconductor cost through short-term commercial pricing agreements, while we continue to work towards longer-term recovery arrangements. We are making good progress on these longer-term agreements, and we expect that incremental cost will be offset by more permanent recoveries as we move throughout 2026, consistent with the assumptions embedded in our guidance. From an EBITDA perspective, the lower pricing we achieved with customers in the first quarter, combined with supplier cost reductions and value engineering activities, allowed us to partially mitigate the elevated cost from memory and resourcing actions. The net impact of these commercial activities was a headwind of just over $15 million. Second, the additional benefit to sales from one-time settlements primarily related to EV programs was approximately $20 million, while the EBITDA was approximately $10 million, as we closed out supplier settlements as well. As a reminder, our full-year guidance included $10 million of expected one-timers from program settlements, which was achieved in Q1. With this context, let me provide more color on our year-over-year Q1 EBITDA bridge. First, let me remind everyone that prior-year results included approximately $15 million of one-time items, which impacts the year-over-year comparison. Second, as just mentioned, the negative impact from all commercial activities, including customer and supplier pricing, was a headwind of $15 million. This was partially offset by the benefit of EV settlements that I also highlighted. The remaining year-over-year decline in EBITDA of approximately $5 million was driven by lower volume and unfavorable FX and slightly higher freight and logistics, partially offset by ongoing cost initiatives, including vertical integration and engineering productivity. Jerome J. Rouquet: Turning to page 11. Adjusted free cash flow for the quarter was negative $23 million, reflecting the typical seasonality of our business, with Q1 generally being one of the lower quarters for cash flow. In 2026, this dynamic was more pronounced for a few reasons. First, EBITDA in the quarter was at the low point for the year, as expected. Second, we increased inventory levels during the quarter due to normal seasonality, inflation, and as a deliberate action to manage supply chain risk and market volatility. And third, the annual incentive compensation payout is in Q1, reflective of the strong performance last year, and is reported in the line Other Changes. As it relates to the remainder of cash flow items, cash taxes were slightly lower year over year, primarily due to lower profitability in the quarter and timing of payments last year. Interest income continued to offset interest expense. Capital expenditures were in line with the prior year and continue to support new program launches. Jerome J. Rouquet: Turning to capital allocation. We deployed $40 million in the quarter through share repurchases and dividends. We ended the quarter with $385 million in net cash and expect to continue deploying capital in a disciplined and balanced manner. Jerome J. Rouquet: Turning to page 12. Turning to our outlook. We are reaffirming our full-year guidance across all key financial metrics, as the strong start of the year will help us offset a softer-than-expected market setup in the second half of the year. Starting with sales, we continue to expect revenue in the range of $3.625 billion to $3.825 billion, which represents a low single-digit growth over market. This reflects the strength of our product portfolio, strong customer demand in the first half of the year, and the continued ramp of recent launches, despite the softer-than-anticipated second-half production environment Sachin outlined. Moving to profitability, we continue to expect adjusted EBITDA in the range of $455 million to $495 million, which corresponds to a margin of approximately 12.8% at the midpoint. Compared to the first quarter, we expect margins to improve as the year progresses. This is primarily driven by higher customer recoveries as well as the continued impact of our cost initiatives, including product costing actions, vertical integration, engineering productivity, as well as resource rebalancing across our global footprint. On free cash flow, we continue to expect adjusted free cash flow in the range of $170 million to $210 million. That said, we are currently trending towards the lower end of this range. This reflects our plan to maintain higher levels of inventory as we proactively manage supply constraints, especially around certain semiconductor and memory components. Importantly, our strong balance sheet provides us with significant flexibility to navigate these dynamics. Maintaining financial strength continues to be a core pillar of our capital allocation philosophy, enabling us to invest in the business and return cash to shareholders while managing near-term volatility. We plan to provide a more comprehensive update on our longer-term capital allocation priorities at our upcoming Investor Day. Jerome J. Rouquet: Turning to page 13. Visteon Corporation continues to be a compelling long-term investment opportunity. We have spent the last couple of years rebuilding our growth algorithm while executing operationally and commercially throughout a dynamic environment. We remain confident in our long-term opportunity, and we look forward to sharing more with you at our upcoming Investor Day on June 25 in New York City. Thank you for your time today. We would like now to open the call for your questions. Operator: At this time, if you would like to ask an audio question, please press star then the number one on your telephone keypad. Again, that is star and the number one. Your first question comes from Mark Trevor Delaney with Goldman Sachs. Mark Trevor Delaney: I was hoping to start with a question on the demand and production environment. The company spoke in its prepared remarks about S&P lowering its forecast for 2026 driven by the Middle East conflict, and Sachin, you said that at least for the first half, customer schedules have actually been solid, if not even a bit better than expected. Could you speak a bit more on what Visteon Corporation is seeing with respect to LVP? And as you look into the second half, are you seeing any softening in your own customer conversations? And maybe clarify what you are trying to bake into guidance for the year and the 1H to 2H trajectory? Jerome J. Rouquet: Thanks, Mark. Let me take that question. We are maintaining our full-year guidance for sales and for EBITDA. Let me give you a little bit of color by quarter. Q1 came in a little stronger than what we had anticipated. We were also positively impacted by some EV settlements, about $20 million. It is important to make sure that we do not annualize that $20 million. Q2, even with the Middle East conflict, has a pretty strong setup. We have good visibility on our orders, and I would say that Q2 looks similar to what we had in Q1 from an order standpoint—so a pretty robust first half of the year. As far as the second half is concerned, we are using S&P revised numbers and dropped the second half of the year for us by approximately 2%. So a softer setup as we go into the second half, but we do have strong launches that are supposed to come in line in Q3 and Q4, mostly around Toyota as well as the HPC launches. Overall, a strong H1 with a little bit of a softer H2, which allows us to stay on guidance for the full year. We still have got a fairly large range this year on sales for the guidance—$100 million each way—so it allows us to have some leeway up and down versus the midpoint. Mark Trevor Delaney: That is helpful, Jerome. And just to clarify, when you talk about the softening in 2H and basing it off of what S&P has projected, it does not sound like you have actually seen a change in your own customer schedule. Is that correct? You are deriving it from market data? Jerome J. Rouquet: That is correct for Q2. We have normal visibility for the next three months. Mark Trevor Delaney: And then another question on memory. The company’s guidance had assumed you would substantially recover the increasing cost in your full-year guidance. You spoke a bit around progress you are making there in the first quarter. Maybe talk about how far along you are in securing those recoveries. And are you still expecting to substantially recover all of the higher semiconductor memory costs for this year? Jerome J. Rouquet: That is a good point. Maybe before we even talk about recovery, we should probably talk about supply because if supply is an issue, recovery may be an issue, which is not our case. I will hand over to Sachin, and then I will talk again about recoveries. Sachin S. Lawande: Thanks, Jerome. I think this is a point that we need to make sure we express clearly. The situation with supply has implications on our ability to recover as well. There are two factors really driving the supply situation. One is the higher-than-expected demand for memory driven by AI—data centers, smartphones, etc. But, very importantly, many of our traditional large memory suppliers are shifting away from the older tech nodes that have been used by automotive to newer tech nodes, which reduces capacity for auto. This has created an imbalance between supply and demand, which has lowered availability of memory for industries like auto and others as well. The impression we should have is that there is no segment of the industry that is going to get enough memory in the short term, and that has resulted in higher prices. As smaller suppliers look at this environment, they see an opportunity to enter the market for auto—smaller fabs in particular. We are working with some of them to bring them into our supply base and, in fact, have managed to secure some supply already for this year. About 10% of our total full-year demand this year, for the first time, would be met by some of these emerging suppliers. One more point I would like to add is that, unlike in the prior semiconductor crisis where the lead times for new capacity to come online were fairly long—two-plus years—in this case, with memories, it is shorter. If there is clean room space available, new capacity can come online in about a year, which is helpful. We believe with more suppliers coming in, this situation will probably last into the middle of next year, maybe towards the end of next year, and start to get better from there. That can also help in terms of driving the prices down as more supply comes into the market. We have done a very good job of ensuring that none of our customers are impacted in terms of their production for Q1, and we anticipate with all of the measures we have in place, working closely with our current suppliers and the new ones, we will be able to mitigate the situation. Although it is going to be tight, we should be in a position to meet customer demand. Jerome J. Rouquet: On the recovery, costs came in in line with expectation in Q1, slightly higher than $20 million, as we had indicated during our last call. In terms of progressing with customers in negotiations, we have done pretty well so far. In Q1, we reported an outflow of $15 million on what we call our commercial items—the net between our supplier savings and what we give to our customers. We had anticipated some level of leakage in Q1 as we were working on long-term contracts. For Q1, we executed very short-term commercial agreements with some of our customers that helped us mitigate some of these additional costs. Overall, progression is going well with negotiations, and we are expecting most of the negotiations to be closed by Q2. We will see as a result some level of catch-up in the second quarter, and we are expecting our commercial business equation to be neutral in the second quarter, as some of the improvement that we have with some suppliers comes online. Overall, for the full year, we are maintaining our guidance in terms of recovery. We are still expecting to have some level of leakage, largely because of the timing issues for the full year. Operator: Thank you. Your next question comes from Colin M. Langan with Wells Fargo. Colin M. Langan: Thanks for taking my questions. Just to follow up on this issue: you have a bit over $20 million in costs but $15 million of recoveries. You got something close to 75% recoveries already, and then you expect to have that caught up in Q2. Does that mean we get a little additional boost in Q2 from recovery timing? Jerome J. Rouquet: Correct. We have had this $15 million leakage, and we like to combine what we are giving to customers versus what we are getting from suppliers. We look at this holistically. We are negotiating with customers the full pricing package, which includes not only the annual price reduction; it includes the legacy recoveries from prior chip shortages as well as the new memory cost increases that we are passing on to customers. We are expecting this leakage of $15 million to be neutral in the second half of the year and then slightly improve in Q3 and Q4 so that we have a minimum leakage for the full year, per our guidance. Colin M. Langan: I think I had that wrong. So it is $15 million leakage—you have about a third recovered in the quarter—but you expect that all to jump back? Does that $15 million become a positive in Q2? Jerome J. Rouquet: It does. It becomes positive in Q2, and it will improve slightly in Q3 and Q4 for a slight negative for the full year. Colin M. Langan: Got it. And then the guide for the year is low single-digit growth over market. You made it clear that the first half was going to be really tough with roll-offs and the BMS, but you still did 3% in Q1. Why not mid-single now as we go through the year, given you have highlighted pretty strong second-half launches? Jerome J. Rouquet: Q1 came in pretty close to our expectations. We had not given guidance per quarter, so 3% was generally in line with the low single digit for the full year. We are expecting to hold that performance throughout the year, and we are expecting all regions to perform well, maybe with the exception of the Americas, largely because of the BMS situation. Overall, a pretty consistent growth over market throughout the year. Operator: Your next question comes from Emmanuel Rosner with Wolfe Research. Emmanuel Rosner: Thank you. I appreciate all the color on the memory supply and trying to derisk the outlook. As we start looking into next year and you speak to OEMs about trying to mitigate the risk of disruptions, are there any conversations around potential decontenting or using solutions that use less memory? And on the pricing side or the recovery side, would the longer-term agreements you are working on with the OEMs allow ongoing pass-through even into next year if DRAM costs keep rising? Sachin S. Lawande: Let me take that. We are not seeing any interest in decontenting. The discussions have been mostly around how we secure enough supply for 2027. Most of the time thus far has gone into securing supply for this year, and there is still a lot of activity. As we start to think about 2027, we are working with all of our suppliers—traditional suppliers plus the new ones we are bringing online. Supply next year will largely depend on our ability to secure enough quantity of parts from these newer suppliers that are emerging, largely because many of the existing larger suppliers to automotive are shifting their technologies to newer technologies. That dynamic has to be managed first and foremost, and that is what we are focused on. We expect that over the course of this year, maybe towards Q3, we should be in a position to have supply secured for next year. In terms of pricing negotiations, they are different by customer. Some are signing up for a multiyear pricing agreement, so it goes into the piece price essentially, and some prefer to have annual pricing negotiations. It varies by customer. Emmanuel Rosner: Understood. And then can you talk a little bit more about the expected ramp-up in launches in the second half? How should we think about this in relation to S&P’s outlook for weaker volume? Do you have a good sense this should not really affect your revenue curve? Sachin S. Lawande: I think so, because—as was evident in Q1—a lot of our performance was driven by new launches, not so much the underlying vehicle production environment. A lot of our high-value launches this year are in the second half and are ramping up in Q4. In terms of the total number of launches, this year looks a lot like last year—I would say even a few more launches this year. But there are some that are very consequential, especially the ones with Toyota and the HPC launches we discussed in our prepared remarks. Those are high value, although their real ramp-up begins in Q4, so contribution this year is still relatively small but meaningful. This helps offset what we have seen thus far as the reduction in vehicle production. If the environment stabilizes, especially in the Middle East, and the underlying vehicle production holds up, that could be a potential benefit to us. It has been a really good start to the year; Q2 looks pretty strong. For the second half, we will have to wait and see how it develops. Operator: Your next question comes from the line of Winnie Dong with Deutsche Bank. Winnie Dong: Hi. Thanks so much for taking my question. My first one is on the new business win of $1 billion for the quarter. For context, would you mind giving us some color on whether this is typical of seasonality or whether you are seeing any sort of pushout of decisions in terms of wins? And secondly, in terms of the growth drivers in 2027 and beyond, perhaps you can tease your Investor Day in June a little bit and outline some big buckets of drivers we can look forward to. Thank you. Sachin S. Lawande: The first quarter was expected to be a little lighter given that we had a very strong finish to last year, and we also had a few display opportunities pushed out into Q2, about $300 million to $400 million worth. Even with that, it might be considered a little light but pretty normal for a first quarter in terms of seasonality of new business wins. Looking at the pipeline for the remainder of the year, much like new product launches, new business wins also look very similar to 2025 in aggregate, but with a different product mix and regional mix. In 2025, we had an even number and value of events for displays and cockpit electronics. This year, we are seeing more opportunities for cockpit electronics and also more in Asia, and the display opportunities this year are more evenly spread between Europe and the Americas. Overall, we are pleased with what we see as new business opportunities in this environment, and we expect this year to look similar to last year in total value of business wins. On your second question, the main drivers are going to be the new products that we have won and are launching—displays will have a very big role to play in our growth given the high wins in the last few quarters; HPCs, simply because of the very high content value, will also have a meaningful impact; and then other growth drivers we have talked about—Toyota as a targeted customer, and then two-wheelers and commercial vehicles. Our growth profile is not relying on just one or two things; we have a number of areas that are all growing, which gives us confidence. Operator: Thank you. Your next question comes from Joseph Robert Spak with UBS. Joseph Robert Spak: Thanks, everyone. Sachin, sorry to go back to memory, but one more point on this. My understanding is some of that additional supply that is coming online is from China. I want to make sure your customers are okay with that. And I thought I heard you mention that you already secured about 10% of this year’s supply from these new sources. Why would it not be at least at that level, if not better, for next year? Sachin S. Lawande: To answer your second question first—absolutely, we expect it to be better, and the question is by how much and to what extent. To give you some sense of the number of different memory chips that we buy: we buy about 60 different types of chips that go into the DRAM category. Then there are also NAND flash, eMMC, and UFS, as well as NOR. There are many different types of memories and different densities that we need. Typically, very few of these suppliers are able to offer all of the parts we need, so we have to have a mix of suppliers. They tend to have their strengths in specific categories. We have been identifying these suppliers, building relationships, starting supply so that we can test their parts, qualify them, and then introduce them in our customers’ production. Regarding your first part of the question—customers’ views on new sources coming online from China and other places—in this environment, where there is a shortage of parts, there is absolutely no problem with that. The first priority is to make sure we have production secured. Obviously, customers would like it to be non–China based if there is availability, but in this environment, we do not see that as a problem. Joseph Robert Spak: Second question, Jerome, on capital allocation. I know you said more details on the long-term plan at the Analyst Day. You bought back $30 million this quarter. I think that means you have about $45 million left on the authorization. You said last quarter you could do about $100 million, and you also earmarked about $300 million for M&A. Is there any change to that thinking with comments you made about free cash flow or the pipeline or the current share price? Could we expect an increase in authorization because it seems like you are coming to the end there? Jerome J. Rouquet: Generally, no—nothing has changed. We had highlighted up to $300 million for M&A and up to $150 million for share repurchases. With the cash balance we have at the end of Q1, even with potentially tracking towards the low end of the range for adjusted free cash flow this year, we could still do everything. We are still very focused on M&A and will continue to return cash to shareholders in a non-linear manner with share repurchases, as well as continue our dividends. Nothing has fundamentally changed in terms of our philosophy. Operator: Your next question is from Dan Levy with Barclays. Dan Levy: Hi, good morning. Thanks for taking the question. First, on growth dynamics—we saw negative growth in China in the first quarter. Maybe you could unpack some of the mix dynamics, where I would have assumed that with the lower end of the market underperforming, the higher end outperforming, that would help you. And is the view that you can still get positive growth for the full year with the launches ramping and bringing you up to positive growth? Sachin S. Lawande: In China, as you mentioned, there was lower growth in vehicle production in the more price-sensitive segments, and a better performance, but not necessarily a lot of growth, in the upper end of the market. That is more helpful to us. I also want to mention the headwind of market share loss of the global OEMs that is still ongoing—so it is not all good news. The new launches so far have largely offset what we saw as declines with our traditional global OEMs. Therefore, for Q1, it was even in terms of outperformance versus vehicle production. As we go forward, especially with the HPC launches, I believe we will start to see growth relative to production in China, with more of a step function next year as those launches ramp. Dan Levy: As a follow-up on DRAM: is there any ability for you to transition your products to DDR5 to address some of the supply issues, or will the newer suppliers be enough to offset the large suppliers that are phasing out DDR4 so that, longer term, this issue will be addressed by these other smaller suppliers? Sachin S. Lawande: DDR5 is not backwards compatible with DDR4. These memories are interfaced to a micro or an SoC, and that micro or SoC needs to have the capability to be interfaced to DDR5. The majority of the micros used in the industry for the cockpit are not capable of being interfaced with DDR5. The evolution of the micros and SoCs used for cockpit—which come from suppliers such as Qualcomm or NXP and others—has to occur before we can move. That typically requires a bigger change and longer time in automotive. What we are seeing is that the higher-end CDCs and HPCs already use DDR5. This may push the industry faster towards higher-end CDCs and HPCs simply because of the shift in the underlying technologies. DDR5 will come at a density that is fundamentally a step higher than DDR4, enabling more processing and memory, which I think will accelerate the trend towards more integrated cockpit domain controllers and eventually central domain controllers like the HPC. We believe this trend will push the industry to adopt more content simply because it will be cheaper to do it that way than to stay with older technologies with more function-specific implementations. Operator: Your next question is from Luke L. Junk with Baird. Luke L. Junk: First question, Sachin, on your early-mover advantage in HPC/AI. I think you said your three wins are more than any other tier-one supplier. Could you double click on the competitive landscape on a relative basis, and then, given the award this morning launching within about 12 months, the near-term pipeline for adding additional awards, including additional vehicles with your current customers? Sachin S. Lawande: We have three customers launching this, and they are all launching initially on their flagship vehicles, but at the same time lining up vehicles following that initial launch, which will extend this business. One of the new learnings for us is that we initially thought it was more limited to just the top-end flagship vehicles, but the competitive dynamics in China—especially with the emerging premium tech segment—are driving more volume to adopt AI as a key foundational capability of the cockpit. We see the market growing rapidly starting in China, and because of exports, we expect that technology to start to make an impact in other regions, probably starting with Europe before it comes to other parts of the world. Luke L. Junk: Jerome, hoping to calibrate the launch cadence in the back half. First, for the high-compute launches, any initial demand indications? And then you made the comment about the fourth-quarter inflection. Was that mainly a Toyota-related comment, or is there some China color as well? Jerome J. Rouquet: We are using IHS for the HPC launches, and these have been holding pretty well compared to what we initially guided to—no major changes. Sachin S. Lawande: In general, there has been no change in the launch plans or the volumes. We have been very focused on ensuring we have supply of components because the lead times, especially with this third win, have been extremely short. For now, the focus is on ensuring we can launch and achieve the ramp of volume we have for this year, which has remained steady. If anything, depending on availability of supply, there may be the ability to increase, but given lead times, that would be a challenge. Operator: Next question is from Tom Narion with RBC. Tom Narion: Two quick follow-ups. First, on the $300 million M&A, in the past you have said this is likely tuck-ins. Is there a reason why this is being prioritized now? Is it because you are seeing deals at attractive pricing? Is it something that works well with what you are trying to achieve now versus later? And then I have a follow-up. Sachin S. Lawande: Yes, in some parts, but it is really more driven by how we see trends emerge in the industry. There is a big trend towards software-driven, more integrated domain controllers for vehicles, which requires that you have all of the software capabilities to implement those features. That is the primary driver of trying to secure those capabilities, which would allow us to offer more integrated domain controllers. Eventually, we see a certain level of ADAS also getting integrated with cockpit as features like AEB become mandated in all jurisdictions. It is already a mandate in Europe; in 2028 and 2029, China and the U.S. will follow. As standard requirements, OEMs will not be able to price for them; they will be part of standard equipment. We expect more features to get standardized or required and therefore integrated, and cost will be a prime driver that will drive greater levels of integration. Second, all of these technologies are emerging rapidly from mainstream tech industries and impacting automotive faster than ever before. We see opportunity for offering services—outsourced R&D services, expert services—to help OEMs define how to use those technologies in their vehicles. We are finding companies that have a lot of depth of expertise but do not necessarily have the scale. We believe we can provide that scaling ability to these companies, help the OEMs, and in turn help make our platform more future proof. Engaging in advanced technologies with OEMs helps us understand how to keep our platforms competitive and in time for market introduction. Third, vertical integration has always been a driver of our M&A. We have been successful with that so far, and we want to continue to take it forward as we see opportunities to bring more of the manufacturing value content into our plants, rather than relying on an extended supply chain, which also helps us address customer requests to be less dependent on China and other parts of the world where we are perhaps more exposed today. Tom Narion: Thanks for the robust answer. And then, Jerome, to clarify, guidance is maintained despite the S&P cutting. Was Q1 coming in ahead of your expectations the main driver of being able to do that? Jerome J. Rouquet: Correct—along with good visibility and robust orders we see for the second quarter. But you are absolutely correct. Chris Doyle: Thank you. This concludes our earnings call for 2026. Thank you for participating in today’s call and your ongoing interest in Visteon Corporation. Operator: This concludes Visteon Corporation’s first quarter 2026 results earnings call. You may now disconnect.
Operator: Hello, everyone. Thank you for joining us today for the Texas Capital Bancshares, Inc. First Quarter 2026 Earnings Conference Call. My name is Sammy, and I will be coordinating your call today. I will now hand over to your host, Jocelyn Kukulka, Head of Investor Relations, to begin. Please go ahead, Jocelyn. Jocelyn Kukulka: Good morning, and thank you for joining us for Texas Capital Bancshares, Inc.’s First Quarter 2026 Earnings Conference Call. I am Jocelyn Kukulka, Head of Investor Relations. Before we begin, please be aware this call will include forward-looking statements that are based on our current expectations of future results or events. Forward-looking statements are subject to both known and unknown risks and uncertainties that could cause actual results to differ materially from these statements. Our forward-looking statements are as of the date of this call, and we do not assume any obligation to update or revise them. Today’s presentation will include certain non-GAAP measures, including, but not limited to, adjusted operating metrics, adjusted earnings per share, and return on capital. For reconciliation of these and other non-GAAP measures to the corresponding GAAP measures, please refer to the earnings press release and our website. Statements made on this call should be considered together with the cautionary statements and other information contained in today’s earnings release, our most recent Annual Report on Form 10-K, and subsequent filings with the SEC. We will refer to slides during today’s presentation, which can be found along with the press release in the Investor Relations section of our website at texascapital.com. Our speakers for the call today are Rob Holmes, Chairman, President and CEO, and Matt Scurlock, CFO. At the conclusion of our prepared remarks, the operator will open the call for Q&A. I will now turn the call over to Rob for opening remarks. Rob Holmes: Good morning, and thank you, Jocelyn. We enter this quarter with clear conviction in our strategy and the disciplined execution required to continue unlocking substantial value for our shareholders and clients. First quarter outcomes reflect our shift in strategic focus to consistent execution and realizing the full potential of our investments. This quarter, we took decisive steps to align our organizational structure with that imperative. I am pleased to announce strategic executive leadership appointments that further enhance our positioning for growth. Jay Klingman will transition to Head of Private Bank and Family Office following five successful years building and scaling our middle market and business banking franchises. Dustin Cosper assumes the role of Head of Commercial Banking overseeing Real Estate Banking, Middle Market Banking, and Business Banking. This shift positions the firm to drive enhanced client outcomes across private banking and commercial banking through more comprehensive and integrated solutions. John Cummings has been named Chief Operating Officer, charged with driving sustained operational excellence and further positioning our platform for scale. Matt Scurlock, Texas Capital Bancshares, Inc.’s Chief Financial Officer, will assume the role of President of Texas Capital Bank, further aligning financial, operational, and business leadership across the organization. We have also appointed Jeff Hood as Chief Human Resources Officer to ensure our talent strategy and culture align with our operational and commercial ambitions. He will be joining the firm in early May. Turning to the quarterly results, contributions across the firm enabled another quarter of strong financial progress, as adjusted quarterly earnings per share increased 72% versus the prior year period to $1.58 per share as total revenue increased 16% year over year to $324 million, driven by 8% growth in net interest income and 56% growth in noninterest revenue. Fee income from our areas of focus increased 59% year over year, reaching $58.8 million in the quarter, a record for the firm. Notably, all three focus areas delivered record quarterly fee income, demonstrating the platform’s continued maturity and enhanced cross-functional strength. This is not a single-driver story; it reflects embedded momentum across advisory, capital markets, wealth, and treasury services, all facilitated by excellent client banking coverage across the platform. New client acquisition remains a fundamental driver to platform value. Each quarter, the firm onboards clients that generate revenue across multiple service lines, a structural advantage that compounds over time. Investment banking fees of $42.3 million grew 89% year over year with broad contributions across syndications, capital markets, and sales and trading, reflecting our unique ability to deliver high-quality client outcomes across a range of product solutions. Treasury product fees of $12.1 million increased 14% as existing clients continue to leverage our differentiated payment capabilities and new clients onboard at an accelerated pace. Wealth management fees also increased for the third straight quarter, reflecting building momentum that we expect to continue through the year. In total, fee income comprised 21% of total revenue versus 16% a year ago, demonstrating the success of our multiyear shift toward a more diversified, capital-efficient, and resilient revenue base. This trajectory directly reflects disciplined client selection and our ability to deepen relationships over time. Our first quarter capital position highlights both the strength of our platform and the efficacy of our capital management approach. Tangible book value per share of $75.67 increased 11% year over year, marking an eighth consecutive quarterly record for this important metric. During the quarter, we repurchased approximately $75 million of common shares at a weighted average price of $96.82 per share, demonstrating our confidence in the franchise and our conviction that earnings momentum will continue. Tangible common equity to tangible assets of 9.87% exceeds peer levels, and CET1 of 11.99% remains well above our stated target of 11% and internally assessed risk profile. As previously discussed, we do not manage the firm to an expected economic scenario. We instead regularly evaluate potential macroeconomic impacts on both credit quality and earnings capacity. Detailed reviews over the past few quarters include topics such as private credit, disruption from artificial intelligence, and exposure to data center supply chains, all of which confirm our adherence to disciplined client selection and diligent concentration management. Leading up to the recent conflict in the Middle East, we assessed the impact of rising commodities pricing on a series of client segments, including commercial clients that rely on commodity inputs such as helium, urea, and aluminum, as well as clients whose customers are potentially impacted by rising prices. While our assessment across these topical areas suggests impacts on specific clients are, at this point, tangential, we nonetheless continue to assume a credit posture in the reserve calculation that is increasingly reliant on a downside scenario weighting. We maintain a balance sheet that is intentionally positioned, carry capital and reserves that provide meaningful flexibility, and deliver a breadth of products and services that keep the firm relevant to our clients in any environment. That posture is a choice—one we have made consistently—and is the reason we approach periods of uncertainty from a position of strength and are front-footed in the market. Our earnings trajectory is sustainable. Our balance sheet is strong. And our platform is positioned for durable growth. Today, we are pleased to announce the initiation of a quarterly common stock cash dividend, a tangible expression of our confidence in earnings momentum and our commitment to returning capital to shareholders while funding continued organic growth. This dividend reflects a mature platform, the strength of our capital position, and management’s conviction in the long-term trajectory of the firm. Thank you for your continued interest in and support of Texas Capital Bancshares, Inc. I will now turn the call over to Matt for details on the financial results for the quarter. Matt Scurlock: Thanks, Rob, and good morning. Starting on Slide 4, first quarter total revenue increased $43.5 million, or 16%, year over year, driven by 8% growth in net interest income and a 56% increase in noninterest revenue. Net interest income increased $18.7 million year over year to $254.7 million, in line with our January guidance of $250 million to $255 million, which anticipated a modest linked-quarter decline of $12.7 million consistent with typical first quarter seasonality. Net interest margin expanded 24 basis points year over year to 3.43%, the sixth consecutive quarter of year-over-year expansion, and improved 5 basis points to the prior quarter. Noninterest expense increased 5% year over year to $213.6 million. On an adjusted basis, noninterest expense was $212.2 million, an increase of $9.1 million relative to the first quarter of last year, as expense-based productivity continues to deliver anticipated revenue growth and incremental new investments align directly with defined areas of capability build. Taken together, pre-provision net revenue increased $33 million, or 43%, year over year to $110.4 million. Adjusted PPNR reached $111.8 million, up $34.4 million, or 44%, marking the fifth consecutive quarter of year-over-year expansion. Provision for credit losses of $16 million was stable year over year, reflective of anticipated quarterly credit trends and management’s continued assumption of economic scenarios materially more severe than consensus estimates. Net income to common was $69.5 million, up $26.7 million, or 63% year over year, and adjusted net income increased 65% to $70.5 million. Strong financial performance, coupled with a disciplined multiyear share repurchase program, is consistently driving meaningful EPS growth for our shareholders. First quarter earnings per share reached $1.56, up 70% year over year, with adjusted earnings per share of $1.58, up 72% year over year. Book value per share of $75.71 and tangible book value per share of $75.67 both increased 11% year over year, representing the eighth consecutive quarter and record high for the firm. The allowance for credit losses held relatively steady at $331 million, or 1.32% of total LHI and 1.81% of total LHI excluding mortgage finance. Total LHI of $25.2 billion increased 13% year over year and 5% linked quarter, with contributions across both the commercial and mortgage finance portfolios. Period-end commercial loans of $12.5 billion increased $1.2 billion, or 10%, year over year, driven by now consistent contributions across industries and geographies and sustained quarterly increases in target client acquisition. Linked-quarter commercial loans increased $336 million, or 3%, representing the ninth consecutive quarter of commercial loan growth and continuing the trajectory of risk-appropriate and return-accretive portfolio expansion facilitated by our bankers across Business Banking, Middle Market, and Corporate Banking. Commercial real estate loans of $5.3 billion decreased 9% year over year and 2% linked quarter, as payoff rates continue to outpace client appetite for capital deployment, with expectations previously provided for full year average CRE balances to decline approximately 10% remaining intact. Despite the expected seasonal linked-quarter pullback, average mortgage finance loans increased 32% year over year to $5.2 billion, with period-end balances increasing to $7 billion, 33% above average for the quarter and consistent with the annual pattern of origination volumes building at the end of Q1 heading into the spring and summer home-buying season. Enhanced credit structures now represent 67% of period-end mortgage finance balances, up from 59% at Q4 2025, further improving the blended risk weighting of the portfolio to 53%. We anticipate that an incremental 5% could migrate to the enhanced structures over the next several quarters, at which point we should reach the maximum near-term potential for the portfolio. Total deposits of $28.5 billion at quarter end increased 9% year over year and 8% linked quarter, with reductions in interest-bearing deposits associated with seasonal tax payments supplemented by modest levels of brokered deposits to support the temporary and predictable late Q1 growth in mortgage finance volumes. Ending-period commercial managed Experian deposits increased $76 million, or 2%, and are now up $309 million since Q3 2025, with average commercial noninterest-bearing deposits remaining at 13% of total deposits for the quarter. Average noninterest-bearing mortgage finance deposits of $4.2 billion decreased $288 million year over year, bringing the self-funding ratio down to 80% for the quarter, as eight quarters of focused reduction clearly improved both the balance sheet resilience and earnings generation. We have now established a more balanced deposit base with a complete treasury offer increasingly embedded across our clients’ platforms and would expect the mortgage finance self-funding ratio to settle between 70% to 80% in the near to medium term. The majority of mortgage finance noninterest-bearing deposits are compensated through relationship pricing, resulting in application of an interest credit to either the client’s mortgage finance or commercial loan yield. The compensation attribution is evaluated on a periodic basis, and we determined that the 60% mortgage finance and 40% commercial split be updated to reflect the evolution of the mortgage finance business, resulting in a 70% mortgage finance and 30% commercial distribution beginning on the first of this year. Average cost of interest-bearing deposits declined 15 basis points linked quarter and 65 basis points year over year to 3.32%, as we continue to add value to banking relationships beyond simply price. This is in part evidenced by the 75% cumulative interest-bearing deposit beta realized since the beginning of the cycle. During the quarter, we completed a $400 million fixed-to-floating senior notes offering due in 2032 priced at a coupon of 5.301%. Proceeds from the issuance will be used in part to redeem the holding company’s $375 million fixed-to-floating rate subordinated notes in May, leveraging improved risk-weighted asset positioning associated with the enhanced credit structures to fulfill holding company cash objectives with a lower-cost instrument. Current and prospective balance sheet positioning continues to reflect the balance sheet and business model that is intentionally more resilient to changes in market rates. Our modeled earnings-at-risk improved as expected this quarter as market rates moved consistent with our previously communicated preferences for adding duration to the swap book. During Q1, $350 million in swaps matured with a 3.31% receive rate. These were replaced with $500 million in receive-fixed OIS swaps executed at 3.45%, with $100 million becoming effective March 1 and the remainder becoming effective on April 1. Looking ahead, we will continue to exercise discipline in appropriately augmenting rate-fall earnings generation embedded in our business model. At this point, we are comfortable with our near-term positioning across a range of forward interest rate paths. Net interest income of $254.7 million declined $12.7 million in the quarter, primarily related to seasonal mortgage finance dynamics and fewer days in the quarter, which were partially offset by quarter-over-quarter improvements in deposit costs. LHI excluding mortgage finance yields compressed modestly, consistent with expected SOFR-linked loan repricing. Adjusted noninterest expense of $212 million increased 5% from Q1 2025, reflecting continued investment in frontline talent across fee income areas of focus and increasing tech-enabled capabilities meant to both improve the client experience while positioning the firm for continued scale. Q1 adjusted salaries and benefits increased $29 million to $130.9 million due to $17 million of seasonal compensation, annual incentive reset, new frontline talent, and annual merit-based salary increases. For the remainder of 2026, we continue to anticipate approximately $125 million of salaries and benefits and $75 million of all other noninterest expense, both on a quarterly basis. As Rob described, noninterest income increased 56% year over year and 15% linked quarter, setting several records for the firm. Noninterest income as a percentage of total revenue reached 21% in the quarter, up from 16% in Q1 2025, consistent with our strategic priority to increase noninterest income through expanded products and services delivered across our platform. Investment banking and trading income of $42.3 million increased 89% year over year, supported by broad-based contributions across the platform. Wealth management and trust fee income of $4.4 million also represented a record high, increasing 11% year over year, supported by assets under management of $4.4 billion, which increased 16% year over year from organic net inflows and favorable market conditions. Treasury product fees at $12.1 million—a record high as well—increased 14% year over year, driven by continued client adoption and the expansion of payment and cash management capabilities that have driven north of 10% growth in gross payment volume in four of the last five years. Total noninterest income is expected to be $65 million to $70 million for Q2, with revenue attributed to investment banking and sales and trading contributing approximately $40 million to $45 million. The total allowance for credit loss, including off-balance sheet reserves, of $331 million remains near our all-time high. When excluding the impact of mortgage finance allowance or related loan balance, the allowance was relatively flat linked quarter at 1.81% of total LHI, which is in the top decile among the peer group. Net charge-offs for the quarter were $17.4 million, or 30 basis points of LHI, tied to previously identified credits in the commercial portfolio. During the quarter, previously discussed commercial real estate multifamily credits were further downgraded as projects in lease-up continue to require ongoing rental concessions to gain or maintain occupancy. Despite these net operating income-influenced grade adjustments, material project-specific equity and sponsor support give us confidence in the fundamental portfolio quality moving through the year. Capital ratios remain strong and well in excess of our internally assessed profile. Tangible common equity to tangible assets of 9.87% and a CET1 ratio of 11.99%. During the quarter, the firm repurchased approximately 770,000 shares for $74.6 million at a weighted average price of $96.82 per share, representing 127% of prior month’s tangible book value per share. We remain committed to prudent capital deployment that balances organic growth and tangible book value accretion through share repurchases at levels that we view as attractive relative to the firm’s intrinsic value. Additionally, against the backdrop of more durable and structurally higher levels of earnings generation across the platform, the Board of Directors has approved the initiation of a quarterly common stock dividend of $0.20 per share, providing another tool to effectively manage capital on behalf of our shareholders. For full year 2026, our overall outlook remains unchanged from guidance given in January as we continue to realize scale from multiyear platform investments. Guidance accounts for one additional rate cut in December with a Fed funds rate of 3.5% at year end. We anticipate total revenue growth in the mid- to high-single-digit range driven by industry-leading client adoption and continued growth in our fee income areas of focus, with full year noninterest revenue expected to reach $265 million to $290 million. Anticipated noninterest expense growth in mid-single digits reflects increased year-over-year compensation expenses tied to improved performance, targeted expansion in defined client coverage areas, and sustained platform investments. Given continued economic uncertainty and our commitment to operating from a position of financial resilience, we reiterate the full year provision outlook of 35 to 40 basis points of average LHI excluding mortgage finance. This outlook reflects another year of positive operating leverage and sustainable earnings generation. Operator, we would now like to open the call for questions. Thank you. Operator: We will now open the call for questions. Our first question comes from Woody Lay from Keefe, Bruyette & Woods. Your line is open, Woody. Please go ahead. Woody Lay: Hey, good morning, guys. The momentum is really great to see. You mentioned some of the uncertainty in the Middle East and feel good about your clients. As it pertains to the investment banking pipeline, I know last year with some of the tariff noise, we saw some timing pushed out to the back half of the year. Do you expect a similar dynamic to happen here if the uncertainty lasts longer in the quarter? Matt Scurlock: I would start by saying that we are really pleased with our track record of finding the right solutions for our clients, which continued this quarter, whether that is bank debt or non-bank debt. We were the number one arranger of middle market syndicated credit in the country this quarter, along with arranging over $11 billion of debt outside the bank markets for our clients, and we raised over $1 billion on our still-new equities platform. When you think about how we use the investment bank as a differentiator in the market, the coverage bankers are doing a great job of leveraging the product partners to win new relationships, particularly with our target prospects, evidenced in part by over half of the investment banking fees outside of sales and trading we generated in the last six months coming alongside new client acquisition in banking. These record fee quarters continue to be underpinned by much more granular deal volumes. These are not a couple of large transactions; they are a durable, consistent approach to delivering service in the market. We still feel really good about the $40 million to $45 million for the quarter and $160 million to $175 million for the full year. Rob Holmes: I would just add one thing, Woody. Matt clearly articulated what I think are very good statistics. Remember, we are not doing investment banking with a different set of clients. We are delivering the best products to our middle market and corporate clients through the great relationships our middle market and corporate bankers have with those clients, which gives credibility to the investment bank and bankers when they come into the room. I think that is a differentiated part of this platform. Woody Lay: Got it. That is helpful color. Maybe shifting over to the mortgage finance business, the period-end loan balances were well above where they have been historically. I know that can be volatile with timing, but any expectation for average balances as we head into the second quarter? Matt Scurlock: There was quite a bit of volatility in Q1 on 30-year fixed-rate mortgages. We got as low as about 5.98% in February and then hit the high point in March at about 6.64%. If you will recall, the full-year guide of about 15% is predicated on a $2.3 trillion origination market and an average 30-year fixed-rate mortgage near that context, which—while there could be some volatility along the way—we still think is the right number for the full year. That gets you to about a $6 billion full-year average warehouse balance. We think that is actually the number for Q2 as well, Woody—about $6 billion of average mortgage finance volumes. You should end around $7.2 billion, and that comes with about $4.5 billion of average mortgage finance deposits. So that self-funding ratio should push down to around 75%, which should help the yield move from around 3.99% this quarter to somewhere around 4.05% in Q2. We have clearly completely restructured that business, with now 67% of those balances residing in the enhanced credit structure, which is generating significant capital. For the loans that are in the structure, it is a weighted average risk weighting at 30%, 53% for the entire portfolio, and 78% of those clients do things with us beyond the dealer, and 100% of them are on our treasury platform. Incremental volume in the mortgage finance business is significantly more profitable for us now than it has ever been. Rob Holmes: I would just suggest that the new credit-enhanced structure fundamentally changed the firm. It took a business that by definition was a subpar loan-only business and moved it—in concert with a new product and service platform—into one where we are doing many things with those clients, and we are lending to them through a dramatically less risky structure that allows for higher returns and releases capital. It fundamentally changed the way we look at that business, and it is more of an industry vertical than a mortgage warehouse. Matt Scurlock: And just to put a couple more numbers around that, Woody, over the last twelve months, we have grown loans by $2.8 billion, or 13%, and we have also bought back 6% of the company—$228 million—for inside of $87 a share, while actually growing CET1 by 36 basis points. This has been a critical factor not just in structurally enhancing profitability, but in allowing us to deploy capital in a variety of different ways. Woody Lay: Alright. That is all for me. Thanks for taking my questions. Rob Holmes: Thanks, Woody. Operator: Next question comes from Casey Haire from Autonomous Research. Your line is open, Casey. Please go ahead. Jackson Singleton: Hi, good morning. This is Jackson Singleton on for Casey Haire. Matt, just wanted to start on NIM. Any color you can give us on the drivers heading into Q2? Matt Scurlock: Happy to walk through that. We are pleased with the ability to generate NII improvement across a range of interest rate environments, and as we have talked about in previous calls, that is predicated on improved deposit repricing—which for us is a result of being more relevant for clients—and a deliberate move away from historically higher-cost funding sources. That said, we have been pretty vocal on previous calls: we think the cost of funding for the industry is going to go higher over time, and our strategy and resource allocation contemplate the mix of businesses and services we will need to earn an acceptable return against that reality. We have no additional reduction in deposit cost incorporated in the full-year guide. For Q2, we do anticipate slightly higher interest-bearing deposit costs to support volumes necessary to fund the seasonal, predictable, and temporary increase in mortgage finance, which we just walked through. As you see mortgage finance grow in the second quarter, that is a lower-yielding asset. The yield is moving from 3.99% to 4.05%, whereas the yield on all other loans outside the mortgage finance business stays around 6.65%. That blends the overall loan yields down from 6.04% to the mid-to-high 5.90%s, which should push the margin down to 3.35%–3.40%, while seeing NII actually increase on the larger balance sheet to $260 million–$265 million. Jackson Singleton: Got it. Super helpful. And then just one follow-up. How should we think about buybacks going forward, given CET1 well above 11%, but TCE is now around 10% which is around the soft target, and you just announced the dividend? Any color on how management is thinking about buybacks for the rest of the year? Matt Scurlock: We have $125 million of remaining authorization. We have shown a propensity to buy back inside of 1.3 times tangible (which is essentially two- to three-year out tangible book value per share). I would look for us to be constructive around those prices. The decisions around the buyback or the recently announced dividend—which Rob can talk to—were not influenced by potential changes in the regulatory capital treatment. But for you, that is roughly a 100-basis-point potential pickup in rent cap should you see these changes go through. We are confident in our current levels of earnings generation, our capital position, our reserve levels, and liquidity, and we are pleased to have another tool at our disposal to effectively allocate capital. Rob Holmes: I would just say that we have proved to be good stewards of capital allocation. Distribution policy is important to shareholders and to us, and the dividend shows great confidence in the platform, our bankers, our earnings, and prospects going forward, as well as our capital and our risk posture. We are excited about having another quiver and the ability to add to the distribution policy as we go forward. Jackson Singleton: Great. Thanks for all the help. I will step back. Operator: Our next question comes from JPMorgan. Please go ahead. Analyst: Good morning. This is Mike Petrini on for Tony. I am curious if you could provide any color on what drove the quarter-over-quarter increase in NPAs. Any industry in particular that stood out? Matt Scurlock: Those are a few previously identified credits that we have been reserving for now for multiple quarters. They are continuing to go through workout in a way that we think is going to be maximally beneficial for the firm. No industry concentration—there is one multifamily and a couple of corporate credits—consistent with our guide of 35–40 basis points provision for the year. Analyst: Great. And then just one on expense. How are you thinking about the split between comp expense and non-comp expense? Matt Scurlock: When you strip out all the seasonal comp and benefit expense for Q1—about $17 million—and add back in annual incentive comp accruals, the impact of new hires primarily in fee income areas of focus, and then just a few weeks of merit increases that were processed late in the quarter, that moves salaries and benefits to about $125 million in Q2. All other noninterest expense remains around $75 million. As a reminder, that is heavily focused on expenses associated with putting new capabilities in the market—growth in occupancy, marketing, and technology expense—which is expense in support of revenue. Think roughly $200 million of total noninterest expense in Q2, and that is probably a good number for Q3 and Q4 as well. As a reminder, that is enough to cover the high end of the revenue guide; if you see revenue, particularly fees, come in at the high end, you would have some offsets in noninterest expense. Analyst: Great. Thank you. Matt Scurlock: You bet. Operator: Our next question comes from Jared Shaw from Barclays. Your line is open, Jared. Please go ahead. Jared Shaw: Hi, sorry about that. Good morning. With the self-funding ratio guiding lower now, what does that mean for total end-of-period and average DDA balances as we look at next quarter? Matt Scurlock: We like, in aggregate, $4.5 billion of average balances for mortgage finance for next quarter, and then you will see that drift a little bit higher toward the end of the quarter. But we think we have essentially right-sized our deposits in that particular segment, with almost all of those clients having appropriate treasury relationships. I would not anticipate the self-funding ratio really moving much lower. I think somewhere between 70%–80% is the right way to think about it over the rest of this year. Jared Shaw: Alright, thanks. And I think you went through the NII outlook for second quarter. Was that $260 million to $265 million? Did I catch that right? Matt Scurlock: You got it right—$260 million to $265 million. Margin is 3.35%–3.40%. Jared Shaw: Thank you. Matt Scurlock: You bet. Operator: Our next question comes from Jefferies. Your line is open. Please go ahead. Analyst: Hey, guys. Max on for David. Just a quick question around C&I and the pipelines. I know you attributed a lot of the growth to actual new client growth rather than just high utilization. Could you talk about new client growth versus higher utilization for fiscal year 2026? Matt Scurlock: Utilization is up 1% linked quarter and down 2% year over year. We continue to sit around that 45% level. The majority of the growth continues to come from new client acquisition. Commitments are up $2.8 billion—almost 15%—year over year. An important thing to remember is that when we are acquiring these clients through the banking verticals, we are doing other things with them. They are generating investment banking fees quite often at the outset of the relationship. Over 90% of them are doing treasury business with us, which is why you are seeing the pickup in year-over-year treasury product fees. The incremental profitability associated with new client acquisition in C&I is significant. Rob Holmes: And to Matt’s point earlier, when you arrange $11 billion of debt for clients that is not bank debt—Term Loan B, high yield, and private credit—and close to $1 billion of equity, the new clients are not only showing up through loan growth. They are showing up in other ways across the firm. Analyst: Got it. Thank you very much for that color. I appreciate it. Just a quick follow-up. Going to CRE loans, paydowns decreased again this quarter. Any color you can add to that? Any specifics you expect for CRE declines for the rest of the year? Matt Scurlock: I would still think average balances are down at least 10%. Average was $5.7 billion last year; we think it is down at least 10%. You could see about $100 million come off in each of the next three quarters. Credit availability in that space dramatically outstrips demand. We are fairly focused on multifamily and industrial, have a great set of clients, and the starts in those spaces are at the lowest levels in ten years. The reduction of those balances is simply a reflection of our clients transacting less, and we have plenty of opportunities to deploy capital elsewhere, so we will not chase lower yields on the marginal client. Analyst: Great. Thank you very much. Operator: Our next question comes from Matt Olney from Stephens. Your line is open, Matt. Please go ahead. Matt Olney: Yes, thanks. Good morning. Most of my questions have been addressed. I want to go back to capital. I appreciate the commentary around the common dividend and the buyback. Where does M&A rank as far as the capital priority list this year? Rob Holmes: Nothing has changed there. It is part of the menu on the strategy continuum. We continue to look at opportunistic alternatives in M&A, whether it is whole bank or otherwise, and we will continue to do that. The great news—and you are going to get tired of hearing me say it—is we do not have to do anything. Our M&A transaction was a transformation, and we still have a ton of synergies, both cost and revenue, that we can exploit and that will benefit shareholders for a long period to come. We are excited about being in the position we are in and not having to do something strategically to achieve our goals. Matt Olney: Okay. Thanks. That is all for me. Operator: Our next question comes from Jon Arfstrom from RBC. Your line is open, Jon. Please go ahead. Jon Arfstrom: Thanks. Good morning, everyone. A few follow-ups. Matt, you mentioned technology spending as one of the drivers you are focused on. Can you talk a little bit about where you are spending in terms of tech and what some of the projects are? Matt Scurlock: We hope at this point we have a track record of effectively investing in a technology platform that yields either new products that generate revenue with target clients or drives real structural efficiencies. The mandate here is no different. We continue to look aggressively at ways to automate, digitize, and eliminate processes that can improve the client experience, improve the employee experience, and decrease operating risk. Some of the year-over-year increase in tech spend is capitalized project portfolio that should reduce expense or show increased revenue elsewhere on the platform. We are also quite focused on figuring out ways internally to leverage AI, so you see some of that come through in tech expenses as well. Rob Holmes: Jon, I grew a little frustrated a short period back about our progress with AI, and we realized to do AI really well, you need a great data platform. We have been building that for the past five years. It is called Big Sky. We are in the cloud with a modern tech infrastructure. We have over 250 internal APIs that you need for AI. We have all the things that we need, and in the past short period of time, we have made up a lot of ground. We have our own secure multi-LLM AI platform called Ranger. It is available to most of our employees and was built by our tech team. About 80% of employees have accessed it in the last four weeks, so it is widely used and widely adopted. We have a three-pronged strategy on AI. Number one, we have firm-wide agents—right now in production for loan ops and fraud. We will have credit agents to do portfolio reviews, etc., in the next quarter, with great adoption by the credit team. We have over 170 processes that we are mapping for firm-wide agents as well. Every company has process mapping, but they are often done vertically—not horizontally. We are mapping processes as a continuum—loan origination, approval, onboarding, monitoring, etc.—and will digitize, improve, or apply AI on top of that process mapping. We also have an agent builder with about 64 employees who have created 280 agents they want to use. We are tracking those agents; if multiple employees created the same agent, we will create a better one, retire the others, and drive firm-wide adoption. Lastly, we are selectively deploying third-party AI solutions for certain use cases. We think that is the right way to move forward, and we are excited about it. We have embedded governance and risk management into every stage of development and deployment, which is important. Jon Arfstrom: That is very helpful. One question on the promotions—and congrats, Matt, on that. The Private Banking and Family Office title reads wealth capabilities as well. Is that the first time we have seen Private Banking and Family Office named in your documents? What is the plan there, and does that include wealth management? Where are you in terms of the timeline for growing that business? Rob Holmes: That business was a legacy business here; however, like most things we found, the infrastructure was poor. We had to move to a new custodian, improve the digital client journey, restructure service, and make a lot of changes. Now that is in really good shape. We have one of the highest-rated high-yield savings digital accounts in America, so we know how to digitally improve client journeys. Now our client journey on our private bank platform is as good as a money center bank. I suggest you try it—we can onboard you, Jon, if you want. Our custody works right now. Our portfolios have always performed competitively, often better than peers for like-risk portfolios. With the right infrastructure and client journey, we can put real weight behind that business and grow it. Our bankers are already calling on these clients—the managers of these companies—and the brand has won their trust and confidence. Just like a middle market banker is the point of the spear for investment banking, they can do the same for wealth, but with much more confidence. Jay has run a wealth business before here in Texas. He knows our clients and can partner really well with Dustin—who used to report to Jay—running Commercial Real Estate. They can partner on growing that business across the platform. The Family Office is new as of about six months ago. We hired someone from a money center bank who ran that business on the West Coast to come here. There are more family offices in Texas than any other state, and more in Dallas than any other city in Texas. We think that is a key component in differentiating both for the private bank as well as investment banking and treasury. Jon Arfstrom: And then just one last one for me—on the dividend. I like that decision, but I am curious: how heavily debated was that at the board level, or was it a relatively easy decision and rational in terms of the life cycle of the company? Rob Holmes: The good news is the Board has complete confidence in this management team and the people who work here. We have created a lot of credibility at the Board level, just like I hope we have at the investor level, and certainly with the regulators, by doing exactly what we said we would do over a long period of time—both in the short and long run. Our employees—bankers, middle and back office—have delivered exactly what we said. When you have these conversations, it is on the backdrop of a lot of confidence and proven performance that gives them the confidence to fully support the dividend. It was an important decision, but it was not labored. Operator: We currently have no further questions. I would like to hand back to Chairman and CEO, Rob Holmes, for some closing remarks. Rob Holmes: Just want to say thank you to everybody for dialing in, and we look forward to next quarter. Operator: This concludes today’s call. We thank everyone for joining. You may now disconnect your lines.
Craig Allen Mailman: Only and disclosures have been made available at the corporate access desk. To ask a question, you can raise your hand or go to liveqa.com enter code GPC 26 to submit questions. So, Marshall, I am going to turn it over to you to introduce your company and team, provide any opening remarks, and tell the audience the top reasons that investors should buy your stock today. Then we can jump into Q&A. Hit the red button. It is new. Okay, I was trying to kill time, but thank you, Craig. Marshall A. Loeb: Good morning, and thanks everyone for your time and interest in EastGroup Properties, Inc. this morning. I will start kind of right to left introducing our team: John Coleman, EVP, runs our Eastern Region from the Carolinas down to Miami; R. Dunbar, who is our president as of January, and runs our Central Region, which is really Texas and Nashville; then Casey Edgecombe, who handles, as many of you know, our investor relations. EastGroup Properties, Inc., if you are not familiar, we call it Shallow Bay industrial REIT, which is really shallow bay, a euphemism for smaller, infill buildings. One of our peers described this years ago and made the comment, EastGroup Properties, Inc. has always been last mile; you all just were not smart enough to coin the phrase. We try to build a campus setting near businesses, near higher-end residential—ideally, that is where the disposable income is. We are typically in smile states, which is where people are moving, where there is population growth. In terms of reasons why to invest in EastGroup Properties, Inc., two or three facts come to mind. We talk internally a good bit about how to lower our risk without reducing our return. We have now had 51 consecutive quarters of FFO growth versus the same quarter prior year. Same thing for our same-store NOI. If we hang in there one more month, we will make it to 13 years of positive FFO and positive same-store NOI—just this push for industrial REIT and the growth we have been able to enjoy. We are one of the older REITs here; we have been industrial since the mid-1990s. So a proven management team. I was looking at the screen earlier at all the red on it, and we have been through everything: COVID, the GFC. We have been an industrial REIT and a public company throughout. Thankfully, our team has been through all those cycles. Our strategy evolves, but we were not housing or office; we have always been a shallow bay industrial REIT during that timeframe. Maybe going through all those economic cycles, one of the other things we have learned is you never know what the next black swan event is, so have a safe balance sheet. We have the lowest debt to EBITDA in our sector, right around 3x. Our debt within our total market cap, as of the close of Friday, was around 14%. That is all laddered, fixed-rate debt in terms of maturity schedule. We also have the lowest top 10 tenant concentration—our top 10 tenants are a little below 7% of our revenue—so we like the geographic as well as tenant diversity. You never know when you are going to pick up the news of an accounting scandal or some issue at one of our tenants. Thankfully, there are not that many, but we try to be geographically diversified, tenant diversified, and have the lowest G&A as a percentage of revenue in our sector. Hopefully, we can run our company with low overhead for you. On top of all that, we are still trading below our long-term multiple of FFO. A lot of that is interest rates—I am trying not to blame it on the spokesperson for the company—but you can get all those things: 13 years of better FFO growth, safer balance sheet, we have cut our debt by about half of where it was a handful of years ago, and we are below our historic multiple. Those are the main reasons why we think it is a compelling opportunity. Craig Allen Mailman: We will now open the call for questions. Perfect. Thanks for the initial comments. You were nice enough to put an operating update out ahead of the conference, and the development leasing, which started to pick up in the fourth quarter, looks like it is continuing. Maybe talk about some of the gestation periods on the 166 thousand square feet that you signed and how the leasing pipeline for development and operating assets looks today. As we focus on that inflection of leasing that investors have been waiting for in industrial that looks like it is here, talk about that trend. Marshall A. Loeb: I will confess, I love our setup in that supply is at its lowest level since 2018, and in the smaller or shallow bay buildings, vacancy is about half the vacancy rate of the industrial market because so many big-box buildings on the edge of town got built, which we do not compete with either by location and mainly building design. Our average tenancy is about 35 thousand square feet. Our average building size is just under 100 thousand square feet. We will have a small campus for that last-mile service or delivery. Thankfully, our development leasing—R. Dunbar, I will let you add some color—we signed a little more than half of our development leasing that we signed in 2024 and 2025 in the fourth quarter. It has been an interesting last 18 months where we have had solid activity. You mentioned gestation period—just getting people to the cash register. We had people in the store; it is getting them to the cash register, and that seemed to happen more in the fourth quarter. The 166 thousand square feet you mentioned were since our earnings report—so early February, a little under a month. We got a development lease signed, and then one that is a long-term tenant expanding their building. It is manufacturing-related, kind of cross border, which we think is another tailwind. Their business is good, and they want to expand the building—we are going to expand their building by about 100 thousand square feet, renew their existing lease, and add 100 thousand square feet. I am pleased with the activity we have. You always breathe a sigh of relief when the lease gets signed, but there is still a fair amount of activity throughout our portfolio that—hopefully, the next time you hear us report, which will be first quarter—I am hopeful we will have a decent chance to build on those 166 thousand square feet. R. Dunbar? R. Dunbar: As everybody is aware, with Liberation Day last year, April 1, it caused a lot of users to pause and wait to see what would happen. We saw the biggest impact on that through our development leasing. The operating portfolio performed quite well last year as users decided to stay in place and renew. Craig Allen Mailman: Did you guys look at the tenant pool for your size range? You are a little bit differentiated having, I think, your average tenant size around 35 thousand square feet, which seems to be a stronger part of the market. How deep is the tenant pool for that segment of the market? I know you out-punch the market in some areas in terms of occupancy versus market occupancy. Talk about the resurgence there—markets that might be thinner where if you do not make a deal it may be a couple months until the next tenant comes, versus others where you could hold the line a little bit more on pricing and maybe even push on the margin. Marshall A. Loeb: Good question. I remember a broker saying to me, every 10 thousand square feet, the number of prospects you have goes up as you come down in size—the smaller the tenant, the more prospects—and the TIs are lower. We focus on tenants that distribute within the metropolitan area. We want growth in Orlando, Dallas, Austin, Phoenix, Las Vegas—that is how we pick markets. In some fast-growing markets, we will have the same tenancy in different parts of the market because when it is a fast-growing city, your traffic is terrible; you have outgrown the freeway system. That helps us. In Dallas, for example, you can compete on your service level. If you are a hotel and your AC is out, you want the repair person quickly, and if they are coming from cheaper space on the edge of town, they are going to get stuck in traffic. We are not the lowest-cost competitor, but we want to compete on location and our own service level. In smaller markets—Tucson, Greenville, South Carolina—there is less competition; it is a smaller portion of our portfolio. We may be one of the fewer games in town versus a Dallas or Atlanta. There are fewer tenants, but that has not held us back on rents. In some areas, there is always activity in Houston, always activity in Phoenix. We are in real estate; we do this every day. When you think big buildings, no one was building 800 thousand-square-foot buildings years ago; the vacancy rates—call it 8% to 9%—are in much newer buildings than you think for a 100 thousand-square-foot building. There is obsolescence or the local owner that may not have the CapEx—maybe a partnership that just is not real estate people. So we should, in my mind, always be able to out-punch the market over the long term. There are a couple of markets we watch—for example, Austin, Texas. The vacancy rate because of oversupply in Austin—and that market has gotten really long north to south—is around 20%, but we are 99% leased in Austin. Phoenix has a pretty high vacancy rate, maybe 14% to 15%, but we are 99% leased in Phoenix. It is a lot of big-box on the edge of town, and there has been a flight to quality in this slowdown too. We see markets like Atlanta that have negative absorption in the Class B and C product in older buildings and pretty strong positive absorption in what we try to own or build, which are the newer buildings. Craig Allen Mailman: We have a couple questions coming in. First one, on tariffs. What are you hearing from tenants following the SCOTUS IEPA ruling? Does the ruling reduce uncertainty for tenants, or do pivots to alternative tariff statutes keep uncertainty elevated? Marshall A. Loeb: It is early to get tenant feedback. Starting last year—and I agree with R. Dunbar—first quarter last year was one of our strongest quarters, and then when we had Liberation Day, it put capital decision-making into a bit of paralysis. Our portfolio stayed full; it was development leasing that slowed. We ended the year 97% leased. We are 96.6%, per our update as of Friday. We are still full. About a third of our development leasing is, as you think about it, one of the things we like about a park setting: a tenant in Building 3 has outgrown their space, so we will build Building 8 for them in the park. It will hurt our same-store numbers, but we usually tell tenants we can accommodate your growth needs. The way the market has worked the last several years, rents have been rising and still are. We can backfill your space in Building 3 at a higher rate. It will take us nine or 10 months to deliver the new building, but we move people around. I think tenants are a little more immune—maybe all of us are. We have said it is going to be a noisy year with a lot of headlines. I am hopeful. I do not think we are done with tariffs. Do not listen to my political advice, but I do not think the Supreme Court ruling means this is not a topic anymore. At some point, you have to run your business. Usually the local team says we need more space; corporate says, the headlines are messy, sit tight, make do. At some point, people get to where they just need more space. That is what we saw later in the year, and we are seeing it to a degree in first quarter. I am hopeful people are getting a little more used to the shocks to the system. Craig Allen Mailman: The other question that came in: could you talk about where cap rates are, on a stabilized or market-rent basis, for assets in your markets today? R. Dunbar: It varies from market to market. Some of the lower cap rate markets, we are seeing low-5s, sometimes upper-4s. Some of the stronger markets—like Nashville, where supply and demand have probably stayed more in check than anywhere else in the country—are there. Dallas cap rates, with the growth rates and strong demand there, are kind of in the low-5s. Depending on the market, you may see a little bit higher, mid-5s. Austin may be a little bit weaker because of the amount of supply. Southern California is more challenged because market rents are more in flux—harder to ascertain today—but still seems to be fairly healthy, mid-5s to upper-5s from what we are hearing and seeing. Craig Allen Mailman: And on development yield, it feels like you have been sticky in that plus-or-minus 7% range. Despite cap rates moving around—and maybe being lower than people would have thought on a market basis—what is your comfort level? Your start guidance was pretty healthy this year. Your view on incremental starts, build-to-suit versus spec. And in the operating update, you issued some equity—the view of equity versus incremental debt. Marshall A. Loeb: Thankfully, our development yields have hung in there—7%, low-7s. We typically say, as a rule of thumb, about 150 basis points above the market cap rate, depending on the size of the portfolio and things like that. We have healthy profit margins on our development. I will brag on our team a little. Last year at this time, we had come out with $300 million in starts, and with Liberation Day and things like that, we build parks in phases—one or two buildings at a time. It is a pull system. Most of our peers say, we are going to build a building and hope three people are not doing that. I will get a call from one of these guys saying, Phase 2 is 50% leased, I have an LOI out or a lease out, or more activity; I need to build the next phase. We only started $175 million a year ago versus the $300 million we had told the Street. It is hard to predict, but we will go as fast or as slow as the market is telling us, and I like that we were disciplined, even though we would rather have done $300 million. This year, at $250 million, which is what we penciled out, the starts will come from the teams in the field. Usually, we will pull that ticket—we were talking earlier today about a few of the development leases we are working on: if we can get this lease in, that will pull the ticket to put more blue shirts on the shelf. It is like a retail store, or like building out a residential subdivision: as one or two homes sell, we start the next one. We think that is lower risk, and we like the returns we are getting. One interesting and maybe not surprising thing—you saw it with the expansion we announced—because supply is back to pre-COVID 2020 levels, and many of the people that build shallow bay are local/regional developers with an institutional partner, in this slowdown their balance sheets were not structured to carry land or a construction team. We bought land from people that were not able to close sites where they had done all the work but did not want to carry it for two years until the market normalizes. We think we will have a really good runway in terms of fewer people—it will take them a while to get back in business and up and running. They will, and we will oversupply again—that is the nature of our business—but there will be a pretty long runway, measured in a couple of years. With that, we have had more prelease opportunities where people have not been able to find space: would you build us a building, or like the one in Arizona we announced, would you expand the building? We have a good relationship with them, but the availability just is not there. We are probably working on more situations now where tenants would take an entire building—or maybe a couple of buildings in a park if we would build it—than in the last three or four years that I can think of. R. Dunbar: To add to Marshall’s comments on the prelease or build-to-suit activity, we really saw in the last year an uptick in conversations with our existing tenant base and customers that needed to either expand or consolidate operations. That has accelerated into this year. The expansion we signed in Arizona was a good sign, and we continue to have other conversations. That speaks to the power of our platform and portfolio—we have over 70 million square feet of existing product and over 1,400 customers. When they need to expand, we are usually the first call. That is why we like to do things in phases and to have some land inventory. With over 1 thousand acres of land, we are in a prime position to service these tenants that now need to expand or reconfigure some of their distribution networks. We feel like we are in a good spot. We will not land all the conversations we are having, but we have shown we landed one earlier this year, and hopefully we will pull another one or two in the boat as we continue throughout 2026. I agree with Marshall—hopefully it would give us some upside to the $250 million in starts. Marshall A. Loeb: It is hard—these are $50 million, $100 million decisions—but if we could land a few of those and the economy can hang in there, I am an optimist. I hope we can hang in there and maybe have some upside to the number of starts. I always say I do not worry about the buildings starting as much as I worry about them finishing. We can start whatever we want to start; we just want to make sure we get it leased. We usually underwrite a year after completion to get the building stabilized and leased. Either way, that is when it rolls into the portfolio. Last year, we saw where our vacancy dropped; it was more buildings that are achieving our yields, but it was taking 16 to 17 months past completion to lease up rather than, at the peak, six or seven months. That was when we peaked on development as a company, probably just under $400 million. I am glad we have the team and the balance sheet and the land. We want to usually have permit in hand for that next phase, which has gotten much harder within the cities—pulling those permits in fast-growing cities. People want the delivery quickly; they want the service person, but no one wants all the trucks on their road. Getting industrial permitted has gotten materially harder than it was five or six years ago, which is great for the 65 million square feet we own; it is a challenge for the next incremental 5 million we will build. John Coleman: I was going to add, if you take a snapshot of where we are in the Eastern Region with new development starts, we are at about a 60% reduction from the peak. That dynamic has worked in our favor. A couple of things: construction costs—although there have been some tariff impacts—are actually lower for new development because of the lack of new demand for construction. As we look forward into 2026, supply will be greatly down, to Marshall’s point, so we think there could actually be some upward pressure on rental rates when that happens. On land, just having the land entitlements in place—to be permit-ready to start—that is key. We have a very deep land inventory that is fully entitled. When that site is ready for the next phase, we are ready to start construction. On development, we had a question come in on whether you have seen water rights extend entitlement timelines or change site coverage for new development. Nothing, at least in our market shed on water, that I have seen or heard of. The entitlement period is taking longer. Power is more of a constraint than typical. For our users, most of them are not heavy power requirements, so we have not seen a hindrance on our activity regarding power, but it is something we are monitoring. That is being driven by data center demand—power and water. It is shocking how much is consumed. In Atlanta, for example, there are public hearings now where residents are showing up in opposition to future data center zonings and permitting. It is on the table; I am not sure where it will go. We put our toe in the water and looked at some data center opportunities—probably not a great fit for us. I think you will continue to see pushback on those two utilities moving forward. Craig Allen Mailman: In the markets you operate in, how much does data center development crimp industrial development? You are not sharing land sites, but you are targeting similar land sites. Where do you see that impact being the greatest on future new supply of industrial? Marshall A. Loeb: Certainly, they can pay a lot more, and usually with industrial we can only go one story, historically. We are about the first guys to get priced out of land when we chase it. It is one more source of competition, tied into power. We said we are not actively looking at data centers, but we want to understand it. If we do have land that has the power and the water for data centers—we joke that we want to know if there is oil under our land. If it is there, we should capitalize on it. It is another set of competition, but they seem much more limited than what we can do for industrial. Ours is hard to come by, but theirs is even harder—zoning, permitting, and especially power. They have approached us on some sites at different times. The power requirements they need, and the lead time to get that power, are so long. If we can capitalize and there is an opportunity to do it without us pretending to be a data center developer—which is not why I would buy EastGroup Properties, Inc. stock—there are better opportunities in other rooms here than this one. Craig Allen Mailman: Shifting to development leasing cadence: how should we think about development leasing cadence throughout the year and, subsequently, development starts? Marshall A. Loeb: It is hard to predict the cadence. It was odd last year—we do not normally have 52% in one quarter; it is usually not that lumped together. You never know when that tenant finally decides. Rents have risen, and what used to be a director of real estate decision is now often a CFO decision. That takes the gestation period out a little bit. We have local/regional tenants and Fortune 100 tenants. Usually, the bigger the company, the bigger the legal department, the longer the gestation period—even if we have three leases with them in other markets. As those leases get signed, we will move quickly to build the next building, with permits in hand. Our prospects all have tenant-rep brokers, and if I am a tenant-rep broker, I want to see construction underway because if I promise your space is going to be ready in June, I want that developer building. If you are moving in, you are going to be calling me every day asking where your space is. That is why it is important for us to have a little bit of inventory in the market. You hate to lose a good tenant because you cannot accommodate their growth, but if we do not, somebody will. That is where, if we land some of these prelease opportunities, I could see upside to the $250 million—or, if the market hangs in there, I hope there is upside. Using last year as an example, you are better served if we are a disciplined allocator of capital. Last year was our lowest new investment year in a while. We did not see the development opportunities, and cap rates were sticky. What we bought was strategic more than opportunistic, whereas a couple years ago we saw things not close because of the capital markets, and we were getting a second look. We had a very active year buying existing, leased but new product. Then that window closed. We will try to find where the market opportunity is. We have said we are going to end up with well-located, state-of-the-art shallow bay industrial buildings in fast-growing markets. Most of the time, we are better off building it. If everybody wants it, we would rather create it than outbid people for it. Sometimes the market gives you that window to buy it vacant or buy it when it is leased. Usually, the inbound calls tell you where the window is. Craig Allen Mailman: Pivoting to AI: as it relates to EastGroup Properties, Inc., what initiatives are you looking at? How much time or money have you spent on identifying opportunities for productivity enhancement or revenue enhancement? How have you looked at it internally? Marshall A. Loeb: Good question. I will compliment our IT team on where we can use it—training and trying to stay safe within a cybersecurity world. We think about making sure we do not get hacked. On AI, we have spent time training all of our team. If you asked where we have seen the reduction to date—we are not a design or creative team, or legal—it has been our accounting. Our quarter-end closing has gotten more automated—our property accounting team has done a really nice job. We would rather reduce the closing time and offset that with analysis time if we can use technology to do that. They may argue with me on the percentages; it has mostly been what is available out there with us tweaking it to use it. Within our tenant base, you are still delivering goods and service to local tenants. The bigger the space, the more we see tenants’ ability to put in CapEx and equipment. At 35 thousand square feet, it is usually not state-of-the-art where a 1 million-square-foot building would be. We will watch to see how they can use it to be more efficient with their space. We keep seeing more opportunities—onshoring/nearshoring is the latest tailwind, kind of like e-commerce. Our old tenants did not go away; then e-commerce started diving into the pie. Now it has been suppliers to the Intel plant in Phoenix, to the TI plant outside of Dallas, to Tesla when they come to Austin. We have tenants that supply anything from food to paper products to boxes—people that need to be near that new source of demand in the market. Craig Allen Mailman: Rapid fire. Same-store NOI growth for the industrial group in 2027? Marshall A. Loeb: For the group, 5.5%? Craig Allen Mailman: From an M&A perspective in your property type, more, same, or fewer companies this time next year? Marshall A. Loeb: Same in the REIT industry? Fewer. So go with the flow. Craig Allen Mailman: Thank you so much. Everyone, enjoy the conference. Marshall A. Loeb: Thanks, Craig. Thanks, team.
Operator: Good morning, ladies and gentlemen, and welcome to Essential Properties Realty Trust, Inc. First Quarter 2026 Earnings Conference Call. This conference call is being recorded and a replay of the call will be available three hours after the completion of the call for the next two weeks. The dial-in details for the replay can be found in yesterday's press release. Additionally, there will be an audio webcast available on Essential Properties Realty Trust, Inc.’s website at www.essentialproperties.com, an archive of which will be available for 90 days. On the call this morning are Peter M. Mavoides, President and Chief Executive Officer; Robert W. Salisbury, Chief Financial Officer; R. Max Jenkins, Chief Operating Officer; A. Joseph Peil, Chief Investment Officer; and Sheryl Kaul, Director of Financial Planning and Data Analytics. It is now my pleasure to turn the call over to Sheryl Kaul. Sheryl Kaul: Thank you, operator. Good morning, everyone, and thank you all for joining us today for Essential Properties Realty Trust, Inc.’s First Quarter 2026 Earnings Conference Call. During this conference call, we will make certain statements that may be considered forward-looking statements under federal securities laws. The company's actual future results may differ significantly from the matters discussed in these forward-looking statements, and we may not revise or update these forward-looking statements to reflect changes after the statements are made. Factors and risks that could cause actual results to differ materially from expectations are disclosed from time to time in greater detail in the company's filings with the SEC and in yesterday's earnings press release. In our earnings release last night, for the quarter, we reported GAAP net income of $60 million and AFFO of $105.8 million. With that, I will turn the call over to Peter M. Mavoides. Peter M. Mavoides: Thanks, Sheryl, and thank you to everyone joining us today for your interest in Essential Properties Realty Trust, Inc. We had a productive first quarter, deploying $389 million into 126 properties and raising $419 million of equity in support of our pipeline, while growing our AFFO per share by 11% year-over-year. Despite a macro backdrop characterized by heightened volatility, our team continued to source and execute attractive investment opportunities, as our ability to deliver capital is highly valued in this environment. Our focus on servicing relationships and providing sale-leaseback capital to growing middle market operators across our targeted industries continues to be a differentiator for our company. Investment cap rates were stable this quarter, with an initial cap rate of 7.7% and a GAAP yield of 8.8%. This meaningful spread to our cost of capital is a key driver of our earnings growth. With $1.5 billion of available liquidity and low leverage of 3.5x pro forma net debt to annualized adjusted EBITDAre, our balance sheet positions us well to continue to deliver compelling growth. Overall, investment activity and portfolio credit trends have started the year ahead of our budgeted expectations. Coupling this with our investment trajectory drives our ability to increase our 2026 AFFO per share guidance to a new range of $2.00 to $2.05. We commensurately increased our investment volume guidance range by $100 million to a new range of $1.1 billion to $1.5 billion, and our cash G&A guidance has improved by $1 million as a result of cost discipline as the platform continues to scale. Turning to the portfolio, we ended the quarter with investments in 2,417 properties that were leased to over 400 tenants. Our weighted average lease term increased to approximately 15 years, with just 2.8% of our annual base rent expiring over the next three years. With that, I will turn the call over to A. Joseph Peil, our Chief Investment Officer, who will provide an update on our portfolio and asset management activity. AJ? A. Joseph Peil: Thanks, Pete. Overall, our portfolio credit trends remain healthy. With same-store rent growth in the first quarter of 1.4% and occupancy of 99.7%, we had just seven vacant properties. Portfolio rent coverage remains strong at 3.5x, and the percentage of ABR under 1.5x rent coverage declined by 140 basis points. Disposition volume moderated to $10.2 million at a cap rate of 6.9% following an elevated fourth quarter of car wash property sales. Looking ahead, we continue to expect modest disposition activity driven by proactive asset management, as well as overall portfolio construction shaping. Our focus on middle market operators continues to yield a highly diversified tenant base, with our top 10 tenants comprising only 15.8% of ABR and our top 20 representing only 26% of ABR at quarter end. We remain disciplined and are actively managing the portfolio toward long-term credit stability, and broad diversification is a pillar of our risk management framework. On the credit event side, during the quarter, one of our restaurant tenants filed for bankruptcy. We own seven properties that were leased to this tenant, which represented approximately 30 basis points of ABR. With identified backfill tenants on five sites and two locations under contract for sale, our expected recovery rate is consistent with our historical range of approximately 80%, which is better than our budgeted expectations. The relatively quick resolution timeline and a reasonable recapture cap rate demonstrate the inherent fungibility of our restaurant assets. As is typical, this situation was operator-specific in nature, and looking at our restaurant exposure overall, operator revenue and margin trends remain healthy and consistent with recent experience. With that, I will turn the call over to R. Max Jenkins, our Chief Operating Officer, who will provide an update on our investment activities and the current market dynamics. R. Max Jenkins: Thanks, AJ. On the investment side, during the first quarter, we invested $389 million at a weighted average cash yield of 7.7%. Our capital deployment was broad-based across most of our top industries, with no notable departures from our investment strategy. During the first quarter, our investments had a weighted average initial lease term of 17.7 years and a weighted average annual rent escalation of 2.1%, generating a strong average GAAP yield of 8.8%. Our investments this quarter had a weighted average unit-level rent coverage of 3.1x, reflecting a conservative rent level and healthy unit profitability for our operators. We closed 22 transactions comprising 126 properties, of which 100% were sale-leasebacks. The average investment per property was $2.9 million this quarter, consistent with our historical range and reflecting our focus on investing in fungible assets. Though we do not normally comment on specific investments, this quarter we closed on a large portfolio that is noteworthy and was reported publicly by this tenant. In January, we acquired 74 properties in a $147 million sale-leaseback with Denny’s as part of their privatization transaction. With an average price of under $2 million per asset and strong unit-level coverage, the property profile exhibits the high level of fungibility that we seek in our restaurant investments. The transaction is a great example of how we add value to our relationships with a reliable and transparent closing process. It also shows how our deep industry expertise, especially in the restaurant sector, enables us to leverage proprietary data to drive an efficient underwriting process. Looking ahead, pricing in our pipeline remains constructive, with cap rates in the mid to high 7% range representing an attractive spread to our cost of capital, which is supportive of our long-term growth trajectory. After a great start to the year on the investment side, we increased our full-year investment guidance by $100 million to a new range of $1.1 billion to $1.5 billion. With that, I would like to turn the call over to Robert W. Salisbury, our Chief Financial Officer, who will take us through the financials for the first quarter. Robert W. Salisbury: Thanks, Max. Overall, we were pleased with our first quarter results. The company generated AFFO per share totaling $0.50, representing an increase of 11% versus the first quarter of last year. On a nominal basis, our AFFO totaled $105.8 million for the quarter. This AFFO performance was slightly above our expectations, driven by a combination of earlier deployment timing, lower cash G&A, and favorable portfolio credit trends. Total G&A in the quarter was $12.3 million and cash G&A was $8 million, representing just 5% of total revenue, down from 5.9% in the same period a year ago. As a result of continued cost discipline, we reduced our cash G&A guidance for the year by $1 million to a new range of $30 million to $34 million. We declared a cash dividend of $0.31 in the first quarter, which represents an AFFO payout ratio of 62%. Our retained free cash flow after dividends reached $40 million in the first quarter, equating to approximately $160 million per annum, and represents a substantial source of internally generated capital to support our future growth. Turning to our balance sheet, our income-producing gross assets increased to over $7.5 billion at quarter end. The increasing scale and diversity of our portfolio continues to enhance our credit profile. On the capital markets front, we completed an overnight equity offering in February, raising over $402 million. We also raised approximately $17 million of equity on our ATM. All of our equity issuance this quarter was completed on a forward basis. We settled $193 million of forward equity during the quarter, with a portion of the proceeds utilized to partially repay our revolving credit facility balance. Our balance of unsettled forward equity totaled $541 million at quarter end. The weighted average price of our unsettled forward equity was $30.55 at quarter end. During the quarter, our share price was modestly above this level. As a result, under the treasury stock method, the potential dilution from these forward shares is included in our diluted share count. For the first quarter, our diluted share count of 212 million shares included an adjustment for 671 thousand shares related to this treasury stock calculation, representing a minimal headwind to our AFFO per share for the quarter. Looking forward, our updated AFFO per share guidance range continues to include a conservative assumption for treasury stock method dilution of approximately $0.01 to $0.02 for the full year. Our pro forma net debt to annualized adjusted EBITDAre remained low at 3.5x at quarter end, which is well below our long-term average in the mid-4x, leaving us with ample dry powder to execute our 2026 business plan. We remain committed to maintaining a conservative balance sheet with low leverage and significant liquidity. As we have previously discussed, we continue to anticipate an unsecured debt issuance in the middle of the year to fund our growth pipeline and extend the weighted average maturity of our liabilities. Lastly, as we noted earlier, we have increased our 2026 AFFO per share guidance to a new range of $2.00 to $2.05, reflecting a growth rate of 7% at the midpoint and over 8% at the high end. With that, I will turn the call back over to Peter M. Mavoides. Peter M. Mavoides: Great. Thanks, Rob. In summary, we are happy with our first quarter results. Our high-quality portfolio is performing well, with a compelling 15-year weighted average lease term, sector-leading diversity, and a deliberate commitment to fungibility that allows us to effectively and efficiently manage the potential risks in the portfolio. On the investment side, our differentiated sourcing and underwriting discipline focused on delivering value to our longstanding relationships, and a well-capitalized balance sheet, position us well to continue to generate best-in-class total shareholder return. We will now open the call for questions. Operator: At this time, if you would like to ask a question, please press star-one. Once again, that is star-one to ask a question. We will take our first question from Caitlin Burrows with Goldman Sachs. Your line is open. Caitlin Burrows: Hi, good morning everyone. Maybe just looking at the acquisition volume and cap rates in the quarter, volume was high. You mentioned cap rates were stable. I think they were maybe a little lower than recent quarters. So on the cap rate side, could you just go through what drove that decline? Is it just the reality of business today, industry mix, the portfolio deal, something else? And would you expect that level to continue? Peter M. Mavoides: Hi, Caitlin, and thank you for the question. As we communicated on our last call, we expect cap rates in the mid to high 7% range, coming down from the 8% that we saw last quarter. Some of that is capital markets and competition. Some of that is industry mix. But certainly, the 7.7% is a healthy rate, and we feel pretty good about that. Caitlin Burrows: Got it. Okay. And then maybe just on the macro side, as you think of the macro volatility that is going on, can you go through how that impacted Essential Properties Realty Trust, Inc. in the quarter or not, and maybe how it impacts competition? Peter M. Mavoides: I think most of the volatility that we see today is going to impact us next quarter. The deals that are closing and pricing in Q1 were really baked in during Q4, which was much more stable. As we think about the current market—volatility, a higher 10-year—I think all, on balance, help us, as we are a consistent, reliable capital provider with a lot of liquidity and a long track record of reliably closing transactions, and counterparties value that in an uncertain and volatile market. On balance, I think it helps. Obviously, if volatility persists, it is going to put some strain on the consumer, and that puts strain at the margins on the portfolio, but certainly nothing that is outsized or gives us pause, which is one of the drivers of raising guidance here on this call. Caitlin Burrows: Got it. Thank you. Peter M. Mavoides: Thanks, Caitlin. Operator: Our next question comes from John James Massocca with B. Riley Securities. Your line is open. John James Massocca: Good morning. Peter M. Mavoides: Good morning, John. John James Massocca: Can you provide a little more detail on the Denny’s transaction? How is that sale-leaseback structured? Is everything kind of a uniform distribution in terms of lease maturity, or is there some variance there? And bigger picture, what made you comfortable with the tenant given some of the news that has been out there about location closures and the take-private transaction? Peter M. Mavoides: I will have Max tackle that question. I would start by saying, first and foremost, as a real estate investor, we take comfort in the properties that we are buying and the lease terms, and then the tenant comes into focus after that. Max? R. Max Jenkins: Thanks for the question, John. To start, these are small, bite-size, granular, fungible restaurant properties, which we have had tremendous success investing in over the years here. You have 74 properties at less than $2 million per asset. The key thing here was the average operating history was over 40 years across our portfolio, so you have durable, strong unit-level coverage, stable performance across the board, and an attractive yield. That is what we look for in restaurant investments. To your question about the structure, it was a combination of both corporate-owned and operated stores as well as multiple franchisees, which is good for us because we have geographic diversification and tenant credit diversification. We were very happy with the process. We have known the equity group for a few years, and it is a strong relationship. They relied on our certainty of close, and we are happy with how that transaction played out. John James Massocca: Okay. And then, relatively small numbers in terms of the overall ABR, but it seems like there was a bit of an increase in rent in some shorter lease maturity years, particularly 2026. Is there something driving that? Is it releasing, or is it something with one of the transactions that closed? R. Max Jenkins: Some of that was attributable to the Denny’s portfolio. We got creative with some of the franchisee stores, so it was not all a contiguous lease termination schedule, which is one of the reasons why we won the deal—we were able to get creative and underwrite every individual property, every franchisee, and the corporate credit as well. There is a little bit of noise, but I would not look too deeply into it. John James Massocca: The number of relationship transactions was a little bit lower this quarter. Was that primarily tied to Denny’s, or were there other transactions with new sale-leaseback partners? Peter M. Mavoides: I would say that decline is mostly related to Denny’s. John James Massocca: Okay. Alright. That is it for me. Peter M. Mavoides: Thank you very much. Thanks, John. Operator: Our next question comes from William John Kilichowski with Wells Fargo. Your line is open. Analyst: Hey, good morning. It is Jamie Feldman filling in for John here. A couple of questions for you. Denny’s was the result of a take-private of a public company. We are seeing a lot of activity in the capital markets—IPOs, take-privates, and a lot going on in the private credit world. What are your thoughts on larger-scale deals going forward versus one-offs? I know the one-offs have been more of a sweet spot. As you think about the pipeline and the conversations you are having with your seller-type clients, what do you think the world looks like over the next 12 to 18 months? Peter M. Mavoides: I do not think we are going to see a ton of ripple-down effect into the middle market tenants we are dealing with. Our larger transactions tend to be very episodic. Certainly, Denny’s is an outsized one. I would expect our portfolio going forward to still be predominantly small, granular deals and not the larger M&A-type transactions. It is rare that they happen in our industries at a size with real estate that really gives us an opportunity to get in there. I would imagine our pipeline going forward remains very granular. Analyst: Thanks for that. On cap rates, you mentioned more competition and they are coming in a little bit. How do you think about your investment spread to your cost of capital going forward, given your different capital sources and the ability to create the same level of accretion for the same dollar amount? Robert W. Salisbury: As we have talked about in quarters past, the investment spread is really more of an output than an input. We tend to price deals in the marketplace based on where the facts and circumstances shake out for each individual deal. On the capital side, our weighted average cost of capital has not moved materially relative to the last time we gave an update. If you look at where our unsecured debt trades today, it is probably in the mid to high 5s. If you look at our cost of equity, which we tend to use our AFFO yield as a proxy for, it is in the mid to high 6s. As you know, we retain nearly $160 million of annualized free cash flow after paying out dividends, which is a free source of capital for funding our investment pipeline. When you throw all those sources of capital into the blender, we are in the mid-5s on a WACC basis today. When you compare that to where we are deploying capital in the mid to high 7s, that is a healthy spread of 200 basis points plus and very supportive of our long-term growth algorithm. From where we sit today, we would love to see our share price at a higher level, but we are very much in business deploying capital for shareholders. Analyst: Thanks for that. One more—there are headlines about higher fuel costs, higher food costs, and now a lot of talk lately about fertilizer costs. As you digest the headlines and think about what could change over the next months and quarters, where do you think you will see the most impact across your tenant base? What are you watching the most as you think about your portfolio? Peter M. Mavoides: The casual dining and entertainment space has seen—and we expect to continue to see—the most weakness. That weakness manifests in flat to down 2% to 3% sales and some margin pressure, maybe 100 to 200 basis points, which can flow through to maybe 10 to 20 basis points on rent coverage. Thematically, we do not expect major shifts in our industries. We dig down to the idiosyncratic risk with specific operators that are either growing, over-levered, or grew too fast, and really understand how they are performing and how our sites within those credits are performing. The portfolio is performing well. Our credit performance is coming in better than anticipated early in the year, which supported our guidance raise. We do not expect material flow-throughs to our portfolio performance, but we are watching the consumer and specifically our casual dining and entertainment space. Operator: Our next question comes from Michael Goldsmith with UBS. Your line is open. Michael Goldsmith: Good morning. Thanks a lot for taking my question. First question is on the bad debt in the period. I think you mentioned a restaurant property group—presumably that is the Applebee’s franchisee. In addition, I think I saw that there was an impairment on the income statement. Can you talk a little bit about what you are seeing from your tenants and if the environment has gotten particularly challenging for any of them? Peter M. Mavoides: I will let AJ tackle the specific impairments. In general, much like my earlier comments, people are performing, and credit is coming in better than anticipated, which supported our guidance increase this quarter. It tends to be very idiosyncratic events that drive impairments and bad debt. On the impairment for the quarter, AJ? A. Joseph Peil: More broadly, on the health of the portfolio, we are paying a little bit closer attention to the entertainment and casual dining space, and you referenced in your question the casual diner we called out in the prepared remarks. That was significantly more episodic than it was a trend line. Broadly speaking, our restaurant portfolio is generating 2.5x-plus coverage across the board, so we feel good about the portfolio. On the impairment, I will have Rob comment on the balance sheet impact. Robert W. Salisbury: As AJ mentioned, many of these situations are idiosyncratic in nature. We have a robust quarterly impairment testing process that is well established and has been in place for a long time. For the impairment this quarter, it was driven primarily by one site at a former American Signature location. That tenant went bankrupt in the fourth quarter. It had been paying rent and the lease had not been rejected until a time during the first quarter, and that triggered the impairment testing process. In general, we have not been bullish on the home furnishing industry. That is an industry that we have not invested in for many years, and we are down to one location now, representing effectively a rounding error in terms of exposure to the portfolio broadly. Not a huge surprise in terms of where the exposure is, and it is not a material impact going forward. Michael Goldsmith: Thanks for that. As a follow-up, you have a term loan that is expiring in early February at a particularly low rate. How are you thinking about refinancing that? The refinancing would be a bit of a headwind for your 2027 earnings. Would you look to accelerate transaction activity to maintain the strong growth you have generated, or do you just proceed as normal? Peter M. Mavoides: We have talked a lot about terming out our debt and getting long term on the balance sheet to match-fund our assets. We are likely to look to the unsecured bond market at some point to take out that term loan, and there will be some incremental dilution as a result of that low rate rolling off. We think about our investment trajectory on a much longer-term basis and make investments in our team to be able to do more and source more and process more transactions—granular ones, which is where we think we add value. When we develop a business plan for 2027, we will look at that. Our ambition has been and continues to be to offer compelling total shareholder return in the net lease space. We will address that as it comes upon us. I would not say the automatic toggle is to buy more just to cover up a little bit of the earnings; we will look at a full business plan in 2027 to position ourselves as a best-in-class grower. Operator: Our next question comes from Haendel St. Juste with Mizuho. Your line is open. Haendel St. Juste: Hey, guys. A couple of quick ones left here for me. First, on the coverage for the investments in the quarter—down a bit versus last quarter when I think you had more industrial deals and below your overall portfolio average. I know this bounces around a bit, but how should we think about your coverage levels on deals going forward in this environment? Should this past quarter prove more of an anomaly? Peter M. Mavoides: I would not read too much into that subset of deals. It is highly influenced by the mix of industries and the individual transactions. We had 22 investments in the quarter across most of our industries, so there is always going to be a wide variation in that number. Restaurants tend to have some of the lower coverage, so the Denny’s properties in the mid to high 2s would certainly drag that down a little bit. Haendel St. Juste: Got it. Maybe some color on Chicken N Pickle—top 10 of yours. There have been some reports that some of their assets may be seeing pressure in terms of sales. Curious on your comfort level with that exposure and anything within the sales trends or credit overall that might be changing your view on that tenant. Peter M. Mavoides: They are a private company, so I do not know where there would be public commentary around their sales. As we said, the entertainment space has seen some challenges, and Chicken N Pickle sits within that bucket. We continue to believe we have good assets on the ground with that operator. We have seen some flat top line. Our coverage remains healthy, it is a good relationship, and we will continue to watch the trends in our entertainment bucket overall. Haendel St. Juste: And on car wash—your exposure there in the quarter was down a bit. Is that just by virtue of other investments in the quarter, or is there more of an effort to get that exposure down? Maybe remind us where you see the long-term exposure target for that segment. Peter M. Mavoides: We continue to think car wash is a very compelling industry with great cash flow dynamics and strong margins, and the real estate presents a compelling investment opportunity. As we have said in the past, we have a soft ceiling for any one industry at 15%. We have run car wash up to that level or above it, and we have comfort doing that given our deep experience and deep data within that space to underwrite incremental investments. As we disclosed, we sold a number of car washes in the fourth quarter where we saw an attractive bid from investors looking to take advantage of accelerated bonus depreciation. You are likely to see that bounce around. We are happy where it is, and we would be happy taking it up if we saw compelling investment opportunities. Operator: Our next question will come from Richard Allen Hightower with Barclays. Your line is open. Richard Allen Hightower: Good morning, guys. Back to the impairment charge booked in the first quarter—I did not catch this. Was it just the one furniture location that led to the entire $16-plus million? And help us with the mechanics—if you sell a vacant box or backfill with a cash rent-paying tenant, how does that affect any potential change to that number going forward? Peter M. Mavoides: A good chunk of that was the furniture store, but there were certainly others. We operate almost 2,500 properties, and there are multiple scenarios happening in any given quarter. You take an impairment when it becomes apparent the value has changed from what is on your balance sheet. You tend not to mark it up once something subsequent happens, but we will see what happens with that property, and our accountants will evaluate what to do accordingly. Richard Allen Hightower: Thanks. And you have a relatively muted official watch list—lower than some peers. Maybe walk us through how you define your watch list and where that stands today relative to a couple of quarters ago. Peter M. Mavoides: We define our watch list with a pretty clear methodology so investors can understand and track it. We define watch list as tenant credit risk of single-B and unit-level coverage risk of 1.5x. That has tended to hover around 1%. I think it is slightly up, maybe 20 basis points this quarter. A. Joseph Peil: It is 1.3% today. Peter M. Mavoides: 1.3%. Very helpful. Thanks. Operator: Our next question will come from Jay Kornreich with Cantor Fitzgerald. Your line is open. Jay Kornreich: Good morning. You mentioned that volatility could cause some strain on the consumer, yet you still feel confident in the investment pipeline as you increased guidance to $1.3 billion at the midpoint. How does the pipeline look, and what industry segments—beyond car washes—might you want to expand in as the year goes on? Peter M. Mavoides: We focus a large part of our investment activity on our relationships within our targeted industries. Our investment pipeline and opportunity set come from there. Generally, we anticipate growing our pie ratably across all our industries. Clearly, we had an outsized transaction in Q1 within the restaurant space, and you see that flowing through. Overall, I would expect it to grow ratably. We are pricing long-term investments—20-year deals—taking a long view of performance, coverage, and sales to develop that pricing. That does not change with short-term volatility. Jay Kornreich: Looking more into casual dining where you referenced some weakness—your exposure to casual dining actually declined 20 basis points this quarter even though you did the Denny’s acquisition. Were you getting out of some less favorable operators while moving into Denny’s? Peter M. Mavoides: Denny’s is in the family dining category given their focus on breakfast and lunch. We also had commentary around a casual diner in our prepared remarks—roughly 30 basis points of ABR—which we worked through, and that is probably what you saw flowing through the casual dining line. Jay Kornreich: Got it. Thanks. Operator: Our next question will come from Smedes Rose with Citi. Your line is open. Smedes Rose: Hi, thank you. As you are working with middle market operators—either existing or potentially new clients—do you get the sense their access to capital from other sources is more constrained now than it was a year ago, either from direct competitors to you or traditional financing like regional banks? Have you seen any changes there? Peter M. Mavoides: Hey, Smedes. Thanks for the question. At the margin, yes, though with 20 transactions during the quarter there are a lot of different scenarios. Overall, the capital markets environment is a little more constrained, but not materially so. Smedes Rose: And to clarify, you mentioned the seven properties in that bankruptcy—I think they were all Applebee’s. Five were backfilled. Are they now open, or are they just scheduled to have a new tenant come online? Peter M. Mavoides: They had a new Applebee’s tenant step right in to the lease. They are open, operating, selling hamburgers, and paying rent. Smedes Rose: Gotcha. Thank you. Operator: Our next question will come from Greg Michael McGinniss with Scotiabank. Your line is open. Greg Michael McGinniss: Good morning. Denny’s is now a top-five concept in the portfolio at around 1.6% of ABR. Are you able to disclose the split between corporate and franchise-owned exposure, and how many different Denny’s franchisees are now tenants? Peter M. Mavoides: We are not disclosing the exact split between corporate and franchisees, but it is pretty diverse. We have up to 15 franchisees. Greg Michael McGinniss: Thanks. For a company with your expected earnings growth, we were a bit surprised to see cash G&A guidance actually lowered. Could you talk about the drivers of that reduction? Robert W. Salisbury: As we looked at the guidance range this quarter, there were a number of moving parts on the cash G&A front. Our initial budget included a range of assumptions around hiring, technology spend, and other initiatives. In general, we are trying to be as efficient as we can as we move through the year. That drove the reduction on the cash G&A side, and you saw the other drivers in the press release. Peter M. Mavoides: Thank you. Operator: Our next question comes from Eric Martin Borden with BMO Capital Markets. Your line is open. Eric Martin Borden: Good morning. On the disposition front, are there any tenants or verticals where disposition yields in the market are tighter than your internal view, where you would be more inclined to recycle capital given the current market yields? Peter M. Mavoides: Pricing is very idiosyncratic. As Rob walked through earlier, our weighted average cost of capital is in the mid to high 5s. We do not see a lot of properties within our portfolio that would trade below that. Generally, our disposition activity is focused on de-risking sales and portfolio shaping, and those assets typically do not garner premium pricing. We are not using dispositions as an accretive source of capital. Eric Martin Borden: Great. Thank you. Operator: Our next question will come from Jana Galan with Bank of America. Your line is open. Jana Galan: Thank you. Good morning. Following up on dispositions, it is funny to see 2Q-to-date activity on dispositions higher than acquisitions. Do you think disposition activity will be elevated this year, or is this just a little more first-half heavy? Peter M. Mavoides: I would not read too much into that. It is really timing. The closing timeline on our dispositions tends to be unpredictable, and we do not control when the buyer is going to close. I would expect normalized disposition activity in the ~$20 million per quarter range. Jana Galan: Thanks, Pete. Operator: Our next question comes from Analyst with Capital One Securities. Your line is open. Analyst: Hi, everyone. Thank you for taking my question. On the previous call, you mentioned the 10-year yield in the mid to high 3s would be a spot where competition could increase. In true markets fashion, yields dove down toward 4% and then came up since. In that short period, were there any changes to the transaction marks that you saw, or was it too quick to glean anything there? Peter M. Mavoides: I would say it is too quick. With a roughly 90-day transaction cycle, we are constantly pricing and closing on deals, and two- to four-week volatility really does not come into play. Analyst: Thank you. Operator: We do have a follow-up question from Caitlin Burrows with Goldman Sachs. Your line is open. Caitlin Burrows: Hi again. Two more modeling questions. You increased full-year acquisition guidance, so it seems like you are pretty confident, but it also looks like the start to 2Q has been slow. Do you think 2Q will end up being a lower volume quarter? Peter M. Mavoides: I think it will likely be lower than the first quarter given the start to the quarter. Generally, the pipeline is full. Without putting too fine a point on it, something in the $275 million to $325 million range is reasonable, but it is too early to tell. Caitlin Burrows: And on the straight-line rent adjustment, it was $15.365 million in 1Q. That seems higher than it has been. Is that the new normal, or was there something one-time in that? Robert W. Salisbury: Appreciate you getting into the weeds on the straight-line rent adjustment. In the fourth quarter, we had a couple of one-time items that moved that around. If you look back to the trend line prior to Q4, the number in 1Q is more in line with that trend. In general, the 1Q number is a pretty good run rate absent any acquisition activity, which would obviously impact where straight-line goes from here given that we are booking GAAP cap rates in excess of our cash cap rates. Caitlin Burrows: Okay. Operator: Thank you. It appears we have no further questions at this time. I will turn the call over to Peter M. Mavoides for any additional or closing remarks. Peter M. Mavoides: Great. Thank you all for your participation in the call today and for your questions. We look forward to seeing you at upcoming conferences, and have a great day. Operator: This concludes today’s program. Thank you for your participation, and you may disconnect at any time.
Operator: This time, we are gathering additional participants and should be on the way shortly. We appreciate your patience and ask that you continue to hold. Good day, and welcome to the Blackstone Inc. first quarter 2026 investor call. Today’s conference is being recorded. At this time, participants are in a listen-only mode. If you would like to ask a question, please signal by pressing star one. If you are using a speakerphone, please make sure your mute function is turned off. At this time, I would like to turn the call over to Weston Tucker, Head of Shareholder Relations. Please go ahead. Weston M. Tucker: Great. Thank you, Katie, and good morning, and welcome to Blackstone Inc.’s first quarter conference call. Joining today are Stephen Allen Schwarzman, Chairman and CEO; Jonathan D. Gray, President and Chief Operating Officer; and Michael S. Chae, Vice Chairman and Chief Financial Officer. Earlier this morning, we issued a press release and slide presentation, which are available on our website. We expect to file our 10-Q report in a few weeks. I would like to remind you that today’s call may include forward-looking statements which are uncertain and may differ from actual results materially. We do not undertake any duty to update these statements. For a discussion of some of the factors that could affect results, please see the Risk Factors section of our 10-Ks. We will also refer to non-GAAP measures, and you will find reconciliations in the press release on the Shareholders page of our website. Also note that nothing on this call constitutes an offer to sell or a solicitation of an offer to purchase an interest in any Blackstone Inc. fund. This audiocast is copyrighted material of Blackstone Inc. and may not be duplicated without consent. Quickly on results, we reported GAAP net income for the quarter of $13 billion. Distributable earnings were $1.8 billion, or $1.36 per common share, and we declared a dividend of $1.16 per share which will be paid to holders of record as of May 4, 2026. With that, I will turn the call over to Steve. Stephen Allen Schwarzman: Good morning, and thank you for joining our call. Blackstone Inc. reported outstanding results in the first quarter. Distributable earnings increased 25% year over year to $1.8 billion, as Weston mentioned, underpinned by 23% growth in fee-related earnings and a 26% increase in net realizations. Inflows reached $69 billion in the first quarter and nearly $250 billion over the last twelve months, reflecting broad-based strength across our fundraising channels. Total assets under management grew 12% year over year to a new record level of more than $1.3 trillion. Most importantly, nearly all of our flagship strategies reported positive appreciation in the quarter compared to declines in major equity and credit indices, led by exceptional strength in infrastructure. We achieved these results amid a volatile market backdrop which was impacted by geopolitical turbulence including the war in Iran, and AI disruption fears. We have also been navigating an intensely negative campaign against the private credit sector despite the strong long-term returns generated in this area, resilient fund structures, and continued healthy demand from institutional investors and insurance companies. First, with respect to the market backdrop, since 2020 alone, we have experienced five market-moving events around this same time of year: the COVID shutdown in 2020; the Ukraine invasion in 2022; the regional banking crisis in 2023; the tariff announcements in 2025; and now the conflict in the Middle East, which triggered the largest quarterly increase in oil prices in over thirty-five years. In each of these prior events, having patience was the key. When the world ultimately normalized, risk appetite returned and investors refocused on fundamentals. To that end, what we see through the lens of our extensive global portfolio is an economy that has been highly resilient through the macro shocks of the past several years. The AI revolution—an extraordinary level of investment taking place in data centers, equipment, chips, energy infrastructure, and other related areas—continues to power economic growth, and we see no signs of that engine slowing down. At Blackstone Inc., we began thinking about the transformative potential of AI many years ago. I personally became active in the field in 2015, spending time with key industry figures that would define the AI revolution. Today, we believe Blackstone Inc. has become the largest investor in AI-related infrastructure in the world, and we have a front-row seat to the remarkable advancements underway in this ecosystem. In 2021, well before ChatGPT arrived, we privatized QTS, which would become the cornerstone of our data center strategy. Our total portfolio now consists of over $150 billion of data centers globally, including facilities under construction, and it continues to grow rapidly, with an additional $160 billion in prospective pipeline development. In addition to developing data centers, two weeks ago, we filed to launch a new public company that will acquire stabilized, newly constructed data centers leveraging our deep expertise in this area. We have also become one of the largest investors in the modernization and growth of the U.S. electric grid, given the rising demand for energy, including to power data centers. Specifically, we are the most active private investor in the utility sector over the past several years. Our portfolio also includes the longest cross-country network of natural gas pipelines in the U.S., with this resource expected to account for approximately half of data center power generation within the next five years. Additionally, we are major providers of private credit to energy companies. Alongside our expansive platforms in digital and energy infrastructure, we have also invested in several of the leading innovators driving the AI revolution itself, such as Anthropic and OpenAI, primarily through our wealth platform. In addition to these winning areas, we expect AI to catalyze new opportunities across other Blackstone Inc. business lines such as life sciences, where we believe AI will accelerate advancements in biomedical research. At the same time, the firm has significant exposure to physical assets which we believe are well insulated from disruption and benefit from their own positive tailwinds, including logistics, residential real estate, transportation and communications infrastructure, and many forms of asset-based credit. We also own fast-growing franchise businesses that are effectively royalty streams on physical assets, alongside a significant portfolio in the health care and industrial sectors. Overall, we believe Blackstone Inc. is extraordinarily well positioned for an AI-enabled future. Of course, some sectors and companies will see disruption. Software in particular has come into focus as an at-risk area and we expect the range of outcomes here. The sector will have to adapt to AI, and there will be winners and losers, with mission-critical platforms likely to be more resilient. As technology moats narrow, advantages will increasingly come from proprietary data, deep workflow knowledge, customer trust, being embedded in systems of record, and the speed and strength of execution. At Blackstone Inc., we will continue to drive preparations in our own portfolio to help our companies address and incorporate these innovations. Turning to private credit, where it is worthwhile to separate fact from fiction. External assertions have ranged from the sector posing systemic risk to the prospect of significant losses of investor capital. These assertions and their dissemination have negatively impacted capital flows in the wealth channel to private credit strategies including to our flagship vehicle in the space, BCRED. Despite the external noise, our institutional and insurance clients—representing 75% of our credit platform AUM—have continued to commit large-scale capital to the asset class. Of note, BDCs and credit interval funds with redemption features represent less than 10% of the U.S. non-investment-grade credit markets. Meanwhile, the Treasury Secretary, leaders of the Federal Reserve and the SEC, and the heads of numerous financial institutions have now acknowledged they do not see systemic risk from private credit. The key question is whether private credit is a good product for investors and can it continue to deliver premium to liquid credit over time. At Blackstone Inc., we have generated 9.4% net returns annually in our non-investment-grade private credit strategies since inception nearly twenty years ago—roughly double the return of the leveraged loan market. This track record crosses market and economic cycles, periods of high and low interest rates, and multiple credit default cycles. We believe we are moving toward a period of lower base rates once we work through the impact of the Iran war. And we also expect defaults to move higher from historic lows, as we have stated previously. But we have designed our funds with these cycles in mind, with low fund leverage, high current income generation, and the equivalent of meaningful reserves for future potential losses. We remain highly confident in our ability to continue to achieve a premium return to liquid markets over time. Meanwhile, our overall credit platform is expanding significantly, including to the investment-grade private credit area which Jonathan will discuss further. Performance and innovation have been the foundation of the outstanding results we have achieved in credit. As with every business at Blackstone Inc., we believe they will continue to drive our growth in credit going forward. In closing, the firm remains laser focused on delivering for our investors in these dynamic markets. We have established leading businesses across virtually every part of the alternatives industry, with over 90 distinct investment strategies providing a unique platform for future growth and profitability. Our people are more innovative than ever, and we are relentlessly pursuing new markets and asset classes. We remain steadfast in our mission to be the best in the world at whatever we do, and we have no intention of slowing down. I will now turn the call over to Jonathan. Jonathan D. Gray: Thank you, Steve, and good morning, everyone. The outstanding results we achieved in difficult markets are a testament to the breadth of our platform and the power of our brand. Blackstone Inc. is an all-weather firm. Meanwhile, multiple pillars of strength are driving us forward. Our institutional business is thriving, our credit platform is expanding despite the market noise, and our private wealth business continues to shine. Starting with our institutional business, which remains the bedrock of our firm, AUM in this channel is now approximately $715 billion, up more than 50% in the last five years, and we are seeing powerful momentum today across numerous areas. Our dedicated infrastructure platform grew 41% year over year to $84 billion, underpinned by exceptional investment performance. The commingled BIP strategy has generated 19% net returns annually since inception seven years ago versus our original target of 10% to 12%. Data centers and energy infrastructure continue to be the largest drivers of gains in this area, as well as for the firm overall. As the AI revolution accelerates, we see a profound shift underway toward hard assets, and having one of the largest infrastructure platforms alongside the largest real estate business in the world should be quite favorable for our investors. Sticking with our open-ended strategies, our multi-asset investing segment, BXMA, crossed the $100 billion milestone in the first quarter, up 15% year over year—its fastest organic growth in nearly twelve years. BXMA delivered its twenty-fourth consecutive quarter of positive returns in its largest strategy in Q1, despite the market downdraft. In our institutional drawdown area, we are raising a new cycle of funds across a number of highly successful and differentiated strategies, most of which we expect to be significantly larger than predecessor vintages. In life sciences, our new flagship, BXLS VI, hit its hard cap in the first quarter, raising $6.3 billion—an industry record and nearly 40% larger than the prior vintage—on the back of 18% net annual returns in the prior funds since inception. The diversity of the sources of capital was remarkable, including from pensions, sovereign wealth funds, foundations and endowments, family offices, insurance clients, and the wealth channel, and 50% of total capital came from outside the United States. This outcome exemplifies the breadth and power of the firm’s fundraising engine. In corporate private equity, we have raised nearly $12 billion to date for our new Asia flagship, including April closings, and we are approaching its $13 billion hard cap, compared to approximately $6 billion for the previous vintage. In secondaries, we raised an additional $6 billion in the first quarter for our latest private equity flagship, bringing it to $11 billion to date—halfway to our target of at least the size of its $22 billion predecessor. The secondaries platform, like BXMA, crossed over the $100 billion milestone in the first quarter. Post quarter-end, we closed an initial $1.7 billion for our fifth private equity energy transition flagship, which we expect to be substantially larger than the prior $5.6 billion vintage. Finally, in credit, we held a final close for our latest opportunistic fund, OSP V, in the first quarter, which hit its cap and was meaningfully oversubscribed, reaching over $10 billion of investable capital—one of the largest institutional credit fundraises in our history. This success in fundraising is in sharp contrast to what one reads regularly in the press about weak institutional demand for private market strategies. Again, what matters is performance. Our opportunistic credit strategy has achieved 13% net returns annually since inception nearly twenty years ago. Stepping back for a moment on our credit business, which continues to deliver strong results amid the noise, we now manage $536 billion of total assets across corporate and real estate credit, up 15% year over year, including $40 billion of inflows in the first quarter. The BXC&I segment specifically grew 18% year over year, and Q1 represented one of our best quarters of fundraising from institutions and insurance clients on record. The foundation of our growth in credit is innovation, which is powering our expansion beyond non-investment-grade strategies to many forms of investment-grade private credit. In Q1, our investment-grade private credit platform grew 23% year over year to approximately $130 billion. We are becoming a key capital provider for the real economy, including infrastructure, residential and consumer finance, commercial finance, and aircraft leasing. The opportunity here is enormous. The need for capital to build out AI infrastructure exceeds the capacity of public markets. For our investors, our direct-to-borrower model is designed to produce a durable premium to comparably rated liquid credits by eliminating distribution costs while delivering borrowers greater certainty. Our model generated nearly 180 basis points of excess spread on credits we placed or originated over the last twelve months for our private investment-grade-focused limited partners. In the insurance channel overall, our open-architecture, multi-client approach continues to resonate, with AUM growing 18% year over year to $280 billion—up fourfold in the past five years. In our non-investment-grade strategies, we continue to see strong demand, as I mentioned, underpinned by our institutional clients. That said, we have seen demand slow in the individual investor channel, as Steve noted, specifically for BCRED. In Q1, BCRED’s gross sales were $1.9 billion, a solid but decelerating number, while repurchases increased, resulting in net outflows for BCRED of $1.4 billion in the quarter. As we saw with BREIT, however, we believe what ultimately matters is long-term performance and delivering a premium to liquid markets. BCRED has generated 9.4% net returns annually since inception over five years ago in its largest share class—nearly 60% higher than the leveraged loan index—through periods of both high and low interest rates. On a year-to-date basis, BCRED protected investor capital against the backdrop of widening spreads and declines in the public credit indices. It did so despite taking significant loss reserves. The portfolio now carries a weighted average mark of 96.4, including the bottom 5% of loans at less than $0.70. Meanwhile, BCRED’s borrowers reported low double-digit EBITDA growth for the most recent twelve-month period, while interest coverage has improved by approximately 40% over the past two years to 2.2x as rates have declined and earnings have grown. Overall, our private wealth platform continued to shine in Q1. Our AUM in the channel increased 14% year over year to $310 billion and is up nearly threefold in the past five years, powered by our performance and brand. As one illustration of our differentiation in this channel, in a recent survey of financial advisers by Bank of America’s equity research team, Blackstone Inc. ranked number one in terms of brand quality for the fourth time in a row, with a score that was four times higher than our nearest competitor. Our total sales in private wealth were $10 billion in Q1, including $7 billion for the perpetual strategies. BXP led the way with $2.5 billion raised and has achieved a remarkable 18% annualized net return in its largest share class, lifting NAV to $21 billion in only nine quarters. Our infrastructure vehicle in private wealth, BX Infra, saw its best quarter of fundraising since launch at approximately $900 million, bringing NAV to nearly $5 billion in just five quarters. BREIT, our largest private wealth vehicle by NAV, raised $1.2 billion in the quarter, up 44% year over year to the highest level in three years. Meanwhile, repurchases fell 41% over the same period, leading to positive net inflows for each of the past two months. BREIT has generated a 9.3% net return for its largest share class since inception over nine years ago—60% above the public REIT index—including positive returns each of the past fifteen months. The vehicle’s portfolio positioning, including significant exposure to data centers—now at 23%—has enabled BREIT to navigate an extremely challenging period for real estate markets and deliver a highly differentiated experience for investors. Looking forward, we remain very optimistic about our prospects in the vast and underpenetrated private wealth channel. Our innovation is accelerating, and we have a multitude of products in the pipeline, including a new perpetual multi-strategy product targeting more liquid exposures called DXHF. This vehicle will leverage the capabilities of the BXMA business and is another important building block alongside our flagship private wealth vehicles in real estate, private equity, credit, and infrastructure, enabling us to offer the full spectrum of these asset classes to individual investors. We plan to bring a number of multi-asset strategies to market over time, including through our strategic alliance with Wellington and Vanguard. Meanwhile, we are seeing positive developments in the defined contribution channel, with the regulatory rulemaking process well underway. Overall, there is huge runway before us in private wealth. In closing, as we demonstrated again in Q1, this firm is built to deliver for investors through good times and challenging ones. We believe we remain tremendously well positioned to navigate the road ahead, whatever it may bring. And with that, I will turn things over to Michael. Michael S. Chae: Thanks, Jonathan, and good morning, everyone. In the first quarter, the firm delivered 20% plus year-over-year growth across fee revenues, fee-related earnings, net realizations, and distributable earnings, while at the same time, our funds reported resilient investment performance—all against a backdrop of significant turbulence in the external environment. This broad-based strength highlights the exceptional balance and durability of our business. Starting with results, fee-related earnings grew 23% year over year to $1.5 billion, or $1.26 per share, representing one of the three best quarters of FRE in our history and the best outside of a calendar Q4. Fee revenues increased 20% year over year to $2.6 billion driven by strong growth in both total management fees and fee-related performance revenues. Total management fees reached a record $2.1 billion, up 13% year over year, underpinned by double-digit growth in base management fees across three of our four segments, including 14% for private equity, 15% for credit & insurance, and 21% for BXMA. In real estate, base management fees declined moderately on a year-over-year basis in Q1, in line with the trajectory we previously outlined, due to harvesting activity in our opportunistic funds and headwinds in our institutional Core+ platform. At the same time, transaction and advisory fees for the firm nearly doubled year over year to $212 million, with a record quarter for our capital markets business. It is important to note that we generate these fees utilizing minimal capital. As our franchise continues to scale, including in infrastructure and investment-grade private credit, we expect continued strength in this revenue stream. Fee-related performance revenues were $488 million in Q1, up 66% year over year, powered by a fourfold increase in these revenues at BREIT and a nearly 2.5x increase at BXPE, alongside contributions from BCRED, BXMPRA, and other perpetual strategies. Distributable earnings increased 25% year over year to $1.8 billion in the first quarter, or $1.36 per share. In addition to robust FRE, net realizations totaled $448 million in the quarter, up 26% year over year. Gross performance revenues grew 70% year over year to $780 million, reflecting the highest level for a calendar Q1 in four years. Principal investment income was lower on a year-over-year basis, with the prior year including the sale of our internally developed Bistro software asset. Realization activity in the first quarter included numerous monetizations in the public portfolio, the sale to a strategic buyer of an aerospace and defense company, the recapitalization of a housing finance platform in India, and the sales of certain other energy positions. This disposition activity reflected a transaction environment that was strengthening in the latter part of 2025, entering 2026, allowing us to execute four IPOs last year. The significant recent market volatility and broader uncertainty has had the effect of pushing out exit pipelines and slowing realization activity in the near term. That said, if there is a durable resolution of the conflict in the Middle East, we would expect robust activity in the second half of the year. Turning to investment performance, our funds delivered resilient returns in the first quarter, powered by the large-scale portfolio we have been building across the AI and energy ecosystem. Infrastructure led the way again in Q1 with 7.8% appreciation in the quarter to 25% appreciation for the last twelve months. Gains in the quarter were broad-based, with particular strength in data centers and in the energy portfolio. The corporate private equity funds appreciated 3.2% in the first quarter and 16% for the last twelve months, with Q1 returns also powered by energy, both the private and public holdings, along with Medline’s strong post-IPO performance. These gains were partly offset by material declines in our software portfolio in the context of the significant contraction in software market multiples. Overall, our private equity operating companies have continued to report healthy underlying fundamentals, with revenue growth increasing sequentially in Q1 to 10% year over year. In credit, our non-investment-grade private credit strategy reported a gross return of 0.6% in the first quarter, and 9% for the last twelve months, reflecting solid underlying credit performance across the vast majority of our holdings. In Q1, certain markdowns in the portfolio were more than offset by continuing substantial current income. At the same time, in real estate credit, our business generated healthy performance again in the first quarter, with the non-investment-grade funds appreciating 2.3% and over 14% for the last twelve months. Meanwhile, BXMA reported a gross return for the Absolute Return Composite of 1.7% in the first quarter, and over 12% for the last twelve months. BXMA has achieved positive composite returns in each of the last twenty-four quarters, as Jonathan noted, notwithstanding multiple significant market drawdowns during this period. BXMA delivered this positive Q1 return in a quarter where public equities, liquid fixed income, and the HFRX hedge fund index were all negative. Indeed, since the start of 2021, BXMA has generated a 50% higher cumulative return than the 60/40 portfolio, equating to approximately 250 basis points on an annualized basis. This performance powered BXMA’s sixth consecutive quarter of double-digit year-over-year growth in AUM in Q1. Finally, in real estate, overall values were stable in the first quarter. Significant strength in data centers was offset by declines in life sciences office, along with our public holdings in India in the context of a 15% decline in the country’s stock market in Q1. The BREP opportunistic funds reported modest depreciation in the first quarter. Outside of the India public portfolio, BREP values were stable. The Core+ funds appreciated 0.8% in the quarter, driven by BREIT’s strong positive performance. I would highlight three important factors with respect to the positioning of our real estate business. First, funds across our global platform—including most recent vintages of our BREP Global and Asia strategies, our BPP U.S. institutional Core+ vehicle, and, of course, BREIT—have significant exposure to a rapidly growing data center platform portfolio. Second, in logistics, our largest exposure in real estate, as you have heard from us and other industry participants recently, we are seeing very positive momentum in leasing activity, including a record forward pipeline for our U.S. platform. Third, we expect the collapse of new supply will be very supportive of fundamentals over time across major sectors, including logistics and multifamily, where industry forecasts call for deliveries this year to be at their lowest levels in twelve years. Overall for the firm, strong investment performance lifted the net accrued performance revenue on the balance sheet—our store of value—up 9% year over year to $7 billion, the highest level in three and a half years, equating to $5.69 per share. Meanwhile, performance-revenue-eligible AUM “in the ground” expanded to a record $635 billion in the first quarter, also up 9% year over year. The firm’s significant embedded earnings power continues to build. In closing, it has certainly been a complex operating environment broadly and for the firm, but our balance provides resiliency in these dynamic markets and creates a strong foundation for future growth. We believe we remain the partner of choice in private markets for investors around the world. And we have greater investment firepower than ever before to capitalize on the many opportunities before us. Thank you for joining today’s call. We will now open the call for questions. Operator: Thank you. We ask you limit yourself to one question to allow as many callers to join the queue as possible. We will take our first question from Craig Siegenthaler with Bank of America. Craig William Siegenthaler: Thanks. Good morning, everyone. And Steve, John, hope everyone is doing well. Our question is on the IPO pipeline. You are sticking with your expectation for a record year of IPO activity despite the conflict in Iran. So what is driving the record IPO outlook? Because I think some of your peers are going to talk about a more muted 2026 in their upcoming calls. And do you expect that to translate into sizable realized performance fees in the second half of this year, or is that more of a 2027 event? Jonathan D. Gray: So, Craig, I think it reflects the diversity of our firm and really our strong presence in the physical world and, frankly, around AI infrastructure. So we saw in the back half of last year we took two companies public in the U.S., Allegion and Medline. Those stocks are up 160%. So if you bring good companies that have real earnings momentum, the market wants that. So I would say it breaks into different buckets. It is AI beneficiary companies—obviously digital infrastructure, some of the tech companies that are going to go public this year. Then I would say the AI-unaffected companies—Medline would fall into that bucket. Those areas, investors, I think, have a lot of interest. Where there will be less activity will be in professional services, information services, software—the white-collar world. But, again, given where we are exposed across our firm, we think we will be able to get a number of IPOs done. So I do think it is really a function of how people perceive this business. In terms of translating, I think you made the right point on timing: these things get public, then over time, you sell. Interestingly, in the case of Allegion and Medline, both have performed so well we have been able to do secondaries relatively quickly. But it is on the path towards liquidity. And we would say once this war resolves and the markets stabilize a bit here, I do think we will see an acceleration. But I think our mix of businesses is favorable—maybe a little more favorable than others in this IPO regard. Michael S. Chae: Hey, Craig. It is Michael. I would also just add that even today, partly based on the IPO activity that we have undertaken recently, if you look at our net accrued performance revenue receivable, within the corporate private equity portion of that, nearly a third is public. And so that puts us in position to more readily monetize these positions if we like the value and markets are right over time. And then on top of that, as Jonathan mentioned, subsequent new issue activity, assuming markets hold up. Operator: Thank you. We will take our next question from Michael Cyprys with Morgan Stanley. Michael J. Cyprys: Hey. Good morning. Thanks for taking the question. So with AI powering strong returns across Blackstone Inc.’s complex, curious where you see that showing up in growth and fundraising results. And as you look out across the business today, what do you see as the biggest drivers of growth over the next year versus the next three to five years, as you pursue new markets and asset classes? Jonathan D. Gray: So, Michael, I would say it is broad based in terms of the impact of AI. Certainly, our infrastructure business, both for institutional clients and individual investors, is benefiting. Because there you have two very big engines: the data centers as well as what is happening in energy. I think as it relates to our energy transition business, which we talked about in the prepared remarks, given the performance there and the need for energy for not only data centers but for robotics and autonomous vehicles and reindustrialization, there you will definitely see strength. In real estate, it is becoming a bigger and bigger part, and as you have seen in BREIT, it has clearly been a big beneficiary, and it allowed us to power through this difficult period of time. But even in our flagship U.S. Core+ fund, it has become a bigger share, and now beginning in some of our opportunistic vehicles. So there, I think it will start to have, over time, a very positive impact in terms of returns. And then on the credit front, asset-based finance is an area where credit investors are very focused. They have concerns about what is going to happen with various corporate credits. They are saying, I am interested in asset-based finance, and again, AI infrastructure ties into that as well. So I would just say that it is broad based. I would also point out, by the way, in our private equity vehicle for wealth, a similar story there where we own some of the big LLMs and tech companies—three big companies likely to go public—and we also have a bunch of AI infrastructure. So when you look across our firm, this strategic decision that we made to go long AI infrastructure, I think, is going to be the single most important thing for the performance of our clients and ultimately the growth of our business. It does not happen overnight, but you are beginning to see it move into our results. And I think it will really differentiate things, lead to inflows, and most importantly, lead to these positive returns for our customers. Michael S. Chae: And, Mike, I would just add broadly, if you step way back, being in a position where we think we are probably the leading large-scale private capital provider to these areas around the ecosystem that need capital so badly to transform the world—that puts us in a really great position. That is sort of the big picture overlay, I would say, in the coming years. Operator: Thank you. We will take our next question from Bart Jarski with RBC Capital Markets. Bart Jarski: Great. Thanks, and good morning, everyone. I wanted to ask around private wealth, and you have a business plan to expand FTE to 450 by the end of this year. In the current environment, are you accelerating that business plan? Are you dialing it back? How is that evolving as you go through the private wealth channel? Jonathan D. Gray: We continue to move in wealth, I would say, at a fairly rapid pace. Joan Solitar and her team have done a terrific job expanding who we are serving within the United States, but broadly around the globe. Canada for us is an exciting market. Japan, I think over time, will grow more in Europe, Middle East, Asia. There is a lot of opportunity. Wealth is so underpenetrated relative to what we see in the institutional world, which is, call it, a third or more allocated to alternatives; individual investors are low single digits, even very wealthy ones. So we see this as a big TAM. And then, as I referenced, we have a pretty unique asset in our brand, recognition of who Blackstone Inc. is, the fact that people trust us as a steward of capital. Then we have this range of offerings—so for investors who want private equity or credit or real estate or infrastructure, now hedge funds—and then these multi-asset areas where we can offer a holistic solution to investors we think are very special. So we continue to invest around the globe, expanding our team, more boots on the ground, and delivering this product. And as customers have good experiences, like we experienced with institutional investors, they start with one product and then start to expand. So this feels to us as an area that has a long runway. And interestingly, going through this moment in credit—we went through a moment, obviously, a few years ago in real estate—in showing that these products can deliver both in terms of their liquidity promises as well as their returns builds confidence with financial advisers and their underlying clients. So our confidence in this channel remains as strong as ever, and our positioning, we think, is quite unique. Operator: Thank you. We will take our next question from Alex Blostein with Goldman Sachs. Alexander Blostein: Good morning, everybody. Thank you. John, just to build on that last point, if you zoom out a bit, the wealth channel is clearly still growing, going through some growing pains. We see a quite significant reaction, not just for you guys, but for the whole space. So curious if you take a step back, what are the lessons learned from the recent experience, which obviously the industry is still going through, with respect to redemptions—in terms of how the products are sold, how they are packaged, how you are thinking about the minimums that will be appropriate for clients to have in order to come into some of these products—as you continue on this path of expanding the footprint there? Thanks. Jonathan D. Gray: Well, Alex, it is interesting. What has been more challenging is that some of the social media and press reporting is so different than the facts that we see. When you think about these products, they are sold not directly to individual investors; they are sold through financial advisers who are obviously sophisticated. There is incredible levels of disclosure when we are selling these products. If you look at BCRED, on the cover page, there are six bold highlighted lines talking about the liquidity limitations in the product. To me, it is not a surprise that we have more than 300,000 customers, and yet, we have not heard complaints from them that they do not understand that they are trading away some liquidity for higher returns. And I think you just have to look back at the BREIT experience. There was a lot of noise at the time. We said the products are working; they are protecting individual investors. And so when you look back in the fullness of time, you have a product that has been around almost nine and a half years. For one year, you had more limitations on liquidity. Instead of one month, it took you four months to get substantially all your money back. And in exchange for that, you produced a 60% premium annualized in returns. And that is the business. And so these caps on redemptions are not a bug; they are a feature of these products. If you are good in any of these products over a ten-year period, there will be a moment, a cycle. The key question is, are you offering a premium in exchange for giving up this liquidity? Have you properly disclosed this? So I feel very good about what we have done. I think, ultimately, the products will continue to produce this premium as they have in BREIT and BCRED. And I think these tests are helpful. I do not think it deters the long-term trend line, which is for individual investors to get the exposure, the higher returns, the diversification benefit, the opportunity to invest in some of the fastest-growing companies in the world, real estate and infrastructure. I think that all holds together. We are going to get through this like we have always gotten through these moments, and the products will continue to grow. Operator: Thank you. We will take our next question from Bill Katz with TD Cowen. William Raymond Katz: Okay. Thank you very much. I want to mix up my question a little bit, given the first set of questions. You seemed to spend a lot of time this quarter in particular talking about BXMA. I was wondering if you could maybe step back and talk a little bit about what you are seeing in terms of institutional allocations, and then within the wealth segment, how are financial advisers repositioning from BCRED? Where do you see the demand going, and would that also include the hedge fund complex at large? Thank you. Jonathan D. Gray: So, Bill, you have been a follower of us for a long time. You know we have not talked a lot about our absolute return business because it had been pretty flat for a long time. It had protected investor capital, but since we brought Joe Dowling on, the business has really inflected in terms of performance. We have delivered, I think, 250 basis points a year of premium here since Joe joined us more than five years ago. We have had twenty-four quarters in a row of positive performance, as we talked about, in our flagship strategy. And that, of course, attracts investors’ attention. If you can deliver a downside-protected vehicle that delivers a premium to 60/40 and you have liquidity, that is a powerful combination. And at the same time, I think investors are recognizing in a world with a lot of volatility, to be able to protect their capital in something that is more liquid is very valuable. And I do believe as base rates have come down, and I think over time will come down further, these products become more and more important. So I would say the receptivity in the institutional meetings I have has really picked up. I would guess, in the individual channel, we will see more and more receptivity. The multi-managers have done quite well. I think the product offerings we will bring will be attractive over time to individual investors as well. So this is an area of the firm that, as I noted, has been pretty flat but is now growing again—up 15% year on year—which is remarkable. And I think, again, performance drives everything for us. What they have done in BXMA bodes very well for the future of that business. Operator: Thank you. We will take our next question from Glenn Schorr with Evercore. Glenn Paul Schorr: No problem. So I wanted to ask on credit and the different moving ins and outs on fees. So maybe you could help separate the headwinds and tailwinds to help us talk about the future. We saw a drop in credit fee-paying AUM during the quarter and the resulting impact on management fees. Credit deployment was down in the quarter, but I am wondering how much of this is timing. You raised a boatload of institutional money between last quarter and this quarter on the institutional side in private credit. Maybe talk about the timing of deployment and how we should think about that translating to management fees. I appreciate it. Michael S. Chae: Certainly. Yes, there are a number of moving parts. Fee AUM was up 14% year over year in the quarter. We saw $37 billion of inflows. The platform is broadening in scale and diversity. There obviously is some near-term deceleration in the BDC area. But overall, I think the breadth of the platform is the story over time. As part of that, our asset-based finance area, which we call ABF/IGPC, was up 29% year over year in fee-earning AUM. We do have substantial dry powder not earning management fees—$74 billion of dry powder in the credit & insurance area. And the vast majority of that earns fees upon investment, so you will see that brought in over time. Those are some of the key drivers. Quarter over quarter, there was a sequential decline of 1%. Again, there are puts and takes, but it was mostly attributable to a one-time benefit in the fourth quarter related to some insurance partnerships and an annual adjustment there. So lots of moving parts. The direction of travel, we think, over the medium and long term is very good. You will see in the very near term some deceleration, but the breadth of the platform across strategies and, as you are pointing out, this building dry powder that will earn fees as invested make us continue to be very positive over time. Jonathan D. Gray: I would just add to that, Glenn, it is striking the difference in terms of what we have seen from the institutional and insurance clients relative to the wealth channel to all the noise about private credit. It is as sharp a contrast as I have seen, and I think it does bode very well for our credit platform. Glenn Paul Schorr: I wonder if I could ask just a very quick follow-up. If software helps—I should say AI helps more than it hurts—software spreads have widened a ton in credit. I am wondering how you think about balancing the opportunity versus too much concentration risk, while things are wide like this? Jonathan D. Gray: Look, I think when you have these moments where markets gap out—it could be on the non-investment-grade side, frankly it could be on the investment-grade side in the fund finance areas—people get nervous. That does create opportunity. Interestingly, the market has held up much better than the headlines. The leveraged loan market at this point has recovered quite a bit for everything really but the software names. I think there will probably be some in technology. I do think there is going to be a heterogeneous outcome for different software companies. So you have to be thoughtful in terms of where you focus. But overall, I think it is attractive. And the fact that we raised more than $10 billion of investable capital for our OSP fund, I think that will prove to be very well timed. So if we see big trade-offs or subsectors where we have differentiated insights, I do think we will be able to deploy capital into that. We have done a few things, but it has been interesting how resilient this market has been despite the headlines. Operator: Thank you. We will take our next question from Dan Fannon with Jefferies. Daniel Thomas Fannon: Thanks. Good morning. Last quarter, you talked about strong management fee growth for 2026. Based on the previous comments, it sounds like credit is slowing a bit here as we think about the near term. But maybe if you could talk more broadly about the other large segments as we think about the rest of the year in management fee growth. Michael S. Chae: Sure, Dan. Stepping back, if you look at the first quarter, three of our four business segments—outside real estate—grew combined management fees 15% year over year. So that is carrying forward the healthy momentum from 2025. In terms of some of the building blocks of that and the outlook: on the positive side, we talked about the new drawdown fundraising cycle that is underway. We will see an embedded upward ramp from these, mostly later in the year. SP X (our Strategic Partners fund) was activated in late Q1 and will continue to fundraise; our third Asia private equity fund and our energy transition fund we expect to activate in the near term. Now, those will all have fee holidays, so the impact will really be in the second half of the year, especially in the fourth quarter. You will continue to see the seasoning and expansion of our perpetual strategies overall—it is nearly half of our firm-wide PE AUM now. The power of BXP scaling—$21 billion in NAV in two years, more than doubling year over year. BX Infra has emerged—about $5 billion, up 3x year over year. And, of course, infrastructure overall—up 41% year over year—including BX Infra and related new products. As we discussed, BXMA obviously has terrific momentum. On the caveat side, we just talked about the deceleration in credit, notwithstanding many of the positives within that platform. And then, as we referenced last quarter, some slowing in our real estate segment, reflecting two things: harvest activity in our opportunistic funds and some headwinds in BPP, as I mentioned. Those are the key factors and sort of the architecture of the year. Operator: Thank you. We will take our next question from Ken Worthington with JPMorgan. Kenneth Brooks Worthington: Hi, good morning, and thanks for taking the question. As we think about the Middle East conflict and fundraising from that geographic customer segment, how big have Middle Eastern clients been historically to Blackstone Inc.? And do you see the conflict impacting fundraising from these clients in the near to intermediate term? And on the other side, does the conflict change where, what, and how big investing looks in the Middle East for Blackstone Inc.? Jonathan D. Gray: Thank you, Ken. I would say we have seen remarkable resilience from those clients so far in terms of continuing to make commitments to our vehicles. It is possible some of them may make some different choices in terms of reinvesting at home for a period of time, but right now, we have continued to see strong interest. I would say in terms of our platform, as you know, we are very diverse. There is no country outside the United States that represents more than low single digits to our overall firm. It is really the way Steve built the firm, and I think it provides real resilience to the overall firm as well. In terms of those countries, I think it is a mistake to bet against the Middle East—either the GCC countries or Israel. These countries are really embracing capitalism, investment, growth, and I think once this conflict is resolved, that pattern will be restored. We think these countries will continue to be quite strong. Reflecting that, we made two commitments during this war period—one in Abu Dhabi to help build a payments company, and one in Dubai in the aerospace area, aircraft leasing. So we continue to be believers in that part of the world, and we think this will prove to be temporal. Operator: Thank you. We will take our next question from Brian Bedell with Deutsche Bank. Brian Bedell: Great. Thanks. Thanks for taking my question. Within the retail wealth product space, just in terms of what you are hearing from financial advisers and the composition of the clients that are asking for redemption requests: I think for BREIT, it was a minority of customers, and I suspect that is the case for BCRED as well, as most people understand the long-term viability of the products. But if you could just characterize what you are hearing from that phase, and to what extent you think it is just the risk-off environment that might impact flows in the near term. And then, given your brand strength, do you expect to actually gain market share in this channel, given not just the brand and performance, but also the breadth of product? Jonathan D. Gray: Brian, I would start with your last question on market share. I do believe that when these shakeouts happen—we saw this in the real estate area—I think the number of competitors has diminished, and I think it positions BREIT very well as real estate starts to pick up in an upcycle. And the way we managed through that proved important. I think there is a likelihood as well here in credit that the combination of how people manage transparency, liquidity, valuations, returns can be beneficial also. So I do think we could see a changing of the guard or winnowing a little bit through this process, so yes to that. On the profile of the redeemers: you are exactly right. Contrary to this popular idea that it is small investors leading the charge, it is actually a smaller number of large investors who are double the size, on average, of the typical account in these vehicles. They are the ones—we saw this if you went back to BREIT, and it is the same story here with BCRED. The great mass, by number, of smaller investors tends to stick with the product over a long period of time. It is the bigger boulders, as opposed to the pebbles, where you get more movement in terms of redemptions. And that has proven to be similar again—different than the popular perception. Operator: Thank you. We will take our next question from Brian McKenna with Citizens. Brian McKenna: Okay, great. Thanks. We have seen time and time again that capital and liquidity become a lot more valuable during periods of volatility. I appreciate the benefits of this from a deployment standpoint. But from a business perspective, can you remind us why you operate a capital-light model? And what are some of the strategic and competitive advantages of having this kind of balance sheet during all parts of the cycle—from a business growth perspective and your ability to always be in a position to lean into longer growth opportunities across the business? Jonathan D. Gray: We appreciate that question because running capital light can be a harder business model—you have to raise money from third parties as opposed to borrowing large amounts of money and earning a spread on that. But we do believe that, given what can happen when the environment changes and what the regulatory climate can look like, being an investment manager gives us the greatest flexibility. Operating a business with virtually no net debt and no insurance liabilities means that if we need to use capital to do something at the firm level, it is available. There is no moment where we are facing any sort of liquidity crisis. As you know, we pay out basically 100% of our earnings between our dividends and our stock purchases. We like this capital-light model. We like being an open-architecture third-party manager for our investors. We think that is the right long-term approach. And particularly when you get to moments of volatility, you are not going to see redemption risk at a firm level. There is no credit risk at a firm level. We think this is an all-weather business model. It is why we have been through a lot of volatility, particularly in the last six years, and Blackstone Inc. keeps powering ahead. So we are going to continue to be a capital-light investment manager, focusing on delivering performance—that is what really matters—building our brand, building this reservoir of trust. And if we do that, you will continue to see very strong capital flows and strong financial performance. That remains the hallmark of our firm. Operator: Thank you. We will take our next question from Brennan Hawken with BMO Capital Markets. Brennan Hawken: Good morning, John. Good morning, Michael. A couple questions, a little more modeling oriented. Quarter-over-quarter base fee growth has slowed in recent quarters. We understand you have several large funds on fee holidays, but can you help us get an idea about what that might look like over time as we progress through the year and make our way closer to those big funds coming off the holiday? And then, also, a second component—stock-based comp ticked up a bit here. How should we think about stock-based comp over the course of the year and next couple of years? Thanks. Michael S. Chae: Sure. Thank you, Brennan. I will take the second one first. On stock-based comp, if you step back, as Jonathan just hit it, if you look over the long term at our capital return policy—nearly 100% of our cash earnings—and at the same time our approach around keeping our share count effectively flat, over the last eight years our share count has basically grown about 0.3% a year while our AUM has compounded about 14% per year. We like that relationship. There is seasonality to SBC growth over the course of the year. The rate of growth in the first quarter was below that of a year ago, which was sort of the preview that we gave. And I do think, for the full year, you will see that rate of growth end up being materially lower than the first quarter—materially lower. On base management fees for the course of the year, I gave some of the building blocks a couple questions ago. Sequentially, you are seeing—probably this quarter and next quarter—some more moderate growth across the firm. We expect that to accelerate in the latter part of the year in part based on those drawdown funds coming online and getting through their fee holidays, as well as continued momentum elsewhere, which I outlined. You do have these headwinds in the real estate area, and we think those will, in a sense, bottom out in the middle part of the year and also accelerate sequentially as we exit the year into the early part of next year. Brennan Hawken: Great. Thanks for taking my questions. Operator: Thank you. We will take our next question from Steven Chubak with Wolfe Research. Steven Joseph Chubak: I wanted to drill down into some of the comments on AI exposure. You spoke about sizable exposure to companies that are certainly well placed for AI transformation across utilities and data centers, and I know you cited a couple of other examples. At the same time, there are growing concerns around disintermediation risk. You cited the challenges facing the software sector, but the threat of AI admittedly extends beyond software. Was hoping you could speak to your process for how you are re-underwriting AI risk across your portfolios, and what are some of the actions you are taking to better position the book to navigate this looming threat? Jonathan D. Gray: I would start with acknowledging you are right. This does go beyond software. It includes, as I mentioned, information services, professional services—really a broader white-collar world. Our biggest exposure would be in software, and that is less than 7%, so pretty small as a percentage of the firm’s AUM. Nevertheless, we are quite focused on working with our companies to adapt to an AI-forward world. Many of these software companies have very valuable incumbency models that should enable them—if they become adroit with AI—to do quite well, and other companies are more exposed. Nevertheless, I think these management teams are capable, and many of them will shift to the new world. I think software will be very important sitting on top of these large language models, but the outcomes will be quite differentiated. So for us, working with our portfolio operations team and our AI experts with our portfolio companies is super important. As we think about deploying new capital, yes, you have to be thinking about what are the risks in this world and what are the multiples. If you look in the quarter, our biggest investments—and this really does not speak to a change, but just how deep we are in the physical world—the biggest investments we made in the quarter were a Spanish waste company, another data center company, a residential services business, and another business in the energy electrical equipment space. Our exposure in those areas is really going to pay off. And I think, by the way, interestingly, real estate—which has been the sleeping giant at Blackstone Inc. here—as investors pivot back to hard assets, as we get some calming after the war, and as the performance picks up along the lines Michael was talking about, particularly around logistics where we are seeing very favorable supply-demand fundamentals, I think that is an area where we could start to see an acceleration. But no question, today this is top of mind when we are investing capital, particularly in those white-collar affected areas. And with our existing portfolio companies, it gets a huge amount of focus. Steven Joseph Chubak: That is great. And, at the risk of breaching the one-question rule, I was hoping—at the risk of this not getting covered—if you could speak to the DOL and the provisional guidance that was offered on alts inclusion in 401(k)s. Jonathan D. Gray: Well, I think what is interesting in 401(k)s, which people do not fully realize, is that fiduciaries today can put private assets into 401(k) plans—defined contribution plans. What has really held it back, of course, is the long history of litigation. And so what you end up with is individuals who are not in a defined benefit plan end up getting no exposure to alternatives, and yet their colleagues who may have joined their company ten years earlier have a huge DB plan and a third of their assets in alternatives. We think it makes a ton of sense for there to be the benefits of diversification and returns—exposure to some of the fastest, most innovative companies in the world; exposure to real estate and infrastructure, which are mostly in the private market. What this DOL ruling—and it is still working its way through the system—does is start to establish a safe harbor, like annuities got a decade ago, so that a plan sponsor can put this in the mix. It will be a minority of assets but will give individual investors the opportunity to get this exposure. It is still a very regulated system between the sponsors, consultants, the ERISA standards. But I think this is a good development. It will take time, but we see interest here. This is an area that we think over time has a lot of potential. Operator: Thank you. We will take our next question from Arnaud Giblat with BNP Paribas. Arnaud Giblat: Yeah. Good morning. My question is regarding the CoreBridge–Equitable merger. I was wondering how this will affect your investment management partnership with CoreBridge. Are there risks to the assets, or is there perhaps a growth opportunity to grow the partnership through the merger? And also, what is your plan for your 12% stake in CoreBridge? Thank you. Jonathan D. Gray: We view this as an exciting opportunity for CoreBridge with their merger with Equitable. As it relates to our existing IMA with them, we have a contractual relationship where we are entitled to manage $92.5 billion of assets, so long as we meet certain performance thresholds. I think we are at around $80 billion today. We expect that will continue to grow. More importantly, we have delivered very strong performance for CoreBridge and its balance sheet. On average, across our insurance clients, as we mentioned, we have delivered a 180 basis point premium relative to comparably rated investment-grade credit. Our hope here is, as the joint balance sheet expands, that we can do similar things for Equitable. Obviously, we have not gotten into any of the details—it is early days and the merger has not been approved—but we would love to try to expand what we do for the combined company. Our base business remains, and we look at this as a potential opportunity to expand because we think we can continue to deliver these premiums for insurance policyholders on the Equitable side, but we will have to wait and see. On our stake, obviously now we are in a merger period. We are going to wait and see. We think CoreBridge represents very compelling value on the screen of where it trades today. This merger has to go through. We are long-term investors. We believe in the compounding in the combination of these companies. Ultimately, at some point—because we run a capital-light business—we will recycle that capital, but we do not expect that in the near term. Operator: Thank you. We will take our next question from Patrick Davitt with Autonomous Research. Michael Patrick Davitt: Hey, good morning, everyone. The market is still having a lot of trouble framing how to think about the refinance risk in the software loan portfolios. Given that it is still many years out and the loans are generally still performing really well, it feels like we are in a state of limbo. Could you better frame what options or levers your credit team has, if any, to proactively work with the backing sponsors well ahead of those maturities to help give some tangible outcomes that nip this concern in the bud preemptively? Michael S. Chae: Thank you. Jonathan D. Gray: It is interesting. If you look at our software exposure in BCRED, for instance, the average borrower put up $3 billion of equity. So they have a lot of incentives here to make these investments work. And as you said, Patrick, the performance of the companies has continued to be good. In fact, in our credit portfolio, our software businesses were the best-performing sector. I think when it comes to options, when you have years away, there are a lot of things that could happen. Right now, sentiment is quite negative. The market is going to see how these companies perform as AI continues to roll out. Given the low levels of leverage—using BCRED again as an example—these were 37% loan-to-value loans. In many cases, the EBITDA has grown quite substantially. So I think for those that are well performing, with this “wall of maturities,” people find a way, either through refinancing or extensions. These things tend to happen. I think the challenge is less around performing companies and more around if you have a business that is struggling—what do you do? That becomes harder, and those are the situations where we have taken meaningful marks in the portfolio. That, I think, is what happens. But generally, if performance continues, I think you will find a receptive market. It may take a bit of time. Right now, the uncertainty quotient is very high. Operator: Thank you. We will take our final question from Crispin Love with Piper Sandler. Crispin Love: Thank you. I appreciate you squeezing me in here. I just have a follow-up on the 401(k) question and the retail channel noise we have seen recently. How do you think that may impact the 401(k) opportunity longer term? 401(k)s definitely have less need for near-term liquidity, and private markets exposures may make sense here as you have articulated. But is it worth the risk and potential headaches for the alts, for the plan sponsors to get involved with a less sophisticated investor base compared to private wealth, given the pushback you would likely see from senators, headlines, etc.? Jonathan D. Gray: You made an important point, which is obviously near-term redemptions are not the focus in retirement savings. We think the rational argument—getting the benefit of long-term compounding from high-performing alternatives—is quite compelling. It may have, in some cases, raised some questions from some of the plan sponsors. But again, I think how this ultimately plays out: I do not believe you are going to see large losses of the kind that you read in the press coming from these private credit sponsors. If the products perform and we get through the redemption cycle again, I think people will see—like we did with BREIT—that these products are more resilient than the skeptics argue. As a result, that, combined with the nature of the long-term hold of the 401(k) vehicles, I think people will see these are quite beneficial. To me, the fact that we have this enormous institutional market—most of which is anchored by defined benefit plans for U.S. retirement workers—and then somehow that same worker who works for a different company today, or no longer works for a state that has a pension plan, is no longer entitled to a dollar of exposure—it just does not seem fair. It does not seem rational. So the key again will be showing people that these products are run in a responsible way and deliver premium performance. In the fullness of time, that is going to win the argument. Operator: Thank you. That will conclude our question and answer session. At this time, I would like to turn the call back over to Weston Tucker for any additional or closing remarks. Weston M. Tucker: Great. Thank you, everyone, for joining us today, and we look forward to following up after the call.
Operator: Ladies and gentlemen, thank you for standing by. At this time, I would like to welcome everyone to the ConnectOne Bancorp, Inc. first quarter 2026 earnings call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question and answer session. If you would like to ask a question during this time, please press star followed by the number 1 on your telephone keypad. If you would like to withdraw your question, again, press 1. I would now like to turn the conference over to Siya Vansia, Chief Brand and Innovation Officer. You may begin. Siya Vansia: Good morning, and welcome to today’s conference call to review ConnectOne Bancorp, Inc.’s results for the first quarter of 2026 and to update you on recent developments. On today’s conference call will be Frank Sorrentino, Chairman and Chief Executive Officer, and William Burns, Senior Executive Vice President and Chief Financial Officer. I would like to caution you that we may make forward-looking statements during today’s conference call that are subject to risks and uncertainties. Factors that may cause actual results to differ materially from expectations are detailed in our SEC filings. The forward-looking statements included in this conference call are only made as of the date of this call. The company is not obligated to publicly update or revise them. In addition, certain terms used in this call are non-GAAP financial measures, reconciliations of which are provided in the company’s earnings release and accompanying tables or schedules, which have been filed today on Form 8-K with the SEC and may also be accessed through the company’s website. I will now turn the call over to Frank Sorrentino. Frank, please go ahead. Frank Sorrentino: Thank you, Siya, and good morning, everyone. We kick off 2026 with strong momentum, firing on all cylinders as demonstrated by our results. Twelve months ago, we detailed our strategic objectives heading into the largest merger in our company’s history. I am pleased to report that we are not only delivering on those goals, we are exceeding initial expectations. Today, our franchise is stronger and better balanced. We diversified our client base and revenue streams, materially improved our deposit mix, including core and noninterest-bearing deposits, and diversified our loan portfolio. We scaled the balance sheet from under $10 billion to nearly $15 billion in assets, increased our market capitalization to over $1.4 billion, and built a valuable franchise, accelerating our presence across Long Island. Our geographic footprint now spans the entire New York City Metro Region and naturally extends to the growing South Florida market. We are positioned for a very strong start to 2026, and we are confident that momentum will continue for the year ahead. Turning quickly to our first quarter performance, we delivered loan growth, margin expansion, accelerating return metrics, and increased tangible book value per share. Reflecting our success and confidence in future performance, we opportunistically repurchased shares in the first quarter and increased our common dividend. William will provide more details regarding our financial performance this quarter and our continued confidence in further margin expansion for 2026. On the expense side, we remain highly disciplined as we continue to realize merger synergies and steadily return to best-in-class efficiency levels. To ensure we continue to operate as a top-tier efficient bank, this discipline is being further enhanced by our focus on optimizing all systems, products, and services, along with the thoughtful integration of AI across the organization. Taken together, these initiatives will drive continued improvement in our expense metrics going forward while also enhancing scalability as we continue to grow. Our first quarter credit quality remained solid. Net charge-offs declined to a recent low. Our nonaccrual loan ratio also decreased, while criticized and classified assets remained at historically low levels. However, as disclosed in our earnings release, delinquencies increased due to an isolated client relationship collateralized by 19 multifamily New York City rent-stabilized properties. The client, whom we are working closely with, has had a strong track record of payment performance spanning more than five years; significant portions of the credit remain fundamentally sound. While it may be too early to determine any financial impact, William, in a minute, will review with you the significant reserves we have recorded against the entire rent-stabilized portfolio. Look, we have always been supporters of affordable housing in all the markets we serve. New York City is a somewhat unique market with its rent-stabilized portion of affordable housing. Our interest continues to be to support the owners that work hard every day to provide solutions for all in the greatest city in the United States. Just a reminder, ConnectOne has a strong track record of successfully resolving credits either through negotiated adjustments to interest rates and payment terms with clients or, alternatively, through sub loans. Next, turning to noninterest income, growth momentum continues to build. Subsequent to quarter-end, we saw accelerating activity in SBA loan sales supplemented by BoeFly, and William will share more details on that shortly. Notwithstanding headline economic uncertainties and volatility, we are confident ConnectOne Bancorp, Inc. will deliver sustained long-term value for shareholders in 2026 and beyond. With that, I will turn the call over to William to walk through our performance in a little more detail. William Burns: Alright. Thank you, Frank. Good morning to everyone on the call. As Frank laid out, we delivered another excellent quarter characterized by accelerating operating performance, robust loan growth, and a significant widening of our net interest margin. For the first quarter, we reported operating earnings per share of $0.79 and operating PPNR as a percentage of average assets of 1.81%. That is up 3.5% from last quarter and up 35% from a year ago. A clear highlight of the quarter was our net interest margin, which expanded by 12 basis points sequentially to 3.39%, building upon a 16 basis point widening in the prior quarter. This quarter exceeded our initial projections and was primarily driven by contractual loan repricings and improved deposit costs. Looking ahead, advancing loan portfolio yields are expected to support continued margin expansion, even without the benefit of further rate cuts. On the asset side, loan originations were strong, with the portfolio growing at an annualized rate of approximately 10%. This was $300 million of growth for the quarter, double the pace we saw in each of the two prior quarters. The pipeline remains strong, and portfolio growth net of payoffs is anticipated to be in the mid-single digits. Maintaining deposit growth that keeps pace with loan growth is a primary focus for our team. While we achieved client deposit growth this quarter, our accelerated loan growth was also funded through a reduction in cash and investment securities and supplemented with some wholesale deposits. In terms of margin outlook, we are maintaining our previous guidance for a year-end spot margin of 3.50%. This factors in a lower probability of rate cuts—maybe there is one to come—loans repricing higher, and a competitive deposit pricing environment, which we are seeing unfold. Now turning to asset quality, the broader portfolio metrics continue to show strength. Our total nonperforming assets declined to just 0.29% of total assets, and our criticized and classified loans dropped to a historically low level of 2.26% of total loans. Further, net charge-offs on our non-PCD portfolio were exceptionally clean at just 0.08% annualized, a recent low. As Frank mentioned, we did experience an increase in 30 to 59 day delinquencies, which rose to 0.81% due to one relationship we are in the process of working out. We recognize the market’s focus on the New York City rent-stabilized space, which is why we provided additional information in this morning’s release. Our total rent-stabilized portfolio has been reduced over the past year to $675 million through paydowns, payoffs, and loan sales. It was $750 million at merger close. Now, $413 million, or 61% of that $675 million, is attributable to the First of Long Island acquisition. That portion was fully reviewed in our merger due diligence and was marked down aggressively, with reserves and yield adjustments aggregating to $66 million, bringing today’s carrying value on that part of our portfolio to less than 85¢ on the dollar. The remaining $263 million, which was originated by ConnectOne, represents just 2.2% of total loans and also has an elevated reserve of $15 million. Between the general reserves and the purchase accounting marks, we have a 12% offset to our aggregate rent-stabilized exposure, providing more than $80 million in total value-absorbing cushion. The provision for loan losses for the first quarter was $5.2 million, reflecting strong loan growth and increased qualitative factors tied to the multifamily portfolio. The provision was partially offset by improved economic forecasts in our CECL model. Our total allowance for credit losses to loans remains healthy at 1.3%. Turning to the income statement, operating expenses remain well controlled across the bank. Excluding merger and restructuring charges, noninterest expenses were $55.7 million for the quarter, and I am targeting a 1.5% per quarter sequential growth rate going forward. On the revenue side, noninterest income was $6.8 million. SBA gains were approximately $0.4 million for the quarter, plus $1.1 million in additional SBA gains recorded in April, putting us ahead of our 2026 target, with a third generated by BoeFly. Finally, our capital position continues to strengthen through solid retained earnings. Tangible book value per share increased by 1.7% to $23.93, bringing us very close to our pre-merger tangible book value of $24.16. The tangible common equity ratio at the Bancorp advanced to 8.64%, and the bank’s leverage ratio to 10.81%. Reflecting confidence in our capital generation and forward margin outlook, the Board declared an 8.3% increase in our common dividend. In addition, we repurchased 90 thousand shares in the quarter at $26.21 per share, and we will continue to opportunistically repurchase shares, taking into account market pricing and asset growth. We have more than 500 thousand shares remaining in our repurchase authorization. Before we get to Q&A, I will turn it back over to Frank for some closing comments. Frank Sorrentino: Thanks, William. To wrap things up, our earnings profile is solid and growing, credit quality remains sound, and we have a well-positioned balance sheet. We are incredibly proud of what we have accomplished so far, having established a powerful and strong framework for our next phase of growth. Our tech-forward, highly efficient culture is driving continuous optimization across the organization, allowing us to maintain our relationship-focused banking model as we continue to scale. Our teams are energized and are executing on the momentum we have created. In short, our franchise has never been stronger. At our current valuation, we believe ConnectOne Bancorp, Inc. represents an interesting opportunity to own a high-quality franchise in one of the most desirable markets in the country. I want to thank you for joining us today, and as always, we appreciate your interest in ConnectOne Bancorp, Inc. We will now open the call for questions. Operator? Operator: Thank you. We will now begin the question and answer session. If you have dialed in and would like to ask a question, please press star then the number 1 on your telephone keypad to raise your hand and join the queue. If you would like to withdraw your question, simply press 1 again. If you are called upon to ask your question and are listening via speakerphone, please pick up your handset to ensure that your phone is not on mute when asking your question. Our first question comes from Tyler Cacciatore from Stephens Inc. Please go ahead. Analyst: Good morning. This is Tyler on for Matthew Breese. Frank Sorrentino: Yes. Hi, Tyler. Hi, Tyler. Analyst: Just starting with loan growth for the quarter, can you walk us through some of the dynamics there, and if there were any accelerated pull-throughs or lower-than-anticipated payoff activity? And then with the stronger growth here, is there any opportunity to be on the higher end of that mid-single-digit guide? Frank Sorrentino: I would say the answer is yes. Payoffs have come down a little bit, which helped to bolster loan growth. The pipeline is strong, and we are seeing the types of business we are looking for in all of the markets we serve. We are executing on our objectives. As far as loan growth for the rest of the year, mid-single digits is where we feel most comfortable. It could be a little higher or a little lower. Analyst: Okay, great. And then just on new originations, what are you putting new loans on at, and are you seeing any compression? William Burns: The pipeline right now is about 6.35%, and the loans that we put on most recently were at about 6.20%. Spreads are being maintained nicely. Analyst: Okay, great. And then if I could just squeeze one more in on the rent-regulated side. I know the release had an uptick in past-due loans. Was that from the legacy portfolio or from FLIC? And then if you could talk about the portfolio as a whole and potential impacts from the new insurance program for rent-regulated properties? Frank Sorrentino: Maybe I will give a quick overview. It is from the legacy ConnectOne portfolio. It is a relationship that goes back a number of years, and we have been working very closely with them. There are challenges in the rent-stabilized space across portfolios, particularly for value-add components, which we generally stayed away from. This is a combination of higher interest rates and other factors within New York City, predominantly the 2019 change in the rent stabilization laws. That said, we have a great track record of working with borrowers to provide solutions. I am optimistic that, based on how we have positioned the portfolio—and as William detailed regarding provisioning—we are well prepared going forward. William Burns: The strong reserves we provided give us comfort on the total portfolio. About 60% of the portfolio came through the acquisition, which gave us the opportunity to take significant reserves that have turned out to be probably overly conservative. Plus, we have added to reserves over the past couple of years, putting us in a very good position. Analyst: Understood. That is all I had. Thank you. William Burns: Thank you. Operator: Our next question comes from Raymond James. Please go ahead. Analyst: Hey, good morning, guys. This is Tim filling in this morning. Thanks for taking my questions. Frank Sorrentino: Sure. Analyst: Could we get an update on your Florida markets and how activity is trending there? In conjunction with that, you recently opened an LPO in Orlando. Any details on recent or planned hires there, or your longer-term view of that market? Frank Sorrentino: We are very bullish on the Florida market. We have been growing there in a measured way. We started with four or five individuals and are now at 18 or 19. The mix of business is steady—a great mix of C&I, owner-occupied, and nonowner-occupied real estate—very similar to our primary New York markets. A decent portion of the business there is related to our New York business. I have joked before that Southeast Florida is like the sixth borough of New York, and it becomes more true every day. We are optimistic about a lot of different parts of Florida, but again, we are growing in a measured way. Analyst: Great, thanks for the color, Frank. Switching to the margin, maybe for you, William. You mentioned the competitive landscape for deposit costs remains challenging. Any thoughts on where deposit costs might trend absent further rate cuts through the rest of the year? William Burns: About flat. We are planning for flat for the year. Most of our margin widening is coming from the repricing of the loan portfolio. Analyst: Understood, appreciate that. And a quick modeling question: do you happen to have the purchase accounting accretion that impacted the margin during the quarter? William Burns: Accretion in net interest margin—yes. We will get back to you on the specific amount included in net interest income. Analyst: Okay, great. I appreciate it. That is all I had. I will step back. William Burns: Alright. Thank you. Operator: Our next question comes from Feddie Strickland from Halti Group. Please go ahead. Feddie Strickland: Hey, good morning. Ex-multifamily, it seems like you had solid progress on already strong credit metrics. Is there anything else in the existing criticized and classified or NPAs that we could see work out later in the year to make those balances fall even further? William Burns: Nothing more than typical. There are always a few assets we are working on, but nothing out of the ordinary in terms of dollar amounts. Feddie Strickland: Got it. And just to clarify your spot margin comment of 3.50% at year-end, should I take that to mean you expect the margin to be 3.50% for the fourth quarter, or is that more as you exit the year in December? William Burns: I would say as we exit the year. That is similar to what we have said before, which was 3.45% or so for the fourth quarter. It is hard to predict exactly. We could get a little more on the loan repricing side, but we also could see deposit costs go up. That is why we are providing a conservative estimate of 3.45% in the quarter and 3.50% spot at year-end. Feddie Strickland: And just one more: do you have the quantity of fixed-rate loans coming up for repricing? William Burns: Put simply, about $100 million a month. It fluctuates a little, but that is a good way to model it. Feddie Strickland: Perfect. That is it for me. Thanks for taking my questions. William Burns: Thank you so much. Operator: Again, if you would like to ask a question, please press star then the number 1 on your telephone keypad. Our next question comes from KBW. Please go ahead. Analyst: Hi, everyone. This is Emily Lee stepping in for Timothy Switzer. Thanks for taking my question, and congrats on the quarter. William Burns: Hi, Emily. Thank you. Analyst: Great to see the dividend increase. Where would you like the payout ratio to go over time? You also mentioned you plan to continue repurchasing shares. How should we think about capital allocation and deployment for the rest of the year? William Burns: On repurchases, we did 90 thousand in the quarter. Our plan is about 100 thousand per quarter for the rest of the year, depending on the stock price and our growth rates. In tandem is our payout ratio. We have always liked a lower payout ratio. I see us continuing to increase dividends each year, with expected increases in earnings going forward and into 2027. I would say our payout ratio would be similar. Analyst: Understood, thank you. And you provided a bit more color on the past-due credits coming from legacy CNOB. Do you have any metrics, such as LTVs, to provide more comfort? William Burns: Nothing at this time. The rent-regulated market is in a bit of flux, and it is difficult to determine exact current LTVs. The majority of our portfolio is current and nonimpaired, and we feel pretty good about the whole portfolio. Analyst: Okay, great. That is all for me. Thank you. William Burns: Thank you so much. Operator: Next question comes from Daniel Tamayo from Raymond James. Please go ahead. Daniel Tamayo: Hey, guys. Hi. Morning. Thanks. I know you took some questions from Tim earlier—appreciate that. I think everything has mostly been asked, so I will ask you, Frank, about the state of the M&A market. We have had some changes in the macro environment—how has that impacted conversations? Where do you stand in those, and is there anything noteworthy from your standpoint within general conversations in the market? Frank Sorrentino: Dan, I know my answer is somewhat standard. We are highly focused on organic growth, expanding within our markets, and taking advantage of opportunities. We did a fantastic job with the First of Long Island merger. It has been integrated well and is providing tremendous opportunities. While we see headlines about M&A, we have been opportunistic and have only done a couple of deals in our existence. We will talk to anyone to understand the environment, but it is difficult to get to a place where something makes a lot of sense, given our size, scale, capability, and opportunities. We are building capital and providing return to shareholders—that is incredibly important. If the right opportunity presented itself, of course we would take a look. Those are becoming fewer and farther between as the ramp-up in other M&A has occurred. We are happy to participate either way. If we get the opportunity, great. If we do not, we will take advantage of opportunities to serve clients who feel negatively impacted or disaffected by other transactions. That is a long way of saying there is a lot in the headlines, but I do not see anything compelling at the moment. Daniel Tamayo: Great. Thanks for taking the question. I think we have hit on everything else. I appreciate it. I will step back. William Burns: I want to follow up with the answer on purchase accounting interest: it was $9.3 million in the most recent quarter, averaging $9 million per quarter for this year, and for 2027 it would be $8 million per quarter. Operator: Our next question comes from KBW. Please go ahead. Analyst: Hi, just a quick follow-up. In your opening remarks, you mentioned the implementation of AI within your organization. Could you provide some color on potential use cases or opportunities for further efficiencies related to AI? Thank you. Frank Sorrentino: Emily, AI is pervasive. If you are not thinking about it or utilizing it in day-to-day operations, you have to question what you are doing. We see it in two ways. First, there are many opportunities for our teams to use AI tools to make processes better, more streamlined, and more effective, cutting down on repetitive tasks. We are seeing tremendous opportunities across the bank. We use tools like nCino, Slack, and Google—our email platform has Gemini built in. All of these provide AI components that make our jobs easier. I am proud of the team for surfacing use cases—sometimes small but highly effective—that help us do more accurate work more efficiently. Second, many vendors we work with—whether nCino, Google, Verafin, or others—are incorporating AI into their platforms. We are seeing a groundswell of opportunities with modern platforms that enable us to do things more efficiently, potentially allowing us to scale faster and better with fewer human resources, while providing additional accuracy and new ways to run the business rather than just designing a faster horse. We are using AI from the smallest opportunities to some of the largest, and it is a great tool going forward. Analyst: That is great. Thank you so much for taking my question. I appreciate it. Operator: That concludes the question and answer session. I would now like to turn the call back over to management for closing remarks. Frank Sorrentino: I want to thank everyone for joining us today and for the great questions. We look forward to speaking with you during our second quarter conference call in a few months. Have a great day. Operator: This concludes today’s conference call. Thank you for joining. You may now disconnect.
Operator: Good day, ladies and gentlemen, and welcome to the Medpace Holdings, Inc. First Quarter 2026 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers’ remarks, there will be a question-and-answer session. If you would like to ask a question, please press 11 on your phone. If your question has been answered and you would like to remove yourself from the queue, simply press 11 again. As a reminder, this call is being recorded. I would now like to introduce your host for today’s conference call, Lauren Morris, Medpace Holdings, Inc.’s Director of Investor Relations. You may begin. Lauren Morris: Good morning, and thank you for joining Medpace Holdings, Inc.’s first quarter 2026 earnings conference call. Also on the call today is our CEO, August James Troendle, our President, Jesse J. Geiger, and our CFO, Kevin M. Brady. Before we begin, I would like to remind you that our remarks and responses to your questions during this teleconference may include forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements involve inherent assumptions with known and unknown risks and uncertainties, as well as other important factors that could cause actual results to differ materially from our current expectations. These factors are discussed in our Form 10-K and other filings with the SEC. We undertake no obligation to update forward-looking statements even if estimates change. Accordingly, you should not rely on any of today’s forward-looking statements as representing our views as of any date after today. During this call, we will also be referring to certain non-GAAP financial measures. These non-GAAP measures are not superior to or replacements for the comparable GAAP measures, but we believe these measures help investors gain a more complete understanding of results. A reconciliation of such non-GAAP financial measures to the most directly comparable GAAP measures is available in our earnings press release and earnings call presentation slides provided in connection with today’s call. The slides are available in the Investor Relations section of our website at medpace.com. With that, I would now like to turn the call over to August James Troendle. August James Troendle: Good day, everyone. Before reviewing Q1 results, I would like to acknowledge that this will be our last earnings call with Jesse J. Geiger, our President. I would like to thank Jesse for his eighteen and a half years of service. Thank you, Jesse. 2026 saw cancellations rise again with backlog cancels reaching their highest point in over a year. Net bookings were below the level seen in Q4, but well above those in Q1 2025 with a net book-to-bill ratio of 0.88. RFPs were down in the quarter sequentially and year over year. Initial award notifications and win rate were strong. We continue to view the quality of opportunity flow as good. While there is nothing we can do to alter our cancellation rate, we are focused on expanding our pipeline of opportunities and have implemented a number of initiatives to improve our win rate. Jesse will now comment on Q1. Jesse J. Geiger: Good morning, everyone. Revenue for the first quarter of 2026 was $706.6 million, which represents a year-over-year increase of 26.5%. Net new business awards entering backlog in the first quarter increased 23.7% from the prior year to $618.4 million, resulting in the 0.88 net book-to-bill. Ending backlog as of 03/31/2026 was approximately $2.9 billion, an increase of 2.9% from the prior year. We project that approximately $1.94 billion of backlog will convert to revenue in the next twelve months, and backlog conversion in the first quarter was 23.3% of beginning backlog. Now, before I turn the call over to Kevin, I want to add that it has been a true honor to serve the company all of these years. I wish all of my Medpace Holdings, Inc. colleagues well, and I am so proud of what we have accomplished together. With that, I will turn the call over to Kevin. Kevin? Kevin M. Brady: Thank you, Jesse, and good morning to everyone listening in. As Jesse mentioned, revenue was $706.6 million in the first quarter of 2026. This represented a year-over-year increase of 26.5% on a reported basis and 25.8% on a constant currency basis. EBITDA of $149.4 million increased 25.9% compared to $118.6 million in the first quarter of 2025. On a constant currency basis, first quarter EBITDA increased 28.6% compared to the prior year. EBITDA margin for the first quarter was 21.1%, compared to 21.2% in the prior year period, as the impact of higher reimbursable costs was offset primarily by lower employee-related costs. In the first quarter of 2026, net income of $123.9 million increased 8.1% compared to net income of $114.6 million in the prior year period. Net income growth below EBITDA growth was primarily driven by a higher effective tax rate in the quarter. Net income per diluted share for the quarter was $4.28, compared to $3.67 in the prior year period. Regarding customer concentration, our top five and top ten customers represent roughly 28% and 37%, respectively, of our last twelve months’ revenue. In the first quarter, we generated $151.8 million in cash flow from operating activities, and our net days sales outstanding was negative 58.8 days. As of 03/31/2026, we had $652.7 million in cash. Our 2026 guidance ranges for revenue, EBITDA, net income, and EPS are unchanged from our prior quarter, based on an effective tax rate of 19% to 20% and interest income of $27.5 million. There are no additional share repurchases in our guidance. With that, I will turn the call back over to the operator so we can take questions. Operator: Thank you. We will now open the call for questions. As a reminder, to ask a question, please press 11 on your telephone and wait for your name to be announced. To withdraw your question, please press 11 again. One moment for questions. Our first question comes from Maxwell Andrew Smock with William Blair. You may proceed. Maxwell Andrew Smock: Hi. Good morning, everyone. Thanks for taking our call. Maybe just following up on the cancellations point. August, I know you mentioned the highest that you had seen in about a year. Just wondering if you could dive into the dynamics behind those cancellations. I know last quarter you called out not really macro-related, more project-specific. I am wondering if that was the case here in the first quarter, and then any detail you can provide around how cancellations have trended so far in the second quarter? And just any other drivers in terms of therapeutic modality, indication, any themes behind outsized cancellations that you saw here in the first quarter? Thank you. August James Troendle: Sure. Hi, Max. Cancellations were again just the kind of random items you would expect: product performance, reprioritization, etc. It was not particularly informed by acute financial shortages or anything like that. So it was the usual factors, but higher than we have historically averaged, and it put pressure on our book-to-bill. Cancellations in the quarter were largely in oncology and cardiovascular, which is fairly typical for us. There is really nothing to call out beyond that. For the second quarter, it is too early to get any kind of read on the cancellation rate and whether it is going to be high again in Q2. It is too early to make any assessment. Maxwell Andrew Smock: Understood. Maybe following up and sticking on the cancellations theme. I think last quarter you also mentioned cancellations were occurring both in terms of your backlog and also in initial awards. A couple of quarters ago, you called out, I think, the initial awards bucket had about $4 billion worth of signed work. Can you provide any update around cancellations out of that bucket in particular and where the size of that bucket is today relative to maybe that $4 billion from a couple of quarters ago? Just trying to get a sense for your visibility and level of confidence into that initial awards bucket converting into backlog moving forward. August James Troendle: We are not going to get into quantifying our pipeline size. We have never quantified that. Cancellations in that initial awards bucket were not particularly elevated in Q1. It was more backlog-related cancellations that were problematic for us. I do not think that impairs our future items rolling into backlog. The last couple of quarters of higher cancellations overall, including in that pre-backlog bucket in prior periods, does influence things, but that was not a particular factor this quarter. Obviously, higher cancellations take away from total revenue opportunities in the year, but with a reduction in cancellations, if we hopefully see that, conversion can proceed at a more normalized rate. Operator: Thank you. Our next question comes from David Howard Windley with Jefferies. You may proceed. David Howard Windley: Hi. Thanks for taking my question. Good morning. I wanted to clarify on the cancellations, a follow-up to Max’s question. August, you said oncology and cardiovascular. I believe you all would treat cardiovascular independent of metabolic, and I just wanted to make sure I heard that right and that we are interpreting that correctly. So metabolic cancellations were actually not part of your callout. Is that correct? August James Troendle: That is correct. We break out our therapeutic areas in our earnings release and in the presentation deck, and cardiovascular is separate from metabolic. There can be overlap in certain programs, but we do break them out separately. David Howard Windley: A market concern is that metabolic has been a significant revenue growth driver, as evidenced by the pie chart you include in the deck. I think the callout on the fairly sizable cancellation that shaded down net bookings last quarter was metabolic. Do you have a GLP-1 concentration that is becoming more volatile, perhaps because of changes in price or market dominance by a couple of players that would cause biotech to think twice about pursuing GLP-1s? Could you provide color on whether you have that exposure? August James Troendle: We have talked about roughly 50% of our obesity work being GLP-1 related. There is a fair amount of work there, but I do not see it as more volatile. For new opportunities, there may be some truth to the market becoming a bit saturated and competitive and pricing-sensitive, but it has not resulted in higher cancellations, even in pre-backlog. Historically, metabolic has the lowest cancellation rate as a percent of opening backlog among the therapeutic areas we break out. Metabolic was higher last quarter because it is a large category and had a slight uptick, while oncology had a downtick in percentage. Generally, oncology is riskier and has more cancellations. GLP-1 is actually a pretty safe therapeutic area for us, and things are going fine. David Howard Windley: That is helpful. On revenue guidance and cadence, given the immediacy of your bookings recognition to revenue—when you recognize a booking the project is already going—and you are highlighting higher cancellations and a sub-one book-to-bill, yet maintaining revenue guidance. Perhaps you or Kevin could speak to the durability or the ability to hold revenue where it is despite backlog not really growing. August James Troendle: Under 606, revenue timing is tough. We have not been great at predicting when pass-through investigator costs will hit, and they have been a larger portion lately. That is always at risk, but our current modeling is that we will be within our guidance range on revenue despite the cancellations. Certainly, we have to worry about future cancellations. Kevin M. Brady: Dave, you are exactly right. Despite the headwind from cancellations we saw in the first quarter, we feel very good about the range we have out there, which is why we reconfirmed guidance. Future cancellations could potentially impact that because cancellations can have a near-term impact, but right now we feel good about the guidance ranges. Operator: Our next question comes from Ann Kathleen Hynes with Mizuho. You may proceed. Ann Kathleen Hynes: Great. Thank you, and good luck, Jesse. On the gross bookings side, can you give us what gross bookings grew and if it was in line with your internal expectations? August James Troendle: We do not break out gross bookings; we just report net bookings. Ann Kathleen Hynes: But directionally, was it? August James Troendle: Directionally, gross awards were on the low end. It was not overwhelmingly cancellations that drove us down from what would have been a great book-to-bill. New gross awards were also on the low end, so it was a combination of both cancellations and weak gross bookings, obviously impacted by prior pre-backlog cancellations in the past. Ann Kathleen Hynes: There is a lot of biopharma M&A with big pharma buying biotech. How should we view your exposure to that going forward? If a big pharma purchases one of your biotech clients, what happens to current trials? August James Troendle: That is frustrating and happens all the time. Generally speaking, we are cut out of future work. Usually, the ongoing work we continue with, although there are cases where they fold that into their current provider or internal resources. Acquisitions are not good for us, but we have a very broad portfolio of clients, and it is something we work around. Operator: Our next question comes from Charles Rhyee with TD Cowen. You may proceed. Charles Rhyee: Thanks for taking the question. Following up on Anne’s question, would you attribute any of the heightened level of cancellations as a result of past M&A? August James Troendle: I do not think any of the cancellations we had in the quarter were related to M&A activity. Maybe I am wrong on some small part, but that was not a driver. Charles Rhyee: Could you give a sense for the mix in the cancellations between drugs canceled in-flight because of futility versus canceled ahead of start because of a change in direction by sponsors? August James Troendle: We do not track that breakdown because the buckets overlap and are difficult to categorize. Nothing struck us as specifically funding-related, which we are sensitive to. Funding is always one factor, but these categories overlap, so we do not try to break them out. Charles Rhyee: In the net bookings, is the level of pass-through revenues in the future work at the same rate you are seeing today, or lower? Kevin M. Brady: In terms of current bookings, there is still some influence of higher pass-throughs. As I mentioned last quarter, I do expect pass-throughs as a percentage of revenue to end the year lower than where we started this year. We were pretty high this quarter at about 44%. I do expect that to come down as some of these metabolic studies wind down, but it depends on future work and bookings as well. Operator: Our next question comes from Eric White Coldwell with Baird. You may proceed. Eric White Coldwell: I will hit this cancel topic a different way. If cancels were average this quarter—understanding gross awards were lower than you would like—what book-to-bill would we have been looking at? August James Troendle: I have not done that math, but directionally it would still have been weak, somewhere around one, I would assume. It was not just massive cancellations that knocked us down from a great 1.15 to 0.88. It was a mixture of the two. Eric White Coldwell: Sometimes these rates are impacted by one or two larger cancels. What would be the quantum? Was it one largest cancel, or was it several? August James Troendle: It was several—two, three. There was not one outsized cancellation that drove it. Some were meaningful in size, but no single cancellation dominated. Eric White Coldwell: One last thing. Your backlog shows a next-twelve-month revenue visibility figure and a total backlog figure. Over time, subtracting the NTM from total, we have seen a deterioration in the backlog coverage beyond one year for six consecutive quarters. Walk us through why there is not a looming “patent cliff”-like dynamic a year plus away that could upend the revenue growth profile. Are you concerned about this, and what would it take to get that number going back up? August James Troendle: There is area for concern. Several quarters back it was not a concern because our pre-backlog was growing fast and I thought cancellations were coming down. That has not happened. Cancellations have continued at a much higher rate in both backlog and pre-backlog. It results in us facing a tougher revenue trajectory. Looking at Q1 versus the remainder of the year, we do not have sequential revenue growth. We will on a year-over-year basis, but not sequentially. As for 2027, it is too far out to get a handle on. Our sequential growth profile now and over the next six months is a real question. We need either cancellations to abate or gross awards to improve—bigger pipeline and better win rates—which is why we are focused on expanding the pipeline and accommodating what could be a higher cancellation rate than historical. I cannot dodge it—sequential growth is not projected at what we would consider a reasonable rate without improvement in one of those factors. Operator: Our next question comes from Jailendra P. Singh with Truist Securities. You may proceed. Jailendra P. Singh: Good morning, and thanks for taking my questions. On RFP trends, you said they were down year over year. Can you elaborate? Any particular areas of weakness? With biotech funding remaining stable over the past eight or nine months, it is surprising to see RFP weakness. Any more color? August James Troendle: It is hard to categorize by sector or therapeutic area. I do not pay a lot of attention to the numerical RFP counts. The industry focuses on RFPs, so I feel compelled to comment, but the bouncing around in RFPs is overwhelmed by quality. There is also the question of whether more RFPs simply means more CROs are being invited to the same opportunities. Measuring it is difficult. I tend to ignore the numerical value on a sequential basis and focus on the quality of opportunities, which I believe remains high. We have seen deterioration in the past tied to funding problems and scenario-planning RFPs, but I do not see that prevailing now. The trend in quality is pretty good, so I do not put a lot of stock in the headline count in a given quarter. Jailendra P. Singh: Do you see the biotech CRO market getting more competitive over the last six months? Some large peers and biotech venture funds are helping secure early-stage work—has that had any impact? August James Troendle: I do not know the impact. The market is very competitive; I have not seen a large change. Our biggest factor over the last eighteen months has been cancellations. We do think we need to work on our win rate. Whether that is due to increasing competitiveness is hard to measure. Certainly, we would like to win more. Jailendra P. Singh: Last quarter you mentioned that in 2026 you do not expect a net productivity benefit from AI as investments would offset gains. Given continued advancements, has there been any change in your thinking on potential impact of AI on your business? August James Troendle: I reiterate what I said before. For AI to yield savings in the next year or two, it would either have to be so transformative as to upend the industry in the short term or be mostly hype. I believe AI has real value, but achieving that value will take a lot of investment. There is low-hanging fruit, but net of investments, we expect to be investing more than we gain over at least the next two years. We are seeing efficiencies in places now, but net benefit is a few years out for us. Operator: Our next question comes from Luke England Sergott with Barclays. You may proceed. Analyst: Hey, this is Jake on for Luke. Thanks for the question. I know large pharma is not a big focus for you, but if they spend ahead of patent cliffs and scoop up more biotechs, and assuming their demand is less volatile, when would it make sense to take on more of this work, or will it always make sense to prioritize biotech? August James Troendle: We have made a strategic decision not to play in large pharma. To be there, you need a very flexible delivery model involving staffing and a lot of functional outsourcing. Large pharma generally expects those services. We have chosen not to do that because we think it detracts from our focus on full-service internal expertise and driving our own efficient clinical development processes, which is of value to virtual and smaller companies. Large pharma tends to focus on incorporating CROs into their systems. It is a different model. It is not unachievable, but it is not for us. Operator: Our next question comes from Sean Dodge with BMO Capital Markets. You may proceed. Sean Dodge: Thanks, and good morning. August, you mentioned in your prepared remarks some initiatives you are putting in place to improve your win rate. Could you tell us a bit more about what you are doing there and how quickly those could pull through to impact gross wins? August James Troendle: I am not going to get into individual items—we would prefer not to broadcast specifics to competitors—but we are very focused on this and see opportunities to expand both our pipeline and win rate to combat higher cancellations and get back to the growth rate we want. In terms of timing, I am hoping over the next few quarters we will see real improvement. We already had a good win rate in Q1, and I am hoping it is sustainable as our enhancements take hold. Sean Dodge: Taking that and going back to the revenue outlook, you continued to hire in the quarter despite cancellations and softer gross wins. Any more context you can share there? It seems to signal confidence that you will continue to grow revenue. How should we square declining net wins with increased headcount? August James Troendle: Your interpretation is correct. We are still hiring. That reflects our confidence. Operator: Our next question comes from Michael Aaron Cherny with Leerink Partners. You may proceed. Michael Aaron Cherny: Maybe to flip the AI question a different way, August. As you engage with clients, do you see any commercial usage of AI being done by your clients right now? We see new models designed to address clinical trial work and drug discovery. Is any of that factoring into dynamics relative to bookings performance and the slowdown you noted? August James Troendle: No. I do not think there are real applications our clients are using that affect our provision of services or interaction with them at this time. Everyone uses AI in places, often embedded in other systems, but nothing that is impacting us currently. Michael Aaron Cherny: I know you said, Kevin, no buyback in the guidance, but given the way the stock has reacted, any thoughts on capacity and capability—not just authorization, but cash flow availability—given the amount of cash on the balance sheet? Kevin M. Brady: We have authorization in place—over $800 million—and we will continue to execute as we always have and look for opportunities to do that, consistent with our plan and strategy. Operator: Thank you. As a reminder, to ask a question, please press 11. Our next question comes from Ryan Halstead with RBC. You may proceed. Ryan Halstead: Morning. Thanks for taking the questions. Going back to SG&A, it looked like there was a pretty nice improvement sequentially. Can you talk about what drove the improvement, and how should we think about SG&A going forward, especially in light of the comments that you are continuing to hire? What are the efficiencies and how should we think about that? Kevin M. Brady: SG&A was up slightly sequentially. Because of improved retention rates we continue to see efficiencies, probably at a slower pace than we have previously, but we expect margins to remain in a very good spot at the midpoint of guidance. We continue to see some benefit flowing through because of retention, and that is reflected in our guidance. Ryan Halstead: On cancellations, do you see within cancellations any trials that are suspended and have the potential to restart in the future? August James Troendle: For both items in backlog and items that have not reached backlog, one of the biggest risks is timing—when something makes it to backlog and when it starts. Sometimes awards happen before funds are raised or as part of sequential studies. There is always the question of delays. Generally, if something is canceled, it is probably dead. Things do not generally come back from the cancel bucket. But there are items that did not make it into backlog in a given quarter that might come in future quarters if delayed. Items put on hold remain in backlog; we do not cancel solely due to a hold. They may restart or eventually cancel. Operator: Our next question comes from Eric White Coldwell with Baird. You may proceed. Eric White Coldwell: Thanks for the follow-up. I am curious what level of net bookings dollars you are using internally to help guide the revenue outlook. I know calling quarters is unreasonable, and you do not know what cancels will be at this point, but you do have a forecast. Directionally, where are you steering us over the next quarter or next three quarters? August James Troendle: Book-to-bill is a poor modeling measure under 606. It can be useful to see if the bucket is filling commensurate with revenue, but you do not model off book-to-bill. You can miss a book-to-bill target because revenue ran up so fast even if bookings exceeded expectations. We are not going to guide to book-to-bill. We hope to have improving bookings over time, and certainly 0.88, where things are contracting, is not something we would expect going forward, but cancellations can drive lower levels occasionally. Eric White Coldwell: Bookings dollars are important. You just did roughly $618 million in the quarter. Are you internally modeling an increase—$650 million, $700 million? What do you need to be within the revenue guidance range for the year? August James Troendle: We anticipate an increase, but we are not going to quantify it or guide bookings by quarter. There are no guarantees. Eric White Coldwell: On pre-backlog, in the past you have given ballparks and said it was comparable to backlog. Any update? Kevin M. Brady: Because we include items that are authorized but have not moved into the three-year window yet, pre-backlog is generally comparable in size to backlog. August James Troendle: We have never tried to consistently quantify it due to variability, but historically it has been comparable, and at times larger. Operator: Our next question comes from Justin D. Bowers with Deutsche Bank. You may proceed. Justin D. Bowers: Hi. Good morning, everyone. August, to understand the moving parts on gross versus net, it seems like you have grown net bookings 25% year over year, but you are calling out cancellations. On the overall gross environment, was this an RFP dynamic or a win-rate dynamic? It seems like your win rates were okay or stepping up. Were the opportunities just not there in the quarter? August James Troendle: In the current quarter, our awards were good and our win rate was good. If we had a backlog policy that put anything awarded in a quarter into backlog—as some CROs have done—we would have had a good book-to-bill. We do not do that because those awards are often based on future plans, and there is a lot to be done, including financing. In our client base, there are many moving parts and risk that a study never starts. We only recognize into backlog items that have started. What is actually starting in the quarter is based on items awarded in prior quarters—sometimes as far back as two years. There is a disconnect between current environment and our bookings; current environment is better reflected in bookings two to three quarters out, with a lag. Justin D. Bowers: To bridge that, it sounds like awards or wins were good but not starting soon. Is pre-backlog growing? August James Troendle: Pre-backlog did grow. We are not providing metrics on the size of the growth. We had a good quarter in terms of new authorizations—not in backlog, but clients indicating they plan to use us. If you add up those authorizations, the pool grew in the quarter. Justin D. Bowers: On those authorizations, how do you risk-adjust the quality of awards? Any change in trends—how well-capitalized or funded these programs are? August James Troendle: We assess, on a project-by-project basis, the likelihood and timing of progression based on a number of factors, including funding. We do not bucket and track counts by high- versus low-risk categories, but our planning tools probability-adjust opportunities and schedule when we think they will convert to backlog and revenue. I do not have metrics indicating an increase in very-high-risk projects. Operator: Next question comes from David Howard Windley with Jefferies. You may proceed. David Howard Windley: Thanks for the follow-up. I want to confirm a few mechanics so we can better explain them. First, you have said an award-to-booking interval could be as short as one to two quarters or as long as a couple of years. Historically, average is maybe three to five quarters—call it about four. Do you agree? August James Troendle: That is in the ballpark. David Howard Windley: When you recognize a booking, that is basically coincident with first patient in? August James Troendle: Yes. David Howard Windley: So at that point, Medpace Holdings, Inc. has already done a significant amount of setup work that is revenue-recognizable? August James Troendle: Frequently, yes. David Howard Windley: In a cancellation where the client decides not to move forward before first patient in, more times than not that is a pre-backlog cancellation, not a backlog cancellation. Correct? August James Troendle: Correct. Before first patient in, costs are relatively small compared to launching the trial. Items can cancel at any stage up to FPI. Once patients are in, cancellation usually reflects a significant event such as toxicity or lack of efficacy. Before FPI, we often have an LOI or startup task order that covers costs and limits liability. David Howard Windley: In this quarter, where cancellations of backlog were relatively high and several in number, those are trials that already had patients in and the client chose to cancel, typically due to futility or toxicity? August James Troendle: Generally product failure, especially in oncology—lack of efficacy or unexpected toxicity. Sometimes things go really well and finish early; you recruit faster, and the total budget ends up lower than bid, effectively reducing backlog. David Howard Windley: Lastly, different subject: congrats to Jesse on the retirement. August, what is your commitment and view of your own longevity in your current role? August James Troendle: I am committed to the company and passionately interested in Medpace Holdings, Inc. and its success. I will be here for quite a while. I will retake duties as President as I have in the past. We have a very strong and deep management team. We will eventually fill that spot, but not in the near term. We have plenty of management strength to continue to move Medpace Holdings, Inc. forward. Operator: I would like to turn the call back over to Lauren Morris for any closing remarks. Lauren Morris: Yes. Thank you for joining us on today’s call and for your interest in Medpace Holdings, Inc. We look forward to speaking with you again on our second quarter 2026 earnings call. Operator: Thank you. This concludes the conference. Thank you for your participation. You may now disconnect.
Operator: As well as the press release regarding the transaction at each company's Investor Relations website. The press release regarding Helix Energy Solutions Group, Inc.'s first quarter 2026 results can be found at Helix Energy Solutions Group, Inc.'s Investor Relations website as well as the earnings presentation. I would now like to turn the call over to Erik Staffeldt, Executive Vice President and Chief Financial Officer at Helix Energy Solutions Group, Inc. Please go ahead. Erik Staffeldt: Thank you, and good morning. As highlighted, any forward-looking statements we make during today's conference call are given in context of today only and are subject to important risks as discussed in the presentation. Actual results and events could differ materially from those discussed here. Please also refer to the additional information discussed on this slide as well as in our SEC filings. I will now turn to a brief overview of Helix Energy Solutions Group, Inc.’s first quarter 2026 results. Helix Energy Solutions Group, Inc.’s team delivered another well executed quarter, safely and efficiently providing our customers with world-class service. Our first quarter results reflect expected seasonal levels during the winter in the North Sea and Gulf of America shelf, impacting our Well Intervention, Robotics, and Shallow Water Abandonment segments, and they reflect the cost of the successful workover of Thunder Hawk Field. Revenues for the first quarter were $288 million with a gross profit of $9 million, resulting in a net loss of $13 million. Adjusted EBITDA for the quarter was $32 million with operating cash flow of $62 million, resulting in free cash flow of $59 million. Highlights for the quarter include strong utilization on the Q4000 performing well intervention work at improved rates; the successful workover and recommencement of production of our Thunder Hawk field; a return to a two-vessel market in the North Sea with the Seawell reactivation and return to operations; good utilization expected in 2026; and strong cash flow generation of $59 million as I shared earlier. With that, our cash position and liquidity remain strong with $501 million of cash and $612 million of liquidity at the end of the quarter. Overall, our first quarter results were as expected, perhaps even marginally better than expected. The current macro environment remains uncertain, but we are seeing some positive developments in the markets we serve. Oil supply disruptions, increased commodity prices, and increased regulatory enforcement in the North Sea are providing positive catalysts that may drive increased activity by our customers for the balance of 2025 and into 2026 and into 2027. We also expect momentum to continue to build in the offshore market. With the results we delivered in Q1 and supported by our backlog and several key contracts, we are maintaining our guidance for 2026: revenue of $1.2 billion to $1.4 billion in line with 2025; EBITDA of $230 million to $290 million impacted by the Thunder Hawk workover in Q1 and the upcoming c Helix One docking; CapEx of $70 million to $80 million primarily a mix of inventory maintenance on our vessels and intervention systems and fleet renewal by Robotics ROVs; and free cash flow of $100 million to $160 million. We expect continued meaningful free cash flow generation, with variability driven by ultimate working capital movements. Key forecast drivers for our annual guidance include second-half utilization on the Q4000 and Q7000, a late season North Sea intervention market, strong markets for our Robotics fleet, and a stable Shallow Water Abandonment segment. Our quarterly financial performance in 2026 is expected to follow the same cadence as previous years’ results, with the second and third quarters being our most active quarters and the first and fourth quarters impacted by winter weather. Our balance sheet is strong with $10 million of funded debt, $501 million of cash, and strong cash flow generation expected in 2026. If you have any questions on our quarterly results or our outlook for 2026, please feel free to reach out to our team directly. With that, we will transition to the transaction announcement portion of the call. For that, I am joined by Bill Transier, Helix Energy Solutions Group, Inc.’s Chairman of the Board; Scott Sparks, Helix Energy Solutions Group, Inc.’s Executive Vice President and Chief Operating Officer; Todd Hornbeck, Hornbeck’s Chairman, President, and Chief Executive Officer. Also joining us for the question and answer portion of the call will be Jim Hart, Hornbeck’s Executive Vice President and Chief Financial Officer, and Potter Adam, Hornbeck’s Senior Vice President of Finance. Now before I kick it over to Bill, I do want to note you have available supporting information on each company's investor relations website, so please feel free to refer to those as we go through the call. With that, Bill, over to you. Bill Transier: Thanks, Erik. By combining Helix Energy Solutions Group, Inc. and Hornbeck, we are bringing together two market leaders and establishing a premier integrated offshore services company poised to create value for current shareholders of both Hornbeck and Helix Energy Solutions Group, Inc. There are many compelling benefits to this combination. First, the strategic combination will create a recognized leader in offshore operations with a diversified and expanded high-specification fleet of specialty vessels supported by subsea robotics, well intervention, and technical service capabilities, including trenching subsea pipelines and cables. Also, the combined company will provide innovative and integrated subsea and marine transportation solutions to customers across deepwater energy, defense, and renewables, thereby expanding service offerings moving forward. Further, combining Helix Energy Solutions Group, Inc.’s well intervention and robotic vessels with Hornbeck’s specialty and ultra high-specification offshore support vessels will allow us to offer a complementary end-to-end service offering that will materially expand the combined company's ability to meet a broader share of customers' deepwater needs spanning the offshore cycle. All of this, in combination with the significant annual revenue and cost synergies the transaction is expected to generate of $75 million or more within three years following the close, make for a strong combination rationale. We will dig deeper into the strategic and financial benefits shortly, and I do want to cover the terms of the transaction in more detail too. First, I would be remiss if I did not take the opportunity to acknowledge Owen Kratz, Helix Energy Solutions Group, Inc.’s President and Chief Executive Officer, for the significant role he has held in building Helix Energy Solutions Group, Inc. into what it is today. He announced last year his plan to retire from Helix Energy Solutions Group, Inc.; I am sure you saw his quote in the press release reiterating his support for the transaction. He has agreed to support Todd through the close of the deal and will remain available thereafter as needed. He, along with the entire executive management team, are committed to getting this combination across the line. With that, I will turn to the highlights of the transaction. This is structured as an all-stock transaction, which will allow shareholders from both sides to participate in the significant upside potential of the combined company. The terms of the agreement, which are outlined in the press release we issued this morning, have been approved by the Boards of Directors of both companies. At closing, which we expect to occur in 2026, subject to approval by Helix Energy Solutions Group, Inc. shareholders, the receipt of applicable regulatory approvals, and the satisfaction of other customary closing conditions, Helix Energy Solutions Group, Inc. shareholders will own approximately 45% of the combined company and Hornbeck shareholders will have approximately 55% ownership. I will note the parties representing a significant majority of the ownership of Hornbeck, including Ares Management funds, have delivered written consents approving the transaction. Through this combination, we will bring together two best-in-class teams with aligned cultures. Following the close, Todd Hornbeck will serve as President and Chief Executive Officer of the combined company. The combined company's Board of Directors will comprise seven directors, three of whom will be from Helix Energy Solutions Group, Inc. and four from Hornbeck, including Todd. I will serve as Chairman of the combined company's board. Post closing, the combined company will operate under the Hornbeck Offshore Services name and trade on the New York Stock Exchange under the ticker symbol HOS, with the Helix brand to be retained for well intervention services. The combined company's headquarters will be in Houston, Texas, and Covington, Louisiana. I also want to touch on why we are stronger and more competitive together as a combined company. In 2025, Helix Energy Solutions Group, Inc. had revenue and EBITDA of $1.3 billion and $272 million, respectively, with more than $500 million in cash at the end of the first quarter. When you include Hornbeck's 2025 annual results, the combined company will increase revenue and EBITDA by 56% and 106%, respectively. As well, we will have incremental growth drivers of two new build MPSVs and 23 vessels that will be available for reactivation. In summary, we believe this unique combination is a compelling opportunity to enhance value for Helix Energy Solutions Group, Inc.’s shareholders and deliver sustainable long-term growth. Now Todd will provide you an overview of Hornbeck. Todd Hornbeck: Thank you, Bill. Let me start by sharing some background on Hornbeck, one of the preeminent market-leading providers of ultra high-spec marine logistics services to a broad range of offshore energy, infrastructure, and defense customers. We have a leading deepwater high and ultra high-spec suite with geographic footprint across the U.S., Gulf of America, Mexico, the Caribbean, Guyana, Suriname, and Brazil. Our focus at the end of the day is tailored logistics solutions that address a broad spectrum of unique customer life-of-field requirements, and we have proven operational capabilities and an unwavering commitment to safety and risk management, as Helix Energy Solutions Group, Inc. does as well. We have also included key highlights of the company by the numbers, including approximately 71 vessels in our current fleet, with two MPSVs under construction and expected to deliver in 2027 giving us a pro forma fleet of 73 vessels with a fair market value of $2.8 billion. We generated adjusted EBITDA of $288 million and an adjusted EBITDA margin of 40% for fiscal year 2025. I would also like to note that if you have any additional questions about Hornbeck as a company and our financials, you can find that information in the appendix section of this presentation. We are also confident that this transaction maximizes value and provides the best long-term prospects to deliver superior returns for our combined investors. We are pleased that this all-stock consideration will allow Helix Energy Solutions Group, Inc. and Hornbeck investors to participate in the upside of this combination. With that, I will turn it over to Scott Sparks, Helix Energy Solutions Group, Inc.’s Executive Vice President and Chief Operating Officer, to walk you through the combined company's global presence and complementary business offerings. Scott Sparks: Thank you, Todd. Another important benefit of this transaction is the geographical alignment of our two companies. Helix Energy Solutions Group, Inc.’s regional presence in West Africa, Asia Pacific, and the North Sea regions, as well as the United States and Brazil, and Hornbeck’s concentration in the Americas, including Brazil and Mexico, creates a combined global footprint spanning the key offshore basins worldwide. The combined company's footprint will include cabotage-protected markets and will have direct access to leading offshore customers, enabling the delivery of premier deepwater services through technologically advanced traffic. This global presence translates into a diversified revenue stream, with approximately half of the combined company's revenue expected to come from the United States followed by Brazil and then the North Sea region. We also want to share more information on our combined customer base and how we expect to serve customers as a combined company. We provide essential services to many of the key organizations and companies that fuel the global economy. We see the integration of complementary service offerings increasing our combined company's relevance with customers, creating unique cross selling opportunities that will drive growth and improve margins. Further, the combined fleet of vessels and specialty equipment enable a comprehensive suite of combined services as a one-stop shop for customers, while enhancing profitability through asset optimization and enhanced scale. Both companies have high-quality blue-chip customers, with whom we have developed strong in-depth relationships. Among our customers are global market-leading companies operating at the forefront of innovation in their respective fields. We are looking forward to delivering an enhanced offering of integrated solutions to our expanded customer base. I will turn it back to Todd to talk through our world-class deepwater fleet and our leading position in the detention industry. Todd Hornbeck: Thank you, Scott. We mentioned a moment ago that together, Helix Energy Solutions Group, Inc. and Hornbeck will have a fleet of high-quality, deepwater, high-spec vessels. The combined company will focus on drill intervention, subsea and specialty services, robotics, marine transportation, and emerging technologies to support the deepwater energy, defense, and renewables markets. The combined company will have the highest-specification fleet of specialty vessels designed to support deepwater life-of-field services globally. It will be the only company capable of providing riser-based well intervention, subsea operations and IRM, and surface vessel logistics support. Additionally, we are combining Helix Energy Solutions Group, Inc.’s market-leading position in subsea trenching of pipeline and cable with Hornbeck's leading position in providing support to offshore energy development. It is also important to note that the combined company will have increased exposure to the defense industry through a cutting-edge fleet supporting military operations and related capabilities. Together, Helix Energy Solutions Group, Inc. and Hornbeck will have operations that provide multiple types of defense services. This includes surface and subsea vessels, vessel management, and emerging technologies such as marine autonomy and artificial intelligence. These capabilities, along with advantages like trusted relationships with key officials and decades of experience in the industry, will position the combined company extremely well to increase revenue with defense customers. Now I would like to transition to a central element of growth: the combined company's scale and growth platform and the significant synergy potential. We are confident that the combined company will be poised for future growth and shareholder value creation with a strong balance sheet, low leverage, and significant cash at the closing to advance the combined company's value-driven strategy. Importantly, this financial strength and projected substantial free cash flow generation will provide significant flexibility for organic growth and investments in the business, or other strategic M&A, to increase long-term shareholder value creation. The combined company’s scaled life-of-field business is expected to mitigate through-cycle earnings volatility while also enabling flexible global asset deployment where the demand is strongest. As you will see in the slide deck, another key part of why we are so confident in this combined company's strong financial profile going forward is the significant synergy opportunities this transaction presents. Scott Sparks: Specifically—We expect to realize $75 million or more in annual cost and revenue synergies within three years following the transaction. The synergies are expected to result from combined and integrated service offerings, as well as expanded services offered to existing customers driving revenue pull-through. The scale of the combined company's fleet will enable asset optimization, reducing reliance on third-party vessel charters, and delivering efficiencies across maintenance, procurement, and operations. In short, we expect to operate more efficiently and benefit from growth opportunities post closing. I would now like to turn it back to Bill to close it out. Bill Transier: I will wrap things up by reiterating that we believe this transaction represents an incredibly exciting opportunity for Helix Energy Solutions Group, Inc. and Hornbeck, as well as both companies’ shareholders and other stakeholders. By bringing these two leaders together, we will create an even stronger combined company designed to innovate, execute with scale, and grow. I would also like to take a moment to thank the talented teams of both Helix Energy Solutions Group, Inc. and Hornbeck. This transaction reflects their continued hard work and dedication, and we would not have been able to reach this milestone without their efforts. I know I speak for the leadership teams of both companies when I say we are grateful for your many contributions. Thank you for joining us today. We will now open the call for questions. Operator, we will take our first question now. Operator: Thank you. At this time, I would like to remind everyone, in order to ask a question, please press then the number 1 on your telephone keypad. We will pause for just a moment to compile the Q&A roster. And your first question comes from the line of Keith Beckman with Pickering Energy Partners. Your line is open. Analyst: Hey, thanks for taking my question, and congratulations, guys. Unknown Speaker: Thank you. Thank you. Analyst: So I just wanted to ask first, could you bucket the $75 million of synergies a little bit better? And then maybe that is over three years. What do you expect the initial capture to be maybe within the first six months to a year or so? Todd Hornbeck: I think the capture will be revenue synergies and being able to combine these assets together to offer a full, plentiful offering to the customers. That should increase utilization across the board on ROVs, the supply vessels, the subsea construction vessels, and well intervention. So that combination and offering life-of-field services to be able to take to the full field development or full field decommissioning is a real added value to the customer base. Scott Sparks: Yes. The crossover services that we pull together as one company provide some very good revenue synergies, but then there is also the size of the fleet that provides good cost synergies with procurement and engineering and all those things as we create a much bigger fleet on a global basis. Analyst: Awesome. Thanks. And then my second question, obviously Hornbeck has had an advantage in cabotage-protected markets on a lot of the OSVs in the Americas. Now with the merger of the two companies, is there any plan over time to move some of the vessels outside of cabotage markets and potentially go outside of the Americas, maybe West Africa, etcetera? Just any thoughts on that at all. Todd Hornbeck: Our plan is we are going to be a growth company, and we plan to continue to grow every segment of the business, but we are going to move the assets where they are most valuable to the company and returns for the company. So we do have assets that can move across the globe and some of the largest and best assets in the industry, and we are going to move where the business is. Analyst: Awesome. Really appreciate you guys taking my questions, and congratulations again. Unknown Speaker: Thank you. Thanks. Thanks. Operator: Your next question comes from the line of Benjamin Sommers with BTIG. Your line is open. Benjamin Sommers: Hey. Good morning, and congrats on the announcement. So my first question is just on the $2 billion of backlog that you guys noted in the presentation. Just kind of curious around the duration of this backlog and any color you can give on the makeup across the various business lines. Todd Hornbeck: So Helix Energy Solutions Group, Inc. reports their backlog, and ours is close to $1 billion covering a significant portion this year and into next year. Erik Staffeldt: So the Helix Energy Solutions Group, Inc. portion of it is about $1 billion. Todd Hornbeck: Yep. Jim Hart: Hornbeck's about $1 billion as well, and that includes our long-term contracts with the military and the specialty vessels as well. As you know, we have been primarily a shorter-term player because of the type of assets we have. We have been able to, on shorter-term contracts, get a lot better returns. But this is the biggest backlog we have had, I think, in our history. It is showing you where the market is going and a lot of opportunity also in our fleet to turn and mark-to-market those vessels as well. Benjamin Sommers: Awesome. Thank you. Super helpful. And then I know you guys mentioned it in the prepared remarks, but just on the strong balance sheet of the combined company. Any color on what you are seeing in the market and then just detailing a bit more on the potential growth opportunities or creation of shareholder value from that strong balance sheet? Todd Hornbeck: Yes. I think we have a superior balance sheet, a lot of cash on the balance sheet. Like I said, we are going to grow all the divisions between the ROV Subsea Group and Well Intervention and Supply Vessels. So we are looking forward to growing it to be an international player worldwide, not just our main focus right now, or has been with the company, about 50% of revenue coming out of the U.S. Gulf, or the America Gulf of America. But we see great opportunities of growth in Brazil, the whole South America, the northern flank of South America with Colombia and Guyana and Suriname and that whole region. Also, West Africa is showing great signs of opportunity as well. So with this balance sheet, we should be able to really move the company forward with a lot of opportunities, whether they are organic or acquisitions as well. Benjamin Sommers: Great. Thank you guys, and congrats again. Unknown Speaker: Thanks. Thank you. Operator: Your next question comes from the line of James Schumm with TD Cowen. Your line is open. James Schumm: The $75 million of synergies, did you say what the split was between revenue and cost synergies there? Bill Transier: No, we have not. We are going to have more of that in the merger proxy, but the majority of it probably will be from revenue synergies and cost efficiencies by putting the companies together and streamlining our services. Todd Hornbeck: But the companies do not really overlap that much in services. That is what makes this combination such a strong combination, putting together, because we did not have robotics and all the tooling and whatnot. We had the MPSVs, the heavy iron. Helix Energy Solutions Group, Inc. has all that. We were not in well intervention or decommissioning. When you are in that business as well, they need supply vessels, MPSVs, and all the things that we have. So we do not overlap a lot. That is what is great about this. We are going to be able to build all of that and retool the business model to be able to grow in all of those areas. Scott Sparks: Whilst we start with that, what we will be able to do is offer a very good bundled service. If you take a deepwater field decommissioning program, we have the Helix Energy Solutions Group, Inc. assets that can do all the deepwater P&A and the well work. Now we have the construction assets to take away the subsea infrastructure. We have the supply boats to support the subsea infrastructure takeaway and the wells P&A work. We can offer that to one client, take away their procurement costs, and give them one contract. That is quite compelling. There will always be some oil procurement companies out there that will not like that, but there will be a bunch of oil companies out there that will see the cost benefits of one contract and one service. James Schumm: Okay. Great. Thank you. And I have not covered OSVs in 12 or 13 years. Can you help me with what the capital intensity of this business is now, just in terms of CapEx to sales? Todd Hornbeck: Well, I will tell you on the OSV side, we are strictly deepwater, ultra deepwater, the largest PSVs in the world. A lot of them are cabotage-protected in the U.S. We have a big presence in Brazil and Mexico and the whole South America. Right now, the market is basically at equilibrium. By the second half of this year, just with the demand coming from the additional rigs coming online, we see that market getting very tight and a lot of revenue growth there or day rate expansion there as well. With the subsea construction market, you know how many trees and installations are going in in deepwater over the next several years. Those vessels also work very, very well in the subsea construction area and also in renewables and the defense market. Our defense market is really looking good, and you know why. Just read the paper. And they like the large PSVs to accommodate that business. You have vessels to bring back into the market too. Yes, it will cost really minor capital. Minor capital, yes. We have 23 vessels that we can reactivate as this market goes undersupplied, whether it is renewables, defense, or drilling support or subsea support. Those are vessels that have been preserved and in good shape, and very low cost to reactivate to put into the market. James Schumm: Thanks. And I was just going to ask about the two new MPSVs that you have. What capital requirements are left on those? Are they substantial, or can you say? Todd Hornbeck: We really do not have any capital requirements to talk about very much left. We have about $50 million, I think, left to spend on those vessels for delivery, but very low-cost entry for those vessels. Unique in nature, they will be the largest MPSVs in the U.S.-flag fleet. We are really excited about the robotics and the subsea infrastructure and everything that Helix Energy Solutions Group, Inc. is doing and folding that into that program. So defense markets, renewable markets, and deepwater subsea construction markets are really anxious to get their hands on those vessels. Scott Sparks: When those vessels hit in 2027, they are going to be the highest-spec Jones Act vessels, and then we will be combining Helix Energy Solutions Group, Inc. Robotics into those vessels as well. So they will be quite unique and ultra high-spec vessels for the Jones Act Gulf of America fleet. James Schumm: Great. Thanks a lot, gentlemen. Appreciate it. Congrats. Unknown Speaker: Thanks. Erik Staffeldt: Thank you. Operator: Press star, then the number 1 on your telephone keypad. And our next question comes from the line of Don Kreis with Johnson Rice. Your line is open. Don Kreis: Morning, guys, and I will echo my sentiments for a good deal. Congrats. Since I cover Helix Energy Solutions Group, Inc., and have for a while, Scott, can you walk around the world and talk about demand like you normally do on an earnings call? I know there have been a lot of rig contracts let recently that soaked up a lot of white space, and can you just walk around the world and tell us how that is influencing activity for the Q4000 and Well Enhancer and Seawell going forward throughout the rest of the year? Scott Sparks: Sure. Good morning, Don. Firstly, North Sea: as you know, last year we had some headwinds against us and had to stack one of the vessels, and I am happy to report now that we have both vessels out actively working. We are expecting good utilization for the monohulls in the North Sea. We are seeing high demand for decommissioning in the North Sea and starting to see a slight improvement in rates. So that dip that went with our past year is behind us, I would like to think. In the Americas, we are seeing more production enhancement activity. We have the Q5000 out currently working for Shell. The Q4000 is out working for Oxy. Oxy and others are looking to add more wells because of the increase in the price of oil, which is looking to further enhance activity. Q7000 has recently finished up with Shell in Brazil—sorry, will finish up at the end of this month—and then we are very close to taking that vessel to Nigeria again, and that is looking good, very close to being contracted. Then we expect to take that vessel back to Brazil where there is high activity and good tendering activity for that vessel. Siem Helix 1 and Siem Helix 2 are on the long-term contracts in Brazil. So our well intervention segment looks very good at the moment, with improving activity and increasing rates going forward. Robotics side is very busy. As you know, our trenching side of the company is very, very active—high utilization, increased rates year over year. We have work booked out in 2026, 2027 on trenching; work booked out all the way to 2030; and bid activity and a very good pipeline of activity out to 2032 on the trenching side. Then the Robotics business is strengthened, and bringing these two companies together there are good opportunities for putting ROVs with high-class vessels in the Gulf of America. So very confident by the end of this year we will have no ROVs available to the market. We might have to look at starting to place capital to increase spend on growth activity. Don Kreis: I appreciate that. And can you comment on day rates? Day rates for the offshore drillers have been kind of flat on these contract renewals. Are you seeing any urgency from customers seeing white space go away and urgency in contracting given recent events in the Middle East and oil price running up? Scott Sparks: We talk about this each quarter, Don. I would say it is relatively flat at the moment in the Gulf. We are seeing increased rig activity that will lead into 2026–2027 to increased rates. We have definitely seen an increase in rates and better activity in the North Sea, and we are stable and locked into long-term contracts in Brazil. So it is a definitely increased and better environment than where we were two or three quarters ago. Don Kreis: Okay. I appreciate that. And, Todd, just one for you. Any changes in Mexico? I know you have had presence there for a while, but not really worked for the government down there. Any improvement that can soak up any of the boats that came back to the U.S. side of the Gulf of America going back to Mexico anytime soon? Todd Hornbeck: As you know, we have a large component of Mexican-flag vessels in Mexico, and that is a cabotage-protected market. Yes, there has been upside. Even though the turmoil with Pemex that unfolded over the last few years, we were not levered to that company. Woodside just started the Trion project, and we have four long-term contracts with Woodside. That has started in earnest now in February, so that will go for many years. We also have a 10-year commitment for all the marine support for supply vessels for the next 10 years for that development of that field. What we are seeing in Mexico is a little bit of change in tone with bringing IOCs back into the country. A couple of years ago under AMLO, they really wanted to get all the IOCs out and all the foreign companies out of Mexico. That has turned around. It looks like we are seeing green shoots starting to happen, and other IOCs are interested in doing structures like Woodside has done there. So it looks promising. Over the next couple of years, we are going to see some growth in Mexico. Mexico is Mexico, so we have been down there a long time and done very well in that market. Don Kreis: I appreciate the color. Congrats again, guys. Unknown Speaker: Thank you. Thank you. Okay. Operator: And your next question comes from the line of Josh Jain with Daniel Energy Partners. Your line is open. Analyst: Good morning. Thanks for taking my question. First one for me, maybe you could go into a bit more detail on your views on OSV supply and demand. You mentioned vessels going back to work. Maybe you could elaborate on your views on the market not only in the markets that you serve, but opportunities elsewhere. It would be good to hear your views today. Todd Hornbeck: I think the market on the big—look, we are really focused on above 4 thousand deadweight class all the way to 6 thousand. So ultra deepwater is where our bread and butter is. That market is traded very thinly now. A lot of capacity is term contracted because Petrobras soaked up a lot of tonnage as we know, and with the rigs in the second half of the year coming back online, we see that market tightening. Our rates—I can say leading-edge rates—are in the mid-40s. They are kind of all over the board because there has been a lot of a little sloppy with the white space. But our rates seem to have held up very well. The second half of the year is where we really see the growth opportunity, the market getting really tight from a supply-demand imbalance. The subsea construction market, renewables market, and our defense market are doing extremely well. So we are servicing a lot of that market with the PSVs today. On our total revenue, about 70% of our revenues come from the specialty business, not from the drill bit. That is a testament to the type of equipment that we have. Analyst: And then on the ROV side, it was alluded to a little bit in the last answer. Is this transaction—I know Helix Energy Solutions Group, Inc. has been a bit conservative to spend capital—but when we think about the tightness of the ROV business, is this the type of transaction that has the potential, given the tightness of that market, to accelerate capital spending over the next few years? And then could you update us on lead times for ROVs today? That is my final question. Thanks. Todd Hornbeck: I think Scott can answer the lead times, but you are correct. That market is very tight. There may be opportunities there. Besides—you can always build ROVs, and Scott will tell you how long that takes and what the cost is—but I think there may be opportunities out there now that we put this together of ROV opportunities and other opportunities in the company to do some acquisitive moves and grow our platform. Scott Sparks: One of the good sides of the ROV business is we can scale up very quickly. To build a new ROV right now is a six-month lead time, and if we did a batch build every month after, we can have another ROV. So we can scale up the ROV business very quickly. There is also Hornbeck—at this time, they hire ROVs in, and that will now be an internal cost to Hornbeck. We can scale up very quickly and bring the two services together. If we cannot find adequate equipment out there on the ROV side and the tooling side, we can be in the market very, very quickly with what I am describing. We are also seeing an increased demand for ROV activity in the renewables business in Taiwan and the APAC region as well. So there is a lot of growth potential on the ROV side, the Robotics side. We also have some plans—Helix Energy Solutions Group, Inc. Robotics has never been an IRM company—and as we bring these two companies together, we are definitely going to build an IRM division, which leads to further growth as well. Analyst: Understood. Congrats on the transaction. Thanks for taking my questions. Unknown Speaker: Thank you. Thank you. Operator: And your next question comes from the line of James Schumm with TD Cowen. Your line is open. James Schumm: Hey, thanks. I just—the Hornbeck net debt, did I calculate that right? Is that around $480 million? Unknown Speaker: No. Scott Sparks: No, that is gross debt. Unknown Speaker: Go ahead, Jim. Jim Hart: That is gross. Our cash is between $75 million and $100 million—$80 million, $90 million, something like that—and the $440 million is gross. James Schumm: I said $480 million. So what do you have as net debt? Is it $380 million or what is the net debt? Jim Hart: Actually, I forgot about the [inaudible], so we have about $380 million. James Schumm: Okay. And then maybe just one for the Helix Energy Solutions Group, Inc. guys. How do you position this for your shareholders? Why is this a good deal for the Helix Energy Solutions Group, Inc. shareholders? Bill Transier: This is Bill. I will take that on. First of all, if you cannot tell the enthusiasm these two guys across the table have been talking about their combined business, it represents a really unique opportunity for these companies to come together and do more than they could on a standalone basis. And I think that is what Helix Energy Solutions Group, Inc. has been looking at for quite a while. It was a good company, well run, like Hornbeck, with a good capital structure, but it was only so big. The ability to build scale, reduce cost of capital, and do some of the things that Scott and Todd are talking about in terms of growing the business, it just makes for a better outcome going forward—a real growth company that can deliver significant shareholder value going down the road. So I look at that as the compelling reasons why, and we are excited about it. Analyst: Okay. Thanks a lot, guys. Appreciate it. Unknown Speaker: Thank you. Thank you. Thank you. Operator: I am not showing any further questions in the queue. I will now turn it back over to the company for closing remarks. Erik Staffeldt: Thank you for joining us today. We appreciate your interest in today's call that highlighted the exciting opportunity that the combination of Helix Energy Solutions Group, Inc. and Hornbeck creates for our investors and customers. Thank you. Operator: Ladies and gentlemen, that concludes today's call. Thank you all for joining. You may now disconnect.
Operator: Good morning, everyone, and thank you for joining us today for Old Second Bancorp, Inc. First Quarter 2026 Earnings Call. On the call today are James L. Eccher, the company's Chairman, President and CEO; Bradley S. Adams, the company's COO and CFO; Darin Campbell, the company's Head of National Specialty Lending; and Gary Collins, the Vice Chairman of our Board. I will start with a reminder that Old Second Bancorp, Inc.'s comments today will contain forward-looking statements about the company's business, strategies, and prospects, which are based on management's existing expectations in the current economic environment. These statements are not a guarantee of future performance, and results may differ materially from those projected. Management would ask you to refer to the company's SEC filings for a full discussion of the company's risk factors. The company does not undertake any duty to update such forward-looking statements. On today's call, we will also be discussing certain non-GAAP financial measures. These non-GAAP measures are described and reconciled to their GAAP counterparts in our earnings release, which is available on our website at oldsecond.com on the home page under the Investor Relations tab. Now I will turn it over to James L. Eccher. James L. Eccher: Hey. Good morning, and thank you for joining us. I have several prepared opening remarks. I will give you my overview of the quarter and then turn it over to Brad for additional color. We will then conclude with certain summary comments and thoughts about the future before we open it up to Q&A. From a GAAP perspective, net income was 25.6 million dollars, or $0.48 per diluted share in the first quarter, and return on assets was 1.51%. First quarter 2026 return on average tangible common equity was 14.2%, and the tax-equivalent efficiency ratio was 52.4%. Excluding all adjustments, which include MSR valuation adjustments and costs related to the 2025 acquisition of Bancorp Financial and its wholly owned subsidiary Evergreen Bank Group, net income for the first quarter was 26 million dollars, or $0.49 per diluted share. First quarter 2026 earnings were impacted by 9.8 million dollars of net loan charge-offs, which primarily included a commercial real estate investor charge-off of 3.9 million dollars for an office property located in Downtown Chicago. The property experienced some vacancy and an updated valuation that was approximately 50% lower than prior estimates. The property now cash flows adequately at the new carrying value after a restructuring. A commercial and industrial charge-off of 1.3 million dollars in the warehousing and distribution space has seen its cash flow position deteriorate over the last year. And lastly, net charge-offs related to the powersport business totaled 3.9 million dollars, a relatively higher-than-normal level due to some seasonality and continuing consumer lending softness consistent with what is being seen in the broader economy. Tangible book value per share increased to $14.35 as of 03/31/2026 from $14.12 as of 12/31/2025. The tangible equity ratio increased 5 basis points from last quarter, from 11.02% to 11.07%, and is 73 basis points higher than the like period one year ago. Common Equity Tier 1 was 13.13% in the first quarter, increasing from 12.99% last quarter, but decreasing 34 basis points from a year ago. Our financial performance continued to reflect an exceptionally strong net interest margin at 5.14% for the first quarter. That is a 5 basis point improvement from last quarter and a 26 basis point increase over the prior like quarter on a tax-equivalent basis. Pre-provision net revenues decreased in the first quarter from the prior quarter primarily due to day count, lower loan balances, and a decline in rates overall. Cost of deposits was 105 basis points for the first quarter compared to 115 basis points for the prior linked quarter and 83 basis points for 2025. For 2026 compared to last quarter, tax-equivalent income on average earning assets decreased 4 million dollars, while interest expense on average interest-bearing liabilities decreased 2.1 million dollars. The loan-to-deposit ratio was 93.2% as of 03/31/2026, compared to about 94% last quarter and 81.2% as of 03/31/2025. The first quarter of 2026 experienced a decrease in total loans of 66.9 million dollars from last quarter. Tax-equivalent loan yields declined 5 basis points during 2026 compared to the linked quarter but reflected a 48 basis point increase from the quarter year-over-year. The decrease in yield in comparison to the prior quarter is primarily a function of Fed rate cuts working through the portfolio. Asset quality trends softened during the quarter. Nonperforming loans increased to 22.7 million dollars, but classified assets declined by 2.8 million dollars. In general, our collateral position is very good on quarter one downgraded credits. We recorded 9.8 million dollars in net loan charge-offs in the first quarter, with the majority stemming from the powersports portfolio and one relationship each in commercial real estate investor and commercial. The allowance for credit losses on loans was 72.1 million dollars as of March 31, or 1.39% of total loans, compared to 72.3 million dollars at year-end, which was 1.38% of total loans. Unemployment and GDP forecast views and future loss rate assumptions remain fairly static from last quarter, with no material changes in the unemployment assumptions on the upper end of the range based on recent Fed data projections. The impact of global tariff volatility and the war in Iran continues to be considered within our modeling. Provision levels quarter-over-linked quarter increased by 6.5 million dollars to 9.5 million dollars and were largely driven by the powersports portfolio net loan charge-offs as well as the two larger credits that we mentioned earlier. Noninterest income reflected a 476 thousand dollar increase in the first quarter compared to the prior linked quarter and a 2.4 million dollar increase from the prior year linked quarter. Mortgage banking income increased 225 thousand dollars compared to the linked quarter and increased 574 thousand dollars compared to the like prior year period, primarily due to volatility of mortgage servicing rights mark-to-market valuations. Excluding the impact of mortgage servicing rights mark-to-market adjustments, mortgage banking income decreased 51 thousand dollars over the prior linked quarter but increased 156 thousand dollars from the prior year like period. Other income increased 358 thousand dollars in the first quarter compared to the prior linked quarter and 714 thousand dollars compared to the prior year linked quarter, driven largely by powersport loan service fees and dealer chargebacks. Total noninterest expense for 2026 declined 2.7 million dollars from the prior linked quarter as the first quarter experienced 349 thousand dollars in acquisition costs compared to 2.3 million dollars in the fourth quarter last year. Our efficiency ratio continues to be excellent, as the tax-equivalent efficiency ratio adjusted to exclude core deposit intangible amortization, OREO costs, and the adjustments to net income as noted earlier, was 51.7% for the first quarter compared to 51.28% for 2025. On the credit front, we are obviously disappointed in the level of charge-offs in the quarter, but otherwise trends at Old Second Bancorp, Inc. remain excellent. Commercial real estate office continues to be under pressure broadly, with valuations coming in at steep discounts to prior levels and rents declining broadly. The good news is that we do not have very much of it on a relative basis and do not see circumstances in other credits similar to this credit that declined in value this quarter. I would say that the last office credit we are generally worried about is a participation loan that came with us via acquisition in 2021 that we unfortunately acquired an additional piece of with the Evergreen transaction. I would like to call your attention to page six of our loan portfolio disclosures for more color on our office portfolio. With respect to the aforementioned C&I relationship, we are working through that one. There is underlying cash flow and value in that business. More broadly, our focus continues to be on the optimization of the balance sheet to perform and withstand the variability of current and future interest rates, as well as diligent oversight of commercial credits and assessment of potential collateral shortfalls. We continue to reduce reliance on wholesale funding as we allow the legacy Evergreen Bank brokered CDs to run off and reprice higher-cost deposits in the falling interest rate environment. With that, I will turn it over to Brad for more color. Bradley S. Adams: Thank you, Jim. As Jim mentioned, revenue trends were generally excellent with only a modest decline in net interest income relative to last quarter. That is pretty unusual. To the prior year quarter, net interest income increased by 18 million dollars, or 29%. Tax-equivalent loan yields decreased by only 5 basis points, but securities yields increased 4 basis points in the first quarter relative to last quarter. Overall, total yield on interest-earning assets declined 3 basis points, and cost of interest-bearing deposits decreased 15 basis points. Total interest-bearing liabilities decreased by 12 basis points. The end result was a 5 basis point increase in the tax-equivalent NIM to 5.14%, relative to 5.09% last quarter. Obviously, we believe this continues to be exceptional margin performance. Tax-equivalent NIM for 2026 increased 26 basis points compared to 4.88% last year. Average loans decreased by 70 million dollars, or 1.3% quarter-over-linked quarter, and average deposits decreased by 162 million dollars. Deposit runoff is largely concentrated in high-beta, effectively wholesale, deposit captions as planned. Loan origination activity in the first quarter was seasonally slower, but the pipeline remained strong. Certainly, the market environment, including ongoing pricing challenges due to tariffs and the uncertainty with war, results in reluctance on borrowers to invest in capital projects. Our lending teams are working with their customers to ensure we can meet their needs and offer loans at a good price when the demand is there. From a stock repurchase perspective, we acquired 1.2 million shares at an average price of $19.63, resulting in a reduction in equity and a growth in treasury stock of 23.1 million dollars for 2026. That enhanced EPS by about $0.01 for the quarter. We are a little more than halfway through the existing buyback authorization. We expect to continue to remain active. Obviously, capital still managed to grow in the quarter despite the size of this capital return, and that is due to the exceptional earnings power that is inherent in this balance sheet right now. It is pretty remarkable that we can have a couple of stumbles in credit and still produce this level of earnings, with an ROTCE still in the mid-teens. Margin trends still feel very good and stable in the near term. I do think later in the year we will start to trend back towards 5%. Loan growth for the remainder of the year is still being targeted in the mid-single-digit level. Expense growth will continue to be modest in the quarters ahead. As you can see, as I mentioned, stock buyback will continue to be an attractive alternative for us as our capital continues to grow. That is it from my end. So with that, I will turn the call back over to Jim. James L. Eccher: Okay. Thanks, Brad. In closing, obviously, a mixed quarter, especially as it relates to the two aforementioned credits. But the rest of the bank is performing exceptionally well, far ahead of expectation, and the earnings power is extremely strong. We remain optimistic about loan growth in the coming quarters and the potential for more strategic growth opportunities as well. Operator: That concludes our prepared comments this morning. James L. Eccher: I will now turn the call over to the moderator and open it up to Q&A. Operator: Certainly. At this time, we will be conducting a question and answer session. If you would like to ask a question, please press 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press 2 if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment, please, while we poll for questions. Your first question for today is from Jeffrey Allen Rulis with D.A. Davidson. We will now open the call for questions. Analyst: Thanks. Good morning. Just a question on the net charge-off expectations to realign where we are for the balance of the year. You had been bouncing around 40 basis points, and you have talked about that with the powersports book. Given this quarter's elevated level, is there any pull-forward on some of those losses, or should we revert back to that prior guide on net charge-offs? James L. Eccher: Yes, good question, Jeff. I mean, I think the first thing is, as it relates to powersports, the absolute level of charge-offs is going to be a little bit higher. I would call your attention to page nine of our loan disclosure deck. You can see—and Darin can speak to this, certainly—but the absolute losses were higher this quarter, and the contribution margins were at an all-time high. So that is the trade-off here. We had an 8.3% net contribution margin after charge-offs. We think loss content will probably trend lower in the coming quarters due to normal seasonality. As it relates to commercial office—page six I mentioned before—we have a little over 3.5% of the loan book in office today, 68% loan-to-value based on updated appraisals. Only 3 million dollars is classified. There is one other credit that is not classified that we are keeping a close eye on, and we may see some pull-forward losses, but it is too early to tell at this point. So, roundabout way of saying, we think losses will trend lower in coming quarters, but just keep in mind that powersport losses will be a little more elevated than what we normally report. Analyst: Appreciate it, Jim. I would take the positive side to the next question on the margin. I heard your comments, Brad, on expectations for the margin, but is there any residual, maybe positive impact on the sub debt payoff? Is that inclusive of your expectations? And the second piece of that is, are you assuming a kind of static rate environment? Bradley S. Adams: What I would tell you at this point—and obviously notice is required to pay it off further—but what we have done for the go-forward is we paid down a portion of the sub debt that resulted in the gross dollar amount of interest expense remaining the same. Obviously, we have ample flexibility to pay it down further, or we could refinance depending on what we view our capital needs as. Capital needs are not urgent at this point, obviously, as you can see by looking at our balance sheet. But I do not think the name of the game is any different than what we have said for the last two years, Jeff. We have got lots of flexibility. The balance sheet is ridiculously strong. To be able to see the kind of delta that we have seen in rates along the curve and deliver this kind of margin stability has been something I am very proud of. I do not see a lot of volatility going in. I think we will see more consumer loan yields as it relates to powersports. In the near term, I think we will see some of that mitigated by the movement back up in rates with some of the macro uncertainty—what that has done to overnight index swap rates and so on and so forth. But all in all, this is about as upbeat and positive as I can sound on interest rates, and I realize I still sound monotone and boring, but it is about as upbeat as I can be. Analyst: Appreciate it. Thanks. Bradley S. Adams: Yep. Operator: Your next question is from Brandon Rudd with Stephens Inc. Analyst: Hi. Morning, guys. I think—thanks for the color on the charge-offs. Can we drill into the increase in the nonperforming loans? I think the press release mentions a few larger relationships. If you could provide a bit more color there. James L. Eccher: Yes. Classifieds were lower. We did have an uptick in some substandard accruing loans. The largest was that aforementioned C&I credit that is cash-flow dependent. They have been hit pretty hard with supply chain disruption and tariff issues. That is really the largest one. We did have a little bit of an uptick in special mention—two or three credits—one of which we talked about was that office. One of them we repositioned. But, again, classifieds in total were down about 3 million dollars. Analyst: Okay. Thank you. And then maybe if I put some pieces together here, the provision was a bit higher than expected. I am assuming that is to cover the charge-offs in this quarter, but the reserve ratio kind of held flat. Looking ahead, should we assume the reserve level—sorry, the ACL ratio—kind of holds flat at this level going forward? James L. Eccher: Plus or minus, that is a reasonable expectation, Brandon, as these classifieds work through and they come down. Analyst: Okay. Thank you. And then one last one, taking a step back, I think there is a new exhibit on slide four at the bottom showing the decline in participation and syndication exposure over time. Is there a level that you would like to get that down to over time? James L. Eccher: Yes, that is a good point. I mean, that portfolio largely came over with the West Suburban acquisition. It peaked at right around 500 million dollars. We have done a real good job of reducing that portfolio. We have essentially more than halved it over the last couple of years. Yes, there is probably some room here; we would like to continue to wind that down. But it has created a headwind to growth the last few quarters. That is not a main line of business for us. We do not view that as franchise-enhancing type of business. So I think you can expect us to continue to wind that down. There is a certain level we will keep, but we would like to continue to wind this down even further. Analyst: Got it. Okay. Thank you. Maybe just one last one on loan yields. Broadly, we have heard that spreads were a bit compressed last quarter. Where are new origination yields relative to roll-off yields, and what is that incremental pickup? James L. Eccher: If I look at it quarter-over-quarter, the weighted average yield that we put on as far as new business has averaged between 6.6% and 6.75% over the last couple of quarters. That is actually down, obviously, 50 to 75 basis points from prior quarters. Analyst: Okay. Sure. Thank you very much. Thanks, Brad. Operator: Your next question for today is from Nathan James Race with Piper Sandler. Analyst: Hey, guys. Good morning. Thanks for taking the question. Bigger-picture question: the earnings power and the high-quality and top-quartile earnings that you guys have been putting up over the last several quarters seem to be masked by the ongoing credit inconsistencies and noise there. Jim, is there anything else you can offer to assure investors that you are getting toward the tail end of some of that credit noise in the legacy portfolio? James L. Eccher: Yes. I guess all I would say is nonperformers overall—if you look at two years ago to the end of last year—we are almost half, right? Obviously, this is a little bit of a disappointing print, having them go up again this quarter. I would just say credit progress and improvement is not always linear. This office credit has been hanging out there for some time. We think we are through most of that book. And then the C&I relationship kind of came to a head over the last six months. All I can say is we understand our NPAs are higher than we would like, and we are working very hard to reduce those. Analyst: Okay, that is helpful. And maybe, Brad, just given the buyback pace this quarter, is there appetite near term—given you are expecting some moderation in charge-offs going forward, and the margin is pretty well positioned for the current rate environment with the Fed on hold—to keep up the pace of buybacks and limit excess capital inflows going forward? Bradley S. Adams: I do not see any reason why buybacks cannot continue at these levels, subject to the remaining amount on the authorization. If you would ask me today what my intentions are, it would be to refile another authorization in short order once this is filled. We have more than enough capital to do anything strategic that I could envision coming our way and still continue to return capital to shareholders. Analyst: Got it. And I apologize—I jumped on late—but, Jim, any thoughts on what you are seeing from a pipeline perspective and how you are thinking about loan growth over the balance of this year? James L. Eccher: Yes, the first quarter is obviously soft in commercial, and it is soft with powersport. Pipelines are building. We still are anticipating low-to-mid single-digit growth through the balance of the year. Nothing has changed on that front. Analyst: And from a pricing competition perspective, are you seeing anything irrational out there on the commercial lending side of things in Chicagoland these days, or how are new spreads holding up on the commercial portfolio? James L. Eccher: I would say commercial real estate is fiercely competitive right now. We are still getting acceptable spreads in our C&I group and leasing. Brad mentioned we think powersport yields will come down a little bit due to competition. But we are still bullish our margin is going to be hanging in there around 5%. Analyst: Okay. Great. I appreciate all the color. Thanks, guys. James L. Eccher: Thank you. Operator: Once again, if you would like to ask a question, please press 1. Your next question is from David Conrad with KBW. Analyst: Hey, good morning. Just a follow-up question on loan growth from here. I was hoping you can break that down a little bit between commercial and powersports. I imagine powersports is just kind of the trough seasonal level for the year. So maybe those two asset classes—give a little bit of expectations for the year. James L. Eccher: Yes. Maybe I will let Darin talk about powersports. As it relates to commercial, we think it will be pretty broad-based. I think we will see growth in commercial real estate, C&I, sponsored, leasing. We are not seeing any one sector with higher expectations than the other. As it relates to powersport, maybe, Darin, you can comment on that. Darin Campbell: Yes. I think I am the same as where I was at end of the year. In the overall group—and with that, I include the collector car lending that we do as well nationally—we will have single-digit growth. I am self-projecting for the remainder of the year. And then charge-offs in powersports were a little bit over 2% this quarter. Analyst: But to your point, the excess spread, the contribution margin, was actually one of the highest you have had in recent quarters. Just wondering if you are doing anything to tweak the credit on that aspect as you are looking at originations going forward in terms of underwriting. Darin Campbell: We have tightened a little bit on the underwriting, but not a material change, because we focus on the net contribution margin, which is the overall profitability of the business. A lot of it is driven by product mix. We have a good mix of originations—endorsed OEM products and non-endorsed products—and we charge higher on the non-endorsed products than we do for our endorsed products. For example, endorsed would be Indian, Triumph, KTM. If you are not endorsed—maybe it is Harley, BMW, Yamaha, Suzuki—those types of products, we charge a point higher for those products. So part of the little higher charge-off rate is related to the product mix coming in over the last couple of years, which is driving the overall profitability. It does not charge off at a point higher, but we charge a point higher. So it is driving a little bit higher charge-off rate, but it is also driving a better profitable portfolio. I see it staying around this level, maybe slightly less. A couple of changes that we made: our overall mix of paper that we did in the first quarter—if you include everything that we did nationally in the business—2025 compared to 2026, our FICO score went from 735 up to 743 on the full mix of business that we did, comparing quarter over quarter. All of that will start playing into the mix as this portfolio continues to turn over. That number should start coming down a little bit, but I would not say materially going down because we like the mix of business that is going into the portfolio from a profitability standpoint. Analyst: Got it. Perfect. And then last one for me, Brad. Expenses were much lower than at least what I expected this quarter. Maybe a little more color on core expenses—where we go from here for the year. Bradley S. Adams: Fourth quarter is always tough because you see bonus levels can have more variability in the fourth quarter based on where everything comes out. Acquisition costs were also in there. I would point you broadly to the overall expense guide, which is we are trying to grow in that 3% to 4% range for the year. That feels right. So I would just expect it to follow that range from here. I would say, given how well the businesses are performing, I would expect to see an overall bonus level as a component of salary and benefits to be relatively consistent with what we saw last year, minus the one-time stuff, of course. Again, I feel like we have done a good job controlling it, and 3% to 4% in this kind of inflationary world, given the type of double-digit increases that we have in employee benefits, is pretty good performance for us. I am pleased with that. Analyst: Got it. Okay. Thank you. Appreciate it. Operator: We have reached the end of the question and answer session, and I will now turn the call over to James L. Eccher for closing remarks. James L. Eccher: Okay. Thank you, everyone, for joining us this morning. We appreciate your interest in the company, and we look forward to speaking with you again next quarter. Thank you. Operator: This concludes today's conference, and you may disconnect your lines at this time. Thank you for your participation.
Operator: Good day, and thank you for standing by. Welcome to the Eagle Bancorp, Inc. first quarter 2026 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. To ask a question during the session, you will need to press star 11 on your telephone. You will then hear a message advising your hand is raised. To withdraw your question, please press star 11 again. Please be advised that today's conference is being recorded. I would now like to hand the conference to Eric Newell, Chief Financial Officer of Eagle Bancorp, Inc. Please proceed. Eric Newell: Good morning. This is Eric Newell, Chief Financial Officer of Eagle Bancorp, Inc. Before we begin the presentation, I would like to remind everyone that some of the comments made during this call are forward-looking statements. We cannot make any promises about future performance and caution you not to place undue reliance on these forward-looking statements. Our Form 10-Ks for the fiscal year 2025 and current reports on Form 8-K, including the earnings presentation slides, identify important factors that could cause the company's actual results to differ materially from any forward-looking statements made this morning, which speak only as of today. Eagle Bancorp, Inc. does not undertake to update any forward-looking statements as a result of new information, future events, or developments unless required by law. This morning's commentary will also include non-GAAP financial information. The earnings release, which is posted in the Investor Relations section of our website and filed with the SEC, contains reconciliations of this information to the most directly comparable GAAP information. Our periodic reports are available from the company online at our website, or on the SEC's website. With me today is our President and CEO, Susan Riel, and our Chief Lending Officer for Commercial Real Estate, Ryan Riel. I will now turn it over to Susan. Thank you. Susan Riel: Good morning, and thank you for joining us today. We are pleased to begin 2026 on track with our near-term strategic priorities: generating capital through earnings, diversifying the balance sheet across both assets and funding, and executing on the repositioning work we have been discussing with you over the past several quarters. The first quarter reflected meaningful progress on several fronts. We returned to profitability, expanded net interest margin, and delivered strong C&I growth, a direct result of the deliberate investments we have made across the franchise and the disciplined execution of our commercial team. At the same time, we are realistic about where we are in this repositioning. The pace at which legacy exposures resolve and scheduled payoffs occur is faster than the pace at which we can prudently generate new earning assets. That asymmetry creates near-term pressure on net interest income and a smaller earning asset base as we work toward a higher-quality balance sheet. We are not shrinking the balance sheet because deposits are leaving us. In fact, core deposits have grown $240 million year over year. We are making strategic choices on both sides of the balance sheet that we believe position us for stronger, more sustainable, and more durable earnings. We continued to reduce reliance on higher-cost brokered deposits, refining the quality of our funding base. In parallel, our active resolution of problem credits is producing elevated charge-offs, a deliberate trade-off we are willing to make because we would rather absorb the near-term earnings impact and emerge with a cleaner balance sheet than carry these exposures for an extended time. The deliberate actions we took throughout 2025 are producing measurable improvement, a trajectory Eric will walk through in detail. We have a plan designed to deliver materially stronger pre-provision net revenue as the funding mix improves, as disciplined loan growth returns to CRE, and as the asset quality work I mentioned continues to reduce the impact from nonaccrual and resolution activity, and we are executing against it. With that, I will turn the call over to Eric to walk through the quarter in more detail. Eric Newell: Thank you, Susan. Before I walk through the specifics, I want to step back and acknowledge the tangible progress we have made on asset quality this quarter. This quarter, we reported net income of $14.7 million, or $0.48 per diluted share, a meaningful swing from the $2.4 million loss we reported last quarter, and that improvement reflects the hard work underway across the portfolio. Reducing criticized and classified loans, resolving nonperforming exposures, and strengthening the overall health of the portfolio remain the top operational priorities for this management team. Based upon investor feedback, and consistent with our commitment to transparency, we continued to expand our disclosures to give investors a better picture of portfolio dynamics—both the progress and the challenges. That transparency is something we take seriously, and it shapes how we will walk through this quarter's activity today. With that as context, let me walk you through what we saw in the first quarter. I will start with our concentration metrics. The first quarter saw continued reductions in our CRE and ADC concentrations, as expected payoffs, resolutions, and the completion of construction projects drove meaningful progress to reduce overall concentration risk to the bank. Our CRE concentration ratio, which measures CRE loans to total risk-based capital and reserves, declined to 295% at March 31, moving below the 300% threshold. Our ADC concentration ratio came in at 76%. Turning to criticized and classified assets, when combining substandard, special mention, and all held-for-sale loans, balances declined by $79.9 million in the quarter to $794.1 million at March 31, compared to $874 million at year-end. As a percentage of Tier 1 capital, that represents 67.3% at quarter-end, down from 74.6% at year-end and down meaningfully from the peak of 90% we saw at September 30 of last year. The directional trend is clear, and we are committed to continuing it. Slide 16 of the investor deck provides additional detail on the composition of that portfolio. On slide 17, we have added a portfolio walk to help illustrate the various inflows and outflows in the criticized and classified book during the quarter. I want to be direct about the inflow activity. $159.9 million of downgrades occurred in the first quarter, which is elevated relative to the $89.3 million we saw in 2025. However, this materially improved from the $445 million inflow we experienced in 2025. Let me briefly touch upon the primary drivers of the inflow. Three relationships accounted for the majority of the downgrade activity. The first is a multifamily project in Maryland experiencing pressured net operating income due to tenant credit issues and releasing costs. The property has been reappraised and is not considered collateral dependent. The second is a hotel relationship downgraded upon receipt of 2025 financials reflecting lower occupancy. We are updating the appraisal and working with the borrower on a remediation path. The third is a single secured C&I relationship moved to special mention. We currently do not expect any loss. Taken together, these are discrete situations, and we believe they are not indicative of broader portfolio weakness. What they do reflect is our portfolio management process working as intended. Loans migrating into criticized and classified are predominantly coming from our lowest pass risk rating category—relationships we have actively been monitoring through our criticized asset committee with upgrade and downgrade triggers and remediation strategies updated each quarter. Turning to the held-for-sale portfolio, we continue to make meaningful progress in the quarter. The portfolio ended at $55.7 million, down from $90.7 million at year-end. Slide 18 of the investor deck walks through the inflows and outflows during the quarter. We transferred three relationships from held for investment during the quarter to facilitate the sale of a fourth held-for-sale relationship, a deliberate action consistent with our strategy of resolving exposures in a manner that minimizes loss. Importantly, of the $55.7 million remaining in held for sale at quarter-end, $55.2 million is already under contract to be sold. While we made progress on total criticized and classified loans during the quarter, nonperforming loans increased to $128.8 million at March 31, up $21.9 million from the prior quarter, representing 1.86% of total loans. Slide 25 of our investor deck walks through the linked-quarter inflows and outflows. Loans on nonaccrual undergo specific reserve analysis, and those determined to be collateral dependent carry specific reserves in the ACL. The provision for loan losses in the quarter reflects the incremental reserves required for those exposures. Provision for credit losses totaled $13.4 million in the first quarter, a decline of $2.1 million from the prior quarter. Our allowance for credit losses ended the quarter at $147.2 million, or 2.12% of total loans. Within that total, we carry $60 million of reserves specifically against our income-producing office portfolio. Net charge-offs totaled $26 million in the quarter, an increase of $13.7 million. This was primarily driven by $11.6 million associated with loans moved to held for sale as part of our targeted resolution efforts. These actions reflect disciplined, relationship-by-relationship strategies to resolve legacy exposures where outcomes are assessed individually to optimize value. In many cases, we believe proactively resolving these credits positions us for stronger long-term results compared to extended workout scenarios. Early-stage delinquency is often the leading indicator of future credit migration, and the $31.9 million decline in 30- to 89-day past due balances is a constructive signal about the forward pipeline. We are encouraged by the trajectory. At the same time, the increase in nonperforming loans is a reminder that this work is not finished. We are not treating it as such. Resolving these exposures, maintaining our reserve discipline, and continuing to improve the overall health of the portfolio remain our highest priorities. Turning to earnings. The improvement in profitability this quarter is in many ways a direct function of the asset quality work I just walked through. The discipline around resolving exposures, managing expenses tied to loan dispositions, and repositioning our funding mix is showing up on the earnings line. With that as context, let me walk through the drivers. Net interest income declined $4.6 million to $63.7 million, primarily reflecting accelerated CRE loan payoffs and lower average cash balances, partially offset by reduced interest expense from the continued reduction of higher-cost brokered deposits. Two fewer days in the quarter also contributed. NIM expanded 9 basis points to 2.47%, driven by an improved funding mix as wholesale funding usage declined. We estimate approximately 3 basis points of NIM pressure from loans moving to nonaccrual and the associated interest reversals. Pre-provision net revenue was $27.7 million, an improvement of $7 million from the prior quarter. The improvement was driven by lower noninterest expense, which declined $21.1 million to $48.7 million, reflecting the absence of two notable items from the fourth quarter: $14.7 million of expenses related to loan dispositions and a $10 million legal provision tied to the probable and estimable resolution of a previously disclosed government investigation. Noninterest income increased modestly to $12.7 million, supported by $3.6 million of gains on loan sales compared to a $1.1 million loss in the prior quarter. Our capital position remains strong and industry-leading. Tangible common equity to tangible assets was 11.51%. Tier 1 leverage was 10.63%, and CET1 was 13.8%. Tangible book value per share increased $0.30 to $37.56 as earnings contributed to capital. On funding, period-end deposits declined $542 million from December 31, of which $413 million reflected the intentional reduction of brokered deposits. Year over year, we reduced brokered deposits by $921 million while growing core deposits by $240 million, reflecting coordinated execution across all our deposit teams. Available liquidity stands at $4.3 billion, and we maintain close to two times coverage of uninsured deposits. Turning briefly to the outlook. Our 2026 forecast is substantially unchanged from what we shared last quarter, and slide 11 of our investor deck provides the detail. We continue to expect full-year NIM in the 2.6% to 2.8% range, noninterest income growth of 15% to 25%, and noninterest expense flat to down 4% when adjusting for the notable items I mentioned. Average deposits, loans, and earning assets are still expected to decline year over year, reflecting intentional balance sheet repositioning rather than operating pressure. Altogether, these trends support our confidence in expanding pre-provision net revenue in 2026 despite a smaller average balance sheet. I will turn it over to Susan for final comments ahead of Q&A. Susan Riel: Thank you, Eric. Before we move to questions, I want to leave you with a few final thoughts. The first quarter demonstrated that our strategy is working. Asset quality is improving, our funding mix is strengthening, and the earnings profile is beginning to reflect the repositioning work of the past year and the true value of our franchise. We still have more to do, and we are not losing sight of that. But the direction is clear, and the discipline across this organization is real. What gives me the greatest confidence in the path ahead is the strength and depth of the team executing against it. Our priorities are well established: continuing to reduce criticized and classified balances, transforming our funding mix toward core deposit relationships, pursuing disciplined loan growth, and expanding pre-provision net revenue over the course of 2026. These priorities and the capabilities we have built across credit, finance, lines of business, and our risk and control functions are the foundation for the next chapter of Eagle Bancorp, Inc.'s story. This franchise has exceptional talent, a distinctive market position, and the institutional strength to continue delivering against these objectives through the leadership transition ahead and well beyond it. Before we conclude, I want to thank our employees for their continued dedication and professionalism. Their commitment has been instrumental in navigating a challenging period and positioning the company for the future. Thank you again for your time and for your continued interest in Eagle Bancorp, Inc. We will now open the call for questions. Operator: Thank you. As a reminder, to ask a question, press star 11 on your telephone and wait for your name to be announced. To remove yourself, press star 11 again. Our first question comes from the line of Justin Crowley with Piper Sandler. Please proceed. Justin Crowley: Good morning, everyone. I just wanted to start off on the level of criticized here. It is good to see that continue to fall with some help from the loan sales. Could you speak a little more to the new inflows into criticized? Is that a pace that you would expect slows from here, or how are you thinking about the trajectory as you move through the year? Ryan Riel: Hey, Justin. Forecasting what that is is tough to do. Our portfolio management practices touch on these loans each and every quarter. We should not see many surprises in that process because we touch it so frequently, but it is expected to continue to see some migration in there. Eric Newell: Ultimately, just to build off of that, Justin, our goal and commitment from my prepared commentary is that criticized and classified will continue to come down on an absolute level as well as relative to loans and Tier 1 capital. Based on what we see today and what we believe, we expect to make meaningful progress by year-end. Ryan Riel: And, Justin, to build on that, it is important to note that the regulatory definition of criticized and classified loans does not require loss content. The potential weakness or well-defined weakness that would define those ratings does not necessarily have loss content in them. That is part of the story we have been telling for several quarters. You have seen the composition of that list fall away from office. Justin Crowley: Okay. Got it. In terms of further loan sales, with what is remaining in held for sale and anything that could get added from here, are we at a point where future disposals are largely coming outside of the office portfolio? How would you set expectations there in terms of what you are looking to ring-fence? Ryan Riel: We are looking at each and every case on a one-off basis. We are evaluating it, management comes to a decision as to what the best path forward is, and we use the tools at our discretion. The anticipation is that tactic will continue to be used as we determine it is the best path to reach the best possible outcome and maximize shareholder value. Justin Crowley: Okay. That is fair. One last one on the office reserve, which you took down in the quarter. Can you talk through a little more on some of the factors that get you comfortable in that decision, in part considering the increase in nonaccruals, with a lot of that being office driven? Eric Newell: The biggest driver of the decline in ACL quarter over quarter related to office actually comes from the approximately $37 million reduction of substandard loans that are a big driver of that pool. That is the main driver of that decline. We assess the overall methodology that we apply qualitatively as well as quantitatively to the entire process, but particularly with office. We believe that the $60 million that is associated with the total office portfolio in the ACL is appropriate at March 31. Justin Crowley: Great. I will leave it there. Thanks for taking the question. Operator: Our next question comes from David Chiaverini with Jefferies. Please proceed. David Chiaverini: Hi, thanks for taking the questions. I wanted to follow up on the credit quality discussion. It is good to see that criticized and classified are down, and it sounds like you are expecting a continued decline through this year. Does this commentary also apply to the nonaccrual loans that we saw increase in the quarter? Eric Newell: I would say yes, generally. What you are seeing in nonaccrual loans is really the result of us working through some of the loans that have been identified as special mention and substandard. To me, the way I look at it, the barometer of what could come is really looking at the total portfolio of criticized and classified. As that portfolio continues to decline, which we expect will occur throughout the year, the incidence or the likelihood of some of those loans flowing into nonaccrual or charge-off will also fall. I think you are going to see some improvement in nonperforming as well, as that entire portfolio gets worked through. David Chiaverini: Great. Thanks for that. On the held-for-sale portfolio and the sales that you have under contract, it looks like on slide 18 there is a valuation of about $3 million. Are you selling loans in line with what you originally thought? And, at what percent of par on average are you selling loans? Eric Newell: I will answer the first part of that, and maybe Ryan can touch on the second part. When you look at the totality of what we put into held for sale through this cycle, which is really over the last three to four quarters, we have pretty much hit the mark. Yes, we had some losses that we recognized in the fourth quarter, but we had gains in the first quarter. When you net all that together, we feel comfortable with the process we have been undergoing to transfer those loans into held for sale. I would remind everyone that when it comes to office, we are generally using broker opinions of value because that is more forward-looking and reflective of the conversations we have been having with market participants with those notes. Ryan, if you want to touch on the second one—on the question of relative to par, where is the landing spot? Ryan Riel: It is a hard one to answer, and it has been a significant drop from par on the office side. If you go back and look through the last several quarters, you will see those numbers, and the second and third quarters of 2025 were where the majority of those challenges showed through the financial statements. We have not compiled the data of where we are relative to the original unpaid principal balance, but it is a substantial decrease because the office market has had a substantial valuation decrease. David Chiaverini: Just building off of that a little bit, when you look at the office portfolio and the cycle to date, what has the loss content been? Eric Newell: For the office portfolio, we have been probably between 45% and 50% when you think about loss content as a function of loss given default and probability of default. David Chiaverini: Got it. And then, as a percentage of carrying value with the reserves netting against that, it is significantly higher, is my assumption. Would you say that is fair? Ryan Riel: That is what Eric's comments address. The reduction to the carrying value netted us, for that portfolio, right about at a new par, if you will. David Chiaverini: Correct. Very helpful. Thank you. Operator: Thank you. Our next question comes from the line of Catherine Mealor with KBW. Please proceed. Catherine Mealor: Thanks. I had a question about the size of the balance sheet. It looks like in your outlook slide, deposits, loans, and average earning assets are coming in below your original range, in part as you clean up and push loans and high-cost deposits off the portfolio. But you have not changed the guidance. Do you feel like the full-year range will fall as we move through the year, or is there any reason to think that you will catch back up to where you originally thought the balance sheet would be? Eric Newell: There are a couple of things going on. Averages are informing NII. From a period-end perspective, our expectation is that CRE will continue to see some decline in the quarter, but when you compare year-end 2025 to year-end 2026 for the CRE portfolio, we expect it to be flat. That informs the forecast in terms of average balances for loans because you are seeing a material reduction in the first half for CRE, and we expect that to come back up in the back half of 2026. In terms of C&I, we saw approximately 5% linked-quarter growth on the loan side, so on an annualized basis that is about 20%. I would expect that to be a little bit lower when you compare year-end to year-end for C&I. That is one of the reasons why, when you look at the forecast, we are actually on the higher end of our loan growth target because of the contribution that C&I delivered relative to our initial expectations in the first quarter. One more thing on the forecast: we did not change the NIM range because the forward curve at March 31 has largely priced out the two rate reductions that were expected at year-end. Given our balance sheet and interest rate risk stance at the moment, that is beneficial to us. Also, we believe there will be growth in average cash in the second and third quarter. We have a third-party payment processor that does not really impact our quarter-ends but does impact our averages because the balances are here for seven to ten days, and the first quarter is a lower level of seasonal activity for them. Catherine Mealor: That makes sense. Thank you. Back to the credit piece—can we talk about the three new inflows into classified that you saw this quarter and mentioned in your prepared remarks? Why were those credits not originally identified when you did your full portfolio evaluation a couple quarters ago? Have you seen deterioration in those three since then, and could we be seeing more for the rest of the year? What are you looking for in your portfolio to ensure that you have captured everything that could be at risk within criticized/classified—any big appraisals coming up or maturities? Ryan Riel: Starting with maturities, if you look at our criticized/classified list, there are a number of loans on there that mature this year, some within close proximity to where we are today. We have been engaged with those customers for many months and figuring out the next step for that particular asset. The risk rating takes into account historical performance but is also forward-looking. On the inflow into criticized and classified, the new entrants are based on new information, not historic information. For the multifamily asset that Eric spoke to, a new appraisal came in and informed that performance continues to suffer from tenant credit issues, which, frankly, on a month-over-month basis continues to get better, and we are continuously engaged with that borrower. For the hospitality asset, recent trends, coupled with secondary and tertiary repayment sources and a decline in hospitality overall in our market, created a well-defined weakness by the regulatory definition. Again, loss content does not need to be present in criticized and classified assets. The point is that idiosyncratic factors in each individual relationship drove the risk rating downgrades, not something more systemic. Operator: Thank you. Our next question comes from the line of Analyst with Raymond James. Please proceed. Analyst: Good morning. Maybe following up on your comments there, Ryan, regarding the couple of new inflows—you have the hotel/motel in Arlington and the Prince George's County apartment building. Those matured in the last couple of weeks. Did you give them extensions, and what is the expectation there in terms of where you are going with those credits? Ryan Riel: We had hoped, before the maturity date, to have a longer-term plan in place. We did not arrive at that, so we put short-term extensions in place in both situations, which have already been booked. The data is as of 03/31, so the current maturity is actually out into the future a bit, and we continue to work with each of those clients for a longer-term solution. Analyst: Got it. In terms of the overall Washington, D.C. market—there are different submarkets with issues—but stepping back, what is your overall sense of activity, especially for multifamily, in terms of renting out properties and where things are going? Ryan Riel: The multifamily market as a whole in the region—across Maryland, D.C., and Virginia—from a rent growth and vacancy perspective is lessening. We are more equating with national averages where, historically, we had exceeded them as a region. That is not necessarily true in each individual submarket, but as a whole it has lessened. Absorption has slowed, and new supply has also slowed even more dramatically, which is a rebalancing mechanism for supply and demand. Additionally, valuations have maintained at higher-than-national averages. Cap rates are in the high 5s where national averages are in the low 6s. Overall, I would describe it as cautious optimism in the multifamily market—not without challenges and the need for owners and lenders to work through them—but overall, it is still a good and stable multifamily market in our nation's capital. Analyst: And a similar question on the office side—my sense is there has been better lease-up activity in some markets. What are you seeing for office activity now? Are the green shoots still there, or have they moderated from a few months ago? Ryan Riel: In the office market, trophy assets in our region continue to perform really well with record-setting rents announced regularly. Trophy and A are really working. On the B and C side, it is still a struggle. Tenant demand is not there. There is a lot of supply being pulled off the market through conversions and other tactics by owners, so it continues to be a challenge in the central business districts. More suburban, community-amenity properties—medical, neighborhood uses—have more demand and greater occupancy, and therefore better cash flow. There is more health in that space. In those more suburban spaces, often there are secondary and tertiary sources of repayment tied to those loans, so it is not just the office valuation as a payment source. Analyst: Going back to the criticized/classified funnel—you mentioned a fair amount was related to updated data, like annual financials. Was there a greater update this quarter than other quarters, or do you expect a similar pace for updated financials and a similar funnel in the second quarter? Ryan Riel: It is a point-in-time issue. The loans we are talking about are not high in quantity; it is the lumpiness of our portfolio that drives the dollars. If you track our top 25 loan list as CRE balances decline, a number of loans have reached full payoff, which has been the most significant portion of our decline in CRE balances—either refinances or sale of the underlying assets. We do not anticipate this level of inflow every quarter, but we will continue to monitor our portfolio and enhance our portfolio management practices. Eric Newell: Building off of that, it is important to reiterate the commitment that the team has to reduce the overall criticized and classified on an absolute basis by year-end. We are going to continue to show progress in future quarters as well. Analyst: Alright. I appreciate all the color here. Thank you very much. Operator: Our last question comes from the line of Christopher Marinac with Brean Capital LLC. Proceed. Christopher Marinac: Good morning. I wanted to ask about the granularity point that Ryan was just making. Is that going to work in your favor in terms of inflows possibly being less because of the smaller-sized loans as you continue to work through the book? And can that drive the reserve behavior from here? I know there is a scenario where reserves could go back up, but you have built this reserve over many quarters, so the decline was no surprise. Should provision continue to come in and be less than charge-offs for a while? Eric Newell: If you look at the first-quarter provision expense as well as charge-offs, that is a decent run-rate for our expectation for the remainder of the year for each quarter. When you add that together, it does show a reduction in the reserve coverage to loans by the end of the year. Are we going to get to a peer level on that metric by year-end? No. But I do expect that the coverage of ACL to loans will be lower at year-end 2026 than where we started the year. Christopher Marinac: Thank you for that. Going back to the C&I evolution—will we see C&I deposits grow year over year as we get further along? I know there was some seasonality in Q1 as the slides implied. How should we think about that a few quarters out? Ryan Riel: If you look back a year from now to March, C&I deposits have grown by a couple hundred million dollars. I do not think the first quarter is indicative of any trend. The C&I pipeline continues to be robust. We continue to mandate primary relationships with the transactions that we bring in. What you will see differently on the production and deposit side is the CRE pipeline, which is now building, will begin to be executed. To Eric's earlier point, we will stabilize balances through the first half and look to grow from our June 30 numbers toward the end of the year on both sides of the balance sheet. Eric Newell: On slide 29 of our deck, we have added disclosure about the C&I portfolio—both loans and deposits. You can see that we had 28% growth of deposits in the C&I line of business year over year. If you look at it from a dollars perspective, C&I more than funded itself dollar for dollar in 2025. I asked Evelyn if she could do it again in 2026, and we will see how she can deliver on that. Joking aside, our expectation is that you cannot fund that line of business dollar for dollar year in and year out, which informs some of the percentage growth that you see. It is evidence of execution of the strategic plan—remixing the loan side to have more balance between C&I and CRE, which lends itself to operating account growth, relationship growth, reduction of brokered deposits, better cost of funds, higher NIM, higher pre-provision net revenue, and better ROA. Christopher Marinac: Thank you, Eric. Last question on the FDIC expense. Is that going to be lumpy in terms of how it comes off in future quarters? Was this quarter any indication of where it could go in the near term? Eric Newell: There are two drivers to our FDIC insurance expense: our overall asset quality metrics and structural liquidity improvement. We are getting a lot of benefit—and have been over the last year—from the improvement of structural liquidity. Looking back over the last two years, our net noncore funding dependency ratio in 2023 was around 30%, and now we are well below 12% to 15%. That has meaningfully contributed to a reduction in the FDIC insurance expense. As we continue to reduce the criticized and classified, and as the FDIC insurance calculation (which looks at modifications under assets in the call report) lessens on our balance sheet going forward, that will have a very positive contribution to FDIC premium expense. I estimate, on a normalized AQ basis, we will probably be about half of where we are at right now on an annual run-rate basis. In terms of timing, there is always a lag because the premium is based off filings that are a quarter behind, but I would expect improvement in the back half of 2026 and definitely into 2027. Christopher Marinac: And half is still using the March case that we just saw? Eric Newell: I would take our full-year 2025 number and use that as the basis. Christopher Marinac: Great. Thanks for clarifying that, and thank you all for the information this morning. Operator: Thank you. Ladies and gentlemen, this will conclude the Q&A session. I will pass it back to the President and CEO, Susan Riel, for closing remarks. Susan Riel: I want to thank all of you for your participation and your questions today, and we look forward to talking to you again next quarter. Have a great day. Operator: Thank you. This concludes our conference. Thank you for participating, and you may now disconnect.
Operator: Greetings, and welcome to the Kaiser Aluminum Corporation First Quarter 2026 Earnings Conference Call. At this time, all participants are in a listen-only mode. A brief question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, as a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Kimberly Orlando, Investor Relations. Thank you. You may begin. Kimberly Orlando: Thank you. Hello, everyone, and welcome to Kaiser Aluminum Corporation’s First Quarter 2026 Earnings Conference Call. If you have not seen a copy of our earnings release, please visit the Investor Relations page at kaiseraluminum.com. We have also posted a PDF version of the slide presentation for this call. Joining me on the call today are Chairman, President, and Chief Executive Officer, Keith A. Harvey, and Executive Vice President and Chief Financial Officer, Neal E. West. Before we begin, I would like to refer you to the first four slides of our presentation and remind you that the statements made by management and the information contained in this presentation that constitute forward-looking statements are based on management’s current expectations. For a summary of specific risk factors that could cause results to differ materially from the forward-looking statements, please refer to the company’s earnings release and reports filed with the Securities and Exchange Commission, including the company’s Annual Report on Form 10-K for the full year ended 12/31/2025. The company undertakes no duty to update any forward-looking statements to conform the statements to actual results or changes in the company’s expectations. In addition, we have included non-GAAP financial information in our discussion. Reconciliations to the most comparable GAAP financial measures are included in the earnings release and in the appendix of the presentation. Reconciliations of certain forward-looking non-GAAP financial measures to comparable GAAP financial measures are not provided because certain items required for such reconciliations are outside of our control and cannot be reasonably predicted or provided without unreasonable effort. Any reference to EBITDA in our discussion today means Adjusted EBITDA, which excludes non-run-rate items for which we have provided reconciliations in the appendix. Further, slide five contains definitions of terms and measures that will be commonly used throughout today’s presentation. At the conclusion of the company’s presentation, we will open the call for questions. I would now like to turn the call over to Keith A. Harvey. Keith? Keith A. Harvey: Thanks, Kim. Good morning, everyone, and thank you for joining us. I will begin on slide seven. We are very pleased with our first quarter performance. The momentum we carried out of 2025 not only continued, but in several areas accelerated. As you saw in our earnings release last night, we are raising our full-year outlook, reflecting how quickly the improvement we are seeing is coming together as we execute our strategy and move toward our long-term conversion revenue and EBITDA goals. We believe 2026 represents the opportunity to deliver a true step change in performance, and our first quarter results reinforce that view. This quarter delivered another record for EBITDA and EBITDA margins. New capacity installed over the last several years is ramping well, customer demand has been stronger than we anticipated coming into the year, lead times across the industry are beginning to stretch, and pricing continues to firm across many of our products. While metal remains at elevated levels, these higher costs, which we pass through, have not led to any signs of meaningful substitution in our markets, and our supply lines for metal remain secure through the balance of the year, which allows us to stay focused on execution rather than availability. There were four key drivers behind the strength of the results we delivered in the quarter. First, customer activity across all of our end markets exceeded expectations. As lead times extended and pricing firmed, the environment has increasingly rewarded reliability and service. These are exactly the conditions where Kaiser Aluminum Corporation differentiates itself and where our operating discipline creates opportunities to win incremental business. Second, we continue to see meaningful mix improvement at our rolling mill Warrick. The mix shift toward higher value-added coated volume is fundamental to Warrick’s long-term success and underpins our confidence in the margin and EBITDA trajectory of the business. Performance has been encouraging and demand for coated products remains strong. Based on what we are seeing today, we expect this mix improvement to continue through the balance of the year. Third, operational performance significantly improved across our operations. With significant start-up costs and related disruptions to the operations now behind us as we completed our new investments, strong operational and financial performance is returning to more historical levels. Excluding metal lag gains in the year-over-year quarterly results, we saw an approximate 850 basis points margin improvement due to operational performance gains alone. And finally, aluminum prices moved up meaningfully during the quarter, creating a metal tailwind. While beneficial to our financial results, it is modest relative to the structural improvements underway across the business. As always, we operate on a metal-neutral basis, passing through what we cannot control while focusing on conversion, productivity, and disciplined capital deployment. I also would like to point out Kaiser Aluminum Corporation’s strong competitive position with the growing use of recycled material across our portfolio, which not only supports our sustainability initiatives, but also creates the environment for strong tailwinds under current conditions. I will continue to remind everyone that these conditions can also reverse and become headwinds should metal prices decline in a volatile market. Neal will cover these points in more detail as he walks through financial details related to the quarter. Neal? Neal E. West: Thank you, Keith, and good morning, everyone. I will now turn to slide nine for an overview of our shipments and conversion revenue. Conversion revenue for the first quarter was $404 million, an increase of approximately $41 million, or 11%, compared to the prior-year period. Looking at each of our end markets in detail, aerospace and high strength conversion revenue totaled $131 million, up $10 million, or approximately 8%, primarily reflecting a 9% increase in shipments over last year. Commercial aircraft production continued to recover, supported by higher build rates at our OEM partners. We are seeing signs of destocking now ending on several of our products, albeit certain plate products continue to destock within our commercial aerospace customers. Demand across our other aerospace and high strength applications, including business jet, defense, and space, remains strong with improving booking rates. Packaging conversion revenue totaled $157 million, up $30 million, or approximately 24% year over year, reflecting a 13% increase in shipments over last year. The shift to coated products is generating higher conversion revenue per pound and this is supported by strong underlying market demand. In addition, the improvement in shipments also reflects the ramp-up of the fourth coating line. As Keith mentioned on our last call, although profitability is expected to strengthen meaningfully in 2026, we plan to operate the line at around 80% utilization while we further optimize quality and consistency. General engineering conversion revenue for the first quarter was $87 million, up $4 million, or approximately 5% year over year, primarily driven by favorable pricing, partially offset by a 2% decline in shipments. Inventory levels across the channel remain at multi-year lows, positioning us well as these markets improve. Tariff-related reshoring and the differentiation of our customer-focused quality and services along with our Kaiser Select offerings are reinforcing a favorable market setup for increasing volumes with improved pricing. And finally, automotive conversion revenue of $29 million decreased by 8% year over year on an 8% decrease in shipments. Sustained high consumer borrowing costs and tariff-related uncertainties are dampening conditions across the automotive industry as a whole. However, demand for larger vehicles such as light trucks and SUVs, where our products are primarily targeted in this end market, remains strong among certain buyers. Additional details on conversion revenue and shipments by end market applications can be found in the appendix of this presentation. Now moving to slide 10. Reported and adjusted operating income for the first quarter was $98 million, up approximately $55 million year over year. Reported net income for the first quarter was $63 million, or income of $3.71 per diluted share, compared to net income of $22 million, or income of $1.31 per diluted share, in the prior-year period. After adjusting for pre-tax, non-run-rate charges of $0.6 million, adjusted net income for the first quarter 2026 was $63 million, or adjusted income of $3.74 per diluted share, compared to adjusted net income of $24 million, or adjusted income of $1.44 per diluted share, in the prior-year period. Our effective tax rate for the first quarter was 24%, compared to 25% in the first quarter 2025. For the full year 2026, we continue to expect our effective tax rate before discrete items to be in the mid-20% range. Additionally, we anticipate the 2026 cash tax payments for federal, state, and foreign taxes will be in the $10 to $13 million range. Now turning to slide 11. Adjusted EBITDA for the first quarter was $129 million, up $55 million from the prior-year period. Adjusted EBITDA as a percentage of conversion revenue improved by 1,200 basis points from 2025 to 31.8%. The year-over-year improvement was primarily driven by $25 million from higher shipment volumes and pricing, and a net $34 million improvement in operating costs. This reflects improved scrap utilization and spreads, which was partially offset by higher operating costs. Of the $34 million operating cost improvement, $15 million was attributed to metal lag gain. In addition to our strong underlying operational performance, the first quarter metal lag gain was approximately $36 million. The increase in year-over-year scrap spreads and the metal lag gain reflect higher aluminum prices influenced by the upward pressure in global markets from the conflict in the Middle East, as well as elevated Midwest premium driven by U.S. tariff policy and tight domestic supply. As the year progresses, we remain focused on operational improvements by optimizing efficiencies and further leveraging our recent capital investment to support continued margin expansion. Now turning to slide 12 for a discussion of our balance sheet and cash flow. We generated solid free cash flow, which we calculate as operating cash flow less CapEx, of $69 million in the first quarter, despite higher working capital demands and elevated aluminum pricing, resulting in total cash of approximately $30 million and $566 million of borrowing availability on our revolving credit facility. Our resultant liquidity position of approximately $596 million remained strong as of 03/31/2026. As a reminder, our senior notes interest costs are fixed at $54 million annually, and we have no debt maturing until 2030. Given our strong last-twelve-month EBITDA performance and cash position, at the end of the first quarter 2026 our net debt leverage ratio improved to 2.8x from 3.4x at year-end, moving us closer to our targeted range of 2.0x to 2.5x. We now expect full-year free cash flow to be in a range of $140 million to $150 million, subject to metal price movements and their impact on working capital. Turning to capital allocation. Our framework remains focused on driving long-term growth. Our priorities are clear: disciplined organic investment, selective inorganic opportunities, and consistent return to stockholders. Our capital expenditures totaled $19 million for the first quarter 2026, and for the full year 2026, we continue to expect our capital expenditures to be in a range of $120 to $130 million. Finally, on April 13, we announced that our Board of Directors declared a quarterly dividend of $0.77 per common share, reaffirming their support for our strategy and focus on delivering sustainable value to our stockholders. 2025 capped our nineteenth consecutive year of dividend payments, a unique distinction that sets Kaiser Aluminum Corporation apart in the industry. In summary, as we celebrate Kaiser Aluminum Corporation’s eightieth anniversary, we enter 2026 with strong momentum, solid visibility across our end markets, and the benefit of having completed major growth investments. With this foundation in place, we are focused on harvesting returns, expanding margins through disciplined execution, and generating meaningful free cash flow. I will now turn the call back over to Keith to discuss our 2026 outlook. Keith? Keith A. Harvey: Thanks, Neal. Let me walk through our end markets and how we are thinking about the remainder of the year as part of that discussion, turning to slide 14. Starting with aerospace and high strength, demand continues to improve. We saw solid bookings and shipments across the portfolio in first quarter, and that strength is expected to continue. Destocking headwinds that affected parts of the market last year continued to ease, and improving demand is now the primary driver. A lack of imports is supporting market share gains, and increasing defense and space spending is adding incremental demand across several programs. In fact, demand for our defense and space applications appears to be taking an additional step higher, building on already high levels in 2025. Utilization across the facilities remains high, including the recently completed Phase 7 capacity expansion at our Trentwood rolling facility, driving longer lead times and upward pressure on pricing for non-contractual bookings. Based on this backdrop, we now expect aerospace and high strength shipments to grow in the range of 15% to 20% this year, with conversion revenue growth of 10% to 15%. In packaging, performance during the quarter was strong, with robust shipments and continued healthy demand in a supply-constrained environment. The fourth coating line advanced further toward full production, with eight monthly output records attained since 2025. This improvement was achieved despite persistent challenges with certain converters we use, particularly related to on-time delivery shortfalls and overall broader performance concerns. Our own execution improved during the quarter and momentum remains positive. With solid multi-year demand visibility, we will continue to position conversion revenue ahead of shipment growth as coated products become a larger portion of our mix. This is reflected largely in higher conversion revenue per pound. As you can see in the appendix of this presentation, conversion prices through first quarter have risen by nearly 50% since we acquired the business in 2021 and continue to improve. Given current market conditions, we now expect packaging shipments to grow between 10% and 15% for the year, with conversion revenue growth in the range of 20% to 25%. General engineering is off to a strong start in 2026 as well. Shipments and booking activity were solid across the portfolio. Pricing and lead times are moving out across most products, signaling a healthier demand environment. Generally speaking, low customer inventories and extending lead times create a favorable market backdrop. Specifically, on semiconductor plate products, order activity has been encouraging, whereas the destocking overhang that weighed on demand last year has largely transitioned into ensuring capacity is available to keep up with requirements. Based on trends we are seeing today, we expect general engineering shipments and conversion revenue both to increase between 5% and 10% for the year. In automotive, results were in line with expectations. Demand for light truck and SUV, where aluminum pairs well in light-weighting, remains healthy. Our shipments were lower as we prepare for two major outages later this year focused on equipment repairs, upgrades, and reviewing plans to significantly expand capacity to support aluminum driveshaft demand. As always, these investments are contractually supported by customer commitments and position the business well for future growth. Based on these factors, we now expect shipments and conversion revenue to be flat to down 5% for the year. Now turning to slide 15 and taking all of this together. We now expect conversion revenue to rise 10% to 15% and EBITDA to increase between 20% and 30% year over year. This improvement reflects stronger demand, firmer pricing, improved mix at Warrick, and continued strong execution across the portfolio. Overall, we are off to an excellent start in 2026. The fundamentals across our markets are aligning well with the expectations we set heading into the year and, in several cases, are exceeding them. The strategy is working, execution remains strong, and the opportunities ahead are even more encouraging. With that, we are happy to take your questions. Thank you. Operator: We will now be conducting a question and answer session. A confirmation tone will indicate that your line is in the question queue. You may press star 2 if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing star keys. One moment while we poll for questions. Our first question comes from William Peterson with JPMorgan. Please proceed with your question. William Peterson: Yes. Hi. Good morning. Thanks for taking the questions. Nice job on the quarterly execution and the revised guidance. I have a few questions. Starting off, trying to unpack the first quarter print: better-than-expected metal price lag benefits—can you unpack that versus the improving demand story and also versus the value-added pricing power? More importantly, looking ahead on the revised guidance, can you help us understand how much scrap spreads play a role versus mix and volume impacts that you had called out? Keith A. Harvey: Sure. Good morning, Bill, and I appreciate your comments. Let me speak to some of that. If I miss something, just hit me with the specific question again. The way I look at where we currently are, I have been trying to pull out the metal lag gains just to understand how we are doing operationally. If I do that in the comparative between the first quarter of last year and the first quarter of this year: last year, if I pulled out the gain and looked at what the EBITDA margin was without the gain, we were around the mid-teens, around a 14% to 15% type margin on just the operational side. If I do the same thing with the first quarter of this year and pull out the $36 million gain that we called out, that margin has moved up to about 24%. So we are driving the business operationally, which includes not only the mix, volume, and pricing we expected in the business, but also underlying better performance at the facilities. That also captures in the traditional business that we are taking advantage of spreads—these are beyond the metal lag that we call out. All in all, we have all the pieces performing much better and as expected. What was key, and I think sometimes gets lost: last year, we called out for the full year about $47 million of one-time start-up costs and related items. We have those pretty much behind us now. So we are getting some of that cost back into the system, the markets are improving, and we are executing better with all the chaos behind us. With regard to metal lags going forward, what we have stated—like in February—we said we are taking what the current quarter outlook does for us, and then we are looking at the forward metal curves. The forward metal curves, especially as we looked at in our last call, seemed to drop off proportionally for the market coming back into alignment. What I will say is that those forward curves are remaining fairly elevated. I am sure that is representative of the volatility in the market. So we could have some continued metal lag gains that will aid us. But, again, we are differentiating between that and operational performance. When I look at the margin growth based on how well we are doing versus just these tailwinds that have taken place, we have almost a 75% improvement year over year in Q1. That is what I am most pleased about and focused on, and I believe it is going to long term drive our business. William Peterson: Thanks for that color. There have been some changes to the Section 232 aluminum tariffs that have been refined somewhat. Are you able to comment on what impacts this change may have on your business, including supporting pricing or other customer feedback that you are hearing thus far? Keith A. Harvey: I have looked at it and tried to understand where that can come to play. I think it enhances the domestic supply position. A lot of those semi-finished type products coming in where a 25% would apply are really going to impact the imports for the most part. The 232s are hanging in quite well. I think we are on the verge of continuing to see reshoring elevate here. We are seeing more factory demand. We are seeing growth in semiconductors start to come off the floor we saw last year. I think it is going to double year over year this year and has potential to double year over year next year. So I think that strong demand and a greater hindrance for imports only leads us to a better market condition with regard to demand and a pricing environment. William Peterson: Maybe one more and I can get back in the queue. On the assumptions baked into the updated aero and high strength guidance, it sounds like you are increasingly more confident in commercial aero demand. Are destocking dynamics done or nearly finished? And how does that compare with the import environment being less pronounced? On the other side, defense sounds like you are feeling incrementally better as well. Keith A. Harvey: That is really it. We are seeing defense, in some programs where we expected perhaps a doubling, actually quadrupling of expected demand coming our way. On commercial aero, I happened to be watching CNBC yesterday morning, and Kelly Ortberg was on from Boeing, and he publicly called out the rise in build rates on the single-aisle from 42 to 47, as well as expected continued progress on other variants that are being up for approval. So we are seeing the commercial definitely get a little stronger. We are also seeing space—it is a cliché, but we are seeing space take off. All these things are hitting around the same time. We got into that same environment in 2019 when we saw not only aerospace start to take off, but also GE begin to rise, and that created a pretty pleasant environment for us. I can foresee the same thing beginning to occur here. William Peterson: Okay. Thanks for the color. Good to hear things turning positive for you. I appreciate the chance to ask some questions. Keith A. Harvey: Thank you, Bill. Appreciate it. Operator: Our next question comes from Samuel McKinney with KeyBanc Capital Markets. Please proceed with your question. Samuel McKinney: Hey, good morning, and congrats on the strong quarter. I am going to follow up on the last question on the aero and high strength market. You had enough confidence in the end market trends to raise the shipment outlook there for the year. You touched on the production ramp at the major OEMs, but can you talk about where you think we are in the destocking/restocking cycle within that end market right now? Keith A. Harvey: If I had to use a baseball analogy, I would say we are coming up in the seventh inning with regard to demand for plate-type products, and I believe we are in the ninth and heading into extra innings on the other products and markets that we participate in, including defense, business jet, space, and the other products. If I look back, we claimed a new record in 2024 for aero and high strength and then we got into some of that destocking last year. If I compare our first quarter results to the first quarter 2024, they are very similar, which is a strong start, stronger than last year. Our outlook, with the activity we are seeing currently and expectations, is that we are going to be growing quarter over quarter through the remainder of the year. I am expecting the quarterly results to continue to improve, and the outlook we are seeing right now supports that. Lead times have more than doubled in the last few months. We are seeing that with record-low inventories outside of the commercial players, which bodes well for long-term demand. We are going to see similar strength on the GE products as well. Samuel McKinney: Thanks. That is helpful. On a per-pound basis, you saw nice sequential expansion in packaging conversion revenue this quarter. Talk to us about the progress you have made and expect to make over the balance of this year on shifting to more coated capacity at Warrick, as well as the reception from your customers on the product coming off that new roll coat line. Keith A. Harvey: We have a target of 80% utilization of that line this year. Naturally, the first question is, with such strong demand, why not ramp it to 100%? Part of the mantra for Kaiser Aluminum Corporation is on-time delivery, and over the last couple of years, we have not been meeting our expectations—much less our customers’ expectations—in that regard. So we are going to ramp up and make sure that our service levels improve in a similar cadence. If we can get those earlier in the year, I am confident that demand will be there to support additional shipments. With regard to customer reception, we have had excellent reception to the quality of the product coming off that line. We have been progressing qualifications well through a number of customers, and as we ramp, we still have a way to go and more upside from that potential. Again, 80% is the target; there remains another 20% beyond that, and we intend to continue to focus on that move to coated. Our customers are receptive; they appreciate it. Demand is as strong as we have ever seen it, and we should continue to see growth throughout the quarter and through the balance of the year in that category. Operator: We have reached the end of our question and answer session. I would now like to turn the floor back over to Keith A. Harvey for closing comments. Keith A. Harvey: Thanks, Maria. We thank you for your continued interest in the company. I would also like to thank all the Kaiser Aluminum Corporation team members for their contributions in helping develop and execute what has long been a very successful strategy. I look forward to updating you all on our progress in July. Have a great day. Operator: This concludes today’s teleconference. You may disconnect your lines at this time. Thank you for your participation.
Operator: Good morning, and welcome to Hexcel Corporation's First Quarter 2026 Earnings Call. All participants are in a listen-only mode. After the speakers' remarks, we will conduct a question-and-answer session. As a reminder, this conference call is being recorded. I would now like to turn the call over to Kurt Goddard, Vice President of Investor Relations. Thank you. Please go ahead, sir. Kurt Goddard: Hello, everyone, and welcome to Hexcel Corporation's First Quarter 2026 Earnings Conference Call. Before beginning, let me cover the formalities. I would like to remind everyone about the safe harbor provisions related to any forward-looking statements we may make during the course of this call. Certain statements contained in this call may constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. They involve estimates, assumptions, judgment, and uncertainties, caused by a variety of factors that could cause future actual results or outcomes to differ materially from our forward-looking statements today. Such factors are detailed in the company's SEC filings and earnings release. A replay of this call will be available on the Investor Relations page of our website. Lastly, this call is being recorded by Hexcel Corporation and is copyrighted material. It cannot be recorded or rebroadcast without our express permission. Your participation on this call constitutes your consent to that request. With me today are Thomas C. Gentile, our Chairman, CEO, and President, and Michael Lenz, Interim Chief Financial Officer. The purpose of the call is to review our first quarter 2026 results detailed in our news release issued yesterday. Now let me turn the call over to Thomas. Thomas? Thomas C. Gentile: Hello, everyone, and thank you for joining us today for Hexcel Corporation's first quarter 2026 earnings call. Our first quarter results were in line with our expectations in terms of an improving commercial market, higher production levels, and channel inventory levels normalizing following the destocking we experienced in 2025. The quarter reflects strong execution across the business in a very dynamic environment, which is creating the operating leverage we predicted as production rates continue to increase. Also, results for the first quarter further demonstrate the long-term value Hexcel brings to our customers as a global leader in the development and manufacturing of advanced lightweight material solutions. Our market position benefits from our deep technical expertise, vertical integration at scale, and long-standing customer relationships. With a uniquely broad portfolio of lightweight composite solutions, Hexcel is well positioned for returning to growth as commercial aerospace production recovers back to pre-pandemic levels and higher. Before turning to our first quarter results in more detail, I want to briefly address the environment with the current situation in the Middle East. We are monitoring developments closely and remain in regular contact with our customers and suppliers as the situation evolves. Hexcel constantly maintains a focus on taking actions to protect our business from near-term cost volatility. While some of the inputs to our products are petroleum-based, most of what we buy is under long-term contracts. We also hedge propylene, a petroleum derivative, for eight quarters. These mechanisms mitigate much of the near-term impact from higher oil prices for feedstock, energy, and logistics costs as much as possible. Our focus is on managing near-term impact and maintaining flexibility in our operations along with a disciplined approach to managing the business. Jet fuel is one of the largest operating costs for airlines, which reinforces the importance of efficiency and lightweighting. Recent Consumer Price Index data shows that prices for airfare have risen almost 15% year-over-year as airlines grapple with higher fuel costs. Newer aircraft deliver improved fuel efficiency, which in a higher-price fuel environment makes lightweighting even more critical. This renewed emphasis on fuel efficiency directly benefits Hexcel. Turning to our first quarter results, Hexcel achieved sales of $502 million, a 10% increase compared to the same period last year. Adjusted earnings per share were $0.59. Rising commercial aerospace demand drove earnings, which enhanced our operating leverage as we grow back into our existing capacity. Gross margins also improved compared to last year. These results reflect improved capacity utilization and strong operating performance across our operations. In our Commercial Aerospace segment, sales were $334 million in the first quarter, an 18.8% increase over the same period in 2025. Sales increased across all four major programs, the Airbus A350 and A320, and the Boeing 787 and 737 MAX. Other commercial aerospace sales increased 15.6% over the same quarter in 2025 on the strength of regional and business jets. As we have discussed from prior quarters, the commercial aerospace recovery has taken longer than initially expected. In our previous call, we highlighted our growing confidence that a sustained increase for commercial production rates at the OEMs was taking hold. We continue to see that production rate ramp materialize. Our first quarter results aligned with our expected outlook for growing commercial aerospace volumes entering 2026 and continuing over the next few years. Remember that as a materials provider, the various supply chain partners keep different levels of inventory and there is also scrap and waste, so production rates we provide are approximate. Also, Hexcel is typically four to six months ahead of the OE aircraft assembly, so our assumptions are based on production, not OE deliveries. Here is how we see the outlook for the major commercial programs. First, the A320. Based on recent public announcements regarding A320 engine availability, we now expect our volumes on the A320 to be at the lower end of our guidance of low-700s for the year rather than low- to mid-700s. We remain confident in the overall catalyst for increased OEM production rates on the A320 to continue going forward. On the A350 program, we are seeing increasing alignment between our production rates and the Airbus build rates, with channel destocking largely behind us. We remain confident in our outlook for 80 units in 2026, perhaps even with a bit of upside. On Boeing programs, we see tangible evidence of progress in the ramp-up of both the 737 and the 787, which includes investments to expand manufacturing capacity in Charleston for the 787 and in Everett for the MAX. While we continue to lag Boeing's production rate for the MAX, the year-over-year first quarter sales growth was particularly noteworthy. Q1 was our best quarter on the MAX in years, with production at around 40 aircraft per month. Our forecast on the MAX for 2026 was mid-400s, and it looks like Boeing will exceed that. On the 787, our forecast was 90 to 100 units, and that continues to be our expectation. As commercial production rates at the OEMs recover, we expect to see ongoing benefits to our operations from increased operating leverage. At the same time, we are taking a measured approach to bringing capacity online to ensure incremental costs are aligned with sustained demand and that the benefits of higher production rates are not diluted. Throughout this process, our priority remains on meeting increasing production requirements while maintaining the highest standards of safety and quality. On balance, we see the puts and takes for this year canceling each other out and we are maintaining our full-year guidance. Turning to the Defense, Space, and Other segment, our first quarter sales of $169 million were impacted by the divestment of our Austrian facility, which led to a decrease in sales volume overall in the segment compared to the same quarter last year. Looking at just Defense and Space, our sales increased low single digits compared to the same period last year. We saw an increase in our volume for our European fighter programs and for both U.S. and European military rotorcraft programs. This was offset by lower volumes for launchers and rocket motors in Space. First quarter volumes for this segment also reflect the inherently uneven nature of defense program funding and spending which can vary from quarter to quarter. We expect to see the impact of increased defense spending in areas such as missiles begin to impact us favorably later this year. As we have discussed in previous calls, organic growth in the Defense and Space market is a strategic priority for Hexcel, and we remain confident in the long-term opportunity. Defense spending trends for procurement of new platforms by the U.S. and Western-aligned countries continue to indicate increased multiyear defense spending, underscoring the durability and scale of the current rearmament cycle. This increased Defense and Space spending highlights opportunity for Hexcel, as our advanced composite materials enable greater range, increased payloads, and enhanced performance characteristics such as low observability for military and space platforms. All these are areas that differentiate Hexcel. In terms of our balance sheet, at the end of Q1, we refinanced our $750 million revolver, extending its maturity to 2031. This refinancing terminated our previous revolver that was set to mature in 2028. This action further reinforces our strong liquidity position. As part of our ongoing work to streamline Hexcel's portfolio toward markets that value our high-performance aerospace carbon fiber, we remain on track with the transition of our Leicester, UK business from industrial applications to aerospace development. The restructuring cost from our transformation at Leicester impacted our results this quarter. To recap, our first quarter results reflected the forecasted rise in commercial volumes we anticipated and our expectations that operating leverage will be beneficial. Our operations typically use cash in the first quarter of the year, and this quarter cash usage was low and noticeably favorable compared to past history. This gives us confidence in the 2026 full-year guidance that we provided on our previous earnings call. Despite the macroeconomic challenges, while uncertainty in the global environment remains elevated, the market fundamentals support sustained demand for Hexcel's lightweight composite material across commercial, defense, and space markets. With our broad product portfolio, market-leading position, and continued operational discipline, we are well positioned to navigate near-term uncertainty and deliver long-term value for our shareholders and other stakeholders. With that, I will turn the call over to Mike to walk through the first quarter financial results in more detail. Mike? Michael Lenz: Thank you, Thomas. Sales growth was strong in 2026 as commercial aerospace platforms ramped and the higher volume drove margin expansion from operating leverage. Total first quarter 2026 sales of $502 million increased 8.8% in constant currency, reflecting strong growth in the commercial aerospace market. This commercial aerospace growth was partially offset by lower Defense, Space, and Other sales following the divestment of the Austrian industrial business in September 2025. By market, Commercial Aerospace first quarter 2026 sales were $333 million, increasing 19% compared to 2025. Commercial Aerospace comprised approximately 66% of total quarterly sales. Sales increased for all four of the major platforms, including the Airbus A350 and A320, and the Boeing 787 and 737. Sales growth for the two Boeing platforms was particularly strong, which was admittedly an easier year-over-year comparison as our first quarter 2025 sales to Boeing were light. Sales for Other Commercial Aerospace in the first quarter increased 15.6% year-over-year with strength in both business jets and regional jets. Defense, Space, and Other first quarter sales at $169 million represented approximately 34% of total sales. First quarter sales decreased 6.9% on lower industrial sales following the divestment of the Austrian industrial business last year. Year-over-year comparisons will be influenced through the third quarter of this year due to this previous divestment. Further, as we proceed with ceasing industrial operations at our Leicester, UK site, as disclosed last quarter, that will add an additional decrement to year-over-year comparisons as the site's annual sales have been around $15 million annually. In terms of the Defense and Space business, international military sales were strong in the quarter, including the Rafale and Typhoon fighter aircraft, as well as European military helicopter programs. Domestically, the CH-53K and Black Hawk sales were strong in the quarter. Space sales were softer year-over-year for launchers and rocket motors. Gross margin of 26.9% for 2026 increased from 22.4% in 2025 on volume, mix, and price realization. Rising carbon fiber sales improved asset utilization, which drives margin expansion from improved cost absorption. In addition, we had a nonrecurring favorable effect from the timing of inventory utilized. As a percentage of sales, operating expenses, including selling, general, and administrative expenses and R&D expenses, were 13.4% in 2026 compared to 12.5% in the comparable prior-year period, with the increase primarily reflecting R&D expenses. A portion of this was the timing of R&D activities as we continue to invest in innovation to secure a position on the next generation aircraft. Adjusted operating income in the first quarter was $68 million or 13.5% of sales, compared to $45 million or 9.9% of sales in the comparable prior-year period. Foreign exchange has become a headwind, as the impact of a weaker dollar is now being felt following a lag resulting from our hedging program. First quarter 2026 operating margin was negatively impacted by approximately 80 basis points from foreign exchange. In contrast, 2025 had a favorable impact of approximately 60 basis points from foreign exchange. Now turning to our two segments. The Composite Materials segment represented 80% of total first quarter sales and generated an adjusted operating margin of 17.6%. This compares to an adjusted operating margin of 14.2% in the prior-year period. The remaining 20% of total sales generated an adjusted operating margin of 14.6%. This compares to an adjusted operating margin of 6.8% in the prior-year period. Net cash provided by operating activities in the first quarter 2026 was $19 million compared to a use of $29 million last year. Working capital was a cash use of $63 million compared to a cash use of $98 million last year. Capital expenditures on an accrual basis were $18 million in 2026 compared to $17 million in the comparable prior-year period. Free cash flow in 2026 was a use of $6 million compared to a use of $55 million in 2025. Q1 is historically a cash-use quarter, but this year was less than typical as the timing considerations we highlighted regarding fourth quarter 2025 cash flow normalized in Q1, in addition to the improved EBITDA result. Adjusted EBITDA totaled $107 million in the three months of 2026 compared to $85 million in the first three months of 2025, an increase of 26%. We refinanced our $750 million syndicated revolver in March, extending maturity to 2031 from 2028, with a slight improvement to pricing. There were no substantive changes to covenants, and this maturity extension enhances our medium-term liquidity and improves our debt maturity profile. Leverage, defined as net debt to last twelve months adjusted EBITDA, was 2.6x at 03/31/2026, and our leverage remains elevated following our revolver borrowing in October 2025 to finance an accelerated share repurchase. We remain committed to a disciplined financial policy and to returning leverage to the targeted range of 1.5x to 2.0x during 2026. The accelerated share repurchase concluded in early March with approximately 4.5 million shares repurchased, or almost 6% of our outstanding float. Since the beginning of 2024, we have returned over $800 million to stockholders through dividends and share repurchases. The company did not repurchase any shares of common stock in the first quarter 2026, and the remaining authorization under the share repurchase program at quarter end was $381 million. The board of directors declared a $0.18 quarterly dividend yesterday, payable to stockholders of record as of May 4, with a payment date of May 11. In closing, we had a solid first quarter, and as Thomas mentioned, we have reaffirmed our 2026 guidance including adjusted EPS of $2.10 to $2.30. Our expectation remains for a roughly even split between the first half and the second half of 2026, consistent with normalized historical seasonality. There remain a number of potential puts and takes, with uncertainty from the Middle East conflict and higher oil prices a potential headwind, whereas the possibility of a faster customer rate ramp could become a tailwind as the year progresses. I also want to state how much I have valued my time as CFO and the privilege of working with an exceptional team producing such differentiated products for our customers. Thomas C. Gentile: Thank you, Mike. Before we open the call for questions, I want to thank Mike for his leadership and contributions as our Interim Chief Financial Officer. Mike stepped into this role at an important time for Hexcel, providing steady leadership while we conducted a search for Hexcel's next CFO. Mike worked with us to close out 2025, assisted with executing the accelerated share repurchase, built a plan for 2026, participated and led the finance sections in two board meetings, refinanced our revolver, and participated in two earnings calls. Quite a set of accomplishments for an interim CFO. With the hiring of Jamie Kugen, who starts May 1 as Hexcel's next CFO, Mike will finish out his tenure and support Jamie in his transition into the new role. Mike came into this role and was not just a caretaker. He brought new perspectives and helped us get better in a variety of financial areas. On behalf of the Hexcel board and the entire management team, I want to thank Mike for his commitment and the impact he made during his time with Hexcel. To close out, our first quarter performance reinforces our confidence in the direction of the business and Hexcel's value proposition. As commercial aerospace production continues to recover, we will benefit from improving operating leverage supported by our disciplined approach to bring capacity back online, control cost, and focus on safety and quality. Long-term fundamentals across Commercial, Defense, and Space remain strong, and Hexcel's differentiated portfolio, technical capabilities, and customer relationships position us well to deliver growth and value over the long term. We will now open the call for questions. Julian, we will take some questions. Operator: As a reminder, to ask a question, please press the appropriate key. Thank you. Our first question will come from David Strauss from Wells Fargo. Please go ahead. Your line is open. David Strauss: Thanks. Good morning. Tom, is there any change in your outlook? I think you had forecast Commercial up low- to mid-double digits for the year. Is there any change there given the potential upside you are talking about on rates? And then second question on the Composite Materials margin. It looks like the incrementals there were north of 40%. I think you are absorbing a decent kind of FX headwind. Kind of how did you get there this quarter, and how are you thinking about incrementals from here? Thanks. Thomas C. Gentile: Great. So in terms of the outlook on Commercial, we are basically saying that we are going to hold to our guidance and our overall plan, with some puts and takes. We do see a little bit of upside on the A350 from the 80. Based on the Airbus master schedule, based on our bottoms-up forecasting, and based on the firm POs that we already have, we see upside on the 737, as I mentioned, and 787 is about flat. But we do see some pressure on the A320. As I said, our original forecast was 700 to 750, so low-700s to mid-700s, and now we are saying it is going to be at the low end of that range because Airbus has highlighted that with the engine situation, they are expecting to deliver fewer A320s this year. So net-net, we see basically a flat outcome for the year in terms of our plan, but substantially up from last year. So again, higher on A350 and 737, flat on 787, and a little down on A320. In terms of the margins, this quarter really benefited from a few things. One, we had strong volume performance. Secondly, we did get some price on a couple of contracts with customers that came due in the normal course of events, and we were able to capture that. We also benefited, as Mike mentioned in his remarks, from inventory that was built last year and was on the books at a lower cost. When we sold it, we got the benefit from that. And then it was just a lot of operational discipline, holding the line on cost, driving productivity in the factories, and that helped improve our margins. Overall, we were very pleased with that outcome. Thank you. Operator: Our next question comes from Sheila Kahyaoglu from Jefferies. Please go ahead. Your line is open. Sheila Kahyaoglu: Tom, thanks for all the color. Just given the volume incrementals are dropping through really nicely, maybe on the A350 where the mix can be particularly favorable, it sounds like you are feeling better about the destocking trend there, and it is only the A320 that is an issue. You mentioned favorable inventory sales timing in Q1. How does the A350 ultimately flow through to the top line and margin profile as we move through the year? And then just the volume on Defense, when do you expect that to really accelerate given some of your programs in your portfolio and how we see the budget come through? Thomas C. Gentile: Right. What we see typically, Sheila, is when our volume goes up, we get better operating leverage because we are using more of our capacity, and so that drives the operating leverage for improved margins. And when I say capacity, we have 14 carbon fiber lines in Salt Lake City. We had four of those mothballed during most of the pandemic. We brought one on at the end of last year. We will bring on another one this year. As we go through the year and rates increase, particularly on the A350, using that additional capacity will create more operating leverage for us. And as we bring the next line on, that will create even further operating leverage. That is really the way it translates: increased volume allows us to utilize more of the capacity that absorbs more fixed cost and increases the operating leverage, which drives margin. And as I mentioned, on the A350 we expect to see the rates continue to increase. As Airbus has said, they are at seven, they are planning to go to eight, and we may see nine before the end of the year. That is why we feel comfortable right now with our outlook of 80, maybe a little bit of upside, as we go through the year. On Defense, it is sometimes lumpy—space launchers and satellites. We do see lumpiness on that. We saw that this quarter. For example, there was one program that we supplied, the Vulcan, which has been paused, and so that was a pretty good number last year and in the first quarter it was fairly negligible. That is an example of the lumpiness. We saw the same in Europe with some launch systems. But on missiles, for example, we are at a very good rate right now, but that gets better and we start to see it really jump in the third and fourth quarter of this year because there have been a lot of new orders for missiles, and that is starting to flow through. It has not flowed through yet. It will flow through later in the year. Then on some of the other programs that we are on, I would say they are still in the EMD phase—in terms of Engineering, Manufacturing, Development—going into LRIP, low-rate initial production. Over time, as those rates start to ramp up from low-rate initial production into full rate, we will start to see the benefit of that. So it is a slow build, but we are starting to see it, and it will become more material in the third and fourth quarter this year. Operator: Next question comes from Scott Stephen Mikus from Melius Research. Please go ahead. Your line is open. Scott Stephen Mikus: Morning, Tom and Mike. Very nice numbers. Tom, if the numbers in my model are correct, I think the $281 million of commercial aero sales in Composite Materials is the highest for any quarter since 2020, which was not really impacted by COVID. Wide-body production rates are still below pre-COVID levels, so I am just curious, was there a restocking benefit? And then on the pricing comments, was there any specific end market or program that was particularly strong from a pricing perspective? Also, you sounded upbeat on the A350 outlook for this year. Airbus has been in Kinston now for over five months. Based on your conversations with Airbus, is that facility no longer an issue when it comes to A350 production, and does the ramp mainly come down to business-class seats and, to a lesser extent, engines? Thomas C. Gentile: Right. On the first one, commercial aero sales were high, and even though wide-body production is still below where it was in 2019 and we expect it to be below for a couple of years, we are seeing the benefits of that increased production. We did not see the restocking that we saw last year. We saw that our deliveries were more in line with the OEM production rates, and so that suggests to us that that is normalizing, and we are not seeing the destocking. That is a positive. In terms of pricing, it was not in any particular area. It was just several contracts that came up for renewal in the normal course of events, and as I have said before, whenever that happens, we do try to align current market conditions with pricing on those contracts, and we got the benefit of that in Q1. We will continue to see that on a regular basis as we go forward. Our contracts tend to be five to seven years, so every year between 15% to 20% of our contracts come up for renewal and we renegotiate them, and we have been getting better prices to align with some of the inflation—the higher cost of labor, material, utilities, and logistics—that we have seen in recent years. On Kinston, I will let Airbus speak to the specifics of it, but certainly they now have full control of it and they are able to control their own destiny. They have been fairly optimistic in terms of their schedules. What we look at is our bottoms-up demand estimate, where we talk to every plant, including Kinston, and that has been very strong. Then we look at the firm POs—our POs are generally firm five months out into the future—so we are starting to see the POs already for September, which is post the August shutdown, and those are very strong as well. It is on the basis of that that we are optimistic on the outlook for the year. Operator: Our next question comes from Myles Alexander Walton from Wolfe Research. Please go ahead. Your line is open. Myles Alexander Walton: Thanks. Mike, you mentioned guidance split roughly in half, first half versus second half. Were you referring to sales, EPS, or both? And that $0.10 or so decline that you are pointing to at the midpoint, is that mostly based on margins being lower within Composite Materials because of the lack of benefit from the inventory you had in the first quarter? And then, Tom, anything you want to comment on in the M&A pipeline or outlook for inorganic growth? Michael Lenz: I was referring to EPS. A couple of things as you think about margins and trajectory going forward. Certainly, that nonrecurring benefit was relatively significant, or I would not have mentioned it. There are other considerations as we move through the year. Thomas mentioned about lines coming back on, which is great because we are carrying the depreciation and get the leverage for that, but you also have some start-up costs when you open up a new line and the phasing of hiring. There is always an ebb and flow along the way. As we looked at the balance of everything—like Thomas said, being pretty good through September—we will see what Q4 comes in. We saw that as the right balance of conservatism as well as looking at the potential opportunity later in the year. Thomas C. Gentile: Right. On M&A, Myles, our focus is really 100% on executing on the production ramp, then also making sure we are driving our R&D and innovation to get on the next generation aircraft, and then focusing on organic growth in our core businesses and in Defense in particular. As you know, we did the ASR last year in October, and we took $350 million out of our revolving credit facility, and we committed that we would pay that back and get our leverage down below 2x. As Mike said, we are at 2.6x to 2.7x right now. Our goal is to get back under 2x by the end of this year, and so we are not really planning on any M&A until we get to that point. In the future, the focus for M&A will be looking at things that are advanced material science and have an ROIC of 15% or greater. In the absence of that, we will continue to repurchase shares in the future, but not until we get back below 2x net debt to EBITDA leverage. Operator: Next question comes from Kenneth George Herbert from RBC Capital Markets. Please go ahead. Your line is open. Kenneth George Herbert: Hey, Tom. Good morning. Nice results. I wanted to see if you can provide a little more detail as to how you are managing risk on specifically your European manufacturing footprint. We have had a number of questions on this over the last month as we have seen greater volatility in input costs. Can you help frame the risk and provide confidence that you will not see any sort of uptick or related risk as a result of what is happening with energy prices or other input costs globally, but in particular with your European footprint? And if I could, you have mentioned a few times increased spending to support next generation aircraft. Do you have any updated thinking on timing as to when we could hear about announcements from your customers? Is the timing accelerating, or has your timing changed at all as you think about next-generation clean-sheet aircraft? Thomas C. Gentile: A couple of things. First of all, most of what we buy for production in the U.S. and Europe comes from the U.S. and Europe—over 90%—so we have that sort of natural hedge. In Europe in particular, we do have a forward buying program on things like natural gas that gives us a little bit more stability in the energy outlook. Of course, if things persist for a very long period of time, we will see the impact of that in out years, but for the next couple of years we feel very confident with our hedging program and our forward buying program. That will help mitigate some of those costs, and the fact that most of what we buy for European production comes from Europe and not from regions that are more impacted by the current events. And in fairness, most of our production of carbon fiber is in the U.S. We have 14 lines in the U.S., two in Europe—one PAN line in Europe—and the rest in the U.S. Prepreg is mostly in Europe, which is near the Airbus plant, but carbon fiber production is tilted toward the U.S. On next-generation aircraft timing, nothing has changed. We are still consistent with what the OEMs have declared publicly, which is that they would not make a decision for another couple of years, maybe launch a program by the 2030 time frame with an entry to service in the late 2030s. There are a lot of discussions going on right now for all different parts of the aircraft, looking at not only what type of carbon fiber and resin system, but also what type of production process. We are deeply engaged in those discussions with both airframe OEMs, Airbus and Boeing, but also with the engine OEMs. I expect that they will stick to the time frame they have announced publicly. Michael Lenz: And, Ken, as Thomas said, we layer in sequentially over several quarters both the hedging of propylene as well as the pre-buy. In the near term you are the most covered, and then that fades as you go out into later periods. None of us have a precise crystal ball as to how events will unfold over the next few months, so this approach provides balance. Operator: Our next question comes from Gautam J. Khanna from TD Cowen. Please go ahead. Your line is open. Gautam J. Khanna: Hey, thanks. Good morning, guys. I wanted to ask if you could quantify what you think your A350 shipment rate was in the first quarter, and maybe if you could give it for some of the other programs as well. Thomas C. Gentile: Just roughly, I would say A350 was at about seven, a little bit underneath seven. 787 was a little bit above seven. Both of them are talking about going to eight later this year. Boeing is talking about going above that, and Airbus is the same for the A350. As I said, we think we could see nine before the end of the year. On the A320, we were just under 60 per month, so kind of in line with where Airbus is. As I said, we are usually ahead of the OEMs. Our production is more of an estimate because we are looking at the quantity of material, and we are also about six months ahead of them. It is not deliveries that we are looking at so much as production. On the MAX, we are in the 40 range, which is consistent with where Boeing has said they are. They have been tracking very nicely and they are expecting to go to 47 later in the year, so we will be prepared for that. On the 787, as I said, we are a little bit ahead of seven per month, and they are tracking nicely to the 90 to 100 that they indicated last year; that still seems to be a good number. That is how we look at each of the rates. Operator: Our next question comes from Analyst from Bank of America. Please go ahead. Your line is open. Analyst: Last quarter you talked about selective hiring for the A350 ramp-up. Could you give us a sense of where you are in the hiring, and how you are thinking about hiring for everything else that is also ramping up? Thomas C. Gentile: Because our production is fungible across all of the programs, our hiring is aggregate, so I will give you the overall. As we said, we were a little bit heavy last year in terms of staffing because we had expected higher rates. We hired people and the rates did not come, so we ended up higher. There was no point in laying them off because we knew we had to hire them back this year and train them. We held on to that, and that impacted some of our margins last year. This year, we expect to hire around 400 people in direct labor to help support the production. Through March, we have hired about 200, about half of that. We were expecting to not start hiring in bulk until the middle of the year, but with the higher rates, we started a little bit earlier. So we had about 200 in the first quarter and expect 400 for the year to support the plan we have in front of us. Operator: Our last question will come from Scott Deuschle from Deutsche Bank. Please go ahead. Your line is open. Scott Deuschle: Good morning. Mike or Tom, is this step-up in R&D likely to continue over the rest of the year, or should it normalize back down from these levels? And the high end of guidance implies the average EPS over the next three quarters is about in line or slightly lower than the $0.59 you printed this quarter. I understand you had the inventory benefit, but unless that was really big, it would seem there would be pressure to grow EPS off this first quarter base given the build rate increases. Could you clarify the puts and takes as you go into 2Q? Michael Lenz: Hey, Scott. A couple considerations at play here. Broadly, our overall R&D headcount is actually down year-over-year, but remember, R&D spending involves other activities as well. We had a degree of an increase in Q1 just with the timing of certain activities related to that. Also, as you start any fiscal year, you revisit where your costs are flowing, and there were a couple of items that were in the factory cost centers that are really dedicated and related to R&D. So there was a little bit of a bucket shift there—nothing drastic or radical. On EPS cadence, we are very well mitigating the various cost increases here in the near term, but not completely 100%. We are being thoughtful about that. While everybody focuses on oil per se and those inputs, a prolonged elevation of that type of situation impacts other things such as shipping costs. There is also the phasing of the start-up of lines with start-up costs and the need to bring the hiring on before you realize the business and the flow-through. Taking all those into consideration, we felt this was the balanced outlook. Hopefully, we see further acceleration that could lead to potential upside. Thomas C. Gentile: And that is exactly right. When we are doing testing of new carbon fibers—to increase tensile strength, modulus, and compression—we have to produce batches of test material. Historically those batches just stayed within the plant, but now that they are picking up and there is a little bit more material, we are allocating them more properly to R&D. You will see some of that, and that is the bucket shift that Mike mentioned. In general, we are stepping up R&D to make sure that we have the right products in front of our customers as they make their decisions on the next generation product. You will see slightly elevated R&D as we go forward—some of it being the bucket shift and some of it being that we are stepping up to be aligned with where the OEMs are, both the airframers and the engine makers, for the next generation aircraft. As for EPS phasing, we are going to be about half and half on EPS for the course of the year—first half and second half. This was a strong start to the year. We will continue to drive production rate efficiencies, hold the line on cost, and drive productivity in the factory. We feel comfortable with the outlook. With all the uncertainty regarding production rates and oil, we feel it is prudent right now to hold the line and maintain guidance. We will certainly try to drive productivity and improve on it, but right now it is about balance. Operator: We have no further questions. This will conclude today's conference call. Thank you for your participation. You may now disconnect.
Operator: Ladies and gentlemen, thank you for standing by. Welcome to the Senstar Technologies Ltd. Fourth Quarter and Full Year 2025 Results Conference Call. All participants are present in a listen-only mode. Following management's formal presentation, instructions will be given for the question-and-answer session. As a reminder, this conference is being recorded. I would now like to hand the call over to Corbin Woodhull of Hayden IR. Corbin, would you like to begin? Corbin Woodhull: Thank you, Latanya. I would like to welcome everyone to the conference call and thank Senstar Technologies Ltd. management for hosting today's call. With us on the call today are Mr. Fabien Haubert, CEO of Senstar Technologies Ltd., and Ms. Alicia Kelly, the CFO. Fabien will summarize key financial and business highlights, followed by Alicia, who will review financial results for the fourth quarter and full year of 2025. We will then open the call for a question-and-answer session. I would like to remind participants that all financial figures discussed today are in U.S. dollars, and all comparisons are on a year-over-year basis unless otherwise indicated. Before we start, I would like to point out this conference call may contain projections or other forward-looking statements regarding future events or the company's future performance. These statements are only predictions, and Senstar Technologies Ltd. cannot guarantee that they will, in fact, occur. Senstar Technologies Ltd. does not assume any obligation to update that information. Actual events or results may differ materially from those projected, including as a result of changing market trends, reduced demand, the competitive nature of the security systems industry, as well as other risks identified in the documents filed by the company with the Securities and Exchange Commission. In addition, during the course of the conference call, we will describe certain non-GAAP financial measures which should be considered in addition to, and not in lieu of, comparable GAAP financial measures. Please note that in our press release, we have reconciled our non-GAAP financial measures to the most directly comparable GAAP measures in accordance with Reg G requirements. You can also refer to the company's website at senstar.com for the most directly comparable financial measures and related reconciliations. And with that, I would now hand the call over to Fabien. Fabien, please go ahead. Fabien Haubert: Thank you, Corbin, and thank you to those joining us today to review Senstar Technologies Ltd.’s fourth quarter and full year 2025 financial results. We continue to deliver solid full year performance with growth in revenue, margin expansion, and continued profitability. In 2025, revenue was $36.4 million, gross margin expanded to 65.5%, and we delivered net income of $3.2 million while maintaining a strong balance sheet with $22.5 million in cash and no debt. Those results reflect steady demand across our business and the strength of our operating model. Importantly, revenue from our core verticals grew 5% for the year, supported primarily by continued strength in corrections and energy, particularly in North America and EMEA. The performance reinforces the resilience of our business and the relevance of our solutions across critical infrastructure markets. Moving to the fourth quarter, we encountered more challenging conditions than anticipated. Revenue declined 14% year over year to $8.8 million, which also impacted margins in the quarter. The fourth quarter was impacted by several nonrecurring and timing-related factors, not a change in the underlying demand. Those factors include delays of government projects, mainly in the U.S. corrections vertical following the U.S. federal government shutdown, and a nonrecurring European telecom utility project, which will convert to further revenue generation in 2026. Most of these projects have shifted into 2026 and later periods. This gives us confidence in the strength of our pipeline, which continues to grow, and the overall demand environment, as reflected in our full year results where our core verticals grew by 5% despite the fourth quarter timing impact. Looking more closely at our verticals, we continue to see meaningful opportunities across data centers, energy, utilities, corrections, airports, and solar farms. These key verticals are increasingly focused on security and operational intelligence, which aligns well with our technology and capabilities. Our strategy remains focused on repeatable deployment and scalable account expansion, where we can leverage our installed base and deepen relationships with key customers over time to cross-sell our advanced technology solutions dedicated to demanding verticals. On the technology front, 2025 marked a breakout year for LiDAR adoption and customer engagement across multiple verticals, with LiDAR increasingly deployed alongside our perimeter intrusion detection solutions, with no cannibalization effect. This has translated into strong LiDAR sales growth, mainly in the fourth quarter. This is an important distinction, as LiDAR is expanding our target market, creating new use cases across virtually all our verticals and enabling Senstar Technologies Ltd. to address a broader range of customer applications. We saw strong growth in LiDAR-related sales and activity with continued momentum and solid pipeline creation. Customer acceptance of LiDAR for both security and operational applications has accelerated dramatically, driving robust pipeline expansion within this strategic initiative, complementing and enhancing our unrivaled PIDS and software reach. Our 3D LiDAR technology in security applications does not compete directly with our core fence and buried detection solutions, but with alternative technologies such as thermal cameras, video and analytics, radar, 2D LiDAR, and others. It also addresses further surveillance needs for several other critical points within our vertical markets, expanding considerably our addressable market and customer use cases. Our acquisition of Blickfield, completed in 2026, represented a transformative step to enhance our competitive position and capture share of this rapid growth market. Our expectation for accelerated growth globally, without requiring significant investment, is supported by maximizing our unrivaled global sales and technical footprint across our current vertical markets to disseminate this groundbreaking technology. On top of that, Blickfield offers high growth perspectives in volume monitoring and traffic applications, where Blickfield has already developed a footprint. Turning to our geographic performance, the U.S. and LATAM remained our strongest markets for the full year of 2025, with solid contribution from corrections and energy. Throughout 2025, we secured important new wins across healthcare, utilities, oil and gas, and energy, while data centers, airports, and increasingly LiDAR continue to generate meaningful pipeline creation. Revenue from the U.S. and LATAM region increased 5% for the year but declined by 20% in the fourth quarter due to government funding delays following the government shutdown. Encouragingly, most of those projects are still alive, and we have seen some positive activity in support of our view that this was largely a timing issue. Canada was a standout performer, returning to growth, with over a 110% revenue increase in the fourth quarter and 22% for the full year, driven by strong wins in corrections and utilities. Our methodical investment in the EMEA region over the last several years is positioning Senstar Technologies Ltd. to capture new opportunities with key accounts in targeted verticals. The region delivered low single-digit revenue growth for the year, reflecting underlying resilience and continued customer demand, though the fourth quarter was impacted by difficult comparisons related to a large-scale nonrecurring utility telecom project in the prior year, which is expected to deliver revenue in 2026. We secured major wins in solar farms, energy, data centers, corrections, and airports, and together with strong pipeline creation, we have renewed conviction behind the region's growth prospects in the coming quarters. We are encouraged by the steady demand we see in the region, supporting a robust pipeline and favorable growth outlook. The EMEA region is experiencing a significant increase in requests for LiDAR applications as well. In Asia Pacific, performance improved in the fourth quarter with 21% growth. On an annual basis, Asia Pacific declined 9%, reflecting the impact of a material nonrecurring project in Q2 2024. We are optimistic about recent wins and continued pipeline development for the key verticals, including solid wins in data centers and corrections, serving as a great source of momentum for quarters and years to come. Across all regions, our business development strategy is gaining traction. We are expanding our presence at key accounts, increasing cross-selling opportunities, and building a more diversified and resilient revenue base. Together with Blickfield, we also secured several promising projects across military and government, airports, corrections, and data centers. Looking ahead to 2026, we are enthusiastic about the opportunities in front of us. We are seeing continued activity across data centers, utilities, energy, and LiDAR, supported by a growing pipeline. Our business development strategy is centered on high-growth verticals, an appetite for complexity, opportunities for scalability worldwide, and leveraging our preexisting footprint. Senstar Technologies Ltd. is making inroads with new key accounts and deepening existing customer relationships. Our pipeline is growing, further supporting improved market penetration and enhanced revenue diversification. The addition of Blickfield to our current portfolio will further assist us in expanding our range of solutions and addressing more security and non-security applications in our current targeted vertical markets. We are also substantially broadening our current addressable market and strengthening our ability to successfully approach verticals in which we were not historically present. Importantly, Senstar Technologies Ltd. will actively support and further develop Blickfield's efforts to expand their position in volume and traffic monitoring applications, which are extremely attractive markets combining vertical excellence, high growth, margins, and worldwide scalability. We will work together with Blickfield to develop positive synergies with the whole group to accelerate its growth. We entered 2026 with an expanding pipeline and are focused on converting that activity into revenue. At the same time, we remain disciplined with cost, ensuring we balance investment in growth with continued operational efficiency. In summary, we enter the new year with a strong balance sheet, steady demand across our core markets, an exciting pipeline, and an enhanced technology portfolio. Our focus is on execution: converting our pipeline into revenue, expanding within key verticals, and driving sustained growth over time. Before turning the call over to Alicia, I would like to thank our employees for their continued dedication, our customers for their trust, and our shareholders for their ongoing support. I will now turn the call over to Alicia for a review of the financial results in more detail. Alicia Kelly: Thank you, Fabien. Our revenue for the fourth quarter of 2025 was $8.8 million, which compared to $10.2 million in the year-ago quarter. This year-over-year reduction is related to nonrecurring project timing and delays in government projects following the federal government shutdown in the U.S., positively offset by stronger performance from the energy vertical. The Asia Pacific region was the strongest performing geographic region in the quarter, with revenue increasing 21% year over year. Growth in the region was fueled by steady demand in data centers, utilities, and healthcare. Revenue from the U.S. and LATAM declined by 20% in the quarter. As Fabien commented, the performance in the U.S. was impacted by challenging market dynamics, including the delays in government projects following the federal government shutdown. Canada delivered a positive offset to performance in North America in the quarter, with revenue increasing by 110% versus the fourth quarter of last year. The EMEA region declined by 24% in the quarter due to a challenging year-ago comparison, which included a large telecom project in 2024 that did not reoccur. The quarter included contributions from the government, airports, corrections, and data center verticals. The geographical breakdown as a percentage of revenue for the fourth quarter of 2025 compared to the prior year quarter is as follows: North America, 44% versus 42%; EMEA, 41% versus 46%; APAC, 15% versus 11%; and all other regions were immaterial for both periods. Fourth quarter gross margin of 61.5% compares to 64.5% in the year-ago quarter. The variation in gross margin is primarily the result of less favorable product mix, in addition to tariff impacts associated with a U.S.-based project, lower revenue, and overhead expense cadence. Our operating expenses were $5.6 million compared to $5.1 million in the prior-year fourth quarter and represented 63.3% of revenue versus 50.2% in the year-ago period. The increase was primarily driven by G&A expense growth of 30% due to the transaction costs associated with the Blickfield acquisition. As a positive offset to the research and development investments, we were awarded a one-time government subsidy for our AI development initiative, validating our innovative technology solutions. Operating loss for the quarter was $159,000 compared to operating income of $1.5 million for the fourth quarter of last year. Operating loss for the quarter was primarily driven by revenue declines and higher G&A costs. The company's EBITDA for the fourth quarter was $35,000 compared to $1.6 million in the fourth quarter of last year. Financial loss was $150,000 in the fourth quarter of this year compared to financial income of $463,000 in the fourth quarter of last year. This is mainly a non-cash accounting effect we regularly report due to adjustments in the valuation of our monetary assets and liabilities denominated in currencies other than the functional currency of the operating entities in the group, in accordance with GAAP. Net loss attributable to Senstar Technologies Ltd. shareholders in the fourth quarter was $33,000, or $0.00 per share, compared to net income of $1.6 million, or $0.07 per share, in the fourth quarter of last year. Added to Senstar Technologies Ltd.'s operational contribution are the public platform expenses and amortization of intangible assets from historical acquisitions. The corporate expenses for the fourth quarter were approximately $925,000 compared to roughly $680,000 in the year-ago period. Turning now to the full year results, revenue for the full year of 2025 was $36.4 million, an increase of 2% compared to $35.8 million in 2024. Growth in the year was driven by the North American region, with strength in the corrections and energy verticals. The U.S. led the revenue growth at 9%, followed by stable single-digit growth in EMEA, offset by a 9% decline in Asia Pacific. The geographical breakdown as a percentage of revenue for 2025 compared to 2024 is as follows: North America, 49% versus 45%; EMEA, 36% versus 36%; APAC, 14% versus 15%; and Latin America, 1% versus 3%. Full year 2025 gross margin was 65.5% compared to 64.1% in 2024. The roughly 150-basis-point improvement in gross margin was largely attributable to a balanced product mix, product redesigns, and efficiency gains in our material purchase process. Our operating expenses were $20.8 million compared to 2024, reflecting the result of investments made in business development, as well as transactional costs associated with the Blickfield acquisition which was announced in December 2025, as well as closing-related costs for a foreign entity. Operating income for 2025 was $3.0 million compared to $3.9 million in 2024. The decline in operating income was related to slower revenue growth and increases in general and administrative costs associated with the Brookfield transaction and the closing of the foreign entity. Financial income was $71,000 in 2025 compared to $731,000 in 2024. Net income attributable to Senstar Technologies Ltd. shareholders in 2025 was $3.2 million, or $0.14 per share, compared to $2.6 million, or $0.11 per share, in 2024. The company's EBITDA for 2025 was $3.7 million compared to $4.6 million in 2024. Added to Senstar Technologies Ltd.'s operational contribution are the public platform expenses and amortization of intangible assets from historical acquisitions, and corporate expenses for 2025 were $3.2 million compared to $2.2 million in 2024. Turning now to our balance sheet, cash and cash equivalents and short-term bank deposits as of 12/31/2025 were $22.5 million, or $0.96 per share. This compares to $20.6 million, or $0.88 per share, as of 12/31/2024. The company had zero debt as of 12/31/2025. That concludes my remarks. Operator, we would like to open the call now to questions. Operator: You may press 2 if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star key. Once again, that is star-1 to ask a question at this time. One moment while we poll for questions. The first question comes from an Analyst with Oppenheimer. Please proceed. Analyst: Hi. With regards to the Blickfield acquisition, is there a specific vertical or opportunity you see for their technology? Fabien Haubert: Yes, thanks. Indeed, we are seeing three main paths to growth. First, LiDAR within our current verticals increases the addressable market tremendously. In a lot of cases, when end users do not choose fence sensors or buried solutions, they privilege cable-less or wireless solutions such as thermal cameras, radar, video, and analytics. With 3D LiDAR, we are able to address part of that market where we were not able to compete in the past if the decision from an end user was not to secure the fence mechanically. That is the first addressable market, which we see rising strongly for us because the technology provides unique strengths that can outperform alternative technologies. Second, within our current verticals, LiDAR gives us the possibility to address parts which we did not address before—typically, when you have storage yards, roofs, corridors, or outside zones without a fence. That increases our opportunity set significantly, and we are already developing a pipeline there. Third, in volume monitoring applications—basically on-the-spot monitoring of bulk for petrochemicals, fertilizers, salt, and other materials—LiDAR gives the possibility to perform live measurement on the spot. It is a vertical where Blickfield is already very active, and we are committed to supporting further development of this vertical. Last but not least, traffic applications such as road, crosswalk monitoring, and tunnels—where Blickfield already has a footprint—are very close to our markets and represent a strong path for growth. Those are the three main directions we want to leverage with Blickfield and the LiDAR technology. I hope I have answered your question. Analyst: Yes, you have. And as far as Brookfield is concerned, the charges we saw in the fourth quarter—are you expecting more in the first quarter, or is that mostly behind you? What can we expect? Fabien Haubert: So, I cannot comment on the first quarter. What I can tell you is that the LiDAR sales in the fourth quarter are only Senstar Technologies Ltd. sales because we used to have a technology partnership with Blickfield, and therefore the sales of Blickfield are not part of the Q4 results. We will present later on in Q1 the sales from Senstar Technologies Ltd. of our LiDAR and, of course, all the big velocity. Alicia Kelly: And just to clarify your question there, we incurred costs through 2025 for Blickfield, and we expect that there will be some costs still in future periods, but not substantial. Analyst: Okay, good. And one other question with regards to the projects that were delayed in the United States: have any of those projects broken ground, or are you moving forward, or is that still pending? Fabien Haubert: All of them are moving forward. The ones we identified are still alive and working, and we have good hopes to convert some of them in the quarters to come. I want to be careful because you can never predict against another shutdown or other macro events, but those projects are still active. We are still working on them with the operational entities of the customers, so we did not encounter major losses or cancellations. We still have good hope they will materialize in the quarters to come. Analyst: And I think it was a telecom project in the EMEA area—you are expecting that to hit again in 2026? Fabien Haubert: Absolutely. We expect some portion of it in 2026. It was a multiphase project. The first large phase occurred last year. The further phases were delayed for reasons outside our control, but yes, some of it should recur in the coming quarters. Analyst: And I saw there were some charges with regards to closing of a foreign office. Where was that located? Fabien Haubert: That is related to the relocation of the company which occurred early 2025 in Canada, and we closed the previous entity, which was the legacy of the Magal office. Analyst: Understood. And what is your employee count? How much has that gone up with the Brookfield acquisition? Alicia Kelly: Headcount went up by 28 people with the acquisition, so we are around 160 people with Blickfield. Analyst: Okay. Great. Thank you. Operator: There are no further questions at this time. I would like to turn the call back to Mr. Haubert. Would you like to make your concluding statement? Fabien Haubert: On behalf of Senstar Technologies Ltd. management, I would like to thank our investors for their interest and long-term support of our business. Have a great day. Operator: Thank you, ladies and gentlemen, for your participation today. This does conclude today's teleconference. You may disconnect your lines at this time, and thank you for your participation.
Operator: Thank you for standing by, and welcome to the WEX First Quarter 2026 Earnings Conference Call. [Operator Instructions] I'd now like to turn the call over to Steve Elder, Senior Vice President of Investor Relations. You may begin. Steven Elder: Thank you, operator, and good morning, everyone. With me today are Melissa Smith, our Chair and CEO; Jagtar Narula, our CFO. The press release and supplemental materials issued yesterday and a slide deck to walk through prepared remarks have been posted to the Investor Relations section of the website at wexinc.com. A copy of the press release and supplemental materials have been included in an 8-K filed with the SEC yesterday afternoon. As a reminder, we will be discussing non-GAAP metrics, specifically adjusted net income, which we sometimes refer to as ANI, adjusted net income per diluted share, adjusted operating income and related margin as well as adjusted free cash flow during our call. Please see Exhibit 1 of the press release for an explanation and reconciliation of these non-GAAP measures. The company provides revenue guidance on a GAAP basis and earnings guidance on a non-GAAP basis due to the uncertainty in the indeterminant amount of certain elements that are included in reported GAAP earnings. I would also like to remind you that we will discuss forward-looking statements under the Private Securities Litigation Reform Act of 1995. Actual results may differ materially from those forward-looking statements as a result of various factors, including those discussed in the press release, the supplemental materials and the risk factors identified in the most recently filed annual report on Form 10-K and subsequent quarterly reports on Form 10-Q and other subsequent SEC filings. While we may update forward-looking statements in the future, we disclaim any obligations to do so. You should not place undue reliance on these forward-looking statements, all of which speak only as of today. With that, I'll turn the call over to Melissa. Melissa Smith: Thank you, Steve, and good morning, everyone. We appreciate you joining us. The first quarter marked a strong start to the year for WEX. We exceeded the high end of our guidance range for both revenue and adjusted net income per diluted share, and we did that with strong execution across the organization. After record revenue and adjusted net income per diluted share in 2025, we continue to build on our momentum in the first quarter of 2026. Revenue for the quarter was $673.8 million, an increase of 5.8% year-over-year. Excluding fuel prices and foreign exchange, revenue grew 5.4%, which was above the midpoint of our prior guidance. Adjusted net income per diluted share was $4.15, up 18.2% year-over-year, excluding fuel prices and foreign exchange adjusted EPS grew 19.4%. Importantly, these results were not driven by just one segment. Benefits in corporate payments continue to perform well, and we delivered better-than-expected results in mobility amid a still challenging market. We're seeing the benefits of our scale, our increasing productivity and the strength of WEX's operating model. At WEX, we simplified the business of running a business. Every day, our customers manage payments and workflows that are complex, regulated and mission-critical. Too often, they still have to stitch together disconnected systems across spending, payments, reimbursement, reporting and controls. That makes decisions slower, oversight harder, and risk more difficult to manage. That complexity is only increasing, and that's exactly why we believe WEX is well positioned to thrive. What makes our model powerful is that across mobility, benefits and corporate payments, our businesses share common technology, data, compliance and financial infrastructure, including WEX Bank that allows us to uniquely solve customer problems in vertically specialized ways while also scaling capabilities across the enterprise. It is why our strategy is focused on the customer and driven by 3 priorities: amplify our core, expanding our reach and accelerating innovation. The work we've done over several years to strengthen that shared operating foundation is translating into tangible business results. In 2025, we increased product innovation velocity by more than 50%. And in 2026, we are focused on converting that velocity into better experiences and outcomes for our customers and stronger productivity, growth and operating leverage for WEX. A large part of our accelerated product innovation is being driven by AI, which is helping us in 2 ways. First, it enables us to deliver better products and make smarter and faster decisions. We're able to use our data, workflows and domain expertise to improve things like claims, spend visibility, service, credit and payment outcomes. Second, is helping us redesign how things get done inside WEX by both automating routine work and improving speed and accuracy allowing our teams to focus on higher value decisions for customers. AI is not a separate initiative but something that is being integrated into our operations to improve customer outcomes and increase efficiency. In 2026, we plan to deliver $50 million in cost-saving actions including savings from automation and modernization with a portion of the proceeds to be reinvested in the business and the remainder to flow through to margins. Let me spend a few minutes on the momentum we're seeing across the business and how that momentum reflects the strategy we were executing, starting with mobility. Within mobility, which represents roughly half of our revenue. We are executing well and delivering improved results even as the market and macroeconomic environment remains challenging. While our outlook does not anticipate a macro recovery, we are making progress in the areas we can control, pricing, sales productivity, product expansion and customer execution. That strong execution is reflected in our financial results in the first quarter. Mobility revenue increased 3.2% year-over-year. Higher U.S. fuel prices were a tailwind, but that benefit was offset by international fuel spreads. Payment processing transactions were down 3%, so this is not a story of the market suddenly snapping back, rather it's a story of improving execution. We are closely monitoring energy price volatility related to the Middle East complex. At this point, we have not seen a meaningful impact on customer demand or volumes in mobility. We are seeing a small impact to travel volume trends leading into the second quarter that we are reflecting in our guidance. We are confident in the progress of our growth levers. We're encouraged by the early traction in 10-4 by WEX where we are growing active users and have earned very high ratings in both the Apple and Google app stores. This product expands our reach into a large and underpenetrated part of the market while creating a path to deepen relationships over time. Lastly, on mobility, I'm proud of our team for completing the complex BP conversion, which will create a small benefit in the second quarter. Most importantly, it solidifies the BP contribution we expect in the second half of 2026 and into 2027. As a reminder, we won this important contract from the strength of our enhanced acceptance product. Let me now shift to benefits, which represents approximately 30% of our revenue. In benefits, our momentum continued during the first quarter. We came through a strong open enrollment season, and that positions us well for the remainder of the year. Benefits revenue increased 8.5% in the quarter. HSA accounts on our platform were up 8% year-over-year to 9.4 million HSA accounts in Q1. Here, WEX Bank continues to be an important differentiator, allowing us to earn attractive yields on HSA assets. Benefits is one of the clearest examples of how our technology investments are creating value for customers. We've talked before about our early results and reducing claims reimbursement times by more than 98%, and we continue to increase integration and automation across the platform. We are leveraging technology to create better customer and partner experiences and drive durable growth. Finally, let me turn to corporate payments, which represents approximately 20% of our revenue. Corporate Payments revenue increased 9.3% in the quarter. In Corporate Payments, we are strengthening the core while continuing to expand the reach of the business across industries, geographies and workflows. We continue to bring in new customers onto our platform and our pipeline is building momentum. We're excited to announce today that we entered into a long-term renewal with a large and strategically important travel customer. This renewal reinforces the value proposition of our platform, reliability, compliance, workflow integration and the ability to handle complex payment flows at scale. Consistent with what we said on our fourth quarter call, the economics of the renewal are already contemplated in our guidance and are fully reflected in our Q1 results. At the same time, we continue to see progress outside of travel. Our direct accounts stable solution leverages our corporate payments platform and has focused on the underserved mid-market, enabling it to deliver outsized growth. Direct accounts payable purchase volume increased in line with last quarter, and this book of business represents approximately 20% of annual segment sales. Broadening our opportunity set outside of travel represents attractive long-term growth opportunities for the segment. We entered 2026 with momentum and our first quarter results reinforce that our strategy is working. In the third quarter of last year, I mentioned we have reached an inflection point. Since then, we have seen both revenue and adjusted EPS grow as we illustrate on Slide 5 of our earnings presentation. This momentum is driven by the strength of our pipeline, improving productivity, and from the pace of product innovation. Our investments over the last several years are producing results, and we are now moving to a phase of scaling those investments to deliver increasing operating leverage and drive meaningful margin expansion over time. We are combining our increased efficiency and scale with a disciplined capital allocation framework. As we illustrate on Slide 14 of our earnings presentation today, our returns on invested capital have been increasing on a NOPAT basis as a result of our strong execution and thoughtful capital deployment. As the environment has changed, we have shifted our capital allocation priorities accordingly, pivoting from accretive M&A to share repurchases. Today, we are prioritizing debt reduction until our leverage ratio is below 3x while continuing to invest in the business. I know some of you may have questions regarding the proxy contest. I will be discussing this in more detail with the lead Independent Director Designee Dave Foss, during a webcast fireside chat on Monday, April 27. I hope you will be able to join us for that discussion. In the meantime, you can read more about our strategy and progress and our thoughts on the proxy contest in the comprehensive investor presentation that we have published on our Investor Relations website last week. With that, I'll turn it over to Jagtar to walk through our financial performance and updated outlook in more detail. Jagtar? Jagtar Narula: Thank you, Melissa, and good morning, everyone. Before I begin, I want to remind you that unless otherwise noted, all comparisons are year-over-year. We delivered solid revenue growth and strong earnings performance in the first quarter while continuing to build momentum and strengthen the operational foundation that positions us for accelerating growth and profitability in 2026. Total revenue for the quarter was $673.8 million, up 5.8% and above the top end of the guidance range we provided last quarter. The impact of foreign exchange rates and fuel prices increased revenue growth by 0.4%. Excluding these macro impacts, revenue was slightly above the midpoint of the guidance range we provided last quarter. Adjusted earnings per share was $4.15, an increase of 18.2%, partially offset by a decrease of 1.2% related to the net negative impact from fuel prices and foreign exchange rates. Excluding these macro impacts, adjusted EPS was above the high end of the guidance range we provided in February. Let me walk you through the macro impacts in the quarter in more detail and how they may have deviated from your expectations given the sensitivities we provide. There are 3 key things to remember when we talk about sensitivities and fuel price guidance, especially in periods of high price volatility like we saw in Q1. First, the European market we operate in tends to move opposite of our U.S. fuel price exposure. Extreme price volatility in Q1 led to an unfavorable $7.6 million revenue impact from these spread movements that offset the favorable $5.5 million revenue impact from U.S. fuel prices. Second, the sensitivity we provide assumes that gasoline and diesel prices move in tandem. In Q1, diesel prices moved much higher than unleaded gasoline prices, so the sensitivity was not as accurate. Our OTR customers, primarily by diesel fuel where our revenue stream is more tied to fixed fees per transaction. Our local customers are primarily buying unleaded gasoline, which is predominantly tied to percentage-based fees and is, therefore, more sensitive to changes in fuel prices. When there is a large disconnect in the price between diesel and unleaded gasoline, as we saw in Q1, the sensitivity is less accurate. Finally, there is a timing factor with late fees in our sensitivities. As we recognize late fee revenue, it is based on balances in prior months at prior fuel prices. This means when prices rise rapidly, the benefit to late fees will trail by about a month. Overall, we did not see the fuel price impact that we would have normally expected in Q1 because of the very sudden increase in the timing at the end of the quarter. However, we are confident that we will see this normalize as we anticipate fuel price volatility levels out for the remainder of the year. One last point on the macro is regarding FX. We also had a favorable $5.1 million revenue impact from FX gains in the quarter. Overall, this is a very noisy quarter in the macro. But the real story is the solid performance across the business that is positioning us well for the remainder of 2026. Before I move on to the segments, I want to update you on our sales and marketing efforts broadly where we are seeing encouraging results. In the first quarter, new business added about 1% to our revenue growth rate versus last year. Our returns are coming in as planned, and we continue to expect new business growth to outpace last year. Turning now to the segments. Mobility revenue increased 3.2% driven by our strategic initiatives taking hold, and a small benefit of 0.2% related to fuel prices and changes in foreign exchange rates. This exceeded our expectations and demonstrates the momentum we're building through both new sales and pricing increases that you can see coming through our account servicing revenue. Our payment processing rate was 1.23%, a decrease of 10 basis points sequentially. The sequential decrease in the net interchange rate is due primarily to the impact of European market movements, which I mentioned earlier and the higher fuel price in the U.S. As a reminder, last year, gallons in OTR were pulled forward into Q1 due to territories, which created a tougher comp for Q1 this year that we were able to overcome. I would add that the local fleet side of the business, we also saw a quarter-over-quarter improvement in same-store sales, which is another encouraging sign. In our Benefits segment, total revenue of $216.2 million rose 8.5%, reflecting the strong open enrollment season, Melissa mentioned earlier. Overall, SaaS account growth was 3.8% in the quarter. While this was slightly lower than what we guided, it was due to shutting down a noncore product that was not delivering the returns we expected that added a 2% drag to account growth in the quarter. The impact is immaterial to both revenue and income. Importantly, this deliberate action aligns with our strategic focus to amplify our core by investing in products that deliver appropriate returns for the business. The Benefits segment continues to capitalize on both the scale we have built and the value derived from our investment portfolio at WEX Bank which allows us to deliver industry-leading returns on our HSA assets. Average HSA custodial cash assets grew 11.8% in the quarter and custodial investment revenue grew 14.2%. HSA accounts also grew 8%, as Melissa noted earlier. Overall, we are very pleased with the performance of the segment. Finally, in Corporate Payments. Revenue of $113 million increased 9.3% at the high end of our expectations with our net interchange rate expanding 3 basis points year-over-year. Purchase volume also increased 3.6%, reflecting continued strength in our travel customers. Travel-related revenue grew approximately 12% in the quarter, supported by the strength of our partnerships. Revenue from non-travel customers grew in the mid-single digits. Within that, our direct AP business grew in line with Q4. We are still in early innings here. And while there is higher volatility in growth rates given the size of the portfolio, seasonal trends from customers and impacts of legacy businesses included in the mix, we remain excited by the long-term opportunity. Moving to margins. Year-over-year, Q1 adjusted operating income margin declined 50 basis points driven primarily by an increase in credit losses from 12 basis points to 19 basis points within the range we guided you to last quarter. Normalizing for the unfavorable 200 basis point impact of higher credit loss and fuel price differences, our adjusted operating margin was at expanded 130 basis points as a result of efficiency gains through technology and AI, pricing actions and the operating leverage we are seeing from higher organic growth by the investments we have made in innovation in 2025. For 2026, we are expecting margin expansion of approximately 75 basis points on a macro-neutral basis, and that is embedded in the midpoint of our guide. With that, let me transition to the balance sheet. WEX is a business that generates strong recurring revenue, which in turn produces reliable free cash flow. On a trailing 12-month basis, we have generated $671 million of adjusted free cash flow, a 14% increase over the same period last year. This is a strength in all periods, but especially in times of economic uncertainty. It gives us significant capital deployment optionality. We also benefit significantly from WEX Bank which provides low-cost funding through deposits and federal home loan bank lines. It's important to note that the bank gives us lower cost of funding versus alternatives such as securitizing our receivables. In addition, as we've mentioned before, WEX Bank also helps us drive higher yields in our HSA assets through its investment portfolio. Touching on leverage. We ended Q1 with a leverage ratio of 3.1x, flat from the end of Q4 as expected and within our long-term range of 2.5 to 3.5x. We remain on trajectory to reach the midpoint of our leverage range in the second half of the year. Let me shift to capital allocation. A focus of every investment decision we make at WEX. Each step of our disciplined capital allocation process is grounded by a clear objective to maximize long-term shareholder value, every investment decision we make is weighted against returning capital to our shareholders, including internal investments in our segments. As we think about deploying capital externally through M&A or share repurchases, we start by prioritizing a safe and strong balance sheet as measured by maintaining leverage ratio below the midpoint of our target range at 3x. Because of that, we expect to continue to reduce leverage through Q2. While M&A is not at the forefront today, we will assess opportunities to strengthen our strategic position. I also want to point you to our new disclosure on return on invested capital that Melissa mentioned earlier. We calculate this by looking at our equity and corporate debt, excluding working capital funding at WEX Bank that includes deposits and borrowings from the Federal Home Loan Bank against our net operating income after tax. We exclude WEX Bank for ROIC because its funding sources aren't comparable to operating capital. As Melissa mentioned, we are very pleased to see this important metric continue to improve. You can find more detail on the calculation in the earnings presentation we posted today. One final point on capital allocation. Our strategy remains consistent, and you should expect any excess cash from higher fuel prices to drop through to reduce leverage near term. Now let's move to earnings guidance for the second quarter and the full year. In Q2, we expect to generate revenue in the range of $727 million to $747 million. We expect adjusted net income EPS to be between $4.93 and $5.13 per diluted share. For the full year, we now expect to report revenue in the range of $2.82 billion to $2.88 billion. We expect adjusted net income EPS to be between $18.95 and $19.55 per diluted share. Compared to the midpoint of the previous ranges, these represent increases of $120 million in revenue and $1.70 in EPS. You should think of these increases as largely driven by updating our fuel price assumption to $4.30 per gallon in Q2 and $3.70 per gallon for the full year. Lastly, on the interest rate side, we are no longer assuming any rate cuts for the rest of the year in guidance. This change had an immaterial impact to full year guidance. In closing, our first quarter results underscore the strength of our diversified model and the discipline of our execution. We remain focused on executing our strategy to deliver results that drive sustainable, long-term shareholder value. With that, operator, please open the line for questions. Operator: [Operator Instructions] Your first question comes from the line of Dave Koning from Baird. David Koning: Good job. And when I look at probably the most important metric, right, the mobility acceleration was really good in the quarter. I mean 3% growth on an organic constant currency, constant macro basis, best in 5 quarters. But you called out tariff impacts were still a headwind and some things are emerging. I guess I'm wondering between tariffs going away, BP coming on late fees, getting a lagged benefit, ISM getting better, are all those kind of emerging benefits that growth actually accelerates from Q1 after a good Q1? Melissa Smith: Well, first of all, thank you. We're really proud of the execution we had in the quarter. And you're right, you're putting a bunch of factors. Last year, we had the pull forward, as you mentioned, that affected some of the growth rate comparisons in the over-the-road business. And we've rolled on BP. We've done a bunch of pricing work. We're feeling good about the trajectory that we're on. when we actually contemplated the guide, we ran through the benefit that we saw in the first quarter. And we held the rest of the year to what we had previously guided. But I think that's really just more to reflect. There's a lot of factors are happening in the world right now, and we just want to be cautious about it. But you're right to point out, we have a number of really positive things that are going our way right now, and we feel really good about the trajectory we have of the business. David Koning: And maybe just as a follow-up, Mobility's EBIT was actually down year-over-year. And I guess I'm wondering, is that mostly just sales and marketing? And maybe Jagtar could kind of put some numbers around it a little bit, like how much of that was simply sales and marketing going up and maybe core EBIT actually grew. But maybe talk through that a little bit. Jagtar Narula: Yes, Dave. So the 2 pieces year-over-year are sales and marketing and credit losses. Remember, credit losses have gone up year-over-year in this segment. We talked a little bit about that last quarter in the Q4 call. It was related to kind of new offers we had put in the market and tested pull those offers away, but we saw higher credit losses coming through associated with them, which is why we pulled the offers away, but we saw that roll through in the quarter. That actually added about 2 percentage points to, as Melissa, I think mentioned in the prepared remarks, about 200 basis points to margin impact, operating margin impact in the quarter. So if you adjust for that piece, margins would have actually been up quarter-over-quarter for the sorry, I'm talking about for the company. For the mobility segment, it was about 360 basis points in this segment. So if you adjusted for that, you would have been roughly flat year-over-year. Operator: Your next question comes from the line of Ramsey El-Assal from Cantor Fitzgerald. Ramsey El-Assal: I have 2 questions I'll ask you both at once, both of them are about fuel prices. I guess the first 1 is, are you seeing any downstream impact on -- or do you anticipate any downstream impact on credit performance because of higher fuel prices? Are you seeing that pressuring your customers in any notable way? And then the second part of the question is just what are you seeing in terms of fuel spreads and as we enter the second quarter here, I was a little surprised that spreads were as impactful as they were given that's a smaller part of your business. I'm just curious, are spreads settling down? Or is there still a risk that you could see some fuel price spread volatility that impacts -- offset some of the benefit of higher retail prices, if that makes sense? Melissa Smith: Yes, it does. Let me start with the first part of your question. So in 2022, we actually had fuel prices were just under $4.50. So we've seen spikes in fuel prices before we're not seeing it impact credit quality, but we are paying attention to that. And actually, we're not seeing it affect customer behavior patterns with the exception of the fact we see people more interested in ways to create efficiency. And we think that's drawing them into our tools. We certainly see more demand for our 10-4 cap. And so we've seen really strong demand for that. So on the kind of the fringe, you'd see more behavior patterns where they're looking for efficiency, but not really having much of an impact overall in the portfolio. And then the spread question. I can start with that. But like spreads, so you know our business in Europe operates off spreads. That's the predominant model there. When you have rapid changes in prices is when you actually see these kind of meaningful changes in spreads because it was a rapid movement and it happened so fast in the first quarter, it had a sizable impact in Q1. We expect the rest of the year and the way that the fuel prices we're forecasting that we're not going to have a similar type of thing. And just to kind of note when we snap fuel prices, as you might guess, they've been moving around quite a bit. And so we took kind of a mid view of the features curve knowing that it's been moving up and down, we took on the midpoint. Operator: Your next question comes from the line of Mihir Bhatia from Bank of America. Mihir Bhatia: Maybe I just wanted to start with adjusted operating margin and just to understand what -- exactly what is embedded in your guide for the year on adjusted operating margin relative to last year? Jagtar Narula: So we're expecting for the year, adjusted margins to increase about 130 basis points. A piece of that is the fuel price change that we made in the current quarter for the full year. So if you exclude the fuel price impact, you're getting about a 75 basis point improvement in operating income margin for the full year. Mihir Bhatia: Got it. That's helpful. And then just sticking with mobility. You have -- and the organic growth, right, your 3% organic growth year-over-year. Can you talk about some of the factors that are driving that? Was it because our transactions are still down -- you obviously have the interchange effect this year. So what is driving the organic growth? And then just related to that, like as we think about the next few quarters, what should the interchange rate, should it bounce back up? Like is the fuel price impact -- are we through that, like the European spreads impacted, will that reverse in 2Q? I think that was 6 of the 10 basis points decline. And what's the good interchange rate to think about for the rest of the year? Melissa Smith: Okay. I had to start. So when we think about managing the business, we think about new customers we're bringing on retention rates as well as pricing. So if you look at the mobility business itself, we -- Jagtar talked about the fact we saw a 1% increase in new sales coming through. So new sales are better and across the portfolio, but also in mobility, driven by the work we did in our sales and marketing investments, you can actually see that coming through pretty rapidly. The second thing retention looks similar than it did last year. Pricing is up. And so pricing has had an impact and a positive impact in revenue growth and probably the primary driver. And then the last thing, Jagtar mentioned that same-store sales improved slightly. It's still negative, but it is getting a little bit better, which is a positive, we think, for the course of the year. Jagtar Narula: And then Mahir, I'll answer your question on the payment processing rate. So you're right. We did see a roughly 10 basis point reduction quarter-over-quarter from the market move in predominantly and then fuel price changes. So as we go into next quarter, you'll see the full quarter impact. So our interchange rate and fuel prices are inversely related because of the fixed fee component of how we charge customers. So as you go into the second quarter, you'll get the full quarter impact of the higher fuel prices -- so you should expect to see interchange rates roughly remain flat to the first quarter. And then as we go through the year, we are assuming that fuel prices decline as we go through the year. In the third and fourth quarters, you'll start to see interchange rates start to rise again as fuel prices decline. Operator: Your next question comes from the line of Rayna Kumar from Oppenheimer. Rayna Kumar: So I just want to go back to mobility for a second. So it obviously came in better than you were expecting. So I just want to understand exactly what came in better than you were anticipating? And how sustainable is that going forward? Melissa Smith: It was a little bit of everything. If you go across the volume came in pretty much actually as we expected. Late fees were a little bit better and pricing was a little bit better. So it's a little bit across the portfolio that were slightly better than we expected. Rayna Kumar: Understood. That's helpful. And then just on the Benefits segment operating margin, like what exactly drove that increase? And how sustainable is that expansion for the remainder of 2026? Melissa Smith: Yes. Let me talk about operating margins just at a macro level and then sure [indiscernible] right now. One of the things that Jagtar mentioned earlier is that if you look at our operating margins in the first quarter, reported they're down and there was a really big impact on margins for the company because of credit losses, which is a bit of a timing issue that will play out more favorably as you go through the course of the year. But underneath that, there's 130 basis points of improvement in operating margin, which is really tied to the work we've been doing over the last few years around using AI to modernize the way that we're operating as a company. And you can see that really coming through with benefits is a piece of that. But overall, we actually have 8% less employees at the end of '25 than we did at the end of 2023. And so we're really reimagining how work can get done. AI has been a huge tool that we're using associated with that. But we have a disproportionate number of employees dedicated in our benefits business. And so that's part of why you actually see that benefit coming through and looking like it's quite scalable. Jagtar Narula: And then Rayna, on your operating margin question as we go through the year, really, the impacts as we go through the year are really going to be related to rates. So while we are no longer assuming any rate reductions, the year-over-year compares will get more difficult as you go through the year. Somewhat related to maturities in the portfolio and reinvestment. So you'll start to see some moderation of operating margin as you go through the year related to that. But we still feel pretty good about where we are as a company. We've been executing well as Melissa mentioned. Operator: Your next question comes from the line of Nate Svensson from Deutsche Bank. Christopher Svensson: Hoping you can discuss pricing opportunities within the mobility business. Clearly, lots of ongoing discussion about this. It feels like we've seen hundreds of slides on that topic in the last couple of weeks. Melissa, I think you briefly alluded to pricing in your prepared remarks and a couple of the answers here in Q&A. So hoping you could just put a finer point around pricing. Maybe both from a philosophical point of view, how you think about pricing generally? And then more tactically, if and how you plan to improve pricing in mobility going forward? Melissa Smith: Yes, sure. So pricing is actually one of the levers that we've been using over the last decade, but certainly, over the last few years, we had about $70 million worth of pricing actions that we took in '24 and '25. And more that are coming through this year. The way that we think about it is we -- as we're looking at pricing, we're balancing the effect to customer attrition with pricing actions, and we look at both of those things to the extent that we can increase on price because of the value that we're providing to our customers and not create a customer attrition issue. We are doing that. And we've done it in different ways. We've looked at our merchant contracts and renegotiated those. We've increased late fees and customer fees across the portfolio. And so it's really just an embedded part of how we operate now. But we've had actually some pretty sizable increases over the last 3 years. Christopher Svensson: Yes, helpful. The other thing I wanted to ask on in your prepared remarks, Melissa, you talked about the impact of travel on the guide for the rest of the year. So hoping for some more color on that. I think you have a few million dollars in quarterly revenue in corporate payments from Middle Eastern travel specifically. One, is that correct? Two, anything beyond that direct exposure that you're calling out either with regards to the impact for March numbers or, I guess, for the outlook for the rest of the year in 2Q and beyond? Melissa Smith: Well, you nailed it. So it really is Middle East travel that we're seeing soft. If you look at Q1, volume was very normal. If you look at our overall growth in corporate payments, we feel really good in travel volume growth was really quite strong across the portfolio. And so what we saw starting in April is that the Middle East corridor was starting to look softer. It's an order of about $3 million a quarter. for us, we reflected that in our Q2 guide. And so we think it's a very narrow sliver of travel volume. But just to be thoughtful, it is a trend that we're seeing in our portfolio. The rest of the portfolio looks like it's operating as normal, and that's what we reflected in our guide. Operator: Your next question comes from the line of Tien-Tsin Huang from JPMorgan. Tien-Tsin Huang: Just a follow-up on that last point there, most in time. Just on the segment outlook. Have that changed at all between corporate payments and mobility, given what you saw in April in the comments there? Jagtar Narula: No, Tien-Tsin. I would say we're continue to hold to the guidance that we've sort of given earlier this year. We don't adjust sort of segment level guidance quarter-by-quarter. So we continue to maintain where we started the year. Tien-Tsin Huang: Okay. Perfect. Just want to make sure. And then just I know the prior full year outlook embedded the $50 million in the cost savings, some of which you said would be reinvested. So I'm curious, a quarter in now as -- has that investing -- have you started that process now? Has that changed at all in terms of magnitude or timing? I'm just trying to get a sense if that's creating a little bit of flexibility for you on the margin. Melissa Smith: The $50 million hasn't changed. It's still embedded in our guidance. And actually, we've seen really good progress in that. And I'm going to point back to the fact that we saw 130 basis points of margin expansion in Q1, excluding some of the noise we have in credit losses. So all the work that we've done over the last few years, we're actually seeing that come through in terms of productivity across the organization, and it's reflecting in our numbers already. And we talked about the fact that we're reinvesting a portion of that, but we're dropping through 75 basis points at the midpoint of our guide on a macro-neutral basis and operating margin expansion. So we talked about last year being this investment year, and we saw that come through in this year being a scaling year, and you can actually see the scale of the investments are coming through in revenue and the scale is coming through in our operating margins. Operator: Your next question comes from the line of Sanjay Sakhrani from KBW. Sanjay Sakhrani: I guess first question is on mobility. I think, Melissa, you said same-store sales still slightly negative. And I guess, through the quarter and year-to-date, we've heard some like cautious optimism on over the road and it's coming back. I'm just curious, is that what you guys see or hear? And like is that not just cycling through your numbers? Or is it just still quite volatile there? And then maybe just to tag along on that. David's first question talked about improving trends over the course of the year. Maybe you could just give us a little bit more on what's on the come as we move through the year? Melissa Smith: Sure. Over-the-road marketplace, we're hearing from our customers, the smaller customers are certainly getting pinched by fuel prices. On the positive side, they are seeing increases in thought rates. And so they're earning more as they're making deliveries, but that's really getting eaten up in large -- the increase in fill prices. The mid and large customers are able to actually tack on fuel price surcharges and so are less impacted by the overall fuel price environment. They are, in general, there's been less operators in the marketplace. There have been more people that have left the market. And so that is creating an overall better environment in terms of just profitability of those who are surviving in thriving in this environment. And so we are seeing changes in the over-the-road market. We're not seeing a big increase in demand yet, which is when we will start to see more of a benefit, but we are seeing dynamics that are hopeful, but at least make the marketplace look like it's improving from a financial perspective. Jagtar Narula: And then, Sanjay, your question about growth trends. I'm not sure if you're referring specifically to mobility of the total company, I'm assuming mobility. So I would say we expect kind of within what we've guided to. I'd say in the early part of the year, we expanded our factoring portfolio last year. We've gotten some growth benefit from that. We'll lap that as we go through the year. But other than that, the trends, as Melissa talked about, we're not assuming any change in the macroeconomic environment. So we're expecting current trends to continue. Sanjay Sakhrani: Okay. Maybe just one follow-up on travel. I think that weakness in April, you mentioned it was sort of isolated to the Mid East, American Express talked about how they were seeing it more broadly and refunds were up. I'm just curious like if you guys haven't seen it now, is some of that sort of factored into your outlook? And then just secondly, on the renewal of that large partner, I know it's in the guidance number. Is there any like take rate optics that we need to be thinking about? And is there a greater impact next year versus this year? I'm just curious, I just want to make sure we're tied on the optics of it. Melissa Smith: Yes, sure. Let me talk about that renewal first of all, super excited. It's a renewal with a customer that we've been co-innovating with for years on embedded payments. I think it's just validation of the value prop that we have, the ability to do workflow integration have complicated payments at scale and have that industry expertise. It's a multiyear agreement and fully reflected in the first quarter results. It should not have an incremental impact to next year. You see it -- it's already baked into the first quarter results. In terms of like broader travel trends, I can tell you what we're seeing right now is very isolated in terms of the specific customers that we're working with that are seeing weakness or those that have exposure in the Middle East. So we're not seeing something that's broad-based across our portfolio right now. And so what we've reported is some softness in that second quarter related to what we're seeing but not broad softness because that is not what we're seeing right now. Jagtar Narula: In terms of your question -- so your question on take rates. I would kind of refer to what we talked about last quarter. We're expecting take rates for the year to be roughly flat to last year with some slightly down in travel, slightly down nontravel, more mix of travel. And so all the dynamics of that renewal are baked into the guide we gave previously. Operator: Your next question comes from the line of Madison Suhr from Raymond James. Madison Suhr: I wanted to start just on the SMB strategy. Just -- any color on SMB sales trends for the quarter? And I guess, bigger picture, how do you think about scaling that business over the medium term to become a bigger part of mobility? Melissa Smith: So SMB is interesting because it's a relatively unpenetrated part of the marketplace. And so we've been on this multiyear journey to focus on it. First, starting with our risk tools. And we talked a couple of years ago about all the work we, did adjusting the tools using AI and then went into marketing and really make changes the way that we're marketing and adjusted the tools as well. So we've had to do a lot of foundational work before we started going after this space. And we've seen really good results. The customers are coming in our LTD to CAC calculations are holding to what we expected them to, and we're monitoring. There's 2 key assumptions that come into this portfolio, it's -- what happens to the credit and what happens with lifetime value of the accounts, and we continue to monitor those. But so far, everything is actually coming in pretty much on the models. And so where we continue to dip focus is how we can refine the motions that we're making, learn about how we're bringing those customers and to become more efficient at that. And I would say we are having success of that each quarter. We get a little bit better. and then continuing to scale the business, and that's in the North American mobility portfolio. So we feel like we've got a good pipeline. That pipeline will continue to build. We're learning from that, and we're getting better. And then the second part for us, when we thought about the small business arena, the 10-4 app that we rolled out last year, we've rolled out really with that same idea. It's an underpenetrated part of the marketplace. These are under operators that we're not going to extend credit to. So they're not going to be capable of really buying into our core products, but we're exposing to them our discount network for fuel. So they're downloading it out. They're using that application to buy fuel at a discount, which is really important to them, particularly right now. They're saving money. They're happening a good user experience we're seeing those users come back month after month. And we think of that as a community that we can continue to build and then sell more into over time. And so we think a small business is an area that we can continue to build and mature and are seeing success so far. Madison Suhr: And then I want to switch gears to the direct AP business. You mentioned volumes in line with 4Q at about 15%. So obviously, good to see some steady trends there, but hoping you could maybe just put a finer point on your expectations for volume growth there for the year? And if double digits is still kind of the right way to think about it. Melissa Smith: Yes. On the AP direct side, which is about 20% of the business, as you know, we're going after the bid market. We continue to build out the sales team there. It has operated really pretty much according to plan. And so those salespeople are bringing new customers. They implement actually quite rapidly. We're expecting through the course of the year to stay in that 15% range on the AP Direct spend volume. It's about 20% of the segment. And then the other part of note, Jagtar mentioned the fact that there are some parts of the business in that -- in corporate payments that aren't growing as fast. Our FI business and our bill pay business or slower growers. And then we've been focused also on embedded payments outside of travel. We have had a number of customer signings. Those are longer implementations. So we expect that volume to be coming through more weighted to the second half of the year. So kind of the net of all of that is you should expect outside of travel volume growing throughout the course of the year and more back-end weighted as the embedded payments customers kick in. Operator: Your next question comes from the line of Daniel Krebs from Wolfe Research. Daniel Krebs: This is Daniel on for Darren. Just wanted to ask a quick one on the full year EPS guide. It seems like you chose not to pass through the 1Q beat and are only raising based on fuel prices. Could you maybe walk through that decision and any potential sources of conservatism you've embedded there? Jagtar Narula: Daniel, that's actually incorrect. We passed through the 12. So I know what you're looking at, we passed through the first quarter beat as well as changes in fuel prices interest rates. Daniel Krebs: Okay. Got it. I just saw raised by 170 at the midpoint, and that was the fuel price adjustment as well. But I can do it more. Operator: Your next question comes from the line of Michael Infante from Morgan Stanley. Michael Infante: Just on the mobility same-store sales front, can you just provide a little bit more color on why local fleet same-store sales have been structurally weaker than OTR? And then given what I assume is an improving exit rate within mobility, what's your expectation on gallons and volumes from here? And does that spot rate improvement in the freight market sort of give you an opportunity to open up the credit box? Melissa Smith: Yes. Actually, the same-store sales is rather over both for OTR and North American mobility over the last quarter. said you're right, historically, the last probably year, NAM same-store sales were a little bit worse than OTR. And it's gotten a little bit better and OTR had gotten a little bit worse. And so those 2 things have kind of come in line. When we think about the -- as we build out the course of the year, we have -- we will have more positive comp next quarter in terms of volume because of the pull forward activity that's negatively affecting us this quarter. And so we'd expect to see volume naturally get better because of that. And we're continuing to see no strong sales. So that should help as well and the BP coming on. So all of those things should help build our transaction and gallon growth going from negative in the first quarter to moving to a positive as you go through the year. Michael Infante: That's helpful. And then just a quick follow-up on benefits and some of the deposit economics. You obviously called out the deposit migration from the third-party banks. Can you just remind us on the differential in unit economics for sort of a dollar held at WEX Bank versus a third party? And how much runway there still is for that migration. Jagtar Narula: Yes, we will typically get about 50 to 100 basis points better if we move it from third-party banks to WEX Bank. We've got roughly -- I mean, we've moved a lot of the money that we expected to move over from third-party banks, WEX Bank. We still have kind of $400 million-ish that a third-party banks, but a lot of that is used for operational purposes. So I wouldn't expect sort of continued movement to that to be a tailwind for us for the rest of the year. Operator: And that concludes our question-and-answer session. I will now turn the call back over to Steve Elder for closing remarks. Steven Elder: Thank you, Rob. Just appreciate everyone's time today, and the company look forward to chatting with you again at the end of the second quarter. Operator: This concludes today's conference call. Thank you for your participation. You may now disconnect.
Operator: Greetings, and welcome to Mobileye Global Inc.'s first quarter 2026 earnings conference call. At this time, all participants are in a listen-only mode. A brief question and answer session will follow the formal presentation. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Daniel V. Galves. Mr. Galves, you may begin. Daniel V. Galves: Thank you, Maria. Hello, everyone, and welcome to Mobileye Global Inc.'s first quarter 2026 earnings conference call for the period ending 03/28/2026. Please note that today's discussion contains forward-looking statements based on the business environment as we currently see it, including regarding our future outlook. Such statements involve risks and uncertainties. Please refer to the accompanying press release, which includes additional information on the specific factors that could cause actual results to differ materially. Additionally, on this call, we will refer to both GAAP and non-GAAP figures. A reconciliation of GAAP to non-GAAP financial measures is provided in our posted earnings release. Joining us on the call today are Professor Amnon Shashua, Mobileye Global Inc.'s CEO and President, Moran Shemesh, Mobileye Global Inc.'s CFO, and Nimrod Nehushtan, Mobileye Global Inc.'s Executive Vice President of Business Development and Strategy. Thanks, and now I will turn the call over to Amnon. Amnon Shashua: Thank you, Dan. Hello, everyone, and thanks for joining our earnings call. We delivered very good results in the first quarter. Revenue was up 27% year over year, adjusted operating income was up 61%, and our operating cash flow was again strong at $75 million despite working capital timing that was a modest drag. We have seen upward pressure on demand for our EyeQ product for the last several quarters. That continued in Q1, and is what we expect for Q2 as well. As a result of higher volume and revenue in Q1, we have raised our 2026 outlook toward the high end of our original guidance, leaving the outlook for the remaining three quarters essentially unchanged. The geopolitical and economic environment remains volatile, but based on our visibility for Q2, we believe there is sufficient conservatism baked into the second half. Diving deeper into the drivers of our business, our ADAS business is very strong with very high margins and cash generation. Design wins over the last several years have secured our position with our main customers over the long term. India looks like a meaningful growth opportunity, and our focus over the last couple years on supporting Chinese OEMs on their export ambitions is paying dividends. Finally, the Surround ADAS segment gives us the opportunity to replace many of these base ADAS programs with much higher average selling prices over time. On our advanced product portfolio, the current priority remains execution, and that is going very well. We have a number of production programs running in parallel, two of which start production in the relative near term. These are SuperVision with Porsche, and the DRIVE robotaxi with MOIA, the Volkswagen Group's autonomy division. For both programs, Mobileye Global Inc. is responsible for the development of comprehensive advanced ADAS and autonomy platforms integrating hardware, software, data, and maps into a complete system that must be provably safe, predictable, and verifiable. These solutions need to meet tens of thousands of requirements set by the automaker and need to be homologated to automotive-grade standards. Each program gives us the ability to prove that Mobileye Global Inc. is the leader in developing and executing complex AI-based systems in the physical world at global scale. Systems that can be validated under strict standards, something that many companies talk about, but few besides us are actually executing on this vision. Specific updates as it relates to SuperVision are as follows. Progress is strong with performance tracking well to our objectives. As a concrete example, six weeks ago, we had the first OEM-directed drives in the U.S. for this system, having only tested in Germany and Israel previously. Our first task was a 2,000-plus kilometer drive in a vehicle equipped with production EyeQ6 High SoC and ECU hardware with the latest software engines integrated into the production architecture. We had no prior knowledge of the route, which was across a diverse set of urban, suburban, and highway road types, and severe weather, including heavy snow. The SuperVision system performance was outstanding, with very few interventions encountered. This was an important proof point for our out-of-the-box performance and ability to generalize to a brand-new geography. We have a couple of more software releases to make, and then expect to have the capability to demonstrate to other potential customers in the various key geographies. On robotaxi, we continue to make rapid progress. In Q1, Volkswagen announced the start of pre-series production of the ID. Buzz autonomous vehicle in a Hanover facility, with vehicles coming off the regular assembly line with Mobileye Global Inc.'s fully integrated self-driving system. Volkswagen's ability to produce fully integrated robotaxis at scale from an active automotive production line is very unique. MOIA, the Volkswagen division that will deploy these vehicles, announced that testing had begun in L.A. for the Uber collaboration. They also announced today that Orlando is the first launch city collaboration with BEEP. For both of these efforts, the path to commercialization is as follows. We continue the current process of testing, data collection, and validation. Once we achieve sufficient proof points, we will begin accepting commercial riders with a safety driver until the required level of performance has been proven that allows us to remove the safety driver. That is the point where the scaling advantages of our approach, including crowdsourced mapping, our deep and diverse global dataset, and Volkswagen’s ability to ramp up production rapidly, will be self-evident in terms of our ability to expand geographic areas of operation more rapidly than competitors. And it is another opportunity for Mobileye Global Inc. to prove its end-to-end capability in terms of executing complex physical AI systems at scale. All of this experience over the next two to three quarters would feed back to further improvements and fine-tuning to be ready for scaling in Europe once the ID. Buzz is fully homologated and certified, which is targeted for 2027. Turning to the Menti side, components of version 3.2 of the robot have arrived and will demonstrate incremental capabilities soon. The hardware roadmap for version 4 is nearly complete and is expected to be ready for demonstration by early 2027. This will be the version that we expect to commercialize for use cases and market entry and will be cost- and weight-optimized and offer enhanced dexterity and manipulation capabilities. Finally, on the buyback we announced this morning, we are a cash-generative company, which is unique in this space. That gives us the ability to pursue growth opportunities like we did with Menti, but also be opportunistic with our equity. While we are making strong progress on our advanced products, and conversion of our large future revenue pipeline, the realities of automotive development timelines and OEM confidentiality agreements limit what we can disclose publicly. In an environment where technology competitors are generating significant news flow, we believe that this lack of visibility has weighed on our stock price. While we continue to execute, we see an opportunity to deploy cash towards share repurchase, which will benefit all shareholders by partially offsetting dilution from stock-based compensation and addressing dilution from the Menti transaction at significantly more attractive prices than those embedded at closing. I will now turn the call over to Moran. Thank you. Moran Shemesh: Thanks for joining the call, everyone. Before I begin, please be aware that all my comments on profitability will refer to non-GAAP measurements. The exclusions in Mobileye Global Inc. non-GAAP numbers are typically amortization of intangible assets, which is mainly related to Intel's acquisition of Mobileye in 2017, and stock-based compensation. This quarter, we also excluded the goodwill impairment loss referenced in the press release, and transaction costs associated with the Menti acquisition which closed in early February. First quarter revenue of $558 million was up 27% year over year. This compared to the indication we gave on the January call of about 19% growth. We had assumed shipments of approximately 10 million EyeQ units in the quarter, including some recovery of safety stocks at customers which had ended 2025 at a very low level. The upside in the quarter was the combination of higher share and higher ADAS fitment rates at core Western customers and, more meaningfully, robust Chinese OEM volume from the export market, a segment where we have higher share than we do on Chinese OEM vehicles sold domestically. Adjusted operating income was $95 million, up 61% year over year. Adjusted operating margin was 17%, up about four percentage points versus Q1 2025. Profitability was largely as expected. Strong mix to our top 10 customers was a bit of a tailwind, offsetting the higher China OEM volumes which typically carry lower pricing and profitability. Operating expenses were as expected, representing about 25% of our full year expectation of around $1.1 billion, and were up versus Q4 mainly due to engineering reimbursement timing that relates to production program milestones and also the consolidation of Menti expenses as of early February. As I noted on the January call, we have been seeing consistent positive revisions from our customers throughout 2025, and that continued in the first quarter of the year. Regarding the facility that Amnon mentioned earlier, turning to full-year guidance, we are increasing the revenue outlook to $1.975 billion at the midpoint, which implies 4% year over year growth. This is underpinned by about 38 million EyeQ units, which is up a little less than 1 million from the prior outlook, accounting for the upside in Q1. A bit more granularity on the volume is that the forecast assumes the current S&P production forecast of our top 10 customers, which is currently -3.5% year over year. It also assumes that the run rate of China OEM volume in 2026 comes down meaningfully from the first half levels. We are not sure what will happen, but given low visibility on that part of the business, we prefer to stay conservative. We are increasing our outlook for adjusted operating income to $210 million at the midpoint, up from $195 million in the prior outlook. The two items impacting revenue-to-income conversion are: number one, a good portion of the incremental revenue is related to China OEM volume, which converts at lower revenue per unit and profitability than the rest of our volume; number two, on the SuperVision side, volume is consistent with our prior outlook, but we do have some incremental costs for the ECU, particularly related to memory. Our assumption of operating expenses is unchanged at approximately 10% year over year growth to around $1.1 billion. Finally, on the full year, we have now provided an outlook for GAAP operating income. At the time of the January call, the impact of the amortization and stock-based comp from the Menti acquisition was not able to be estimated precisely. Now it is. The only thing to note is a reminder that only a portion of the shares issued as part of the acquisition will show up in the share count this year. That is because the majority are tied to vesting requirements for the multi-year milestones. Therefore, the relevant accruals are included in the projected share-based compensation expenses referred to in the guidance. Another important point to note is that while there will be share-based compensation expense and some impact to the share count associated with these shares in 2026, it will be gradual as full vesting only occurs for 50% of the shares in 2028 and the remainder in 2030. Turning to the second quarter, we are assuming about 9.3 million EyeQ units and for revenue to decrease approximately 6% on a year-over-year basis. We would expect gross margin to be slightly below Q1 level based on the mix of orders we are seeing currently and for operating expenses to be consistent with Q1 level, maybe slightly down. To conclude, we are almost four months into 2026 and continue to see positive demand signals from our customers on the core business. As Daniel discussed, we are also seeing very good execution progress ahead of a large number of advanced product launches over the coming one to two years which we expect to create significant growth for the company. Finally, I am pleased that we are able to begin a share buyback program as we believe it takes advantage of the strong cash flow of our business and benefits all shareholders by offsetting a portion of RSU issuance, which is a critical part of Mobileye Global Inc.’s compensation structure. Thank you, and we will now take your questions. Operator: We will now open the call for questions. If you would like to ask a question, please press 1 on your telephone keypad. A confirmation tone will indicate that your line is in the question queue. You may press 2 if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. We ask that analysts limit themselves to one question and a follow-up so that others have an opportunity to do so as well. One moment while we poll for questions. Our first question comes from Edison Yu with Deutsche Bank. Please proceed with your question. Analyst: Hi. Thank you. This is Winnie on for Edison. First question is on the ADAS side. It seems like the year’s guide is raised reflective of the Q1 beat. So just curious what conditions you are seeing now in the channel, and because you have given us some guidance for the rest of the quarter, can you just refresh some of that to reflect what you are seeing in the first half of the second quarter? Thank you. Moran Shemesh: I think that basically, in terms of the guidance, we are reaffirming our guidance from the January call and adjusting it for the upside that we are seeing in Q1, as we do not anticipate this upside to impact the rest of the year. So that is the main reason. And as for the upside, I can briefly mention what we were seeing. First, on the China OEM export volume, we think that probably half of the upside is coming from there. We are seeing very strong demand for both Q1 and also incorporated into Q2. For the second half, we are still conservative and this market is volatile, but we are seeing very good demand on that. Some of our customers have very significant year-on-year growth on export. Secondly, ADAS fitment rate is increasing in 2026 for our top OEM customers. We are seeing constant demand here throughout the year, so this is unchanged from our January call. And third is the safety stock inventory adjustment for our customers. We talked about it in 2025 being at a very low level, even below three weeks or so, and they have now increased their respective stock to approximately four to five weeks which is kind of normal. We do not anticipate this volume to reverse this year, as it is a normal stock they need for their ongoing shipments. Amnon Shashua: Just to add on the macro side, there are a few tailwind effects that we are benefiting from. The first one is the increase in export volumes by the Chinese OEMs with our strong customers. Interestingly, these volumes are in emerging markets like Asia and South America and are not necessarily competing with the European volumes that we have. So we can benefit from an overall increase in volumes. The second is that we have increased our market share in our key customers. Although we have been in the majority of the volumes of our top 10 customers, it was not necessarily 90-plus percent in all of them. Over the past two years we have been increasing our market share, replacing older solutions by competitors. So that is also a tailwind effect, and overall, we do not anticipate these two trends to weaken. We expect them to continue as they were, and it is what stands behind the revision to the guidance. Analyst: That is very helpful. Thank you. A follow-up on Menti, I was wondering if you can give us an update on the progress made thus far, and would it be reasonable to assume some kind of proof of concept later in the year with external customers? Thank you. Amnon Shashua: We are making progress on two fronts. One is the hardware. What we have shown a month or two ago was version 3.1, and version 3.2 is being assembled now, with better dexterity and improved hands as well. Software-wise, we are integrating VLMs into the system, designing tasks that are more targeted to home-use tasks or to B2C domains. We have another version 3.5 of the hardware in two months from now, and version 4, which is the hardware to go into mass production, should be ready by end of this year, early next year. Regarding the proof of concept, we are still analyzing the domains. Part of our analysis is the viability of the B2C model rather than B2B, or starting B2C and then B2B. So we are still analyzing the opportunities of the use cases that we are building for the robots. Operator: Our next question comes from Christopher Patrick McNally with Evercore ISI. Please proceed with your question. Analyst: Thanks so much, team. Amnon, I wanted to focus on the upcoming KPIs to the driver-out as you test in Los Angeles and Florida, and maybe what is to come after driver-out with respect to commercial scale. So if I divide it into two parts, on the driver-out, what is left in your timeline to validate the service for that fall in Q4 launch, as you mentioned? Amnon Shashua: Our milestones for the driver-out are first to start validation on the final Level 4 vehicle. There are still a few more months until we get the final vehicle ready for series production, then we will start the validation. Also, there are some things that we need to close with the remote operators, make sure that everything there is running as we plan. Then we start with the commercial drives with a safety driver, and towards the end of the year remove the driver. We are on track with all our plans in that area. What comes after that? Our first priority is driver-out on an SDS system that is fully homologated both software and hardware, automotive grade. This is a huge moat. Once we get that, the second is scale. We want to see 2027 with at least six cities and hundreds of vehicles, at minimum. That is the next real big milestone. Then we will look at the market and see whether we need to simply remain an SDS provider, which at the moment is our plan A, or to extend our vertical integration. We will see what happens by 2027. Analyst: Perfectly clear, and I think you basically hit on the first part of my follow-up. But if we take the second, we all understand driver-out is not really the end of AV development or service. Could we talk about the original ODD expansion? Will the first commercial service go on the highway? And how do we think about those AV improvements which are non-safety-critical, like smoothness of the ride and your service getting better as it ramps, into 2027 in the U.S.? Amnon Shashua: We are talking about robotaxis, so robotaxis is full deep urban point to point in cities. We have the capability also to support the highways, but we will start in deep urban inside the cities and then gradually expand into highways as well. In terms of comfort, this is part of our KPIs today. I do not see us coming out with a commercial service that does not have the necessary comfort level of driving. Of course, the most important is the safety level, but we are, in our KPIs, measuring what would be called roadmanship, making sure that at the comfort level we are also meeting our KPIs. All of that should be in 2026. 2027 is more focused on scaling, both scaling number of vehicles and reducing the ratio of teleoperators to vehicles. That would be the goal for 2027. Operator: Our next question comes from Joseph Robert Spak with UBS. Please proceed with your question. Analyst: Thanks. Good morning. One quick follow-up on the guidance and then a bigger question. Amnon, on the guidance, I know you mentioned that one of the reasons for the EBIT flow-through versus the revenue flow-through was some of the China mix. But if I understood correctly, I thought the better China volume was in the first quarter, and that you are still assuming sort of that low-9 million sort of pace globally for the rest of the year. So maybe just help me understand some of that conversion. And if you could, I think you mentioned Q2 is still trending pretty well there, so maybe some even more near-term expectations on the quarter. Moran Shemesh: For the China OEMs that you mentioned, it is not just in the first quarter. It is also in the second quarter. So in terms of the year, the portion of China OEM has increased by a few hundreds of thousands of chips, which impacts, of course, the conversion of revenue to profitability, as the export volumes in China are for a lower ASP than what we sell in the West. So that is the guidance clarification. Amnon Shashua: Just to add to this, to clarify, these China export volumes do have lower ASP. However, they are for new markets that today, or until today, we did not have any sales in. So it is not that there is a competition between higher-ASP, higher-margin European business, for example, or American business for us that now comes from a lower ASP from China. These China volumes go to, let us say, blue oceans when it comes to ADAS penetration. So it is a net gain for us. Analyst: Thank you. And then just to follow up on Chris’ prior question with the DRIVE product, I appreciate the commentary on the KPIs, but what is really the process here between the different parties? Where does sign-off on moving to the next phase lie? Is it with you, with MOIA, with the TNC? And you did briefly sneak in there at the end, Amnon, that you would look after these launches whether it makes sense to remain an SDS player or extend that vertical integration. The latter clearly gives you more freedom. Is there anything that prevents you from doing that from a partnership or exclusivity perspective? Amnon Shashua: No. Nothing prevents us from pursuing the right business direction. It also depends on how the future plays out. Are there going to be one or two SDS suppliers out there, which is our current assumption, or are there going to be multiple? If there are going to be multiple, maybe the right business decision is to go more vertically integrated. But it is too early to tell. Right now, our focus is on the SDS, on the driver-out, the SDS hardware, the software, the roadmap, the teleoperation. There is a lot going on there. The maps—making sure that the maps scale so that we can scale quickly from city to city during 2027. That is the focus of the company. We have no limitations on how to pursue our business model. As for the first part of your question, the driver-out eventually depends on the customer, which is MOIA and Volkswagen. We are supplying the technology. We do not determine when the driver would be out, but our KPIs and milestones of both parties are targeting 2026. Operator: Our next question comes from Joshua Buchalter with TD Cowen. Please proceed with your question. Analyst: Hey, guys. Thanks for taking my question. I will start with one on the model. I am a little confused on the ASP trends implied in the guidance. You mentioned China tends to be lower ASP, but if I sort of run this low-9 million EyeQ shipments per quarter through the rest of the year, it implies ASPs continuing to trend down through the rest of the year despite China becoming a lower part of the mix, and potentially some advanced ADAS solutions later in the year. Can you help walk me through the ASP trends through the year, and if we should indeed be modeling low-9 million EyeQ shipments per quarter through 2026? Thank you. Moran Shemesh: In the January earnings call, we discussed ASP with regards to the second chip that we have this year. We have approximately one specific program with a dual chip when the second chip is discounted. We have approximately 800,000 units this year. So this is an ASP headwind of about $0.80. And with the China OEMs, we did increase, as I mentioned before, the China portion in terms of volume for 2026. So this is an additional maybe $0.30 to $0.40 decrease in ASP since our last estimation, although volume has increased significantly. So that is the explanation. Daniel V. Galves: It is also pretty difficult to be precise about it because there are other parts of the business as well. And just to be clear, we are not assuming additional advanced product launches for this year. Analyst: Okay. Thank you both. Then maybe a bigger picture one. Amnon, given your position in the industry, I was hoping you could reflect on how the regulatory environment for autonomous mobility broadly and robotaxis has changed over the last year, and when we should expect that to be a more meaningful part of Mobileye Global Inc.’s model. Thank you. Amnon Shashua: In the U.S., it is self-certification, which is very convenient to start ramping up. In Europe, the bar is much higher in terms of homologation, and this is the advantage of our partnership with MOIA and Volkswagen—that they take the homologation part to homologate the vehicle in Europe. I believe that as robotaxis start proliferating from the thousands of units to tens of thousands to hundreds of thousands, we will see more regulation coming in everywhere, not only in Europe, but also in the U.S. So having a very clear and precise and crisp definition of safety—in our case, it is RSS and PGF, stuff that we talked about back in the past—is very important to prepare the company towards an environment in which the regulatory profile is going to be much more risk-oriented. Nimrod Nehushtan: If I may add to this, if you see the communications from other companies on robotaxi launches, it is primarily either in China or in the U.S. You see much less news coming for the European market. We think that some of the reasons for that are the regulatory requirements in Europe that we have been actively working on with VW for the past year and a half almost. Through this engagement, we have exposure to how regulators view this business, and they do require specific KPIs and very detailed explanations on validation concepts and testing methodologies, how you overcome different unexpected events and safety assurances, etc. It is much more nuanced than just the high-level technological debate that is being made on public stages. We think we have a significant advantage in being fairly advanced in this process, and this will prove, we believe, as a competitive advantage in the next few years, being one of the only, if not the only, robotaxi enablers in the European market, which in and of itself has potential of tens of millions of commuters. Thank you. Operator: Our next question comes from George Gianarikas with Canaccord Genuity. Please proceed with your question. Analyst: Hi, everyone. Thank you for taking my question. I was wondering if you could comment on some of the recent traction that NVIDIA has seen with their reference design and what your pitch is to OEMs in terms of total cost of ownership, and why they should pick your solution. Thank you. Amnon Shashua: At the end of the day, it is a combination of performance and cost. If you refer to ALPAMAYO, we downloaded ALPAMAYO—it does not seem like a production-worthy system. It is something nice to play with, but it is not anywhere close to being production worthy. Whether an OEM can take it and upgrade it or refine it for a production-worthy system is yet to be seen. I would add that in 2016 NVIDIA had something similar with pixel labeling that they announced open source for the automotive industry. OEMs did nothing really—there was no real traction for it. Bringing something into production is tough. Taking a demo-ware or a nice demo into production—there is a death valley in between. And this is something that Mobileye Global Inc. is very good at. This 2,000-kilometer expedition that I mentioned in my script is very meaningful. It is an OEM taking a number of competing systems; one of them is the Mobileye Global Inc. system with Porsche, which is not yet ready—it is maturing over time. It is maturing; this year it will be ready for start of production, but it is not yet fully matured. Doing a 2,000-kilometer expedition without us knowing the route in advance, in very significant weather conditions—urban, suburban, highways, day and night, and snow—and our system really excelled. So this shows that going from demo to production is an art and a science, and something that Mobileye Global Inc. excels in. It is not just a matter of “here is an open-source network that does something cool; can we then refine it and bring it to production?” Just to mention, a production program we have with an OEM has about 60,000 requirements. This is what it takes to go from a demo to a production system. One of the strengths of Mobileye Global Inc. is not only that we are experts in AI—that we build an AI system and we are experts in learning—we have cost-optimized solutions and we know how to bring stuff into series production. And this is difficult. Analyst: Thank you. And maybe as a follow-up, there is a lot written about Volkswagen and their future strategy. I just wondered if you could please comment on your relationship there and their commitment to deploy your solutions over time. Thank you. Nimrod Nehushtan: Ultimately, the reality today is that all of the upcoming SOPs, product launches across all brands of Volkswagen Group mostly—spanning from base ADAS in lower-priced vehicles to robotaxi and everything in between—of the upcoming SOPs are with Mobileye Global Inc. products. This is the plan of record. It has been the plan of record in the past couple of years, and it did not change. If anything, we managed to expand our business with Volkswagen in these two years, also winning projects for the base segment, introducing Surround ADAS for the first time with Volkswagen Group on very high-volume vehicles. We are seeing them pulling additional vehicle platforms to the already nominated products we have with them. We need to distinguish between some news that comes out that serves certain interests and the realities of their planning schedules. Our experience in this industry shows that the first thing to change, if there is indeed a decision to take a different product, is these bank schedules, and they did not change. If anything, they changed for the better from our line of sight. We are not seeing any evidence of change of course. We are not seeing risk to our existing projects as a consequence. Of course, we need to finish the execution and get to the SOP date, but the business opportunity remains very significant for us when we finish the execution. Operator: Our next question comes from Shreyas Patil with Wolfe Research. Please proceed with your question. Analyst: Great. Thanks so much. Maybe just to follow up on some of your earlier comments. I am curious what you are seeing in the pipeline amongst OEMs. From the outside perspective, it does seem a bit jumbled. We have seen Mercedes and BMW appear to be pulling back from L3 in Europe, focusing on effectively SuperVision-like products. Ford and GM are talking about deploying their own solutions within the next three years. Others are partnering with AV players such as Nissan and Wayve. So how many opportunities are actually available to pursue in areas like SuperVision and Chauffeur in your view? Or have OEMs sort of laid out their plans for autonomy over the next few years? Amnon Shashua: I think by and large, OEMs have not yet made up concrete plans. We see opportunities for SuperVision. We see even more opportunities for Surround ADAS. With Level 3, I believe we will see the bigger opportunities as we get closer to production with Audi on Level 3, or as we get the driver-out of our robotaxi and also show a significant cost reduction of the robotaxi stack, which we can show by the end of the year. So SuperVision and Surround ADAS—we see significant opportunities, but with OEMs, it takes time, and we cannot predict the timing at this point. Our focus is really the execution. Execution will bring more opportunities. Analyst: Okay, great. And maybe just a quick modeling follow-up. I think you talked about higher DRAM costs for this year. Maybe if you could help quantify that, and is that something you can pass along via price adjustments? Moran Shemesh: The DRAM is the responsibility of our Tier 1s. Mobileye Global Inc. just sells the chip. On the SuperVision area, we buy the memory directly for the ECU. It is a relatively small business. We are talking just about a few million dollars, and we are passing that through to customers. The dynamics there are changing, so it is not something that is expected to significantly impact our costs, but it is a few million currently. Operator: Our next question comes from Mark Delaney with Goldman Sachs. Please proceed with your question. Analyst: Yes, thank you very much for taking my question. The company discussed the performance of its pre-production vehicle in the U.S. with EyeQ6 High. You spoke to that doing well across urban, suburban, and highway settings and achieving your mean time between failure objectives. Can you remind investors what Mobileye Global Inc. is targeting for MTBF for this product, how it compares to competitors, and maybe most importantly, given what you were able to see on the unplanned route, is it catalyzing any incremental OEM business interest? Amnon Shashua: We are not sharing our MTBF goals. SuperVision is an eyes-on system, so MTBF is important but not as crucial as it is for robotaxi. There are other KPIs like comfort, not only disengagements but also comfort, ODDs—what kind of ODDs can you satisfy? There is a long list of requirements. It is not just one number that determines the driving experience of the product. It also changes from OEM to OEM—an OEM has a lot to say about the driving experience because they set the requirements. So it is not only the base technology that determines the driving experience; there is a lot that goes into it. What I can say is that this 2,000-kilometer expedition has shown the excellence of our product even though the product is not yet finished, especially compared to other competing demo systems that were part of this expedition. It shows that the gap—the discrepancy—between all the talk that you hear and the actual performance is huge. Analyst: Thanks. My other question was related to Mobileye Global Inc.’s efforts in AI. Now that you have the Menti Robotics transaction completed, can you speak more to the synergies between the existing Mobileye Global Inc. efforts in AI and what Menti brings? Are you able to work better jointly to accelerate your efforts in real-world AI? Thanks. Amnon Shashua: We are planning an AI Day around July timeframe, where we are going to lay down our complete vision of AI. Just to give perspective, the software running today on our EyeQ6 High—internally we call it Gen 1.5. In about two months, it will be Gen 2.0, and by the end of the year, it will be Gen 3.0. We are working very fast on a rewrite in order to accommodate the best AI has to offer, whether it is GenAI, whether it is simulators—everything—and we will be very transparent about it in our AI Day. So expect around July a consolidated view of how we take modern AI and bring it into physical AI, both in terms of robotaxi and in terms of robotics. Operator: Next question comes from Luke Junk. Please proceed with your question. Analyst: Thank you. First, I wanted to ask, bigger picture, as already referenced, there has been a lot of chatter about OEMs pulling back from L3 applications and refocusing on L2+. Are you seeing any broader repercussions of this, specifically in terms of Surround ADAS and the amount of interest you are seeing at the front end of the funnel? It seems like it is really an area the market is consolidating around right now. Amnon Shashua: We are engaging with OEMs on Level 3, but I would say that Level 2+ or SuperVision is gaining more traction with OEMs, and Surround ADAS is gaining even more traction. I believe that driver-out with the robotaxis, especially when you have a credible cost-down path, will reignite Level 3 and Level 4 consumer programs with OEMs. Nimrod Nehushtan: The debate around Level 3 is not new. It has been going on and off—there have been cycles of excitement versus skepticism—for ten years now. Ultimately, it is a very challenging product because it requires robotaxi performance levels, but for a privately owned vehicle, so the cost is supposed to be significantly lower in a much more efficient system. Also, in order to have a useful product, it needs to be available in a broad enough ODD, or at least in a broad enough area to satisfy the needs of consumers. We believe that our product with Audi, which is progressing well, is going to satisfy these key requirements. As we progress with execution, we will be able to show this and expose this to the OEMs—that it is not an “if” question, it is a “when” question, and the “when” is imminent. I do not think that any OEM has question marks on the value proposition to consumers. It is a consensus that the ultimate value proposition to consumers is eyes off and mind off—giving back time to the driver. This remains a compelling case. OEMs may be more cautious in going all-in in developing this when it is not clear there is an available solution. We believe that we will be providing this available solution very quickly relative to others, and this can reignite the momentum with OEMs. Analyst: Thank you for that. Maybe a related question. Some OEMs with robotaxi offerings have been recently trumpeting the advantages of their data collection efforts. Can we get an update on where Mobileye Global Inc. is making strides in this regard in terms of extracting more data in REM and maybe some of the specific benefits of your test fleet, both for advanced products and robotaxi? Thank you. Amnon Shashua: We have no shortage of data. As we mentioned a year or two years ago, we have hundreds of petabytes of data that we can leverage for our development. Not only that, we added simulators that can run billions of hours of driving experience overnight—I talked about it at CES. It is not that we lack data. For the robotaxi, we just need to do the validation with the final hardware in terms of the vehicle platform, and this should be done in a few months from now. Thank you, Luke. Operator: Our next question comes from Gary Mobley with Loop Capital Markets. Please proceed with your question. Analyst: Hi, guys. Thanks for taking my question. I wanted to ask you about Surround ADAS. Perhaps you can give us an update there. More specifically, looking at your top 10 OEM customers, what percentage of those have committed to conversion to Surround ADAS? And maybe you can give us an update as to the timing or contribution for revenue from Surround ADAS and the ASP impact. Nimrod Nehushtan: Our first Surround ADAS design win announcement was roughly a year ago. It was with Volkswagen Group, which basically committed to upgrade their entry fleets to Surround ADAS starting 2028. As some reference numbers, the average ASP is around $100 to $150, with similar gross margins to our base ADAS volume, which is roughly 70%. Over the past two quarters, we managed to add two additional OEMs. So up to date, we have three. One is the major U.S. OEM that we announced back at CES, which, in a similar fashion to VW, decided to upgrade the entire electric fleet to Surround ADAS from base ADAS today—actually with a higher ASP than what VW has, with more content. Recently, we also announced Mahindra, the first Indian OEM to adopt Surround ADAS. So now we have three, and two of them are today our top 10 customers. We believe that Mahindra represents a significant growth opportunity given that the Indian market is just now starting to adopt ADAS. In India, less than 10% of vehicles have ADAS at all, and regulation coming up in 2027 is expected to accelerate this to the higher 90s in just a couple of years, which is a huge organic opportunity for us. Through this product with Mahindra, we can benefit and be a market leader in India. Zooming out on Surround ADAS, thinking in just a year to have three design wins, two out of the top 10 OEMs with significant volumes—this in and of itself, without new design wins, can represent, when these will be launched, more than a 10% increase in revenue on a yearly basis. As this gains momentum and as we make progress in execution, which we are, and we show this to more and more OEMs, we expect this to generate more interest, and these growth numbers can be even improved in the future. Analyst: Thanks. I appreciate that color. And for Moran, I had more of a housekeeping question. Can you give us some context around the goodwill impairment charge in the quarter? Moran Shemesh: In Q1, versus our previous evaluation from December, market cap went down about 35%. So we had to do an impairment assessment in the quarter. I have to say this goodwill is kind of unique in its nature, since it is goodwill pushed down to Mobileye Global Inc. from Intel on the acquisition of Mobileye in 2017. So even initially, it was a very significant portion of our net assets, which is not something reasonable for our company to have—goodwill on its own assets. On the valuation itself, we recognized a goodwill impairment of $3.8 billion. On the business aspect, we kept the same projections but reflected a higher risk premium because of the macroeconomic environment and geopolitical environment. That impacted the valuation and we recognized this impairment in Q1. Operator: Our next question comes from Aaron Rakers with Wells Fargo. Please proceed with your question. Analyst: Yes, thanks for taking the question. I wanted to ask first on SuperVision. I apologize if I missed it. Can you help us appreciate the volumes that were shipped this last quarter in SuperVision, and any updated views on the volumes as we start to think about the Porsche ramp going forward as we move through 2026 and into 2027? Moran Shemesh: We delivered in Q1 20,000 units. We are seeing stability in demand. 2025 was high in SuperVision. For Q2, we estimate 15,000 units—roughly the same number. We are still pretty conservative for the second half, and for the full year we are still estimating about 150,000 units or a bit more, kind of consistent with or a bit lower than 2025. In case that demand changes or there is any further impact—it is not something that we are seeing—orders keep coming, and this business has had stability for the last few quarters. As for Porsche, we are not anticipating volume in 2026. Amnon Shashua: The ramp-up will start in 2027, towards the second half of the year. Daniel V. Galves: Just to recap, we did not change our SuperVision volume assumptions for the year. Analyst: Perfect. And as a quick follow-up, I want to go back to the memory question. I know that you talked about your partners handling the pricing dynamics. But at a higher level in the current situation, are you seeing any risk from just actual supply of memory impacting any of your OEM customers or your partners from a procurement perspective? Is that a headwind that we should think about, or have you not seen any of that? Thank you. Nimrod Nehushtan: We did not see direct reporting or direct planning from our customers to accommodate for this. Our revised guidance reflects the recent discussions we had with our customers, and of course they baked in all of these risks into their current estimates. Of course, we need to keep a close cap on the situation and monitor it, but we are not seeing any direct imminent change. Operator: Maria, this next question will be our last question today. Operator: Our last question will be from Steven Fox with Fox Advisors. Please proceed with your question. Analyst: Hi. Good morning. I will try to make it a good one. I was wondering if you can go back and maybe expand on the initial comments you made in the prepared remarks about India. It sounded like you were saying you are more bullish about it. How much, and if you could talk about why, and whether there is any influence potentially down the road from your position with Chinese exports? Thanks very much. Amnon Shashua: Thank you. Nimrod Nehushtan: The Indian market has been lagging in terms of ADAS adoption rates compared to Europe, U.S., China, Japan, and Korea. Recent numbers suggest roughly 8% ADAS take rates in the Indian market, which refers to vehicles sold in India by both Indian OEMs and foreign OEMs. Just for reference, the Indian automotive market is roughly 5 million units per year. So in the pure size, it is a very significant opportunity. There is regulation coming up in 2027 which is expected to incentivize and mandate OEMs to adopt ADAS solutions starting 2027, and we expect this to increase the ADAS penetration rate from the 8% it is today to 70%, 80%, 90% in two or three years. We are today very strong with Indian OEMs—the two major Indian OEMs. The recent announcement on Surround ADAS with Mahindra reflects the strength and leadership position we have, and also that the Indian market is not necessarily just for entry solutions but also for more advanced higher-ASP products as there is more demand by Indian consumers for advanced functionalities. In Mahindra’s case, for example, ADAS has been ranked as one of the key reasons for Mahindra's increased sales year on year. They have been growing very fast and their customers vote for ADAS as one of the reasons for it. We believe that there is strong demand by consumers, there is going to be a regulatory push, and just the sheer size of the population suggests that it can be an organic growth opportunity, and we are very well positioned—not just with Mahindra, also others that are selling into the Indian market. Operator: We have reached the end of our question and answer session. I would now like to turn the floor back over to Mr. Galves for closing comments. Daniel V. Galves: Thanks a lot, Maria, and to the Mobileye Global Inc. management team, and thanks, everyone, for joining the call. We will talk to you next quarter. Thank you. Operator: This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.
Operator: Good morning, and welcome to CenterPoint Energy's First Quarter 2026 Earnings Conference Call with Senior Management. [Operator Instructions] I will now turn the call over to Ben Vallejo, Vice President of Investor Relations and Corporate Planning. Please go ahead. Ben Vallejo: Good morning, and welcome to CenterPoint's Q1 2026 Earnings Conference Call. Jason Wells, our Chair and CEO; and Chris Foster, our CFO, will discuss the company's first quarter 2026 results. Management will discuss certain topics that will contain projections and other forward-looking information. and statements that are based on management's beliefs, assumptions and information currently available to management. These forward-looking statements are subject to risks and uncertainties. Actual results could differ materially based on various factors as noted in our Form 10-Q, other SEC filings and our earnings materials. We undertake no obligation to revise or update publicly any forward-looking statements other than as required under applicable securities laws. We reported $0.48 per diluted share for the first quarter of 2026 on a GAAP basis. Management will be discussing certain non-GAAP measures on today's call. When providing guidance, we use the non-GAAP EPS measure of diluted adjusted earnings per share on a consolidated basis referred to as non-GAAP EPS. For information on our guidance methodology and a reconciliation of the non-GAAP measures used in providing guidance, please refer to our earnings news release and presentation on our website. We use our website to announce material information. This call is being recorded. Information on how to access the replay can be found on our website. Now I'd like to turn it over to Jason. Jason Wells: Thank you, Ben, and good morning, everyone. On today's call, I'd like to address 4 key areas of focus for the quarter. First, I'll walk through our strong first quarter financial results. Second, I'll provide an update on our load outlook for Houston Electric, including yet another significant increase in our firmly committed load forecast to 12.2 gigawatts of new industrial load. Third, I will cover how our continued and accelerating growth in the greater Houston area to provide incremental capital investment opportunities and further support customer affordability. And lastly, I'll touch on our growing optimism for transformational load growth opportunities for our Indiana electric service territory, which would similarly provide for incremental capital investment and support customer affordability. I will start with our strong first quarter financial results. This morning, we reported non-GAAP EPS of $0.56 for the first quarter of 2026. Chris will walk through the details of these results, but I want to highlight that our execution through the first quarter positions us well for the remainder of the year. With that said, we are reiterating our full year 2026 non-GAAP EPS guidance of $1.89 to $1.91, which, at the midpoint, would represent 8% growth over actual 2025 delivered results. As a reminder, we rebase our long-term earnings guidance from each year's actual results. This approach provides our investors with the direct benefit from compounding effect of the earnings we have consistently delivered. In addition, this approach helps contribute to the durability of our earnings profile, underscoring our commitment to delivering value through disciplined execution and sustained growth each and every year. Over the long term, we continue to expect to grow non-GAAP EPS at the mid- to high end of our 7% to 9% annual guidance range through 2028 and 7% to 9% annually thereafter through 2035. I would now like to provide an update on the accelerating growth our Houston Electric business continues to experience and our strong execution, which enables us to take advantage of the growth in the near term. As we shared on the fourth quarter call, we have meaningfully accelerated our load growth outlook, bringing forward our forecast for a 50% increase in peak demand by a full 2 years. Our conviction in that accelerating time line was grounded in 7.5 gigawatts, a firmly committed load that we expected to be energized by 2029, including 2.5 gigawatts that was already under construction as of our last update. Since then, we have made significant progress in executing against our prior forecast, while adding additional customers. As a result, we now have clear line of sight to 12.2 gigawatts of firmly committed load. With the team's disciplined execution, we have already secured ERCOT approval for 3.2 gigawatts of this load. 2.5 gigawatts was approved since our last earnings call alone and within less than 80 days of filing for approval. We expect to submit the remaining 9 gigawatts of projects to ERCOT for approval within the next few weeks. Importantly, this firmly committed load is highly diversified, spanning more than a dozen unique customers across nearly 20 distinct projects. We believe these projects are manageable in size with 90% representing 0.5 gigawatt of demand or less. That, along with our utilization of existing capacity and our customer selection of project sites near substation allows for quick and efficient interconnections. Our focused execution over the last few months has also provided us with a clear path to energization. Notably, we are positioned to energize approximately 8 gigawatts of this firmly committed load by 2029, which is 80% of our 10 gigawatt increase we originally forecasted to be energized by the end of 2031. This diversified growth and economic development has another key benefit to the Greater Houston area, which helps us keep electricity delivery charges affordable. The Greater Houston area is no longer an emerging destination to site new data centers. It is now firmly established as a location of choice for some of the world's largest hyperscalers and developers. However, this is only one facet of Houston's multidimensional growth. The region's growth is being propelled by significant investments in life sciences, energy, energy exports and advanced manufacturing. With this growth comes new jobs in an influx of new residents, which has fueled a 2% annual residential growth, the areas experienced for the last few decades. The expansion of the economy and increase in population have significant affordability benefits for our customers. Notably, we expect that utilizing 10 gigawatts of existing system capacity to provide approximately $4 billion in aggregate savings for Texas residential and commercial customers over the next 10 years. supporting affordability and creating headroom for future customer-driven investments. This affordability profile is one that very few areas in the country can offer as our charges are 11% below the national average and the lowest in ERCOT. Looking ahead, we believe this growth will continue for years to come, requiring the further expansion of our system to support growth beyond the near term. We are making steady progress on a refresh load study that will inform our transmission planning process. and we expect to complete the study later this year. In Indiana, we are increasingly confident in our ability to secure potentially transformational opportunities to support local economic growth and address affordability. We continue to make considerable progress in our conversations with a large load customer on a project that would represent our single largest load in our Southern Indiana service territory with substantial upside for additional growth. Beyond the significant economic development benefits this opportunity would bring to the local community, it represents a powerful lever to enhance affordability for our customers. We estimate that this initial incremental load could enable $250 million in savings to our residential customers over 15 years, meaningfully reducing customer bills with the opportunity for even greater savings as potential upside for growth materializes. In closing, we continue to believe we have one of the most tangible and executable long-term growth plans in the industry. We are uniquely positioned to move at the speed of business to execute on near-term customer-driven opportunities. while also delivering our service affordably. We are laser-focused on making longer-term investments to enhance growth across all of our service territories while also improving customer outcomes. With that, I'll turn it over to Chris to cover the financials in more detail. Christopher Foster: Thanks, Jason. This morning, I will cover 4 areas of focus. First, the details of our strong first quarter financial results and how they position us for the rest of the year. Second, I'll provide a brief regulatory update and our progress with respect to timely recovery of our capital investments through the filing of our interim capital trackers. Third, I will touch on our planned capital deployment in 2026, which is right on track as we target to invest $6.8 billion this year for the benefit of our customers and communities. And finally, I will provide an update on our derisked financing plan, balance sheet health and credit metrics. Now starting with our strong financial results on Slide 6. On a GAAP EPS basis, we reported $0.48 for the first quarter of 2026. On a non-GAAP EPS basis, we reported $0.56 for the quarter. Our non-GAAP EPS excludes the impacts from the tax gain and other expenses related to the sale of our Ohio LDC, which is on track to close in the fourth quarter of this year. In addition, we continue to exclude the impacts of removing our temporary generation units from base rates as they are no longer part of our regulated utility business. As a reminder, we expect to start marketing these units for either a sublease or sale later this year in anticipation of getting those units back no later than spring of next year. Taking a closer look at the drivers of our first quarter earnings. Growth in rate recovery contributed $0.11 when compared to the same quarter last year. driven by a full quarter impact of updated rates, reflecting the interim filing mechanisms that went into effect late last year. Weather and usage were $0.02 unfavorable when compared to the comparable quarter last year, driven by milder weather across our Texas and Indiana service territories. Additionally, higher interest expense was $0.04 unfavorable, reflecting new issuances, slightly offset by lower commercial paper balances and favorable pricing on the convertible debt we issued during the quarter. O&M was flat for the quarter as we continue to accelerate our peer-leading vegetation management program to enhance the customer experience, and improve customer outcomes during severe weather events. Lastly, the absence of earnings from our Louisiana and Mississippi businesses post divestiture resulted in $0.05 of unfavorability when compared to the first quarter of 2025. The divested rate base has already been replaced by the acceleration of investments in our Texas businesses. These results reinforce our confidence in delivering on our full year 2026 non-GAAP EPS guidance range of $1.89 to $1.91. The accelerated growth that Jason highlighted and the work we've done to derisk our financing needs and more efficiently execute are additional tailwinds that further position us well to deliver and could continue to provide upside as we move through the year. Over the long term, we continue to expect to grow non-GAAP EPS at the mid- to high end of our 7% to 9% long-term annual guidance range through 2028 and 7% to 9% annually thereafter through 2035. Now turning to a broader regulatory update. As a reminder, we continue to recover approximately 85% of our investments through capital trackers, several of which we filed this quarter. I'll start with Houston Electric. In February, we submitted the first of our 2 permitted filings of our Distribution Capital Recovery Factor, or DCRF, and our Transmission Cost of Service tracker or TCOS. The DCRF filing requested a revenue requirement increase of approximately $108 million, capturing incremental distribution investments over the last 6 months. I'm pleased to share that we entered into a settlement agreement earlier this month and requested new rates to be effective in June, ahead of our planned timing. The TCOS filing requested a revenue requirement increase of approximately $36 million, incorporating transmission investments made between July and December of last year. During this quarter, the filing was approved and new rates went into effect just last week. Turning now to Texas Gas. In February, we also filed our annual capital investment recovery mechanism, or GRIP, requesting a revenue requirement increase of approximately $62 million, capturing capital investments made through 2025. Pending approval, we expect these investments to be reflected in customer rates in June. Lastly, as a reminder, we plan to file rate case applications for our gas businesses in Minnesota and Indiana later this year, which in the aggregate, represent less than 20% of the earnings power of our consolidated base. Next, I will touch on our continued execution against our planned capital investments for 2026 as shown on Slide 7. We invested $1.2 billion in the first quarter for the benefit of our customers and communities. The quantum of capital deployed in the first quarter is consistent with the seasonal timing of our capital plan as we expect larger construction and resiliency projects to ramp throughout the year. In short, we remain firmly on track to execute the $6.8 billion of planned work this year as we continue to make investments to strengthen our system, improve customer outcomes and build the most resilient coastal grid and safest gas systems in the nation. Beyond our base 10-year $65.5 billion plan, we will continue to fold in the over $10 billion of incremental capital investment opportunities as we gain better clarity on project costs currently embedded in our plan. as well as line of sight to new projects required to meet the unprecedented load growth across our service territories. And in addition, we'll potentially discover more capital investment opportunities as we refresh our transmission planning later this year, which we are targeting to complete in the second half of this year. These additional investments will continue to provide upside to our over $65 billion base plan through 2035, further increasing the earnings power of the company. Lastly, I want to touch on our credit metrics and balance sheet. As of the end of the first quarter, our adjusted FFO to debt ratio based on Moody's rating methodology was 12.5%. This metric reflects temporary timing pressure from opportunistically pulling forward planned debt issuances in the quarter to take advantage of attractive market conditions. As that capital is deployed and financing normalizes, we expect this impact to reverse over the course of the year. And as a reminder, we expect to end the year at the high end of our targeted cushion in light of the corporate AMT revised guidance. Importantly, we have filed for a refund of some of the previous paid cash taxes and expect to receive a refund later this year. We expect to incorporate the impacts of this favorable guidance into our financing plan later this year. Overall, from a financing standpoint, we have completed nearly 70% of our planned 2026 financing needs, significantly derisking this year's financing plan. I also want to highlight that the $650 million convertible debt issuances we executed in February has allowed us to reduce near-term exposure to floating interest rates. I would like to highlight that our commercial paper balance at the parent at the end of the first quarter was 0 compared to our normal average balance of approximately $1 billion. In summary, we are confident in our ability to execute in the near term and beyond given the derisked nature of our plan. We are reiterating our 2026 non-GAAP earnings guidance targeting at least the midpoint of $1.89 to $1.91. At the midpoint, this would represent an 8% increase over 2025 delivered results. Looking ahead, we expect to grow non-GAAP EPS at the mid- to high end of our 7% to 9% range from 2026 through 2028. And over the long term, we expect to grow non-GAAP EPS at 7% to 9% annually through 2035. We remain committed to investing to improve customer outcomes and enabling growth across the states that we have the privilege to serve. And with that, I'll now turn the call over to Jason. Jason Wells: Thank you, Chris. In closing, with our focus on disciplined execution, we have made meaningful progress in enabling more growth faster. -- particularly in our Houston and Indiana electric service territories. We believe that our ability to attract and serve large load customers will unlock the potential to transform the communities we have the privilege to serve. This growth, combined with our delivery of strong and consistent results in our proactive efforts to significantly derisk our regulatory profile and financing plan. increases our conviction that we have one of the most compelling affordability profiles and one of the most tangible and executable long-term growth plans in the industry. Ben Vallejo: Thank you, Jason. Operator, I'd now like to turn it over for Q&A. Operator: [Operator Instructions] Our first question coming from the line of Shahriar Pourreza with Wells Fargo Securities. Shahriar Pourreza: Just first, just there's obviously more specificity around the Houston Electric load, including the 12 gigs of firmly committed demand and the 8 gigs of data center load expected online by 29. Can you just help us bridge how much of that committed load is already embedded in the current plan versus what could represent incremental upside and of the projects not embedded. I guess what are the gating items to include it in plant? Jason Wells: Thanks for the question, Shar. The model in ERCOT is a little bit different than the rest of the country. We just provide transmission and distribution service. From a CapEx standpoint, the incremental system modifications, switchyard and substations that are needed to connect these customers timely are paid for by the large load customer. So I wouldn't look at this as necessarily a direct impact to the CapEx plan. There are 2 though tailwinds to the financial plan that I think are important. The first is despite the fact that there is not significant CapEx again, the customer is paying for the modifications in the interconnection, it does represent a significant amount of incremental demand charges, Probably the way to think about this is it's about -- for every 1 gigawatt of industrial load that we add to our system, it's about $6 million a month of incremental demand charges. So that provides a pretty significant tailwind both from an earnings standpoint but also a customer affordability benefit. And then indirectly related to CapEx is the need to replace that capacity on the system. And that's what we've been highlighting in terms of the trendy working through right now. That will result in the second half of this year in incremental projects to effectively replace the capacity and make sure the system is able to accommodate future load growth. So again, I wouldn't think about the 12 gigawatts of firmly committed load is directly driving CapEx. What it does is it directly drives demand charges that are outside of the plan. So that's a tailwind from an earnings and an affordability standpoint, and then indirectly supports the need for future CapEx that we will roll into the plan later this year. Shahriar Pourreza: Got it. Got it. And then just maybe just kind of correlated to the first question is just with ERCOT's new preliminary long-term forecast that projects now like 278 gigs of total demand by 29% and $3.68 by 2032. But both obviously ERCOT and PUCT have indicated that those forecasts likely overstate. I guess, remind us how you're using this kind of in your planning process? And should we think about it as mostly supportive of Houston's growth or as something that could ultimately drive incremental wires investment above what is already embedded in your current plan through '26? Jason Wells: Yes. As we've highlighted on previous calls and what you've seen in our ERCOT emissions, we are much more disciplined in terms of load that we submit to ERCOT for planning purposes. The loan that we submitted to ERCOT in this most recent study was effectively consistent with the load that we have under construction. We submitted about 3.6 gigawatts. And as we're reporting today, we have 3.5 that we're actively under construction in terms of committing. We will be filing with ERCOT, as I said, another 9 gigs in the coming couple of weeks. From a CapEx standpoint, again, I think the real opportunity here is replacing the capacity for future growth. And so in the second half of this year, you'll see an update from us where we articulate the new projects that will be needed to support future growth, the dollars associated with those. And then I think this continues to be a tailwind for the continued buildout of the 765 kV system on what I would call more of a medium-term, longer-term opportunity. So again, the growth is fantastic and the fact that it provides significant customer affordability benefits by effectively spreading the fixed cost of our system out over a much larger customer base provides near-term opportunities for earnings for incremental demand charges and then sets us up for incremental transmission projects that likely will need to be executed before the end of the decade and again, supports the buildout of the 765 KV system early into the next. Operator: Our next question coming from the line of Steve Fleishman with Wolfe Research. Steven Fleishman: Just wanted to go to the commentary on Indiana, and it sounds like things are maybe getting closer there. Could you talk to -- I think you've talked in the past about the potential to turn your CT into a CCGT? And I don't know if there's other investments if you were to land this customer. Could you give us some sense of the investment opportunity there, both physically and then also in dollars? Jason Wells: Yes.. No, absolutely. Steve, happy to provide that color. So if you've looked at the MISO Q, we have a transmission project that we've filed for to provide incremental capacity in that region. And in our integrated resource plan filing that we that we recently filed with the commission, we've got a scenario that supports the potential for a large load customer. Effectively, we've got existing capacity on our system today. We can enhance that with the new transmission investments that are articulated in that MISO Q. We can also then as you mentioned, provide incremental capacity by converting our simple cycle to a combined cycle facility up there. All of that unlocks at least 1.5 gigawatts of incremental capacity for a large load customer because we have existing capacity because we have the simple cycle plant already, Bill. I would think about this as more around about $1 billion opportunity as opposed to several billion dollars just to put some scale around the incremental CapEx. Again, this is I think an incredible opportunity for our customers up in that region. It allows us to provide customer affordability benefits that will be significant. It will provide incremental earnings from those sales and it will provide tailwinds around about $1 billion of incremental CapEx. Outside of that initial $1.5 billion -- 1.5 gigs, we are continuing to evaluate the opportunity to support future large load customers and that could result in even more incremental CapEx down the road. Steven Fleishman: Would the $1 billion opportunity be kind of by 2030 or after 2030? Jason Wells: No, no. This is all -- Yes, definitely within '27, '28, '29. Steven Fleishman: Okay. And then I guess just on the -- I just want to clarify on the ERCOT. So that number that we got from ERCOT last week on demand, that huge number. Your what the numbers that you have for your region territory within that, they're consistent with what we heard today? Or is there like a bigger number based on however they ask the data to be given to them, that matches up with their total number? Jason Wells: Yes. Our total submission as part of that process for large loads was roughly 4 gigawatts. That was included in those reported tables. Outside of -- and that was effectively the large load customers that we were currently and actively constructing transmission modifications, interconnection facilities. Outside of the number that was picked up on that table, we also filed a large load study that incorporated continued residential growth, the potential for large load customers. And that was a little bit more than 11 gigawatts. Those weren't picked up in ERCOT's numbers, but were filed with ERCOT. Today, what we're doing is updating those numbers. So this is in excess of what ERCOT just reported. We felt that given the methodology that ERCOT asked us to submit the customers, the 9 gigawatts that we will be filing for in a couple of weeks didn't meet that criteria back earlier this year. But certainly, we made a significant amount of progress in these 9 gigawatts that we will be filing in the coming weeks, meet all of the related commitments under the batching process for ERCOT, and we feel confident our committed load firmly to be low customers. So this is an incremental amount to what was reported by ERCOT. Operator: Our next question coming from the line of Richard Sunderland with Truist Securities. Richard Sunderland: Just circling back to this transmission commentary, I want to understand what you're studying for that 2H update it sounds like if I was following you earlier that the transmission need is all this decade. Could you maybe frame what's in flight now and what it's doing for capacity that's being utilized by this new load and what that might mean for this next batch of transmission out of the study? I'm just trying to think about total dollars that might come this decade that aren't reflected in the plan right now. Jason Wells: Yes. As we've been talking about on previous earnings calls, we think probably the most important aspect to focus on for large load is existing hosting capacity. These large load customers need to connect in any power timely. For us, we have existing capacity on our system of roughly 10 gigawatts. We also have about 9 gigawatts of generation that wants to connect it, is in the process of connecting to our system here in Houston. We're using that capacity to satisfy those customers that we talked about today. Part of the transmission plan that we have outlined in our $65 billion includes projects to make sure that we have the existing capacity where we need it. So think about that as sort of like intra-regional investments to move power around the greater Houston region. Also in the $65-plus billion CapEx plan, we have increased import capacity, primarily through the 765 kV lines that really will start to come online in '31 and '32. And so this transmission study that we've been alluding to really seeks to kind of fill a gap around '29, '30 and '31, where we see existing capacity being exhausted and before those new 765 kV projects provide incremental import capacity. So again, it will be increasing our capacity at the tail end of this decade and then there will be incremental projects to move this load around the Houston region to where it's needed. And there will likely be system stability investments to make sure that the system can accommodate the number of large load customers that are being proposed here. So it should be a fairly significant set of new transmission projects that we'll be able to highlight in the second half of this year. Richard Sunderland: Understood. That's very helpful commentary. And then I realize [indiscernible] was briefly referenced in the script, but just thinking high level here with all of this load commentary you've been offering today, how are you thinking about the market opportunity around those units as it stands now versus, say, a year ago? . Christopher Foster: Sure. We are in the market actually on the -- some of the smaller units at this stage and already seeing very strong market receptivity. As you can imagine, when we first took these units under lease, this was back in 2021. So you can imagine just how much of the demand has changed since then. So we're really seeing directionally almost double the original lease rates that we had in place. So the way to think about this at a high level for those larger units, as you know, those are currently serving the San Antonio area. At this stage, the back-end data when they return to the company from when we could start to market those units would be by the end of March 2027. So at this point, our focus would be on getting ready, being prepared ahead of that to make sure that we can take advantage of what would probably be a cash upside to the company's plan. Operator: Our next question is coming from Jeremy Tonet with JPMorgan. Jeremy Tonet: Just wanted to kind of go to the credit side, if I could. I was just wondering if you might be able to expand a bit more on the timing of the trajectory of the credit metrics here and how you expect to exit '26 at this time? Christopher Foster: Sure thing. This is purely [indiscernible], a function of timing. So we're still highly confident that we will end the year at the high end of the cushion that we talk about relative to the Moody's methodology. So it's 150 basis points of cushion. And so the why behind that is a couple of things. First, from a timing perspective, we pulled forward a substantial amount of debt issuances in the plan. So now we've got 70% of our planned 2026 financing needs taken care of. The other attribute I would remind you of is just that -- just before our prior earnings call, there was a treasury related announcement associated with the corporate alternative minimum tax. And there, there's a very good outcome, right? We'll have the opportunity to no longer be a cash taxpayer, which was previously on the order of roughly $150 million a year. So we'll get that benefit, right, in the form of a refund that will occur here in the next few months. Beyond that, what I think is also less appreciated is that we will also pursue some prior period recoveries, which would allow for even more cash improvement once we see those refunds. So those elements really give us good confidence at a year-end again, we will be at the high end of that range. Jeremy Tonet: Got it. That's very helpful. And I just wanted to expand the conversation a little bit. A lot has been talked about data centers here. But just wondering, I guess, if you could talk a bit more on traditional large load drivers in the Gulf Coast and Houston area. And I guess, maybe how you see that trending? Jason Wells: Absolutely. Look, I think a lot of this has been oriented to data centers, but really when we talk about the large load customer updates today, it includes both advanced manufacturing and data centers. As you know, as we've talked about on previous calls, [indiscernible] is becoming kind of an epicenter for advanced manufacturing, basically manufacturing almost the entirety of the equipment, except for the chips that are going into these data centers. There's also advanced manufacturing on the life sciences front. These types of facilities are heavy users of electricity and power, they themselves run their own data centers to tune their advanced manufacturing facilities. And so while it's not data centers for the market, they're heavy users of electricity for their function. So we see this growth really driven again by advanced manufacturing data centers. We continue to see significant activity on the energy and energy export side of things. Really, I want to continue to underscore, I think the diversity of economic and load growth drivers is really what sets this region apart. We don't see any slowdown in any of the large industries that are driving propelling Houston's economic development. Operator: Our next question coming from the line of Bill Appicelli with UBS. William Appicelli: Just a question on the batch study review process or COD. And maybe you could just expand on how the firm load commitments you guys have fit within that framework that they are in the process of reviewing? Jason Wells: Yes. So as I mentioned, we've got about 3.2 gigawatts already approved through the ERCOT process that will likely show and qualify for the baseline concept. The 9 gigawatts that we're filing for will likely qualify for batch 0. There's effectively 2 load studies that we have to have approved by ERCOT to qualify for Baxter, one of those 2 need to be approved to the steady state load study. We're on track to have those submitted to ERCOT. In a time period that would allow ERCOT to again, approve those to be included in bags. As I've mentioned, we have had very successful approvals of our previous submissions anywhere from 55 days to just under 80 days. So outside of kind of the interconnection and load studies that are required, the customers here have the land they're prepared and ready to pay all of the associated fees. We have the equipment, all of the long lead time equipment, in particular for us, this is the high voltage breakers and transformers, customers that will actually utilize the power or signed up. And so all of the definitions that are going to be required to be either a baseline or back 0 customer. William Appicelli: Okay. And then shifting gears a little bit, I mean -- what are you guys seeing in terms of the penetration of battery storage in your service territory and what kind of impact is that having from your view? I know you realize that you're responsible for on the T&D side, but just curious, you've seen a big uptick in storage in ERCOT broadly. And so just curious from your perspective what the impacts are and the outlook there? Jason Wells: It has been -- I mean -- and you know the numbers, a significant level than battery investment in the state that is all but sort of changed the summer peak pricing in the ERCOT market as batteries have helped really kind of smooth that summer peak demand. What we see kind of going forward, as I mentioned, from our vantage point, we've got about 9 gigawatts of incremental generation that is connecting to our [indiscernible] Greater Eastern region. And that is largely solar and batteries almost exclusively. We continue to see a high degree of interest in -- for the solar projects in particular to qualify for the tax credits before they expire. As a result, many of -- most of these projects are co-locating batteries. And so we continue to see batteries as effectively a tailwind to keeping energy costs low for customers for at least the next couple of years. And then we know that there are some incremental gas development that will really help after the tax credits expire and potentially, we see sort of a slowdown in the solar and battery build-out as we approach sort of the end of the decade. So we believe that strongly the generation is going to be there for this growth. Battery is going to help moderate the cost of electricity for customers, and we continue to see a robust pipeline connecting to the system over the next 2 years. Operator: Our next question is coming from the line of Julien Dumoulin-Smith with Jefferies. I'll move on to the next questioner. Our next question coming from the line of Anthony Crowdell with Mizuho Group. Anthony Crowdell: I know Julian does 3 calls at once, so he's probably a little tied up. Just -- I don't believe it's apples-to-apples. Apologies for the question. Just when I look on Slide 4, and you talk about the 8 gigawatts of data center load expected to be energized by 2029. Is that the same 8 gigawatts that in fourth quarter slide deck you guys are focused on getting that on by year-end '28. I mean -- my question is that load getting pushed back a year or it's actually not an apples-to-apples comparison? Christopher Foster: Anthony, let me just go and lay off for you. In the prior quarter, we had talked about 7.5%. That number is now going to 8%. And it's by the end of 2028 is the way to think about it. So apples-to-apples, that's the number from 7.5% to 8%. What we provided this morning, though, is that the firmly committed top line number is actually going to 12.2 gigawatts. Anthony Crowdell: Perfect. Great. And then just lastly, a quick follow-up on -- you talked about -- I think you going to file Minnesota and Indiana gas cases later this year. Any -- is it just infrastructure investment that's driving that filing or anything else in those -- in either of those 2 filings? Christopher Foster: Sure. Pretty straightforward. Definitely, it's really about replacement CapEx in Minnesota on a very straightforward program to focus on safety and reliability. As it relates to Indiana, there, what I think is important that we have already signaled is our focus on affordability. In particular, we are evaluating actually, Anthony combining what are currently 2 gas rate cases up there into 1 which we would likely file in Q4 of this year. By combining the cases, we're likely to see a customer build benefit explicitly for those customers that we serve in Southwest Indiana as a result of the cost allocation changes. And so excited to be able to put those forward. Both of those, I think you should anticipate for Q4 of this year, both Minnesota and Indiana. Operator: Our next question coming from the line of Andrew Weisel with Scotia Bank. Andrew Weisel: First question is you've talked about the utilizing 10 gigawatts of existing system capacity around Houston to generate those $4 billion of savings, but you now have over 12 gigawatts of committed mode -- obviously, no 2 projects are the same, but do you have a rough ballpark number of what would be required or cremental gigawatt of demand going forward? I know you alluded to some new transmission projects that may be you'll announce later this year. I'm asking more like a sensitivity in terms of assets and CapEx needs and then what kind of impact would that have on the rest of the customer base? Would it bring further customer benefits? Or should we think about it more like net neutral going forward? Jason Wells: Yes. Ultimately, I think about it as further customer benefits. I think we have been in a very unique position in holding our rates relatively constant since 2014. And and that largely has been a function of the economic growth in Houston. I can't size for you kind of $1 per gigawatt for incremental because it is going to be so unique. What's the cost of and the length of the import lines, where specifically are the intra-regional lines needed what's needed from a system stability standpoint. Those are all the things that we're evaluating as part of the transmission study. This will create incremental capacity at a cost, but -- the way that I would think about it is it unlocks the benefit of future economic growth for the region. And just as we've invested in capacity in the past, that's been utilized and kept our rates flat. The same will happen here. And ultimately, the single biggest lever for affordability of utility service is economic development. and we are laser-focused on continuing to make sure that we support the greater Houston region, Indiana and Minnesota's economic development opportunities. Andrew Weisel: Okay. directionally helpful. Then second, in terms of the balance sheet, on cash taxes, I know you mentioned you'll be getting some refunds and you expect to see lower cash tax outflows going forward. Do you see that as being meaningful enough to reduce the guidance calling for $4 billion of common equity. Obviously, that will depend on CapEx, which is constantly rising. But all else equal, would that be meaningful enough to impact equity? And then please remind me, was the convertible already embedded in the assumptions? Or could that also imply some downside? Christopher Foster: Sure. So thanks for the question. On the convert, you can imagine that helped reduce kind of near-term floating rate pressure. So that was a nice add to the plan. As I think about the corporate alternative minimum tax benefit, what we had shared is that not only will you get the refund improvement for this year, right? So just think about that as roughly in line with that $150 million a year of cash tax payments that would go away, you would keep that benefit, right, as you go forward, right? So that roughly $150 million a year. So what we've shared actually is that can provide us the equivalent of adding an incremental $1 billion of CapEx to the plan with no incremental equity. And so as you can hear from what Jason has shared this morning, certainly, there are multiple opportunities. So that's how we've tried to share that. Actually, we've got even more CapEx we can add to the plan without adding incremental equity. Operator: I see there are no further questions in the queue at this time. Ladies and gentlemen, this concludes CenterPoint Energy's First Quarter 2026 Earnings Conference Call. Thank you for your participation, and you may now disconnect.
Operator: Ladies and gentlemen, thank you for standing by. Welcome to the CACI International Inc Third Quarter Fiscal Year 2026 Earnings Conference Call. Today’s call is being recorded. Later, we will announce the opportunity for questions and instructions will be given at that time. If you should need assistance during this call, please press 0 and someone will help you. At this time, I would like to turn the conference call over to George A. Price, Senior Vice President of Investor Relations for CACI International Inc. Please go ahead, sir. George A. Price: Thanks, Jeanne. Good morning, everyone. I am George A. Price, Senior Vice President of Investor Relations for CACI International Inc. Thank you for joining us this morning. We are providing presentation slides, so let us move to Slide 2. There will be statements in this call that do not address historical fact, and as such constitute forward-looking statements under current law. These statements reflect our views as of today and are subject to important factors that could cause our actual results to differ materially from anticipated. Those factors are listed at the bottom of last night’s press release and are described in the company’s SEC filings. Our Safe Harbor statement is included on this exhibit and should be incorporated as part of any transcript of this call. I would also like to point out that our presentation will include discussion of non-GAAP financial measures. These should not be considered in isolation or as a substitute for performance measures prepared in accordance with GAAP. Let us turn to Slide 3, please. To open our discussion this morning, here is John S. Mengucci, President and Chief Executive Officer of CACI International Inc. John. John S. Mengucci: Thanks, George, and good morning, everyone. Thank you for joining us to discuss our third quarter fiscal year 2026 results, as well as our updated fiscal 2026 guidance. With me this morning is Jeffrey D. MacLauchlan, our Chief Financial Officer. Let us move to Slide 4, please. Before turning to our results, I want to start by reminding everyone that CACI International Inc is a fundamentally different company than it was ten or even five years ago. This evolution is the result of a clear and consistent strategy, intentional leadership, and disciplined execution over many years. It did not happen by accident. The key elements of our strategy are, first, we operate in seven markets where we possess decades of deep mission knowledge. We know and understand what our customers need. Second, we focus on enduring priorities. We are a national security company that targets narrow, deep funding streams. Third, we are a software-defined technology leader. We differentiate ourselves by using software to address critical needs with the speed, agility, and efficiency our customers demand. Fourth, we invest ahead of customer need to show the art of the possible without waiting for requirements. And fifth, we deploy capital in a flexible and opportunistic manner to create value for our customers and our shareholders. Executing this strategy enabled us to expand our portfolio, increase free cash flow per share, and generate additional shareholder value. Slide 5, please. Turning to our third quarter results. We delivered another quarter of outstanding performance on our way to another exceptional year. Revenue for the quarter was $2.4 billion, up 8.5% year over year. We also generated a strong EBITDA margin of 12.3%, and robust free cash flow of $221 million. In addition, we won $2.2 billion of awards, which represents a book-to-bill of 0.9x for the quarter and 1.2x on a trailing twelve-month basis. These awards were driven by our exceptionally strong recompete performance, an important indicator of customer confidence and a key enabler of long-term growth. While award activity improved in the quarter, it is not yet fully recovered from the multiple government shutdowns and acquisition organization changes. As we said before, quarterly awards can be lumpy. But we continue to have excellent visibility, a strong pipeline, and see a very constructive macro environment. Our results continue to reinforce that CACI International Inc is differentiated and well positioned. With that said, we are raising our fiscal 2026 revenue and EBITDA margin guidance, driven by the addition of ARKA and the strength of our organic margin performance. Slide 6, please. On that note, let us discuss our recent acquisition in a bit more detail. During the third quarter, we closed the acquisition of ARKA, a leading technology company focused on national security missions in the space domain. ARKA brings exquisite space-based imaging sensor technology with high technical barriers to entry, agentic AI-based ground processing software, and deep customer relationships built over decades of strong performance. ARKA is a powerful addition to CACI International Inc. We now have sensors deployed across all domains. We can provide multi-source actionable intelligence and bring operationalized agentic AI capabilities to classified customers across the national security apparatus. In fact, we already have agentic AI efforts underway with our shared customer footprint and we see significant additional cross-selling opportunities. ARKA positions us for opportunities including Golden Dome, INDOPACOM support, future ground architecture, and space superiority missions. To fully leverage our combined capabilities, we have integrated ARKA and CACI International Inc’s existing space portfolio under the leadership of ARKA’s former CEO. ARKA exemplifies the type of acquisition that investors should want us to make: wide competitive moat, unique capabilities and technology, exceptional execution history, and strong financial performance, and all in one of the most strategically important domains in national security. It is our flexible and opportunistic capital deployment strategy in action, positioning CACI International Inc to drive long-term growth and free cash flow per share and additional shareholder value. Slide 7, please. CACI International Inc is a national security company. That focus continues to be a powerful differentiator in the marketplace. We have more than 1,400 people embedded in mission spaces across all combatant commands performing planning, intelligence analysis, cyber, and operational support. We are involved in every operational headline you read, as well as the many operations you will never read about. This proximity to mission gives us an advantage that is hard to replicate. We understand the mission and the threats because we see them every day. This creates a feedback loop that sharpens our business development, strengthens our reputation for execution, and informs our decision making, allowing us to confidently invest ahead of customer need. These are meaningful discriminators that create competitive advantage and help drive our financial performance. For example, CACI International Inc recently received multiyear extensions on several contracts in critical mission-focused areas as a direct result of our exceptional delivery. Slide 8, please. Our strategic investments, informed by the mission proximity I just described, have positioned CACI International Inc as a leader in software-defined technology and key warfighting domains that are receiving significant attention and funding from our customers. And these investments also demonstrate a repeatable strategy that will drive future growth and shareholder value. A great example is our SPECTRAL program, where we are developing the next generation of shipboard signals intelligence and electronic warfare capabilities for the Navy’s surface combatant ships. We initially invested ahead of customer need to show them the art of the possible and to demonstrate our differentiated solution during the bid phase. Now we are actively investing ahead of need during execution to accelerate delivery of capabilities to the field, a key ask of the current administration. During the quarter, the program continued to progress as we achieved Milestone C, marking the start of SPECTRAL’s low-rate initial production and deployment phase. This is a defining step towards ramping up the program and delivering this critical EW technology to the fleet. And because SPECTRAL is built using software-defined technology with open architectures, another key administration priority, we see significant additional opportunities across the Department of Defense and international. Another example is in countering UAS, where we are seeing accelerating demand, increasing orders, and a growing pipeline driven by Merlin, our commercially sold counter-UAS system. Merlin leverages nearly two decades of our counter-UAS investments and work across the Department of Defense to deliver a system that sees farther, detects more, provides more critical decision-making time, and delivers more effective low- to no-collateral-damage capabilities than any other available system. Merlin is a software-defined system that can be rapidly updated and provides a nearly unlimited magazine of economically sustainable nonkinetic effects, including unique cellular detection and defeat capabilities. From concept to deployment in under a year, we are not only providing the Department of Defense with the capabilities they are asking for, we are also delivering them at the speed demanded. We are proving this in real time with the Merlin system that our customers deployed on the southern border. A final example is our strong positioning for Golden Dome. CACI International Inc has been investing in, developing, and building many of the capabilities this mission requires across many critical layers. First, our counter-UAS systems. Defending the homeland is not just about ballistic or hypersonic threats. It is also increasingly about threats from unmanned aircraft systems. CACI International Inc’s technology is ideally suited for this mission, where extended detection range provides critical time for decision making and low- to no-collateral-damage effects are critically important for mission success. Second, our exquisite left-of-launch capabilities. These include sensitive cyber activities as well as our worldwide set of embedded sensors, which can detect and defeat threats before they are deployed. And third is our space-based sensing. ARKA significantly expands our capabilities in the space domain, including technologies such as hyperspectral imaging and missile detection. SPECTRAL, Merlin, and Golden Dome are three significant proof points of how CACI International Inc creates value for our customers and our shareholders. They demonstrate where we identified an enduring need early, invested well ahead of award, and established differentiated positions through years of disciplined execution and continued innovation. Slide 9, please. Turning to the macro environment. We continue to see constructive budgets and demand signals. While the government fiscal year 2027 budget is still evolving, the proposed spending looks very positive in many key areas for CACI International Inc, including electronic warfare, counter-UAS, space (especially classified space and counter-space programs), C5ISR, and IT modernization, including AI and the digital backbone. We are in the right markets that are aligned to enduring, well-funded priorities. We are providing the right capabilities to address our national security customers’ most pressing needs. And with that, I will turn the call over to Jeff. Thank you, John, and good morning, everyone. Please turn to Slide 10. As John mentioned, we are very pleased with our third quarter performance. Jeffrey D. MacLauchlan: Despite some modest disruption from the ongoing DHS shutdown, our revenue and awards reflect our strong market position in a recovering but still sluggish award environment, while our strong margins and cash flow demonstrate the high-value, differentiated characteristics of our offerings and our operational excellence. In the third quarter, we generated revenue of $2.4 billion, representing 8.5% year-over-year growth, of which 6.8% was organic. Despite the modest DHS impacts that I mentioned, we still saw the expected acceleration in organic growth moving into the second half of the year. EBITDA margin of 12.3% in the quarter represents a year-over-year increase of 60 basis points, even after absorbing $17 million of ARKA transaction costs. Adjusting for these expenses, our strong third quarter profitability was driven primarily by overall mix and strong program execution. Third quarter adjusted diluted earnings per share of $7.27 were 17% higher than a year ago. Greater operating income along with a lower share count more than offset higher interest expense, including $11 million related to ARKA, a higher income tax provision, and the transaction costs I mentioned earlier. Finally, we delivered healthy free cash flow of $221 million in the quarter, driven by strong profitability and good working capital management. Third quarter cash flow was reduced by approximately $20 million due to transaction costs and other acquisition-related financing fees. Days sales outstanding, or DSO, were 55 days, two days lower than the prior quarter. Slide 11, please. Turning to our balance sheet and capital structure. Our pro forma leverage at the end of Q3 was 4.2x net debt to trailing twelve-month EBITDA, slightly better than the expectation we provided when we announced the ARKA acquisition. We continue to expect leverage to return to the low threes within six quarters based on the strong cash flow characteristics of our business. I will remind you again that we have a strong track record of successfully and quickly deleveraging after major acquisitions. This underscores our consistent financial performance, disciplined capital deployment, and demonstrated access to capital. As we have previously indicated, ARKA is accretive to both growth and margins. The acquisition of ARKA is just the latest example of our flexible and opportunistic capital deployment strategy and the evolution of our portfolio, which positions CACI International Inc to deliver long-term growth and free cash flow per share and additional shareholder value. Slide 12, please. We are pleased to increase our fiscal 2026 revenue and EBITDA margin guidance driven by the addition of ARKA and the strength of our organic margin performance. You will notice on the right-hand side of the chart, we have provided a breakdown of costs associated with an acquisition for transparency and your modeling purposes. We now expect revenue to be between $9.5 billion and $9.6 billion. This represents total growth of 10.1% to 11.3%, which includes about 3.5 points of growth from acquisitions, including approximately $150 million from ARKA. We are increasing our fiscal 2026 EBITDA margin to the 11.8% to 11.9% range, underscoring our strong execution and evolving portfolio as well as contributions from ARKA. Our full-year margin outlook includes the impact of approximately $22 million of transaction costs related to the acquisition. Our updated FY 2026 adjusted net income guidance is between $615 million and $630 million. Adjusted net income reflects the after-tax impact of approximately $60 million of pre-tax transaction costs and higher interest expense, largely offset by stronger organic margin and ARKA’s earnings contribution. This yields full-year adjusted EPS guidance of between $27.70 and $28.38 per share, which represents growth of 5% to 7% even as we absorb these costs. And finally, we are reaffirming our free cash flow guide of at least $725 million, even after absorbing nearly $50 million of transaction costs, interest expense, and an increased investment in capital expenditures. As we consistently say, we see free cash flow per share as the ultimate value creation metric, and our FY 2026 guidance represents 65% growth in free cash flow per share over FY 2025. Slide 13, please. Turning to forward indicators. All metrics continue to provide good long-term visibility into the strength of our business. Our third quarter book-to-bill of 0.9x and our trailing twelve-month book-to-bill of 1.2x reflect good performance in the marketplace, even with the multiple shutdowns and slow rebound in award decisions. Trailing twelve-month weighted average duration of our awards in Q3 continues to be just over six years. Our total backlog of $33.4 billion increased 6% year over year, while our funded backlog increased 19% over the same period. Both metrics reflect healthy organic growth even when normalizing for ARKA’s contribution of $835 million to total backlog and $422 million to funded backlog. Additionally, ARKA has another $2 billion of noncompetitive franchise programs from which we expect to recognize revenue over time but that do not yet meet the regulatory criteria to be added to backlog. For fiscal year 2026, we now expect 98% of our revenue to come from existing programs, with 1% each from recompetes and new business. Progress on these metrics reflects our continued strong operational performance and yields increased confidence in our outlook as we close out the year. In terms of our pipeline, we have more than $4 billion of bids under evaluation, over 80% of which are for new business to CACI International Inc. We expect to submit another $22 billion in bids over the next two quarters, with over 75% of those being for new business. We continue to have excellent visibility, are well positioned in a very constructive macro environment, and remain very comfortable with our outlook, including our three-year targets. In summary, we delivered another quarter of strong results. Our performance continues to demonstrate our differentiated position in the marketplace, which is further enhanced by our acquisition of ARKA. Our ongoing investment ahead of customer need enables us to win and execute high-value, enduring work that drives long-term growth, increased free cash flow per share, and additional shareholder value. And with that, I will turn the call back over to John. John S. Mengucci: Thank you, Jeff. Let us go to Slide 14, please. In closing, I want to emphasize what truly differentiates CACI International Inc. While others talk about adjusting to the changing market, we are already delivering. We anticipated years ago that speed, software-defined solutions, and mission proximity would define success for the long term in national security. We positioned the company accordingly through deliberate investments and disciplined execution of our strategy. This is all about expanding the limits of national security. It is not about chasing trends. It is about understanding where threats are evolving, where our customers’ hardest problems will be, and building the capabilities to address them before they ask. That is what has allowed us to compete and win against a broader set of competitors. Our third quarter and fiscal 2026 results to date demonstrate this differentiation in action: strong organic growth, expanding margins, robust cash generation, and the strategic addition of ARKA to further strengthen our position in the space domain. We are executing our strategy, delivering for our customers, and driving long-term shareholder value. Before I turn the call over for questions, I want to congratulate NASA and the Artemis II crew on their historic achievement. I also want to recognize that both CACI International Inc and ARKA contributed critical technology that exemplifies the caliber and mission impact of our offerings. CACI International Inc’s optical communications technology enabled high-definition video and data transmission throughout the entire mission, while ARKA provided essential sensing technology on the SLS rocket to ensure a safe crew ascent. To both teams, thank you for your exceptional work on this landmark achievement for our nation’s space program. As is always the case, our success is driven by our now 27,000 employees who are ever vigilant, expanding the limits of national security. To everyone on the CACI International Inc team, I am proud of what you do every day for our company and for our nation. And to our shareholders, I thank you for your continued support of CACI International Inc. With that, Operator, let us open the call for questions. Operator: At this time, in order to ask a question, press star then the number 1 on your telephone keypad. Star 1 again. For today’s call, we do ask you that you limit yourself to one question and one follow-up. Thank you. Your first question comes from the line of Jonathan Siegmann with Stifel. Please go ahead. Jonathan Siegmann: Morning, John, Jeff, and George. Thanks for taking my question, and congratulations on closing the transaction. Just a real quick one. With ARKA, now that it is all integrated under one leadership, can you scale how big your space exposure is today? John S. Mengucci: Yeah, John, thanks. Well, it has definitely gotten larger, and not just in size, but frankly, in scale and just the absolute eye-watering capabilities that that national asset brings in. Look, we do not use that national asset term loosely. They are a 62-year-old company, have been at the forefront of technology developments since the Cold War, with an outstanding track record of execution. We talked to the majority of the satellite primes that utilize what ARKA provides in space, and we received outstanding feedback: a consistent partner consistently delivering on schedule and within cost. Jeffrey D. MacLauchlan: You know, what drives the growth of the space business further? Definitely Golden Dome. Some of the backlog numbers that I mentioned earlier—just to have an asset that has another $2 billion of noncompetitive sole-source franchise programs from which we are going to continue to expect revenue—really does drive future growth. John S. Mengucci: All in all, today, looking at space, you are looking at greater than $1 billion worth of total business, with future growth we see coming forward when we get to talking about fiscal year 2027. Jonathan Siegmann: Appreciate that. And maybe I will just ask one for Jeff on margins because that was pretty impressive for the quarter. Previously, you made statements quantifying the difference between tech and expertise, which was helpful for us. Now that you have added the super A’s—ARKA and Azure—is there any framework that we can think about for the relative margin differences between those two segments? And any lumpiness or seasonality to keep in mind? Jeffrey D. MacLauchlan: Yeah, thanks, John. Look, you hit at an item that we are probably not going to provide a lot more specificity around, at least at this point, but clearly, the addition of these significant technology franchises is important in the evolution of the portfolio we have been talking about for some time and the attendant margin expansion that comes with that. So you put your finger on something that we are not quite ready to quantify, but the condition that you observe is clearly the case. I would add relative to the second part of your question that that does come with a certain amount of lumpiness in terms of margin. You can see that a little bit when you do the algebra around the fourth quarter margin, where we have particularly strong margins this quarter and you will quickly figure out that increasing our margin performance for the year probably means some lumpiness in the fourth quarter that goes the other way, the way this quarter went the right way. So there is some variability around that that you have noted. Overall, however, we clearly have embarked on this strategy with the expectation that margin continues to go up and to the right, despite an occasional quarterly bounce. John S. Mengucci: And, John, let me also add on the revenue side. The expected financial contribution over the next twelve months that we shared with you all in December is still accretive to revenue growth and margin. But on the revenue side, revenue is not going to be linear. It is a technology business. You make deliveries; you book revenue. When you book, you book profit. So, you know, unfortunately or fortunately, program schedules are not congruent with quarter-end points. We cannot apologize for that. It is very much like the rest of our technology business. We will do our best to estimate quarter to quarter, but this is a full-year business. We have said that a lot. And ARKA is a fantastic growth addition for us as we move forward. Operator: Your next question comes from the line of John Godin with Citigroup. Please go ahead. John S. Mengucci: John? John, are you there? Operator, let us move on to the next question. Operator: Your next question comes from the line of Gavin Eric Parsons with UBS. Please go ahead. Gavin Eric Parsons: Thank you. Good morning. John, you talked about this a bit, but maybe it is a two-part question on the booking environment. It seems like the submits are building really nicely, but that is not converting to the pipeline. So what are you seeing there? And then second, on funding, if I exclude ARKA, your funded backlog was up high single digits. So is the funding environment still behaving better even if the award environment maybe is lagging? Thanks. John S. Mengucci: Yeah, Gavin, thanks. Let us unpack that. Look, we continue to see excellent visibility and a strong pipeline. We see a really constructive macro forecast as we look forward. Let me just start with we are in the right places. We are investing ahead of need in the right capabilities. We are able to deliver them faster and more efficiently. That is exactly what the administration wants. But it is safe to say we are not a short-term hand-to-mouth business. We have a large and growing backlog, as you mentioned—nearly $34 billion, which is up 7% year over year. Funded backlog is up 19% year over year, and a healthy trailing twelve-month book-to-bill of 1.2x. And then the last thing I would like to share is a statistic I enjoy: the weighted average duration of backlog on a rolling basis is greater than six years as we get through Q3. So funding trends, customer demand, a potential $1.5 trillion GFY 2027 budget (which includes reconciliation funding), all continue to support what we are looking at going forward. We have talked about the fact that there is a number of short-term factors behind the slow award decision-making, and we could spend the rest of the day being 50/50 on reasons why. There is a lot of money in the budget. That means there is an awful lot of planning. Reconciliation funds are multiyear money. But at the end of the day, awards are lumpy. I like our plan. I like the pipeline. I like the bids submitted. Over the next couple of quarters, I fully believe that the government will go back to the days of awarding most programs within 100 to 300 days of when they plan to, and we will continue to move forward. But at the end of the day, not a hand-to-mouth business. We are growing just fine. We will continue to grow, we will get through this awards trough, and we will continue to deliver. Jeff? Jeffrey D. MacLauchlan: Gavin, I would add to that. You noted the funded backlog increase. The organic piece of that is 10%. I would also note that the sluggishness that we have seen in the acquisition and award structure—and this is underscored by the backlog statistic that we just used—we have not experienced any administrative part of the contract administration. So the government is, by and large, funding programs. They are paying bills. They are processing invoices. Payment offices are working. The sluggishness in the awards mechanism has not translated into that side of the government. Gavin Eric Parsons: Okay, thanks, guys. And a long shot here, but guidance implies growth accelerates in April, and you have got some pretty easy comps this year. So any early thoughts on if the exit growth rate can continue into next year? Jeffrey D. MacLauchlan: Yeah. We do see growth accelerating in the fourth quarter, which has always been the plan. When I referred to the fact that we were seeing the growth acceleration we expected in the third, that was part of that. But I would also encourage you to keep John’s comments in mind relative to the fact that the business is managed to the year. We have customers that have rhythmic buying patterns at different times of year. They buy differently, and we typically have a strong fourth quarter—strong second half and particularly fourth quarter—which we see again this year. But I would encourage you to not think about that as an exit rate for the year. If you look over time at the distribution of our margin and revenue growth, you will see that back-end-weighted trend. Do not extend that into 2027 as we close out 2026. John S. Mengucci: If I added a comment about 2027, I would encourage you to look forward to us continuing to deliver—driving revenue, driving margins, driving free cash flow. Again, we would not say that if we were not very comfortable with our three-year targets. Jeffrey D. MacLauchlan: The momentum in the business that you see is real. Operator: Your next question comes from the line of Gautam Khanna with TD Cowen. Please go ahead. Gautam Khanna: Good morning, guys. How are you doing? John S. Mengucci: Morning. Jeffrey D. MacLauchlan: Morning. Gautam Khanna: Good. I wanted to follow up on that last question. I remember last quarter you kind of explained the Q4 sequential ramp that is expected—JTMS and some other programs. I am curious why those would not continue to be at a very high rate exiting June into September. Is there anything one-time with those specific contracts that are driving so much of the sequential growth that then tapers off? And then I just wanted to get your broad perspectives on the fiscal 2027 budget request and how that might benefit CACI International Inc—in what parts of the business? Jeffrey D. MacLauchlan: Why do I not take the first part of that, and let John take the broader budget question. I would refer you back to the discussions that we have had about the different ramp profiles, and there are a couple of things that are happening in the fourth quarter and the sequence from third to fourth. One is that we have a number of programs that ramp in sort of a bimodal growth rate. One of the patterns that I talked about is a lot of these large agile software programs have an initial phase that is planning the second phase. So there is acceleration and then a leveling off and then a reacceleration. We are working through those phases right now on ITAS and, to a lesser extent, NCAPS. We very much are in that mode for JTMS. The other thing I would point out is that we do have a number of the technology areas where customer communities are particularly heavier buyers at different times of year, often with increased activity in the fourth quarter of our fiscal year. And then the final variable is that we have a number of items where we are in the early stages of activities that are driving investment for future growth—that is another variable in that mix. So the real answer is it is a portfolio. While mix sometimes feels like a handy explanation, there really are three or four substantive conditions that are at play here, and they come together from time to time with outcomes that we try to suggest you expect. John S. Mengucci: On the 2027 budget, larger budgets never hurt. We would rather have larger budgets than shrinking ones. But as I have said many times, we are going to pay much more attention to where the funds are flowing under the surface. What we see in the President’s Budget request looks very positive. The J-books came out earlier this week, so we will be able to garner much more detail from those as we build our fiscal 2027, 2028, and 2029 plans. We are in a $300 billion TAM, and we are roughly a $10 billion company, so there is plenty of room for us to grow. We firmly believe that the electronic warfare and counter-UAS areas, both in the Department of Defense and in DHS, show great promise. We are having all the right meetings and planning sessions and making the right internal investments to meet those market needs. Space looks really good, both in the classified space programs where we are very strong in those future budgets—especially those in the FY 2027 plan—C5ISR, and then 2027 and beyond. Operator: Your next question comes from the line of Scott Stephen Mikus with Melius Research. Please go ahead. Matt Martolo: Good morning. This is Matt Martolo on for Scott Stephen Mikus. Good morning, and congrats on Milestone C on SPECTRAL. As that program moves into LRIP and eventually into full-rate production, are there any challenges that you foresee or investments that need to be made to support the production ramp? And then how should we benefit as it moves into production? Thank you. John S. Mengucci: Yeah, thanks. We are extremely proud of where the SPECTRAL program is. That was a long road for us to achieve victory there, and the team has done an outstanding job. We received Milestone C. We are just beginning the LRIP portion in the October–November timeframe—sort of Delivery Zero—where we will begin delivering some of the systems. On the investment side, as my prepared remarks stated, we invested long ahead of the award of that program to make certain that the brains of that system, which is looking at multiple antenna feeds and all of the known threats, provide a great AI baseline for naval combatant ships. We have performed those investments. We have also continued CapEx investments in our production facility in Melbourne, where we are rolling out both CAESAR/CAF and the SPECTRAL program. We have continued to invest in this program, driving, frankly, long-lead item purchases slightly ahead of Milestone C so that we could take that timeline between C and when we can deliver the first system down. It is an absolute proof point for us on our focus on excellent execution. It is a new large-type program for us, but a great partnership with the Navy coupled with the right funding timing allows us to deliver to the well over 100 ships that are in the U.S. Navy fleet today. Operator: Your next question comes from the line of Seth Michael Seifman with JPMorgan. Please go ahead. Rocco Barbero: Good morning, guys. This is Rocco on for Seth. How should we think about ARKA impacting margins moving forward? You mentioned that quarter-to-quarter margins can be lumpy from the technology side of the business. But is the 11.6% that is implied for next quarter the right way to think about the lower end of the new company margins post these deals? Jeffrey D. MacLauchlan: The ARKA contribution in the fourth quarter is pretty consistent with our expectations. John mentioned the fact that this is a delivery and mix business and very much not linear. We gave some indication of margin in the December 2022 call, but I would point out that within any particular quarter, around that average, we may see three- or four-point swings. I do not know if I am getting exactly to the question that you asked. The ARKA expectation for the fourth quarter is well aligned with our expectation when we made that announcement. The organic business mix will be a softer quarter when you do that math. Rocco Barbero: Right, that makes sense. And then what type of directed energy capability does ARKA bring to CACI International Inc? And have they been fielded at this point? John S. Mengucci: They bring a portion of directed energy—things we cannot talk about on the line. Yes, it is a new capability for us. We were not in the directed energy business prior, and I think we will be able to talk more on that in the quarters to come. I do want to touch back on your earlier question. Look, ARKA is a long-term play for us. It is probably one of the strongest acquisitions that we have done in terms of both doubling down on capabilities and customer relationships, and us owning and growing a price-based business in a market that is going to see valuations of those such a strong space portfolio grow in years to come. We have been able to do that all inside of a company that covered down on our transaction and our interest costs and is still delivering $725 million of free cash flow. We are in the very early innings. We just got to integration on April 1. We are still in the month of April, so in the first twenty or so days, we have gotten a lot done. And Andreas, who is running the combination of ARKA’s business and our space business, is already making a major impact as to how we can continue to grow in space. Operator: Your next question comes from the line of Tobey O’Brien Sommer with Truist Securities. Please go ahead. Tobey O’Brien Sommer: Thank you. If I think about the business from a really high level—mission tech, expertise, etc.—is it fair to think of mission tech as a mix shift of two to three points per year because of faster growth as well as, generally speaking, applying more capital on acquisitions in that direction? Jeffrey D. MacLauchlan: I think, Tobey, that is broadly right. It is a hard thing to generalize, but the condition you observe is certainly true, and you are on the right vector, to be sure. Tobey O’Brien Sommer: And with respect to counter-UAS, I was wondering if you could characterize what the experience in the war so far has meant to the opportunities that you see in front of you and maybe how that has impacted customer conversations and decision making. John S. Mengucci: Yeah, Tobey, thanks. Let us start with where we are in the counter-UAS market. We are already in government inventory. We have been doing this for a couple of decades. Merlin is our family of counter-UAS systems. It is part of our broader $2 billion EW portfolio. We continue to expect growth from counter-UAS. The foundational part of this is that we are able to sell it under two different vectors—under FAR Part 12 and FAR Part 15—so we can meet the administration’s priorities. We are in place for world events and the like. We are currently providing counter-UAS to all four of the armed services. We are in active discussions or negotiations with 16 other agencies and organizations across the federal government, and we already have, as I talked about in my prepared remarks, a system that has been fully deployed on the southern border. As you all know, it is our practice that for anything competitive, we are not going to provide details, but we will absolutely share those details on the next quarterly call and in incremental press releases as we go forward. On the international front, as an update since our last call, we are now very active working sales in theater through the U.S. Army Task Force 59, DIANA 401, and CENTCOM for mobile counter-UAS units. We are getting kits prepared to support testing against one-way attack drones—the ones that have been in the news over the recent quarter. We have established relationships with resellers to give us access into the Saudi, Kuwaiti, and Qatari markets through their Ministries of Defense. They are all in various stages of the process, but you should expect those folks to be on board within 45 days, and we have to work through the exportability issues. We are very strong in this market. We have talked about this for quite a long time. Current events are driving stronger demand, as well as with the seven countries to whom we have already delivered EW. So it is a strong market, well funded in the U.S. through both direct reconciliation bills, adding billions to our TAM, which is what moved us to a $300 billion level, and really strong interest in counter-UAS for Golden Dome, as well as other initiatives like the eastern flank drone wall. A lot of positive work here. We are putting the right dollars of investment to work, and you saw the CapEx is up slightly—half of that was to ARKA, and a portion goes through our EW portfolio—and we are full speed ahead in how we want to grow this. Operator: Your next question comes from the line of Sheila Karin Kahyaoglu with Jefferies. Please go ahead, Sheila. Sheila Karin Kahyaoglu: Hi. Good morning, guys. Just one question for me. Great stuff on the funded backlog growing despite the environment. Maybe just honing in on your Civil business—still solid growth there, up 7%. What are you seeing, and how do we think about major program drivers within Civil into fiscal 2027? Jeffrey D. MacLauchlan: There are a couple of things going on in Civil, Sheila. You can see the modest DHS headwinds, but you can also see the NASA NCAPS ramp. Those would be the principal drivers of the change that you see. Sheila Karin Kahyaoglu: Okay, great. Thank you. Jeffrey D. MacLauchlan: You are welcome. Sheila Karin Kahyaoglu: Operator? Operator: Your next question comes from the line of David Egon Strauss with Wells Fargo. Please go ahead. Joshua Korn: Hi, good morning. This is Joshua Korn on for David. I wanted to follow up on the broader defense budget question. It is noted in the slides that the reconciliation funding is starting to flow through. Is there any way you could quantify to what extent your programs benefit from the base budget versus the reconciliation benefit from last year? And then any thoughts on what that might look like for 2027? Thanks. Jeffrey D. MacLauchlan: The majority of what we do and what we have been able to grow is in the base budget, and it will continue to be in the base budget because we have selectively decided in our several markets to go after areas that are traditionally funded within the base. On the reconciliation funding, we have seen those start to flow. They are going to be very prevalent in Golden Dome, as well as border security. We have seen some additional funding show up there. We are doing a lot of AI-based object-tracking tech, as well as additional spend in our counter-UAS area. We are currently modernizing the Space Force’s critical infrastructure through reconciliation funding. Again, you can directly tie that to things in the Golden Dome area. In the intelligence world, we continue to enhance what we do in the left-of-launch area around situational awareness. And then in IT modernization, we have a lot of large enterprise systems that we are looking to try to make common across the Department of Defense. If the Army has a picture-perfect enterprise system to X, we are pushing to have that same solution be used through the rest of the Department of Defense. A lot of nice funding. Whether it is RDT&E or in procurement versus O&M, it does not quite matter to us. We are always doing modernization through sustainment, which is a large use of O&M funding. Clearly, as our business continues to evolve, we will see increasing amounts of RDT&E funding. So we are really well funded to close out 2026, and just as nicely funded as we go forward in fiscal year 2027. Joshua Korn: Great, thank you. Operator: Your next question comes from the line of Mariana Perez Mora with Bank of America. Please go ahead. Alex Preston: Hey, guys. This is Alex Preston on for Mariana this morning. I just wanted to go back to NASA and the Civil side real quick. Given the budget fluctuations there in FY 2027—right, the request calls for significant cuts year over year, but there is also this shift towards exploration away from pure science, so there is a bit of a dynamic there. I am curious if you had any broad puts and takes on that budget request and where you see CACI International Inc and ARKA playing within that context. Thanks. John S. Mengucci: Yeah, so I guess we are on both sides of that, Alex. Let us start with NASA NCAPS first. We continue to successfully ramp that program. We are receiving very high praise from our customer. We are deploying a commercial agile-scale delivery model to really standardize and centralize software development across NASA, very similar to what we have done with Customs and Border Patrol on BEAGLE. The way to think about that work in terms of budgets and administration priorities: we are reducing software development times, increasing efficiency, and bringing administrative systems across NASA into compliance with the plethora of federal reporting requirements. We have all key metrics, and we are supporting, I think, 800 to 900 different applications and platforms. So there is no impact to the work that we are doing. By driving commonality and moving NASA and their software development frameworks closer to the way that commercial companies and CACI International Inc do software development, it is going to generate cost savings across the organization. The nice thing for us, it supports the theme of NASA wanting to reduce their reliance on outside headcount and push those dollars more into mission, which is fantastic for us as we look at our space business. So it is the organization taking full advantage of what we are doing on one part of our business—driving agile software development practices and putting DevSecOps in place—that has been saving the organization money. And the even sweeter news is we are on the receiving end of that as we look at what we do in space. Very much aligned, and not a funding threat to where we are going on NCAPS, and it will continue to ramp to support 2027 growth rates. Alex Preston: Great. Thank you. Really appreciate the color. Operator: Your next question comes from the line of John Godin with Citigroup. Jeremy Jason: Hi. This is Jeremy Jason on for John Godin. Thank you for squeezing me in. As we think about these complex technical solutions transitioning from development to production—like SPECTRAL—I wanted your take on the outlook for the scalability of these technologies across different customers and upcoming budget cycles. And could that theory be affected by a potential blue wave? Thanks. John S. Mengucci: I will take your last comment first. The beautiful thing about being an investor in CACI International Inc is that a number of years back, when we set this company on its next course, we spent a lot of time looking strategically at the kind of markets we wanted to support and the parts of the federal government we were going to be very focused on. It is no accident that we are focused on national security—DoD, the Intelligence Community, and DHS—all of which have full bipartisan support. Blue waves, red waves, purple waves—it does not much matter to what we are doing. We are in very critical areas that the government will not decide to just turn off. So first and foremost, that is where we are at. On systems like counter-UAS, SPECTRAL, and our work in agentic AI—those all scale wonderfully as we move forward. Our optical communication terminals move beyond the 2- and 4-watt proliferated LEO systems to very exquisite systems. For SPECTRAL, its scalability is to deliver the baseline we have agreed upon to well over 100 combatant ships, and then move into the FMS side of where SPECTRAL goes. On top of the FMS work is all the topside and antenna work that we and the Navy believe should be the next phase of SPECTRAL so we can secure even more signals from those topside antennas and drive processing improvements that will protect ships not only from missiles, but also from drones. In the counter-UAS area, we have been scaling up production capabilities in Sterling and in Melbourne to be able to deliver Merlin. It is a tough supply chain right now—there are a lot of people buying flat panel radars. What differentiates us, and how we enhance it going forward, is the software capability of that system. It is not always about updating hardware. Whether this is fly-by-wire drones, one-way attack drones, cellular drones—you name it, we have seen them all over the planet. We are more than able to scale forward from that position as well. We can talk a lot about optical communication terminals and everything we have done in the tech area, but they all follow that common theme: you need to understand the mission so that you can deliver. We hear a lot about AI and how that is going to move different parts of our business forward. Frankly, AI without mission is like a car without gas—it is great to look at, but you cannot do much with it. We have been able to scale AI use throughout a lot of what we do, and we are looking forward to driving the growth further in fiscal year 2027. Operator: Your next question comes from the line of Jan-Frans Engelbrecht with Baird. Please go ahead. Jan-Frans Engelbrecht: Good morning, John, Jeff, and George. Congrats on another good quarter. I wanted to talk about the ARKA and legacy CACI International Inc space portfolio. Is there an ability to combine those capabilities into a solution for the customer? John S. Mengucci: Thanks, Jan-Frans. Probably the most prolific revenue synergy we have is going to be on the ground processing side, where ARKA already has authorizations to operate agentic AI solutions in a number of different mission models that allow them to process and find different things in the GEOINT stream. We are just as adept on the SIGINT side, but we have not moved to AI on that side. We are just beginning to have customer meetings, given that we just got everything integrated. So there are revenue synergies there that have not even begun, which will allow us to move the Intelligence Community further down the path toward higher-level, multi-INT solutions. The other area that we are already connecting is how do we go about building larger-scale optical communication terminals—larger ones, or ones of the same size that need to push a terabit of data through them versus 2 to 4 meg. ARKA is a 60-plus-year space company. We are a six-plus-year space company in the world of optics. There are a lot of synergies already taking place there. We are looking at different ways that we can get through production and different ways we can do engineering. There is so much more we can be doing for the folks who build satellites and the customers who absolutely need information from those missions. We are really excited about what the future brings for us. Jan-Frans Engelbrecht: Thanks, John. Very helpful. And then a quick follow-up, if I may. If we look at FY 2027, and you have great visibility in this business—close to four years of annual revenue in the backlog—any large multiyear contracts that you have bid on, sort of multibillion-dollar contracts, that you expect to be adjudicated in FY 2027? Or any notable recompetes that we should look out for in the next twelve months? John S. Mengucci: On the new business front, we always have a number of multibillion-dollar things that are rumbling around at different stages. Do we have some that are over a billion dollars that can be awarded in fiscal year 2027? Absolutely. Frankly, we were looking at some of those to be awarded toward the end of 2026, but we were not there. We will be able to report on how 2026 wraps up and how they go forward within 2027. On the recompete front, 2026 has been a really large year for us. As Jeff mentioned during his prepared remarks, we are already greater than 90% on the recompete front. What is just as exciting is that future recompetes that would have come up in 2027 have already been extended by 18 to 24 months, which is a great way to win a recompete—never having to bid on it. You only get there when customers recognize the importance of the areas we are in, the importance of national security, and the level of performance we have had. Operator: That concludes our Q&A session. I will now turn the conference back over to John S. Mengucci for closing remarks. John S. Mengucci: Thanks, Jeanne, and thank you for your help on today’s call. We really want to thank everyone who dialed in or listened to the webcast for their participation. We know that many of you have follow-up questions, and Jeffrey D. MacLauchlan and George A. Price and Jim Sullivan are available after today’s call. Please stay healthy, and all my best to you and your families. This concludes our call. Thank you, and have a fantastic day. Operator: This concludes today’s conference call. Thank you all for joining. You may now disconnect.
Operator: Good morning, and welcome to the Pinnacle Financial Partners First Quarter 2026 Earnings Call. [Operator Instructions] Please note, this event is being recorded. I will now turn the call over to Jennifer Demba, Senior Director, Investor Relations. Please go ahead. Unknown Attendee: Thank you, and good morning. During today's quarterly earnings call, we will reference the slides and press release that are available within the Investor Relations section of our website, pnfp.com. President and CEO, Kevin Blair will begin the call. He will be followed by our Chief Financial Officer, Jamie Gregory, and they will be available to answer your questions at the end of the call. Our comments include forward-looking statements. These statements are subject to risks and uncertainties, and the actual results could vary materially. We list these factors that might cause results to differ materially in our press release and in our SEC filings, which are available on our website. We do not assume any obligation to update any forward-looking statements because of new information, early developments or otherwise, except as may be required by law. During the call, we will reference non-GAAP financial measures related to the company's performance. You may see the reconciliation of these measures in the appendix to our presentation. And now Kevin Blair will provide an overview of the quarter. Kevin Blair: Thank you, Jennifer. Good morning, everyone, and thanks for joining us. January 1st marked the official close of our merger with Synovus. And rather than slow down, we hit the ground running. We're choosing to lead. In our first 90 days together, we focused on what has always mattered at Pinnacle, building the best team, delivering exceptional client experiences and translating that into sustainable, profitable growth. The early results speak for themselves. For the first quarter, Pinnacle delivered diluted earnings per share of $0.89 and adjusted diluted EPS of $2.39. On an organic basis, we generated over $2 billion in loan growth and almost $2 billion in core deposit growth, right in line with our 2026 expectations. The net interest margin expanded into the top half of our target range and adjusted noninterest revenue grew over 20% versus combined results in the first quarter of 2025. Moreover, credit remained stable, and we continue to see strength in key metrics and ratios such as adjusted return on tangible common equity and adjusted tangible efficiency. As expected, our results this quarter included $275 million of merger-related costs. At the same time, our recruiting engine continues to do what it does best, when. We added 50 experienced revenue producers during the quarter, up 22% on a combined basis from the fourth quarter of 2025 and up 11% on a combined basis from the prior year. This momentum has carried into April with another 37 new hires or accepted offers. That's not a coincidence. Great bankers are drawn to environments that are empowering, engaging and frictionless making it easier to deliver distinctive seamless client service. Integration is progressing ahead of plan, and importantly, without losing the soul of what makes Pinnacle work. Our operating model is in full motion. Leadership accountability is clear. Technology and system decisions are largely complete, and we remain firmly on track for operational and brand conversion by March 2027. Most importantly, our clients noticed positively. In the latest Coalition Greenwich survey, legacy Pinnacle ranked #1 nationally in Best Bank awards earned while Synovus ranked 6. According to Coalition Greenwich, outcomes like this are exceptionally rare in bank mergers and they don't happen by accident. We have never viewed this as a merger of 2 companies. It's a merger of relationships, and that has met one clear mandate from day 1, maintain what clients value and make it better. These results tell us we're doing both. Our team members felt it too. This month, Pinnacle was named #12 on the Fortune 100 Best Companies to Work For List, our tenth consecutive year earning that recognition. Through a period of real change, our culture didn't fade, it showed up. Finally, last month, Pinnacle joined the KBW NASDAQ Bank Index or BKX. This transition from the KRX places us amongst a select group of banks recognized globally for scale, consistency and strong returns, and reflects the outstanding reputation we have built with investors. As we look ahead, we remain firmly focused on executing the Pinnacle playbook. Our priorities are clear, consistent and unchanged. We remain focused on top quartile organic growth, disciplined hiring of experienced revenue producers and sustained earnings expansion. These priorities are supported by strong risk management and fundamentals built to perform through cycles and deliver superior results over time. Scale only matters if it makes you better, and this combination does exactly that. With that, I'll turn it over to Jamie to walk through the quarter and the key drivers in more detail. Jamie? Andrew Gregory: Thank you, Kevin. Our first quarter sequential and year-over-year comparisons are significantly impacted by the Synovus merger, which closed on January 1. As a result, we will make selected references to combined results for legacy Pinnacle and Synovus in prior quarters to give you a clear view of our organic growth in the first quarter. The primary driver between our reported EPS and adjusted EPS in the first quarter was $275 million of merger-related expenses. Net interest income was $933 million in the first quarter driven by excellent balance sheet growth. Period-end loans excluding the day 1 purchase accounting loan mark, increased $2.1 billion or 10% annualized from the combined firm's fourth quarter 2025. The majority of the organic loan growth was in C&I credits, with contributions from our geographic markets as well as in our specialty lending lines. Linked quarter organic core deposit growth was $1.9 billion or 8% annualized in the first quarter. This healthy growth in core deposits was driven by higher interest-bearing demand deposits and money market accounts and was broad-based across our geographic business units. Total deposit growth was impacted by a strategic reduction of broker deposits. The net interest margin expanded to 3.53%, which was in line with our previous guidance of 3.45% to 3.55% and driven by purchase accounting, balance sheet marks and fixed rate asset repricing. Recall that in January, we repositioned a portion of the legacy Synovus securities portfolio. These transactions reduced interest rate risk in the securities portfolio, support our Level 1 HQLA position and eliminated approximately all of the PAA associated with the securities portfolio. We also took other securities actions during the first quarter to enhance balance sheet liquidity and yield. On a combined basis, adjusted noninterest revenue increased over 20% year-over-year and was stable compared to the fourth quarter. Core banking, wealth management and capital markets fee growth was strong year-over-year. Income from our equity method investment in BHG was $31 million during the first quarter, in line with expectations. We remain disciplined with noninterest expense control while continuing to invest in revenue-producing talent and technology, partially offset by the realization of some of our merger-related cost synergies. Our adjusted tangible efficiency ratio was 51%, in line with expectations for this phase of the merger integration. We incurred $275 million of nonrecurring merger expense in the first quarter. On a combined basis, our nonmerger-related linked quarter growth was driven by higher employment expenses largely due to seasonally higher personnel costs. Also, on a combined basis, head count was down 2% sequentially. We realized the majority of our 2026 merger-related expense synergies in the first quarter. Credit trends remained very healthy in the first quarter. Net charge-offs were in line with expectations at $49 million or 23 basis points. This compares to 25 basis points for the combined firm in the fourth quarter and 19 basis points for the combined firm in 2025. The nonperforming asset ratio was 0.58%, which was largely impacted by 2 senior housing relationships that were previously rated, have a specific reserve and should be resolved this year. The allowance for credit losses ended the first quarter at 1.19% compared to 1.17% for legacy Pinnacle at the end of December. This increase in the reserve was driven by net loan growth, a deterioration in the economic forecast and an increase in individually analyzed loans. These factors were partially offset by a decline in qualitative reserves. For your reference, we have included slides in the appendix on our nondepository financial institution loan portfolio and the private credit exposure within this portfolio. As you can see, Pinnacle's NDFI loan exposure is approximately $7.3 billion. In the first quarter, approximately $700 million of legacy Pinnacle music catalog loans that were previously classified as general C&I credits were reclassified as NDFI. Our common equity Tier 1 ratio ended the quarter at 9.8%. Our intent remains to deploy capital generated through earnings to client growth as we proceed through 2026, while building CET1 to the low end of the range. I will now hand it back to Kevin to review our 2026 financial outlook. Kevin Blair: Thank you, Jamie. Pinnacle's differentiated revenue producer hiring model continues to be the engine of our growth, and it performs well through cycles. That's not a claim, it's a track record. The momentum we're building today through disciplined hiring and client consolidation is what drives our confidence in the path ahead. Our 2026 outlook is unchanged from what we shared in January, and our first quarter results reinforce it. We expect period-end loan growth of 9% to 11%, excluding the purchase accounting loan mark versus combined balances at year-end 2025. We're on track with 3% organic period-end loan growth, excluding the purchase accounting loan mark in the first quarter. Importantly, our assumptions are not dependent on changes in line utilization rates or moderation in current paydown and payoff activity. Same model, same results, our bankers win clients, and these clients consolidate to Pinnacle. Total deposits should grow 8% to 10% versus combined year-end 2025 balances. That growth will be driven by continued recruiting momentum, core commercial client deepening and the ongoing contribution from our specialty deposit verticals. Our adjusted revenue outlook remains $5 billion to $5.2 billion for the full year. The net interest margin is expected to be approximately 3.5% with the marginal benefits of near- to medium-term fixed rate asset repricing within the legacy Pinnacle portfolio generally offset by a methodical increase in our on-balance sheet liquidity position. Our net interest margin range assumes a forward rate path consistent with current market expectations. The balance sheet remains approximately 1% asset sensitive to the front end of the curve and 1.5% asset sensitive to long-term rates. And our goal continues to be towards managing a relatively neutral posture for the foreseeable horizon. We continue to expect approximately $1.1 billion in adjusted noninterest revenue this year, driven by sustained execution in treasury management, capital markets and wealth management. This guidance also includes a projection for BHG investment income of approximately $105 million to $115 million for 2026. The slight headwind relative to our prior estimate is not a reflection of BHG's core performance. Rather, this is part of a strategic effort to further optimize their funding and delivery platforms, a decision which presents a modest near-term revenue recognition headwind, but which we believe best positions BHG to enhance long-term profitability and enterprise value. We're managing for the right outcome, not just the next quarter. Our adjusted noninterest expense forecast remains in the range of $2.675 billion to $2.775 billion. We expect to realize approximately 40% or $100 million of our merger-related savings this year. Underlying tangible expense growth is driven by revenue producer hiring from the back half of 2025, continued 2026 recruiting, real estate build-out to support market expansion and normal inflationary items. We now estimate $400 million to $450 million of the $720 million in nonrecurring merger-related and LFI charges will be incurred this year, excluding merger-related equity acceleration cost. We continue to operate in a constructive credit environment. Net charge-offs are expected to be in the range of 20 to 25 basis points for the full year, consistent with combined company performance in 2025. The fundamentals underpinning that outlook are sound, and we see nothing on the horizon that changes our view. Our focus for capital management for the rest of 2026 remains on managing our CET1 ratio towards our target of 10.25% while continuing to prioritize deployment for core client growth. As it relates to the most recent capital NPR, we estimate the proposal could have a 60 basis point positive impact to our CET1 ratio. We continue to expect an adjusted effective tax rate of approximately 20% to 21% for the year. In summary, Pinnacle is navigating this year from a position of strength. While some question the pace, complexity or disruption inherent in a merger of this size, the first quarter delivered exactly what we said it would and in a meaningful way. Top quartile revenue growth, expanding merger synergies and disciplined execution across every geography and specialty banking unit reinforce our conviction and what lies ahead. Integration is progressing. The team is performing and the model built over the past 25 years is precisely what this environment rewards. We are only one quarter in ahead of pace and exceeding expectations, but make no mistake, this is just the opening act. The model works, the team is motivated and we're locked in on proving that this is built to last. With that, operator, let's transition to the Q&A portion of today's call. Operator: [Operator Instructions] Your first question is coming from John McDonald from Truth Securities. John McDonald: Just wondering if you guys could drill down a bit into the outlook for loan and deposit growth. The things that you've seen so far this quarter that give you confidence in both? And maybe just a reminder, how much is driven by the seasoning of hires that have already been done and how much is coming from other factors? Kevin Blair: John, it's a great question. As we've talked about the first quarter, I think, answered the question of whether the combined companies can continue to grow. And what gave me a great deal of confidence was the diversification across the geographies and the specialties and the momentum that we continue to see in our pipelines in all of those areas is what gives me a great deal of confidence in the trajectory that this is not just a 1 quarter or 2 quarter growth story. As you recall, the combined companies back in fourth quarter also grew double digits. . We had about $4.2 billion in funded production this past quarter. As you saw in the deck, it was largely across all of our geographies and our specialty units. And so that gives me a great deal of comfort that it's not coming from one asset class or one area. We know that the bankers that we've hired in previous years continue to generate a lot of that growth. Also, we know that some of the hires that we made this year, the 50 that we talked about are already hitting the ground running. So, for me, the pipelines are robust. The combination of the benefits from previous hiring as well as the cross-selling opportunities that we have from introducing each of the organization's capabilities to the other client base. That's what gives me confidence. And so you saw we maintain our guidance. Same thing on the deposit side. It's coming from the new hires. It's coming from some of our deposit specialties. And again, it's fairly broad-based. And that, again, gives us confidence that we reiterated the guidance for the year. John McDonald: Great. And maybe just a follow-up on the deposits for Jamie. The core deposit growth was plus 6% and -- the total was plus 6%, the core was plus 8%. You mentioned a little bit of strategic reduction of brokered. Can you give us a little color on that? And do you see the core deposit growth kind of accelerating up a bit as you go through the year? Andrew Gregory: Yes, John. As we look into 2026, we do expect to see deposit growth to be more back-end loaded as we look to the seasonals and the growth, as Kevin mentioned, from the hires. The first quarter was very strong. I mean growing core deposits at $1.9 billion, pretty much in line with loan growth gives us a lot of flexibility. And so what do we do with that flexibility? We reduced our broker deposits. Basically, it's just a cost optimization play and wanted to reduce costs where we could. Operator: Your next question is coming from Timur Braziler from UBS. . Timur Braziler: First question is just any change in the go-to-market strategy on either side of the bank and just wondering what the reception has been early on from any changes made. Kevin Blair: Yes, go-to-market strategy. As we've talked about, Timur, it's really moving to the Pinnacle model. And what that means is that we're adopting the rapid hiring of revenue producers. And I think what you can see this quarter is about 40% of the producers that were hired were hired in what I would consider the legacy Synovus footprint. And that is about a 50% increase over what we would have done in the same period last year. So the model of hiring has been rolled out and is actually being executed within that Synovus model, within the Synovus footprint. The model that we're executing on the Pinnacle side has to do with autonomy, a decentralized framework that allows specialty bankers to support the local geographies that's been rolled out. Our bankers on the legacy Synovus side love it. It quite frankly, is what they were used to years ago within Synovus, so it wasn't a great deal of change. I would tell you that the engagement level with our frontline team members is very high. And I think you can see that with the results. This could have been a quarter where people were focused on distractions and talking about the merger and changes, but reality is everyone continue to serve their clients and generate the growth that we thought they could generate. And so I would say the model changed a little bit from the Synovus side, but it was well received, and it's already in the process of being well executed. On the Pinnacle side, really no changes. We -- as I said, we've kept the incentive structure, we've kept the hiring model. We've kept the decentralized geographic framework. So there shouldn't be a lot of changes on that side. Timur Braziler: Okay. Great. And then one on expenses, as my follow-up. We got the guide for this year. I'm just wondering, as we go out into next year, and we get the majority of the cost saves starting to hit, just how do those flow through? Are you expecting there to be net reduction of expenses as you get the majority of the cost saves? Or are we in growth mode where investment into the franchise is going to maybe eat into some of those, and it's still going to drive increased expenses maybe at a decelerated growth rate. Kevin Blair: Yes, Timur, as we look at 2027, there are 2 components, and you hit them both. First is we will continue to operate in this model where we expect to be winning with recruiting, bringing bankers over. We expect that to continue. And so you should look at the historical kind of core NIE growth rate of legacy Pinnacle, and that's in line with how we're looking at longer term. And so for 2027, you could see that be in the high single digits. And then from there, you back out the synergies. And we said our target for 2027 is 75% of the overall synergies, so going from the 40% to the 75% will offset a portion of that core NIE spend, but just a portion of it. Operator: Your next question is coming from John Pancari from Evercore. John Pancari: On the -- on the loan front, I think your organic growth was pretty solid in the quarter against your 9% to 11% guide. Could you give us a little bit more detail in terms of what you're seeing in terms of credit spreads and new money loan yields? Are you seeing any competitive pressure there? And then also on the lending front, if you can give us a little bit more granularity what you're seeing in terms of loan demand and line utilization in the quarter, how that's faring? Kevin Blair: John, I'll start with the end. We actually didn't see a lot of change in line utilization this quarter. It was actually down a little bit. But we did put on about $8.2 billion of commitments versus just $4.2 billion of funded loans. So I think you could see some fund-ups happen over the next several quarters based on this quarter's production, but the growth this quarter was not driven from line utilization increases. . When we look at loan pricing this quarter, our yields came in right around $620 million on new loans. And I think that's within our expectations and essentially flat with kind of where the combined company's fourth quarter experience would have been. So I don't think there's any surprises. I've heard a lot on the deposit front as it relates to competition and hypercompetitive environment. We came in at $262 million roughly on production there. It was up about 6 basis points from last quarter when you combine the organization. That was really more just movement into the money market category. So I think in general, when we analyze the competitive landscape, not only on loans but also on deposits, I think it's pretty rational. I think what's different is that a lot of folks expected some of these promotional rates to come down. And they haven't come down. They've remained fairly stable. But it's a competitive world we're living in, but we're not seeing anything that's irrational or anything that we can't compete with. And so we feel pretty good about where we are on a pricing standpoint, and there's nothing in that competitive data that would make us change our outlook on NIM or on growth. John Pancari: Got it. All right. And then I appreciate the color on the competitive dynamics on both side to the balance sheet. Separately, on the broader growth strategy, and I certainly appreciate your commitment to the 9% to 11% loan growth and the 8% to 10% deposit growth and the whole growth strategy and the hiring behind it. In this backdrop, certainly some uncertainty out there, if the macro backdrop does weaken and you tighten standards on the credit front, what does that mean for your growth expectations? How do you expect that you could modify and adapt to the backdrop and still -- would you still be confident in these targets on the lending side? Andrew Gregory: John, that's the beauty of this model is that a lot of the growth that we're talking about is predicated on bankers bringing their books over. And so we put some slides out there in the past laying out the book of business that we expect to build just based on bankers that have already been hired. And that still exists. And you could say that on the Pinnacle side, there's $15 billion to $20 billion of growth embedded and people who are on the team today, and they will bring clients over, build their books to where they used to be, where we've seen all the rest of the bankers build their books. And that's not economic dependent. And so sure, a stronger economy is a positive, stronger growth is a positive, being in the Southeast as a positive. But our growth is more predicated on that hiring than anything else. And in that number, the $15 million to $20 million, that doesn't include the prior Synovus hires, and that may be another $5 billion on top of that. And so -- we see a lot of growth just from bankers, bringing over books of business, building their books. And it's more about that than it is the general volatility of the economy. Kevin Blair: And Jamie, just to add on to that, John, we do -- as you know, we look at all of our transaction activity, we analyze pipelines, but we also survey over 400 commercial clients every quarter. We also look at the actual cash inflows and outflows of 24 industry categories. And looking at that survey this quarter, as Jamie said, we don't rely on the underlying economic growth to drive it. But the bottom line is, I think we're operating in a great footprint. -- and our clients are remaining constructive even in this environment. Now not euphoric, but they're durable -- and I think they're adapting and finding efficiencies and they're leaning in a little bit. And so we saw that the overall sentiment of our client base hasn't really changed even with all these geopolitical risk and some of the uncertainty that's out there. So I think that gives us confidence that the economy at this point won't serve as a headwind. Operator: Your next question is coming from the line of Ebraham Poonawala from Bank of America. Ebrahim Poonawala: I just wanted to go back to sort of the net interest margin. When we think about the purchase accounting benefit and then the loan deposit growth dynamic, when you look at the first quarter growth that came on the balance sheet, is that around the same ballpark? I'm just trying to figure out what the resiliency of the 3.5%-ish margin is in a world where there's no big change in the interest rate backdrop. And maybe tied to that, Jamie, what's your sense of noninterest-bearing deposits as the mix of total changing from here? Do you see that going thing flat, going up or going down? Andrew Gregory: Yes, Ebrahim, it's a great question. As we look at growth, kind of circling back to the prior question, the growth in core deposits is a huge positive in the first quarter, tying that out with the with loan growth. As we look forward, we expect to see strong core deposit growth continuing relatively in line with loan growth a little bit behind. And that will help us out in the funding mix. But in the first quarter. Kevin mentioned loan production rate was 6.2%. On the deposit side, it was 2.62%. And so you think about that margin, it's about 3.6% and between loan yields and deposit costs of just the growth in the first quarter. Now you can't use that and just say, okay, well, that's actually not accretive for the rest of the year if you continue to do that because there are other things that go into that, and you will see us do some actions as we go through the year for liquidity management, there will be a little bit of a headwind to the margin. So I think the right way to look at it longer term kind of when we get beyond 2026, as you think about the legacy Pinnacle margin, which was approximately 3.3%, just below premerger, that's probably a decent margin for future incremental growth. And if you use that as a proxy for incremental margin of growth beyond 2026, then what you see is slight -- very slight headwind to the margin in the out years. And so that's generally how I'm thinking about it. For this year, we're saying a 350 margin for the full year 2026, coming off the 353 in the first quarter. I will just say that in the first quarter, there are a couple of positives that will not reoccur in the second quarter. And that's day count is a little positive and also our securities repositioning in the month of January was slightly positive to the margin. So a good baseline for Q1. Adjusted for those is in the 350 area. And basically, what we're saying is that's a good full year number as well. With regard to NIB, we do expect that to remain relatively stable at around 20% of deposits. Ebrahim Poonawala: Got it. That is good color. And just one quick follow-up. I believe when we did the deal -- so you talked about a lot of growth coming from banker hiring. Are there opportunities given the larger balance sheet size to bring on wallet of existing relationships, which are on the balance sheet and where you could see a bit more loan growth beyond what's coming from the hiring? Like is that something we should be thinking about? Is that a real opportunity? . Andrew Gregory: Well, Ebrahm, I will start with some successes we had in the first quarter. We had 6 capital markets deals that totaled $10 million in revenue that basically they are lead arranger fees, investment banking advisory, I mean these are some of the benefits when you have more balance sheet, more clients you get more of this type of business. So that's fee revenue, it's not exactly what you're asking, but that's the type of business that has a $120 billion bank that we're going to see more and more of. And so we're really pleased to see that in the first quarter post close to hit the ground running with that. And yes, obviously, we can have bigger whole limits, things like that on the balance sheet. But in all aspects, we're just more relevant to the larger clients here in the Southeast. Kevin Blair: And Ebrahim, you recall, we put $100 million to $130 million in revenue synergies, and one of the categories was relationship expansion. And a lot of that had to do with being able to offer the other client base, some of the services that the company would bring to the combined firm. This quarter, equipment finance, we were able to put up about $120 million guidance facilities in the legacy Synovus footprint coming from the Pinnacle Equipment Finance team. On the dealer finance side, we have about $650 million in the pipeline coming from the legacy Synovus footprint, asset-based lending. We have about $200 million of new market deals that are in process. And then in capital markets, we were able to do $110 million in multicurrency syndications which we wouldn't have been able to do in legacy Pinnacle. So you're already starting to see, as Jamie mentioned, on fee income and lending, the fruits of bringing the companies together, but we're in the early innings there. And I think it's going to continue to drive growth. But that would obviously be embedded in our expectations for this year. Operator: Your next question is coming from Casey Haire from Autonomous. Casey Haire: So I wanted to touch on the recruiting strategy. Very good momentum here at 87% or so year-to-date. I was wondering if there is upside to that 250 target for 2026. And then are you still getting the same economics on these hires, but just noticed the expense guide, while it's the same, it does imply a bit of a step up going forward versus flat. Kevin Blair: Previously. Well, Casey, I don't want to bet against ourselves and up our targets today. But as I said, I feel really great about what we've been able to accomplish in the first quarter not just because of the numbers. But I think, as you know, many people were questioning whether we could continue to hire with a merger weighing on some of these decisions where bankers may be waiting, watching and taking a pause. So I think first quarter shows that the model itself is the attraction point and the merger has not changed that. . Could we go over that number? Sure. I mean but we're still focused on where we are today. You saw the 50 that we've hired another 37 that have already accepted offers. I think 22 of those individuals are already in the bank and have started working here. And so I'm super excited about it. And as I mentioned in my earlier comment, the fact that when we look at some of our legacy Synovus leaders, they've already started to execute on the model, seeing a 50% increase there. So in terms of the economics, I think we go into this expecting similar economics. I can't tell you whether the 50 we hired to date are going to exceed or fall below that. But what we've been seeing in tracking gives me -- it gives me a great deal of confidence and no change into what those individuals will bring to the bank. And it goes back to what Jamie said earlier. The model isn't just about hiring. We're not bringing over people using headhunters. We're recruiting people that have worked with other Pinnacle team members so that there is a great deal, a higher probability of success because we know what their work was at their previous institution. And so I think that you'll continue to see that growth. Jamie mentioned earlier, $15 billion to $20 billion of embedded growth on the Pinnacle side, let's say, another $5 million from the legacy Synovus hires. I'm incredibly bullish on our ability to continue to add. And what's interesting to me when I look at it across the geography, it came from every geography, and it came from every specialty. 28 geographic hires, 22 specialty hires. And so I think there's a lot of additional hires that will happen this year. Casey Haire: Great. And just switching to capital. Is there any -- just some updated thoughts on potential BHG monetization or making use of the Greystar JV with credit risk transfers to speed up the CET1 rebuild. Kevin Blair: No update on the BHG side as far as a liquidity event. But I will say that we spend a lot of time with that team and -- we really do believe in their strategy going forward of remixing their distribution. We think that it will improve long-term profitability as well as improve enterprise value. So we appreciate that partnership. On capital ratios, starting here at 983 on CET1, our intention is to build capital as we go through the year to get to the low end of that target range, get to the 1,025 area. There is a chance that we would use some sort of a CRT or SRT strategy to help with capital, but it would have to be the right situation and the right cost of capital. Right now, we're not really contemplating anything in that regard, but that is definitely a tool in the toolkit should we find the right fit at the right cost. So we'll continue to evaluate those options as we go through the year. Operator: Your next question is coming from Michael Rose from Raymond James. Michael Rose: Maybe just to touch on the revenue synergy slide. Obviously, I understand that all the ranges provided were reiterated. But any sense on what could -- what areas we could see progress maybe a little bit sooner versus later in that 2- to 3-year dynamic? And then I guess just from the outside looking in, how do we get comfortable because it's always hard to see, I think, from the outside looking in that you're actually realizing those revenue synergies. So any sort of comfort there would be helpful. . Kevin Blair: Thanks, Michael. I'm glad I brought it up because I think the context does matter here because we are only 1 quarter in, and we're still operating on 2 separate systems, which create some barriers to be able to offer the other organizations products. I think where you'll see the early wins are more concentrated in the accelerated RM hiring, which was one of the areas that we thought we would see early wins. And then the specialty cross-sell pollination that I mentioned earlier, whether that's equipment finance, asset-based lending, dealer finance, family office, those sort of things we can offer without being on the same platform. So still feel very comfortable with the $100 million to $130 million. I think if you remember in one of the industry conferences we were at, we said we expected a modest, I think, $20 million in 2026, and what we're seeing in our pipelines and the opportunities there, I think we'll be able to achieve that within this year's numbers. And so we'll be very transparent as we get to those numbers, we'll share where they're coming from, and we'll go back and show you those relative to what our targets were so that you can see the pull-through, but I would just say one quarter in, we're still on 2 systems. The synergy story is coming to life. And I think when we put the combined toolkit in front of our bankers on one platform, these numbers will really begin to accelerate. Michael Rose: Okay. Very helpful. Appreciate that, Kevin. And then maybe just as my follow-up. Obviously, a really good start on the hiring front. It's been brought up a couple of times here. I think in these types of deals, though, we always worry about retention. And I think that was 1 of the key attributes of Pinnacle over a very long time period was just the high level of retention. Can you just talk to that there? Because obviously, it seems like the backdrop for hiring, everybody is hiring at this point and more so than they have in the past couple of years at least. So maybe you can just talk to some of the retention of lenders and associates and how that should trend moving forward? Kevin Blair: Yes, Michael. Like internally, to your point, not only do we set the goals for hiring, we also set a retention goal for voluntary turnover at 7%. And that was the combined retention number of both organizations. And you could argue that's a fairly aggressive target given that we're going through a merger. And through the first 90 days of the year, we're right on that target. And yes, we've had a couple of folks leave the organization. A lot of them retired. I think of our producers that have left, almost 20% were due to retirement. And so I think we're ahead of the game there. As you know, once you pay out bonuses, you generally see a higher level of turnover. And so that percentage that we have to this point that's been annualized. We would expect it to continue to decline from here. So I think others have said this merger would be a huge opportunity to poach Pinnacle team members that just hasn't happened. And I think, again, it has everything to do with the model and the fact that these team members are deeply engaged in our company, they are successful and they're not searching out another opportunity. And that's, I think, what's different from what you've seen from other mergers. Operator: Your next question is coming from Jared Shaw from Barclays. Jared David Shaw: I guess, just sticking on the hiring question. Are you, at this point, looking to expand into any new geographies? Or is most of the hiring just getting more concentration in markets you're already in? Kevin Blair: Jared, no new expansion markets at this point. If you recall, we recently expanded into the national capital region within the last 5 years. We continue to hire in that Maryland District of Columbia, Virginia market. It's continued to be a great growth engine for us that has expanded down into Richmond. We're making hires in Central Virginia, and that is a growth engine. I would tell you that this quarter, the state of Florida has been our best growth both in kind of the Northern, Central Florida as well as South Florida. I think that's a real opportunity because as we've shared in the past, even though we have a strong presence there, we believe we can add a lot of density in each of those markets. And then more recently, we added a new -- Pinnacle data, a new market in mobile Alabama, and that's been a real growth engine for us. And so I would tell you, we will continue to focus on the 9 states in the District of Columbia that we're in today, and there is lots of opportunity within those. And the pipelines that we have today are largely focused on those markets. Jared David Shaw: Okay. And then just as a follow-up, I know the systems conversion is still a little ways out, but how are you -- I guess how are you looking at AI and maybe seeing how that could change your ultimate either tech spend or tech opportunity as you're moving towards this broader tech integration? Kevin Blair: Well, look, number one, yes, we're still focused on March 2027. We know that, that conversion will be the first time that our clients will fill the impact of this merger. And so we're progressing on plan, and we're in a good place to be able to have all the systems conversion -- all the systems converted. We've decisioned over 250 technology platforms, and now we've gone through a built processes to be able to complement those technology decisions. So AI is something that we've been deploying for some time. I think we're kind of through the pilot phase. . If you may recall, we rolled something out at Synovus several, I guess, a year ago that was called ChatPFP, which is kind of an internal policy forms and procedures platform. I think we've answered now 18,000 banker questions. And I think we've saved over 3,000 hours from the work that we've done there. We also have 13 portfolio initiatives that are in flight. And I would tell you that our AI focus is around 3 things: banker and team member productivity, where we can use it to not replace team members, but to make them more effective at doing their job. Number two, credit intelligence, where we can use it to really reduce the time that it takes from client application to closing. And then third, leveraging the capabilities with our business partners so that we can use the technology, the AI technology that they're deploying. We will leverage some of the AI tools as we do conversion. We've used it on process reengineering. We'll use it on some of the coding that we have to do. And so it is fully embedded in our culture today. And we're rolling out lots of tools across the organization to help all of our bankers be more effective. Operator: Your next question is coming from Anthony Elian from JPMorgan. Anthony Elian: A follow-up on capital. I know you have the buyback authorization in place, but Jamie, the expectation to get to the low end of the 1,025 CET1 target before you begin or contemplate any amount of buybacks. Andrew Gregory: Tony, that's our plan. And so when you think about our capital accretion, it remains similar to what we discussed last quarter. The capital waterfall in today's earnings deck is a pretty good illustration of that. So we have 38 basis points of capital generated in the first quarter from earnings, and then we deployed 8 basis points of that to our common dividends. And when you look at the remaining 30 basis points, that is what gets either delivered to clients or is either used for -- to grow capital ratios or to be deployed to something like share repurchases. And in the first quarter, we deployed 24 basis points to clients. Now that was a little bit higher than what we said in January when we said that we would expect to deploy about 20 basis points, but truthfully, that resulted from the growth in commitments more than the growth in loans. And so as we look forward, I think that's a healthy way to look at capital accretion each quarter. We still think that there are many scenarios where capital -- where RWA growth consumes about 20 basis points, but you could see quarters like this quarter where it's a little bit higher than 20. Anthony Elian: Okay. And then on Slide 27 in the appendix, what drove the decline in the total loan mark to $675 million and the year 1 purchase accounting now expected at $90 million, which I think is at the low end of the previous range. . Andrew Gregory: Yes, Tony, that's largely driven by rates. There's a little bit of a shift in the valuation due to kind of where the marks came out by loan product. And so that was really just a rate story. But what I'll say on the PAA and amortization going forward, 70% of that is in residential mortgages. And so you look at those residential mortgages, the average rate is around 4.25%, the average underlying loan rate, and we're assuming about a 7% prepay rate on those mortgages. So the volatility around PAA amortization should be relatively light. And so -- unless rates decline significantly. And so that's generally how you should think about the PAA amortization from year-end evaluation. Operator: Your next question is coming from Stephen Scouten from Piper Sandler. Stephen Scouten: I wanted to go back to BHG really quickly. I think, Kevin, you mentioned some of the change in guide was relative to adapting funding mechanisms. I'm just curious, looking at the slide, it looks like originations were up year-over-year. Could that revenue be a little bit more episodic around securitizations? Or kind of how should we think about the cadence of BHG and kind of what that looks like longer term? . Andrew Gregory: The BHG outlook remains strong. As I mentioned earlier, it's a great partnership. I mean the team down there just continues to dominate in consumer lending. And we're pretty pleased with everything they're doing. When you look at the production in 2026, I mean, there's a strong increase from 2025. The real change is the distribution. And the way to think about that from our perspective is that the price received on the loans of bank partnerships is just simply a lot higher than the price received on securitization or whole loan sales. And so the reason you would choose the lower price, though, is because you don't have any ongoing costs to voluntary repurchases, things like that. And so we think the right strategy is to take the lower premium today by selling more into securitizations and loan sales to asset managers, and improve long-term profitability. But it also should improve enterprise value. And the reason for that is it gives people more certainty into that forward earnings profile when it's just based on the production and the price of production of the loan sales. And so we're really pleased with the strategy. We look forward to seeing it play out, but it will result in lower fee revenue for us in 2026, but it's the right long-term move. Stephen Scouten: Got it. Great color there. And then just one other piggyback on all the hiring questions. I know you said mobile a newer market. How long do you think today the existing footprint can kind of drive this level of growth? And if you had to expand markets, is it fair to think of you guys moving west slightly with all the dislocation that's occurred in those markets? . Kevin Blair: For me, Steve, for the foreseeable future, there's so much opportunity. When we look at the market share data and you look at the Greenwich data, I mean, look, we haven't talked about that today, but for legacy Pinnacle to be #1 in the country and the Net Promoter Score and legacy Synovus to be #6 in the country, it shows you we have 2 strong organizations coming together, creating a loyal client base. When we look at the data in the markets we serve today, the only thing that people are hired than Pinnacle on is market share. And the market share that some of these bigger banks have, they're also those same banks that have very low Net Promoter Scores. And so our opportunity to hire in the existing markets and to take share from those bigger institutions is right in front of us, and we're doing it every day. So that's going to fuel the growth. As it relates to expanding into new markets, what I think we've proven out is it's less about choosing a market and trying to then go and find talent. What we've done is we find the talent regardless of where the market is. If you get the right leader, that person will be able to bring over the right team, and we'll be able to grow by rolling out that Pinnacle model. Operator: Your next question is coming from Bernard Von Gizycki from Deutsche Bank. Bernard Von Gizycki: Just on credit, the allowance for credit losses during the quarter. Just I wanted to see if you could unpack a few of the things, the deterioration economic forecast, the increase in the individually analyzed loans and just the decline in the qualitative reserves that you show on Slide 34 of the deck. Could you just unpack the drivers a little bit here for us? Andrew Gregory: Yes, it's a great question. I mean when you look at the economic impact, a couple of things were happening there. One, we obviously use the updated forecast from Moody's. But as you can see in the appendix, we also adjusted the weightings of the scenarios. And the reason we did that was because of the economic uncertainty, everything that's going on in the world. We just wanted to put a little heavier weighting on slow growth and basically just acknowledge what's going on out there. And that drove the change in the economic outlook. And then what was the rest of your question? Kevin Blair: Qualitative. Andrew Gregory: The qualitative -- the qualitative reserves, obviously, we have those in there. each quarter, it's a fairly significant amount of the allowance. Those ebb and flow based on the differences or how we see the outlook of individual portfolios. That came down this quarter based on us just seeing a little bit reduced risk in some of those portfolios that we had allocated. We had it in multifamily and a few others. And our outlook has improved on those areas, and we reduced the qualitative accordingly. Bernard Von Gizycki: Great. And just my follow-up. In case I missed this, just there's no change in the full year guide of the 1.1 to 1.15 of the adjusted fee income, despite the reductions in BHG, like you mentioned, from optimizing their funding. Just what areas helped offset this? I mean, Jamie, you mentioned some of the capital markets deals. I'm thinking something from there. Just any thoughts on what the offsets were? Andrew Gregory: Yes. When you look at the rest of the year, first, I'll kind of get the starting point on the first quarter. You had core banking fees up 11%, wealth up 14%, capital Markets more than doubled when you look at year-over-year comparison. So we have great momentum to start the year. And as we look forward, we really expect to see that continue. So embedded in that guidance is mid- to upper single-digit growth in each of those categories. We expect that in core banking fees and wealth and in capital markets. And then that will be offset partially by that reduction in BHG revenue. Operator: Your next question is coming from Catherine Mealor from KBW. Catherine Mealor: It was nice to see the average earning assets ahead of expectations. Can you give any update to how you're thinking about the building cash and securities as we move through the year? . Kevin Blair: Yes, Catherine, in the first quarter, you saw us grow the securities portfolio by about $750 million. And you should expect to see us continue growing the securities portfolio as we go through the year. and we could end the year up $1.5 billion to $2 billion. Longer term, I would expect to see the securities portfolio grow to 19%, 20% of assets over time, and you'll just continue to see us build towards those levels. Catherine Mealor: Okay. Great. And then maybe one follow-up on just the reserve question. You gave your net charge-off guidance of 20 to 25 basis points. As we think about the reserve, do you view that as more stable bias upward or bias lower just as you kind of sit here at our -- at the current reserve and how you're thinking forward about the credit risk. Kevin Blair: A lot of that depends on the economic outlook. And as we just discussed, we increased the weighting to slower growth. And if the economic outlook improves, well, that would be a tailwind to reducing the allowance. But we believe outside of that, we expect it to be relatively stable. And you didn't ask the question, but as I think about it, in provision expense, you should continue to see what you saw this quarter outside of the change in the ratio, you should expect to see a provision about $20 million higher than charge-offs just due to strong loan growth and providing for that loan growth. Operator: Your next question is coming from David Chiaverini from Jefferies. David Chiaverini: So overall growth was stronger than expected in the first quarter. You previously mentioned earlier this year that the first half might be slower than the second half. Is it fair to say that growth could be more consistent through the year than originally expected? Kevin Blair: Well, there are seasonal in the second half of the year that we would expect to play out. And so we view the first quarter as being ahead of schedule. And so it's a strong quarter for us with regards to growth in both loans and core deposits. And so we're going to strive to maintain that momentum, but this is definitely being ahead of schedule. David Chiaverini: Great. And then back on to capital. Can you talk about the Basel III end game and the impact that could have on your capital ratios? And how you might deploy any incremental capital that may result that? Kevin Blair: Yes. That's the question of the day from my perspective, strategically, the proposed rules can really work to our advantage. The impact of AOCI inclusion is fairly immaterial to us at these rate levels, but the changes in risk weightings further enhance the attractiveness of our core client business, C&I lending and commercial real estate lending relationships. So we feel that we are very well positioned for this, both in our go-to-market strategy and our balance sheet management. Of the estimated 60 basis points benefit in the risk-weighting asset changes, about 35 to 40 basis points comes from commercial lending and about between 10 to 15 basis points comes from residential mortgages. So we await the finalization of these -- of the rules. We look forward to getting through the comment period and implementing in the new regime because we think it will just really only enhance what we do and how we serve our clients. But your question on the incremental capital, we're not going to make any decisions today based on this until we get to the final rules and the rules implemented, but it's definitely going to -- it definitely looks like it's going to be a positive to our capital ratios. Operator: Your next question is coming from Gary Tenner from D.A. Davidson. Gary Tenner: I had clarifying question about the NIM roll forward in the deck. It included securities mark benefit of 7 or 8 basis points. I'm just curious how that -- it was 9 basis points. But with the bond repositioning in the first quarter, I'm surprised that it was reflected quite that way. So could you talk about that item versus kind of ongoing securities yield and in the wake of the repositioning? Kevin Blair: Yes, that was going to come through one way or another. By doing the repositioning, it came through in NII instead of PAA. And so that's really basically at close, we marked that book to market, the securities portfolio. And so that's really just a placement on the income statement difference between the two. And I think that's a testament to the permanence of PAA when it's rate driven. I mean basically, with loans and securities, you can make that PAA go away and turn it in NII by executing a market trade. And so we feel really good about the future of NII from the marking of the Synovus balance sheet. And I think that, that just kind of shows the longevity of it. But really one way or another, that was going to be in the margin in the first quarter, but the trades just made it traditional NII. Gary Tenner: Okay. So that was just the margin benefit, not necessarily the accretion. Can you give us, Jamie, just what the kind of net accretion benefit was in the quarter overall? Andrew Gregory: Yes. The way to think about that is -- so securities accretion, PAA accretion would have been $25 million a quarter is kind of a good number. If you look at loan accretion, it's about $20 million a quarter. And that's, again, as I mentioned earlier, that 70% of that is coming from residential mortgages. And so that's the general accretion that's in the margin each quarter. Operator: Your next question is coming from Chris Marinac from Brean Capital Research. Unknown Analyst: Can you talk about the NDFI business line in terms of is there an upper bound to where you want that to go over time? And I appreciate the disclosure you gave on NDFI to? Kevin Blair: Chris, you saw it on Slide 37, it's 9% or $7 billion. And I think what's important, you see the headlines, only about $1.7 billion in private credit, less than 2%. And look, just think about the backdrop, I know the media investors are painting this picture of all NDFI exposure being the same. And I just don't believe that to be accurate. And it's not how we manage the book. Where we do have exposure there -- our protection is structural. We said on the very top of the capital structure, senior secured first lien loans. And we largely have effective advance rates when you factor in the liquidity and the eligibility buffers of around 50%. So we are well structured there. The biggest part of that book for us is our structured lending division, which is about $3.4 billion. And so we've been operating that for the last 7 years, and that group has not produced a single charge-off and hasn't had an NPA since 2019. So I think they execute with a great deal of credit and operational discipline. So I don't believe that there's an upper bounds. We believe that each loan that we're bringing on today is well structured, secured and performing well. like any asset class once you start getting a 10% or larger, I think you have to start thinking about whether you have concentration risk, and so we would look at that. But the great thing about this book, as you heard, Jamie, even the catalog music business, these loans, although they are contained in one bucket, they're very different, and they're very granular. And so I would hate to set a target for something based on an asset category that, quite frankly, has different underlying structural components that are not homogeneous in nature, and hence, likely are not likely to perform similarly through different economic scenarios. Unknown Analyst: No, that makes sense. And then the reserve assigned to these is just part of the general C&I bucket, correct? Kevin Blair: That's correct. . Operator: Your next question is coming from Robert Rutschow from Wells Fargo. Robert Rutschow: I guess, first, do you expect to have a Visa gain, and would there be any impact to capital from that? Kevin Blair: No. No, we do not. Robert Rutschow: Okay. And then second, if I could just follow up on the retention question. Do you think you'll provide that retention number going forward? And is there a period where you might expect sort of elevated churn in the legacy Synovus employee base over the next, say, 12 to 18 months? Kevin Blair: Look, we are a transparent organization. We'll be happy to provide that data. The real answer to that is this last quarter. If you have folks that don't want to be part of the new company, the first quarter is the period in which they would have self-selected based on the fact that bonuses are paid, and generally, that's when recruiting picks up. So I would tell you the kind of the worst is behind us and the fact that we're on track tells me that it should only get better from here, but we will be extremely transparent on that. . Operator: This concludes our question-and-answer session. I'd now like to turn the conference back over to Kevin Blair for any closing remarks. Kevin Blair: Thank you, Matthew, and thank you all for your thoughtful questions and for your continued investment in what we are building here. I think one quarter in as a combined company, the results speak for themselves. Loan growth, deposit growth, margin expansion, recruiting momentum and a culture that just didn't survive the merger, it's strengthening and scaling. That doesn't happen by accident. It happens because of the model, the people and the strong commitment from leadership to doing the right thing. . And doing things the right way matters. While some of our industry peers go through mergers and they've leaned in on things like elevated promotional deposit rates as a big client retention tool, that's not how we operate. Our retention strategy has one solid foundation, and that's talent. The best bankers attract the best clients, the best clients stay. It's that simple, and it works. People are what makes the difference. What the first quarter tells me is that we didn't merge into mediocrity. The Pinnacle model is fully intact. We're actively expanding. We're producing exactly the results it was built to produce. What particularly energizes me, as I said earlier, is the speed at which our Synovus leaders have embraced and applied the Pinnacle hiring model, up 50% year-over-year. As excited as I am about the progress we've made, we're not perfect. There have been moments in this integration where we've moved too fast. We've had to course correct or we didn't have the immediate answer. That will continue, and undertaking of this size doesn't come without its share of bumps, and I wouldn't suggest otherwise. But I'd tell you this, the wins have greatly and consistently outweighed the misses, and we learn from every one of them. One quarter will not define us, but it will set a standard that we intend to exceed, and we're not done proving it. Culture is what I think about every single day because results follow it, not the other way around. And the culture is holding. The recruiting momentum, the systems conversion ahead, the revenue synergies being locked in and the client relationships deepening across our 9 states, those are the chapters that are still to be written. We have shown that this model can do what it does and do it well. The best of what this firm has to offer is still in front of us. Before I close, I want to speak directly to our team members because no number in this presentation, no metric we reported today happens without you. Many of you didn't ask for this merger. Many of you had real concerns about your role, your market, your clients and your future. Those concerns are valid, and I never want to minimize them. Change of this magnitude is hard, and you faced it head on. You showed up, you served your clients without missing a beat. You welcome new team members you've never met, and you made them felt like they belong. That kind of character cannot be manufactured, it cannot be taken for granted. Your efforts, your passion, your dedication is exactly why I have no doubt about where this firm is headed. You're the reason it works, and I'm deeply grateful. I also want to recognize Jennifer Demba, our Director of Investor Relations, who will be retiring in June. Jennifer, over the past 3 years, you've been an extraordinary partner, elevating our investor relationships, and leading the function better than you found it. Your impact from this organization will be felt long after June. Thank you, and we wish you nothing but success in this well-deserved next chapter of your life. As we wrap up today's call, I'll end where we started. We entered 2026 with a promise to deliver for our shareholders, our clients and our communities and, most importantly, our team. One quarter end, we've delivered. We did exactly what we said we would do. And this is just the opening act. The model has proven, the team is unified, and we are locked in on executing every promise we have made. We look forward to seeing many of you at upcoming conferences. And with that, Matthew, we can conclude today's call. Operator: Certainly. Thank you for joining us today. That concludes the Pinnacle Financial Partners first quarter 2026 earnings call. Have a good day.